UNIT-3

DECISION – MAKING
 DECISION - MAKING

TOPICS
1. Introduction to Decision Making
2. Types of Decisions
3. Nature of Decision-Making
4. Different Approaches in Decision-making
5. The Rational Model of Decision Making (Steps)
6. Challenges to Rational Model
7. Decision Making Strategies
8. Techniques for Effective Decision Making
9. Role of Goals and Objectives in DM
10. Role of Boards and Committees in DM
11. DM Practices Abroad
12. Case Study- ICL (Indian Cricket League)
 1.INTRODUCTION TO DECISION MAKING
• Integral process of planning
• Decision = choice made from available alternatives
• Decision Making = process of identifying problems and
opportunities and resolving them
• Decision Making- The process of examining possibilities,
options and choosing a course of action.
• It is a conscious human process
• Decision making is the one truly distinctive characteristic
of managers.
• Decisions made by top managers commit the total
organization toward particular courses of action.
 2. TYPES OF DECISIONS
●
Direction to organizations
●
Vision, Mission and Long term Goals
Strategic Decisions ●
Develop strategies based on resources
●
Expensive and long term impact
●
High Managerial competence & Risky

●
Supports Strategic Decisions
Tactical Decisions ●
Medium term
●
taken at Department, division and unit level

●
Pre programmed
Operational ●

●
Highly structured
Every day decisions
Decisions ●
As per policy manuals
●
Frontline management
 2. TYPES OF DECISIONS
Another classification proposed by Herbert simon :

Programmed Decisions

• Non Recurring
Non-programmed Decisions
• No specific Procedures or Rules
• Previous experience not available
•Experience
●

●
Based
Repetitive
on limited information
and routine
in the past
●
Rules or guidelines to make decisions
 3. NATURE OF DECISION MAKING
 Decisions made by Individuals and groups
 Managers mix rational and other factors in DM
 in case of new opportunities difficult to develop alternatives
 decisions based on past needs to be implemented in future
 future is uncertain and difficult to predict with accuracy
 bounded rationality by Herbert simon- not perfectly rational
but serves the purpose- “satisficing”.
 Intuitive DM- decisions based on rational and gut-feel.
 DM under certainty
 DM under uncertainty
 DM under Risk
 DIFFERENT APPRAOCHES TO DECISION MAKING
Authoritarian or Individual Decision Making :
i. Individual knowledge based Decisions
ii. Then announced to the group for implementation
iii. Less time in making decisions and more time in
explaining and agreement by the group
Group Decision Making
iv. Group develops ideas, shares ideas, analyses and
agrees upon
v. Time consuming to make decisions and less time in
communicating
vi. Group members work hard since it is agreed upon
 THE RATIONAL MODEL OF DECISION MAKING
Assumptions:
Decision-making is a goal oriented process
 All choices are known
 order of preference
 Maximum advantage
Steps :
1. Awareness of Problem
2. Diagnose and state the problem
3. Develop the alternatives
4. Evaluate the alternatives
5. Select the best alternative
6. Implement and verify the Decision
 CHALLENGES TO RATIONAL MODEL
• Impossible to state the problem accurately
• Not fully aware of problems
• Imperfect knowledge
• Limited time and resources
• Cognitive limits
• Politics
Bounded Rationality:
A concept that suggests that the ability of managers to be
perfectly rational in DM is limited by such factors as
cognitive capacity and time constraints.
 DECISION MAKING STRATEGIES
a) Optimising :
The best possible solution to a problem. Implementation depends on
time that is available, cost of generating alternatives, availability of
resources, knowledge and attitude and values of the people involved.
b) Satisficing
Combination of satisfactory and sufficient. Choosing the first
satisfactory alternative as a decision rather than identifying the best
alternative
c) Maxi-max
Optimistic strategy, choosing best alternative which maximises the
maximum pay off.
d) Maxi-min
Pessimistic strategy, worst possible outcome of each decision is
considered and the decision with highest number of minimums chosen
 TECHNIQUES FOR MAKING EFFECTIVE DECISIONS
 They help identify and analyze factors
 help in choosing the best action
 provide a structured analysis of factors
 bring out the consequences of the decisions and help managers to choose the
best option
Techniques
a) Pareto Analysis
b) paired comparison analysis
c) Grid analysis
d) Decision Trees
Other elements to consider for making effective decisions
1. Six Thinking hats- Edward de bono;
2. Cost benefit analysis
3. Impact analysis
4. prioritization
 ROLE OF GOALS AND OBJECTIVES IN DM
Goal: A goal is a future target or end result that an
organization wishes to achieve.
Objective: It is an end point of a management program
Goals and Objectives are used interchangeably however
goals provide direction for the organizations and they are
broad whereas objectives are detailed roadmaps and help
reach the goals.
Criteria of effective goals/objectives:
•Acceptance criteria
•Smart Criteria
• Building agreement at the top
• Communication for building understanding
 ROLE OF BOARDS AND COMMITTEES IN DM

