INTRODUCTION TO DECISION MAKING:
Decision making is the essence of management. No executive can do anything unless he decides
something. An executive is considered as always decisive and always takes quick decisions in the
best interest of the organization. Sound decision making is considered as the outstanding
characteristic of a successful manager. Management and decision making go together.
Decision making is a part of planning and the success of planning depends on sound decision
making. Manager is to take decisions at every stage of business. Decision making involves
choosing a course of action from alternative courses of action available to him in solving a
problem. The manager’s job is to decide and choose the best course of action. It is the very
important function
DEFINITION OF DECISION MAKING:
Decision making is a process. It consists of activities a manager performs to come to a
conclusion. It is a conscious and a human process. It is applicable to all levels of management
and all types of organization.
It is to analyze the course of a problem, develop alternatives to the problem and the manager is
to choose a particular course of action which he considers to be the best in the present
circumstances. Some of the definition of authorities is quoted to have better understanding.
Koontz and O’Donnell define “Decision making—the selection from among alternatives of a
course of action—is at the core of planning.”
Louis. A. Allen defines decision making as “the work a manager performs to arrive at
conclusions and judgement.”
George R.Terry defines, “decision making is the selection based on some criteria from two or
more possible alternatives.”
Dalton E. McFarland defines, “A decision is an act of choice wherein an executive forms a
conclusion about what must be done in a given situation. A decision represents a behaviour
chosen from a number of possible alternatives.”
So decision making is a process of selection from a set of alternative courses of action which is
thought to fulfill the objectives of the decision problem more satisfactorily than others. A
decision making is an act of choice wherein a manager selects a particular course of action from
the available alternatives in a given situation. It involves the process of establishing goals,
defining tasks, searching for alternatives, and developing plans in order to find the best answer
to the decision problem
FEATURES OF DECISION MAKING:
The features of decision making are as follows:
(a) It is a selective process as it is a process of choosing a course of action from among the
alternatives. Decision making is not involved if there is only one alternative to the problem.
(b) It is a human and rational process involving to a great extent the application of intellectual
abilities. It involves deep thinking and foreseeing things. But decision cannot be completely
quantified. Many decisions are based on institution and instincts. Systematic analysis of
pertinent facts is not always possible.
(c) Decision making is a dynamic process. It involves a time dimension and time lag. A particular
problem may have different decisions at different times depending on the situation. Thus,
decision making is situational.
(d) It is the end process proceeded by deliberation and reasoning.
(e) It always related to the environment. The decision taken will always be in perfect co-relation
with the environment. A change in environment may affect the decision for the problem.
(f) Decision making is goal oriented process. Decisions are made to achieve certain desired goals
or objectives.
(g) It implies freedom to the decision maker regarding the final choice. It also involves
commitment of resources in specified ways.
(h) It is a continuous process. A manager has to take a number of decisions and managerial job
is perpetually a decision making exercise.
CLASSIFICATION OF DECISIONS:
Decisions are classified according to different bases. They are:
(a) Nature:
According to the nature the decisions may be classified as Routine and strategic decisions. A
routine decision is also known as tactical decisions. These decisions are made repetitively on the
basis of rules, procedures and policies. Decisions can be taken without much deliberation. They
may be complicated but are always one-dimensional. These decisions can be taken at any level
of management.
(b) Level of Management:
Some decisions are taken by the top management and some are taken at the lower level.
Decisions relating to policies affect the enterprise. They are known as policy decisions. Example:
Granting of Bonus to employees and fixing its quantum.
Operating decisions are taken by the lower management in order to implement policy decisions.
Example: The calculation of the amount of bonus payable to employees.
(c) Capacity:
On the basis of capacity with which decisions are taken they are classified as organisational and
personal decisions. Where a manager takes a decision in his official capacity it is known as
organisational decision. Such decisions can be delegated. Decision taken by a manager as an
individual and not as a member of the organization are is a personal decision. It cannot be
delegated.
(d) Programmes:
Decisions are classified as programmed and non- programmed decisions. Programmed decisions
are of routine and repetitive nature. They are to be dealt with according to specific procedures.
