Methods of Decision Making

Decision Making Meaning, Definition, Characteristics and Difference

Table of Contents:-

  • Decision Making Meaning
  • Decision Making Definition
  • Characteristics of Decision Making
  • Difference between Problem Solving and Decision Making
  • Decision Making and Problem Solving
  • Methods of Decision Making
  • Importance of Decision Making
  • Steps in Decision Making

Decision Making Meaning

Decision making may be viewed as the process of selecting a course of action from among several alternatives to accomplish the desired result. Its objective is to direct human behaviour and commitment towards a future goal. It involves committing the organisation and its resources to a certain choice of course of action thought to be sufficient and capable of achieving some predetermined objective.

Decision Making Definition

According to George R. Terry, “Decision making is the selection based on certain criteria from two or more alternatives”.

According to Mary Cushing Niles, “Decision making takes place in adopting the objectives and choosing the means and again when a change in the situation creates a necessity for adjustments”.

According to Heinz Weihrich and Harold Koontz, “Decision making is defined as the selection of a course of action among alternatives; it is the care of planning”.

Managers at all levels in the organisation make decisions and solve problems. It is the process of lessening the gap between the existing and the desired situation through solving problems and making use of opportunities. A decision is a conclusion reached after consideration; it occurs when one option is selected, and to the exclusion of others it is the rendering of judgment.

Characteristics of Decision Making

Characteristics of decision making can be of the following types:

  1. Process of Selecting Courses of Action
  2. Find the Best Possible Action
  3. Intellectual or Rational Process
  4.  Involves Certain Commitment
  5.  Related to the Situation or Environment
  6. Pervasive Function
  7. Human and Social Process
  8. Freedom to Choose among Alternative Courses of Action

1) Process of Selecting Courses of Action

It is a process of selection or choice among alternative courses of action. The need to make a decision occurs only when more than one alternative exists for doing the work. 

2) Find the Best Possible Action

Controlling aims to find out the best possible course of action. It is a rational and purposeful activity designed to attain well-defined purposes. Decisions relate means to ends. To identify the best alternative, it is vital to evaluate all available alternatives. As directing is always purposeful, there may just be a decision not to make.

3) Intellectual or Rational Process

It is an intellectual or rational process. As a mental exercise, it involves considerable deliberation and thoughtful consideration of different factors influencing the choice. It is the end process preceded by reasoning and judgment.

4) Involves Certain Commitment

It involves a certain commitment. A decision results in the commitment of resources and the reputation of the organization. This commitment may be short-term or long-term depending upon the decision type. It involves a time dimension and time lags.

5) Related to the Situation or Environment

It is always related to the situation or the environment. A manager may make one decision in a particular situation and an opposite decision in a different situation. In some cases, there may just be a decision not to make.

6) Pervasive Function

It is a pervasive function of management. This function is performed by managers at all levels as the nature of decisions may differ from one level to another. It is a continuous process.

7) Human and Social Process

It is a human and social process. Direction involves the use of intellectual abilities and intuition, subjective values and judgment. It is not a purely intellectual process. Perception and human judgement are indispensable and no technique can replace them. But knowledge and experience also provide the basis for correct decisions.

8) Freedom to Choose among Alternative Courses of Action

The choice in judgment-making implies the freedom to choose from among alternative courses of action without coercion. It also means uncertainty about the outcome. When there is no choice of action, no decision is essential. The need for making any decision occurs only when some uncertainty as to the outcome exists.

Difference between Problem Solving and Decision Making

Problem-solving is a mental process and is part of the bigger problem process that includes problem-finding & problem-shaping. Considered the most complex of all intellectual functions, problem solving has been defined as a higher-order cognitive process that needs the modulation and control of more routine or fundamental skills. Problem-solving happens when an organism or an artificial intelligence system needs to move from a given state to the desired goal state.

Every problem indeed requires a decision. The conclusion helps the organization to face and tackle new challenges and problems. Fast and correct decisions help to solve problems and to accept new challenges.

