18 Decision Making Models

Dr.Vishal Kumar

18.1 Learning Objective

18.2 Introduction

18.3 Decision and decision-making

18.4 Elements of decision making

18.5 Types of Decisions

18.6 Circumstances or situations to involve Individual and Group in Decision Making

18.7 Rational decision making process

18.8 Models of Decision-Making Behaviour

18.9 Summary

19.1 Learning Objective

After completing this module, you will be able to:

i. Understand the decision and decision making

ii. Understand the elements of decision making

iii. Know about various types of decisions

iv. Know about circumstances to involve individual and group in decision making, and also

v. Understand models of decision making behaviour.

DECISION- MAKING MODELS

19.2 Introduction

Decision making is at the core of management. The management executives take a number of decisions every day. They are not able to perform their duties without taking any decision. A decision may be a direction to others to do or not to do. Decision making is thus a key of manager’s activities. In an organization managers has to take many important decisions such as where to invest profit, what to do about an employee who is always late, where should the firms new warehouse be built, what subject will have top priority at the departmental meeting the next morning, and so on. It is done through all the managerial functions such as planning, organizing, direction and control. So decision making is a selection process. The best alternative is selected out of many available alternatives. If there is only one alternative, there is no decision making. Thus decision-making is the end process. It is preceded by detailed discussion and selection of alternatives.

19.3 Decision and Decision-making

Before we discuss the various aspects of managerial decision-making, let us develop some understanding about the concepts of decision and decision-making.

Decision:

A decision is a choice from among two or more, alternatives.
According to W. Jack Duncan, “A decision is a conscious choice to behave or to think in a particular way in a given set of circumstances. When a choice has been made, a decision has been made”.

Decision-making:

Decision making is the end process. Decision making is preceded by detailed discussion and selection of alternatives.
According to K.M. Bartol and D.C. Martin, “Decision making is the process of identifying and selecting a course of action to solve a specific problem”.
According to F.A. Shull, “Decision making is a conscious and human process, involving both individual and social phenomenon based upon factual and value premises, which concludes with a choice of one behavioral activity from among one or more alternatives with the intention of moving towards some desired state of affairs”.
According to Haynes and Massie, “A decision is a course of action which is consciously chosen for achieving a desired result”.

So, a decision is an act of choice. It can be defined as an act of choice by the manager from among two or more possible alternative courses in a given situation on the other hand decision making is a process of selecting the best course of action out of many alternatives available. It considers two or more alternatives from which a final choice can be made to solve a decision problem. Thus, decision making is a conscious, intellectual activity involving judgment, evaluation and selection from several alternatives.

19.4 Elements of Decision Making

In decision making only the best possible alternative is chosen out of many alternatives available. If there is only one way to do the task, there is no decision making. The best choice can be made only by evaluation of alternatives.
Decision making is the application of intellectual abilities to a great extent.
Decision making is the process followed by deliberation and reasoning. Managers have to take decisions on various policies and administrative matters.
Decision making is the end process. It is preceded by detailed discussion and selection of alternatives.
Decisions are usually made to achieve some purpose or goal or objectives. Decision is taken to achieve the objective of organization.
Decision making requires knowledge, skills, experience and maturity on the part of decision-maker.
Decision making is situational. An individual takes decision according to the situation prevailing.
Decision making invariably based on rational thinking. Since the human brain with its ability to learn, remember and relate many complex factors, makes the rationality possible. It not only involves intellectual abilities but also of intuition, subjective values and judgment.
Decision making is a time-consuming activity. Any decision requires careful study and consideration before finalize any decision.
Although every decision is usually positive. Sometimes certain decisions may be negative and may just be a decision not to decide.
Decision making involves a certain commitment. Every decision is based on the concept of commitment. Each decision results into the commitment of resources and reputation of the organization.

19.5 Types of Decisions

Managers make different types of decisions in organizations. For making decisions, decision-making variables and managerial decision situations are different. Different types of decisions are taken by managers for the smooth running of organization. Some of these decisions are discussed below:

1. Programmed Decisions and Non-Programmed Decisions:

-Programmed Decisions

These are repetitive, routine, well structured in nature and do not require much deliberation.
These types of decisions are made by middle level or lower level management in accordance with some policies, rules and procedures.
Decisions are action oriented and mistakes are not too costly and fewer resources are required.
Risks involved are not high and can be delegated easily.
These are used for dealing with all issue that is, complex as well as with uncomplicated issues. These decisions have clear procedures set up to deal with them.

