DECISION MAKING

Decision Making is defined as selection of a course of

action from among alternative, it is at the core of planning. A
plan cannot be said to exist unless a decision a commitment
of resources, direction or reputation has been made. Until
that point, there are only planning studies and analysis.
Managers sometimes see decision making as their central job
because they must constantly choose what is to be done, who
is to do it, and when, where, and occasionally even how it will
be done.
Decision making is, however, only a step in
planning, even when it is done quickly and with little thought
or when it influences action for only a few minutes. It is also
part of everyones daily living. A course of action can seldom
be judged alone, because virtually every decision must be
geared to other plans.

The Importance and Limitations of Rational Decision

Making
Decision making was considered a major part of
planning. As a matter of fact, given an awareness of an
opportunity and a goal, the decision process is really the
core of planning. Thus, in this context the process leading
to making a decision might be thought of as:
1. premising
2. identifying alternatives
3. evaluating alternatives in terms of goal sought
4. choosing an alternative, that is, making a decision
Rationality in Decision Making
It is frequently said that effective decision making must
be rational. But what is rationality? When is a person
thinking or deciding rationality.

People acting or deciding rationally are attempting to reach

some goal that cannot be attained without action. They
must have a clear understanding of alternative courses by
which a goal can be reached under existing circumstances
and limitations. They also must have the information and
the ability to analyze and evaluate alternatives in the light of
the goal sought. Finally, they must have a desire to come to
the best solutions by selecting the alternative that most
effectively satisfies goal achievement.
People seldom achieve complete rationality, particularly in
managing. In the first place, since no one can make decision
affecting the past, decisions must operate for the future, and
the future almost invariably involves uncertainties. In the
second place, it is difficult to recognize all the alternatives
that might be followed to reach a goal, this is particularly
true when decision making involves opportunities to do
something, that has not been done before.

Limited or Bounded Rationality

A manager must settle for limited rationality or
bounded rationality.
In other words, limitations of
information, time, and certainty limit rationality even
though a manager tries earnestly to be completely rational.
Since managers cannot be completely rational in practice,
they sometimes allow their dislike of risk the desire to
play it safe to interfere with their desire to reach the best
solution under the circumstances.
Satisficing that is, picking a course of action that is
satisfactory or good enough under the circumstances.
Although many managerial decision are made with a desire
to get by as safely as possible, most manages do attempt
to make the best decisions they can within the limits of
rationality and in the light of the size and nature of risks
involved.

The Principles of the Limiting Factors

Assuming that we know what our goals are and agree on clear
planning premises, the first step of decision making is to
develop alternatives. There are almost always alternatives to
any course of action, indeed, if there seems to be only on way
of doing a thing, that way is probably wrong. If we can think of
only one course of action, clearly we have not thought hard
enough.
The activity to develop alternatives is often as important as
being ale to select correctly from among them. On the other
hand, ingenuity, research, and common sense will often
unearth so many choices that all of them cannot be adequately
evaluated. The manager needs help in this situation, and this
help as well as assistance in choosing the best alternative, is
found in the concept of the limiting or strategic factors.

A limiting factor is something that stands in he way of

accomplishing a desired objective. Recognizing the limiting
factors in a given situation makes it possible to narrow
th4e search for alternatives to those that will overcome the
limiting factors.
The principles of the limiting factor is as follows: By
recognizing and overcoming those factors that stand critically
in the way of a goal, the best alternative course of action can
be selected.
EVALUATION OF ALTERNATIVES
Once appropriate alternatives have been found, the next
step in planning is to evaluate them and select the one that
will best contribute to the goal. This is the point of ultimate
decision making, although decisions must also be made in
the other steps of planning selecting goals, in choosing
critical premises, and even in selecting alternatives.

Quantitative and Qualitative Factors

In comparing alternative plans for achieving an
objective, people are like to think exclusively of
quantitative factors.
There are factors that can be
measured in numerical terms, such as time or various
fixed and operating costs. No one would question the
importance of this type of analysis, but the success of the
venture would be endangered if intangible, or qualitative,
factors were ignored. Qualitative or intangible factors,
are those that are difficult to measure numerically, such as
he quality of labor relations, the risk of technological
change, or the international political climate. There are too
many instances in which an excellent quantitative plan was
destroyed by an unforeseen war, a fine marketing plan was
made inoperable by a long transportation strike, or a
rational borrowing plan was hampered by an economic
recession. These illustrations point out the importance of
giving attention to both quantitative and qualitative factors
when comparing alternatives.

