Decision-making signifies the actual selection of a course of action from among a number of alternatives. It is so important to the job of managing that management is sometimes described as consisting essentially of the decision-making process. Decision-making permeates planning, organizing, controlling, and all other functions of management. Because of limitations in time, money, etc., management is forced to discover a number of alternatives and choose the one that is expected to contribute more with fewer costs and other unsought consequences to the accomplishment of some goal. Since decision-making involves selection from among the alternatives, the course of action to be followed is better regarded as part of the planning process.
Management has to take decisions on all types of problems and matters. Generally, decisions relating to routine matters are decentralized so that top management can concentrate on vital and strategic decisions and laying down broad policies. It also adds to the efficiency of management if decisions related to the distant future are made in advance. However, it needs to be emphasized that decision-making as a rational process should be based on a systematic analysis of all pertinent facts and not guided by intuition or hunch.
All organizations do not always exist in the same type of situation, and the situations do not remain the same for all decisions. Though it is difficult to identify each and every situation and discuss it in this study lesson, we can classify various situations into three possible conditions. These are (i) Certainty (ii) Risk (iii) Uncertainty.
(i) Certainty: This condition is present if the decision-maker knows exactly what will happen. Thus, he will be able to predict the outcome precisely. For instance, if we put Rs. 1,000 in a fixed deposit for a year at a 6 percent rate of interest we will know how much interest (Rs. 60) our money will earn. When a decision is made under certainty, a manager knows exactly what the outcome will be because he knows his resources, time available, and other associated things.
(ii) Risk: The future conditions are not always known in advance. In real life, most managerial decisions are made under risk conditions, that is, some information is available but it is insufficient to answer all questions about the outcome. So a decision-maker has to make probability estimates of these outcomes. How can one assign probability estimates to various courses of action? One has to depend on past experience if the situation is similar. But no two situations are exactly similar in business operations. If probability estimates are assigned to expected outcomes on the basis of past experience, it is known as objective probability. On the other hand, if the probability estimates are assigned on the basis of what is known as “gut feel”, it is subjective probability. The “gut feel” here refers to how an individual feels about the problem and the course of action to be taken to solve that problem without totally relying on past experience.
(iii) Uncertainty: Sometimes there are uncertain conditions when the decision-maker feels that he cannot estimate probabilities for various alternatives or outcomes because he has no way of measuring the likelihood of those alternatives. For instance, if you are planning a trip to Kashmir and have never been there before, and have not been heard about the weather in Kashmir during winter, you may be in a predicament as to what clothes to carry and what precautions to take.
Principles of Decision-Making
A manager’s effectiveness is related to the quality of his decisions. Decision-making by a manager involves arriving at conclusions and exercising judgment. In all circumstances, management decisions should follow a few basic principles which are likely to ensure their soundness.
(i) Principle of Definition: A logical decision can be made only if the real problem is defined with minute attention. Too often, time and effort are wasted due to the manager’s inability to pinpoint what the problem or the objective is. Indeed, it would be no exaggeration to suggest that a problem well defined is half solved.
(ii) Principle of Evidence: Decisions should not be taken hastily. They must be based on evidence meaning that adequate facts must be present to back the judgment. When the facts underlying a problem are discovered and care is taken to analyze the situation, the basic work in decision-making is done.
(iii) Principle of Identity: People have different perspectives. As a result, the same fact appears to be different for different people. Not only that, the relative importance of the same fact differs from year to year.