3.

DECISION MAKING
3.1 INTRODUCTION
 Owing to this fact, P.P. Drucker in his book “Practice of Management,” observes “Whatever a manager
does, he does through making decision.” True, the job of management involves the making of
innumerable decisions. That is why many persons think that management is decision-making.
 Definition of Decision-Making: Some of the important definitions of decision-making are given as
under. Decision-making is the selection based on some criteria from two or more possible alternatives.
“-—George R.Terry
 A decision can be defined as a course of action consciously chosen from available alternatives for the
purpose of desired result —J.L. Massie
 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 course of behaviour chosen from a number of possible
alternatives. -—D.E. Mc. Farland
 From these definitions, it is clear that decision-making is concerned with selecting a course of action
from among alternatives to achieve a predetermined objective.
Following elements can be derived from the above mentioned definitions:
1. Decision–making is a selection process and is concerned with selecting the best type of alternative.
2. The decision taken is aimed at achieving the organisational goals.
3. It is concerned with the detailed study of the available alternatives for finding the best possible alternative.
4. Decision making is a mental process. It is the outline of constant thoughtful consideration.
5. It leads to commitment. The commitment depends upon the nature of the decision whether short term or long term.

Features or Characteristics of Decision-Making:

From definitions and elements we can draw the following important features of
managerial decisions:
1. Rational Thinking:
It is invariably based on rational thinking. Since the human brain with its ability to learn,remember and relate many complex
factors, makes the rationality possible.
2. Process:
It is the process followed by deliberations and reasoning.
3. Selective:
It is selective, i.e. it is the choice of the best course among alternatives. In other words,decision involves selection of the
best course from among the available alternative courses that are identified by the decision-maker.
4. Purposive:
It is usually purposive i.e. it relates to the end. The solution to a problem provides an effective means to the desired goal or
end.
5. Positive:
Although every decision is usually positive sometimes certain decisions may be negative and may just be a decision not to
decide. For instance, the manufacturers of VOX Wagan car once decided not to change the model (body style) and size of the
car although the other rival enterprise (i.e. the Ford Corporation) was planning to introduce a new model every year, in the
USA.
That a negative decision and is equally important was stressed by Chester I. Bernardone of the pioneers in Management
Thought-who observed, “The fine art of executive decision consists in not deciding questions that are not now pertinent, in
not deciding prematurely, in not making decisions that cannot be made effective, and in not making
decisions that other should make. ”
3.2 DECISION MAKING ENVIRONMENT
 It is said that every manager’s primary responsibility is decision-making. Managers follow a sequential set of
steps to make good decisions that are in the interest of the firm. This process is known as decision making
process. However, the decision making environment is also an important factor in the process. Let us learn
some important aspects of the Decision making environment.
Decision Making Environment
 The quality of the decisions made in an organization will dictate the success or failure of the said business.

 So all the available information and alternatives must be studied before arriving at an important decision. The
process of decision making will help a great deal.

 Another factor that affects these decisions is the environment in which they are taken. There are a few
different types of environments in which these decisions are made.

 And the type of decision making environment has an impact on the way the decision is taken. Broadly there
are three basic types of decision making environment. Let us take a brief look at each of them.
1] Certainty
Such type of environment is very sure and certain by its nature. This means that all the information is available and at hand.
Such data is also easy to attain and not very expensive to gather.

So the manager has all the information he may need to make an informed and well thought out decision. All the alternatives
and their outcomes can also be analyzed and then the manager chooses the best alternative.

Another way to ensure an environment of certainty is for the manager to create a closed system. This means he will choose
to only focus on some of the alternatives.

He will get all the available information with respect to such alternatives he is analyzing. He will ignore the other factors for
which the information is not available. Such factors become irrelevant to him altogether.

2] Uncertainty

In the decision making environment of uncertainty, the information available to the manager is incomplete, insufficient and
often unreliable.

In an uncertain environment, everything is in a state of flux. Several external and random forces mean that the environment
is most unpredictable.

In these times of chaos, all the variables change fast. But the manager has to make sense of this mayhem to the best of his
ability. He must create some order, obtain some reliable data and make the best decision as per his judgment.
3] Risk
Under the condition of risk, there is the possibility of more than one event taking place. Which means the manager has to
first ascertain the possibility and probability of the occurrence or non-occurrence of the event.

The manager will generally rely on past experiences to make this deduction.

