CHAPTER FOUR

DECISION MAKING

4.1. Meaning of decision making

Decision making is the process of selecting or choosing the best course of action from a number of
alternatives based on some criteria. Decision-making is defined as a rational choice among
alternatives. There have to be options to choose from; if there are not, there is no choice possible
and no decision. Decision-making is a process, not a lightning bolt occurrence. In making the
decision, a manager is making a judgment, reaching a conclusion, from a list of known 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, the 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.

Decision-making is a selection process, the means to achieve the end, the application of intellectual
abilities to a great extent, a dynamic process, situational and taken to achieve the objectives of an
organization. Decision making includes the evaluation of available alternatives through critical
appraisal methods.

Decision-making has three elements (parts)

When managers make decisions; when
i. they are choosing or selecting from among alternatives.
ii. they have available alternatives. When there are no alternatives, there is no decision-making,
rather it become mandatory.
iii. they have purpose in mind. The purpose in mind is organizational objectives.

4.2. Rational Decision Making Process

Effective decision making requires a rational selection of a course of action. Rationality implies
making decision based on facts, experience, experimentation or research and analysis with
distinct procedure.

The followings are the process of making rational decision.

1. Identifying problems
A necessary condition for a decision to exist is a problem - the discrepancy between an actual and
desired state; a gap 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.

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 The severity of the problem for the organization is measured by the gap between the 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 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:

 Deviations from 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.
 Deviation from 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.
 Out side 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.

Decision makers face three types of problems

 A crisis problem is a serious difficulty requiring immediate action. An example of a crisis is a
severe cash flow deficiency that has a high potential of evolving into serious losses, and a
customer protest against the quality of a product.
 A non-crisis problem is an issue that requires resolutions but does not simultaneously have the
importance and immediacy characteristics of a crisis. Many of the decisions that managers make
center on non-crisis problems. Example of such problems is a factory that needs to be brought into
conformity with new state antipollution standards during the next three years and an employee who
frequently is late for work.
 An opportunity problem is a situation that offers strong potential for significant organizational
gain if appropriate actions are taken. Opportunities typically involve new ideas and novel directions
that could be used, rather than difficulties that must be resolved. Non-innovative managers tend to
focus on problems rather than opportunities.

2. Developing Alternatives

Before a decision is made feasible alternatives should be developed. This is a search process in
which relevant internal and external environment 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 Delphi technique.

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3. 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?

4. 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 so as 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.

5. Implementing the Chosen Solution

For the entire decision-making process to be successful, considerable thought must be given to
implementing and monitoring the chosen 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 themselves they are means to
an end; so proper implementation is necessary to achieve that end.

6. Establishing a control and evaluation system

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 much planned results, then the changes must be made in the solution chosen, in its
implementation, or in the original objective if it 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. Types of decision

Decisions can be classified in to: programmed and non programmed.
1. Programmed Decisions

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Programmed decisions are those made in routine, repetitive, well-structured situations through
the use of predetermined decision rules. Managers have made the same decision many times
before and little ambiguity involved. 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 the 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.

E.g. 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 experience to draw up on, 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.

E.g. To add a product to the existing product line, to reorganize a company, to acquire another
firm.

Types of Managerial Decisions

Type of Type of Procedures Examples
decisions problem
Programmed Repetitive, Rules, Business: processing payroll vouchers
routine standard College: processing admission
operating applicants
procedures, Hospital: preparing patient for surgery.
policies
Non- Complex, Creative Business: introducing a new product.
programmed novel problem College: constructing new classroom
solving facilities
Hospital: reacting to regional disease
epidemic
Government: solving spiraling inflation
problem

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4.4. 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 vary from managers
to managers or/and from situation to situation. To put it in other way, decisions are made under
three basic conditions. These are 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 under certainty there is a little
ambiguity and 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 under 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 moderate chance of
making 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 consequence 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 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. The decision-
making is like being a pioneer. Reliance on experience, judgment, and other people's experiences
can assist the manager is assessing the value of alternatives.

E.g. Innovation of new machine, journey of discoverers.

Why Do Managers Make Poor Decisions?

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All managers recognize the importance of making sound decisions. Yet most managers readily
admit having made poor decisions that hurt their company or their own 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
a desired result.

 Using unreliable sources of information: 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 “plays 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 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.

Sometimes a manager’s decision is not exactly “poor”, but it still doesn’t produce optimal results.
Less than optimal decisions can have three causes:

1. Bounded rationality imposes limits on a decision, such as that it should be economical or

logistically practical. This limit serves as a screening device, eliminating some of the
alternatives. The manager must choose from the options that have filtered through the
restrictions. The overall optimal decision may no longer be a valid option when using this
method. The decision maker simply selects the best alternative, given various specifications that
must be met.

2. Sub optimization is a manager’s tendency to operate solely in the interests of his/her

department rather than in the interests of the company as a whole. In making a decision, the
department manager cannot be so self-centered as to ignore the effects of the action on other
areas. The key is to improve the company’s performance, not just the performance of one
department.

3. Unforeseen changes in the business environment also cause less than optimal decisions.

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