Decision Making in Management: Meaning, Definition, Models, Types, Approaches

What is Decision Making?

Decision making is a process of solving a problem and the process ends with choosing a solution to the problem. Hence, the process of making decisions is a mental process, which is a thought process that is based on implicit or explicit assumptions.

Decision making is an important part of the management function as decisions are used for planning and taking key decisions. The management of enterprises needs to take many decisions for taking care of their operational needs and requirements. Decision making is essential in all the functions of the management and covers all parts of the business.

In other words, Decisions making is an integral part of human lives where we make decisions every day consciously or unconsciously for some reason or the other. To take decisions, there are several choices and we choose the one that seems to be the most effective for the given situation.

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Definition of Decision Making

Some definition of decision making process are as follows:

Decision making is a process of identifying and choosing alternative courses of action in a manner appropriate to the demand of the situation.

Kreitner

A decision is an act of choice – wherein an executive forms a conclusion about what must not be done in a given situation. A decision represents a course of behaviour chosen from many possible alternatives.

D. E. McFarland

Decision-making is the selection based on some criteria from two or more possible alternatives. – George R. Terry

According to Koontz and O’Donnell, Decision-making is the actual selection from among alternatives of a course of action.

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Features of Decision Making Process

The main features of decision making process are as follows:

1. Rational Thinking
2. Process
3. Positive Impact
4. Reconsidered
5. Fosters opportunity
6. Selective
7. Accountability
8. Systematic

Rational Thinking

Decision-making is a human activity. As the human brain has the ability to learn, remember and relate many complex factors, which makes rationality possible in decision-making. So, decision-making is invariably based upon rational thinking.

Process

Decision-making is the process followed by discussions and reasoning.

Positive Impact

Decision-making should positively impact the other related factors of the organisation. Positive decisions make organisations grow, succeed and help, motivate employees, etc.

Reconsidered

Decision-making should be based upon the factor of revising the decisions as and when required. A decision taken should be able to be reconsidered again.

Fosters opportunity

Decision-making should be confined to making decisions that foster opportunities for others by allowing and involving others to act.

Selective

Decision-making involves the selection of the best option from among the available alternative options that are recognised by the decision-maker. Hence, decision-making is regarded as a selective activity.

Accountability

Decision-making cannot be done without the authority and responsibility to make decisions. A decision should also ensure accountability as per the provided authority and responsibility.

Systematic

Decision-making should be done in a systematic way. A decision must be taken in a systematic manner as time and resources are involved in decision-making.

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Approaches to Decision Making

There are two basic models or approaches to decisions making adopted by managers. Which are given below:

1. Normative Approach Theory
2. Descriptive Decision Theory

Normative Approach Theory

It is a method used for systematically selecting the best choice from various alternatives that are based on reason and pieces of evidence. It is an approach that uses a sequence of analytical phases to assess related facts, observations and results before selecting a proper course of action.

Descriptive Decision Theory

It is used for explaining the different choices that people make and also for analysing the reasons for making those choices and their consequences.

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Types of Decisions

The types of decisions are classified under various categories based on different sections:

1. Based on the Nature of Decisions
2. Based on the Levels of Management
3. Based on the Capacity of Individuals

Based on the Nature of Decisions

On the basis of nature, there are two types of decisions, which are explained as follows:

• Programmed Decisions
• Non-programmed Decisions

Programmed Decisions

Programmed decisions are normally repetitive in nature. These decisions are based on regular procedures and common habits and relate to certain standard operating procedures of an enterprise.

These decisions deal with the regular operating procedures in an organisation and include purchasing procedures, financial procedures etc.

Non-programmed Decisions

Non-programmed decisions are not regular procedures in nature. They are concerned with unusual situations and need to be handled as and when they come. Such decisions do not have any standard procedures.

The decisions in these cases can relate to the competition in the market or the declining value of company shares. Non-programmed decisions are taken by the top-level management of the organisation.

Based on the Levels of Management

There are different types of decisions made at different levels of management. We have here discussed two major types of decisions based on the level of management:

• Strategic Decisions
• Operational Decisions

Strategic Decisions

Strategic decisions, are more significant and are generally taken by the upper-level management of organisations (like the CEO, managing directors, etc). They relate to important policy decisions regarding entering new markets, forming alliances with external sources and companies, etc.

They require a thorough analysis of the situation with some possible alternatives. Strategic decisions can also relate to the introduction of a new project, the set up of a new plant, the installation of a computer system and more. These decisions are very crucial for the survival and growth of an organisation.

Operational Decisions

Operational decisions are made to increase the efficiency of the operations and are based on regular rules, policies and processes. They are concerned with the up-time of the machines, uses of resources, the efficiency of functional procedures and various other processes involved during production, and more. Such decisions are taken by operational managers and are pertaining to the daily operations of an organisation.

