Chapter - 01

Decision-Making
Contents:

1. Meaning and Definitions of Decision Making

2. Characteristics of Decision-Making
3. Types of Decision-Making
4. Factors Involved in Decision-Making
5. Techniques and Methods of Decision-Making
6. Process and Steps of Decision-Making
7. Principles of Decision-Making
8. Models of Decision-Making
9. Importance of Decision-Making

Meaning and Definitions of Decision Making

One of the most important functions of a manager is to take decisions in the organization. Success or failure
of an organization mainly depends upon the quality of decision that the managers take at all levels. Each
managerial decision, whether it is concerned with planning, organizing, staffing or directing is concerned with
the process of decision-making.

It is because of its perverseness of Decision-Making that professor Herbert Simons has said the process of
managing as a process of decision-making. As per his opinion a post of position cannot be said to be
managerial until and unless the right of Decision-Making is attached to it. A decision is a course of action
which is consciously chosen from among a set of alternatives to achieve a desired result. It means decision
comes in picture when various alternatives are present. Hence, in organization an execute forms a conclusion
by developing various course of actions in a given situation. It is a made to achieve goals in the organization.
To decide means to cut off on to come to a conclusion.
It is also a mental process. Whether the problem is large or small in the organization, it is usually the manager
who has to comfort it and decide what action to take. So, the quality of managers’ decisions is the Yardstick
of their effectiveness and value to the organization. This indicates that managers must necessarily develop
decision making skills.
According to D. E. McFarland, “A decision is an act of choice – wherein an executive form a conclusion
about what must not be done in a given situation. A decision represents a course of behavior chosen from a
number of possible alternatives”.
According to Haynes and Massie, “a decision is a course of action which is consciously chosen for
achieving a desired result”.

According to R. A. Killian, “A decision in its simplest form is a selection of alternatives”.

 Characteristics of Decision-Making
The important characteristics of decision-making may be listed thus:
1. Goal-Oriented:
Decision-making is a goal-oriented process. Decisions are usually made to achieve some purpose or goal. The
intention is to move ‘toward some desired state of affairs.
2. Alternatives:
A decision should be viewed as ‘a point reached in a stream of action’. It is characterized by two activities –
search and choice. The manager searches for opportunities, to arrive at decisions and for alternative solutions,
so that action may take place. Choice leads to decision. It is the selection of a course of action needed to solve
a problem. When there is no choice of action, no decision is required. The need for decision-making arises
only when some uncertainty, as to outcome exists.
3. Analytical-Intellectual:
Decision-making is not a purely intellectual process. It has both the intuitive and deductive logic; it contains
conscious and unconscious aspects. Part of it can be learned, but part of it depends upon the personal
characteristics of the decision maker. Decision-making cannot be completely quantified; nor is it based mainly
on reason or intuition. Many decisions are based on emotions or instincts. Decision implies freedom to the
decision maker regarding the final choice; it is uniquely human and is the product of deliberation, evaluation
and thought.
4. Dynamic Process:
Decision-making is characterized as a process, rather than as, one static entity. It is a process of using inputs
effectively in the solution of selected problems and the creation of outputs that have utility. Moreover, it is a
process concerned with ‘identifying worthwhile things to do’ in a dynamic setting. A manager for example,
may hire people based on merit regularly and also pick up candidates recommended by an influential party, at
times. Depending on the situational requirements, managers take suitable decisions using discretion and
judgment.
5. Pervasive/Universal Function:
Decision-making permeates all management and covers every part of an enterprise. In fact, whatever a
manager does, he does through decision-making only; the end products of a manager’s work are decisions and
actions. Decision-making is the substance of a manager’s job.
6. Continuous Activity:
The life of a manager is a perpetual choice making activity. He decides things on a continual and regular basis.
It is not a one-shot deal.
7. Commitment of Time, Effort and Money:
Decision-making implies commitment of time, effort and money. The commitment may be for short term or
long-term depending on the type of decision (e.g., strategic, tactical or operating). Once a decision is made,
the organization moves in a specific direction, in order to achieve the goals.
8. Human and Social Process:
Decision-making is a human and social process involving intellectual abilities, intuition and judgment. The
human as well as social imparts of a decision are usually taken into account while making the choice from
several alternatives.
9. Integral Part of Planning:
As Koontz indicated, ‘decision making is the core of planning’. Both are intellectual processes, demanding
discretion and judgment. Both aim at achieving goals. Both are situational in nature.

