Principles and Practice of Management

Lesson No 03

Decision Making
 “A decision is a judgment. It is a choice
between alternatives. It is rarely a choice
between right and wrong. It is at best a
choice between “almost right” and
“probably wrong”.-Drucker

“A manager by profession is a
decision maker; Uncertainty is
his opponent, overcoming it is his
mission.”
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 Definitions

1. Decision making is an act of choice wherein a manager selects a

particular course of action from the available alternatives in a given
situation. Managerial decision making involves the entire process of
establishing goals, defining tasks, searching for alternatives and
developing plans in order to find the best answer to the decision
problem.
Chhabra T.N

2. Decision making is defined as the process of choosing a course of

action from among alternatives to achieve a desired goal

Vijayarashavan G.K & Sivankumaram

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3. Decision making is the process of identifying problems and
opportunities and then resolving them. Decision making involves
effort
both before and after the actual choice.(22)
Dart,
R

According to the above definitions, it is clear that managerial decision

making is a process of selecting best alternative, which will help to
improve the organizational efficiency and effectiveness. Today’s
business environment is complex and management could find more than
one answer for the issues or problem they face.

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Examples:
01. Selecting a business ownership type
02. Selecting a location area
03. Selecting a product or service
04. Selection a prudential technology
05. Make or buy decisions
06. Employee recruitment
07. Outsource or own services
08. Selecting grand strategies
09. Selecting financial souses
10. Selecting credit policy
11. Investment decision

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Managerial Decision Environment

Managerial decision environment consists of such factors like,

decision making condition, nature of problems or opportunities, the
decision type and the responsible management level. See table 2.9
presents of these factors.

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 Managerial Decision Environment Cont.…

Decision making conditions Certainly /risk /uncertainly ambiguity

Nature of the opportunity or problem Well-structured unstructured

Program None programmer decisions

The decision type
decisions

Responsible Management level Front line Middle Top

Management Management Management

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Decisions Making Conditions
These are decisions making conditions which could be identified based
on the information about alternative solution and the probability of
success or failure.

A .Certainty

Under certainty, all the information is relevant to the opportunity or problem

fully available. Therefore taking decision is very easy and the outcome also
known very well before taking the decisions. Consider the example of investing
money at fix deposit in a bank we can get existing interested trades of all the
banks and could select a bank with highest interest rate. Further, the investor
calculate actual interest amount that he is going to get at the maturity. Therefore
investment decisions in fixed deposits could take under a certain environment.
However there are a very few decisions could made under the conditions of true
certainly. Because the decision environment is towards to more risk or uncertain
in most cases.

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Decisions Making Conditions Cont….
B. Risk

Risk situation is the environment somewhat moved from certain conditions

towards the uncertain condition. Under the risk, information on the decision is
available but their future outcomes are not that clear or subject to change.
Decision maker may have probability estimates regarding the outcomes and he or
she could apply probability calculation to select opinion. However these
probability calculations are also subject to change.

Example: assume investing money in commercial banks serving accounts. At the

time of the deposit the account holder get the existing interest rate. But due to the
future economic conditions it could be changed. Therefore there is a risk
regarding the future income.

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Decisions Making Conditions Cont….

C. Uncertainty

This is a situation more towards the uncertain from certainty. Decisions goals are
known to managers under uncertainty also. But they are not fully aware of the
possible alternatives. At least they don’t know the probability of outcomes.
Information is incomplete.

Example: investment in the share market. Investor might know his or her goal to
protect the investment and to earn satisfactory earnings. However he or she
doesn’t know all the available alternatives at the share market or possible future
outscores of the various investment avenues.

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Decisions Making Conditions Cont….
D. Ambiguity

This is the situation more and more uncertain. Here the decision goal, problem or
opportunity is not clear. Alternatives are difficult to understand. Information is
limited. Managers have to take decisions based on their belief on the nature using
pessimistic approach. However results may be depends and could not predict.
Example: Investing money in a new international business where there is a high
international

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Nature of the Opportunity or Problem
The decision opportunity or problem has two foams i.e. well-structured or
unstructured. Well-structured problems are clearly defined, routine and
repetitive. When the decision making conditions are more towards the
certainty, managers find more and more well-structured problems or
opportunities.
On the other hand, some problems or opportunities are unique, unpredicted
and ambiguous and these are not routine matters but novel matters. When
the decision making conditions are more towards uncertainty or ambiguity
the problems are more towards unstructured.

