In this article we will discuss about decision making. Decision making is one of the most important functions of management.
The word “decision” is derived from a Latin word “Decis” which means “Cutting away or cutting off to come to a conclusion” this is itself means that a single thing is to be brought in action by cutting off many other things that look alike.
Thus decision making means choosing one alternative from available so many.
Decision making is a human process and depends upon the immediate assessment of pros and cons of the available alternatives.
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Learn about: 1. Definitions of Decision Making 2. Types of Decision Making 3. Characteristics 4. Process 5. Styles 6. Techniques
7. Benefits 8. Principles 9. Stages 10. Rationality in Decision-Making 11. Significance and Other Details.
Decision Making: Definitions, Types, Characteristics, Techniques, Stages, Principles, Need (Importance) and a Few Others
Contents:
- Definitions of Decision Making
- Types of Decision Making
- Characteristics or Nature of Decision-Making
- Decision Making Styles
- Techniques of Decision-Making
- Benefits to Planning
- Rationality and Decision Making Models
- Guidelines to Promote Effective Decision Making
- Principles of Decision-Making
- Need (Importance) for Decision-Making
- Programmed vs. Non-Programmed Decisions
- Stages in Decision-Making
- Rationality in Decision-Making
- Significance (Importance) of Decision-Making
Decision Making – Definitions of Decision Making according to R.A. Killian, MacFarland and George Terry
Decision making is to decide and means “to cut off or to come to a conclusion. A decision has been defined as an act of choice wherein an executive forms a conclusion about what must be done in a given situation. A decision represent course of behaviour chosen from a number of possible alternatives. “Decision making is the actual selection from among alternatives of a course of action.”
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According to R.A. Killian, “A decision, in its simplest form, is a selection of alternatives”.
Decision making is, therefore, the selection of one best alternative for doing a work. It is a choice made by the decision maker about what should and should not be done in a given situation.
A decision can be defined as a particular course of action chosen by a manager as the most potent apparatus at his disposal for achieving goal(s) he is pursuing or for solving the problem that is bothering him. In other words, decision in its simplest form is a selection of alternatives. It is implied that decision making envisages two or more alternatives from which a final decision can be made. However, if there is only one alternatives, there is no decision to be made.
It is the selection of one course of action from two or more alternative courses of action.
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According to MacFarland, “A decision is an act of choice wherein an executive forms a conclusion about what must be done in a given situation. A decision represents a course of behaviour chosen from a number of possible alternatives”.
Thus, the way an executive acts or decides the course of action from among various alternatives is an act of decision making.
According to George Terry, “Decision making is the selection based on some criteria from two or more possible alternatives”.
Though there are many alternatives available to a manager, he has to choose the best out of them on the basis of the above definitions.
Decision Making – Top 7 Types: Tactical, Strategic, Programmed, Non-Programmed, Basic, Routine, Organizational, Personal, Off-the-Cuff, Planned, Policy and a Few Others
There are many ways of classifying decision in an organisation but the following types of decisions are important ones:
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Type # 1. Tactical and Strategic Decisions:
Tactical decisions are those which a manager makes over and over again adhering to certain established rules, policies and procedures. They are of repetitive nature and related to general functioning. Authority for taking tactical decisions is usually delegated to lower levels in the organisation.
Strategic decisions on the other hand are relatively more difficult. They influence the future of the business and involve the entire organization. Decisions pertaining to objective of the business, capital expenditure, plant layout, production etc., are examples of strategic decisions.
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Type # 2. Programmed and Non-Programmed Decisions:
Prof. Herbert Simon (June 15, 1916 – February 9, 2001), an American economist and psychologist, has used computer terminology in classifying business decisions. These decisions are of a routine and repetitive nature. The programmed decisions are basically of a routine type for which systematic procedures have been devised so that the problem may not be treated as a unique case each time it crops up.
The non-programmed decisions are complex and deserve a specific treatment. In the above example, if all the professors in a department stop their teaching work the problem cannot be solved by set procedural rules. It becomes a problem which requires a thorough study of the causes of such a situation and after analysing all factors a solution can be found through problem solving process.
Type # 3. Basic and Routine Decisions:
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Prof. Katona has classified decisions as basic and routine. Basic decision are those which require a good deal of deliberation and are of crucial importance. These decisions require the formulation of new norms through deliberate thought provoking process. Examples of basic decisions are plant location, product diversification, selecting channels of distribution etc.
Routine decisions are of repetitive nature and hence, require relatively little consideration. It may be seen that basic decisions generally relate to strategic aspects, while routine decisions are related to tactical aspects of an organization.
Type # 4. Organizational and Personal Decisions:
Organizational decisions are those which an executive takes in his official capacity and which can be delegated to others. On the other hand, personal decisions are those which an executive takes in his individual capacity but not as a member of organization.
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Type # 5. Off-the-Cuff and Planned Decisions:
Off-the-cuff decisions involve “shooting from the hip”. These decisions can be taken easily and may be directed towards the purposes of the enterprise. On the other hand, planned decisions are linked to the objectives of organization. They are based on facts and involve the scientific process in problem solving.
Type # 6. Policy and Operating Decisions:
Policy decisions are those which are taken by top management and which are of a fundamental character affecting the entire business. Operating decisions are those which are taken by lower management for the purpose of executing policy decisions. Operating decisions relate mostly to the decision marker’s own work and behaviour while policy decisions influence work or behaviour pattern of subordinates.