Types of Decision-Making
The decisions taken by managers at various points of time may be classified thus:
1. Personal Decisions:
Decisions to watch television, to study, or retire early are examples of personal decisions. Such decisions,
pertain to managers as individuals. They affect the organization, in an indirect way. For example, a personal
decision to purchase a Maruti rather than an Ambassador, indirectly helps one firm due to the sale and hurts
another because of the lost sale. Personal decisions cannot be delegated and have a limited impact.
2. Organizational Decisions:
Organizational decisions are made by managers, in their official or formal capacity. These decisions are aimed
at furthering the interests of the organization and can be delegated. While trying to deliver value to the
organization, managers are expected to keep the interests of all stakeholders also in mind—such as employees,
customers, suppliers, the general public etc. they need to take decisions carefully so that all stakeholders
benefit by what they do.
Individual decisions are taken by a single individual. They are mostly routine decisions.
Group decisions, on the other hand are decisions taken by a group of individuals constituted for this purpose
(for example, Admission Committee of a College, Board of Directors in a company). Group decisions,
compared to individual decisions, have far reaching consequences and impact a number of persons and
departments. They require serious discussion, deliberation and debate.
3. Programmed and Non-Programmed Decisions:
A programmed decision is one that is routine and repetitive. Rules and policies are established well in advance
to solve recurring problems quickly. Programmed decisions leave no room for discretion. They have to be
followed in a certain way. They are generally made by lower level personnel following established rules and
procedures.
Non-programmed decisions deal with unique/unusual problems. Such problems crop up suddenly and there is
no established procedure or formula to resolve them. Deciding whether to take over a sick unit, how to
restructure an organization to improve efficiency, where to locate a new company warehouse, are examples
of non-programmed decisions.
4. Strategic, Administrative and Routine Decisions:
Strategic decision-making is a top management responsibility. These are key, important and most vital
decisions affecting many parts of an organization. They require sizeable allocation of resources. They are
future-oriented with long-term ramifications.
Administrative decisions deal with operational issues—dealing with how to get various aspects of strategic
decisions implemented smoothly at various levels in an organization. They are mostly handled by middle level
managers.
Routine decisions, on the other hand, are repetitive in nature. They require little deliberation and are generally
concerned with short-term commitments. They ‘tend to have only minor effects on the welfare of the
organization’. Generally, lower-level managers look after such mechanical or operating decisions.
 Factors Involved in Decision-Making
There are two kinds of factors to be considered in decision-making in favor of any alternative.
These may be classified as:
i. Tangible Factors and
ii. Intangible Factors.
i. Tangible Factors:
Among the tangible factors relevant to decision-making the important ones are:
• Sales;
• Cost; Purchases;
• Production;
• Inventory;
• Financial;
• Personnel and
• Logistics.

The effect of any decision on one or more of the tangible factors can be measured and therefore it is easy to
consider the pros and cons of every decision. Decisions based on these factors are likely to be more rational
and free from bias and feelings of the decision-maker.
ii. Intangible Factors:
Among the intangible factors which may influence decision-making in favor of any alternative, the important
ones are the effects of any particular decision:
(a) Prestige of the enterprise;
(b) Consumer behavior;
(c) Employee morale and so on.
Accurate information and data about these factors is not easy to obtain. Therefore, intuition and
value-judgment of the decision-maker will assume a significant role in the choice of a particular alternative.

