PRINCIPLES OF BUSINESS

MANAGEMENT

Problem Solving and

Decision-making

D20059499
Edition 1

*D20059499-E1*
D20059499-E1
 PRINCIPLES OF BUSINESS MANAGEMENT
Problem Solving and Decision-making
CONTENTS PAGE

How to work through this study unit 1

Introduction to Decision-making 3

Lecture One: Managerial Decision-making 4

A Case Study 12

Bibliography 24

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1st Edition April 2014

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 HOW TO WORK THROUGH THIS STUDY UNIT

The icons used in this study unit

Read through the descriptions of icons below. Look out for these icons as you work
through the study unit. They will show you at a glance where you need to work
through tasks, definitions, self-assessment questions, and so on.

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We have interspersed tasks throughout your lessons.

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conclude each lesson with a set of self-assessment questions.

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The best way to study

To ensure that you get the full benefit of this study unit, we recommend that you do
the following:

 Read the next section carefully, called Introduction to this Study Unit. It provides
you with the learning outcomes for each of the lessons in the study unit.
 Carefully and diligently work through each lesson, keeping in mind the outcomes
that you have to achieve.
 Ensure that you complete all the tasks in the lessons.
 Ensure that you answer all the self-assessment questions in the lessons. Compare
your answers to those provided in this study unit.
 If you encounter any words that you do not understand, make a list of these, then
look up their meanings in a dictionary.

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 INTRODUCTION TO DECISION-MAKING

Managers experience the responsibility, power, and vulnerability of their position when
they make major decisions. At some stage we all face the loneliness and uncertainty
that can accompany important decision-making. Biographies of political leaders often
focus on crucial choices they faced, showing the difficulty and stress of the decision-
making process.

However, Kolb et al. (1991) identifies two problems that arise if we focus on subjective,
individual experience to analyse and improve the decision-making process in
organisations. These two problems are as follows:

 Decisions are independent, solitary events that are not connected to other
decisions or a decision-making process. The organisational process of decision-
making can interfere with the most experienced decision-maker's work.
 While decision-making is normally an individual process, in organisations it is a
social process. An organisation's decisions are identified, made and
communicated by individuals throughout the organisation. Managers depend on
the decision-making of others and the information that others give them. They
also delegate decision-making and share information with others.

So an important part of a manager's role is to determine who in the organisation has

the information, experience and wisdom to make a specific decision. It is also
important for a manager to consider whether stakeholders will accept the outcome of a
decision. By viewing decision-making as a social process, a manager takes
responsibility for determining how a problem will be solved, but will not necessarily
take responsibility for the solution. Clearly, we cannot assume that a decision made
within an organisation is made alone.

Planning, organising, leading and controlling decision-making are essential

components of the managerial function.

In this study unit we will focus on the following aspects of decision-making:

 the distinction between decision-making and problem-solving;

 various types of decisions and the conditions under which they are made;
 the process of making decisions;
 the social aspects of making decisions; and
 alternative ways of making decisions with other people.

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 LECTURE ONE:
MANAGERIAL DECISION-MAKING

Managerial decision-making and problem-solving

In this lecture, we will approach decision-making from a manager's point of view.

As managers, we must establish our objectives and then achieve them through the
management process of planning, organising, leading, and controlling. This process
will include our strategic and functional plans.

From our own practical experience we know that problems have to be solved, and daily
decisions must be made when implementing plans. However, we must recognise the
difference between problem-solving and decision-making.

When making a decision we may not have a problem to solve. For example, we may
make a decision to set new standards of performance, establish a new objective for the
company, or open a new branch office. All of these are business decisions concerned
with company operations.

Other decisions we make may concern the solution to an operating problem. These
decisions are often relatively unimportant or routine decisions. Our task in these
circumstances is to make a choice between several alternative solutions to the
problem. Therefore, we should be skilled in the process of problem-solving.

In this lecture we will discuss both decision-making and problem-solving.

Defining decision-making

A manager's effectiveness is directly related to the quality of his or her decision-

making. A manager must know how to reason clearly, and interpret facts and opinions.
A manager needs good judgement to make good decisions. Good judgement depends on
experience, values and abilities. Whatever their natural ability, managers can develop
their decision-making skills.

Decision-making can be defined as follows:

 Decision-making is the selection, based on some criteria, of one alternative from

two or more possible alternatives.
 Cronje et al. define decision-making as a choice between two or more options.
 Peter Drucker states that the decisions that really matter are strategic. They
involve either finding out what the situation is or changing it, and finding out
what the resources are or should be.