Type # 7. Policy, Administrative and Executive Decisions:
Ernest Dale (born in Hamburg, Germany and died at the age of 79) has classified decisions in business organization as under:
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(a) Policy Decisions:
Policy decisions are taken by top management or administration of an organisation. They relate to major issues and policies such as the nature of the financial structure, marketing policies, outline of organization structure.
(b) Administrative Decisions:
Administrative decisions are made by middle management and are less important than policy decisions. According to Ernest Dale the size of the advertising budget is a policy decision but selection of media would be an example of administrative decision.
(c) Executive Decisions:
Executive decisions are those which are made at the point where the work is carried out. Distinguishing between these three types of decisions Dale writes, “policy decisions set forth goals and general courses of action, administrative decisions determine the means to be used and executive decisions are those made on a day-to-day basis as particular cases come up”.
Decision Making – 13 Main Characteristics or Nature of Decision-Making
The characteristics or nature of decision-making become clear by the following facts:
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(1) It is a Process of Selecting the Best from the Alternatives:
The first characteristic of decision-making is that under it the best alternative is selected out of the many available ones. There are many ways to solve a problem. The manager selects the best one out of them all. For example- if an organisation has the problem of increasing sales, there can be many ways of solving this problem – like reducing prices, more and good advertisement, making available the facility of selling goods on credit, etc. The manager has to select the best appropriate alternative out of them.
(2) Decision-Making is Based on Rational Thinking:
Rational thinking is considered to be the essence of decision-making because the conclusions arrived at with the help of decision-making and their success depends on rational thinking or intensive study.
(3) Decision-Making is Always Related to Some Problem or Conflict:
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Since the purpose of decision-making is to find out solution to problems or conflicts, it is naturally related to them. In other words, if there are no problems or conflicts, decision-making and manager will both come to lose their importance. In this context it is said that Problems are the diet or food upon which a manager lives and prospers.
(4) It Involves the Evaluation of Various Available Alternatives:
It is evident that in case there is only one solution to a problem, decision-making is not needed. There should be many alternatives for taking a decision. When there will be many alternatives, they will be evaluated through the medium of decision-making. In other words, the best alternative will be chosen after taking into consideration its merits and demerits.
(5) Decision-Making is Aimed at Achieving Organisational Goals:
Decision-making is not a futile exercise because through its medium efforts are made to achieve the goals of an organisation successfully.
(6) Decision-Making Involves Commitment:
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Every decision taken by a manager is a promise. In other words, a manager through the medium of decision, tells us that the consequences of the decisions taken by him will be good.
(7) It is Basically a Human Activity:
One of the special characteristics of decision-making is that it is a human activity. Decisions are taken by men and are meant for them.
(8) Decision-Making is both a Managerial Function and an Organisational Process:
It is a managerial function because decision-making is the chief responsibility of all the managers. It is called organisational process because there are many decisions which a manager cannot take single-handed and they need a group of managers or a committee of managers.
(9) Decision-Making is the Core of Planning:
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Although decision-making is needed for all the managerial functions, yet planning is completely dependent on decision-making because all the chief or major decisions are taken here. When under planning the functions of determining objectives, policies, procedures, rules, etc., are performed, decision- making has a special importance.
(10) Decision Starts Action:
When a problem arises, work is immediately suspended and till a decision is taken the work cannot recommence. Therefore, the future activity starts only after a decision is taken.
(11) Uncertainty of Results:
It is true that the best alternative is chosen only after an analysis of the various alternatives but the consequences of the best alternative are uncertain as it is an imaginative action with reference to future.
(12) It is a Universal Mark of a Manager:
Decision- making is a universal mark of a manager. It means whatever a manager does is based on decision-making and this speciality is found everywhere and in every manager.
(13) It may be Negative:
Decisions can both be positive and negative. Positive decision means deciding to do something while negative decision means doing nothing.
Decision Making – Decision Making Styles of the Managers: Intuitive Style, Sensation Style, Thinking Style and Feeling Style
Different managers exhibit different styles as decision makers. The importance of style arises in diagnosing the problem and evaluation of the alternatives.
A few styles of the managers are as follows:
1. Intuitive Style:
Decision making by intuition is characterised by inner feeling of the person. He takes a decision as per the dictates of his conscious. He thinks about the problem and an answer is found in his mind. The decision maker has his own preferences, influences, psychological makeup and these things play a vital role in taking a decision. The past knowledge, training and experience of the decision maker plays an important role in intuitive decisions.
With this technique of decision making, decisions are taken quickly and the decision making capability of the person is also used. In case the intuition of the decision making person is wrong then decision will also be incorrect. In such a style the other technique of decision making are also neglected.
2. Sensation Style:
People who are sensation types like to solve problems in standard ways. The past experience of a person becomes a good basis for taking decisions. When a similar situation arises then the manager can rely on his past decisions and takes similar decisions. The person sees and understands things in terms of concepts with which he is familiar. These individuals do well in routine work and at lower levels of hierarchy they are quite effective.
Though past experience is a good basis, present situations should be properly analysed and assessed before taking a decision.
3. Thinking Style:
Thinking type of managers tends to be unemotional and uninterested in the feelings of others. Their decisions are controlled by intellectual processes based on external information and generally- accepted ideas and values. These people usually organise information well and seldom reach a conclusion before considering all options well.
The increasing use of computers has helped in systematic analysis of data. The information has become a major tool in managerial decision making.