Techniques and Methods of Decision-Making

In order to evaluate the alternatives, certain quantitative techniques have been developed which facilitate in
making objective decisions.
Important decision-making techniques are four and they have been discussed as under:
(1) Marginal Analysis:
This technique is also known as ‘marginal costing’. In this technique the additional revenues from additional
costs are compared. The profits are considered maximum at the point where marginal revenues and marginal
costs are equal.” This technique can also be used in comparing factors other than costs and revenues.
(2) Co-Effectiveness Analysis:
This analysis may be used for choosing among alternatives to identify a preferred choice when objectives are
far less specific than those expressed by such clear quantities as sales, costs or profits. Koontz, O’Donnell and
Weihrich have written that “Cost models may be developed do show cost estimates for each alternative and
its effectiveness. Social objective may be to reduce pollution of air and water which lacks precision.
(3) Operations Research:
This is a scientific method of analysis of decision problems to provide the executive the needed quantitative
information in making these decisions. The important purpose of this is to provide the managers with scientific
basis for solving organizational problems involving the interaction of components of the organization. This
seeks to replace the process by an analytic, objective and quantitative basis based on information supplied by
the system in operation and possibly without disturbing the operation.
(4) Linear Programming:
It is a technique applicable in areas like production planning, transportation, warehouse location and utilization
of production and warehousing facilities at an overall minimum cost. It is based on the assumption that there
exists a linear relationship between variables and that the limits of variations can be ascertained. It is a method
used for determining the optimum combination of limited resources to achieve a given objective. It involves
maximization or maximization of a linear function of various primary variables known as objective function
subject to a set of some real or assumed restrictions known as constraints.

Principles of Decision-Making
Following are the important principles which may be taken into consideration while taking decision:
(1) Marginal Theory of Decision-Making:
Marginal theory of decision-making has been suggested by various economists. Economists believe that a
business undertaking works for earning profit. To earn profit is their prime motto. That is why they agree that
the manager must take every decision with the aim in view that the profit of his organization goes on increasing
till it reaches its maximum. According to economists’ marginal analysis of a problem is based on Law of
Diminishing Returns. With extra unit of labor and capital put in production, the production increase but it
increases at a proportionately reduced rate. From every extra unit of labor and capital the production
diminishes and a time comes when the increase in production stops with ‘zero’ as the production of the last
unit used therein.

At this stage further production is discounted. A decision is taken to the effect that no additional unit of labor
and capital now is required to be introduced in the production. Production of the last unit is marginal one
where – after further introduction of extra unit becomes uneconomical or non-yielding.

The marginal principle can be effectively used while taking decision on matters relating to –

(i) Production,
(ii) Sales,
(iii) Mechanization,
(iv) Marketing,
(v) Advertising,
(vi) Appointment and other matters where marginal theory can be scientifically and statistically used and
a good decision is rendered possible.
(2) Mathematical Theory:
It will be wrong if we say that the decision-making techniques owe too much to the mathematical theory of
taking decisions. Venture analysis, game theory, probability theory, waiting theory are a few of the theories
on the basis of which a manager analyses a given fact and takes decision accordingly. This has given rise to a
scientific approach to the decision-making process.
(3) Psychological Theory:
The nature, size and purpose, of the organization play an important role in decision-making. Manager’s
aspirations, personality, habits, temperament, political leanings and social and organizational status, domestic
life, technological skill and bent of mind play a very important role in decision making. They do help in
decision-making. But psychology of the manager has a bearing on the decision he takes and this fact cannot
be brushed aside. Decision-making is a mental process and the psychology of those who are deliberating and
of the person who take the final decision has a definite say in decision-making.
(4) Principle of Limiting Factors:
The decisions taken are based on limited factors nevertheless they are supposed to be good because of the
simple fact that under the circumstances it was the only possibility. From this principle it emerges that though
there are numerous alternative available to a decision-making but he takes cognizance to only those
alternatives which suit the time, purpose and circumstances and which can be properly and thoroughly
analyzed considering the human capacity and then finally one of the alternatives is chosen which forms the
basis of a decision.
(5) Principle of Alternatives:
Decision is an act of choice. It is a selection process. Out of many available alternatives the manager has to
choose the one which he considers best in the given circumstances and purpose.
(6) Principle of Participation:
This principle is based on human behavior, human relationship and psychology. Participation signifies that
the sub-ordinates, even if they are not concerned, should be consulted and due weightage should be given to
their viewpoint. Japanese do this. Japanese institutions – business or government make decisions by
consensus. This makes all of them feel that they are very much part of the decision. The Japanese debate a
proposed decision throughout its length and breadth of the organization until there is an agreement.