Drucker continues that:

'Among these are all decisions on company objectives and how to reach them.
All decisions on productivity belong here; they always aim at changing the total
situation. All organisation decisions and all major capital-expenditure decisions
also belong here. But most of the decisions that are considered operating
decisions are also strategic in character: because they involve the arranging of a
sales district or training of salesmen; plant layout and raw material inventory;
preventive maintenance or the flow of payroll vouchers through an office.'

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The decisions described above are not taken in the problem-solving process. They are
taken to direct and shape a company towards its future. The decisions made must be
implemented in order to produce results. They must therefore be consistent
throughout the business, department by department.

Task
Develop your own definition of decision-making.

Types of managerial decision

Some decisions will have long-lasting financial and marketing implications for a
company. Other decisions will have a minimal impact. Managers may have a surfeit of
information on which to base their decisions, or too little. Managers will vary their
decision-making process according to circumstances. Some decisions will be one-off
decisions, while others will be routine.

Decision content and uniqueness

The decisions that management makes will depend on two factors:

 decision content; and

 decision uniqueness.

We can assess a decision's uniqueness by considering the following three factors:

 Has the problem been encountered before?

 How frequently has it occurred?
 How satisfactorily has it been resolved?

Programmed and non-programmed decisions

We can now distinguish between two different types of decisions:

 Programmed decisions: These are decisions made systematically in accordance

with some rule, policy or procedure, for example, salary reviews, customer
complaints or acceptance of a cheque from a customer. They are normally easy to
make, but managers should be alert to specific circumstances and the reason for
each decision. Some routine decisions are not simple to make. For example, the
ordering of stock is a critical issue and takes planning to ensure that the correct
decision is made.
 Non-programmed decisions: These are unique or non-routine decisions. They are
usually complex and there is no established way of dealing with them  for
example, the allocation of company resources, or the introduction of a new
product. The ability to make good non-programmed decisions can distinguish
effective from non-effective managers.

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 Task
Are the following decisions programmed or non-programmed decisions?

1. You are the manager of an upmarket clothing store and new ranges of designer clothes
have been made available. You must decide what you will stock for the following season.
2. As the marketing manager of a pharmaceutical company you are responsible for the sales
staff. A member of your sales staff has been performing poorly over the past six months.
You need to decide on a course of action.
3. As manager of a large grocery store you have realised that the point-of-sale system
(where the customers pay) is outdated. You need to decide whether to upgrade the
system.

Answers to task

1. This is a non-programmed decision because it is unique – your decision would be different

each season.

2. This is a programmed decision – while you may not have had to deal with this type of
problem before, the company would have procedures in place for dealing with it.

3. This is a non-programmed decision – it is unique.

Decision-making conditions

The management environment always influences the decision-making process. The

macro-management environment, the micro-management environment, and the
market or task environment are subject to frequent changes. For instance, a decision
regarding a new product will be influenced by consumers' needs and perceptions and
their buying power, as well as the ability of suppliers to supply raw materials and
legislation.

Prediction is therefore difficult. Decision-makers will use all information available from
the environment to make decisions that should best achieve required results.
Decisions also have to be made in the face of uncertainty, for instance, the changing
inflation rate, the appointment of a new employee, the development of a new product,
or the purchase of new equipment.

Decisions will affect future outcomes and in turn be affected by future conditions.
Decisions may therefore be made under three possible conditions  certainty, risk, and
uncertainty  as illustrated in Figure 1.

Certainty Risk Uncertainty

Outcomes of decisions Outcomes of decisions

predictable unpredictable

Fig. 1 Decision-making conditions (from Cronje et al.)

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Managers may need to make decisions under any of the following three decision-
making conditions:

 Conditions of certainty: Under conditions of certainty, managers have enough

information to know exactly the outcome of a decision. Accurate, reliable
information is available to help them.
 Conditions of risk: Managers can sometimes predict the possible results, or
outcome of a decision, even though they may not know which particular outcome
will actually occur. The decision is then made under a condition of risk. These
decisions often involve returns on long-term investments and are made at higher
management levels. Limited information is available for decision-making.
Previous results may be used to provide objective probability estimates, for
example, management may use past sales figures to estimate future sales
figures. (An objective probability estimate is the likelihood that a particular state
of things will occur based on historical fact.) Alternatively, they may use
subjective probability estimates, also known as 'gut-feel', when accurate
information is not available. (A subjective probability estimate is where the
manager must rely on a personal estimate or 'gut feel' that the particular state of
things will occur.) For example, when making a decision on costs for the
following financial year based on projected raw material price increases set by
suppliers, management may use their 'gut feel' to estimate the increase.
 Conditions of uncertainty: Under these conditions, management finds it difficult
or impossible to assign approximate probabilities to the outcome. Essentially,
management does not know all the alternatives, the associated risks, or the
decision outcome. Managers can act only within the bounds of information
available at that time.