But facts alone may not be sufficient for decision making. The imagination, experience and beliefs of the decision maker are also required to comprehend the facts in the proper perspective.
4. Feeling Style:
Feeling types of managers like harmony among people. They tend to be sympathetic and relate well to others. They also enjoy pleasing people and believe that much of the inefficiency and effectiveness in the organisation is a result of interpersonal difficulties.
On the basis of the above style, we can have four basic style combinations which are:
(i) Sensation-Thinking
(ii) Sensation-Feeling
(iii) Intuition-Thinking
(iv) Intuition-Feeling.
Decision Making – Top 5 Techniques: Marginal Cost Analysis, Cost-Benefit Analysis, Operation Research, Linear Programming and Network Analysis
The process of managerial decision-making has become very cumbersome. In order to evaluate the alternatives, certain quantitative techniques have been developed which facilitate making objective decisions.
Some of these techniques are discussed below:
Technique # 1. Marginal Cost Analysis:
The technique is also known as marginal costing as under it the additional revenues from additional costs are compared. The profits are maximum at the level where marginal revenues and marginal costs are equal. Marginal analysis can also be used in comparing factors other than costs and revenues.
For instance, in order to find the optimum output of a machine, one can vary inputs against output until the additional inputs equal the additional output. This would be the point of the maximum efficiency of the machine. Break-even analysis is the modification of this technique which tells the management the point of production where there is not profit and no loss.
Technique # 2. Cost-Benefit Analysis:
It is a technique of weighing alternatives where the optimum solution cannot be conveniently reduced to monetary terms as in the case of marginal cost analysis. It is used for choosing among alternatives to identify a preferred choice when objectives are far less specific than those expressed by such clear quantities as sales, costs or profits. For instance, social objectives may be to reduce pollution of air and water which lacks precision.
Cost models may be developed to show cost estimates for each alternative and benefit models to show the relationship between each alternative and its effectiveness. Then, synthesizing models, combining these results, may be made to show the relationships of costs and effectiveness for each alternative.
Technique # 3. Operations Research:
Operations Research has been defined as the scientific method of analysis of organisational problems to provide the executive the needed quantitative information in making suitable decisions. The object of operations research is to provide the managers with a scientific basis for solving organisational problems involving the interaction of components of the organisation.
In days gone by, executive decisions used to be taken on the basis intuition, subjectively or past experience even in big organisations. Operations research seeks to replace this process by an analytic, objective and quantitative basis based on information supplied by the system in operation and possibly without disturbing the operation.
Operations research is widely used in modern business organisations. For instance, inventory models are used to control the level of inventory. Linear programming is useful for allocation of work among individuals in the organisation. Sequencing theory helps the management to determine the sequence of particular operations.
In addition to these, there are other techniques like queuing theory, games theory, reliability theory and marketing theory which are important tools of operations research which can be used by the management to analyse the problems and take decisions.
Technique # 4. Linear Programming:
Linear programming is a technique devised for determining the optimum combination of limiting resources to achieve a given objective. It is based on the assumption that there exists a linear relationship between variables and that the limits of variations could be ascertained. It is particularly helpful where input data can be quantified and objectives are subject to definite measurement.
It is applicable in such problem areas as production planning, transportation, warehouse location and utilisation of production and warehousing facilities at an overall minimum cost. Linear programming involves maximisation of minimisation of a linear function subject to a set of some real or assumed restrictions known as constraints.
Technique # 5. Network Analysis:
Network analysis is used for planning and controlling the project activities. Under this, a project is broken down to small operations which are engaged in a logical cycle. The next step is to decide the sequence of operations to be performed. A network diagram may be drawn to present the relationship between all the operations involved.
The diagram will reveal gaps in the flow plans. It will also show the interdependence of various activities of project and point out the activities which should be completed before the others are initiated. A number of network techniques have been developed of which PERT (Programme Evaluation and Review Technique) and CPM (Critical Path Method) have become very popular.
Decision Making – 5 Major Benefits to Planning
While decision making without planning is fairly common, it is often not appealing. Planning allows decisions to be made in a much more comfortable and intelligent way. Planning even makes decisions easier by providing guidelines and goals for the decision. We might even say that planning is a type of decision simplification technique.
Decision makers will find five major benefits to planning:
1. Planning allows the establishment of independent goals:
When decisions are made to achieve some planned vision, manager find himself steering the organization. When decisions are taken in response to some external crises, like lowering sales in the market, the external forces steer the management decision. By planning for decision, “management by firefighting” is replaced by a conscious and directed series of choices.
2. Planning provides a standard of measurement:
A plan provides something to measure against, so that you can discover whether or not you are achieving or heading toward your goals. As the proverb says, if you don’t know where you’re going, it doesn’t matter which way you go.
3. Planning converts values to action:
When you are faced with a decision, you can consult your plan and determine which decision will help advance your plan best. Decisions made under the guidance of planning can work together in a coherent way to advance company or individual goals.
4. Planning is useful in emergency situations, too:
When a crisis arises, a little thought about the overall plan will help determine which decision to make that will not only help resolve the crisis but will also help advance the overall plan. Without a plan, crises are dealt with haphazardly and decisions are made which may ultimately be in conflict with each other.
5. Planning allows limited resources to be committed in an orderly way:
Budgets, time, effort, manpower—all are limited. Their best use can be made when a plan governs their use.