Models of Decision-Making
Models represent the behavior and perception of decision-makers in the decision-making environment. There
are two models that guide the decision-making behavior of managers. These are:
1. Rational/Normative Model:
These models believe that decision-maker is an economic man as defined in the classical theory of
management. He is guided by economic motives and self-interest. He aims to maximize organizational profits.
Behavioral or social aspects are ignored in making business decisions.
These models presume that decision-makers are perfect information assimilators and handlers. They can
collect complete and reliable information about the problem area, generate all possible alternatives, know the
outcome of each alternative, rank them in the best order of priority and choose the best solution. They follow
a rational decision-making process and, therefore, make optimum decisions.
 This model is based on the following assumptions:
i. Managers have clearly defined goals. They know what they want to achieve.
ii. They can collect complete and reliable information from the environment to achieve the objectives.
iii. They are creative, systematic and reasoned in their thinking. They can identify all alternatives and
outcome of each alternative related to the problem area.
iv. They can analyse all the alternatives and rank them in the order of priority.
v. They are not constrained by time, cost and information in making decisions.
vi. They can choose the best alternative to make maximum returns at minimum cost.
vii. Changing economic and social factors (economic and political policies, socio- cultural values, ethics,
traditions, customs etc.) also inhibit the ability of managers to make rational decisions.

2. Non-Rational/Administrative Models:

Non-rational models are descriptive in nature. They describe not what is best but what is most practical in the
given circumstances. They believe that managers cannot make optimum decisions because they are
constrained by many internal and external organizational factors. Managers cannot collect, analyses and
process perfect and complete information and, therefore, cannot make optimum decisions. Absolute rationality
is rare.

They are not optimum decisions. They are satisfying decisions. The concept of making decisions within the
boundaries or limitations of managers to collect and analyses all the relevant information for decision-making
is known as ‘principle of bounded rationality’. This model is realistic in nature as it presents a descriptive and
probabilistic rather than deterministic approach to decision-making. Rather than searching for all alternatives
for making decisions and analyzing their outcomes, decision-makers use value judgments and intuition in
analyzing whatever information they can collect within the constraints of time, money and ability and arrive
at the most satisfying decision. This model does not represent optimum situation for decision-making. Instead,
it represents the real situation for decision-making.

Importance of Decision-Making
Decision-making is an indispensable component of the management process. It permeates all management
and covers every part of an enterprise. In fact, whatever a manager does, he does through decision-making
only; the end products of manager’s work are decisions and actions.
For example, a manager has to decide:
i. What are the long-term objectives of the organization, how to achieve these objectives, what strategies,
policies, procedures to be adopted (planning);
ii. How the jobs should be structured, what type of structure, how to match jobs with individuals
(organizing);
iii. How to motivate people to peak performance, which leadership style should be used, how to integrate
effort and resolve conflicts (leading);
iv. What activities should be controlled, how to control them, (controlling).
 Thus, decision-making is a central, important part of the process of managing. The importance of decision-
making in management is such that H.A. Simon called management as decision-making. It is small wonder
that Simon viewed decision-making as if it were synonymous with the term ‘managing’. Managers are
essentially decision makers only.

According to Glueck there are two important reasons for learning about decision-making:
i. Managers spend a great deal of time making decisions. In order to improve managerial skills, it is
necessary to know how to make effective decisions,
ii. Managers are evaluated on the basis of the number and importance of the decisions made. To be effective,
managers should learn the art of making better decisions.

7 Steps involved Decision-Making Process

The steps are:

1. Identifying the Problem

2. Identifying Resources and Constraints
3. Generating Alternative Solutions
4. Evaluating Alternatives
5. Selecting an Alternative
6. Implementing the Decision
7. Monitoring the Decision.
 Decision-Making Process: Step # 1. Identifying the Problem
The first step in the decision-making process is identifying the problem. Prior to identifying the problem, it is
essential to first recognize that a problem exists. Identification of the problem involves three stages: scanning,
categorization, and diagnosis. The scanning stage involves monitoring the work environment for changes that
may indicate the emergence of a problem.

At this stage, a manager may have a very faint idea that an environmental change could lead to a problem or
that an existing situation is posing a problem. When an organization fails to achieve its goals, there is a
performance gap between the predicted or expected level of performance and the actual performance level.

