MANAGERIAL DECISION MAKING

UNIT FOUR
4. MANAGERIAL DECISION-MAKING
4.1 Meaning of Decision Making:
Decision-making: is a rational choice or selection of one alternative from
among a set of alternatives; i.e. it is the act of choosing one alternative from
among a set of alternatives.
Decision-making: is the management function that consists of choosing one
course of action from all the available alternatives.
Decision-making: is part of every aspect of the manager’s duties, which
include planning, organizing, staffing, leading, and controlling, i.e. decision-
making is universal. In all managerial functions, decision-making is involved. All
managerial functions have to be decided. For example, managers can formulate
planning objectives only after making decisions about the organization’s basic
mission. Even though in all managerial functions decision-making is involved,
critical decision-making is during planning because planning identifies the
objectives of the organization; i.e. decision must be made to identify the
objectives/missions of an organization. In the planning process, managers
decide such matters as what goals or opportunities their organization will
pursue, what resources will be used, who will perform each required task, etc.
The entire planning process involves managers in a continual series of decision-
making situations.
4.2 The Decision-Making Process
Decisions are organizational responses to problems. Every decision is the
outcome of a dynamic process that is influenced by a multitude of forces. So
decision-making has its processes/series of steps. The process is a sequential
process rather than a series of steps.

1. Identifying problems
One of the necessary conditions for a decision to exist is a problem for problem-
oriented decisions - the discrepancy between an actual and desired state; a gap

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between where one is and where one wants to be. If problems do not exist,
there will be no need for decisions; i.e. problems are prerequisites for decisions.
How critical a problem for the organization is measured by the gap between
levels of performance specified in the organization’s goals and objectives and
the level of performance attained; i.e. it is measured by the gap between the
level of performance specified (standards set) and level of performance
attained. The problem is very critical when the gap between the standard set
and actual performance attained is very high. To locate problems, managers
rely on several different indicators:
o Deviations from the past performance: A sudden change in some
established pattern of performance often indicates that a problem has
developed. When employee turnover increases, sales decline, selling
expenses increase, or more defective units are produced, a problem
usually exists.
o Deviation from the plan: When results do not meet planned
objectives, a problem is likely. For example, a new product fails to
meet its market share objective, profit levels are lower than planned,
the production department is exceeding its budgets. These
occurrences signal that some plan is off course.
o Outside criticism: The actions of outsiders may indicate problems.
Customers may be dissatisfied with a new product or with their
delivery schedules; a labor union may present a grievance; investment
firms may not recommend the organization as a good investment
opportunity; alumni may withdraw their support from an athletic
program.
2. Gathering information and analyzing the situation
It refers to gathering internal and external information which is relevant for the rational decision-
making process and it involves examining the external and internal factors which affect sound
decision making: the external environment (for Treats and Opportunities) through PEST analysis and
internal environment (for Strengths and Weaknesses) through self-audit.
3. Developing Alternatives
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Before a decision is made feasible alternatives should be developed. This is a

search process in which the relevant internal and external environments of the
organization are investigated to provide information that can be developed into
possible alternatives. At this point, it is necessary to list as many possible
alternatives solutions to the problem as you can. No major decision should be
made until several alternative solutions have been developed. Decision-making
at this stage requires finding creative and imaginative alternatives using full
mental faculty. The manager needs help in this situation through brainstorming
or the Delphi technique.
4. Evaluating Alternatives
Once managers have developed a set of alternatives, they must evaluate them
to see how effective each would be. Each alternative must be judged in light of
the goals and resources of the organization and how well the alternative will
help solve the problem. In addition, each alternative must be judged in terms of
its consequences for the organization. Will any problems arise when a particular
course of action is followed? Such factors as worker’s willingness…
5. Choosing an Alternative
Based on the evaluation made, managers select the best alternative. In trying
to select an alternative or combination of alternatives, managers find a solution
that appears to offer the fewest serious disadvantages and the most
advantages. The purpose of selecting an alternative is to solve the problem to
achieve a predetermined objective. Managers should take care not to solve one
problem and create another with their choice. A decision is not an end by itself
but only a means to an end. This means the factors that lead to implementation
and follow–up should follow solution selection.
6. Implementing the Solution:
A decision that is not implemented is little more than an abstraction. In other
words, any decision must be effectively implemented to achieve the objectives
for which it was made. Implementing a decision involves more than giving
orders. Resources must be acquired and allocated. Decisions are not ends by

