CHAPTER FOUR

DECISION-MAKING
Meaning:

- 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, 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. The entire planning process
involves managers in a continual series of decision-making situations.

Decision-making has three elements (parts)

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

THE DECISION-MAKING PROCESS

Decisions are organizational responses to problems. Every decision is the outcome of a dynamic process that is influenced by
multitude of forces. So decision-making has its own processes / series of steps. The process is a sequential process rather then a
series of steps.

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. 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
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; alumni may withdraw their support from an athletic program.

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.

Confusions are common in problem definition because the events or issues that attract the manager’s attention may be symptoms of
another more fundamental and pervasive difficulty than the problem itself. That is, there may exist confusion on the identification
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of a problem and its symptoms. The accurate definition of a problem affects all the steps that follow. Managers once they have
identified problems, they have to try to diagnose the cause of the problem. Causes unlike symptoms are seldom apparent.

This step has three general stages: scanning, categorization, and diagnosis.
1) Scanning stage: involves monitoring the work situation for changing circumstances that may signal the emergence of a
problem. At this point the manager may be only vaguely aware that an environmental change could lead to a problem or
that an existing situation constitutes a problem.
2) Categorization stage: entails attempting to understand and verify signs that there is some type of discrepancy between
the current state and the desired state. At this point the manager attempts to categorize the situation as a problem and a no
problem, even though it may be difficult to specify the exact nature of the problem, if one exists.
3) Diagnosis stage: involves gathering additional information and specifying both the nature and the causes of the problem.
Without appropriate diagnosis, it is difficult to experience success in the rest of the decision-making process. At the
diagnosis stage, the problem should be stated in terms of the discrepancy between current conditions and what is desired;
the cause of the discrepancy should be specified.

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.

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? Such factors as worker’s willingness…

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 and Monitoring the Chosen Solution

For the entire decision-making process to be successful, considerable thought must be given to implementing and monitoring the
chosen solution. It is possible to make a "good' decision in terms of the first five steps and still have the process fail because of
difficulties at this final step.

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

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 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.

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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 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 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 over all 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.

Types of Decisions

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

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

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 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.
E.g. A hospital wishing to improve patient care may adjust its patient-staff ratio (programmable situation), reorganize its staff (a
non programmable situation).

Continuum of Decision situations

WELL STRUCTURED PARTIALLY ILL-STRUCTURED

(PROGRAMMED) STRUCTURED (NON PROGRAMMED)
1. Specification of 1. Only a part of 1. Decision procedure
decision procedure decision process can not be completely
agreed in advance can be completely structured in advance
of resolution. specified and of resolution.
structured.
2. Little managerial 2. Manager makes 2. Individuals resolve
involvement at time final resolution each situation on the
of each resolution from structured basis of experience
portion of his/her and judgment.
experience and from
intuition.
3. Repeated resolutions 3. Different managers may 3. Different managers may
with same data yield agree on certain data reach different conclusions.
same results.

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 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.

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  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 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.

Some times 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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