CHAPTER THREE

DECISION MAKING

Meaning of Decision Making

Decision making is a conscious choice among analyzed alternatives, followed by action to

implement a choice. It can be defined as a solution selected after examining several alternatives
chosen because the decider foresees that the course of action he selects will be more than others
to further his goals and will be accompanied by the fewest possible objectionable consequences.

Decision making is a selection process, the means to achieve the end, the application of
intellectual abilities to a great extent, a dynamic process, situational and taken to achieve the
objectives of an organization. Decision making includes the evaluation of available alternatives
through critical appraisal methods.

Decision making is defined as a rational choice among alternatives. There have to be options to
choose from; if there are not, there is no choice possible and no decision. Decision making is a
process, not a lightning bolt occurrence. In making the decision, a manager is making a
judgment, reaching a conclusion, from a list of known alternatives.

Effective decision making requires a rational selection of a course of action. Managers’ goals can
be reached under existing circumstances and limitations. They must also have the information
and the ability to analyze and evaluate alternatives in the light of the goals sought. And finally,
they must have a desire to come to the best solution by selecting the alternative that most
effectively satisfies goal attainment. Thus, rationality implies making decision based on facts,
experience, experimentation or research and analysis with distinct procedure.

The Decision‐Making Process

Quite literally, organizations operate by people making decisions. A manager plans, organizes,
staffs, leads, and controls her team by executing decisions. The effectiveness and quality of those
decisions determine how successful a manager will be.

TESFAHUN T. Page 1
Managers are constantly called upon to make decisions in order to solve problems. Decision
making and problem solving are ongoing processes of evaluating situations or problems,
considering alternatives, making choices, and following them up with the necessary actions.
Sometimes the decision-making process is extremely short, and mental reflection is essentially
instantaneous. In other situations, the process can drag on for weeks or even months. The entire
decision-making process is dependent upon the right information being available to the right
people at the right times.

The decision-making process involves the following steps:

1. Define the problem.

2. Identify limiting factors.

3. Develop potential alternatives.

4. Analyze the alternatives.

5. Select the best alternative.

6. Implement the decision.

7. Establish a control and evaluation system.

1. Define the problem

The decision-making process begins when a manager identifies the real problem. The accurate
definition of the problem affects all the steps that follow; if the problem is inaccurately
defined, every step in the decision-making process will be based on an incorrect starting point.
One way that a manager can help determine the true problem in a situation is by identifying
the problem separately from its symptoms.

The most obviously troubling situations found in an organization can usually be identified as
symptoms of underlying problems. (See Table 1 for some examples of symptoms.) These
symptoms all indicate that something is wrong with an organization, but they don't identify

TESFAHUN T. Page 2
root causes. A successful manager doesn't just attack symptoms; he works to uncover the
factors that cause these symptoms.

TABLE Symptoms and Their Real

1 Causes

Symptoms Underlying Problem

Low profits and/or declining Poor market research

sales

High costs Poor design process; poorly trained employees

Low morale Lack of communication between management and

subordinates

High employee turnover Rate of pay too low; job design not suitable

High rate of absenteeism Employees believe that they are not valued

2. Identify limiting factors

All managers want to make the best decisions. To do so, managers need to have the ideal
resources — information, time, personnel, equipment, and supplies — and identify any limiting
factors. Realistically, managers operate in an environment that normally doesn't provide ideal
resources. For example, they may lack the proper budget or may not have the most accurate
information or any extra time. So, they must choose to satisfice — to make the best decision
possible with the information, resources, and time available.

TESFAHUN T. Page 3
3. Develop potential alternatives

Time pressures frequently cause a manager to move forward after considering only the first or
most obvious answers. However, successful problem solving requires thorough examination of
the challenge, and a quick answer may not result in a permanent solution. Thus, a manager
should think through and investigate several alternative solutions to a single problem before
making a quick decision.

One of the best known methods for developing alternatives is through brainstorming, where a
group works together to generate ideas and alternative solutions. The assumption behind
brainstorming is that the group dynamic stimulates thinking — one person's ideas, no matter how
outrageous, can generate ideas from the others in the group. Ideally, this spawning of ideas is
contagious, and before long, lots of suggestions and ideas flow. Brainstorming usually requires
30 minutes to an hour. The following specific rules should be followed during brainstorming
sessions:

 Concentrate on the problem at hand. This rule keeps the discussion very specific and
avoids the group's tendency to address the events leading up to the current problem.