Brainstorming and governing both are necessary skills for business and life. Problem solving often involves a conclusion and is generally important for management and leadership. There are processes and methods to improve the quality of decisions. It is more natural to certain personalities, so these individuals should focus more on improving the quality of their decisions. People who are less natural decision-makers are usually able to make quality assessments but then need to be more decisive in acting upon the assessments made. Problem-solving and directing are closely linked to each other. Each of them demands creativity in identifying and developing possibilities.

Decision Making and Problem Solving

Decision Making and Problem Solving are two significant key management functions. It is customary to see the managers of firms get involved in controlling and problem-solving. Problem solving involves defining the problem. The problem is defined by asking a few questions such as “What causes you to think there is a problem?” and “How is it happening?”

Consideration of the condition characterised by the absence of the problem is the crux of decision making. In other words, if you begin to think about what will the case look like when the problem is solved then you are into making a decision. Hence, decision making and problem solving are almost integrated.

Methods of Decision Making

Various methods of Decision making are as follows:

1) Marginal Analysis

This technique is used in decision-making to figure out how much extra output will result in one more variable (e.g., raw material, machine, and worker) being added. Paul Samuelson defines marginal analysis as the extra output that will result by adding one extra unit of any input variable, other factors being held constant. Marginal analysis is specifically useful for evaluating alternatives in the decision making process.

2) Financial Analysis

This decision making tool is used to estimate the profitability of an investment, calculate the payback period (the period taken for the cash benefits to account for the original cost of investment), and analyse cash inflows and cash outflows. Investment alternatives can be evaluated by discounting the cash inflows & outflows.

3) Break-Even Analysis

This tool enables a decision maker to evaluate the available alternatives based on a fixed cost, price and variable cost per unit. The level of sales which is essential to cover the fixed costs can be estimated by break-even analysis. 

4) Ratio Analysis

It is an accounting tool for analysing accounting information. Ratios define the relationship between two variables. The basic financial ratios compare costs & revenue for a particular period. The purpose of conducting a ratio analysis is to interpret financial statements to determine the strengths and weaknesses of a company, as well as its historical performance and current financial condition.

5) Operation Research

Operation research, rather simply defined, is the research of operations. An operation may be called a set of acts needed for the achievement of the desired outcome. Such complex, interrelated acts can be performed by four types of systems: Man, Machine, Man-Machine unit and organisation of men, machines, and man-machine units, OR is concerned with an operation of the last type of system. Various theories and models of operation research are game theory, decision tree analysis, queuing model, transportation models, and simulation. any

6) Pareto Analysis

It is a very simple technique that helps to choose the most effective changes to make. It is based on the Pareto principle the idea that by doing 20% of the work, we can generate 80% of the advantage of doing the entire job Pareto analysis is a formal technique for finding the changes that will give the greatest benefits. This technique is useful when many possible courses of action are competing for attention. Pareto Analysis is a simple technique that helps to identify the most important problem to solve. 

Methods of Decision Making

7) Paired Comparison Analysis

This technique helps to work out the importance of several options relative to each other. It is particularly useful when objective data related to the problem is not available. This makes it easy to choose the most critical problem to solve or select the solution that will give the greatest advantage. Paired Comparison Analysis helps to set preferences where there are conflicting demands on limited resources. It is also an ideal tool for comparing completely diverse options such as whether to invest in marketing, a new IT system or a new piece of machinery. These decisions are usually much more difficult than comparing three possible new IT systems.

8) Grid Analysis/ Decision Matrix Analysis/ Pugh Matrix Analysis

Grid analysis, also known as Decision Matrix Analysis, Pugh Matrix Analysis or Multi-Attribute Utility Theory (MAUT) is a very useful decision-making technique in situations where a manager has to choose from several options by taking into account many factors that must be considered to make a right decision. This is an effective technique to make necessary decisions where a clear preferred option does not exist.

9) Force Field Analysis

This is a useful technique for looking at all the forces for and against a decision. In effect, it is a specialised method of weighing pros & cons. By carrying out the analysis, one can plan to strengthen the forces supporting a decision and lessen the impact of opposition to it.

10) Brainstorming

Brainstorming is meant to overcome pressures for conformity in the interacting group that slow the development of creating alternatives. It does this by utilising an idea-generation process that particularly encourages any alternatives while withholding any criticism of those alternatives. 