-Non- Programmed Decisions:-

Decisions which are non repetitive in nature and made by top level management whenever the need arises like decision about mergers, acquisitions and takeovers, new facilities, new products, labor contracts and legal issues are called Non- programmed decisions.
These decisions are also called strategic decisions or basic decisions or unstructured decisions. These decisions are of long-term horizon that’s why it is also called policy decisions.
A careful analysis is made by the management before taking these decisions as high resources are required for the implementation of such decisions.
A non-programmed decision relates to complex circumstances for which there is no simple and easy solution and these matters are very influential for the organization.
The Non-programmed decisions require “judgment, intuition and creativity”.

2. Major and Minor decisions:

Certain decisions are considerably more important than others and are prioritized. They are called major decisions. We can measure the relative significance of a decision in four ways.

Degree of Impact: A decision which has long term impact on company like replacement of man by machine, diversification of product etc. rated as a major decision whereas decisions which does not have long term impact and are not so prioritized such as decision to store raw material, termed as minor decisions.

Impact of decisions on other departments:

3. Routine and Strategic Decisions:

-Routine decisions: Those decisions which are taken for the smooth functioning of organization are routine decisions.

Routine decisions are related to the general functioning of the organization.
Routine decisions are taken within the purview of the policy of the organization.
Routine decisions do not require much evaluation and analysis. So it is taken quickly.
It is taken frequently to achieve high degree of efficiency in the organizational activities.
Routine decisions are taken at middle or lower level of management, who are responsible for the supervision of actual operation.

-Strategic Decisions are:-

Strategic decisions are policy decisions as they are related to policy matters and taken generally by the top management and middle management.
Strategic decisions require lengthy deliberation and large funds. Plant location, selection of distribution channels, decision relating to a new product etc. are some examples of strategic business decisions.
Strategic decision has a long term impact on business. A slight mistake in the policy decision is bound to injure the entire organization.

4. Organizational and personal decision:

Organizational decisions are:

Organizational decisions are taken by top executives for effective functioning of organization. Organizational decisions affect the activities of the organization directly.
Power to take organizational decision can be delegated from the superior to the subordinate and he takes this decision on his authority and capacity.

Personal decisions are:-

Personal decisions concerned to an employee.
Personal decisions are taken by managers in their individual capacity and not as members of the organization.
Personal decision does not reflect the functioning of an organization.

5. Individual and Group decisions:-

Individual decisions:

When a single employee is involved in decision making it is called individual decision.
Individual decisions are different from personal decisions. When individual decisions are taken then the decision maker is a member of an organization. He can implement it in the organization.
The decision maker is delegated with authority to take individual decisions.

Group Decision:

When two or more individual participate in the decision making process it is called group decision making.
When important and strategic decisions are taken by a group of persons in a large organization which may result into some change in the organization.
Interdepartmental decisions are also taken by groups consisting of managers of the departments affected by the decisions.

19.6 Circumstances or situations to involve Individual and Group in Decision Making

In decision making, the choice is never between individual and group decision making process. It is basically a question of deciding when group participation will bring better results and when individual decision making would optimize organizational effectiveness. Some such areas of decision making are:

In establishing objectives, groups are typically superior to individual in that they bring greater cumulative knowledge to problems.
In identifying alternatives, individual efforts ensure that different and unique solutions are identified from various functional areas that can later be considered by the group.
In selecting alternatives, involvement of group members often leads to greater acceptance of the final outcome.
In evaluating alternatives, group judgment is often superior to individual judgment, because it involves a wider range of viewpoints.
In implementing the selected alternative, individual responsibility is generally superior to group responsibility. Whether decisions are made individually or collectively, individuals perform better in carrying out the decision than groups do.

19.7 Rational decision making process

Decision making is not an easy job as it requires a lot of skill and experience. A decision making is affected by number of factors. So, the managers can take good decisions by adopting a procedure. Decision making has been the function of a manger in an organization. The success or failure of a manger has always been reckoned in terms of the quickness and correctness with which he takes business decisions which are reflected in growth and efficiency of the organization he has been managing.

Generally, there are two approaches of decision making. They may be termed as models also but they have been described differently by different writers and thinkers.

