Decision Making

Concept & definition: Decision-making might be defined as follows:“Decision-making is the process of selecting the best alternative course of action; from among a number of alternatives given to management or developed by it - after carefully and critically examining each alternative”.Following are given a few popular definitions of decision-making:"Decision making is the selection based or some criteria from two or more possible alternatives". -G.R. Terry"Decision-making is a course of action chosen by a manager as the most effective means at hisdisposal for achieving goals and solving problems". Theo Haimann

Decision Making Models

There are basically two models of or approaches to decision-making behaviour of managers. These are Normative or Rational approach and Behavioural approach. The central theme for both the models is rationality. While the normative model embraces rationality tightly, the behavioural model seeks to somewhat release itself from the grip of rationality.

Normative Model (Rational Economic Man)

The hero of normative model is the rational economic man who is the perfect embodiment of rationality. The term 'rationality' implies a consistent and value maximizing choice. According to Simon, rationality is the selection of preferred behaviour alternatives in terms of value whereby the consequence of behaviour can be evaluated. A rational business decision is one which effectively and efficiently assures the attainment of aims for which the means are selected. It means that the decision-maker as an economic being tries to maximize the advantage by selecting the best or optimum solution to a problem. It is called a normative approach because it is idealistic and, advocates perfect and fully scientific decision. It is based on the following assumptions:(a) The decision-maker is systematic, logical and reasoned in his thinking. (b) He is also scientific in his thinking and imbued with a spirit of enquiry;he tries to discover reality, never takes things for granted, and accepts things only after verification.

.(c) He is very objective; never allows himself to be pulled or pushed; controls his emotions carefully.(d) He is knowledgeable; he is in a position to get full information on matters in which he is interested. (e) He is able to analyze his information intelligently f) He can set clear and definite goals to maximize his gains or minimize his pains or losses. He knows his priorities very well.

(g) He moves purposefully to reach his goals. Thus, he chooses appropriate means and relates them clearly to his goals, because he is definite about his ends and means.

Administrative or Behavioural Model

Herbert Simonll put forward the concept of 'administrative man' who takes decisions based as intuition and rational thinking. A person who depends much upon intuition is more subjective and a person who depends much upon logical thinking is more objective. This is what Herbert Simon has called the 'principle of bounded rationality'. Simon emphasized that a person makes decisions not only on absolutely logical analysis of facts, but also on his intuition, value system and way of thinking, which are subjective in nature. The subjectivity in decision making arises because:(i) The individual does not want to study and analyze the problem because of his perception.(ii) He does not have the full knowledge of the alternatives and/or their consequences. .(iii) He interprets the organizational goals in his own way. He adopts a course of action .which according to him will meet the goals effectively.(iv) He is lazy or careless in taking the decision. He may be indifferent towards the consequences of his decision.The rationality of the individuals is generally bounded by these limitations. The concept of bounded rationality explains the behaviour of people, in practice. It recognizes that a person cannot be expected to have full knowledge and information and his capacity to perceive, retain and retrieve information is not unlimited. Human goals are multiple and conflicting. The traditional theory of completely rational and economic man cannot work in practice.Thus, in practice, managerial decision-making is a sub-rational, fragmented and pragmatic activity. Absolute rationality is a super human and rare faculty. It is an ideal worthy to be aimed at but seldom reached. Rationality is not only elusive but is also illusory. Managers can at best be intendedly rational. They are ordinary humans, though endowed with moderate intelligence and initiative. They are not all-knowing and all powerful. They have their own share of limitations-intellectual, emotional and physiological. Even if they can make very objective decisions, several situational factors are likely to come in the way.The 'real life' decision-maker who makes decisions within bounded rationality is called 'administrative man' as against the 'economic man' representative of rational decision making. The administrative man seeks 'satisficing decisions', which are satisfactory and sufficient for his practical purposes. He has a mixture of rational and emotional sentiments, economic and non-economic values. He is neither completely rational nor completely emotional. He no doubt likes to reach best decisions. That is his ideal and he knows about its desirability. He also knows about his limitations and the limitations imposed on him by his environment. He defines his problems in practical terms, collects as much information as possible, considers a feasible and familiar set of alternatives and chooses one of them. He may not engage in an exhaustive search process for information and for alternative courses. He may not follow a pre-determined, systematic, sequential decision making process. He is very flexible in his approach. He does not hesitate to adjust his goals and the means of attaining them in tune with the 'ground' realities.