A simple example would be planning to buy a house or a car. Rather than having to decide between buying the item right now with all cash or never having it, you can plan to buy it over several years by making payments. Or, you might combine this plan with the plan to buy a smaller house and add rooms later as they could be afforded. By planning you can thus accomplish things that might otherwise look impossible.
Decision Making – Top 2 Models: Rational Economic Model and Administrative Model
We all like to think that we are “rational” people who make the best possible decisions. What does it mean to make a rational decision? Organizational scientists view rational decisions as ones that maximize the attainment of goals, whether they are the goals of a person, a group, or an entire organization.
We will present two models of decision making that derive from different assumptions about the rationality of individual decision makers:
1. The rational-economic model- Manager is an economic man who makes rational decisions.
2. The administrative model- Manager is an administrative man who makes decision with a combination of intuition and rational thinking.
1. Rational Economic Model:
The classical management thinkers stressed that the decision maker is an economic man and is guided by economic considerations in choosing solution to a problem. He would define the problem clearly, and will systematically search for the optimum solution to a problem.
For this, he must have complete and perfect information, and be able to process all this information in an accurate and unbiased manner. He would finally select the alternative that maximizes his goal.
The main assumptions of rationality are:
i. Goal Orientation:
It is assumed that there is no conflict over the goal. Whether the decision involves purchasing a new computer, or choosing the proper price for a new product, the decision maker has a single, well-defined goal that he is trying to reach.
ii. Problem Clarity:
It is assumed that the problem is clear and unambiguous. The decision maker has complete information regarding the decision situation.
iii. Known Options:
It is assumed that the decision maker is creative, can identify all the relevant criteria, and can list all the viable alternatives. Further, the decision maker is aware of all the possible consequences of each alternative.
iv. Clear Preferences:
Rationality assumes that the criteria and alternatives can be ranked according to their importance.
v. No Time or Cost Constraints:
The rational decision maker can obtain full information about criteria and alternatives because it is assumed that there are no time or cost constraints.
vi. Maximum Returns:
The rational decision maker always chooses the alternative that will yield the maximum economic returns.
vii. Decisions are Made in the Interests of the Organization:
Rational managerial decision making assumes that decisions are made in the best economic interests of the organization. That is, the decision maker is assumed to be maximizing the organization’s interests, not his own interests.
Most decisions that managers face don’t meet all these tests. Decision, making usually isn’t the logical, consistent, and systematic process that rationality implies.
Let’s examine some of the limitations to the concept of rationality:
1. The decision making situation may involve multiple goals all of which can’t be maximized simultaneously. Further, these goals may be of conflicting nature. Decisions are therefore rarely directed toward achieving an overall organizational goal.
2. It is not practical to have all the information on all the possible alternatives available. Moreover, there are limits to an individual’s information-processing capacity.
3. Certain environmental factors are beyond the control of decision makers. Thus the consequences of various alternatives cannot be anticipated perfectly.
4. Perceptual biases can distort problem identification. The decision maker’s background, position in the organization, interest, and past experiences focus his attention on certain problems and not others. The organization’s culture can also distort a manager’s perceptions.
5. Many decision makers select information more for its accessibility than for its quality. Important information, therefore, may carry less weight in a decision than information that is easy to get.
6. Decision makers tend to commit themselves prematurely to a specific alternative early in the decision process, thus biasing the process toward choosing that alternative.
7. Many decision makers spend more effort trying to avoid mistakes than in developing innovative ideas.
8. Organizations place time and cost constraints on decision makers, which in turn limit the amount of search managers can undertake. Thus, new alternatives similar to old ones tend to be sought.
The rational-economic approach to decision making does not fully appreciate the fallibility of the human decision maker. Based on the assumption that people have access to complete and perfect information and use it to make perfect decisions, the model can be considered a normative (also called prescriptive) approach—one that describes how decision makers ideally ought to behave so as to make the best possible decisions.
It does not describe how decision makers actually behave in most circumstances. This task is undertaken by the next major approach to individual decision making, the administrative model.
2. Administrative Model-Bounded Rationality:
A more realistic description of decision-making behaviour is based on the administrative man model of Herbert Simon. Simon’s administrative man uses only limited rationality in his decisions.
This conceptualization recognizes that decision makers may have a limited view of the problems confronting them. The number of solutions that can be recognized or implemented is limited by the capabilities of the decision maker and the available resources of the organization. Also, decision makers do not have perfect information about the consequences of their decisions, so they cannot tell which one is best.
In choosing between the alternatives, the administrative man, not having the ability to ‘maximise’ (i.e. to find the best alternative), attempts to ‘satisfice’ (i.e. to look for the one which is good enough).
How decisions are made according to the administrative model – Instead of considering all possible solutions, as suggested by the rational-economic model, the administrative model recognizes that decision makers consider solutions as they become available. Then they decide on the first alternative that meets their criteria for acceptability.
Thus, the decision maker selects a solution that may be just good enough, although not optimal. Such decisions are referred to as satisficing decisions. Of course, a satisficing decision is much easier to make than an optimal decision. In most decision-making situations, March and Simon note, satisficing decisions are acceptable and are more likely to be made than optimal ones.
To illustrate this point, consider how a personnel department might select a new receptionist. After several applicants interviewed, the personnel manager might choose the best candidate seen so and stop interviewing. Had the person been following a rational-economic model he would have had to interview all possible candidates before deciding the best one.