Marginal Analysis
Evaluating alternatives may involve utilizing the techniques of
marginal analysis to compare additional revenues arising from
additional costs. Where the objective is to maximize profits,
this goal will be reached, as elementary economics teaches,
when the additional revenues and additional cost are equal.
Marginal analysis can be used in comparing factors other than
cost and revenues. For example, to find the best output of a
machine, inputs could be varied against outputs until the
additional input equals the additional output.
Cost Effectiveness Analysis
A improvement on, or variation of, traditional analysis is cost
effectiveness, or cost benefit analysis. Cost effectiveness
analysis seeks the best ratio of benefits and costs, this means,
for example, finding the least costly way of reaching an
objective or getting the greatest value for given expenditures.

In its simples terms, cost effectiveness analysis is a

technique for choosing the best plan when the objectives are
less specific than sales, costs, or profits.
Non-quantitative objectives can sometimes be given
some fairly specific measures of effectiveness. In a program
with the general objectives of improving employee morale,
for example, a company can measure effectiveness by such
verifiable factors as employee turnover, absenteeism, or
volume of grievances and can supplement these
measurement with such subjective inputs as the judgment
of qualified experts.
The major feature of cost effectiveness analysis are that
it focuses on the results of a program, helps weigh the
potential benefits of each alternative against its potential
costs, and involve a comparison of the alternatives in terms
of the overall advantages.

SELECTING AN ALTERNATIVE: THREE APPROACHES

When selecting from among alternatives, the managers
can use three basic approaches: 1) experience, 2)
experimentation, 3) research and analysis.

Reliance on
the past

Experimentation

How to
select from
among
Alternatives

Research
and
Analysis

Choice
made

Bases for Selecting from Among Alternative Courses of Action

1) Experience
Reliance on past experience probably plays a larger part than
it deserves in decision making.
Experienced managers
usually believe, often without realizing it, that the thins they
have successfully accomplished and the mistakes they have
made furnish almost infallible guides to the future. This
attitudes is likely to be more pronounced to move experience
a manager has had and the higher in an organization he or
she has risen.
To some extent, experience is the best teacher. He very fact
that managers have reached their position appears to justify
their past decisions.
Moreover, the process of thinking
problems through, making decisions, and seeing programs
succeed or fail does make for a degree of good judgment (at
times bordering on intuition). Many people, however, do not
profit by their errors, and there are manages who seem never
to gain the seasoned judgment required by modern
enterprise.

2) Experimentation
An obvious way to decide among alternatives is to try
one of them and see what happens. Experimentation is
often used in scientific inquiry. People often argue that it
should be employed more often in managing and that the
only way a manager can make sure some plans are right
especially in view of the intangible factors is to try to
various alternatives and see which is best.
The experimental technique is likely to be the most
expensive of all techniques, especially if a program
requires heavy expenditures in capital and personnel and
if the firm cannot afford to vigorously attempt several
alternatives. Besides, after an experiment has been tried,
there may still be doubt about what if proved, since the
future may not duplicate the present. This technique
therefore, should b used only after considering other
alternatives.

3) Research and Analysis

One of the most effective technique for selecting
alternatives when major decision are involved is research
and analysis. This approach means solving a problem by
first comprehending it.
It thus involves a search for
relationships among the more critical of the variables,
constraints, and premises that bear upon the goal sought.
It is the pencil-and-paper (or, better the computer and
printout) approach to decision making.
Solving a problem planning requires breaking it into the
component parts and studying the various quantitative and
qualitative factors. Study and analysis are likely to be far
cheaper than experimentation. Hours of time and reams of
paper used for analysis usually cost much less than trying
the various alternatives. The major step in the research
and analysis is to develop a model simulating the problems.