 Entertain all ideas. In fact, the more ideas that come up, the better. In other words, there
are no bad ideas. Encouragement of the group to freely offer all thoughts on the subject
is important. Participants should be encouraged to present ideas no matter how
ridiculous they seem, because such ideas may spark a creative thought on the part of
someone else.

 Refrain from allowing members to evaluate others' ideas on the spot. All judgments
should be deferred until all thoughts are presented, and the group concurs on the best
ideas.

Although brainstorming is the most common technique to develop alternative solutions,

managers can use several other ways to help develop solutions. Here are some examples:

 Nominal group technique. This method involves the use of a highly structured meeting,
complete with an agenda, and restricts discussion or interpersonal communication

TESFAHUN T. Page 4
 during the decision-making process. This technique is useful because it ensures that
every group member has equal input in the decision-making process. It also avoids some
of the pitfalls, such as pressure to conform, group dominance, hostility, and conflict, that
can plague a more interactive, spontaneous, unstructured forum such as brainstorming.

 Delphi technique. With this technique, participants never meet, but a group leader uses
written questionnaires to conduct the decision making.

No matter what technique is used, group decision making has clear advantages and
disadvantages when compared with individual decision making. The following are among the
advantages:

 Groups provide a broader perspective.

 Employees are more likely to be satisfied and to support the final decision.

 Opportunities for discussion help to answer questions and reduce uncertainties for the
decision makers.

These points are among the disadvantages:

 This method can be more time-consuming than one individual making the decision on his
own.

 The decision reached could be a compromise rather than the optimal solution.

 Individuals become guilty of groupthink — the tendency of members of a group to

conform to the prevailing opinions of the group.

 Groups may have difficulty performing tasks because the group, rather than a single
individual, makes the decision, resulting in confusion when it comes time to implement
and evaluate the decision.

TESFAHUN T. Page 5
The results of dozens of individual-versus-group performance studies indicate that groups not
only tend to make better decisions than a person acting alone, but also that groups tend to inspire
star performers to even higher levels of productivity.

So, are two (or more) heads better than one? The answer depends on several factors, such as the
nature of the task, the abilities of the group members, and the form of interaction. Because a
manager often has a choice between making a decision independently or including others in the
decision making, she needs to understand the advantages and disadvantages of group decision
making.

4. Analyze the alternatives

The purpose of this step is to decide the relative merits of each idea. Managers must identify the
advantages and disadvantages of each alternative solution before making a final decision.

Evaluating the alternatives can be done in numerous ways. Here are a few possibilities:

 Determine the pros and cons of each alternative.

 Perform a cost-benefit analysis for each alternative.

 Weight each factor important in the decision, ranking each alternative relative to its
ability to meet each factor, and then multiply by a probability factor to provide a final
value for each alternative.

Regardless of the method used, a manager needs to evaluate each alternative in terms of its

 Feasibility — Can it be done?

 Effectiveness — How well does it resolve the problem situation?

 Consequences — What will be its costs (financial and nonfinancial) to the organization?

5. Select the best alternative

TESFAHUN T. Page 6
After a manager has analyzed all the alternatives, she must decide on the best one. The best
alternative is the one that produces the most advantages and the fewest serious disadvantages.
Sometimes, the selection process can be fairly straightforward, such as the alternative with the
most pros and fewest cons. Other times, the optimal solution is a combination of several
alternatives.

Sometimes, though, the best alternative may not be obvious. That's when a manager must decide
which alternative is the most feasible and effective, coupled with which carries the lowest costs
to the organization. (See the preceding section.) Probability estimates, where analysis of each
alternative's chances of success takes place, often come into play at this point in the decision-
making process. In those cases, a manager simply selects the alternative with the highest
probability of success.

6. Implement the decision

Managers are paid to make decisions, but they are also paid to get results from these decisions.
Positive results must follow decisions. Everyone involved with the decision must know his or her
role in ensuring a successful outcome. To make certain that employees understand their roles,
managers must thoughtfully devise programs, procedures, rules, or policies to help aid them in
the problem-solving process.

7. Establish a control and evaluation system

Ongoing actions need to be monitored. An evaluation system should provide feedback on how
well the decision is being implemented, what the results are, and what adjustments are necessary
to get the results that were intended when the solution was chosen.

In order for a manager to evaluate his decision, he needs to gather information to determine its
effectiveness. Was the original problem resolved? If not, is he closer to the desired situation than
he was at the beginning of the decision-making process?