Decision Risk Characteristics

1. High certainty Low Repeated sufficiently to reduce uncertainty
to a minimum. Decisions are of a routine
nature, usually affect a small group only, and
are easy to apply. Prediction of decision
outcome is nearly perfect.
2. Fair amount of Medium Reasonable estimates of uncertainty are
certainty possible. Decisions affect two or three
departments at maximum.
3. Considerable Above Little surety of hoped-for results from
uncertainty average decisions. Includes large areas of activity.
4. Great uncertainty High Situations cover very broad areas and many
non-predictable factors.

Fig. 2 Classification of decisions by the extent of certainty involved

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 Task
Look back at the previous task and describe the conditions under which the decisions must be
made. Look carefully at the information available in each situation.

Answers to task

1. The decision will be made in a condition of uncertainty. Buyers' preferences, inflation and
many other factors must be considered, and little information will be available for decision-
making.

2. This decision will be made in a condition of certainty. The manager will have to measure
the staff member's performance and apply set rules to achieve a definite outcome.

3. This decision will be made in a condition of risk. The manager will know the costs involved
and the nature of the problem and can therefore predict the result.

Decision-making models

There are two basic ways in which managers can make decisions. We can simplify
these into models or processes that we follow when reaching decisions.

The two main models are:

 the bounded-rationality model; and

 the rational model (optimising model).

The bounded-rationality model

In this model the manager selects the first option that meets the minimum criteria and
is most easily attainable – it is often not the best option. This form of decision-making
can be used when decisions are programmed and low-risk. They are made to satisfice.
('Satisfice' means to be satisfactory or adequate in the situation, not the best.) For
instance, when a customer has asked for a refund but has not returned the purchase
cash slip and this is a policy requirement of the company. The manager could decide
between insisting on receiving the slip and possibly losing a customer, or refunding the
customer and relabeling the product.

The rational model (optimising model)

In the rational model the manager seeks alternative solutions and then selects the
practical solution that is most likely to achieve the objectives. This model is most
useful when managers need to make decisions that are non-programmed and high-
risk. For example, a manager who must decide whether to embark on a retrenchment
programme may not be able to accurately forecast future sales, and would need to use
this model.

In most situations managers use a series of steps when making a decision. This helps
them to identify a problem, decide on what they want to achieve when making a
decision and search for various solutions. When a problem occurs for the first time, in
other words, it is unique; a manager must work through the entire decision-making
process.

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In order to reduce the complexity of decision-making, managers can use rules, policies
and procedures, which take away the need to evaluate the various alternatives each
time a decision must be made. Generally, the higher up in management you are, the
greater the risk associated with decisions, the more unique the decisions and the
greater the uncertainty of the outcome. You will therefore need to use the entire
decision-making process.

We will now consider the rational decision-making process.

Steps in the rational decision-making process

There are six main steps that lead to a particular result, as summarised in Figure 3.

Step 1: Recognise, identify and define the problem and develop objectives

The first step is to recognise that a problem exists. This is probably the most difficult
phase, because it is easy to treat the symptom as the cause. To ensure you identify the
problem, first follow the four steps set out below:

1. Identify the condition that you consider to be unsatisfactory. (Do not interpret
this condition and arrive at a solution at this stage as you may be wrong!)
2. Describe in writing the condition and any deviations from the expected or
normal.
3. Background to the deviation: List and identify the probable causes of the
condition in reverse chronological order (start from the current condition and
trace possible errors back in time). You will need to have a sound knowledge of
the cause-effect structure of any system in order to reach a good solution.
4. Consequences of the problem: The next step is to try to establish in chronological
order the probable consequences if the present situation remained unchanged.
Ask yourself what would happen if you took no action.

The above steps will help you to define Drucker's 'critical factor', which must be
changed before the problem can be corrected.
The definition of the problem must be clear in relation to the objective of the decision.
The objective should be to achieve better business performance and results, in the
short and long term. You should also consider any company constraints in terms of
resources and policies.
Once you have decided exactly what the problem is, analyse it in detail. You need to
decide who to consult, who to inform, and who will be affected by the decision.

Ask yourself what information you require in order to make this particular decision,
what information you already have, and what additional information is necessary.

Remember, however, that you will seldom be able to get all the facts, either because of
time constraints or because they are inaccessible. You should reach a compromise
between spending all the time and money necessary to gather the facts required to
make a correct decision, and collecting fewer facts but making a quicker decision. In
important areas, for instance where a large sum of money or the safety of personnel is
at risk, more facts should be accumulated before a decision is made than in low-
priority areas.

