Unit - 1

Decision Making

1.1 Concepts

Decision-making is the process of selecting the best alternative course of action from a number of alternatives given to management or developed by it critically and carefully examining each alternative.

      Decision and Decision Making Relationship

Decision Making is a process and decision is the outcome. The better the decision- making process the better would be the decision leading to an efficient commitment of precious organizational resources.

Relationship between decision and decision-making

Features of Decision-Making

The major characteristics of managerial decision-making are:

There are three dimensions of pervasiveness of decision-making:

• All managers in management hierarchy take decisions within the limits of their authority pertaining to the areas of functioning.
• Decision-making is done in all functional areas of management like

Production, marketing, finance, personnel, research and development and so on.

• Decision-making inherits all the functions of management which includes planning, organizing, staffing, directing and controlling.

Decision-making calls for creativity and imagination on the part of managers, meaning it forces managers to think in terms of developing best objectives and alternatives to obtain those objectives.  The intelligent the manager the better would be his decisions.

It involves in choosing the best alternative from a number of alternatives in a rational and scientific manner. If alternatives do not exist then  no decision-making problem is involved in that situation.

It commences since the inception of business and continues throughout the organizational life. It is involved in the process of liquidating or winding up a business enterprise. All managers take decisions for organizational purposes.

All actions of people operating the enterprise are based on decisions taken by management. The quality of actions by people depends on the quality of decisions taken by management.

The organizational resources like time, effort, energy, physical resource is implied both during the process of taking decisions and the time of implementation of decisions. Right decisions imply right commitment of resources .

It depends on the situation the management is facing. When the situation changes , decision-making also changes. The decision-making is different during boom and recession conditions.

1.2 Decision Making Process

The following are the steps involved in decision-making process. Different tools and techniques support each step.

Step 1: Identification of the purpose of the decision

The problem is thoroughly analyzed and when it comes to identifying the purpose of decision one should ask a couple of questions like

• What exactly is the problem?
• Why the problem should be solved?
• Who are the affected parties of the problem?
• Does the problem have a deadline or a specific time-line?

Step 2: Information gathering

In an organization, a problem will have many stakeholders. Adding to this there can be dozens of factors involved and affected by this problem.

In the process of solving the problem, you will have to gather as much as information related to the factors and stakeholders involved in the problem. For the process of information gathering, tools such as 'Check Sheets' can be used effectively.

Step 3: Principles for judging the alternatives

In this step, the baseline criteria for judging the alternatives should be set up. When it comes to defining the criteria, organizational goals as well as the corporate culture has to be taken into consideration.

As an example, profit is one of the main concerns in every decision making process. Companies usually do not make decisions that reduce profits, unless it is an exceptional case. Likewise, baseline principles should be identified related to the problem in hand.

Step 4: Brainstorm and analyze the different choices

For this step, the best option is brainstorming that is to list down all the ideas. Before the idea of generation steps, it is vital to understand the causes of the problem and prioritization of causes.

For this, you can make use of Cause-and-Effect diagrams and Pareto Chart tool. Cause-and-Effect diagram helps you to identify all possible causes of the problem and Pareto chart helps you to prioritize and identify the causes with highest effect.

Then, you can move on to generate all possible solutions (alternatives) for the problem in hand.

Step 5: Evaluation of alternatives

Use  judgement principles and decision-making criteria to evaluate each alternative. In this step, experience the effectiveness of judgment principles which come into play. You need to compare each alternative for their positives and negatives.

Step 6: Select the best alternative

Once you go through from Step 1 to Step 5, this step is easy. In addition, the selection of the best alternative is an informed decision since you have already followed a methodology to derive and select the best alternative.

Step 7: Execute the decision

Convert your decision into a plan or a sequence of activities. Execute your plan by yourself or with the help of subordinates.

Step 8: Evaluate the results

Evaluate the outcome of your decision. See whether there is anything you should learn and then correct in future decision making. This forms one of the best practices that will improve your decision-making skills.

1.3 Behavioral Concepts

Behavioral approach is one of the approaches in decision-making. It also known as descriptive approach and administrative model. Herbert A Simon, a well-known economist, attempts to explain how decisions are made in real-life situations, as well as proposes this theory. A manager has to make decisions under different conditions and situations. While taking a decision we consider how a manager has to perceive the things, how he reacts and how he tries to resolve all this in human behavior.

Managers have limited and simplified view of problems because:

• They do not have full information about the problems
• They do not possess knowledge of all possible alternative solutions
• They do not have the ability to process environmental and technological information
• They do not have sufficient time and resources to conduct an exhaustive search for alternative solutions to the problems.

Therefore, this model is based on concepts such as:

• Bounded Rationality :

The concept is that the values, unconscious reflexes, skills, and habits limit decision makers.

• Satisficing:

The tendency to search for alternatives until one is found that meets minimum standard of sufficiency to resolve the problem.

• Coalition

A political force in decision making which consists of an informal alliance of individuals or groups formed to achieve a goal.

Task-Oriented Behavior

A professional using a task-oriented approach to business management focuses on planning, coordinating and assigning employee tasks. This type of manager focuses on employee behavior in terms of assignments and what’s best for the business.

Employee-Oriented Approach

An employee-oriented approach to business management places emphasis on the interpersonal relationships of workers. A manager using this behavioral method doesn’t place great emphasis on production where it increases employee anxiety and damages the ability of employees to establish strong bonds. This type of manager wants employees to have positive working relationships and strives to create a welcoming office environment.

