Fundamentals of Management – MGT 501

Decision Making: As a managerial

function
-- By Prof. Dr. Sharmina Afrin

Learning Objectives: After completing this topic, you will

be able to learn:
▪ Decision and Decision-making
▪ Decision-making process
▪ Steps of the decision-making process
▪ Decision-making situation – Three perspectives on how decisions
are made
✓ Rational Decision-making
✓ Bounded Rational Decision-making
✓ Role of Intuition (Intuitive Decision-making)
▪ Types of Problems
▪ Types of Decisions
▪ Decision-making conditions

1 Prof. Dr. Sharmina Afrin, Department of Management, Faculty of Business, BUBT

Decision and Decision-making

What is Decision?
Decision is a choice from two or more alternatives (options). Individuals at all
levels and in all areas of organizations make decisions. Managers make decisions
regarding the different issues of the organizations.

What is Decision-making?
Decision-making is making the right choice from two or more alternatives
considering or analyzing the different decisional factors (criteria) which affect the
choice. Decision-making is a comprehensive process, not just a simple act of
choosing among alternatives.

Decision-making Process

Managers make decision through a step by step process. Decision-making process

is a set of eight steps which include identifying a problem, identifying decision
criteria or factors, developing alternatives, selecting an alternative, and evaluating
the decision’s effectiveness.

2 Prof. Dr. Sharmina Afrin, Department of Management, Faculty of Business, BUBT

Steps of the Decision-making Process

There are eight steps in the decision-making process. The steps are as follows:

Step 1: Identifying a problem

The decision-making process begins with the existence of a problem.

Problem means a discrepancy or difference between an existing and a desired state

of affairs, i.e. a gap between which exists now and what is expected. So, the
decision-maker or the manager first identifies the problem.

Example: A BBA passed student needs to be admitted into a university for

obtaining MBA degree. His existing situation is he is not admitted into any
university. His desired state of affairs is he wants to get admitted into a university.
So, there is gap between the existing and the desired state of affairs.

Step 2: Identifying decision criteria or factors

After identifying a problem, the decision-maker or manager must identify the
criteria or factors which are important to resolving the problem. That is, managers
must determine what is relevant in making a decision.

Example: In this step the BBA passed student identifies the following criteria or
factors which are relevant in selecting the right university.

The criteria or factors are:

1) Ranking of the university

2) Cost of the program
3) Qualifications of the faculty members
4) Location of the university campus
5) Permanent campus
6) Timing of classes

3 Prof. Dr. Sharmina Afrin, Department of Management, Faculty of Business, BUBT

Step 3: Allocating weights to the criteria or factors
If the criteria identified in Step 2 are not equally important, the decision-maker
must weigh the criteria or factors in order to prioritize them or give them
importance in the decision.

Example: In this step, the student gives importance to the identified criteria or
factors.

Table 1: It shows the factors and their weights.

Criteria or Factors Weight

Ranking of the university 10
Cost of the program 8
Qualifications of the faculty members 7
Location of the university campus 5
Permanent campus 4
Timing of classes 2

Step 4: Developing alternatives or options

The fourth step requires the decision-maker to list down the viable (possible)
alternatives which could resolve the problem.

Example:

The student lists down the following universities:

- University of ‘A’
- University of ‘B’
- University of ‘C’
- University of ‘D’
- University of ‘E’
- University of ‘F’

4 Prof. Dr. Sharmina Afrin, Department of Management, Faculty of Business, BUBT

Step 5: Analyzing alternatives
After developing / identifying the alternatives, the decision-maker must critically
analyze each alternative by appraising it against the criteria established in Step 2
and Step 3. The decision-maker does it by his or her own judgment. From this
comparison, the strengths and weaknesses of each alternative become evident.

Example:

Table 2: It represents only the assessment of the six alternatives against the six
decision criteria.
Name of Ranking Cost of the Qualifications Location Permanent Timing of
the of the program of the faculty of the campus classes
University university members university
campus
‘A’ 10 3 10 8 5 4
‘B’ 8 7 7 8 7 6
‘C’ 8 5 7 10 10 7
‘D’ 7 7 7 8 7 10
‘E’ 7 8 7 8 7 7
‘F’ 8 3 6 10 8 5

Now, the decision-maker multiplies the value of each factor of all alternatives in
Table 2 by the weight of each factor in Table 1, and therefore, he gets Table 3.

For example, the values of ‘ranking of the university’ of all universities (10, 8, 8,
7, 7, 8)*(the weight of ranking of the university-10 in table 1).

The values of ‘cost of the program’ of all the universities (3, 7, 5, 7, 8, 3)*( the
weight of cost of the program- 8 in table 1).