However, by ending the search after finding a candidate who is just good enough, the manager is using a much simpler approach. The process used in this example characterizes an approach to decision making known as the administrative model.
Note that it is often impractical for people to make completely optimal, rational decisions. The administrative model recognizes the bounded rationality under which most organizational decision makers operate. It should not be surprising that the administrative model does a better job than the rational-economic model of describing how decision makers actually behave.
Our point is not that decision makers do not want to behave rationally, but that restrictions posed by the innate capabilities of the decision makers themselves and the social environments in which decisions are often made some times preclude “perfect” decisions.
Decision Making – Factors that Promote Effective Decision Making
Effective decision-making is the basic requirement for an organization to perform effectively. It is not simply choosing the best alternative; it is much more than that. Decision making, to be effective needs the kind of environment which facilitates it.
What are the factors, which can contribute to the effectiveness of decisions, are discussed below:
1. Organization Structure:
Organization structure should be well defined and conducive to decision making at various levels. If it is rigid and highly centralized, it will have the effect of suppressing the decision-making activity. But if it is flexible and have scope for proper delegation of authority, it will facilitate prompt decision-making expected to have wider acceptance.
2. Proper Communication System:
Effective decision-making requires machinery for proper communication/information through all the channels in the organization.
3. Prioritization of Problems:
The managers have limited capabilities and resources for solving large number of problems. It is therefore, they should fix priority of the problems more urgent and crucial must be attended immediately and other may be deferred for the time being.
4. Standardization of Policies, Procedures and Rules:
To simplify decision-making process, standardization of policies and procedures and rules to the extent possible is required.
5. Participative Decision-Making:
Participative decision-making should be encouraged as to get maximum contribution, cooperation and commitment of subordinates for implementing decisions.
6. Training of Managers:
Systematic training and various developing programs should be provided to the managers to develop their decision making skill and capabilities.
7. Management Information System:
Since decision making is based on the available information, reliability and timing of getting information influences the effectiveness of the decision. A good management information system can help the process.
8. Application of Proper Techniques of Decision Making:
The managers should be well versed with the various techniques of decision making so that they can apply the appropriate techniques to the appropriate places.
9. Encouragement to Creativity:
The management should inculcate the culture of respecting and motivating the creativity of individuals so that individual potential can be fully utilized in reaching to final decisions.
At the organizational level, it is required to create a conducive environment and infrastructure to promote effective decision making, and at the individual level, sincerity, analytical skills, and rationality is required.
Decision Making – 10 Important Principles: Adequate Information, Limiting Factor, Considering Other’s View, Maximisation of Profit, Human Reaction and a Few Others
Any decision can be made effective by properly following the decision-making process.
Even then the managers should follow certain principles which are as under:
(1) Principle of Adequate Information:
Information is the principal base for an organisation for taking decision. The adequacy and trust worthiness of the information will give rise to a good decision. Therefore, a manager, before taking a decision, should ensure as to which information is essential.
There can be some information acquiring of which may be costlier than the benefit it may bring. Such information should be ignored but the decision should not be finalised so long as all the necessary information has been received. It is better to post-pone taking decision rather than doing so on the basis of inadequate information.
(2) Principle of Limiting Factor:
A manager makes use of the principle of limiting factor for the development of different alternatives. This principle means that a decision-maker should find out as to what an organisation can accomplish and what it cannot do. This information can be gathered by him by analysing the external and internal factors.
In the examples, taken under the ‘Decision-making process’, there is an alternative of purchasing new machinery but because of the non-availability of adequate finance new machinery cannot be purchased. Here, in this case, finance is the limiting factor. There is ci need of analysing all the limiting factors.
These limiting factors are liable to change in accordance with the changing circumstances. For example- today finance is the limiting factor and tomorrow it can be the supply of machinery. It means finance is available but the machinery is not available in the market.
(3) Principle of Considering Others’ Views:
To take a successful decision it is important to study deeply the various alternatives on the one hand, along with the views of other people on the other hand. The quality of the decision can be improved by heeding the views of others. It does not. However, mean that the views of other people should be accepted, it simply means that they should be carefully listened to. If there is something worthwhile, it can be accepted otherwise it can be forgotten. In this context it is said, ‘Listen to everybody, but do according to your Judgement’.
(4) Principle of Maximisation of Profits:
According to this principle, before taking the final decision every alternative should be studied with reference to its cost and profit. Only that alternative should be accepted which can yield the maximum profit. It is, however, important to note that along with the profit care should be taken of social responsibility and the legalities involved.
(5) Principle of Human Reaction:
At the time of taking decision it should be kept in mind as to what impact it shall have on the persons concerned and what will be their reaction. For example- if an individual employee is ousted from the company, will other employees desert the company with him? If all the employees leave collectively, it shall result in the closure of the company. Therefore, it is the assumption of this principle that the favourable and unfavourable reactions in respect of a particular decision should be anticipated before taking a decision.
(6) Principle of Self-Interests:
According to this principle, a decision should not adversely affect the personal interests of any person working in the organisation. This alone can ensure their cooperation. For example- while deciding incentives the employees who prefer monetary or non-monetary incentives should be kept in mind. Only on this basis incentives should be decided for them.
(7) Principle of Proper Timing:
According to this principle, a decision should be taken at the right time. Untimely decision has no significance. For example- if it is felt that there will be a paucity of raw material for some time to come, and it has been stocked beforehand to meet this situation, the decision will be considered timely.