Problem Solving Process:

(I) Defining the decision-making problemThe first step in the decision-making process is to define the decision-making problem. 'Well begun is a half done'; is the proverb which throws light on the logic of this step. In fact, many managers are very fuzzy about what the decision is to be taken; and they put their fingers to just what they feel about decision-making. Then they proceed to decision-making process in a half-hearted manner getting little success.Our aim at this stage is not to attempt a formal definition of the decision-making problem; which is neither possible nor desirable. Answers to questions like the following may throw sufficient Light on the conceptual aspects of the decision making problem:(I) what area or areas of management e.g. production, marketing, finance, personal etc. is/are covered by the proposed decision?(ii) At what level of management - upper, middle or lower - will the proposed decision be taken?(iii) What function or functions of management viz. planning, organizing, staffing, directing or controlling is/are covered by the proposed decision?(iv) Whether necessary resources - men, money, materials, machinery, technology etc are available with the organization; should the proposed decision be implemented?(v) In what manner will the proposed decision contribute to organizational mission and objectives?(vi) What consequences - good or bad - are likely to arise from the implementation of the

proposed decision?(vii) Whether a decision, similar to the proposed decision had been taken in the past; and with what consequences?(2) Collection of Data A decision as good as the adequacy and quality of data are on which it is based. Without data or Facts available with management, decision-making exercise is very much like throwing arrows in the air, without any definite aim. Accordingly, management should proceed to collect necessary data for decision-making purposes. Services of MIS (Management Information System) in this regard may prove to be highly useful and valuable.

(3) Development of alternatives The primary technical step in the decision - making process is development of alternatives. 11us step is usually guided by SWOT (Strengths, weaknesses, opportunities and threats) analysis.Accordingly, management must develop those alternative; which- capitalize on the strengths of the company- overcome its weaknesses/ limitations-lead to best exploitation of environmental opportunities and- help to convert environmental threats or challenges into opportunities for gain; or otherwisemanage threats successfully.

(4) Evaluation of Alternatives

After development of alternatives, each alternative is critically evaluated in terms of its merits and limitations - to get at the 'net worth' of each alternative. Management, at this stage, is recommended to adopt the following criteria for evaluation - Risk and resource implications associated with each alternative- Cost-benefit analysis for each alternative- Behavioural implications and psychological satisfaction for people, associated with .alternative.While evaluating alternatives, management must follow a liberal approach and borrow techniques of analysis from many disciplines like, Economics, Statistics, Mathematics, Sociology Psychology etc.

(5) Selection of the Best AlternativeSelection of the best alternative will not follow automatically from the evaluation of alternatives. In making a selection of the best alternative, management may base its decision on any of the following two bases:

- Experience- Experimentation I

Management may take a final decision as to the selection of the best alternative .on the basis of its experience. Naturally experienced managers take better decision. However, experience on the basis selection must be applied with caution: as future conditions are likely to be much different from those experienced by management.A second basis of selection is experimentation. A sample of decision may be put to implementation on a trial basis; and the response to decision implementation analyzed carefully – before taking implementation of decision, in a full-fledged manner.However, experimentation through a scientific basis of selection may not be possible in all cases .For example. a pharmaceutical company cannot experiment new drugs on human lives. Mreover,exprimentation is a costly and time-consuming process.

(6) Implementation of the decisionA decision remains only a 'paper-decision'; unless and until it is put into practice. Implementation of the decision requires the following managerial aspects, to be taken care of:- Communication of decision to those who are to implement it.- Making all resources and facilities available to the operators of the decision- Motivating people to implement the decision with enthusiasm and - exercising general supervision over the implementation of the decision.

(7) Follow-up or feedback action'After the decision has been put into practice; the management must watch consequences – good and bad -which arise from the implementation of the decision. This is the follow-up or feedback aspect of the decision-making process. In view of the feedback obtained form the implementation the decision, necessary modifications may be done in the decision. This feedback may also lead to better decision-making in future.

TECHNIQUES OF DECISION MAKING:Managers often face decision problems of novel, non-routine type, for which no precedents are available. Each problem is unique and needs to be handled as such. Traditionally, managers banked exclusively upon their intuition, hunch and judgment for making non-programmed decisions. But now modem techniques are also available for taking unstructured or unprogrammed decisions.

1. Judgemental Technique

Judgment by human beings is the oldest technique of decision-making. It is subjective in nature1. As it is based on past experience and intuition about the future, it is frequently used for making routine decisions or decisions of limited scope. Judgmental technique is cheap and can be quickly applied. On the other hand, it is risky and hazardous also. If the judgment is wrong, the decision taken will also be wrong. Because of its drawback, this technique is not used in situations where large capital commitments are involved or where futurity is critical.Traditional managers largely depended upon judgment while making decisions. Usually the judgement is based on one's memory, values, precedents, facts, and education. Intuition is the ability to know or recognize quickly and readily the possibilities of a given situation. Managers often explain intuition in vague terms such as "it just feels right." In some cases it may be arbitrary, based on a whim, while in other cases it is based on years of experience that produces an innate sense of what will work and what will not in given situations. Intuition adds an element of spontaneity to managerial decision making, and as a result it offers the potential for greater creativity and innovation. Especially in risk and uncertain environments, successful managers probably use a good deal of intuition in decision making.