•The board of directors is ultimately responsible for the

company’s business affairs and governance
• Board of directors to represent shareholders and make
decisions on their behalf.
• The success of the board of directors depends on the
composition, structure, resources, diligence, and authority
including management, external auditors, internal
auditors, legal counsel, professional advisors, regulators
and investors.
 Roles and responsibilities of boards of directors
1. Represent shareholders and create shareholder value.
2. Align the interests of management with those of shareholders while
protecting the interests of other stakeholders (customers, creditors,
suppliers).
3. Define the company’s mission and goals.
4. Establish or approve strategic plans and decisions to achieve these goals.
5. Appoint senior executives to manage the company in accordance with
the established strategies, plans, policies, and procedures.
6. Approve major business transactions and corporate plans, decisions, and
actions according to the bylaws.
7. Develop and approve executive compensation, pension, long-term
benefits, including stock ownership and stock options.
8. Review financial reports, including audited annual financial statements
9. Review management’s report on the effectiveness of internal control
over financial reporting
 ROLE OF BOARD COMMITTEES IN DM
Board committees normally function independently from each other, are
provided with sufficient resources and authority, and are evaluated by the
board of directors.
Thus board committee are a subset of the board and perform specific
functions that assist the board in discharging its advisory and oversight
responsibilities.

Public companies usually have the following board committees:

• Audit committee
• Compensation committee
• Governance committee
• Nominating committee
• Disclosure committee
• Other standing or special committees
 Types of Board Committees
Audit Committee –three independent directors; to implement
and support the oversight function of the board, specifically in
the areas related to the internal controls, risk management,
financial reporting, and audit committees.

Compensation Committee – composed of at least three

independent directors; serves to design, review, and implement
‘directors’ and ‘executives’ compensation plans.

Governance Committee - consist of both executives and

nonexecutives directors; should be established to advise, review,
and approve management strategic plans, decisions, and actions
in effectively managing the company.
 Types of Board Committees
Nominating committee – composed of at least three
independent directors; should be formed to monitor issues
pertaining to the recommendations, nominations and elections
activities of directors.

Disclosure committees – this committee is usually led by corporate

counsel, CFO’s, or controllers. It is responsible for reviewing and
monitoring the company’s conference call scripts, and
presentations to the investors by senior management.

Special committee – the board of directors may form a special

committee to assist the board in carrying out its strategic and
oversight function, including financing, budgeting, investment,
mergers and acquisitions.
 DM Practices Abroad
 Some countries tend to use more centralized decision making
than others
 Most British organizations are highly decentralized
 French managers graduated from the Grand Écoles and lack
confidence in their middle managers so decision making
tends to be centralized
 German MNCs tend to be fairly centralized, autocratic, and
hierarchical. managers focus more on productivity and quality
of goods and services than on managing subordinates
 Decision making in Sweden is decentralized and participative
Focus more on quality of work life and the importance of the
individual in the organization
 DM Practices Abroad
Ringisei
A Japanese term that means “decision making by
consensus.” Japanese consensus decision making can be
very time-consuming. In practice most Japanese managers
know how to respond to “suggestions” from the top and to
act accordingly, saving much time
Tatemae : A Japanese term that means “doing the right
thing” according to the norm.
Honne : A Japanese term that means “what one really
wants to do.”
 DM Practices Abroad

MNCs based in the United States

Use fairly centralized decision making in managing their
overseas unit
Ensure that all units are operating according to the overall
strategic plan
Thus providing necessary control for developing a
worldwide strategy
Most evidence indicates the overall decision-making
approaches used around the world favors centralization