(8) Principle of Employees’ Participation:
According to this principle, at the time of taking decision all those employees who are to implement the decision should be consulted. This will encourage a sense of cooperation among them and they will not oppose the decision. This principle is different from the principle of taking other people’s view. The principle of employees’ participation takes into consideration only those employees who are directly affected by the decision, while according to the other principle the point of view of any person can be considered.
(9) Principle of Proportionality of Resources:
According to this principle, decision to utilise the available limited resources of an organisation should be made on the basis of proportionality. In other words, the resources should be so distributed as to ensure maximum profit to the organisation. Resources should not be used for unnecessary activities, while the essential activities suffer.
(10) Principle of Changing Environment:
Business decisions are affected by internal and external environment. It is important to anticipate future changes likely to take place in both these cases. If it is not done there is a possibility of bringing changes in the decisions according to the changes in these factors which is not a good sign.
It is, therefore, clear that if all the above-mentioned principles are kept in mind and strictly observed, there is nothing that can render a decision unsuccessful.
Decision Making – Need for Decision-Making
Occasions for decision-making mean those circumstances in which decisions are to be taken.
There is a need for taking decision in the following three situations:
(1) At the Time of Getting Routine Information:
The first opportunity to take decision is provided to the manager at the time of getting daily routine information. For example- on the basis of sales information, a decision has to be taken regarding the declining sales and; taking decision to take action against the regular absentees on the basis of the attendance register for the employees.
(2) At the Time of Getting Special Information:
Apart from routine information, the managers sometimes get special information from the subordinates. An occasion for decision-making arises when the subordinates are helpless in solving a problem or the subordinates have not been given any specific instructions regarding that problem.
For example- when a supervisor requests the manager to purchase some new machinery particularly when it has not been working satisfactorily even after having been repeatedly repaired, it will be treated as a special information and on the basis of this information a decision will be taken by the manager.
(3) At the Time of Initiative of the Executive Concerned:
It is not only the routine information or the special information which alone provides occasions for decision-making, but sometimes managers, keeping in view the business situations, take decision on their own initiative.
For example- a manager can take decision to provide some special facilities to the employees of the organisation if he finds that some rival organisation is going to do so. Similarly, if a manager gets information about some modern machinery being available, he can take a decision to replace the old machinery.
Decision Making – Programmed vs. Non-Programmed Decisions
Programmed Decisions:
1. These are made for solving routine and repetitive problems.
2. Decisions are made by using pre-determined procedures and rules.
3. These involve less use of judgement.
4. There is often consistency for longer period of time over many situations.
5. Such decisions are made for solving both simple and complex problems.
6. Techniques used for programmed decisions include standard procedures and rules, organisational structure, etc.
Non-Programmed Decisions:
1. These are made for solving unique and non- repetitive problems.
2. Decisions are made by using experience, creativity and innovativeness.
3. These involve more use of experience and judgement.
4. There is consistency in the long-run.
5. Such decisions are made generally for solving complex problems.
6. Techniques used for non-programmed decisions include linear programming, queuing, theory, break even analysis, simulation, replacement theory, etc.
Decision Making – Stages: Defining the Problem, Analysing, Collection of Data, Developing Alternative, Review of Key Factors, Selecting the Best Alternative and Implementing
The synonyms of the word ‘rational’ according to most dictionaries are – judicious, logical, sensible, scientific and the like. A rational decision must be distinguished from an intuitive decision which is based on hunch and past experience of the manager and so often lacks objectivity.
A rational decision is backed by a scientific process involving analysis of the problem, collection of relevant data, review of key factors, evaluation of alternatives and choice of best alternative. Such a decision could be justified on a logical basis and does not suffer from the personal bias of the decision-maker.
Scientific decision-making involves the following stages:
(i) Defining the problem.
(ii) Analysing the problem.
(iii) Collection of data.
(iv) Developing alternatives.
(v) Review of key factors.
(vi) Selecting the best alternative.
(vii) Implementing the decision.
(i) Defining the Problem:
Sufficient time should be spent on defining, the problem as it is not always easy to define the problem and to see the fundamental thing that is causing the trouble and that needs correction. Practically, no problem ever presents itself in a manner that an immediate decision may be taken.
It is, therefore, essential to define the problem before any action is taken, otherwise the manager will answer the wrong question rather than the core problem. Clear definition of the problem is very important as the right answer can be found only to a right question.
(ii) Analysing the Problem:
After clearly recognising the problem, the next phase of decision-making is the analysis of problem which involves classifying the problem and gathering information. Classification is necessary in order to know who should take the decision and who should be consulted in taking it. Without proper classification, the effectiveness of the decision may be jeopardised.
The problem should be classified keeping in view the following factors:
(a) The nature of the decision, i.e., whether it is strategic or it is routine,
(b) The impact of the decision on other functions,
(c) The futurity of the decision,
(d) The periodicity of the decision, and
(e) The limiting or strategic factor relevant to the decision.
(iii) Collection of Data:
A lot of information is required to classify any problem. So long as the required information is not available, any classification would be misleading. This will also have an adverse impact on the quality of the decision. Trying to analyse without facts is like guessing directions at a crossing without reading the highway signboards. Thus, collection of right type of information is very important in decision-making. It would not be an exaggeration to say that a decision is as good as the information on which it is based.
Collection of facts and figures also requires certain decisions on the part of the manager. He must decide what type of information he requires and how he can obtain this. Before gathering the information, one must be clear to how much time and money he can spend in gathering the information he needs.