Based on the Capacity of Individuals

Based on the capacity of individuals, types of decisions are categorised as follows:

• Personal and Organisational Decisions
• Individual and Group Decisions

Personal and Organisational Decisions

Personal decisions are those decisions that a working individual takes in an organisation for himself. These decisions generally affect the life of the person making the decision. Sometimes, they also affect the enterprise such as decisions to quit the organisation. The authority to make personal decisions is with the individual and that right cannot be given to others.

Organisational decisions relate to the working of the organisation. These decisions are taken by the managers to improve the efficiency and working of the organisation.

Individual and Group Decisions

Individual Decisions: A decision taken by an individual in his own capacity is referred to as an individual decision. Individual decisions are mostly concerned with routine problems.

Group Decisions: These decisions are taken by a group of people created for the purpose to sit together and work on a solution. These decisions are taken by the top management of the company.

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Process of Decision Making

The process of decision making involves the various steps, which are given below:

1. Identify the Problem
2. Collect the Relevant Information
3. Identify Alternatives
4. Select and Develop Alternative Solutions
5. Implement the Decision
6. Take Action
7. Review the Decision

Identify the Problem

The first step requires identifying the problem, which is an important part of decision making. It is necessary to consider the important and strategic factors in defining a problem. There can be many obstacles that limit the process of identifying a problem. It is necessary to search for the reason for the source of the problem to get the correct picture for taking a decision.

Collect the Relevant Information

The next step is to study the problem well and collect all information connected with it. It is important to collect these details so that the problem can be well analysed and understood. The important things to be kept in mind are:

• Impact of the decision in times to come
  
  
• Decisions affecting the people
  
  
• Total options available
  
  
• Clarity of the decision

Identify Alternatives

Once the total information relevant to the problem is gathered, the manager has to identify a proper solution to take care of the problem. He has many options available to him and has to select the right option for solving the problem. While taking a decision, he has to take into account several factors in terms of cost and time, government rules and regulations and other social and psychological issues.

Select and Develop Alternative Solutions

Once the problem is defined and analysed, the next stage is to select the right option from the different solutions available. The main objective of looking for alternative solutions is to find the best possible solution from the various available alternative courses of action.

Implement the Decision

This is an important stage where the best solution is selected for the problem and the decision is implemented after it is informed and communicated to the others involved. The decision needs to be implemented and put into action because if it is not put into action, then there is no meaning to the decision taken.

Take Action

It is necessary for the decision to work and for that the manager should develop a plan for making the decision actionable and achievable. The plans related to the decision should be well projected for the people to understand their roles and responsibilities with their tasks.

Review the Decision

The last step in the process entails reviewing the decision and collecting feedback, which is an important aspect of decision making. It gives an accurate picture of the decision taken and lets the manager know whether his decision was right and if has been accepted by others.

In case, there is a problem with the decision taken, the manager can look at its shortcomings and find remedial measures for solving the issue.

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Decision-Making Models

No organisation can completely depend on a particular set of techniques for solving problems. This is because a problem is analysed from different perspectives by different individuals. Therefore, various models are devised for analysing situations from different out-looks. Some of the important decision-making models are:

• Rational Model
• Bounded rationality Model
• Contingency Model

Rational Model

This is a cognitive model in which managers use their thoughts for analysing the available alternatives and selecting the best one. The rational model is used for making non-programmed decisions, which you will study in the subsequent section of the chapter. This model is based on the assumption that a decision-maker has complete information about the impact of the selected alternative. In this model, the decision maker begins with establishing goals, determining the criteria for making the decision, analysing the available alternatives, and finally making a decision.

Let us discuss the seven basic steps, followed under the rational model:

Identifying decision situations

A decision maker needs to identify the decision making situations that may be in the form of problems or opportunities. A problem exists when a manager finds gap between the desired and actual performance.

For example, if a manager finds that employees have more work than they can get done; he/she may decide to hire additional employees. An opportunity exists when a manager identifies a situation that may help in achieving more desirable situation than the current one.

For example, Brunswick, in spite of being the number one recreational boat builder in North America, decided to buy Baja Boats as they find the situation as an opportunity to expand into a market niche. The management had a notion that this move would help the company to grow in the future.

Developing objectives and criteria

The next step after identifying the decision-making situation is to determine the criteria for selecting alternatives. This is important as it helps in establishing the desired outcome.

For example, the manager, before deciding which job applicant should be hired, may need to determine the important outcomes needed. If the manager needs to select an employee, effective at sales, he/she should set good interpersonal skills as a criterion.

However, setting single criteria is not always sufficient to guide the decision-making process as one factor rarely produces all the desired results. Therefore, it is important to weight various criteria before taking any decision.

Generating alternatives

Once objectives and criteria are established, the next step is to generate alternatives that could help in achieving the desired outcomes. For example, the manager may generate a list of alternative candidates by using various means like placing an ad in newspapers or trade magazines.

Analysing the alternatives

The next step is to analyse the generated alternatives. For this, it is important to examine the feasibility of each alternative. Returning to our hiring example, suppose, the manager found three candidates for the sales position.