Following are the steps involved in the rational decision making:

Identification and diagnosing the problem: The very first step in the process of rational decision making is to identification or recognition of a problem. Problem arises due to difference between what is and what should be. The changes of business environment are the main reason for creating of a problem. So, manager should define what the problem is. Once the problem has been correctly identified, it needs to be properly diagnosed. Diagnosing requires that management should understand the problem in relation to higher level objectives of the organization, and should also identify the gap between the existing situation and the situation expected to emerge. In these circumstances manager has to use his experience, imagination and judgment in order to find out the real nature of problem.
Collection of information and developing alternatives: The next step in the process of decision making is to collect the required information at various levels. Then, the manager has to study the information with great care and diligence. In this step problem is to be analyzed from different angles. It is very useful to analyze the problem from different angles in order to ensure quality and quick decision making. After collecting relevant information, the next step is development of alternative solution or alternative course of action. if there is no alternative then there is no need of taking decisions. Generally several alternatives are available in a decision solution. But when the number of alternatives available is too large, then management will do well to restrict itself to those alternatives, which are more direct and strategic to the problem involved. It is advisable to the manager that he should consider the limiting factors also. Some alternatives cannot be selected due to limiting factors. Time and cost are the probable limiting factors of an organization.
Analyzing, evaluating and selecting the most suitable alternative: In order to choose the best alternative, management must analyze and evaluate each and every alternative so that they are able to know the pros and cons of available alternatives. The available alternatives are screened in the order of maximum benefits derived from them. Each alternative is evaluated in terms of risk involved in implementing them. For this both tangible risks such as contributions to accomplishment of common goals, financial implications etc and intangible risks such as public relations, corporate image and employee morale should also be considered. If two or more alternatives are at equal level then, the decision maker should find the actual difference of alternatives which will be the deciding factor to select an alternative. After careful evaluation of each alternative, management can select best alternative. An alternative which gives maximum benefits to the organization is selected or in other words the selected alternative should fit with the organizational terms. So in its choice of alternatives, management may be guided by its past experience, experimentation and research and analysis.
Converting the decision into effective plan: The alternative so selected has to be implemented to achieve the desired objective. In doing so, the cooperation of subordinates is indispensable. The selected alternative decision is communicated to concerned persons. Free, frank and uninterrupted interaction between the superior and subordinates will make the subordinates convinced about the efficacy of the decision which when implemented will seek to achieve the desired result. The language of decision should be simple and understandable.
Evaluating the decision: Good decisions are those which hold good in the same situation at another time and place and at different time, place and situations. For this purpose continuous monitoring of result and the relevant factors impeding their implementation need be evaluated from time to time so that necessary modifications could be effected. it is the duty of every manager to see whether the decision is properly implemented or not. Progress must be checked through meetings, reports, personal observations and any other appropriate feedback channels. If follow up activities confirm that an effective solution was reached, management should inspect related areas of the organization to see if the same action could solve problem there. If management feels that the selected alternative is not the best one, an amendment may be made to achieve desired goals.

19.8 Models of Decision-Making Behavior

Effective decision making requires a rational choice of a course of action which is based on the view that a manager is completely rational in his decisions. A manager’s decision making behaviors are based on three models of man: Economic man, Administrative man, and Social man. So there are two major extreme that is economic and social man and in between of them, there is a model of Simon’s administrative man.

Economic Man Model: The classical management thinkers stressed that managerial decisions must be rational. They argued that the decision maker is an Economic man and is guided by economic considerations in choosing solution to a problem. He always selects that alternative which gives him the greatest advantage. He makes his search for the best alternative in a planned, orderly and logical manner. The classical approach is based on some assumptions and these assumptions are:

The decision maker wants to maximize economic gains.