It is also important to note that when one gathers the facts to analyse a problem, he wants facts that relate to alternative courses of action. So, one must know what the several alternatives are and then should collect information that will help in comparing the alternatives. Needless to say, collection of information is not sufficient, the manager must also know how to use it.
(iv) Developing Alternatives:
After defining and analysing the problem, the next step in the decision-making process is the development of alternative courses of action. Without resorting to the process of developing alternatives, a manager is likely to be guided by his limited imagination. It is rare for alternatives to be lacking for any course of action. But sometimes, a manager assumes that there is only one way of doing a thing.
In such a case, what the manager has probably not done is to force himself consider other alternatives. Unless he does so, he cannot reach the decision which is the best possible. From this can be derived a key planning principle which may be termed as the principle of alternatives. Alternatives exist for every decision problem. Effective planning involves a search for the alternatives towards the desired goal.
(v) Review of Key Factors:
While developing alternatives, the principle of limiting factor has to be taken care of. A limiting factor is one which stands in the way of accomplishing the desired goal. It is a key factor in decision-making. If such factors are properly identified, manager can confine his search for alternatives to those which will overcome the limiting factors. Depending upon the situation faced, the limiting factor may be inadequate funds, shortage of human resources, old machines, or lack of marketing skills.
(vi) Selecting the Best Alternative:
In order to make the final choice of the best alternative, one will have to evaluate all the possible alternatives. Peter Drucker has laid down four criteria in order to weigh the consequences of various alternatives.
They are:
(a) Risk – A manager should weigh the risks of each course of action against the expected gains. As a matter of fact, risks are involved in all the solutions. What matters is the intensity of different types of risks in various solutions.
(b) Economy of Effort – The best manager is one who can mobilise the resources for the achievement of results with the minimum of efforts. The decision to be chosen should ensure the maximum possible economy of efforts, money and time.
(c) Situation or Timing – The choice of a course of action will depend upon the situation prevailing at a particular point of time. If the situation has great urgency, the preferable course of action is one that alarms the organisation that something important is happening. If a long and consistent effort is needed, a ‘slow start gathers momentum’ approach may be preferable.
(d) Limitation of Resources – In choosing among the alternatives, primary attention must be given to those factors that are limiting or strategic to the decision involved. The search for limiting factors in decision-making should be a never ending process. Discovery of the limiting factor lies at the basis of selection from the alternatives and hence of planning and decision-making.
(vii) Implementing the Decision:
The choice of an alternative will not serve any purpose if it is not put into practice. The manager is not only concerned with taking a decision, but also with its implementation. He should try to ensure that systematic steps are taken to implement the decision. The main problem which the manager may face at the implementation stage is the resistance by the subordinates who are affected by the decision.
If the manager is unable to overcome this resistance, the energy and efforts consumed in decision-making will go waste. In order to make the decision acceptable, it is necessary for the manager to make the people understand what the decision involves, what is expected of them and what they should expect from the management. The principle of slow and steady progress should be followed to bring about a change in the behaviour of the subordinates.
Decision Making – Rationality in Decision-Making
A business manager can make decisions by intuition, i.e., without considering carefully all the alternatives. Practically, everyone takes decisions in this way because of the feeling that the particular course of action is the best one. This kind of feeling may have no logic behind it. Moreover, it is difficult to explain why one is feeling a particular way. Psychologists emphasise that there are forces other than reason within a person which influence and shape a decision.
Decisions based on intuition are subjective and are taken without any conscious effort to weigh the advantages and disadvantages of various alternatives. On the other hand, if a decision is taken after thorough analysis and reasoning and weighing the consequences of various alternatives, such a decision will be called an objective or rational decision. These are the two extremes in decision-making.
Effective decision-making requires a rational choice of a course of action. There is a need to define the term ‘rational’ here. Rationality is the ability to follow a systematical, logical, thorough approach in decision-making. Thus, if a decision is taken after thorough analysis and reasoning and weighing the consequences of various alternatives, such a decision will be called an objective or rational decision. Gross suggested three dimensions to determine rationality – (i) the extent to which a given action satisfies human interests; (ii) feasibility of means to the given end; and (iii) consistency.
A business decision relates means to end (or objectives). In other words, the means chosen to achieve an end must be justifiable. It must lead to the realisation of the objectives. According to Fred Luthans, “Mean-end is the most often used definition of rationality in decision-making. If appropriate means are chosen to reach desired ends, the decision is said to be rational. Of course, this is the result of the application of reasoning, intelligence, good sense and judgement. In other words, reasoning is the proper choice of the means to the proper goals.”
The end-mens approach to rationality is faced with certain problems. Firstly, the ends to be attained are often incompletely or incorrectly stated. Secondly, in actual practice, means cannot be separated completely from ends. Thirdly, the means ends terminology obscures the role of the time- element in decision-making.
Simon has identified six models of rationality to describe choice behaviour of decision-makers.
A decision is:
(i) Objectively rational if it maximises given values in a given situation.
(ii) Subjectively rational if it maximises attainment relative to knowledge of the given subject.
(iii) Consciously rational if the adjustment of means to ends in a conscious process.
(iv) Deliberately rational to the degree that the adjustment of means to ends has been deliberately sought by the individual or organisation.
(v) Organisationally rational to the extent it is directed towards the realisation of the organisational goals.