Many techniques are available to help problem-solvers to analyse facts. However,

problem-solvers should avoid being ruled by these techniques.

A basic guideline in analysis is to search for patterns in the facts, for example,
similarities between different situations and differences between similar situations.

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Another guideline is to pursue the question 'Why' – the most important question in the
problem-solving process.

Recognise a
Step 1 problem or
opportunity

Set objectives
Group
decision
Step 2 Develop alternative making
solutions

Evaluate the various

Step 3 alternatives
Quantitative
tools
Step 4 Select the best
option

Step 5 Implement the

decision

Step 6 Follow-up, evaluate

and control

Fig. 3 Steps in the decision-making process (adapted from Cronje et al)

Step 2: Develop alternative solutions

It is easy but risky to consider a solution before gathering sufficient facts and then
making the facts fit the theory.

There is always more than one possible course of action. Form a basis of comparison
for alternative proposals by first considering the consequences of taking no corrective
measures.

Remember not to fall into the trap of using 'either/or' terminology. Problems are
usually too complex for simple solutions, and problem-solving often involves
compromise.

This, the creative stage, is by far the most difficult and challenging in the process. Use
brainstorming techniques, imagination and originality, and never allow biases,
automatic reactions or conventional attitudes to obstruct constructive thought. When
you have worked out the possible alternatives, you can proceed to Steps 3 and 4.

Steps 3 and 4: Evaluate and select the best alternative

In this phase you must make your choice from the alternative solutions. You should
analyse the consequences of your decision by asking: 'What will happen if we do this?'
Here you can use quantitative tools to evaluate the alternatives. We will discuss these
in more detail later in this unit.

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The following criteria will help you to make your selection:

 Economic: Which solution will give the best results for the least effort? At this
stage you will measure gains against risks.
 Operational: Which solution is likely to work best to achieve the organisation's
goals?
 Resources: Do you have the human and other resources to put the decisions into
practice? Do staff have the skills? This is important because a good theoretical
solution may not work in practice because the human resources are either
unavailable or lack the necessary skills.
 Will the solution be acceptable to everyone?
 Which solution will have the best future impact?

Step 5: Implement the decision

At this stage you should develop an 'action plan' to put your decision into practice and
achieve its objectives.

When turning your decision into action, remember that other members of staff will be
responsible for putting it into effect and should feel that they have been part of the
decision-making process. Present the decision in terms with which they can identify,
and encourage their participation in its implementation. Ensure that the decision will
help them in their work and give them a sense of achievement. Only then will they
accept the decision as their own, and action taken will be positive and effective. This is
an essential part of good decision-making.

Step 6: Evaluate and control

The success of the decision should be measured against quantifiable goals, standards
and objectives. Should it become obvious from these evaluations that the chosen
solution is not working, a manager has several options. One of these would be to adopt
a previously identified alternative. If the problem had been incorrectly defined, the
manager could start the whole process from scratch of reassessing the implementation
of the solution.

A decision can only be considered complete once it has been exposed to the realities of
the business environment. Without evaluation, therefore, the decision-making process
is meaningless.

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 A CASE STUDY

Consider the following problem.

Restaurants and hotels were recently forced by law to restrict smoking on their
premises. Restaurants were given a three-month grace period to comply with
legislation.

The legislation

 Restaurants must designate at least 75% of the area allocated to customers as a

non-smoking area.
 Up to 25% of the restaurant can be a smoking area. However, this area must be
sealed off from the non-smoking area by walls and the area must have either
external ventilation or extraction via a separate extraction unit, which does not
mix the smoky air with that of the non-smoking area.

The restaurant's problem

A restaurant is situated in the interior of a shopping centre with no external

ventilation. The restaurant is small, so 25% of it will provide a very small area for
patrons who smoke. Research over a one-month period showed that 62% of their
customers were smokers. What should the restaurant owners do?

The restaurant currently has seating for 40 people and two sections, smoking at the
centre of the restaurant and non-smoking on its perimeter, adjoining a mall that is
non-smoking.

A ventilation system and new wall will cost R78 000.

What decision should this restaurant take?