He is fully objective and rational, uninfluenced by emotions. He can identify the problem clearly and precisely.
He has full information about various alternatives and is able to evaluate them intelligently to find out which alternative is the best.
He has complete freedom to choose the best alternative.
The rational economic model is prescriptive and explains how decision makers should behave. But perfect rationality is a norm which can be aimed at but not attained. Many writers criticize this model as it lacks realism. When we look closely into this prescriptive model, we find that many of its assumptions about capabilities of man are unrealistic. As explain in this model, a man does not have enough capacity to Gather all necessary information for a decision. Mentally store all information. Accurately recall information any time he likes. Do a series of complex calculations.
Rank all consequences on the basis of their merits.
Moreover, a man’s loyalty to his organization is not always high and the decision making behavior is contingent upon personal and environmental factors.
Administrative man Model or Bounded Rationality Model: In actual practice, each person takes a decision which involves a combination of intuition and rational thinking. So, another model developed by Herbert Simon, A more realistic description of decision making behavior that is based on administrative man model. Simon’s administrative man uses only limited rationality in his decisions because his information processing skills are limited. It is therefore, also known as Bounded Rationality Model. The concept of bounded rationality explains the behavior of people in practice. The administrative man seeks satisfying decisions which are satisfactory for his practical purpose. He makes decisions which are good enough and do not make undue demands of his time, efforts and money. It recognizes that a man cannot be expected to have full knowledge and information and his capacity to perceive, retain and retrieve information is not unlimited. The traditional theory of complete rational and economic man cannot work in practice. Herbert Simon Model of administrative man describes the decision making behavior of individuals in actual practice. It recognizes that managers are unable to make perfectly rational decisions due to the following limitations:
The individual does not study and analyze the problem fully because of personal bias, indifferent attitude etc.
The individual does not have the full knowledge of the alternatives and consequences.
The individual does not search for the best solution, but for ‘good enough solutions’. In other words, he aims at ‘satisfactory’ rather than ‘optimum decision’.
The effectiveness of a decision is dependent upon environmental factors which are beyond the control of decision makers. Thus, the consequences of various alternatives cannot be anticipated perfectly because of uncertain environment.
Although managers must live with bounded rationality, they can continually strive for perfect rationality in decision making. As said by Simon, a man has only bounded rationality because there are certain limitations to complete rationality. Once a manager has a good factual base he must cutoff further research and act.
Social Man Model: As the opposite extreme from the economic man is the completely irrational social man model developed by classical psychologists. Freud, in particular, says that man being a bundle of feelings, emotions and instincts is guided by his unconscious desires. He is also subject to social pressures and influences. So, such a person is not capable of making rational management decisions. The well known experiment by Solomon Asch demonstrates that this world is full of irrational conformists. His study utilized several groups of seven to nine subjects each. They were told that their task was to compare the lines. All except one of the subjects in each group had pre-arranged with the experimenter to give clearly wrong answers on twelve of the eighteen line-judgment trials and more than one-third gave incorrect answers to the twelve test questions. Strong social pressures can similarly for managers also to choose obviously wrong alternatives. In all such cases, their decision cannot be termed as organizationally rational, though they may be personally rational, being oriented to their personal goals.

19.9 Summary

A decision is something that takes place prior to the actual performance of a course of action that has been chosen. Managerial decision making involves the entire process of establishing objectives, defining tasks, searching for alternatives and developing plans in order to find the best possible answer to the decision problem. There are various types of decisions like routine and strategic, programmed and non-programmed, individual and group decisions etc. Each of the above mentioned requires different inputs and ways to handle the decision making problem but the common steps mentioned above are applicable on all these also. Managers must remember that models and information systems can provide support to the decision making but the fact remains that the crucial decisions are to be taken by managers and not by models and systems.

you can view video on Decision Making Models

Suggested Readings

Daltoll Mc Farland, Management Principles and Practices, The Macmillan Company, New York, 1964, p 160.
Stephen P Robbins, David A Decanzo, Fundamentals of Management, 3rd Edition, Pearson Education, 2002.
P C Tripathi, P N Reddy, Principles of Management, 4th Edition, Tata McGraw-Hill, 2008.
VSP Rao, V Hari Krishna, Management- Text and Cases, Excel Books, 2002.
Herbert A. Simon, The New Science of Management Decisions, Harper and Bros., 1960,P. 1.
Schermerhorn, Management, 8th Edition, Wiley India Edition, 2006.
Stephen P. Robbins, Mary Coulter, Management, 9th Edition, Pearson Education, 2008.
Peter F. Dreucker, The Practice of Management, Harper and Bros., 1954, p. 351.
Koontz and O’ Donnel, “Principles of Management” McGraw-Hill, New York, 1980.
Koontz Harold and Cyrill O’Donnell, “Essentials of Management” New Delhi,
Tata McGraw Hill, 1987.
Prasad L.M, “Principals and Practice of Management”. Sultan Chand &Sons,
Educational Publishers, 23 Dargaigani, New Delhi 110002. 1993.
Charles W L Hill, Steven L Mc Shane, Principles of Management, Tata McGraw-Hill, 2008
Philip, M.Morse and George E. Kimball, Method of Operations Research, John Wileys, New York, 1951.