Decision Making process

What Is Decision Making

is a process by which a decision (course of action) is taken.

Decision-making lies embedded in the process of management. According to Peter Drucker, "Whatever
a manager does, he does through decision-making".

A manager has to take a decision before acting or before preparing a plan for execution. Moreover, his
ability is very often judged by the quality of decisions he takes. Thus, management is always a decision-
making process.

It is a part of every managerial function. This is because action is not possible unless a firm decision is
taken about a business problem or situation.

This clearly suggests that decision-making is necessary in planning, organising, directing, controlling and
staffing. For example, in planning alternative plans are prepared to meet different possible situations.
Out of such alternative plans, the best one (i.e., plan which most appropriate under the available
business environment) is to be selected. Here, the planner has to take correct decision. This suggests
that decision-making is the core of planning function. In the same way, decisions are required to be
taken while performing other functions of management such as organising, directing, staffing, etc. This
suggests the importance of decision-making in the whole process of management. The effectiveness of
management depends on the quality of decision-making. In this sense, management is rightly described
as decision-making process. According to R. C. Davis, "management is a decision-making process."
Decision-making is an intellectual process which involves selection of one course of action out of many
alternatives. Decision-making will be followed by second function of management called planning. The
other elements which follow planning are many such as organising, directing, coordinating, controlling
and motivating. Decision-making has priority over planning function. According to Peter Drucker, it is the
top management which is responsible for all strategic decisions such as the objectives of the business,
capital expenditure decisions as well as such operating decisions as training of manpower and so on.
Without such decisions, no action can take place and naturally the resources would remain idle and
unproductive. The managerial decisions should be correct to the maximum extent possible. For this,
scientific decision-making is essential.
Decision making implies choice:

Decision making is choosing from among two or more alternative courses of action. Thus, it is the
process of selection of one solution out of many available. For any business problem, alternative
solutions are available. Managers have to consider these alternatives and select the best one for actual
execution. Here, planners/ decision-makers have to consider the business environment available and
select the promising alternative plan to deal with the business problem effectively. It is rightly said that
“Decision-making is fundamentally choosing between the alternatives". In decision-making, various
alternatives are to be considered critically and the best one is to be selected. Here, the available
business environment also needs careful consideration. The alternative selected may be correct or may
not be correct. This will be decided in the future, as per the results available from the decision already
taken. In short, decision-making is fundamentally a process of choosing between the alternatives (two or
more) available. Moreover, in the decision-making process, information is collected; alternative
solutions are decided and considered critically in order to find out the best solution among the available.
Every problem can be solved by different methods. These are the alternatives and a decision-maker has
to select one alternative which he considers as most appropriate. This clearly suggests that decision-
making is basically/fundamentally choosing between the alternatives. The alternatives may be two or
more. Out of such alternatives, the most suitable is to be selected for actual use. The manager needs
capacity to select the best alternative. The benefits of correct decision-making will be available only
when the best alternative is selected for actual use.

2. Continuous activity/process:

Decision-making is a continuous and dynamic process. It pervades all organizational activity. Managers
have to take decisions on various policy and administrative matters. It is a never-ending activity in
business management.3. Mental/intellectual activity: Decision-making is a mental as well as intellectual
activity/process and requires knowledge, skills, experience and maturity on the part of decision-maker.
It is essentially a human activity.4. Based on reliable information/feedback: Good decisions are always
based on reliable information. The quality of decision-making at alllevels of the Organisation can be
improved with the support of an effective and efficient management information system (MIS).5. Goal
oriented process: Decision-making aims at providing a solution to a given problem/ difficulty before a
business enterprise. It is a goal-oriented process and provides solutions to problems faced by a business
unit.6. Means and not the end: Decision-making is a means for solving a problem or for achieving a
target/objective and not the end in itself.7. Relates to specific problem: Decision-making is not identical
with problem solving but it has its roots in a problem itself.8. Time-consuming activity: Decision-making
is a time-consuming activity as various aspects need careful consideration before taking final decision.
For decision makers, various steps are required to be completed. This makes decision-making a time-
consuming activity.

Needs effective communication:

Decision-taken needs to be communicated to all concerned parties for suitable follow-up actions.
Decisions taken will remain on paper if they are not communicated to concerned persons. Following
actions will not be possible in the absence of effective communication.10. Pervasive process: Decision-
making process is all pervasive. This means managers working at all levels have to take decisions on
matters within their jurisdiction.