Step Process
Recognise, identify and The problem is that the restaurant must comply with new legislation
define the problem to restrict smoking in public areas.
Set objectives Make a decision regarding the allocation of smoking and non-
smoking areas for the restaurant at the lowest possible cost.
Develop alternative The restaurant owners asked a number of their regular customers
solutions and all their staff to attend a brainstorming session (see later in this
unit) to come up with ideas for the restaurant. The ideas included:
1. Leave the restaurant as is and wait for a complaint to be made.
2. Box off the current smoking section and put in a separate
ventilation system. Use artificial windows to create space.
3. Make the restaurant totally non-smoking.
4. Move the kitchen and make that the smoking area – it has an
external wall that could be used, and the kitchen could be moved
to the centre of the restaurant.
5. Do away with the kitchen and buy all food ready prepared, so
that only ready-made food can be served.

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Evaluate various The various options were evaluated as follows:
alternatives
1. This could result in a fine of R200 000 which the restaurant
could not afford and would result in the restaurant being
liquidated.
2. The cost of a new ventilation system was prohibitive; the
restaurant would take 18 months to realise the return on
investment.
3. This might cause a loss of the smoking customers who make
up the majority of the restaurant's patrons. All restaurants in
the mall are in a similar situation, so competitors would face
similar problems; patrons would have limited options in the
shopping centre. The only restaurants that could afford to
make the structural changes would be the larger franchises,
which are indirect competitors with a different target market.
4. Too costly.
5. Currently the restaurant derived much of its revenue from
cooked food, this would result in reduced turnover and
perhaps leave the business non-viable.
Select the best option A decision is taken to make the restaurant totally non-smoking.
Implement the decision Date is set for implementation. Letters will be issued to all patrons
explaining the situation and making them aware that they can smoke
outside the centre before enjoying their meal. Staff will be advised
about how to handle customer complaints regarding this decision.
Policy will be developed to deal with customers who smoke in the
restaurant.
Follow up, evaluate and Follow-up takes place by giving customers a questionnaire to
control complete one month after the changes have taken place. The
questionnaire solicits feedback from customers to ensure that they
are satisfied with the service and the decision is implemented. A
record of all incidents is kept to ensure that the policies are
functioning well.

The rational decision-maker

As we have seen from our discussions, rational decision-making means that a manager
makes consistent, value-maximising choices within specified constraints (Robbins).

Robbins cites the following factors that must be present in order for someone to make
a rational decision:

 Problem clarity. The problem is clear and unambiguous.

 Goal orientation. There is no conflict over the goal, and it is well defined.
 Known options. It is assumed that the decision-maker is innovative, knows all
the criteria, and has all the viable alternatives.
 Clear preferences. It is accepted that the criteria and alternatives can be ranked
rationally.
 Constant preferences. It is assumed that the decision criteria will stay the same
and that the weights assigned to them are constant over time.
 No time or cost constraints. It is assumed that there are no time or cost
constraints, and therefore the decision-maker can obtain sufficient information
about criteria and alternatives.
 Maximum payoff. The final choice will maximise economic payoff.

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There are limitations in the rational decision-making process and rationality may be
bounded, as we will now discover.

Limitations in the rational decision-making process

Managers and management students should be aware of some basic limitations that
can handicap effective management decision-making. Robbins has listed the following
10 issues that could limit the decision-making process:

 There are limits to a person's information-processing capacity.

 People tend to intermix problems and solutions.
 Biased perception can distort problem identification.
 Information is sometimes selected for its accessibility instead of its quality.
 Decision-makers sometimes favour a specific alternative before thinking it
through.
 Evidence that a previous solution did not work does not always generate a search
for other or new solutions.
 Prior decisions may put a constraint on current choices.
 Because of divergent interests, it is difficult to create a common effort towards a
single goal.
 Time and cost constraints are placed on decision-makers.
 Most organisational cultures reinforce the status quo.

Task
Using the steps in the decision-making process and an example of your choice, describe in
detail how you would make your decision.

Group decision-making

If you look back at Figure 3 you will see that part of Stage Two (setting objectives) and
Stage Three (developing alternative solutions) can involve group decision-making.
Group decision-making means that several people are involved in the decision-making
process as a group. One of the main benefits of group decision-making is that different
people bring creativity to the decision-making process, especially with regard to setting
objectives and the development of innovative solutions.

Opinions of group decision-making vary. One view is that it restricts creativity because
of poor communication skills, the social conformity that results from peer pressure,
and a lack of understanding of the implications of the decision on the part of some
group members. However, because groups generate several solutions, they make
above-average decisions.
Managers should know the benefits and disadvantages of group decision-making.

Benefits of group decision-making

The benefits of group decision-making include the following:

 In the case of a complex problem, a group will make a better decision, especially
if no expert is present.
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 More solutions are developed.
 Acceptance of a decision by group members is better.
 It is easier for the group members to communicate the decision to their
subordinates.

