MANAGEMENT PLANNING AND CONTROL

Decision-Making

- is usually defined as a process or sequence of activities involving stages of problem

recognition, search for information, definition of alternatives and the selection of an actor
of one from two or more alternatives consistent with the ranked preferences”.
- It is defined as the selection of course of action. It is the core of planning. A plan cannot
exist unless decision has been made.

Theories on Decision Making

There are many theories of decision making but we will discuss the following:
1. Organizational Process Model
2. Rationality in Decision Making

Organizational Process Model

All organization follows rules, procedures & system. Decisions in organizations are made
according to the procedures and systems that organizations have for example a centralized
organization decisions will come from top done. In organization where authority is dispersed
participative decisions will be made. So the processes and standard operating procedure (SOP)
will determine the quality of decisions made.

Rationality in Decision Making

It is said that effective decision making must be rational. But what is rationality. When is
a thinking person deciding rationally? People deciding rationally are attempting to reach goals in
a systematic way.
They collect all:
1) relevant information,
2) analyze information,
3) evaluate and
4) make choice

So these are 4 basic steps in making a rational decision. If we follow these steps can we make
"best decision"? Can we get all information for all alternatives?

Importance of Rational Decision Making

Using rational decision-making and systematic approach enables managers to find
superior quality solutions to all problems. Rational decision-making provides clear idea of
alternate means to attain a goal under complex situation. Under rational decision-making,
managers use the available information to find solutions and alternative means to achieve goals.
The aim of rational decision-making is to find the best alternative solution that is highly effective
in goal attainment.

Limitations to Rational Decision Making

Future is uncertain and hence managers cannot always use rational approach to decision-
making. They need to take decision keeping in mind the future trends however; no one can
predict the future rationally. It is also an extremely tough task to consider all possible alternative
actions for goal accomplishment.

Limited Rationality
People have worked on the issues pertaining to all information to be collected for all alternatives.
What has been analyzed is that it is humanly impossible to collect all information for all
alternatives. A manager must settle for limited rationality. Information is limited, time is limited
and certainty is limited.
Therefore managers dislike risk and do not reach the best solution. The decision making is
`satisfying', that is, picking a course of action that is good enough.
Steps in Rational Decision Making

1. Search for alternatives: Given that we know our objectives, the first step in decision making
is to search for alternatives. Search for alternatives is based on the concept of `limiting' factor.
The Principle of the limiting factor' is to recognize and overcome factors that stand critically in
the way of goals; the best course of action can be selected.

2. Evaluation of Alternatives: the next step in decision making is to evaluate and select one that
contributes best to the goals

When deciding about one alternative, managers can use three basic approaches:
1. Experience
2. Experimentation
3. Research and Analysis

Usually mangers use their experience and judgment to select an alternative. Experience and
judgment is really reliance on the past.
The other method by which managers select alternatives is experimentation, i.e., managers would
try an alternative and see its results.
The 3rd method is arriving at alternatives through researching and analysis.

Factors to consider when evaluating alternatives

1. Quantitative Factors: the quantitative factors are those factors that can be measured
numerically.
2. Qualitative Factors: the manager must also consider the qualitative factors. The
qualitative factors are the intangible in nature.

Techniques or Methods for the evaluation of alternatives

1. Marginal Analysis- the marginal analysis technique helps to compare additional revenues
with additional cost.
2. Cost Effectiveness Analysis- this technique in the improvement of the traditional
marginal analysis. In this case the manager considers the cost benefit analysis. The cot
can be measured in terms of money time, risk, goodwill, etc. the main feature of cost
effectiveness analysis is that it gives importance to the results.

An alternative is one of a number of possible choices or course of action.

Types of Decision
It would be better to know the types of decision that organizations usually take. These are:
1. Programmed
2. Non Programmed

1. Programmed
A programmed decision is structured or repetitive or routine decision. Example:
Reordering of standard inventory item, checking at a check post

2. Non-Programmed
Non-programmed decisions are used for unstructured, novel and ill-defined situations of
nonrecurring nature. Example: introduction of new product in the market,

Approaches to Decision making

A number of modern techniques are used to improve the quality of decision making under
normal conditions of uncertainty. The most important are:

1. Risk Analysis
2. Decision tree
3. Preference theory

1. Risk Analysis: An intelligent decision maker would like to know the size of risk they are
taking in deciding to choose a course of action.
Example: There is a situation where you have to take decision and you have worked out the
probabilities of gains i.e., for situation 1 the gain is zero and the probability you will have
 zero gains is 90%. Looked other way there is 10% probability that you will not have zero
gains. The highest gain is 35 points and the probability is 40%. So as decision maker you will
decide which gains to pick? Where the probably of gains is high? The probability of gain is
highest where gain is 10 and probability 80%. But the probability of high gain (35) is only
40%. A manager who is not risk averse will go for last gain.
Gain: 0 10 15 20 25 30 35
Probability: .90 .80 .70 .65 .60 .50 .40 of achieving this gain

2. Decision Tree: A decision tree approach makes it possible to see major alternatives and
the subsequent decisions may depend on events in future. Figure 3 is depicting a decision
tree for an organization to choose between either have permanent security staff of its own
or to contract out security service. For each choice the cost of success and failure is
worked out. If the decision to have permanent security staff is taken, then the successful
implementation will give gain of Rs.100, 000 and failure will cost Rs.200, 000. So in the
final analysis we see contracting out as giving more gains.
3. Preference or utility theory explains individual attitude toward risk. Some people are
willing to take small risk (risk averters), others are willing to take greater risk (gambler)
Example: If there are 60% chance of being right and having 20 gains or 40% chance of
being wrong and have 30 gains. Would the person take the risk of taking that decision for
40 chances and having higher gains?

Following are some of the factors that influence decision making:

1. Personal Differences: People have different personality, experiences and perception and that
influences their decision making.

2. Role of Knowledge: The knowledge of people varies, therefore, individual managers will
make decision on the amount of knowledge they possess.

3. Institutional Factors: Institutional factors such as organization structure, procedure and

system affect decision making.

Concepts:
Rational decision: a systematic and sequential process of making decisions and achieving
objectives.
Limited rationality: managers have limited time and information therefore their

Creativity- a decision maker's ability to discover original and novel ideas that lead to feasible
alternative courses of action.

Innovation- the implementation of creative ideas in an organization.