Methods of Decision Making

Methods, Steps and Importance of Decision Making

 Table of Contents:-

Methods of Decision Making

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. It 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. 

7) Paired Comparison Analysis: This technique helps to work out the importance of a number of 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 make a choice from several options by taking into account many factors that must be considered in order to make a right decision. This is an effective technique to make necessary decisions where a clear and obvious 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 and all 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.

Methods of Decision Making

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 fast. 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 decision results 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 in the most efficient and effective manner. 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 a number of sources like 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 

(a) the data environment and 

(b) the system environment is called a model. 

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

Step 4: Evaluation: Originally, we formulate 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 taking 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 taken.

Step 6: Follow-up Actions: Decisions or no decisions, the decision maker has to plan, 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 got 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.