TECHNIQUES OF DECISION MAKING (FOR PROGRAMMED DECISIONS)Programmed decisions are routine and repetitive in nature. They are taken with the help of one or more of the following techniques:1. Habit. Managers try to solve repetitive and routine problems through established habits which arise from experience and learning and are internalized or programmed in the form of certain set responses to problems. Any conscious thinking is not required for applying habit technique in decision making. It comes as a spontaneous course of action to deal with routine problems.

2. Standard Operating Procedures. They may be said to be 'clerical routine' to solve problems. Repetitive and routine problems are handled through established work procedures. They are in the nature of standing plans or decision criteria for ensuring consistency in managerial decision making. They are more likely to be modified or altered as per the needs of the organization, unlike habits.

3. Organisation Structure. For making effective programmed decisions, organisation structure is used as a systematic traditional means or technique. Necessary managerial positions are created to solve problems of different nature. Responsibilities are assigned properly and adequate authority is delegated to each manager to carry out his responsibilities. Delegation of authority for making decisions and vertical flow of information are provided for in an organisation structure. Also, managers know what is expected of them, to whom they are accountable and whom to contact for resources and information, through the medium of organisational structure.

Operational Research TechniquesOperational or operations research is the application of scientific method, tools and techniques to operations of system with optimum solution to the problem.2 Operations research (OR) may be defined as the scientific method of analysis of decision problem to provide the manager the needed quantitative information in making decisions.In days gone by, managerial decisions Used to be taken on the basis of intuition, subjectivity or past experience even in big organizations. Operations research seeks to replace this process by an analytic, objective and quantitative basis. It does not provide ready-made solution but provides the quantitative data and analytical framework which facilitate decision making. It gives emphasis on defining the problem and careful compilation and evaluation of data, development and testing of hypothesis, establishing relationship between various data and taking effective measures to control performance.The technique of operations research involves the following steps:(I) Construction of a mathematical model that pin-points the important factors initial situation(ii) Definition of criteria to be used for comparing the relative merits of various possible courses of action.(iii) Procuring empirical estimates of the numerical parameters in the model that specify the particular situation to which it is applied.(iv) Carrying through the mathematical process of finding courses of action which will give optimum solution.

Operations research is a generic term which includes many techniques like linear programming, waiting lines or queuing theory, games theory, etc.A brief discussion of the operational research techniques is given below:

(a) Linear Programming. Linear programming involves maximization or minimization of a linear function of some primary variable known as objective function subject to a set of some rules or assumed restrictions known as constraints. It is used for determining the operational combination of limited resources to achieve a given purpose. It is based on the assumption that there exists a linear relationship between variables and that the limits of variation can be ascertained. Linear programming is applicable in such problem areas as production planning, transportation, warehouse location and utilization of production facilities at an overall minimum cost.

(b) Queuing Theory. Queuing theory or waiting line theory is applied to any situation that creates a need to balance the cost of increasing available services against the cost of letting units wait. In other words, queuing theory uses mathematical techniques to balance the cost of waiting lines versus the cost of preventing waiting lines by increased services. A group of items waiting to receive services including those services is known as queue. A queue exists where the demand for a limited service exceeds the availability of the service. A long waiting line may result in the line of customers to the business while opening of further facility to serve all customers may result in idle capacity. In such a case, decision is taken with the help of queuing theory. The idle capacity is the cost that has to be balanced (against the cost of providing the service).(c) Games Theory. Games theory may be applied to decision situations where the rational opponent is involved so that resulting effects are dependent on the specific strategies selected by the decision maker and the opponent. The theory assumes that the

opponent will carefully consider what the decision maker may do before he selects his own strategy. There exists a definite conflict of interests between the decision maker and the opponent as in the case of games applied for fun or entertainment. In norma1 games, each player or group of players tries to choose a course of action which will frustrate opponent's actions and help in winning the game. Similarly, while deciding the business strategy, an attempt is made to maximize one's profit and minimize loss and to minimize opponent's profit and maximize loss.

