CHAPTER THREE

PROJECT RISK MANAGEMENT

DECISION MAKING
 Definition and Conception
 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, i.e.
decision-making is universal.
 It’s the process of your possibilities options, comparing them, and choosing
a course of action.
Decision-making has three elements (parts)
1. Choosing or selecting from among alternatives.
2. Available alternatives. If no alternatives, there is no decision-making, rather
it become mandatory.
3. Having purpose in mind. The purpose in mind is organizational objectives.
 Cont’d
We have four categories of daily activities we
face
Things we want to do and have to do
Things we have to do but don’t want to do
Things we want to do but don’t have to do
Things we don’t want to do and don’t have to do
 Features of Decision-Making
 Decision-Making is Goal-Oriented:
 Each and every decision of management major or minor must make, at
least, some contribution towards the attainment of organizational
objectives.
 Decision-Making is Pervasive:
 All managers in the management hierarchy take decisions
 Decision-making is done in all functional areas of management
 Decision-making is inherent in all functions of management i.e.
planning, organizing, staffing, directing and controlling.
 Decision-Making is an Intellectual Exercise:
 Decision-making calls for creativity and imagination on the part of
managers
 Cont’d
 Decision-Making is a Continuous Process:
 Decision-making process commences since the inception of business and continues
throughout the organizational life.
 Decision-Making is the Basis of Action:
 All actions of people operating the enterprise are based on the
decisions taken by management vis-a-vis organizational issues .
 Decision-Making Implies a Commitment of Organizational
Resources:
 Commitment of organizational resources time, efforts, energies,
physical resources etc. is implied both during the process of taking
decisions and more particularly, at time of implementation of
decisions.
 Decision-Making is Situational:
 Decision-making much depends on the situation facing the
management; at the time when a decision-making problem crops up.
 Six C’s of decision making
• Construct a clear picture of precisely what must be
decided
• Compile a list of requirements that must be met
• Collect information on alternatives that meet the
requirements
• Compare alternatives that meet the requirements
• Consider what might go wrong with alternatives
• Commit to a decision and follow through with it.
 THE DECISION-MAKING PROCESS
o The process is a sequential process
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.
 To locate problems, managers rely on several different indicators:
- Deviations from past performance, Deviation from plan and Out
side criticism.
2. Developing Alternatives
 Before a decision is made feasible alternatives should be developed.
 Relevant internal and external environment of the organization are
investigated to provide possible alternatives.
 Cont…
3. Evaluating Alternatives
 Once managers have developed a set of alternatives,
they must evaluate them to see how effective each
would be.
4. Choosing an Alternative
 Based on the evaluation made managers select the best
alternative.
 The purpose of selecting an alternative is to solve the
problem so as to achieve a predetermined objective.
 A decision is not an end by itself but only a means to
an end.
 Cont…
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.
 Implementing the Solution: A decision that is not
implemented is little more than an abstraction.
 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.
 Decision-Making Conditions
 Decisions will be made under three basic conditions. These are condition of
certainty, condition of risk, and condition of uncertainty.
1. Decision-making under Certainty
 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.
2. Decision-making 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.
 In a risk situation, managers may have factual information, but it may be
incomplete.
 There is moderate ambiguity and chance of making bad decision.
E.g. Tossing a coin (heads or tails), metrology
 Cont…

3. Decision-making under Uncertainty

 Under this condition the decision maker does not know what all the
alternatives.
 Decision-making under uncertainty is the most ambiguous and there is
high chance of making poor decisions.
 Reliance on experience, judgment, and other people's experiences can
assist the manager assess the value of alternatives.
 Types of decisions
 Decisions can be classified in to: programmed and non
programmed.
1. Programmed Decisions
 Programmed decisions are those made in routine, well-structured situations
through the use of predetermined decision rules.
 The decision rules may be based on habit/custom, 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.
2. Non-programmed Decisions
 used to solve non-recurring, original, 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.
 Challenges of decision making

 Vaguely defined goals

 Lack of full information
 Time constraint
 Limitations of intelligence
 Unavailability of evaluation techniques
 Ego Factor
 Political considerations
 Environmental changes
THANKS!