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CONCEPT OF DECISION MAKING

Decision is a choice among alternatives. It is a course of action consciously chosen from


acceptable alternatives to achieve objectives.
Decision making is a future oriented activity. It involves forecasting and planning. It is the
process of evaluating two or more alternatives leading to a final choice. Decision making
is closely involved in planning for the future and is directed towards a specific objectives
or goal.
Relevance of decision making
Problem solving: Decision making is the process of solving problems. Problem
solving is essential for achieving objectives.
Rational choice: decision making identifies and evaluates available alternatives
for making a choice. It is based on logical facts together with judgment of the
decision maker.
Pervasive in managerial functions: decision making id pervasive in all functions
of management. Owner- manager make strategic decisions, middle managers make
tactical decisions, and lower managers make operational decisions.
Performance evaluation: all decisions influence performance. Effective decisions
are needed for business effectiveness.
Types of Decision Making
Drop or continue product line: if there is a range of products one of which is
deemed to unprofitable, it may consider dropping the item from its range. This
type of decision is very much related to profitability. An important factor in the
decision to drop or continue a product line is whether it will increase or decrease
the future income of the business. If the profit increases by dropping the product,
that product should be dropped. But if the profit decreases by dropping, then that
product should be continued.
Decision to accept or reject special order: special order arises when a company
has excess of idle production capacity. If there is no spare capacity, the question of
special offer does not arise. Fixed cost does not increase generally by accepting the
special order, only the variables cost increase. If the price offered is more than the
marginal cost, that proposal may be accepted and vice-versa.
Make or buy: management sometimes may have to face with the decision whether
to make a part of production or buying them from outside. Such a decision arises
when a company has idle plant capacity and technical capability of manufacturing
the component. Whether to make or buy a part depends upon the total cost. If the
total cost for making is greater than buying, in that case, certainly the company
should buy the part. But if the total cost for making is lower than buying the
obviously the company hold make the part.
Replace or retain of equipment: it is a decision for equipment. Whether the
existing equipment should be retained of not is depends upon different types of
costs. By bringing the new machine inside the company, if the annual cost
increases then new machine should not be purchased. But by using new machine,
if the profit is maximizing on one hand ands cost increases in other. In this case the

new machine should be acquired. Thus this type of decision depends upon cost as
well as profit.
Steps in decision making process

Recognize
and define
the problem

Identify
appropriate
alternatives

Evaluating
selected
alternatives

Choose the
best
alternative

Implement
decision

Evaluation and follow-up

1. Recognize and define the problem: decision making begins with the existence of
the problem. A problem is a gap between the existing situation and the desired
outcome. The problem should be properly defined.
2. Identify appropriate alternatives: appropriate alternatives course of actions to
solve the problem should be identified. Owner of the business should be creative
and innovative to identified alternatives. They should be based in information
collection and analysis.
The sources of alternatives can be:

Discussion with subordinates, customers, sales forecast etc.


Opinions of experts
Management information system
Brainstorming, electronic meeting etc.

3. Evaluate selected alternatives: each selected alternatives should be evaluated in


terms of decision criteria. Key consideration is:
Feasibility of the alternative in terms of costs, time, legal constraints,
human and other resources.
Affordability and satisfactoriness of the alternatives
4. Choosing the best alternative: This is the choice phase for choosing the best
alternative. The approach for making the choice can be:
Experience: decision making is not only a rational process but also a
judgmental process. Experience can be a useful basis for choosing a course
of action.
Experimentation: it is pre-testing the alternative. Market testing of new
products is an example.
Research and analysis: a model is built to simulate the problem
5. Implement the selected alternative: implementation is putting a decision into
action. The selected alternative should be effectively implemented into action. It
should be accepted by the people willingly.

6. Evaluation and follow-up: this step is essential to evaluate the decision


effectiveness in solving the problem. Its progress is monitored and its success is
evaluated.