Disadvantages of group decision-making

The disadvantages of group decision-making include the following:

 The process is time-consuming and costly.

 One person may dominate the group.
 The decision is often a compromise and not the best one.
 Group social pressure may persuade some people to follow the majority, which
may not result in the best decision.
 Power struggles may develop among members of the group.

Summary of this study unit

In this lecture we have discussed managerial decision-making. We began by defining

decision-making as a process whereby management decides between two or more
alternative courses of action.

There are two main types of decisions, programmed and non-programmed.

Programmed decisions refer to routine decisions that occur on a regular basis.
Management often put policies, rules and procedures in place to ensure consistency in
these decisions. In routine decisions management can use a bounded-rationality model
to select the options that will satisfice (in other words, be adequate). Non-programmed
decisions refer to unique problems and require a more thorough decision-making
process to find a solution. Management can use the rational model for decision-making
in this instance.

We learnt that decisions are made under conditions that we classify according to the
amount of information available to the manager. When a manager has all the available
information required to make a decision and the problem is known and understood,
decisions are being made under conditions of certainty. Decisions are made under
conditions of risk when a manager does not have all the available information and
estimates (objective and subjective) may be made. Under conditions of uncertainty,
little or no information is available and often the problem may not be understood fully.
Under these conditions the rational model for decision-making should be used.

Managers in different fields may have very different jobs, but they all need to make
decisions. All managerial functions  planning, organising, leading and controlling 
depend on the manager's ability to make decisions. We can therefore conclude that the
long-term success of an organisation depends on the manager's ability to make
decisions.

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 Self-assessment questions

When you have completed the answers to the Self-assessment Questions, test the
accuracy of your answers by comparing them with the answers provided. If your
answers are incorrect, revise the relevant notes. If, after that, you still have problems
with parts of the work, phone your tutor and ask for guidance.

Question 1

Answer true (T) or false (F) to the following statements.

1. One of the steps in the rational decision-making process is to recognise a

problem and develop objectives.
2. Decisions under conditions of uncertainty are more suited to the bounded
rational model of decision-making.
3. When decisions are made under conditions of uncertainty, the likelihood of
alternatives is unknown and the outcome associated with each alternative is
unknown.
4. One of the drawbacks of group decision-making is that only a limited number of
creative ideas is generated.
5. Problem solving involves the gathering of sufficient information on which to make
a decision.
[5]

Question 2

Choose one correct answer for each of the following questions.

1. Decision-making follows a set process. Which of the following is in the correct

sequence?

(a) recognise a problem; generate various courses of action; develop objectives;

evaluate the courses of action, select the best one, implement, control and
follow up;
(b) recognise a problem and develop objectives; generate various courses of
action; evaluate the courses of action, select the best one, implement,
control and follow up;
(c) recognise a problem and develop objectives; generate various courses of
action; select the best course of action, implement, control and follow up;
(d) recognise a problem; generate various courses of action; evaluate the
courses of action, select the best one, control and follow up.

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2. Elton Mashaba is faced with a problem. His company sells retreaded tyres to
garages but recently sales have declined and he needs to make a decision. This is
an example of:

(a) a programmed decision under the condition of certainty;

(b) a programmed decision under the condition of uncertainty;
(c) a non-programmed decision under the condition of risk;
(d) a non-programmed decision under the condition of uncertainty.

3. When recognizing problem or opportunities we need to

(a) gather information

(b) consider overall mission
(c) evaluate alternatives
(d) formulate/develop models

4. When Norman Mofolo encountered staff in his business accepting cheques from
customers he decided to put a policy in place to deal with this type of decision.
This is an example of:

(a) a procedure;
(b) a non-programmed decision;
(c) a routine decision;
(d) a rule.

5. What is the most important, and most difficult, step in decision making?

(a) Identifying the problem.

(b) Developing alternative courses of action.
(c) Selecting an alternative course of action to implement.
(d) Implementing the solution.

6. The decision of Modern Clothing in 1998 to market the new range of Jonty
Rhodes casual wear was based on the expectation that Jonty's cricketing
performance and popularity would continue to rise. This is an example of:

(a) a decision under conditions of uncertainty;

(b) a decision under conditions of certainty;
(c) a programmed decision;
(d) a decision under conditions of risk;
(e) a non-rational decision.

7. Before the introduction of ATMs by most major banks, some high-ranking bank
officials were not convinced of their future success, despite positive market tests.
This is just an indication of the _______ associated with this decision.

(a) certainty;
(b) risk;
(c) uncertainty;
(d) creativity;

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Principles of Business Management / © ICG / Page 17
 (e) compromise.

