Addis Ababa University, College of Business and Economics, Department of Management

2022
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

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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.
- Business partner complain supplier, distributor
- Government complain
- Customer complain
- 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 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.

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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.

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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

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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 none 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 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 applicants
operating Hospital: preparing patient for surgery.
procedures, Government: using state owned motor

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policies vehicle.
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

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.

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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.

• 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.

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.

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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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