Decision Making concepts
Decision-making is common to all of us, in our daily lives. In fact, every action of an individual is based on the decisions taken by him/her-concerning various matters.
Sometimes we take major decisions and are highly conscious about them. Minor or routine decisions, however, are taken by us; without ourselves realising the fact that a decision is being taken by us.
For example, the decision of a person to buy a bottle of soft-drink on a scorching summer day is a decision; without the person, being aware of the fact, that a decision is being taken by him/her. For major decisions, however, one is very conscious, careful and alert; and takes them in a planned manner.
In the context of business management also, decision-making is a common phenomenon, characterizing the ‘organisational lives’ of all managers. All managers take decisions-major or minor – within the limits of their authority, concerning their work field. In fact, whatever a manager does; he does so through decision-making. It is the thread that runs through the whole fabric of management.
Point of comment:
Sound decisions by managers lead to sound actions on their part; and, accordingly, better and efficient attainment of organizational objectives is facilitated.
Concept of Decision-making:
Decision-making might be defined as follows:
Decision-making is the process of selecting a 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 on 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 his disposal for achieving goals and solving problems.” – Theo Haimann
Relationship between decision and decision-making:
From the definitions of decision and decision-making, it follows that decision making is a process; a decision is the outcome of this process. Accordingly, the better the decision-making process; the better would be the decisions emerging out of it leading to an efficient commitment of precious organisational resources.
Features of Decision-Making:
Following are the major features or characteristics of managerial decision-making:
(i) Decision-Making is Goal-Oriented:
Each and every decision of management major or minor must make, at least, some contribution towards the attainment of organisational objectives. In case otherwise, decision-making is a wasteful activity; involving only a sheer wastage of the time, energy and efforts of managers, and precious organisational resources.
(ii) Decision-Making is Pervasive:
There are three dimensions of the pervasiveness of decision-making; viz:
(a) All managers in the management hierarchy take decisions, within the limits of their authority, pertaining to their areas of functioning.
(b) Decision-making is done in all functional areas of management e.g. production, marketing, finance, personnel, research and development etc.
(c) Decision-making is inherent in all functions of management i.e. planning, organising, staffing, directing and controlling.
(iii) Decision-Making is an Intellectual Exercise:
Decision-making calls for creativity and imagination on the part of managers; in that decision-making forces managers to think in terms of developing best objectives and best alternatives for attaining those objectives. In fact, the more intelligent a manager is; the better would be the decision-making done by him.
(iv) Decision-Making Involves a Problem of Choice:
Decision-making is fundamentally a choosing problem i.e. a problem of choosing the best alternative, from out of a number of alternatives, in a rational and scientific manner. If in a managerial decision-making situation, alternatives do not exist; then there is no decision-making problem involved in that situation.
Further, more are the alternatives that are available in a situation; the more complicated the decision-making process is likely to be.
(v) Decision-Making is a Continuous Process:
Decision-making process commences since the inception of business and continues throughout the organisational life. All managers take decisions for organisational purposes; so long as the enterprise is in existence. In fact, decision-making is also involved in the process of liquidating or winding up a business enterprise.
(vi) Decision-Making is the Basis of Action:
All actions of people operating the enterprise are based on the decisions taken by management vis-a-vis organisational issues. In fact, the quality of actions by people well depends on the quality of decisions taken by management.
(vii) Decision-Making Implies a Commitment of Organisational Resources:
Commitment of organisational resources time, efforts, energies, physical resources etc. is implied both during the process of taking decisions and more particularly, at time of implementation of decisions. Right decisions, accordingly, imply a right commitment of resources; and wrong decisions imply a wrong commitment of precious organisational resources.
(viii) Decision-Making is Situational:
Decision-making much depends on the situation facing the management; at the time when a decision-making problem crops up. Whenever the situation changes; decision-making also changes; e.g. decision-making by management on similar issues is radically different during boom conditions and during conditions of recession or depression.