(d) Replacement Theory. This theory helps in the determination of the time when certain items of plant and equipment should be replaced. Replacement requires investment, but it saves operating costs which will be too high while using old items. Thus, the problem is when an item should be replaced cost is minimum. The replacement of items is necessary because efficiency of an item deteriorates with time, or it may become obsolete. There may that the item fails completely and it is required to be replaced. In all such cases, the problems are decided by the replacement theory.

(e) 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 inter-dependence 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. These techniques have been discussed in detail in the chapter on Management Control Techniques.

Delphi TechniqueIt is a group decision technique3 and is used in long-range forecasting. This technique involves four basic steps. Firstly, a panel of experts on the particular problem at hand is drawn from both inside and outside the organisation. Secondly, each expert is asked to make anonymous predictions or forecasts. Thirdly, each expert is provided composite feedback of the ways various experts have answered the question. Lastly, each expert is free to change his opinion on the basis of the feed-back. This process is repeated several times till a consensus decision is reached.The Delphi technique is used to:(i) Determine or develop a range of possible programme alternatives;(ii) Explore or expose underlying presumptions of information leading to different judgments;(iii) Seek information which may generate a consensus on the part of the respondent group;(iv) Correlate informed judgements on a topic spanning a wide range of disciplines; and,(v) Educate the respondent group on the diverse and inter-related aspects of the problem.

Decision Tree

A decision tree is a graphic method by which a decision maker can readily visualize alternatives together with risks, possible outcomes and information needs involved in

each chance. Decision tree is a visual devise for illustrating some or all the chances available at various stages in a multistage decision process and the consequence of each choice. The concept of decision tree recognizes that there are many decisions which are linked to each other. The decisions form a kind of network or a tree with decisions branching out from the trunk, according to the answers given or decisions made at each stage. "Some decisions involve a series of steps, the second step depending on the outcome of the first, the third depending on the outcome of the second and so on. Often uncertainty surrounds each step, so we face uncertainty piled upon uncertainty. Decision trees are a model to deal with such a problem".

Organisational context of decision Making

Decision-making in groups is a collective process which is based on the old adage that "two heads are better than one". In group decision-making, the group members interact with each other, deliberate on the problem and arrive at some collective decision. The decision may be arrived at through either consensus or simply majority. Consensus implies that all members must agree to the proposed decision, where majority vote implies that it is enough for the majority of the group members to agree on the decision arrived at.

Advantage of Group Decision Making

The potential advantages of group decision making are as follows:(i) The knowledge base of the group is greater which can help in taking better decisions.(ii) The group members may have different specialties as in case of cross functional teams. This will allow group to analyze the problem from different perspectives or aspects. In such a situation, the decision is likely to be comprehensive in nature.(iii) The input from the members of the group can eliminate the biases that are generally introduced in the process of Individual decision making.1t also reduces the unreliability of individual's decisions.(iv) The group format allows participation of group members in the decision making. This can lead to better decision besides providing satisfaction to the participants.(v) Group decision making can be used as a training ground for new members to learn decision making and communication skills. Thus it can serve as an instrument of human resource development. (vi) Group decisions are likely to be implemented effectively. The group members who have participated in taking the decision jointly are supposed to lend full support to the decision because of their greater commitment to the decision. However, it is important that the decision should be accepted by all the members of the group.

Disadvantages of Group Decision Making

The potential disadvantages of group decision making are as under:(i) Group decision making is a time consuming process. Usually, a group takes more time in reaching a decision since there are too many opinions to be taken into consideration. The greater the differences among group members, the greater are the time taken in decision making.(ii) Sometimes, the group leader or some member may dominate in the group deliberations which might result in taking a biased decision.(iii) A group may make decisions that are simply a compromise between the various

views held by individual members. This is particularly true when a group must make a decision on a controversial issue.(iv) Some members may simply agree with the others for the sake of agreement since there are social pressures to conform and not to be the odd man out. Thus the desire to be a good group member tends to silence disagreement and force consensus among the members. The social pressures can be very strong.(v) The participants in group decisions may have their own axes to grind or their own interest to protect. These self-centered interests lead to personality conflicts that may create interpersonal obstacles and diminish the efficiency of the process as well as the quality of the decision.(vi) When there is a conflict between the group goals and the organisational goals, the group decision is likely to be detrimental to the interests of the organisation.(vii) Group decision making may be affected by the problem of 'groupthink'. Under this, the desire of the group members for complete consensus may override their motivation to disagree with an alternative or to evaluate other available alternatives. Naturally, the effectiveness of group decision making will suffer.(viii) Group decision making may prove to be more risky than individual decision making. Since it is a collective decision, the group may be tempted to take more risk than warranted by the situation. Such a tendency is known as 'risky shift'.