Decision Making

Bhasura Valsan. K
Department of Commerce
Maharajas College, Ernakulam.
 Decision Making
Meaning & Definition
 Decision making is an integral part of life. Decision making is a function of choice.
Decision making is a continuous process. It involves the selection of the best course of
action from several alternatives available.
 Decisions are taken at different levels of management of a business concern. All
decisions are guided by the objective of the firm. The objective of the firm may be
maximisation of profit and maximisation of wealth of shareholders.
 Definition : According ti Bayard O Wheeler “Decision making is the process of selecting
a particular course of action from among a number of alternatives. As applied to
business, a choice is made among alternative ways of using resources to accomplish pre
determined objectives”
Importance of decision making

 1. Effective utilisation of resources: Well planned business decisions help

propet utilisation of resources for the achievement of the objectives set.
 2.Selecting the best alternative : A decision taken after evaluating each
alternative helps to choose the best.
 3.Evaluation of managerial performance: The rate of success of the
decisions taken also reveals the efficiency rate of the managerial team
responsible for those decisions
 4.Motivation of Employees: Successful decisions increase the profitability
of the business These decisions motivate employees as they also may share
in a, portion of the increased profit.
 5. Facilitates innovation: Rational business decisions promote innovation.
Importance of Decision Making

 6. Increases Efficiency : Good decisions are taken after evaluating the cost
and benefit of each alternative.
 7.Facing Problems and Challenges: Well planned decisions equipp firms to
face new challenges and to make best use of opportunities.
 8. Indispensable Element: In an organization decision is essential to
accomplish its short term and long term goals. So decision making is
inevitable in all areas of business.
 9. Pervasiveness of Decision Making: Decisions are taken at different levels
of management of a business concern. So it ia petvasive in nature.
Elements of Decision making

 1.The decision taker: An individual or a group of individuals is involved in

the task of decision making.
 2. Goals or objectives to be achieved : Decisions are taken with the goals or
ovjectives of the firm in mind. It may be maximisation of profit or
minimisation of cost etc.
 3.Alternative solutions : If a problem can besolved only in oneway there
is no need of any decision at all. Decision is needed only when there are
two or more alternatives.
 4. The outcome or pay off each alternative : Outcome or pay off means the
profit or benefit that may arise out of each alternative. The outcome or
pay off of each alternative must be ascertained and compared. The
alternative which will give the higher pay off will be chosen.
Elements of decision making

 5.Criteria : Peter F. Drucker suggested the following criteria for evaluating each
alternative
 (a) Risk: The degree of risk behind each alternative
 (b) Effort: Cost, Time, and efforts needed for each alternative.
 (c)( Time: Time needed for the implementation of each alternative.
 (d)Resources :Physical, financial and human resources required for the implementation of
each alternative
 6. The decision environment : The internal and external forces that influence business
decisions are called decision environment. A decision taken without proper assessment of
the environment cannot be implemented successfully. The internal forces may be the
quality of the labour, quantity and nature of finance available, technological factors etc.
The external factors may be the policy of the government, business cycle etc.
 7. Limiting factor: Limiting factor is the one that limits or controls the decisiob maker. The
limiting factor may be the non availability of low cost funds, cheap labour, skilled labour
etc. A decision taken without giving due importance to its limiting factor will not be
successful.
Decision Making Environment

 There are three types of environment in which decisions are taken namely
certainty, uncertainty and risk
 (a) Decision Making under Certainty : Under this situation all the information
needed to take the decision area available. All the possible alternatives and
their outcome can be assessed correctly. Thesr decisions are usually of a routine
and repetitive nature.
 (b) Decision Making under Uncertainity : Most of the crucial business decisions
are taken under situations of uncertainity. Here the possible alternatives and
their outcome are not clear. Hence a decision cannot be taken after careful
evaluation of the possible alternatives. Though sufficient data are not available,
decisions are taken on the basis of the experience of decision maker and on
certain assumptions.
 (c) Decision making under Risk: Here the decision maker knows the probability
of the occurancea but he does not know their possible outcome of these
alternatives. Here the decisions are taken partly by chance.
Steps in Decision Making
 Steps in Decision Making

 1. Defining the problem : The first step in the process of decision making is to
identify and study the real problem. A problem well defined is half solved Proper
identification and study of the problem minimise the chances of wastage of time and
energy. It also helps to eliminate ambiguities involved in the problem.
2. Analysing the problem: After defining the problem the next step is its Analysis. It
involves classifying the problem and gathering information. The problem should be
classified keeping in view the following factors :
(a)The nature of decision – Strategic or Routine
(b) The impact of decision on other functions.
(c) The futurity of the decision.
(d)The periodicity of the decision
(e) The limiting or strategic factor relevant to the decision.
The problem should be analysed from all possible angles. Each and every situation
have some merits and demerits. So the manager analyse the problem in detail with all
the available data or information.
Steps in Decision Making

 Identifying or Developing Alternative Solutions: A problem can be solved in

many ways. The decision taker has ti search for and develop or identify each
possible solutiin or aalternative. In developing alternatives the manager has to
use his Past experiences, personal judgements and also take the opinion and
judgement of experts. If not properly identified, the resultv will be wastage of
time and energy.
 4. Evaluating alternatives: All the alternative solutions should be evaluated in
terms of their nature, time, impact, objectives etc. The merits and demerits
of each alternative should be studied carefully. The element of riak involved
in each alternative and the resources available for its implementation should
also be considered.
 5 Selecting the best alternative : When the evaluation of the alternatives is
over, the decision taker chooses the best alternative. The choice is dependent
on the costcof the alternatives, their feasibility, the constraints such as risk and
its intensity, economy of efforts, timing and limitations of resources should also
be considered.
Steps in Decision Making