Responsible job:

Decision-making is a responsible job as wrong decisions prove to be too costly to the Organisation.
Decision-makers should be matured, experienced, knowledgeable and rational in their approach.
Decision-making need not be treated as routing andcasual activity. It is a delicate and responsible job.

Advantages of Decision Making

Decision making is the primary function of management:

The functions of management starts only when the top-level management takes strategic decisions.
Without decisions, actions will not be possible and the resources will not be put to use. Thus decision-
making is the primary function of management.

2. Decision-making facilitates the entire management process:

Decision-making creates proper background for the first management activity called planning. Planning
gives concrete shape to broad decisions about business objectives taken by the top-level management.
In addition, decision-making is necessary while conducting other management functions such as
organizing, staffing, coordinating andcommunicating.3. Decision-making is a continuous managerial
function: Managers working at all levels will have to take decisions as regards the functionsassigned to
them. Continuous decision making is a must in the case of all managers/executives. Follow-up actions
are not possible unlessdecisions are taken.4. Decision-making is essential to face new problems and
challenges: Decisions are required to be taken regularly as new problems,difficulties and challenges
develop before a business enterprise. This may be due to changes in the external environment. New
productsmay come in the market, new competitors may enter the market and government policies may
change. All this leads to change in theenvironment around the business unit. Such change leads to new
problems and new decisions are needed.

5. Decision-making is a delicate and responsible job: Managers have to take quick and correct decisions
while discharging their duties. Infact, they are paid for their skill, maturity and capacity of decision-
making. Management activities are possible only when suitabledecisions are taken. Correct decisions
provide opportunities of growth while wrong decisions lead to loss and instability to a business unit.

5. Steps Involved In Decision Making Process

Decision-making involves a number of steps which need to be taken in a logical manner. This is treated
as a rational or scientific 'decision-making process' which is lengthy and time consuming. Such lengthy
process needs to be followed in order to take rational/scientific/resultoriented decisions. Decision-
making process prescribes some rules and guidelines as to how a decision should be taken / made.
Thisinvolves many steps logically arranged. It was Peter Drucker who first strongly advocated the
scientific method of decision-making in hisworld famous book 'The Practice of Management' published
in 1955. Drucker recommended the scientific method of decision-making which,according to him,
involves the following six steps:

1.

Defining / Identifying the managerial problem,

2. Analyzing the problem,3. Developing alternative solutions,4. Selecting the best solution out of the
available alternatives,5. Converting the decision into action, and6. Ensuring feedback for follow-up.The
figure given below suggests the steps in the decision-making process:-
dentifying the Problem: Identification of the real problem before a business enterprise is the first step in
the process of decision-making. Itis rightly said that a problem well-defined is a problem half-solved.
Information relevant to the problem should be gathered so that criticalanalysis of the problem is
possible. This is how the problem can be diagnosed. Clear distinction should be made between the
problem andthe symptoms which may cloud the real issue. In brief, the manager should search the
'critical factor' at work. It is the point at which thechoice applies. Similarly, while diagnosing the real
problem the manager should consider causes and find out whether they arecontrollable or
uncontrollable.

2. Analyzing the Problem: After defining the problem, the next step in the decision-making process is to
analyze the problem in depth. This isnecessary to classify the problem in order to know who must take
the decision and who must be informed about the decision taken. Here,the following four factors should
be kept in mind