In this scenario too, the manager has some information available to him. But the availability and the reliability of the
information is not guaranteed. He has to chart a few alternative courses of actions from the data he has.
3.3 TYPES OF DECISION
 Decision-making is one of the core functions of management. And it is actually a very scientific function
with a well-defined decision-making process. There are various types of decisions the managers have to take
in the day to day functioning of the firm. Let us take a look at some of the types of decisions.
 Types of Decisions
1.Strategic Decisions and Routine Decisions
As the name suggests, routine decisions are those that the manager makes in the daily functioning of the organization, i.e. they
are routine.
Such decisions do not require a lot of evaluation, analysis or in-depth study. In fact, high-level managers usually delegate these
decisions to their subordinates.
On the other hand, strategic decisions are the important decisions of the firm. These are usually taken by upper and middle-
level management. They usually relate to the policies of the firm or the strategic plan for the future.
Hence such decisions require analysis and careful study. Because strategic decisions taken at this level will affect the routine
decisions taken daily.
2.Programmed Decisions and Non-Programmed Decisions
Programmed decisions relate to those functions that are repetitive in nature. These decisions are dealt with by following a
specific standard procedure. These decisions are usually taken by lower management.
For example, granting leave to employees, purchasing spare parts etc are programmed decisions where a specific procedure is
followed.
Non-programmed decisions arise out of unstructured problems, i.e. these are not routine or daily occurrences. So there is no
standard procedure or process to deal with such issues.
Usually, these decisions are important to the organization. Such decisions are left to upper management. For example, opening
a new branch office will be a non-programmed decision.
3.Policy Decisions and Operating Decisions
Tactical decisions pertaining to the policy and planning of the firm are known as policy decisions. Such decisions are
usually reserved for the firm’s top management officials. They have a long term impact on the firm and require a great
deal of analysis.

Operating decisions are the decisions necessary to put the policy decisions into action. These decisions help implement
the plans and policies taken by the high-level managers.

Such decisions are usually taken by middle and lower management. Say the company announces a bonus issue. This is a
policy decision. However, the calculation and implementation of such bonus issue is an operating decision.
4. Organizational Decisions and Personal Decisions
When an executive takes a decision in an official capacity, on behalf of the organization, this is an organizational
decision. Such decisions can be delegated to subordinates.
However, if the executive takes a decision in a personal capacity, that does not relate to the organization in any way this
is a personal decision. Obviously, these decisions cannot be delegated.
5. Individual Decisions and Group Decisions
When talking about types of decisions, let us see individual and group decisions. Any decision taken by an individual in
an official capacity it is an individual decision. Organizations that are smaller and have an autocratic style of
management rely on such decisions.

Group decisions are taken by a group or a collective of the firm’s employees and management. For example, decisions
taken by the board of directors are a group decision.
DECISION MAKING PROCESS AND TOOLS
5 steps of decision-making
 While numerous entities – such as academic institutions or advice blogs – have attempted to distill
the decision-making process into a series of five to seven steps (the University of Massachusetts-
Dartmouth’s seven basic steps is an oft-cited one), all processes more or less follow this format:

1.Identify your goal. This may sound like a no-brainer for personal goals, but for setting achievable
business goals, the more stakeholders involved, the more likely your goals will be misaligned.
2.Gather relevant information. This includes identifying courses of action and alternatives, and
researching both of these.
3.Evaluate your options. At this point, decision-makers must weigh the evidence.
4.Make your choice.
5.Evaluate your decision. This includes both short-term and long-term evaluations.
Decision-making tools and techniques
Here are some of the more popular options.
• Decision matrix: A decision matrix helps you evaluate all of your options. When using the matrix, create a table with all the
choices in the first column and all the factors that affect the decision in the first row. Next, score each option to decipher
which factors are of more importance. A final score is then tallied to reveal the best pick.
Pros and cons list: Decision-makers use a T-chart – or pros and cons list – to weigh the benefits and disadvantages of the
options. It ensures that all positives and negatives are considered when making a decision.
• Decision tree: A decision tree is a graph or model that contemplates each option and its outcomes. This technique also
conducts statistical analyses.
• Multiple voices: Multivoting is used when multiple people are involved in making a decision. It helps whittle down an
extensive list of options to a smaller group until the final decision is revealed.
• Pareto analysis: A Pareto analysis technique is useful when many decisions need to be made. This helps prioritize which ones
should be made first by determining which decisions will have the most significant impact.
• Cost-benefit analysis: This technique is used when weighing the financial ramifications of each possible alternative to
determine what makes the most sense from an economic perspective.
• Conjoint analysis: A conjoint analysis is a method business leaders use to determine consumer preferences.
• SWOT analysis: A SWOT analysis assesses strengths, weaknesses, opportunities and threats – exactly what this planning tool
stands for.
• PEST analysis: An acronym for “political, economic, social and technological,” a PEST analysis can improve decision-
making and timing by analyzing external factors. This method considers present trends to help predict future ones.
Why decision-making tools are useful
When embarking on a formal decision-making process, many businesses turn to tools and techniques to help leaders organize
their thoughts and arrive at the best decision for their organization.