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themselves they are means to an end; so proper implementation is necessary

to achieve that end.
7. Monitoring the solution:
Monitoring is necessary to ensure that things are progressing as planned and
that the problem that triggered the decision process has been resolved.
Effective management involves periodic measurements of results. Actual results
are compared with planned results (the objective); if deviations exist, changes
must be made. Here again, we see the importance of measurable objectives. If
such objectives do not exist, then there is no way to judge performance. If
actual results do not have many planned results, then the changes must be
made in the solution chosen, in its implementation, or the original objective if it
is deemed unattainable. The various actions taken to implement a decision
must be monitored. The more important the problem, the greater the effort that
needs to be expended on appropriate follow-up mechanisms. Are things
working according to plan? What is happening in the internal and external
environments as a result of the decision? Are subordinates performing
according to expectations?... must be closely monitored.
4.3 Decision-Making Conditions
When managers make decisions, the amount of information available to them
or the degree of knowledge they have about the likelihood of the occurrence of
each alternative varies from manager to manager or/and from situation to
situation. To put it in another way, decisions are made under three basic
conditions. These are a condition of certainty, condition of risk, and condition of
uncertainty.
1. Decision-making under Certainty
When managers know with certainty what their alternatives are and what
conditions are associated with each alternative, a state of certainty exists.
Decisions under certainty are those in which the external conditions are
identified and very predictable; i.e. we are reasonably sure what will happen
when we make a decision. The information is available and is considered to be
reliable, and we know the cause-and-effect relationships. In decision-making
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under certainty, there is a little ambiguity and a relatively low chance of making
poor/bad decisions. Decision-making under certainty seldom occurs, however,
because external conditions seldom are perfectly predictable and because it is
impossible to try to account for all possible influences on any given outcome it
is very rare.

2. Decision-Making under Risk

A more common decision-making situation is at risk. Under the state of risk, the
availability of each alternative, the likelihood of its occurrence, and its potential
payoffs and costs are associated with probability estimates; i.e. decisions under
risk are those in which probabilities can be assigned to the expected outcomes
of each alternative. In a risk situation, managers may have factual information,
but it may be incomplete. There is moderate ambiguity and a moderate chance
of making a bad decision.
E.g. tossing a coin, metrology
3. Decision-making under Uncertainty
Under this condition, the decision-maker does not know what all the alternatives
are, what the probability of each will occur is, or what consequences each is
likely to have. This uncertainty comes from the dynamism of contemporary
organizations and their environment. Big multi-national corporations assume
these kinds of decisions. Decision-making under uncertainty is the most
ambiguous and there is a high chance of making poor decisions. In decision-
making under uncertainty, probabilities cannot be assigned to surrounding
conditions such as competition, government regulations, technological
advances, the overall economy, etc. Uncertainty is associated with the
consequences of alternatives, not the alternatives themselves. Decision-making
is like being a pioneer. Reliance on experience, judgment, and other people's
experiences can assist the manager in assessing the value of alternatives.
E.g. Innovation of a new machine, journey of discoverers.

3.4 Types of Decisions

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Decisions can be classified as follows based on different backgrounds/basis

4.4.1 Programmed and Non-Programmed Decision
1. Programmed Decisions
Programmed decisions are those made in routine, repetitive, well-structured
situations through the use of predetermined decision rules. The decision rules
may be based on habit, computational techniques, or established policies and
procedures. Such rules usually stem from prior experience or technical
knowledge about what works in a particular type of situation. Most of the
decisions made by first-line managers and many of those made by middle
managers are the programmed type, but very few of the decisions made by top-
level managers are the programmed type. Managers can usually handle
programmed decisions through rules, procedures, and policies.
Example: Establishing a re-order point, Decide if students meet graduation
requirements, Determination of employee pay rates
2. Non-programmed Decisions
Non-programmed decisions are used to solve non-recurring, novel, and
unstructured problems. No well-established procedure exists for handling them,
because it has not occurred before managers do not have the experience to
draw upon, or problems are complex or completely new. Because of their
nature non-programmed decisions usually involve significant amounts of
uncertainty. They are treated through farsightedness. Most of the highly
significant decisions that managers make fall into the non-programmed
category. Non-programmed decisions are commonly found at the middle and
top levels of management and are often related to an organization’s policy-
making activities.
Example: To add a product to the existing product line, to reorganize a
company, to acquire another firm
In reality, most decisions fall between the two; i.e. a continuum of decision
situations exists ranging from those that are highly structured to those that are
unstructured. Situations between the two extremes are partially structured. As
the name suggests, in a partially structured situation, only a part is well
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structured. Typically, although the manager has a great deal of data available,
the final choice is not obvious. Many intangibles are involved in the final choice.
Therefore, the manager must base the ultimate decision on the data and
supplementary factors, using judgment and experience.
Example: A Hospital wishing to improve patient care may adjust its patient-
staff ratio (programmable situation), reorganize its staff (a nonprogrammable
situation)