A Major Classification of Types of Decisions:
In fact, is a sort of Herculean task to list out all the decisions which managers take during the course of organisation life; as decisions taken by managers are numberless stretching from tiny to gigantic decisions? Yet, one could attempt the following classifications of managerial decisions – to have an idea of the basic nature and varieties of managerial decisions.
(i) Personal and Organisational Decisions:
Personal decisions are those which are taken by managers concerning their personal life matters. On the other hand, organisational decisions are those which are taken by managers, in the context of organisation and for furthering the objectives of the organisation.
The highlight of the above distinction between personal and organisational decisions is that sometimes, personal decisions of managers have got organisational implications; and then such personal decisions must be taken by managers, in the best interests of the organisation.
For example, the decision of a manager to proceed on a long leave is a personal decision of the manager. But then, in the interest of the organisation, he must appoint some deputy to act on his behalf, till he returns.
(ii) Casual and Routine Decisions:
Casual decisions (whether more significant or less significant) are those which are taken only on some special issues concerning organisational life e.g. a decision to install a new piece of machinery. Casual decisions of a significant nature are taken at upper levels of management. Insignificant casual decisions may, however, be permitted even at lower levels of management.
On the other hand, routine decisions are those which are taken in large numbers during the normal course of organisational life, with repeated frequency. A major number of routine decisions are taken at operational levels of management.
Point of comment:
One should not suppose that routine decisions are not taken at upper levels of management. Top ranking managers also indulge in routine decision-making. However, the number of routine decisions and their frequency at top levels of management is rather restricted.
(iii) Strategic and Tactical Decisions:
Decisions relating to designing of strategies are strategic decisions i.e. decisions of utmost significance for the organisation. Such decisions are taken at uppermost levels of management. For implementation purposes, strategies are translated into operational plans or tactical decisions. Such tactical decisions are taken at middle and lower levels of management.
(iv) Policy and Operative Decisions:
A policy decision is a decision in the nature of guidance and instruction; which defines and confines the area of discretion of subordinates, in matters of decision-making. Naturally policies are decided by superiors for the guidance of subordinates. Decisions of subordinates taken within the prescribed limits and guidance of policies are, in management terminology, called operative decisions.
(v) Programmed and Non-Programmed Decisions:
Programmed decisions are those which are taken within the framework of the existing plans of the organisation; and for taking which prescribed policies, rules, procedures and methods are available with the organisation. Such decisions do not pose much problem for managers.
On the other hand, non-programmed decisions are those for taking which there is no provision in the existing planning framework of the organisation. Such decisions are warranted by extraordinary exceptional or emergency situations.
For example, if workers are on strike on a particular day; such a situation will call for an un-programmed decision as to how to deal with the work- situation on that day. Non-programmed decisions are taken by managers confronting emergency situations, in consultation with higher levels of management.
(vi) Individual and Collective Decisions:
This classification of decisions rests on the manner of decision-making. An individual (not personal) decision is one which is taken by a manager in his individual capacity, without being in consultation with any other person, whatsoever. Such decisions are dictatorial or authoritarian in nature, and are taken by ‘big bosses’ of the organisation.
On the other hand, collective decisions are those which are jointly taken by a group of managers and other persons – through a process of mutual consultations – in meetings or committees or other joint forum. Such decisions are democratic in nature.
(vii) Financial and Non-financial Decisions:
Financial decisions are those which involve financial implications or commitment of organisational finances. In fact, most of the management decisions are financial in nature. On the other hand, non-financial decisions are those which do not involve financial implications; e.g. a decision-asking people to be punctual for the organisation or a decision-asking people not to accept gifts from suppliers or others.
In a way, non-financial decisions may also be very significant for the organisation.
Additional observations on classifications of decisions:
Decisions may also be classified according to functional areas of management; e.g. production decisions, marketing decisions, accounting decisions, research decisions and so on. Further, decisions may be classified according to basic functions of management; e.g. planning decisions, organising decisions, staffing decisions, directing decisions and controlling decisions.