Example: An employee is absenting himself for a long time without proper intimation. The
immediate superior is to deal with it without informing chief executives. In every organization
there are well established standard procedures which are to be followed to deal with cases of
this type. They are well established and structured.
(e) Individual and Group decisions:
Decision taken by an individual in the organization is called as individual decision. This is
possible in small organizations and where autocratic style of management prevails.
Group decisions are those which are taken by a group i.e. by a Committee, Board of Directors. It
is also known as collective decisions.
STEPS IN DECISION MAKING:
Decision making is an indispensable component of management process. Managers have to
make simple as well as complex decisions. Decision making is not so easy. It requires skill that
cuts everything managers do. Every decision is a dynamic process which is influenced by
multiple forces. Generally a process is a dynamic concept. Events and relationship are dynamic,
continuous and flexible. They are to be considered as a whole in which many forces interact.
A manager can make decisions by intuition i.e. without considering alternatives decides as per
the dictates of his mind. Further he feels that the particular course of action is the best. There is
no logic behind it. Decisions based on intuition are subjective and are taken without any
conscious effort to weigh the merits and demerits of various alternatives.
Effective decision-making requires a rational choice of a course of action. The term rational is to
be defined. Rationality is the ability to follow a systematical, logical, through approach in
decision making. Thus if a decision is taken after thorough analysis and reasoning and weighing
the consequences of various alternatives, such a decision will be called an objective or rational
decision. In reality manager’s decisions involve a combination of intuition and rational thinking.
So on the basis of rationality decisions classified into two types known as subjective and
objective decisions. A subjective decision relies more on intuition and an objective decision
relies more on logical thinking. In this connection Herbert Simon has proposed the theory of
“bounded rationality”. This means the managers making the most logical decisions they can
within the constraints of limited information and ability.
The steps in decision making process can be explained by going through the following steps:
1. Problem Identification
2. Diagnosing the problem
3. Development alternatives
4. Analysis and evaluation of alternatives
5. Selection of the best alternatives
1. Problem Identification:
The first step in decision making is problem identification which means to recognize what the
real problem is. Problems generally arise because of disparity between what is and what should
be. The threats and environmental changes may also create decision problem.
In this step the manager is to identify and define the real problem in a straight way rather than
finding a solution to the problem. A problem well defined is half solved. There may be multiple
causes for an organisational problem and the manager has to identify it which is really not an
easy task.
2. Diagnosing the Problem:
In this step the manager is to know the real cause of the problem or the contributing factors of
the problem. The problem should be well understood in terms of its elements. Its magnitude, its
urgency, its courses and its relations with other problems.
The manager is to diagnose the problem quickly and correctly and they are to collect and
analyze the problem. The manager is to find out the real cause or source of the problem.
Symptoms of the problem should be considered and analyzed to diagnose the problem.
After diagnosing the problem the manager is to classify the problem and gather information
about it.
The problem should be classified in view of the following guidelines:
(i) The nature of the decision whether it is strategic or routine.
(ii) The impact of the decision on the various functions of the business.
(iii) The futurity of the decision.
(iv) The periodicity of the decision.
(v) The limiting factors relevant to the decision.
3. Developing Alternatives:
A complete diagnosis facilitates the manager in knowing the problem and the situation in which
the problem exists.
The manager is to search for various alternative solutions to the problem. It is his duty to reach
and analyze all possible ways. If there is only one way of solving a problem there is no problem
of decision making. Developing a wide range of alternative solutions may increase the freedom
of decision makers. It is always advisable for the manager to restrict the alternative solutions
only to strategic or critical to the problem.
The manager is to follow the principle of limiting factor. This factor limits the performance in
achieving an objective. Those alternatives which are not possible to be achieved are not to be
considered. Time and cost constraints should be considered. Developing alternatives is a
creative process which requires research and imagination. The decision makers can also rely on
their past experience, practices followed by others, and their creative techniques as well.
4. Analysis and Evaluation of Alternatives:
Next step in decision making is to analyze the alternatives. The term analysis means methodical
classification of available data. This is attempted with the object of knowing the pros and cons
in relation to each other. Only those alternatives with good prospects are to be screened.
Screening involves two important approaches.
In the first approach the decision maker is to prepare a list of limits and constraints and applies
these constraints on each alternative. Any of the alternatives who do not meet those
constraints are totally rejected and the rest are evaluated.