Programmed and Nonprogrammed Decisions

A distinction can be made between programmed and
nonprogrammed decision. A programmed decision, is applied
to structured or routine problems. This kind of decision is
used for routine and repetitive work, it relies primarily on
previously established criteria. It is in effect, decision making
by precedent. For example, lathe operators have specification
and rules that tell them whether the part they made is
acceptable, has to be discarded, or should be reworked.
Nonprogrammed decisions are used for unstructured, novel,
and ill defined situation of a nonrecurring nature. Example are
the introduction of the Macintosh computer by Apple
Computer, Inc., the development of the four-wheel drive
passenger car by Audi, and the marketing of a small video
camera by Kodak. In fact, strategic decisions in general, are
nonprogrammed decisions, since they require subjective
judgments.

Most decisions are neither completely programmed nor

completely nonprogrammed, they are a combination of both.
Most nonprogrammed decisi8ons are made by upper-level
managers, this is because upper-level managers have to
deal with unstructured problems. Problems at lower level of
the organization are often routine and well structured,
requiring less decisi8on discretion by managers and
nonmanagers.
DECISION MAKING UNDER CERTAINTY, UNCERTAINTY,
AND RISK
All decisions are made in an environment of at least
some uncertainty. However, the degree will vary from
relative certainty to great uncertainty. There are certain
risks involved in making decisions.

In a situation involving certainty, people are reasonably

sure about what will happen when they make a decision.
The information is available and is considered to be reliable,
and the cause and effect relationships are known.
In a situation of uncertainty, on the other hand, people has
only a meager data base, they do not know whether or not
the data are reliable, and they are very unsure about
whether or not the situation may change. Moreover, they
cannot evaluate the interactions of the different variables.

In a risk situation, factual information may exist, but they

may be incomplete. To improve decision making, one many
estimate the objectives probabilities of an outcome by using,
for example, mathematical models. On the other hand,
subjective probability, based on judgment and experience,
may be used. Fortunately, there are a number of tools
available that help managers make more effective decisions.

MODERN
APPROACHES
UNDERUNCERTAINTY

TO

DECISION

MAKING

A number of modern techniques improve the quality of decision

making under the normal conditions of uncertainty.

1) Risk Analysis

All intelligent decision makers dealing with uncertainty like to know

the size and nature of the risk they are taking in choosing a course of
action. One of the deficiencies in using the traditional approaches of
operations research for problem solving is that many of the data
used in a model are merely estimates and others are based upon
probabilities. The ordinary practice is to have staff specialists come
up with best estimates. However, new techniques have been
developed that give a more precise view of risk.

Virtually, every decision is based on the interaction of important

variables, many of which have an element of uncertainty but,
perhaps, a fairly high degree of probability.

2)

Decision Trees
One of the best ways to analyze a decision is to use so-called
decision trees. Decision trees depict, in the form of a tree, the
decision points, change events, and probabilities involved in
various course that might be undertaken. A common problem
occurs in business when a new product is introduced. Managers
must decide whether to install expensive permanent equipment to
ensure production at the lowest possible cost or undertake cheaper,
temporary tooling that will involve a higher manufacturing cost but
lower capital investments and will result in lower losses if the
product does not sell as well as estimated. (Figure 6-3)
Decision tree approach makes it possible to see at least the
major alternatives and the fact that subsequent decisions may
depend upon events in the future. Decision trees and similar
decision techniques replace broad judgments with a focus on the
important elements in a decision, bring out into the open
premises that are often hidden, and disclose the reasoning
process by which decisions are made under uncertainty.

3)

Preference Theory

Preference or utility theory is based on the notion that individual

attitudes toward risk will vary. Some individuals are willing to take
only smaller risks than those indicated by probabilities (risk averters)
and
others
are
willing
to
take
greater
risks
(
gamblers).
While referred to here as preference theory this
technique is more classically called utility theory. Purely statistical
probabilities, as applied to decision making, rest upon the assumption
that decision makers will follow them.

EVALUATING THE IMPORTANCE OF A DECISION

Sine managers not only must make correct decisions but also must
make them as needed and as economically as possible, and since they
must do this often, guidelines to the relative importance of decisions
are useful. Decisions of lesser importance do not require thorough
analysis and research, and they may even be safely delegated without
endangering an individual managers basic responsibility.
The
importance of a decision also depends upon the extent of
responsibility, so what may be of practically no importance to a
corporation president may be of great importance to a section head.