(vi) Personality rational, if directed to the realisation of individual goals.
Rational Economic Model of Decision-Making:
The classical management thinkers stressed that managerial decision must be rational. They argued that the decision-maker is an ‘economic man’ and is guided by economic considerations in choosing solution to a problem. Obviously, he will find the optimum solution to maximise the advantages.
The classical approach is based on the following assumptions:
(i) The decision-maker intends to maximise economic gains.
(ii) He is fully objective and rational uninfluenced by emotions.
(iii) He can identify the problem clearly and precisely.
(iv) He has full information about various alternatives and is able to evaluate them intelligently to find out which alternative is the best.
(v) He has complete freedom to choose the best alternative.
The rational economic model is prescriptive and explains how decision-makers should behave. But perfect rationally is a norm which can be aimed at but not attained. In real life, the decision-maker cannot be completely rational due to several constraints. The decision-making behaviour is contingent upon personal and environmental factors. Thus, managers may not be rational decision-makers in real life situations.
Administrative Model of Decision-Making (Principle of Bounded Rationality):
In actual practice, managers take decisions which involve different combination of intuition and rational thinking. A manager who depends much upon intuition is more subjective and a person who depends much upon logical thinking is more objective. This is what Herbert has called the ‘principle of bounded rationality’. Simon emphasized that a person makes decision not only on absolutely logical analysis of facts but also on his intuition, value system and way of thinking, which are subjective in nature.
Causes of Bounded Rationality:
Herbert Simon of administrative man describes the decision-making behaviour of individuals in actual practice. It recognises that managers are unable to make perfectly rational decisions due to the following constraints or limitations –
(i) The individual does not study and analyse the problem fully because of personal bias, indifferent attitude, etc.
(ii) The individual does not have the full knowledge of the alternatives and/or their consequences.
(iii) The individual interprets the organisational goals in his own way. He may adopt a course of action which according to him will meet the goals effectively.
(iv) The individual does not search for the best solution, but for ‘good enough solutions’. In other words, he aims at ‘satisfactory’ rather than ‘optimum decision’.
(v) The decision-making situation may involve multiple goals all of which can’t be maximized simultaneously. Further, these goals may be of conflicting nature.
(vi) The effectiveness of a decision is dependent upon environmental factors which are beyond the control of decision-makers. Thus, the consequences of various alternatives cannot be anticipated perfectly because of uncertain environment.
The rationality of the individuals is generally affected by the above limitations. The concept of bounded rationality explains the behaviour of people in practice. The administrative man seeks satisficing (not optimal) decisions which are satisfactory for his practical purposes.
He makes decisions which are good enough and do not make undue demands on his time, efforts and money. It recognises that a man cannot be expected to have full knowledge and information and his capacity to perceive, retain and retrieve information is not unlimited. The traditional theory of complete rational and economic man cannot work in practice.
Rationality requires complete knowledge of the consequences that will follow each choice. But it is not always possible. Rationality further requires a choice among all possible alternatives. But every individual has his limitations. He may not be able to identify all possible alternatives.
Moreover, decision-making relates to future which requires some degree of imagination. One may not be able to imagine objectively because of his frame of mind. From this, we can say that a man cannot be completely rational. As said by Simon, a man has only bounded rationally because they are certain limitations to complete rationality.
Thus, Simon’s point of view is highly realistic as it helps in understanding the actual behaviour of the decision-maker. It also modifies substantially the traditional theory of decision-making based on complete rational man. Subjective factors are bound to affect a person’s decisions even though he is otherwise rational.
Decision Making – Significance
No business can survive without effective decision-making. Decision-making is an essential part of every function of management. In the words of Peter F. Drucker, “Whatever a manager does, he does through decision-making.” Decision-making lies deeply embedded in the process of management. Decision-making spreads overall the managerial functions and covers all the areas of the enterprise. Management and decision-making are bound up and go side-by-side. Whether knowingly or unknowingly, every manager makes decisions constantly.
Herbert A. Simon described decision-making as synonymous with managing. Joseph A. Literer felt that decision-making is the core of managerial activity. Decision-making involves thinking and deciding before doing and so is inherent in every managerial function. Each manager has to take a number of decisions while performing his functions of planning, organising, staffing, directing and controlling. This is why, decision-making is often called the essence of managing.
Decision-making and planning are deeply interlinked. The determination of objectives, policies, programmes, strategies, etc., involves decision-making. The managers also take decisions on the organisational design, staffing, directing and leading the employees in work situations and on regulating performance in tune with predetermined standards. In other words, all managerial functions are preceded by certain managerial decisions.
The most outstanding quality of a successful manager is his ability to make sound decisions. A manager has to make up his mind quickly on certain matters. It is not correct to say that he has to make spur of the moment decisions all the time. While taking many decisions, he gets enough time for careful fact finding, analysis of alternatives and choice of the best alternative. Decision-making is a human process. When a manager decides, he chooses a course which he thinks is the best.
Right from the day when the size of the business used to be very small to the present-day, the importance of decision-making has been there. The only difference is that in today’s business environment, the decision-making is getting more and more complex. Whatever a manager does, he does through making decisions.
Some of the decisions are of routine nature and it might be that the manager does not realise that he is taking decisions. Other decisions which are of strategic nature may require a lot of systematic and scientific analysis. The fact remains that managers continuously take decisions and initiate steps to implement them. Thus, management is a blend of thinking, deciding and action.