In the second approach various alternatives are grouped into classes on some specific criteria
which are important to decision making. The group which shows the best result is selected for
future analysis.
In evaluation the factors to be considered are:
(i) The risk involved and the resources available.
(ii) They should be compared in connection with accomplishment of objectives in relation to
efforts involved and results expected.
(iii) Tangible and intangible factors are to be considered. Tangible factors are those which can be
expressed numerically like sales, profits, money invested, return or investment, time taken.
Intangible factors are most qualitative and they cannot be quantified. Example: Reputation of
the company, employee morale.
(iv) The decision maker may also face a problem in the ranking decisions wherein two or more
alternative solutions appear equally good. In that case, actual difference will be the deciding
factor.
(v) Finally in evaluation none of the alternatives found suitable in achieving the expected results
than the decision maker is to take a fresh attempt to trace the undiscovered alternatives.
5. Selection of Best Alternative:
The next step for the manager is to decide on the best alternative.
This decision is taken by focusing on two aspects:
(i) The alternative should contribute to the achievement of organisational objectives.
(ii) It should maximize the result in the given set of conditions.
The approaches to be in selecting the alternative are:
(i) Experience
(ii) Experimentation
(iii) Research and analysis.
(i) Experience:
Managers can choose the alternative based on their past experience, if they have solved similar
problems in the past. But past decisions should not be repeated unless the circumstances are
similar. When the environmental factors are more flexible or variable in nature past experience
can be of no avail. Past decisions are to be amended taking the present circumstances into
account.
(ii) Experimentation:
In this approach there are three stages. They are implementation, observation and analysis. The
alternative is put into practice, results are observed and the alternative which shows the best
result is chosen. This approach is expensive and time-consuming. This should be used only on a
limited scale.
(iii) Research and Analysis:
This is considered as the most effective technique when a major decision is involved. It tries to
bring out the relationship between the critical variables, constraints and premises and its
impact on objectives to be achieved. The alternative with the one which has the most positive
impact on objectives is chosen.
In spite of these approaches available in selecting the best alternative the decision maker’s
personal values and aspirations also affect the choice of best alternative.
FACTORS INFLUENCING DECISION MAKING:
There are many factors which influence decision making. Some factors can affect the entire
process of decision making while some other affect only certain steps of the process. The
influence of these factors will have some impact and they must be understood for effective
decision making.
Normally the factors that influence the decision are:
1. Time pressures
2. Manager’s values
3. Organisational policy
4. Risk taking of manager and
5. Other factors.
1. Time Pressures:
The quality of decision depends on the availability of time given to the manager for taking
decisions. Managers are forced to decide in time frames established by others. Want of time can
force a manager to decide without gathering important facts or exploring possible solutions
thoroughly. The quality of decisions taken leisurely is bound to be better compared to decisions
taken in a hurry.
2. Manager’s Values:
Manager’s value will have a significant bearing on the quality of decisions. The value
orientations of managers determine much of their behavior. This will be reflected in their style
of functioning, identification of their mission, objectives, and strategies.
Further some specific influences which have value on decision making process are:
(i) Value judgements necessary for developing objectives and assignment of priorities
(ii) In developing alternatives, it is necessary to make value judgement about the various
possibilities and
(iii) Value judgements reflected in the alternatives chosen.
3. Organisational Policy:
The top management develops policies to guide the actions of the organization. Any decision
against the policy cannot be implemented. Change in policies is also not quick as they cannot be
immediately.
It is usually easier and more practical to change the course of proposed decision. So this will
affect the decision to be taken.
4. Manager’s Propensity for Risk:
Risk-taking is an integral component of the decision-making process. If the manager is less
inclined towards risk-taking will select different objectives, his evaluation of alternatives will be
different and select alternatives which are totally different from a manager who is more inclined
towards risk-taking. This personal attitude of the manager influences the decision making.
5. Other Factors:
The other factors which influence the quality of decision making are:
It should facilitate a good interaction and co-ordination between departments.
The attitude of the top management should facilitate the performance of the organization. The
human resources required for performance and the skills needed for the execution must be
available for performance. The financial resources needed for performance are to be provided
for.