If a manager's plan hasn't resolved the problem, he needs to figure out what went wrong. A
manager may accomplish this by asking the following questions:

TESFAHUN T. Page 7
  Was the wrong alternative selected? If so, one of the other alternatives generated in the
decision-making process may be a wiser choice.

 Was the correct alternative selected, but implemented improperly? If so, a manager
should focus attention solely on the implementation step to ensure that the chosen
alternative is implemented successfully.

 Was the original problem identified incorrectly? If so, the decision-making process
needs to begin again, starting with a revised identification step.

 Has the implemented alternative been given enough time to be successful? If not, a
manager should give the process more time and re-evaluate at a later date.

Types of decision

Although managers in large business organizations, government offices, hospitals and schools
may be separated by background, lifestyle and distance, they all sooner or later must share the
common experience of making decisions. They all will face situations involving several
alternatives and an evaluation of the outcome. In this section we will discuss various types of
decisions.

Programmed decisions:
Are decisions managers make in response to repetitive and routine problems and at lower level
management. These decisions are "programmable" because of a specific procedure can be
worked out to resolve them based on experience in similar situations.
 Such decision should be made without expending unnecessary time and effort
 They are handled through policies
 Once a standard procedure has been established, it can be used to treat all like situations.
 They usually involve an organization's every day operational and administrative activities
 They are primarily found at the lower levels of management.
 Data used in making a programmed decision usually are complete and well defined.
 Participants know the details and agree on how to resolve the problem.
Non-programmed Decisions:

TESFAHUN T. Page 8
Are made for non- repetitive, non-routine, infrequent, novel, special, highly important, dynamic,
complex and unstructured problems. When a problem has not arisen in exactly the same manner
before, or extremely important, it may require a non programmed decision. Making such
decision is clearly a creative process.
 No well-established procedure exists for handling them, primarily because managers do not
have experience to draw upon.
 Usually handled by general problem solving processes, judgment, intuition and creativity.
 In contrast to programmed decisions, available data are usually incomplete.
 Non programmable decisions are commonly found at the top levels of management and often
is related to an organization's policy-making activities such as whether to manufacture new
product, to reorganize the company, or to acquire another firm, are examples.

Formal decision

A decision made on data and well organized and well documented manner. Usually decisions
made in organization are formal plans. They do follow certain prescribed patterns, written rules
and procedures.

Informal decisions

A decision made without proper data support and proper organization. They are not in properly
documented manner. Usually decisions made in our personal life are informal plans.

Intuitive decisions: A decision made based on estimating or guessing to decide among

alternatives.

Systematic decisions: a decision made based on organized, exacting and data driven process for
choosing alternatives.

Proactive decision: a decision made in anticipation of an external change or other conditions.

Reactive decision: a decision made in response to external change.

TESFAHUN T. Page 9
Types of Decision Making in Management

Decision making is a fundamental element of the managerial process. In considering the types of
decision making, managers need to look at two aspects: the seven kinds of decisions that a
manager might face or produce and the four processes or styles employed in making the
decision.

The seven kinds of decisions that a manager might face or produce

Irreversible: These decisions are permanent. Once taken, they can't be undone. The effects of
these decisions can be felt for a long time to come. Such decisions are taken when there is no
other option.

Reversible: Reversible decisions are not final and binding. In fact, they can be changed entirely
at any point of time. It allows one to acknowledge mistakes and fresh decisions can be taken
depending upon the new circumstances.

Delayed: Such decisions are put on hold until the decision maker thinks that the right time has
come. The wait might make one miss the right opportunity that can cause some loss, specially in
the case of businesses. However, such decisions give one enough time to collect all information
required and to organize all the factors in the correct way.

Quick Decisions: These decisions enable one to make maximum of the opportunity available at
hand. However, only a good decision maker can take decisions that are instantaneous as well as
correct. In order to be able to take the right decision within a short span of time, one should also
take the long-term results into consideration.

Experimental: One of the different types of decision making is the experimental type in which
the final decision cannot be taken until the preliminary results appear and are positive. This
approach is used when one is sure of the final destination but is not convinced of the course to be
taken.

TESFAHUN T. Page 10
Trial and Error: This approach involves trying out a certain course of action. If the result is
positive it is followed further, if not, then a fresh course is adopted. Such a trail and error method
is continued until the decision maker finally arrives at a course of action that convinces him of
success. This allows a manager to change and adjust his plans until the final commitment is
made.