4.4.2 Routine and Strategic Decisions

1. Routine decisions
Routine decisions are related to the general functioning of the organization. They do not require
much evaluation and analysis and can be taken quickly. Ample powers are delegated to lower ranks
to take these decisions within the broad policy structure of the organization. Routine decisions are
repetitive and hence, require relatively little consideration. It may be seen that basic decisions
generally relate to strategic aspects, while routine decisions are related to tactical aspects of an
organization.

2. Strategic decisions

Strategic decisions are important which affect objectives, organizational goals, and other important
policy matters. These decisions usually involve huge investments or funds. These are non-repetitive
and are taken after careful analysis and evaluation of many alternatives. These decisions are taken at
the higher level of management. A basic decision requires a good deal of deliberation and is of
crucial importance. These decisions require the formulation of new norms through a deliberate
thought-provoking process. Examples of basic decisions are plant location, product diversification,
selecting channels of distribution

4.3. 3. Policy and Administrative Decisions

1. Policy Decisions
Policy decisions are taken by top management or the top administration of an organization. They
relate to major issues and policies such as the nature of the financial structure, marketing policies,
outline of organization structure. Policy decisions set forth goals and general courses of action

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2. Administrative Decisions

Administrative decisions are made by middle management and are less important than policy
decisions. The size of the advertising budget is a policy decision but the selection of media would be
an example of the administrative decision. Administrative decisions determine the means to be used

4.3.4 Organizational and Personal Decisions:

When an individual decides an executive in the official capacity, it is known as an organizational

decision. If the decision is taken by the executive in a personal capacity (thereby affecting his
personal life), it is known as a personal decision. Sometimes these decisions may affect the
functioning of the organization also. For example, if an executive leaves the organization, it may
affect the organization. The authority of taking organizational decisions may be delegated, whereas
personal decisions cannot be delegated.

Organizational decisions are those which an executive takes in his official capacity and which can be
delegated to others. On the other hand, personal decisions are those which an executive takes in his
capacity but not as a member of the organization.

4.5 Why Do Managers Make Poor Decisions?

All managers recognize the importance of making sound decisions. Yet most
managers readily admit having made poor decisions that hurt their company or
their effectiveness. Why do managers make mistakes? Why don’t decision
always result in achieving some desired goal? Making the wrong decision can
result from any one of these decision-making errors:
 Lack of adequate time
Waiting until the last minute to make a decision often prevents
considering all alternatives. It also hampers thorough analyses of the
alternatives.
 Failure to define goals
Objectives cannot be attained unless they are clearly defined. They
should be explicitly stated so that the manager can see the relationship
between a decision and the desired result.
 Using unreliable sources of information

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A decision is only as good as the information on which it is based. Poor

sources of information always result in poor decisions.
 Fear of consequences
Managers often are reluctant to make bold, comprehensive decisions
because they fear disastrous results. A “play it safe” attitude sometimes
limits a manager’s effectiveness
 Focusing on symptoms rather than causes
Addressing the symptoms of a problem will not solve it. Taking aspirin for
a toothache may provide temporary relief, but if an abscess causes the
pain, the problem will persist. Business managers are too often foul on the
results of problems instead of the causes.
 Reliance on Hunch and Intuition
Intuition, judgment, and ‘feel’ are important assets to the decision-maker.
But a manager who permits intuition to outweigh scientific evidence is
likely to make a poor decision.

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