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The decision type
Based on the decision making situation and the nature of the problem or
opportunity, we can identify two scission types, programmed decision and non-
programmed decisions.

A. Programmed Decisions
When the decision making conditions are more towards to certainty and decision
problems are well structured, the decision taken by managers are program
decisions. These are the decisions taken frequently, repetitive and routinely. So
why we call these as programmed decision because they already programmed
and practiced earlier.

Examples: Selecting students for various under graduate courses by the Sri
Lankan University Grand Commission (UGC). UGC calls applications, select
students to the various degree programmers according to the Z score marks and
the district populations. UGC simultaneously inform the selection decisions to
the applicants and to relevant universities. UGC does this annually as a retire
matter and so as a programmed.

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The decision type Cont….

B. Non programmed decisions

When the decision making condition are more towards too uncertain or ambiguity
and the decision problems are not well structured, managers have to take non
programmed decisions. So these are novel and first time decisions. Since these are
new decisions, mainly deals with new activities such as introducing new products,
new location decisions, selecting new strategies to beat competition, expansion of
factories, opening foreign branches etc.

Example: When UGC decides to establish a new university. That is anon program
decision where they have to take novel decisions such as selecting a city, construct
new buildings, recruit new staff, design new academic courses etc.

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Responsible Management level for Decision

When the decisions are programs decision, front line and middle
management are capable enough to take decisions. But when the
decisions are more likely non program decision, the responsibility
should be taken by middle and mostly by the top management. Table
shows this relationship.

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Decision Responsibility

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 The Decision-Making Process
Define the problem/
Setting
Searching Comparing &
managerial For potential evaluating
Objectives by alternatives alternatives
identifying
The Limiting factors

Revise or
update Renew
objectives/pro search
blem

The act
Follow-up
Implementing of choice/
and
Take decisions select the
control
corrective best alternative
action as
necessary

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Define the problem /Define the Opportunity

Identify the problem separately from its symptoms

(A successful manager doesn’t just attack
symptoms; he works to uncover the factors that
cause these symptoms )

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Eg: Symptoms and their real causes

Symptoms Underlying Problems

Low profits/declining sales Poor market research

High cost Poor design process, poorly trained
employees

Low morale Lack of communication between

management and subordinates

High employee turnover Rate of pay too low, job design not
suitable

High rate of absenteeism Employees believe that they are not

valued

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Identifying the limiting factor

Realistically, managers operate in an environment that normally

doesn’t provide ideal resources. For example- they may lack the
proper budget or may not have the most accurate information or
extra time. So they must choose to satisfice-to make the best
decision possible with the available information, resources and
time available.

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Develop potential alternatives

A manager should think through and investigate several

alternatives solutions to a single problem before making a
quick decision. one of the best methods for developing
alternatives is through brainstorming(where a group works
together to generate ideas and alternative solutions)

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Although brainstorming is the most common technique to
develop alternative solutions, managers can use several other
ways to help develop solutions. Here are some examples-
nominal group technique (it’s a structured meeting, with an
agenda, restricts discussion during the decision making
process)
Delphi technique- ( participants never meet, but a group leader
uses written questionnaire to conduct the decision making

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Analyze the alternatives

>Decide the relative merits of each idea

>Identify the advantages and disadvantages of each
alternative solutions
>Perform a cost benefit analysis for each alternative
>Rank/give weights/ to each alternative
>A manager needs to evaluate each alternative in terms of-
Feasibility (can it be done)
Effectiveness (how well does it resolve the problem situation?)
Consequences ( what will be its cost to the organization?)

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Select the best alternative

Decides which alternative is-

the most feasible and effective
less cost to the organization
chances of success

A manager simply selects the alternative with

the highest probability of success

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Implement the decision
Establish a control- Actions needs to be monitored.
An evaluation system should provide feedback on
how well the decisions is being implemented, what
are the results, what adjustments are necessary to
get the results etc…

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