Here’s a look at several ways businesses can benefit from decision-making tools.
1. They can help you make sense of the data.
When analyzing data related to a decision, it can be challenging to weigh all the varied factors and their impact on your
decision’s outcome. A decision-making tool will help put things in perspective and guide decision-makers to act according to the
organization’s most important factors.
2. They encourage brainstorming and creative thinking.
When tasked with using a decision-making tool, team members involved in the process tend to stretch their imaginations to
develop different possible outcomes to consider. Decision-making tools inspire more creativity, guiding users to think outside
the box rather than weigh only the options that immediately come to mind.
3.They help organize and prioritize goals.
Decisions tend to involve multiple goals. For example, a company may need a project to be profitable while also adhering to
laws and regulations. Decision-making tools can assign importance to a decision’s competing goals, helping you settle on a
solution that matches your company’s priorities.
4. They remove bias from the decision-making process.
Everyone has some bias that can cause a mistake during the decision-making process. The tools remove a great deal of
individual bias and emotion from the process. For example, a product manager may want to launch a new product their
department created without thinking clearly about production costs or customer demand. A decision-making tool would
introduce these factors in its framework.
 3.4 INDIVIDUAL VS GROUP DECISION MAKING
 Difference # Individual Decisions:
 1. Decisions are taken by a single individual.
 2. Individual decisions are less costly.
 3. They are based on limited information gathered by managers.
 4. Individual decisions are taken in situations of crisis or emergency.
 5. They do not involve moral commitment on the part of members to accept and implement them.
 6. Individual decisions do not affect morale or job satisfaction of employees
 7. They introduce one-man control.
 8. Individual decisions do not promote interaction amongst superiors and subordinates.
 9. Decisions are usually based on clear policy guidelines.
 10. Though decisions are based on individual thinking, they are high-quality if the individual has expertise and
experience in making such decisions.
 11. Individual decisions are usually taken in competitive business situations where people are not open to
suggestions.
Difference # Group Decisions:
1. Decisions are taken by a group of persons.
2. Group decisions are costly in terms of time and money.
3. They are based on extensive information collected by members of the group.
4. Group decisions are taken when there is sufficient time to make decisions.
5. Group decisions are easier to implement as group members feel committed to them.
6. Group decisions positively affect morale and job satisfaction of employees.
7. They introduce self-control.
8. They promote superior-subordinate interaction and healthy relationships amongst them.
9. Group decisions are taken when the problem requires creativity and expert knowledge of a group.
10. It usually results in high-quality decisions as they are based on extensive brainstorming. They provide the benefit of
synergy.
11. Group decisions are usually taken in supportive business situations where group members encourage problem-solving
together.
 3.5 HERBERT SIMON’S MODEL & PRINCIPLE OF RATIONALITY

Systematic Decision-Making Process (Simon, 1977)

 The Herbert Simon Model is related to decision making process, The Simon model
describe the core of the decision making process and is generally used as the basis
for describing the decision making process.
 The decision-making process can be divided into three main phases.

 Intelligence
 Design
 Choice

Modeling is Essential to the Process

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DECISION MAKING SYSTEM
 Intelligence phase
 Reality is examined
 The problem is identified and defined
 Design phase
 Representative model is constructed
 The model is validated and evaluation criteria are set
 Choice phase
 Includes a proposed solution to the model
 If reasonable, move on
Intelligence Phase
 Searching the environment for conditions calling for decisions. The phase consists of determining that a problem exists.
(It consists of problem finding activities related to searching of the operating/business environment, for identifying condition
calling for decisions.)
Design Phase
During this phase a positive set of alternative solution is generated and tested for feasibility.
Choice Phase
In this phase, the decision-maker selects one of the solution identified in the design phase.
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