Rationality in Decision-Making:
For examining the issue of rationality in decision-making, we consider the following two models of human behavior:
- Economic-man model and
- Administrative man model
1. Economic-Man Model:
Economic man model of human behaviour is a gift of Economic Theory, and is propagated by Adam Smith and other classical economists. According to them, man is a completely rational being (a rational being is one who proceeds according to logic, in all his/her actions).
For example, a consumer will always try to maximize his satisfaction from the use of limited means, at his disposal by being fully rational in his approach to consumption.
A producer, likewise, will always try to maximise his profits by attempting an optimum combination of factors of production or by deriving maximum output from minimum inputs by following a fully rational approach vis-a-vis his productive operations.
This economic-man model cannot be applied to managers while taking decisions. A rational manager is one who analyses all the alternatives in the decision-making situation; and then takes a decision in a fully rational manner. Managers must be rational in decision-making; but cannot be absolutely rationale in their approach-as suggested by ‘economic-man model’, because of practical limitations.
2. Administrative Man Model:
Administrative man model of human behaviour is suggested by Prof. Herbert Simon, a well- known Economist and Nobel laureate. This model of human behaviour is the practical man model and is based on the principle of ‘bounded rationality’ (i.e. limited rationality); according to which managers can be rational only in a limited way, during the process of decision-making.
They cannot develop and evaluate all the possible alternatives in the decision-making situation. They just analyses a limited number of alternatives and take a decision which is just ‘good-enough’.
Case for administrative man-model/case against economic man model:
Following are given certain factors which substantiate the case for administrative man model (or bounded rationality) and condemn the case for economic-man model:
(i) Vaguely defined goals:
Many-a-times, organisational goals-for the attainment of which decision-making is required are very vaguely defined. Under such circumstances, managers cannot be absolutely rational.
(ii) Lack of full information:
Usually, complete data for decision-making purposes are not available with the organisation. As such managers cannot develop all the possible alternatives, in a given managerial situation, i.e. they cannot be absolutely rational, in their decision-making process.
(iii) Time constraint:
A manager has to take not just one decision. He has to take many decisions within the time available at his disposal. How could then he devote all his time and efforts in taking just one decision, in an absolutely rational manner? He has to be practical in approach by dividing his time among many decision-making situations, in an equitable manner.
(iv) Limitations of mind:
Mental capacities of every manager, howsoever competent and intelligent, are limited. He cannot possibly think of all alternatives in a managerial decision-making situation and evaluate them. In fact, this is a practical limitation of every human mind.
(v) Availability of evaluation techniques:
All the techniques necessary for evaluation of alternatives are rarely available to a manager. Even in a large organisation, all the modern techniques of evaluation are not available. Therefore, a manager can evaluate only such alternatives, as could be analyzed with the help of techniques made available to him, by the organisation.
(vi) Pressure from above:
Sometimes, on a manager, there is pressure exerted by higher authorities to decide an issue, in a particular manner. Under such conditions, a manager has to be obedient to higher authorities – discarding the criterion of absolute rationality.
(vii) Ego Factor:
Big managers, in many enterprises, take decisions which satisfy their ego. They hardly care for the rationality aspect, in their decision making behaviour, not to speak of absolute rationality.
(viii) Political considerations:
Managers, in many cases, have to adopt a compromising attitude, when a decision involves conflicting interests of two opposite parties. Here, political considerations dominate; and managers take decisions in a practical manner compromising the interests of two conflicting parties. Absolute rationality, in such situations, is out of question.
(ix) Environmental changes:
In the present-day-times of highly volatile and turbulent external environmental conditions, absolute rationality in decision-making is not possible. It is not possible for management to predict future environmental conditions accurately. Decisions based on premises of uncertain environmental conditions must not be expected to be absolutely rational.