Course Code MGT 1

Description Principles of Management

Pre-Requisites none
Department: College of Business
Week 15
Administration
Foundation of Decision Making Module No. 12

LEARNING OUTCOMES

At the end of this module, the students will be able to:

1. Understand the foundation of decision making.

INTRODUCTION

Decision-making is an integral part of modern management. Essentially, Rational

or sound decision making is taken as primary function of management. Every
manager takes hundreds and hundreds of decisions subconsciously or consciously
making it as the key component in the role of a manager.

Decisions play important roles as they determine both organizational and

managerial activities. A decision can be defined as a course of action purposely
chosen from a set of alternatives to achieve organizational or managerial objectives
or goals. Decision making process is continuous and indispensable component of
managing any organization or business activities. Decisions are made to sustain the
activities of all business activities and organizational functioning.

Decisions are made at every level of management to ensure organizational or

business goals are achieved. Further, the decisions make up one of core functional
values that every organization adopts and implements to ensure optimum growth
and drivability in terms of services and or products offered.

CONTENT

Definition of Decision Making

According to the Oxford Advanced Learner’s Dictionary the term decision

making means - the process of deciding about something important, especially in a
group of people or in an organization.

Trewatha & Newport defines decision making process as follows:,

“Decision-making involves the selection of a course of action from among two or

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more possible alternatives in order to arrive at a solution for a given problem”.

As evidenced by the foregone definitions, decision making process is a

consultative affair done by a committee of professionals to drive better functioning
of any organization. Thereby, it is a continuous and dynamic activity that pervades all
other activities pertaining to the organization. Since it is an ongoing activity, decision
making process plays vital importance in the functioning of an organization. Since
intellectual minds are involved in the process of decision making, it requires solid
scientific knowledge coupled with skills and experience in addition to mental
maturity.

Further, decision making process can be regarded as check and balance system
that keeps the organization growing both in vertical and linear directions. It means
that decision making process seeks a goal. The goals are pre-set business objectives,
company missions and its vision.

To achieve these goals, company may face lot of obstacles in administrative,

operational, marketing wings and operational domains. Such problems are sorted
out through comprehensive decision-making process. No decision comes as end,
since in may evolve new problems to solve. When one problem is solved another
arises and so on, such that decision making process, as said earlier, is a continuous
and dynamic.

A lot of time is consumed while decisions are taken. In a management setting,

decision cannot be taken abruptly. It should follow the steps such as

1. Defining the problem

2. Gathering information and collecting data
3. Developing and weighing the options
4. Choosing best possible option
5. Plan and execute
6. Take follow up action

Since decision making process follows the above sequential steps, a lot of time is
spent in this process. This is the case with every decision taken to solve management
and administrative problems in a business setting. Though the whole process is time
consuming, the result of such process in a professional organization is magnanimous.

Decision-making under Certainty:

A condition of certainty exists when the decision-maker knows with reasonable

certainty what the alternatives are, what conditions are associated with each
alternative, and the outcome of each alternative. Under conditions of certainty,
accurate, measurable, and reliable information on which to base decisions is
available.

The cause and effect relationships are known and the future is highly
predictable under conditions of certainty. Such conditions exist in case of routine and

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repetitive decisions concerning the day-to-day operations of the business.

Decision-making under Risk:

When a manager lacks perfect information or whenever an information

asymmetry exists, risk arises. Under a state of risk, the decision maker has
incomplete information about available alternatives but has a good idea of the
probability of outcomes for each alternative.

While making decisions under a state of risk, managers must determine the
probability associated with each alternative on the basis of the available information
and his experience.

Decision-making under Uncertainty:

Most significant decisions made in today’s complex environment are formulated

under a state of uncertainty. Conditions of uncertainty exist when the future
environment is unpredictable and everything is in a state of flux. The decision-maker
is not aware of all available alternatives, the risks associated with each, and the
consequences of each alternative or their probabilities.

The manager does not possess complete information about the alternatives and
whatever information is available, may not be completely reliable. In the face of such
uncertainty, managers need to make certain assumptions about the situation in
order to provide a reasonable framework for decision-making. They have to depend
upon their judgment and experience for making decisions.

There are several modern techniques to improve the quality of decision-making

under conditions of uncertainty.

The most important among these are:

(1) Risk analysis,

(2) Decision trees

Risk Analysis:

Managers who follow this approach analyze the size and nature of the risk
involved in choosing a course of action.

For instance, while launching a new product, a manager has to carefully analyze
each of the following variables the cost of launching the product, its production cost,

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the capital investment required, the price that can be set for the product, the
potential market size and what percent of the total market it will represent.

Risk analysis involves quantitative and qualitative risk assessment, risk

management and risk communication and provides managers with a better
understanding of the risk and the benefits associated with a proposed course of
action. The decision represents a trade-off between the risks and the benefits
associated with a particular course of action under conditions of uncertainty.

Decision Trees:

These are considered to be one of the best ways to analyze a decision. A

decision-tree approach involves a graphic representation of alternative courses of
action and the possible outcomes and risks associated with each action.

By means of a “tree” diagram depicting the decision points, chance events and
probabilities involved in various courses of action, this technique of decision-making
allows the decision-maker to trace the optimum path or course of action.

Moreover, a manager willing to take a 75 percent risk in one situation may not
be willing to do so in another. Similarly, a top executive might launch an advertising
campaign having a 70 percent chance of success but might decide against investing in
plant and machinery unless it involves a higher probability of success.

Though personal attitudes towards risk vary, two things are certain.

Firstly, attitudes towards risk vary with situations, i.e. some people are risk
averters in some situations and gamblers in others.

Secondly, some people have a high aversion to risk, while others have a low
aversion.

Most managers prefer to be risk averters to a certain extent, and may thus also
forego opportunities. When the stakes are high, most managers tend to be risk
averters; when the stakes are small, they tend to be gamblers.

Exercises

1. Differentiate the risk analysis and trees decision.

2. What decisions have you made and turned out with positive result? How did you

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 process your decision making?

LEARNING ACTIVITIES

1. How important it is for a company or any organization to have a clear understanding

about decision making how will this help the organization?
2. Given a task to decide for a specific circumstance would you rather take the risk?
Why or why not?
3. Explain the decision -making steps and its significance.

ASSESSMENT

Short Quiz
Direction: Answer Questions 1 to 5 found in the LMS Quiz No. 1 Week No. 5
You will be guided with the instructions provided.

ASSIGNMENT

1. Briefly discuss the decision making styles.

RELATED READINGS / REFERENCES

https://www.managementstudyguide.com/what-is-decision-making.htm

https://www.businessmanagementideas.com/decision-making/decision-making-under-certainty-
risk-and-uncertainty/3371

Prepared by: Approved by: Noted by:

Rod Phillip Corro, MBA Roman Asińo, MBA Rito A. Camigla Jr., EdD.
Faculty Program Chair VP for Academic & Student Affairs

PLAGIARISM DECLARATION

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 I hereby certify that the module ____________________ submitted to Trimex Colleges is
entirely my original work, except where otherwise indicated. I am aware of the College's rules on
plagiarism, including those on disciplinary action that may result from plagiarism. Any use, in any form
whatsoever, of the works of any other author shall be properly recognized and cited at their point of
use.

Signature :

Author’s Name : __________________

Faculty

Date of submission :

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