THEORIES OF DECISION MAKING:
Decisions are made by managers based on facts, experience, intuition and authority. Decisions
were responsible for achieving objectives. The techniques used for arriving at a decision are to
be compared with the decision to know the effectiveness of the performance of the
organization.
The theories of decisions stem from the manner in which the decisions Earnest Dale have
specified the list of theories.
They are:
1. Traditional economic theory
2. Psychological theory
3. Mathematical theory.
1. Traditional Economic Theory:
This theory advocates that decision makers try to maximize profits and all their activities is
aiming to do so. As advocated by traditional economists the decision makers tries to maximize
profits. Any practical decision maker will always have an eye on profit maximization.
2. Psychological Theory:
This theory advocates that what actually goes on in the decision maker’s mind when he actually
makes a decision. In this connection, Herbert A. Simon has come out with an avocation which is
considered as the best. He states that the decision maker ”satisfice” rather than maximize. The
satisfice refers to decision-making technique in which managers accept the first satisfactory
decision they uncover.
The consequences which a manager considers good enough will depend on what has been
achieved in the past.
3. Mathematical Theory:
These theories help the managers in developing alternative. Solutions and specifies the risk and
consequences more clearly. In mathematical theories operations research has been developed
as a separate area.
Managers of today make use of modern techniques for decision making to study the normal
conditions of uncertainty.
The most important techniques used are:
1. Risk Analysis
2. Decision Trees and
3. Preference Theory
1. Risk Analysis:
Under conditions of certainty managers know their objective and have accurate, measurable
and reliable information about the outcome of each alternative decision they are considering.
Risk occurs whenever we cannot predict an alternative’s outcome with certainty but they do
have enough information to predict the probability it will lead to desired state.
Risk analysis attempts to develop for every critical variable in a decision making problem a
probability distribution curve. Usable ones can be derived by asking each specialist who
estimated a variable to gauge the range of probability of each variable.
2. Decision Tree:
This is a type of network used to model a progression of decisions involving uncertainty.
Network is made up of nods (shown as circles) connected by branches or arcs (shown as lines)
which represents routing, transporting and distribution of people or material.
A decision tree is a type of network and it is named as such due to its visual presentation
resembling a tree with branches. This representation forces the managers to assign probabilities
to each possible outcome and to use simple expected values to determine the best decision.
3. Preference Theory:
Other Name: Utility Theory:
According to this theory we need better understanding of the individual decision maker’s
aversion to or acceptance of risk. This varies not only with people but also varies with the size of
the risk, the level of managers in an organization and financial resources involved. The top
managers will take more risky decisions compared to lower level managers.
Normally we come across managers with varying level of risk acceptance and risk aversion. We
do not know much about the about the attitudes of managers about risk but we know that
some people are risk averters in some situations and gamblers in some others. The data can be
presented in a graph and this is known as a personal curve. Most of the managers are gamblers
when small stakes are involved but become risk averters when the stakes rise.
REFERENCE
1. Herbert, Peter (1984). "The financial implications of purchasing policy". Journal of General
Management. 9 (4): 36–54.
2. Herbert Alexander Simon (1977). The New Science of Management Decision. Prentice-
Hall. ISBN 978-0136161448.
3. Koontz and O’Donnell (1995). Complex problem solving: the European perspective.
Hillsdale, NJ: Lawrence Erlbaum Associates. ISBN 978-0805813364. OCLC 32131412.
4. Dalton E. Macfarland, Erich N.; Anthony, William P. (December 2016). “Tacit knowledge
and strategic decision making”. Group & Organization Management. 27 (4): 436–455.
Doi:10.1177/1059601102238356. S2CID 145110719.
5. George R. Terry, Daniel; Tversky, Amos, eds. (2000). Choices, values, and frames. New
York; Cambridge, UK: Russell Sage Foundation; Cambridge University Press. P. 211. ISBN
978-0521621724. OCLC 42934579.
6. Louis A. Allen (2000). Multi-criteria decision making methods: a comparative study.
Applied optimization. Vol. 44. Dordrecht, Netherlands: Kluwer Academic Publishers. P.
320. Doi:10.1007/978-1-4757-3157-6. ISBN 978-0792366072.
