THE INSTITUTE OF FINANCE MANAGEMENT

MSD 06202 - FUNDAMENTALS OF MANAGEMENT

TOPIC 6: DECISION MAKING

6.0 Meaning of decision making

Decision making is the process of choosing a course of action from among alternatives to
achieve a desired goal

According to James Stoner, "Decision making is the process of identifying and selecting a course
of action to solve a specific problem."

According to Trewartha and Newport, "Decision making involves the selection of a course of
action from among two or more possible

When trying to make a good decision, a person must weigh the positives and negatives of each
option, and consider all the alternatives. For effective decision making, a person must be able
to forecast the outcome of each option as well, and based on all these items, determine which
option is the best for that particular situation.

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Maker ?
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Nature of decision Making (Features)

Decision making is
 A goal oriented process, means decisions are made to achieve some goal or objective.
 Implies a set of alternatives. A decision problem arises only when there are two or more
alternatives.
 a dynamic process - it involves time dimensions and time lag meaning the technique to be
used will depend on the type of the problem and the time available for its solution
 Always related to the environment - every decision will depend on the situation we are in
with at that time.
 implies freedom to the decision maker, specifically to the final choice which may
involves commitment of resources

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  It is continuous and or ongoing process, managers must have to take series of decisions
for smooth running of everyday operations
 It is an intellectual or rational process as it involves deliberations, reasoning and
evaluation

6.1 The decision-making process

Decision making is a systematic process, hence it consist of the following nine (9)
process/elements

1. Identifying/recognition of the problem

Decision making begins with the recognition of the real problem that requires decision. At this
stage, a manager must identify and define the real problem, where by imagination; experience
and judgement are required for detection of problem that requires managerial decision.

Nb: a problem well defined is half solved. This means that, 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 determines the true problem in a situation is by identifying the
problem separately from its symptoms.

2. Diagnose the real problem

This implies the analysis of the problem in term of its elements, its magnitude, its urgency, its
course/source and its relation with other problems. The major aim is to find the real courses or
sources of the problem, its impact, time frame available, etc.

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.

3. Identify decision criteria

Based on the problem description such as magnitude, urgency- a manager must identify
important criteria relevant for resolving a problem

4. Allocate weights to the criteria

The criteria's aren’t equally important, thus the decision maker must weigh the items in order to
give the correct priority in the decision

5. Develop possible alternatives

A manager must not jump into the first feasible alternative to solve the problem quickly. Thus, a
manager should think through and investigate several alternative solutions to a single problem
before making a quick decision.

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There are several ways for developing alternatives, One of the best known methods 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. Brainstorming
usually requires 30 minutes to an hour.

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

managers can use several other ways to help develop solutions.
Here are some other ways:
 Nominal group technique. This method involves the use of a highly structured meeting,
complete with an agenda, and restricts discussion or interpersonal communication during
the decision-making process. This technique is useful because it ensures that every group
member has equal input in the decision-making process.
 Delphi technique. With this technique, participants never meet, but a group leader uses
written questionnaires to conduct the decision making.

6. Evaluate or analyse 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?

7. Choose / select the best course of action

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

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

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 8. Implement the decision
Once the decision has been made, it needs to be monitored. 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.

Because Managers are paid to make decisions, but they are also paid to get results from these
decisions, then Positive results must follow decisions and everyone involved with the decision
must know his or her role in ensuring a successful outcome.

9. Establish a control system and evaluate decision effectiveness

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 case the feedback indicates that the decision is not yielding the desired result,
necessary changes should be made in the decision or its implementation.

Identify the Diagnose the Identify Allocate Develop

problem problem potential
decision weights to
alternatives
criteria the criteria
Feedback

Evaluate Implement Choose the Analyze the

decision the decision best alternatives
alternative
effectiveness

The Decision making process

6.2 Decision making Conditions/situations

Certainty condition – a situation where manager can make accurate decision because all
outcomes are known

Risk condition – a situation where decision maker is able to estimate the likelihood
(possibility/chance) of certain outcomes. Basically here managers use secondary data
available and past experience to develop/assign probabilities to different alternative

Uncertainty condition – a situation where the decision maker has neither certainty nor
reasonable probability estimate available.(A manger is not certain about outcome and he
cannot make any probability estimate)

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 6.3 Decision making styles

 Linear thinking style – is characterized by a person’s preference for using external data
& facts and processing this information through rational and logical thinking to guide
decision and action

 Non Linear thinking style - is characterized by a person’s preference for using internal
sources of information (feelings and intuitions) and processing this information through
internal insights, feelings and hunches to guide decision and action

NB: When two employees makes a decision on something, find themselves disagreeing on each
other, managers need to recognize that; their employee may use different decision making style.
So their differences don make one’s persons approach better than the other, it just mean their
decision making style are different.

6.4 Types of managerial decisions

The managerial decisions are classified into the following groups
A. Programmed and non- Programmed decisions
Programmed decisions are concerned with relative routine and repetitive problems. Such
decisions have short-term impact and are relatively simple based on established decision rules
and regulations to save time and effort.
These decisions requires the little thought and judgement, and therefore made at lower levels of
management. Example, a habitually late comer employee can easily be dealt with under
established procedure

Non- Programmed decisions concerned with unique or unusual problems or non -repetitive
problems that cannot be tackled by predetermined manner.
These decisions are highly made by higher levels such as location of the plant, opening a new
branch, development of new product etc.