Now, the manager needs to analyse the prospect of hiring the candidates. The manager finds that the first candidate’s salary needs to exceed the budget; therefore the person cannot be selected for the job. Coming to analyse the remaining two alternatives, the manager may rate both candidates on pre-decided criteria.

Selecting alternative

After the analysis, it becomes easy to select the most suitable alternative. The rational model suggests that managers select the alternative that maximises the desired outcome. In our hiring example, the manager may rate two candidates A and B and select B as he/she received higher total score on the criteria.

Implementing the decision

In the rational model, effective decision implementation has few components. First, it is important to assess sources and reasons for possible resistance to decision. For example, a district sales manager, might resist the decision to hire B as A was his good friend. Next, it is also important to determine chronology and sequence of actions designed to overcome the resistance.

For example, the manager could sit and discuss with the district sales manager regarding why selecting B was more in benefit of the company rather than hiring A. The third component of decision implementation is to assess resources required to implement decisions effectively. For example, the manager must assess the training needs for newly recruited candidate so that he/she could efficiently adapt to the job role.

Monitoring and evaluating results

The final step in the rational model is to monitor and evaluate the results of decision implementation. To do this the outcomes should be compared with the set objectives. For example, in case of hiring B, the manager should gather information on his/her work performance and whether his/her hiring is helping the organisation in achieving its objectives.

Bounded rationality Model

This model was propounded by Herbert Simon. The bounded rationality model is a cognitive decision-making model with limited time to decide. The model assumes that decision making is a rational process of determining the best solution by analysing the given information in a specific time period.

The bounded rationality model describes decision processes in terms of three mechanisms:

• The rational model assumes that people identify all possible solutions and then select the best alternative. However, in reality, people do not take decisions like this. People evaluate possible solutions to a problem one at a time. If one solution fails then only they seek another one. When an acceptable solution is found people stop searching for other alternatives. Thus, if first alternative works, the effort of finding other alternatives is likely to stop.
  
  
• According to the bounded rationality model, people search for alternatives into areas that have possibility for bringing success. Thus, in our hiring example, the manager instead of deciding several criteria and searching candidates everywhere may hire someone who is already doing such job.
  
  
• The third mechanism of the bounded rationality model is the concept of satisficing, which refers to selecting a minimally accepted solution rather than going further to search more alternatives that could yield the best outcome. Therefore, the rational model focuses on the decision maker as an optimiser. However, the bounded rationality model sees the decision maker as a satisficer.
  
  
• The bounded rationality model does not seek the best solution (as in case of rational model); instead, it searches a solution that is acceptable. It assesses one solution at a time and describes how decision makers actually identify solutions to organisational problems.

Contingency Model

This is a situation-based model that assumes that there is no universal model applicable for solving all types of problems. According to this model, decisions must be made in line with all social, political, and economic factors. This model is appropriate for making decisions related to leadership, mentoring, organisational behaviour, etc.

For example, today, organisations, working in a highly competitive environment need to follow the contingency model of decision making in order to maintain a collaborative, cooperative work environment that may not thrive under traditional, hierarchical decision making structures.

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Types of Decision Making

In organisations, decision making can be either centralised or decentralised. Let us now discuss these two ways of decision making in next sections.

Centralisation

Centralisation is a process by which the authority of decision making is rested in the hands of top management. This type of decision making structure is found in small organisations due to their small size of operations. The following are the main advantages of centralised decision making:

• Low managerial overheads as authority is rested at one place
  
  
• High degree of consistency as decisions are taken at one point
  
  
• Total participation of top management due to its accountability for the success or failure of decisions
  
  
• Simple decision-making structure as there is a line command (decisions are made at top level and passed to lower levels).

However, centralisation is not free from limitations. The centralised structure promotes strict, autocratic environment that can be detrimental to the health of the organisation. Moreover, it leads to ineffective communication as employees are only required to implement decisions and are not involved in the decision-making process.

Decentralisation

In decentralisation, authority of decision-making is distributed among employees working at lower levels in an organisation. However, top management has control of all strategic issues. The decentralised structure is used in large organisations operating at different locations across a country or the world. In such organisations, if decisions are made at a central location, it would be difficult to manage uncertainties and changes in the business environment of different locations.

Advantages of decentralised structure:

• Reduction of the workload of top management as it is focused on strategic goals
  
  
• Effective utilisation of skills of middle and lower level managers
  
  
• Increase in efficiency and productivity due to an effective communication system.
  
  
• Quick response to changes as decisions are made independently as the need arises.

Disadvantages of decentralised structure:

• Reduction of top management’s control: In the decentralised structure, if roles and responsibilities of medium and lower-level managers are not properly defined, managers may take decisions as per their own convenience and go beyond the limits defined by the top authority. In such a case, the top management may lose control over its operating units.
  
  
• Misunderstanding of goals: In large organisations having many divisions/plants, communication can be distorted due to a misunderstanding of corporate goals by employees working in different units.
  
  
• Requirement of high expertise: To take decentralised decisions, an organisation needs to hire highly skilled managers having experience in making decisions. This may incur high costs for the organisation.

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FAQs

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