8. The decision-making skills of managers are most evident in their ability

to________ :

(a) identify and define problems;

(b) generate creative alternatives;
(c) select the best possible alternative;
(d) implement their decisions;
(e) manage decision-making groups.

9. How many of the following statements are correct?

 Group decision-making is always more creative than individual decision-

making.
 The creativity of a group decision depends mainly on the decision-making
technique used.
 One of the advantages of group decision-making is that it improves
the commitment of participants to the final decision.
 Group decision-making is typically used in complex situations where no
one member is an expert.
 The tendency to reach consensus is one of the dangers of group decision-
making.

(a) one;
(b) two;
(c) three;
(d) four;
(e) five. [9]

Question 3

1. Explain programmed and non-programmed decision-making, mentioning the role

of information in each case. Give your own examples. (8)

2. Explain:

 objective probability; (2)

 subjective probability; (2)
 uncertainty; and (2)
 risk. (2)

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Principles of Business Management / © ICG / Page 18
3. Why is it that managers spend so much time involved in group decision-making
and what are the benefits derived from this approach? (7)
4. List the steps in the rational decision-making model (process) (6)
5. Describe three considerations that a manager should make before selecting a
course of action. (3)
6. Read the following scenario through carefully and then answer the questions.

Belinda Molefe has decided that she wants to start a business making and selling
African jewellery (brooches, necklaces and earrings). She had made some
jewellery as gifts for friends and they had been very impressed. She has been to a
number of flea markets (which generally operate on Saturdays and Sundays) and
has seen many people selling African curios and beadwork but it was all the
same. Her designs are individual and no two pieces are alike. She has decided to
call her business Beadazzles. Her friend, Dot, runs the fleamarket stand for a
share of the profits, because Belinda is busy with the production of the jewellery.

Beadazzles has been running successfully for 6 months in the fleamarket.

However, in the 7th month, Belinda started experiencing problems with her
product with many people returning the jewellery they bought because it had
broken. Dot also decided that she was no longer willing to help and had actually
gone into competition with Belinda at the same fleamarket. As a result profits
were diminishing and Belinda needed to take action.

Help Belinda to define the problem of diminishing profits by answering the

following questions:

(a) How big is the problem? Explain. (2)

(b) What events caused this problem? (2)
(c) How long has it existed? (1)
(d) Who has been involved; in what way were they involved? (2)
(e) How was the problem discovered? (1)
(f) Having identified the problem as one of diminishing profits,
make two suitable suggestions for solving the problem. (2)
[10]
[35]

Total Marks: [59]

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Principles of Business Management / © ICG / Page 19
 Answers to self-assessment questions

Question 1

1. T
2. F – decisions under the condition of certainty are most suited to this type of
model
3. T
4. F – many ideas are generated; this is one of the benefits of group decision-
making
5. T. [5]

Question 2

1. (b)
2. (d)
3. (a)
4. (c)
5. (a)
6. (a)
7. (b)
8. (a)
9. (c) [9]

Question 3

1. Programmed decisions: These are decisions made systematically in accordance

with a rule, policy or procedure, for example, salary reviews, customer
complaints, or acceptance of a cheque from a customer. They are normally easy
to make, but managers should be aware of the reasons for their decision and the
conditions under which the decision is made. Some routine decisions may not be
simple to make. For example, ordering stock is a critical issue and must be
carefully planned to ensure that correct decisions are made. There is enough
information to make a decision.

Non-programmed decisions: These are unique, or non-routine decisions. These

are solutions to problems that have never occurred in the same way before. They
are complex and there is no established way of dealing with them, for example,
the allocation of company resources, or the introduction of a new product. The
ability to make good non-programmed decisions helps distinguish effective from
non-effective managers. Non-programmed decisions are always made under
conditions of inadequate information. Managers may have to make objective
probability estimates or subjective probability estimates in areas where
information is lacking. (8)

2. (a) Objective probability – the likelihood that a certain event will occur based
on historical data. (2)
(b) Subjective probability – when insufficient information is available a
manager needs to use 'gut feel', or their personal belief that a certain event
will occur. (2)

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 (c) Uncertainty – little is known about a situation, for example,
the available options, probability of occurrence, potential benefits, and so
on. (2)
(d) Risk – the potential benefits, costs and probability of occurrence are
known. (2)

3. When setting objectives and developing alternative solutions, managers can use
group decision-making. Group decision-making means that a number of people
are involved in the decision-making process – as a group. One of the main
benefits derived from group decision-making is that various people bring
creativity to the decision-making process, especially with regard to setting
objectives and to the development of innovative solutions.