Path-Goal Theory

Path-goal leadership theory is a situational style of behavioral management in which the work environment and the characteristics of employees influence which behavioral approach to management is most effective. Path-goal leadership has four leadership types: directive, supportive, participative and achievement-oriented. Determining which behavioral approach to use requires a manager to consider employee skills, experience, nature of the assignment, dynamic of the work group and the office environment.

1.4 Organizational Decision-Making:

Decisions can be classified into three categories based on the level at which they occur

• Types of Decision Making

• Strategic Decisions:

Decisions made at the top level of the organization and generally determine the organizations overall direction.

• Tactical Decisions :

Decisions taken by mid-level managers to achieve goals and objectives set by their superiors.

• Operational Decisions

Day-to-day decisions made by employees and low-level managers to ensure target is met and business is running smoothly.

For example,  think about the restaurant that routinely offers a free dessert when a customer complaint is received. The owner of the restaurant made a strategic decision to have great customer service. The manager of the restaurant implemented the free dessert policy as a way to handle customer complaints, which is a tactical decision. Finally, the servers at the restaurant are making individual decisions each day by evaluating whether each customer complaint received is legitimate and warrants a free dessert

There are four decision-making approaches

• The rational decision-making model
• The bounded rationality decision-making model
• The intuitive decision-making model
• The creative decision-making model.

Rational decision- making model:

The rational decision-making model describes a series of steps that decision makers should consider if their goal is to maximize the quality of their outcomes.

The rational decision-making model has important lessons for decision makers.

• When making a decision,  make sure that you establish your decision criteria before searching for alternatives.
• This would prevent from liking one option too much and setting your criteria accordingly.
• Generating large number of alternatives covers a wide range of possibilities.
• This helps to make more effective decision that does not require sacrificing one criterion for the sake of another.

Bounded rationality decision-making model

      The bounded rationality model of decision-making recognizes the limitations of our decision-making processes.

      According to this model, individuals knowingly limit their options to a manageable set and choose the first acceptable alternative without conducting an exhaustive search for alternatives.

      An important part of the bounded rationality approach is the tendency to satisfice (a term coined by Herbert Simon from satisfy and suffice), which refers to accepting the first alternative that meets your minimum criteria.

      Satisficing is similar to rational decision making. The main difference is that rather than choosing the best option and maximizing the potential outcome, the decision maker saves cognitive time and effort by accepting the first alternative that meets the minimum threshold.

Intuitive Decision Making Model

• The intuitive decision-making model has emerged as an alternative to other decision- making processes.
• This model refers to arriving at decisions without conscious reasoning.
• 89% of managers surveyed admitted to using intuition to make decisions at least sometimes and 59% said they used intuition often.
• The intuitive decision-making model argues that in a given situation, experts making decisions scan the environment for cues to recognize patterns. 
• Once a pattern is recognized, they can play a potential course of action through to its outcome based on their prior experience.
• Once a viable course of action is identified, the decision maker puts the solution into motion.
• The key point is that only one choice is considered at a time.
• Novices are not able to make effective decisions this way, because they do not have enough prior experience to draw upon.

Creative Decision Making Model:

• Creative decision-making is a vital part of being an effective decision maker.
• Creativity is the generation of new, imaginative ideas.
• Individuals and organizations are driven to be creative in decisions ranging from cutting costs to generating new ways of doing business.
• While creativity is the first step in the innovation process, creativity and innovation are not the same thing. Innovation begins with creative ideas, but it also involves realistic planning and follow-through.

The five steps to creative decision making are similar to the previous decision-making models in some keys ways.

• Problem identification which is the step in which the need for problem solving becomes apparent. If you do not recognize that you have a problem, it is impossible to solve it.
• Immersion is the step in which the decision maker consciously thinks about the problem and gathers information. A key to success in creative decision making is having or acquiring expertise in the area being studied.
• Incubation -The individual sets the problem aside and does not think about it for a while. At this time, the brain is actually working on the problem unconsciously.
• Illumination or the insight moment when the solution to the problem becomes apparent to the person, sometimes when it is least expected
• The verification and application stage happens when the decision maker consciously verifies the feasibility of the solution and implements the decision.

1.5 MIS and Decision Making Concepts

Functions

• Data Capturing: captures data from internal and external sources of an organization.
• Processing of data: The captured data is processed to convert it into the required management information.
• Storage: MIS stores processed or unprocessed data for further use.
• Retrieval of information:  MIS retrieves data from the stores as and when required by various users.
• Dissemination of MIS : Management information , which is the finished product of MIS is disseminated to the users in the organization.

Components of MIS

The major components of a typical management information system are;

• People – people who use the information system
• Data – the data that the information system records
• Business Procedures – procedures put in place on how to record, store and analyze data
• Hardware – these include servers, workstations, networking equipment, printers, etc.
• Software – these are programs used to handle the data. These include programs such as spreadsheet programs, database software, etc.

The need for MIS

The following are some of the justifications for having an MIS system

• Decision makers need information to make effective decisions. Management Information Systems (MIS) make this possible.
• MIS systems facilitate communication within and outside the organization – employees within the organization are able to easily access the required information for the day to day operations. Facilitates such as Short Message Service (SMS) & Email make it possible to communicate with customers and suppliers from within the MIS system that an organization is using.
• Record keeping – management information systems record all business transactions of an organization and provide a reference point for the transactions.