S/N Characteristics Programmed decisions Non- programmed decisions

1 Type of problem Structured Unstructured
2 Goals Clear and specific Vague
3 Information Complete Ambiguous or incomplete
4 Frequency of occurrence Routine and repetitive New and unusual
5 Level of Management Made at lower levels Upper levels
6 Time frame for solution Short-term impact Long term
7 Basis of solution Policies, procedures & rules Judgement, creativity &
experience

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 B. Routine and strategic decisions

Routine or operating decisions are of repetitive in nature. they involves short-term commitments
and have minor impact on the future of the organization.
Are generally made at lower level of Management relating to day to day operations of the
organization by the help of established standard procedures
Strategic or policy decisions involve long-term commitments of business resources and have
large impact on the future of the business as the whole. these decision are made at high levels of
management including location of the plant, opening a new branch, installation of computer
system etc.

C. Organizational and personal decisions

A manager as a decision maker can make decision in two areas for organization and for him/her
self.
Organizational decisions are made by managers based on rationality, judgement and experience
in their official capacity as resource allocators for the interest of the organization. These
decisions affect the functioning of the business and can be delegated to lower levels

Personal decisions are made by managers as individual on their own behalf. These decisions
cannot be delegated, they affects the personal life of a manager but also may affects the
organization indirectly or directly. Eg. Decision to marry, to retire, to buy a house e.t.c

D. Individual and group decisions

Individual decisions are made by single individual mainly concerned with routine problems for
which broad policies are available. In such decisions, the analysis of various variables to support
decisions is simple

Group decisions are those taken by a group of persons constituted for that purpose. In most cases
group decisions are important for the organizations. Eg. Decisions by B.O.D, committee, etc

6.5 Importance of Decision making to an organization

Decision making is the vehicle for carrying managerial work load and discharging managerial
responsibilities. It is through decision making that managers strive to achieve organizational
goals. They attempt to bridge the gap between the existing and the desired situation by taking
and executing decision. The following are some other benefits or roles of decision making in an
organization

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  Better utilisation of resources. Decision making helps to utilise the available resources for
achieving the objectives of the organisation. The available resources are the 6 M's, i.e.
Men, money, materials, machines, methods and markets. The manager has to make
correct decisions for all the 6 M's. This will result in better utilisation of these resources.

 Facing problems and challenges. Decision making helps the organisation to face and
tackle new problems and challenges. Quick and correct decisions help to solve problems
and to accept new challenges.

 Helps the business to grow. From Above point all this results in quick business growth.
However, wrong, slow or no decisions can result in losses and industrial sickness.

 Achieving objectives rational decisions help the organisation to achieve all its objectives
quickly. This is because rational decisions are made after analysing and evaluating all the
alternatives.

 Increases efficiency. Rational decisions help to increase efficiency. Efficiency is the

relation between returns and cost. If the returns are high and the cost is low, then there is
efficiency and vice versa. Rational decisions result in higher returns at low cost.

 Facilitate innovation. Rational decisions facilitate innovation. This is because it helps to

develop new ideas, new products, new process, etc. This results in innovation. Innovation
gives a competitive advantage to the organisation.

 Motivates employees. Rational decision results in motivation for the employees. This is
because the employees are motivated to implement rational decisions. When the rational
decisions are implemented the organisation makes high profits. Therefore, it can give
financial and non-financial benefits to the employees.

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6.6 Common Problems/ limitation of decision making
 Time Consuming A lot of precious time is consumed for decision making. Individual
decisions take a lot of time because the manager has to study the merits and demerits of
all the alternatives.

 Limited resources. Gathering information is sometimes expensive based on the fact the
in most cases managers need to make decision within limited time or quickly.

 Biased Decisions. Sometimes decisions are biased. That is, the manager makes decisions,
which only benefit himself and his group.

 Limited Analysis of the alternatives before making a decision the manager must analyze
all the alternatives by studying the merit and demerits of each alternative and the select
only the best alternative.

 Human Limitations, Most of decision makers do not have the ability to process
information intelligently, when they are invaded by so many details they become
overloaded hence choose only those details which they think relates to the problem

 Uncontrollable Environmental Factors. Environmental factors include political, social,

technological and other factors.

 Uncertain Future. Decisions are made for the future. However, the future is very
uncertain. Therefore, it is very difficult to take decisions for the future.

Revision Question (Topic 6)

1. What do you understand by the term decision making?

2. Briefly explain the steps involved in decision making
3. Explain different decision making styles you have learned in class
4. Is there a relationship between planning and decision making?
5. Explain the merits and demerits of Group decision making
6. What are deferent types of managerial decisions?
7. What situations do face managers when making decisions?
8. Define decision making. Is decision making important to an organization? Explain with
reasons
9. Differentiate programmed from non-programmed decisions
10. Briefly explain the major limitations of the decision making process
11. Describe possible guideline for effective decision making in an organization

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