Conditional: Conditional decisions allow an individual to keep all his options open. He sticks to
one decision so long as the circumstances remain the same. Once the competitor makes a new
move, conditional decisions allow a person to take up a different course of action.

The four processes or styles employed in making the decision

A leader gives direction to people to follow. He is responsible for ensuring that his decision
provides the right direction to the organization. Be it in a business or in other organizations,
decision making is an important component of leadership skills. The different types of decision
making that a leader typically encounters are:

Authoritative: In authoritative type of decision making the leader is the sole decision maker
which subordinates follow. The leader has all the information and expertise required to make a
quick decision. It is important that the leader is a good decision maker as it is he who has to own
up to the consequences of his decision. Though effective, in case the leader is an experienced
individual, it can harm the organization if the leader insists on an authoritative type of decision
making even when there is expertise available within the team.
Facilitative: In facilitative type of decision making, both the leader and his subordinates work
together to arrive at a decision. The subordinates should have the expertise as well as access to
the information required to make decisions. Such an approach could be useful when the risk of
wrong decision is very low. It is also a great way of involving and encouraging subordinates in
the working of the organization.
Consultative: As the name suggests, consultative decisions are made in consultation with the
subordinates. However, the fact remains that unlike in the facilitative decision making style, in
consultative decision making it is the leader who holds the decision making power. A wise leader
tends to consult his subordinates when he thinks that they have valuable expertise on the

TESFAHUN T. Page 11
situation at hand.
Delegative: As per the term, the leader passes on the responsibility of making decisions to one or
more of his subordinates. This type of decision making is usually adopted by the leader when he
is confident of the capabilities of his subordinates.
It would have been so good had there been a universal model for decision making. However, due
to the dynamic nature of conditions, be it our workplace or our personal lives, we have to resort
to different types of decision making.

The Decision Making Environment

Decision making, like planning and other management functions, does not take place in a
vacuum. There are many factors in the environment that affect the process and the decision
maker.

Degree of certainty

In some situations, the manager has perfect knowledge of what to do and what the consequences
of the action will be. In others, the manager has no such knowledge. Decisions are made under
conditions of certainty, risk and uncertainty.

Decision under certainty

It means the manager has what is known as a prefect knowledge. The manager has had this
decision to make before; the alternatives are known, and the consequences of each alternative are
fully understood. In this type of decision making situation, the manager will choose the
alternative known to get the best results. Here it means a manger can rely on a policy or standing
plan; the decisions will be made routinely.

Decisions under risk

It provides a more difficult decision making environment. In this situation, the manager knows
what the problem is, knows what the alternatives are, but does not know how each alternative
will work out even though s/he knows the odds (probabilities) of possible outcomes. The
manager is faced with dilemma of choosing the best alternative available.

E.g. tossing a coin, metrology

TESFAHUN T. Page 12
Decision under uncertainty

It is the most difficult for a manager. This decision making situations is like being a pioneer. In
this situation, the manager is not able to determine the exact odds (probabilities) of the potential
alternative available. The manager may be dealing with too many variables or perhaps there are
too many unknown facts.

Regardless of the reasons, the manager is unable to accurately predict the probable results of
choosing anyone of the alternative. Reliance on experience, judgment and other people’s
experience can assist the manager in assessing the value of the alternatives.

E.g. Innovation of new machine, journey of discoverers.

Why Do Managers Make Poor Decisions?

All managers recognize the importance of making sound decisions. Yet most managers readily
admit having made poor decisions that hurt their company or their own effectiveness. Why do
managers make mistakes? Why don’t decision always result in achieving some desired goal?
Making the wrong decision can result from any one of these decision-making errors:

 Lack of adequate time: Waiting until the last minute to make a decision often prevents
considering all alternatives. It also hampers thorough analyses of the alternatives.

 Failure to define goals: Objectives cannot be attained unless they are clearly defined.
They should be explicitly stated so that the manager can see the relationship between a
decision and a desired result.

 Using unreliable sources of information: A decision is only as good as the information on

which it is based. Poor sources of information always result in poor decisions.

 Fear of consequences: Managers often are reluctant to make bold, comprehensive decisions
because they fear disastrous results. A “plays it safe” attitude sometimes limits a manager’s
effectiveness.

 Focusing on symptoms rather than causes: Addressing the symptoms of a problem will not
solve it. Taking aspirin for a toothache may provide temporary relief, but if an abscess causes

TESFAHUN T. Page 13
 the pain, the problem will persist. Business managers too often foul on the results of
problems instead of the causes.

TESFAHUN T. Page 14