1. Futurity of the decision,2. The scope of its impact,3. Number of qualitative considerations involved,
and4. Uniqueness of the decision.3. Collecting Relevant Data: After defining the problem and analyzing
its nature, the next step is to obtain the relevant information/ dataabout it. There is information flood in
the business world due to new developments in the field of information technology. All
availableinformation should be utilised fully for analysis of the problem. This brings clarity to all aspects
of the problem.4. Developing Alternative Solutions: After the problem has been defined, diagnosed on
the basis of relevant information, the manager has todetermine available alternative courses of action
that could be used to solve the problem at hand. Only realistic alternatives should beconsidered. It is
equally important to take into account time and cost constraints and psychological barriers that will
restrict that number ofalternatives. If necessary, group participation techniques may be used while
developing alternative solutions as depending on one solutionis undesirable.5. Selecting the Best
Solution: After preparing alternative solutions, the next step in the decision-making process is to select
an alternativethat seems to be most rational for solving the problem. The alternative thus selected must
be communicated to those who are likely to beaffected by it. Acceptance of the decision by group
members is always desirable and useful for its effective implementation.6. Converting Decision into
Action: After the selection of the best decision, the next step is to convert the selected decision into an
effectiveaction. Without such action, the decision will remain merely a declaration of good intentions.
Here, the manager has to convert 'hisdecision into 'their decision' through his leadership. For this, the
subordinates should be taken in confidence and they should be convincedabout the correctness of the
decision. Thereafter, the manager has to take follow-up steps for the execution of decision taken.7.
Ensuring Feedback: Feedback is the last step in the decision-making process. Here, the manager has to
make built-in arrangements toensure feedback for continuously testing actual developments against the
expectations. It is like checking the effectiveness of follow-upmeasures. Feedback is possible in the form
of organised information, reports and personal observations. Feed back is necessary todecide whether
the decision already taken should be continued or be modified in the light of changed conditions.Every
step in the decision-making process is important and needs proper consideration by managers. This
facilitates accurate decision-making. Even quantitative techniques such as CPM, PERT/OR, linear
programming, etc. are useful for accurate decision-making. Decision-making is important as it facilitates
entire management process. Management activities are just not possible without decision-making as it
isan integral aspect of management process itself. However, the quality of decision-making should be
always superior as faulty/irrationaldecisions are always dangerous.

Various advantages of decision-making (already explained) are easily 'available when the entire
decision-making process is followedproperly. Decisions are frequently needed in the management
process. However, such decisions should be appropriate, timely and rational.Faulty and hasty decisions
are wrong and even dangerous. This clearly suggests that various advantages of decision-making are
availableonly when scientific decisions are taken by following the procedure of decision-making in an
appropriate manner.For accurate/rational decision-making attention should be given to the following
points:1. Identification of a wide range of alternative courses of action i.e., decisions. This provides wide
choice for the selection of suitable decisionfor follow-up actions.2. A careful consideration of the costs
and risks of both positive and negative consequences that could follow from each alternation.3. Efforts
should be made to search for new information relevant to further evaluation of the alternatives. This is
necessary as the quality ofdecision depends on the quality of information used in the decision-making
process.4. Re-examination of the positive and negative effects of all known alternatives before making a
final selection.5. Arrangements should be made for implementing the chosen course of action including
contingency plans in the event that various knownrisks were actually to occur.6. Efforts should be made
to introduce creativity and rationality in the final decision taken.

6. Why Rational and Right Decisions Are Not Possible?

Rational decisions are the best decisions under the available circumstances. All decisions should be
rational as such decisions facilitateexpansion of business and give more profit, goodwill and prosperity
to a business unit. Rationality and decision-making are closely relatedconcepts. Rationality principle is
applicable to all types of decisions. All decisions (business, economic, social etc.) should be fair
andrational. They should serve as examples over a long period. For such decisions,
rational/scientific/balanced approach is essential while

making decisions. In the absence of such approach, decisions are likely to be faulty and dangerous to the
Organisation and also to allconcerned parties.

Rationality in decision-making is possible through human brain which has the ability to learn, think,
analyze and relate complex facts andvariables while arriving at a decision. A manager has to introduce
rationality in his decision-making by using his skills, experience, knowledgeand mental abilities.On some
occasions, such rational and right decisions are not taken due to variety of possible reasons. It is also
possible that the decisiontaken may be rational when taken but is treated as wrong/irrational/faulty
because' the results available from the decision taken are not asexpected/positive/encouraging.
Rational decisions may not be possible when the approach of the decision-maker is casual and
superficial.He may not be alert, careful and cautious while taking the decisions or he might not have
followed the decision-making process in a scientificmanner. In brief, all business decisions should be
rational as far as possible as such rational decisions offer many benefits/advantages.However, rational
decisions may not be taken on certain occasions. According to Herbert A. Simon, human beings are not
always rational inthe decisional process.

7. Reasons Why Rational and Right Decisions May Not Be Possible?

1.
Inadequate information, data and knowledge: For rational decision-making accurate, reliable and
complete information about variousaspects of the problem under investigation is necessary. The
possible future trends can be estimated with the help of such information.This facilitates rational
decision-making. However, adequate and reliable information may not be available at the time of
decision-making. As a result, the decisions become defective or irrational. Such decision may prove to be
faulty in the course of time. This is how thedecisions become irrational to certain extent.