5 Prof. Dr. Sharmina Afrin, Department of Management, Faculty of Business, BUBT

Table 3

Name Ranking Cost of Qualification Location Permanent Timing of Total

of the of the the of the faculty of the campus classes
Univer university program members university
sity campus
‘A’ 100 24 70 40 20 8 262
‘B’ 80 56 49 40 28 12 265
‘C’ 80 40 49 50 40 14 273
‘D’ 70 56 49 40 28 20 263
‘E’ 70 64 49 40 28 14 265
‘F’ 80 24 42 50 32 10 238

Step 6: Selecting an alternative

This step includes choosing the best alternative from among those considered.
When all the pertinent criteria in the decision have been weighed and viable
alternatives analyzed, the decision-maker chooses the alternative which generated
the highest total in Step 5 (Table 3).

Example: In Table 3 University of ‘C’ scored the highest (273) on the basis of the
criteria identified, the weights given to the criteria, and the assessment of each
alternative against the decision criteria. So, University of ‘R’ is the best alternative
which the BBA passed student should choose.

Step 7: Implementing the alternative

This step is concerned with putting the decision into action. The decision-maker
performs all the activities which are necessary to implement the decision.

Example: Now the student will complete all the necessary activities and formalities
which require to get admission into the University of ‘C’.

Step 8: Evaluating the decision’s effectiveness

6 Prof. Dr. Sharmina Afrin, Department of Management, Faculty of Business, BUBT
The last step in the decision-making process involves evaluating the outcome of
the decision to see if the problem had been resolved or not. That means, whether
the problem identified in Step 1 is properly solved by the chosen alternative or not.

Decision-making Situation– Three

perspectives on how decisions are made.

Managers or decision-makers make decisions facing different situations. It is called

the perspectives on how decisions are made.

There are three perspectives of decision-making:

Rational Decision-making:
It describes the choices that are consistent, value-maximizing within specified
constraints. Manager or decision-maker makes choice which is consistent with the
problem, which generates the maximum outcome and where there are specified or
less constraints. Here, the decision-maker makes choice in very positive situation.

There are some assumptions of Rational Decision-making or Rationality:

• The problem is clear and unambiguous.

• A single, well-defined goal is to be achieved.
• All alternatives and consequences of the alternatives are known.
• Preferences are clear.
• No time or cost constraints exist.
• Final choice will maximize payoff (maximize the outcome).

Bounded Rational Decision-making (Bounded Rationality)

7 Prof. Dr. Sharmina Afrin, Department of Management, Faculty of Business, BUBT
Bounded Rational Decision-making is the decision-making behavior which is
rational, but limited (bounded) by an individual’s (decision-maker) ability to
process information. Here, to process information means, to gather and analyze
information.

In this case, managers cannot possibly analyze all information on all alternatives.
So, managers ‘satisfice’, rather than maximize.

‘Satisfice’ means managers accept solutions that are ‘good enough’.

‘Satisficing’ means, acceptance of solutions that are ‘good enough’.

Role of Intuition (Intuitive Decision-making)

Intuitive Decision-making: Making decision on the basis of knowledge,
intelligence, experience, understanding, feelings, and accumulated judgment.

The five aspects of intuition which influence the decision-makers or managers

when they make choice are as follows:

8 Prof. Dr. Sharmina Afrin, Department of Management, Faculty of Business, BUBT

Types of Problems
When managers work in their organizations, they generally face two types of
problems.

1. Structured Problems: Problems which are straight forward, familiar

and can be easily defined are called structured problems. These problems are
well known to the managers, easily understood, and managers usually face
these problems.
For example: A University needs to admit new intakes in a specific
semester.

2. Unstructured Problems: Problems which are new or unusual and for

which information is ambiguous or incomplete. These problems are not
straight forward, familiar, and easily defined. Managers face these problems
in unique situations.
For example: A semester of an academic year of a University remains closed
for a specific period of time due to an unavoidable disaster.

Types of Decisions
To handle the two types of problems, managers make two types of decisions.

They are as follows:

1. Program Decisions: To handle structured problems, managers make

program decisions. Program decision is a repetitive decision which
managers handle by routine approach.

2. Non-programmed Decisions: To handle unstructured problems

managers make non-program decisions. It is a unique decision which
requires a custom-made solution, means decisions are taken depending on
the situation.

9 Prof. Dr. Sharmina Afrin, Department of Management, Faculty of Business, BUBT

Decision-making Conditions

There are three conditions managers may face when they make decisions. They are
certainty, risk, and uncertainty.

1. Decision-making in Certainty: A situation in which a manager can

make accurate decisions because all outcomes are known. It is the ideal
situation for making decisions because the outcome of each alternative is
known.

2. Decision-making in Risk: A situation in which a decision-maker is able

to estimate the likelihood (possibility / chance) of certain outcomes.

3. Decision-making in Uncertainty: A situation in which a decision-

maker has neither certainty nor reasonable possibility or chance of certain
outcomes.

10 Prof. Dr. Sharmina Afrin, Department of Management, Faculty of Business, BUBT