One of the biggest drawbacks is that it is time-consuming because groups often

try to reach consensus.

Benefits of group decision-making:

 When a problem is complex, a group will probably make the best decision,
especially if no expert is present.
 More solutions are developed than with other techniques.
 Group members more readily accept the decision.
 It is easier for the group members to communicate the decision
to their subordinates. (7)

4. (a) Recognise and identify the problem and develop objectives.

(b) Generate various courses of action.
(c) Evaluate the courses of action.
(d) Select the best one.
(e) Implement the chosen course of action.
(f) Follow up and control. (6)

5. Linear programming – Linear programming is one of the most extensively used

management tools. It is used for the allocation of resources. Cronje defines it as
'a quantitative tool for optimally allocating scarce resources among competing
uses to maximise benefits or minimise losses.' Resources may be physical,
human, informational or financial.

For example, if sales executives must visit 10 customers each day, linear
programming can calculate the most cost-effective way in which they can do this
without having to retrace their steps.

Queuing theory – Queuing theory is used to achieve an optimal balance between

the cost of increasing service and the time that individuals, machines or
materials must wait for service. For example, if a paint production line has only
three paint mixers then paint ready for mixing will have to wait on the line until a
machine is free. Queuing will analyse the cost associated with purchasing
another machine, as opposed to that of keeping the paint waiting for mixing.
Another example is a bank in which customers must queue for service. It will not
cost the bank anything to ask the customers to wait but it will cost them to
employ another cashier to reduce the queue.

Queuing theory can identify the optimal solution for maximising service while
minimising costs. (3)

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6. (a) It is threatening the existence of the business, so it is a big
problem. (2)

(b) There were two causes: the quality of the jewellery decreased and her friend
went into competition with her. (2)

(c) Since the seventh month. (1)

(d) Dot because she went into competition with Belinda; and her suppliers of
the raw materials because the quality of her jewellery was not as good as it
had been. (2)

(e) People started to complain about the jewellery and were

returning it. (1)

(f) This is your own answer. Suggestions are: find another supplier; change
fleamarkets or find another outlet. (2)
[35]

Total Marks: [59]

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Principles of Business Management / © ICG / Page 22
 Summary of Lecture One

Types of Decisions
Definition Programmed Decisions
Manager faced with problem and Routine, repetitive problems, managers
must make a decision between two develop procedures and rules to deal with
or more options them
Implies Non-Programmed Decisions
Manager faced with problem Novel problems, do not occur on a regular
Choices must be analysed basis
Conscious choice must be made
between them in line with goals of
the organisation
Conditions for decision-making
Certainty
Steps in the decision-making process Manager knows the problem, knows what options are
available, knows the consequences
Recognise a problem or opportunity and Risk
set objectives Options are known but outcomes are not, manager must
use probability estimates when making decisions
Define the problem and not the symptom Objective probability – based on historical evidence
Subjective probability – manager uses personal estimates
Set objectives for the outcome, i.e. what do Uncertainty
you want to achieve Available options and possible outcomes are unknown,
 often problem is not even defined
Generate various courses of action
Use techniques to find many alternative
courses of action e.g. brainstorming
 DECISION-MAKING
Evaluate various courses of action
Evaluate all possibilities in terms of
strengths, weaknesses, opportunities and
threats and in light of objectives

Select the best option
Once courses of action have been
evaluated, select the best

Implement the option
Implement, make policies, develop
procedures, train where necessary

Follow up, evaluate and control
Evaluate regularly to ensure that the decision
was a correct one; if it was not, look again at
the problem or select another possible option
and re-implement

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 BIBLIOGRAPHY

 Cronje et al., Principles of Management. 1999. Juta.

 Stoner, JF, Freeman, RE and Gilbert, DR, Management. 6th Edition. 1995.
Prentice-Hall.

 Kreitner, R, Organisational Behaviour. 1991. Irwin.

 Kreitner, R, Management. 3rd Edition. 1986. Houghton Miflin Company.

 Callahan, RE, Fleenor, LP, Knudson, HR and Merril, CE, Understanding

Organisational Behaviour – A Managerial Viewpoint. 1986. Publishing Co.,
Columbus, Ohio.

 Kolb, DA, Rubin, IM and Osland, J, Organisational Behaviour: an Experimental

Approach. 5th Edition. 1991. Prentice-Hall, New Jersey.

 Muller, LJ, Management and Organisational Behaviour. 2nd Edition. 1998.

Pitman Publishing Co., London.

 Robbins, SP Organisational Behaviour: Concepts, Controversies and Applications.

3rd Edition. 1988. Prentice-Hall, New Jersey.

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