2. Uncertain environment: Decisions are taken on the basis of information available about various
environmental variables. However, thevariables are many and complex in nature. They may be related
to political, economic, social and other aspects. It is not possible to studyall such variables in depth due
to inadequate information/data. This leads to inaccuracy in decision making and the decisions taken
arenot fully rational.3. Limited capacity of decision-maker. A decision-maker should be expert,
knowledgeable, intelligent and matured. He needs vision andcapacity to imagine possible future
situation. In the absence of such qualities, the decision-maker may not be able to take rationaldecisions.
Similarly, the decision taken may not be rational if the decision-maker fails to follow all necessary steps
required for scientificdecision-making. A hasty decision or decision taken without full use of all mental
faculties may not be fully rational. Thus, decisions arelikely to be less rational if the decision maker lacks
capacity to take rational decisions.4. Personal element in decision-making: Decision-making should be
always impartial and also favorable to the Organisation. Decisionagainst Organisation but favorable to
decision maker or other employees will be unfair. Such decision will not be rational. Similarly,
everydecision-maker has his own personal background in the form of personal beliefs, attributes,
preferences, likes and dislikes and so on. Adecision-maker is expected to keep these elements away
while taking management decisions. This may not be possible in the case of alldecision-makers and on
all occasions. However, decisions are not fully rational when such personal element comes in the
picture.5. A decision cannot be fully independent: Managerial decisions are interlinked and
interdependent. A manager has to make adjustments orcompromises while making decisions. For
example, for reducing price, some compromise with the quality may be necessary. A managergives more
importance to one and less to the other. He takes one decision which is rational at the same time makes
some compromise inthe other decision. As a result, other decision is not likely to be fully rational. In
short, business decisions are interlinked. This brings anelement of irrationality in some decisions.The
points noted above suggest why it is not possible to take rational and right decisions on all occasions.
8. Relationship Between Planning and Decision-making

There is close relationship between planning and decision-making. Decision-making has priority over
planning function. It is the starting pointof the whole management process. In fact, decision-making is a
particular type of planning. A decision is a type of plan involving commitmentto resources for achieving
specific objective. According to Peter Drucker, it is the top management which is responsible for all
strategicdecisions such as the objectives of the business, capital expenditure decisions as well as
operating decisions such as training of manpowerand so on. Without management decisions, no action
can take place and naturally the resources would remain idle and unproductive. Themanagerial
decisions should be correct to the maximum extent possible. For this, scientific decision-making is
essential.

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
decisionsdetermine how successful a manager will be.Managers are constantly called upon to make
decisions in order to solve problems. Decision making andproblem solving are ongoing processes of
evaluating situations or problems, considering alternatives,making choices, and following them up with
the necessary actions. Sometimes the decision

makingprocess is extremely short, and mental reflection is essentially instantaneous. In other situations,
theprocess can drag on for weeks or even months. The entire decision

‐
making process is dependent uponthe 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.

Define the problem

The decision

making process begins when a manager identifies the real problem. The accurate definitionof the
problem affects all the steps that follow; if the problem is inaccurately defined, every step in thedecision

making process will be based on an incorrect starting point. One way that a manager can helpdetermine
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
ofunderlying problems. (See Table for some examples of symptoms.) These symptoms all indicate
thatsomething is wrong with an organization, but they don't identify root causes. A successful
managerdoesn't just attack symptoms; he works to uncover the factors that cause these symptoms.

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, theymay lack the proper budget or may not have the most
accurate information or any extra time. So, theymust choose to
satisfice

to make the best decision possible with the information, resources, and timeavailable.Time pressures
frequently cause a manager to move forward after considering only the first or mostobvious 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 andinvestigate
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 groupworks together to generate ideas and alternative solutions. The assumption behind
brainstorming is thatthe group dynamic stimulates thinking

one person's ideas, no matter how outrageous, can generateideas from the others in the group. Ideally,
this spawning of ideas is contagious, and before long, lots ofsuggestions and ideas flow. Brainstorming
usually requires 30 minutes to an hour. The following specificrules should be followed during
brainstorming sessions:

Concentrate on the problem at hand.

This rule keeps the discussion very specific and avoids thegroup'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 badideas. Encouragement
of the group to freely offer all thoughts on the subject is important. Participantsshould be encouraged to
present ideas no matter how ridiculous they seem, because such ideas mayspark a creative thought on
the part of someone else.
Refrain from allowing members to evaluate others' ideas on the spot.

