Chapter -Three

Decision Making
1
 Decision making: is defined as the process of selecting or
choosing the best course of action from numbers of
alternatives based on the criteria.
 Because managers are continually confronted with
opportunities and threats/problem from external
environment.
 They must constantly analyze the effect of different
decisions on their organizations
 Then select the alternative that will move the firm
toward its stated objectives.
 Types of decision making
2

 Several authors believe that there are two types of

decisions: programmed & non-programmed decisions.
 A. programmed decision making
 It is "programmable" because of a specific
procedure can be worked out to resolve based on
experience in similar situations.
 A decision that is repetitive and routine
 Cont’d
3

 A definite method for its solution can be established

 Does not have to be treated as new, each time its
occurrence
 It involves an organization's every day operational
and administrative activities
 They are primarily found at the middle and lower
levels of management.
 Cont’d
4

 Data used in making a programmed decision

usually are complete and well defined.
 Participants know the details and agree on how to
resolve the problem.
 Examples: pricing standard, customer orders,
determining billing dates, recording office
supplies etc.
 B. Non-programmed Decision
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 It is used to solve non-recurring problems.

 No well-established procedure exists for handling them.
 A decision that is unique (novel or new) and ill-
structured.
 Managers do not have experience to draw upon.
 In contrast to programmed decisions, available data are
usually incomplete.
 Cont’d
6

 Non programmable decisions are commonly found

at the middle and top levels of management
 It is “tough” decisions that involve risk and
uncertainty and
 call for entrepreneurial abilities
 Such decisions draw heavily on the analytical
abilities of the manager
 Cont’d
7

 It is often related to an organization's policy-making

activities, such as:
 Add a product to the existing product line,
 Reorganize the company, or
 Acquire another firm.
 Examples: Moving into a new market, investing in a
new unproven technology, changing strategic direction
 Types of Problems & Level of management
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Ill-structured To
p

Non-programmed
decision making Level in
Type of management
Problem

Programmed
Decisions

Well-structured Lower
 Decision-making Process
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1. Identifying a problem
2. Identifying decision criteria
3. Allocating weights to criteria
4. Developing alternatives
5. Analyzing alternatives
6. Selecting an alternative
7. Implementing the alternative
8. Evaluation of decision effectiveness
 1. Identifying a problem

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 Problem is a discrepancy (difference) between an

existing and a desired state.
 The decision making process begins by determining

a problem exists; that is, unsatisfactory condition.

Example:
“The manager has resigned, and we need another
manager”
Here the phrase “manager has resigned” reflects the
current state while “need another manager”
represents a desired state.
 2. Identifying Decision Criteria
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The word criteria, is defined as “a standard by

which something can be judged”.
A decision criteria therefore, is the basis of a
decision, which outlines the relevant and
important factors for a decision.
And implicitly, it also defines what is not
important.
 Decision Criteria: Example
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In the above-cited scenario, the decision criteria

may include the following factors:
 Relevant qualifications
 Leadership skills
 Communication skills
 Planning and analytical skills
 Professional experience
 3. Allocating Weights to Criteria
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 The next step in the decision making process is

prioritization.
 Prioritization is achieved by assigning quantitative
weights to each criteria element.
 The weight defines the relative significance of each
element.
 4. Developing Alternatives
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 This involves developing a list of the alternative that

may be viable in dealing with the stated problem.
 Involves defining the possible alternatives (or
choices) that would resolve the problem.
 In our case, the alternatives would be a list of
candidates or job applicants.
 5. Analyzing Alternatives
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 Alternatives are rated and analyzed on the basis of

the criteria.
 The decision maker must critically evaluate each one
and identify the strong and weak points
 The rating can be based on a specified scale, say 1 – 5
etc.
 Rating may be subjective in nature and thus, may
depend on the judgment of the individual(s)
 Cont’d
16

 we are not only consider things that can be measured

in numerical terms such as time and various types of
fixed & operating costs.
 but also consider intangible or qualitative factors
such as:
 The quality of labor relations,
 The risk of technological change
 The international political climate.
 6. Selecting an alternative
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 Involves choosing the best alternative, based

on the above rating and analysis that suit to
the problem.
 In selecting the best alternative, factors such
as risk, economy of efforts, timing and
limiting factors should be considered
adequately.
 Generally implies selecting the alternative
with the highest score.
 7. Implementing the Alternative
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 Putting the decision into action

 This requires:
 Communication of decisions to subordinates,
 Getting acceptance of the decisions, and
 Getting support and cooperation for converting
the decision in to effective action.
 8. Evaluation
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 Evaluation forms an integral part of any process

 Involves evaluation of the outcome based on the
desired goal and criteria
 Involves assessing the effectiveness and efficiency of
the outcome (or the entire process)
 In case of any undesired results, each step of the
process is carefully reviewed to trace the root causes
 Decision making under different
conditions/state of nature
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Decision under certainty condition

● All required information are completed
● Decision has clear-cut goals
● Future outcomes associated with each alternative are
clear
● Decisions made in which the external conditions are
very predictable
 Cont’d
21

Decision under risk condition

● Decision has clear-cut goals
● Good information is available
● Future outcomes associated with each alternative
are subject to chance
 Cont’d
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Decision under uncertainty condition

● Managers know which goals they wish to achieve
● Future outcome about alternatives is unknown

● Information about alternatives and future events is

incomplete

● Managers may have to come up with creative

approaches to alternatives
 Cont’d
23

Decision under ambiguity condition

● By far the most difficult decision situation
● Goals to be achieved or the problem to be solved is
unclear
● Alternatives are difficult to define
● Information about outcomes is unavailable
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