The categorization stage attempts to understand this performance gap. At this point, the manager attempts to
categorize the situation as problematic or not. The diagnosis stage involves gathering relevant facts and other
additional information pertaining to the problem. It also specifies both the nature and the causes of the
problem. At this stage, the problem should be stated in terms of the discrepancy that exists between the current
conditions and the desired conditions, and the causes for the discrepancy should also be specified. Proper
diagnosis is very essential for the success of the decision-making process.
Constraints of Decision-Making:
The external constraints affecting decision-making are:
a. Political Constraints: An organization is affected by changes in the political environment. For instance,
a change in the government of a State or country may affect policies in effect. Further, the policies of a
particular party may or may not be conducive to the organization.

b. Economic Constraints: Economic factors also impose certain constraints on an organization. The
economic factors that affect decision-making are economic policies, condition of the economy, domestic
demand, etc.

c. Social Constraints: Decision-making is also affected by various social constraints. Social variables such
as changes in lifestyle of people, the increasing number of women in the workplace, the increasing number
of divorces, etc. affect an organization’s decisions regarding products and marketing strategy.

d. Technical Constraints: Technology also has a great impact on decision-making. Organizations find it
essential to adopt automation and information technology in order to compete effectively with competitors
and to achieve their goals.

e. Legal Constraints: An organization’s decisions are also affected by changes in legislation. New laws and
regulations have a direct bearing on the way an organization function.

f. Environmental Constraints: With growing concern for the environment, an organization has to take into
consideration the norms set by the government and other agencies. An organization has to keep its
pollution under control, recycle the Waste it produces, and produce environment-friendly products. These
constraints affect the organization’s decisions on how to utilize its resources.

g. Ethical Constraints: Organizations are often governed by norms which guide ethical behavior. These
norms are set either by the government, an association of organizations, or by the organization itself.
 Decision-Making Process: Step # 2. Identifying Resources and Constraints
Once the problem is identified and diagnosed, the manager should identify the resources and constraints
relevant to the problem. Anything that can be used to solve the problem is a resource. These include people,
money, materials, time, equipment, expertise, and information. On the other hand, constraints are the factors
that limit managers’ efforts to solve the problem.
They are hindrances to problem solving. Examples of constraints include lack of adequate resources, etc.
Organizations generally face more than one problem at a time. These problems compete for the manager’s
attention and for the scarce resources of the organization.

Making an explicit list of the organization’s resources allows the manager to allocate the resources in such a
way that they are utilized to the maximum extent possible.

The listing of constraints alerts managers to the presence of various bottlenecks that could create problems.
Organizations sometimes face situations in which the absence of a specific resource or the presence of a
particular constraint poses a problem for conducting its business.

Decision-Making Process: Step # 3. Generating Alternative Solutions

Once the problem, resources and constraints of the organization are identified, the next step would be to
generate feasible alternatives to the problem. Managers should not take any major decision without exploring
all the possible alternatives.
The temptation to accept the first feasible alternative often prevents managers from finding the best solution
to the problem. Generating a number of alternatives allows them to resist the temptation of finding a speedy
solution to the problem and increases the chances of reaching an effective decision.

The development of alternatives can often be facilitated through brainstorming, a group decision-making
technique that encourages members of a group to generate as many feasible ideas as possible on a given topic,
without carefully evaluating each one of them. In a brainstorming session, none of the ideas offered is
criticized. Each idea is recorded for later evaluation.

When sufficient data is available, it is relatively easy to distinguish between alternatives and to determine their
relative effectiveness. Managers should not devote too much time to generating alternatives when the data
available is very limited. Similarly, a manager prefers fewer alternatives when the cost of evaluating the data
is high.

Decision-Making Process: Step # 4. Evaluating Alternatives

The generation of alternatives should be followed by a thorough analysis of the pros and cons of each
alternative. In other words, alternatives should be evaluated in order to see how effective each would be.
Generally, there are five criteria on the basis of which alternatives are evaluated: feasibility, quality,
acceptability, cost, and ethics.