All judgments should bedeferred 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
canuse 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 withan 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
thedecision

making process. It also avoids some of the pitfalls, such as pressure to conform, groupdominance,
hostility, and conflict, that can plague a more interactive, spontaneous, unstructured forumsuch as
brainstorming.

Delphi technique.

With this technique, participants never meet, but a group leader uses writtenquestionnaires to conduct
the decision making.No matter what technique is used, group decision making has clear advantages and
disadvantages whencompared 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 theprevailing opinions of the group.Groups may
have difficulty performing tasks because the group, rather than a single individual, makes thedecision,
resulting in confusion when it comes time to implement and evaluate the decision.The results of dozens
of individual

versus

group performance studies indicate that groups not only tend tomake better decisions than a person
acting alone, but also that groups tend to inspire star performers toeven higher levels of productivity.So,
are two (or more) heads better than one? The answer depends on several factors, such as the natureof
the task, the abilities of the group members, and the form of interaction. Because a manager often hasa
choice between making a decision independently or including others in the decision making, she
needsto understand the advantages and disadvantages of group decision making.The purpose of this
step is to decide the relative merits of each idea. Managers must identify theadvantages 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 eachfactor, 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?After a manager has analyzed all
the alternatives, she must decide on the best one. The best alternativeis the one that produces the most
advantages and the fewest serious disadvantages. Sometimes, theselection process can be fairly
straightforward, such as the alternative with the most pros and fewestcons. 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 whichalternative is the most feasible and effective,
coupled with which carries the lowest costs to theorganization. (See the preceding section.) Probability
estimates, where analysis of each alternative'schances of success takes place, often come into play at
this point in the decision

making process. Inthose cases, a manager simply selects the alternative with the highest probability of
success.Managers are paid to make decisions, but they are also paid to get results from these decisions.
Positiveresults must follow decisions. Everyone involved with the decision must know his or her role in
ensuring asuccessful outcome. To make certain that employees understand their roles, managers must
thoughtfullydevise programs, procedures, rules, or policies to help aid them in the problem

solving process.Ongoing actions need to be monitored. An evaluation system should provide feedback
on how well thedecision is being implemented, what the results are, and what adjustments are
necessary to get theresults that were intended when the solution was chosen.In order for a manager to
evaluate his decision, he needs to gather information to determine itseffectiveness. Was the original
problem resolved? If not, is he closer to the desired situation than he wasat 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 mayaccomplish this by asking the following questions:

Was the wrong alternative selected?

If so, one of the other alternatives generated in thedecision

making process may be a wiser choice.

Was the correct alternative selected, but implemented improperly?

If so, a manager should focusattention solely on the implementation step to ensure that the chosen
alternative is implementedsuccessfully.

Was the original problem identified incorrectly?

If so, the decision

making process needs to beginagain, starting with a revised identification step.

Has the implemented alternative been given enough time to be successful?

If not, a managershould give the process more time and re

evaluate at a later date

2. Definitions of Decision-making
1.

The Oxford Dictionary defines the term decision-making as "the action of carrying out or carrying into
effect".

2. According to Trewatha & Newport, "Decision-making involves the selection of a course of action from
among two or more possiblealternatives in order to arrive at a solution for a given problem".

3. Characteristics of Decision Making

What are the 3 decision making levels that management accountants can be involved in?

They are:

Strategic

These are unstructured, long term decisions like setting strategies for an organisation, for example,
which new products to launch in the next 5 years.

These decisions will have major impacts for the organisation.

Tactical
These are more structured, medium term, more detailed plans, for example, producing the budget for
the next year.

As these are medium term, they will have a medium impact.

Operational

These are short term (day to day) plans and decisions, for example, which supplier to purchase from in
the next week.

As these are very short term, they have minor impacts on the organisation.

Which types of managers will be involved at which level of planning?

Senior managers will be involved at the strategic level of planning.

Their decisions will be forward looking, and use internal and external sources of information.

Middle managers will be involved at the tactical level of planning.

Their decisions will be forward and backward looking, for example comparing the budgeted results with
actual results and calculating variances.

They will mainly use internal sources of information to make decisions.

Front line managers will be involved at the operational level of planning

Their decisions will be made using historic, detailed and internal sources of information