 6. Communicating and implementing the decision : A. Mere decision will not be sufficient..
Implementation meabsconversion of decision into action. For getting the desired results
the decision should be properly implemented in the right time. Every one involved in it
must know what must do, how to do it and When to do it. The decision taken should be
effectively communicated to those person who are to implement them.
 7.Follow up action : The actual results of the decision should bw conpared with the
expected results to find out variations.variations if any. The term feedback refers to
information transmitted by a receiver back to the original sender of a message. Follow up
helps to evaluate the effectiveness of decision taken and implemented. The reasonsfor
follow up of the decisions are as follows:
 (i) If the decision is good one, obe will know what to do if faced with the similar problems
again
 (ii) If the decision is a bad one One will know what not to do the next time.
 (iii) If the decision is bad and the one who follows up soon, may take enough corrective
action.
 In order to achieve proper follow up, the management should devise an efficient system
of feedback information.
 TYPES OF DECISIONS

 1. Spontaneous and Rational decisions : Sometimes the managers are forced to take quick decisions
without a serious analysis of its cost and benefits and its constraints. These decisions are called
spontaneous decisions. Here the chances of errors are more.
 Rational decisions are taken only after studying carefully the cost and benefit and constraints of each
possible alternative. Hence the chance of errors are also less.
 2 Programmed and Non- Programmed decisions : Programmed decisions are of a routine nature. These
decisions are taken for simple, common and frequently occurring problems. These decisions are taken
on the basis of set procedures. These decisions are repetitive and routine in nature and they are taken by
lower level executives. According to James Stoner, these are made in accordance with certain habits,
rules, or procedures . Pricing of products, Salary fixation etc are programmed decisions.
 Non programmed decisions are non repetitive in nature. They are highly important and unstructured.
There is no standard procedure for handling such problems. These decisions are made in accordance
with personal beliefs, attitudes, and skills. These arev taken as per the policies of the concerns.. These
decisions solve problems like how to allocate resources. These decisions are taken by hogh level managers
and there is no standard procedure fir handling suxh problems.
Types of decisions

 3. Major and Minor decisions : Major decisions have direct bearing on the
achievement of the goals of the concern. And so these decisions are made very
carefully.. They are decided by top executives. Thus a decision which has a long
range impact is called major decision. Eg. Replaement of men by machine,
developing a new product, quality od product, diversification of product line
etc.
 Minor decisions arecmade in the course of execution of major decisions. For eg
while implementing a major decision of developing a new product, minor
decisions have to be taken regarding packaging etc. Minor decisions are taken to
solve minor problems. Eg. Repair of machine, assignment of job etc.
 4.Short run and Long run decisions : Short run decisions are those the effect of
which will remain only for a short period of time. Whereas the effect of long run
decisiobs will remain over a long Period.
Types of Decisions

 5.Routine and strategic decisions: Decisions that are taken ti carry out the
day to dat activities are called routine decisions.. They are also called
tactical decisions. They are repetitive in nature.. They have only minor
impact on the business. These decisions are made at middle and lower
vlevela of management. Eg. Provision fir air conditioning, better lighting,
recreational facilities etc
 Strategic decisions are of long term nature and involve commitment of large
funds. As these decisions affect the entire organization, they are considered
as basix decisions. They are taken by the top management. Eg. Price
reduction, installation of an automatic plant, Selection of a location,
Selection of a product line, merger, takeover, clisure of a certaib division
etc. Here much deliberation and judgement are needed because such
decisions deal with unique problems and policy issues.
Types of Decisions

 6.Individual and group decisions : Individual decisions are taken on routine problems and
already there is a set procedureto solve these problems. Analysis of such probllem is simple
and definite procedures are given to solve it.
 Group decisions arev taken in the intereat of the organization asawhole.. Mutual
understanding and utmost good faith is the essence of group decision. Eg. Decisions taken
by board of directors or a committee. The main drawback of the group decision is that no
one in the group can be individually made responsible for the result of the decision.
 7.Analytical and adaptive decisions: Analytical decisions are taken when the problem is
complex but its output is certain or definite. Eg, Deciding the area of products.
 The adaptive decisions are taken when the problem is complex but the output is uncertain.
Eg. Changes in policy, plans etc.
 8. Managerial deisions: These decisions are relate to the integration and coordination of all
the activities in an organisation to achieve the predetermined goal eg, Installation of anew
programme.
Types of Decisions

 9. Mechanical and Judgemental decisions: Mechanical decisions are taken

when the problem is simple but its output is certain and clear. Judgemental
decisions are taken when the problem is simple but the output is vague or
indefinite Eg. Deciding the area of marketing, personnel etc.
 10.Technical Decisions: These decisions are concerned with the process
through whixh the inputs are converted into output. Eg. Decision regarding
drilling the well etc.
 11.Institutional Decisions: It relates to decisions regarding diversification of
activities, raising additional amount if capital, acquisition etc
Thank you