11) Nominal Group Technique

The Nominal Group Technique restricts interpersonal communication or discussion during the decision-making process, hence, the term nominal. Group members are all physically present, as in a traditional committee meeting, but members work independently.

Importance of Decision Making

The importance of decision-making is underlined in the following points:

1) Better Utilisation of Resources

Decision making helps to utilise the available resources for achieving the goals of the organisation. The available resources are the 6Ms, i.e., Men, Money, Materials, Machines Methods, and Markets. The manager has to make correct decisions for all the 6M’s. This will result in better utilisation of the resources.

2) Facing Problems and Challenges

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

3) Business Growth

The fate of any business venture is decided by the decision-making ability of the business leadership, at the helm. They are the ones who command and steer the ship to its destination. Profiting in a business is all about making the most of a window of opportunity that appears in a marketplace. Timing is of the essence in business. Fast and correct decision making results in better utilisation of the resources. It helps the organisation to face new challenges. It also helps to achieve its objectives. All this results in quick business growth. However, slow, wrong or no decisions can result in losses and industrial sickness.

4) Achieving Objectives

Decisions help the organisation to achieve all its goals quickly. This is because rational decisions are made only after analysing and evaluating all the alternatives. 

5) Increases Efficiency

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

6) Facilitate Innovation

Rational decisions facilitate innovation. This is because it helps to develop new products, ideas, new processes, etc. This results in innovation. Innovation gives a competitive advantage to the institution.

7) Motivates Employees

Rational decisions result in employees’ motivation. This is because the employees are motivated to execute rational decisions. When rational decisions are implemented the organisation can make high profits. Therefore, it can give financial & non-financial benefits to the employees.

8) Effective Management

Every decision made by the management of a business affects employee morale and performance, ultimately influencing the overall business performance. Management is all about getting things done most efficiently and effectively. Every management decision needs to be made while making the most judicious use of resources at disposal with economical use of the time factor. The importance of decision-making in management is immense as the business policy and culture adopted, ultimately affect a company’s output and performance.

Steps in Decision Making

Decision-making involves the following steps as given below.

Step 1: Definition of the Problem

Identifying the problem of choice and then explaining it is the starting point for making decisions. As a part of the description, alternative solutions to a problem have to be listed; the structure or ordering of alternatives is necessary.

Step 2: Collection of Data

Data means available facts and figures. The description of an economic problem has to be followed by an analysis. For analysis, data must be collected. Data can be collected from several sources such as public records, handbooks,  government bulletins, trade journals, official reports, personal interviews etc. The problem is that data may not be always available. Available data may not be usable. Available and usable data may not be always correct.

Step 3: Formulation of a Model

In describing the problem, the purposes and alternatives are developed. The relation between objectives and constraints must be explicitly stated so that data can be meaningfully used to analyse the outcome of alternative courses of action under different decision environments. Such statement of relations, taking care of 

  1. The data environment and 
  2. The system environment is called a model. 

A model is an analytical aid for making decisions under different circumstances.

Step 4: Evaluation

Originally, we formulated models in the abstract symbolic world. Then we must evaluate it to see how far the model represents situations in the real world. This is done by considering the real elements in the underlying assumptions of the model. Sometimes, assumptions have to be relaxed to study the result of a course of action in reality.

Step 5: Framing a Decision

When the possible results of possible courses of action are thus analysed with the help of data and models, it becomes easy to select a particular course of action to cope with a certain problem. Such a selection is designated as making or making a decision. If we do not have adequate and appropriate data and or if we do not have a realistic and flexible model to take care of varied decision environments, decisions may not be made.

Step 6: Follow-up Actions

Decisions or no decisions, the decision maker has to plan, and follow-up strategies and actions; he has to anticipate the reactions (moves and counter-moves) of other people who are likely to be affected by his decisions. In that light, he has to make short-run (immediate) and long-run (remote) decisions. Decision making is a continuous process; it has a never-ending sequence, provided we realise that a problem induces a decision which creates a new problem, which calls for a new decision and so on.

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