Feasibility refers to the degree to which an organization can accomplish a particular goal within the related
organizational constraints (such as time, budget, technology and policies). Alternatives that do not seem
feasible should not be considered any further. Quality refers to the extent to which an alternative finds an
effective solution to the problem under consideration.
Alternatives that only partially solve the problem are eliminated at this stage. Acceptability refers to the degree
of support extended to the chosen alternative by the decision-makers and those who would be affected by its
implementation. The costs criterion refers to the resources required and also the degree to which the alternative
may produce undesirable side effects. Ethics refers to the degree of compatibility of an alternative with the
ethical standards and social responsibilities of the organization.

Decision-Making Process: Step # 5. Selecting an Alternative

After evaluating the alternatives, the next step in the decision-making process would be to select the best
alternative. Managers can make use of three basic approaches for selecting among alternatives.

These are:
(a) Experience,
(b) Experimentation, and
(c) Research and analysis.

When taking decisions, managers tend to rely on past experience to a great extent. Many managers believe
that their previous accomplishments and mistakes are infallible guides to the future. Though experience is the
best teacher, excessive reliance on it can be dangerous, especially since many managers fail to recognize the
underlying reasons for their mistakes or failure.

Moreover, the solutions to new problems may be very different and the lessons from one’s experience may
not be valid in every situation.

For one to take good decisions, these have to be evaluated in terms of the future. Experience can be useful
only when the decision-maker learns the fundamental reasons for success or failure from experience. A
successful program, a profitable product promotion, or any other decision that turns out well, may provide
avenues for such learning.

Another way to decide among alternatives is to try one of them and see the consequences. Experimentation is
often used in scientific inquiry. Most people recommend that it should be employed more often in managing
and that it should be the only way by which a manager can make sure that the plans are right. For instance, a
firm may test a new product in a certain market before launching it nationwide. Organizational techniques are
often tried out in a branch office before being implemented throughout the company.

When important decisions are involved, one of the most effective techniques to select an alternative is through
research and analysis. This approach attempts to solve a problem by first understanding it. It tries to find
relationships among the critical variables, constraints, and premises which have a direct effect on the goal to
be accomplished. In this approach, the decision-maker develops a model simulating the problem. He may also
represent the variables in a problem situation through mathematical terms and relationships. One of the most
comprehensive research and analysis approaches to decision-making is operations research.
 Decision-Making Process: Step # 6. Implementing the Decision
Once the best among the available alternatives has been selected, it must be implemented properly to achieve
the objective for which it was selected. It is possible for a good decision to become ineffective due to poor
implementation. Successful implementation of a decision usually depends on two factors – careful planning,
and sensitivity to those who will implement the decision and/or those who will be affected by it.

Minor changes require only a little planning, whereas major changes require extensive planning efforts, such
as written plans, special funding arrangements, and careful coordination with units inside and outside the
organization. Decisions can be implemented smoothly by being sensitive to the reactions of those whom the
decision will affect.

The decision-makers should anticipate potential resistance at various stages of the implementation process.
They should also realize that unanticipated consequences may arise despite the fact that precise evaluation of
all alternatives and carefully consideration of the consequences of each alternative have been undertaken.

After the process of implementing the decision has begun, any number of situations, such as unexpected effects
on cash flow or operating expenses, can arise. Managers must, therefore, have contingency plans ready to deal
with such situations. In order to overcome resistance to change, the people who will be implementing the
decision should be given careful orientation and training.

A participative approach may be an effective way for the successful implementation of certain decisions. Most
managerial problems require the combined efforts of many members of the organization; each should
understand what role he or she is to play during each phase of the implementation process.

Decision-Making Process: Step # 7. Monitoring the Decision

Managers are required to monitor the process of implementation of the decision so as to make sure that
everything is progressing according to plan. It should also be ensured that the problem that initiated the
decision-making process has been resolved.

Monitoring decisions involves gathering information to evaluate how the decision is working. Thus, feedback
is an essential component of the decision process. It allows the decision-maker to determine the effectiveness
of the chosen alternative in solving the problem or in moving the organization closer to the attainment of its
goals. In order to evaluate the effectiveness of a decision, there should be a set of standards against which
actual performance can be compared. A second requirement is the availability of performance data for
comparison with the set of standards. Finally, a data analysis strategy, which includes a formal plan outlining
how the data will be used, should be developed. By reviewing the decisions, the decision-maker will recognize
the mistakes he has made and learn where and how to avoid them in the future. This will also help him sharpen
his decision-making skills.

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