If a decision commits the enterprise to heavy expenditures of

funds or in an important personnel program, such as program for
management appraisal and training, or if the commitment can be
fulfilled only over a long period, such as by the construction of a
new chemical plant, it should be subjective to suitable attention
at an upper level of management. In situation where the impact
of a decision on people is great, its importance is high.
OTHER FACTORS IN DECISION MAKING
There are other factors that influence decision making.
1)

Personal values and organization culture

Values influence decision making at all organizational levels,

managers and non-managers alike. What is true for individuals is
also pertinent to the organization as a whole. Thus, the pattern of
behavior, shared beliefs, and values of members of an
organization do influence decision making.

2) Group decision making

In modern organizations, decisions are often made by groups
of individuals, such as committees or teams.
3)

Creativity and innovation

Effective decision making requires creativity and innovation.

THE SYSTEMS APPROACH AND DECISION MAKING
Decisions cannot usually be made, of course, in a closedsystem environment. Many elements of the environment of
planning lie outside the enterprise.
In addition, every
department or section of an enterprise is a subsystem of the
entire enterprise managers of these organizational units must
be responsive to the policies and programs of other
organizational units of the total enterprise. People within the
enterprise are a part of the social system, and their thinking
and attitudes must be taken into account whenever a manager
makes a decision.

THE NATURE AND PURPOSE OF ORGANIZING

It is often said that good people can make any organization
pattern work. Some even assert that vagueness in organization is a
good thing in that it forces teamwork, since people know that they
must cooperate to get anything done. However, there can be no doubt
that good people and those who want to cooperate will work together
most effectively if they know the parts they are to play in any team
operation and the way their roles relate to one another. This is true in
business or government as it is in football or in a symphony orchestra.
Designing and maintaining these systems of roles is basically the
managerial function of organizing.
For an organizational role to exist and be meaningful to people, it
must incorporate (1) verifiable objectives, which are a major part of
planning; (2) a clear idea of the major duties or activities involved,
and (3) an understood area of discretion or authority so that the
person filling the role knows what he or she can do to accomplish
goals. In addition, to make a role work out effectively, provision
should be made for supplying needed information and other tools
necessary for performance in that role.

It is in this sense that we think of organizing as (1) the identification

and classification of required activities, (2) the grouping of activities
necessary to attain objectives, (3) the assignment of each grouping to a
manager with the authority (delegation) necessary to supervise it, and
(4) the provision for coordination horizontally (on the same or similar
organizational level) and vertically (e.g., corporate headquarters,
division, and department) in the organization structure.
FORMAL AND INFORMAL ORGANIZATION
Many writers on management distinguish between formal
information organization. Both types are found in organization.

and

Formal Organization
General formal organization means the intentional structure of role
sin a formally organized enterprise. Describing an organization as
formal does not mean there is anything inherently inflexible or unduly
confiding about it. If a manager is to organize well, the structure must
furnish an environment in which individual performance, both present
and future, contribute most effectively to group goals.

Formal organization must be flexible. There should be room for

discretion, for advantageous utilization of creative talents, and for
recognition of individual likes and capacities in the most formal or
organizations. Yet individual effort in a group situation must be
channeled toward group and organization goals.
Although the attainment of goals must be the reason for any
cooperative activity, we must look further for principles to guide the
establishment of effective formal organization.
Informal Organization
Chester Bernard, author of the management classis, The Functions of
the Executive, described informal organization as any joint
personal activity without conscious joint purpose, even though
contributing to joint results. Thus, the informal relationships
established in the group of people playing chess during lunchtime
may aid in the achievement of organizational goals. It is much easier
to ask for help on an organization problem from someone you know
personally, even if he or she may be in a different department, than
from someone you know only as a name on an organization chart.

The Formal and Informal Organization

Pres.

V.P.

Dv.Mge

Dept
Mgr.

V.P.

D.vMgr

Dept.
Mgr.

Informal Organization
Morning coffee
regulars

Dv. Mgr

Dept.
Mgr.

Dv. Mgr.

V.P.

Dv. Mgr.

Dept.
Mgr.

Informal Organization
Bowling team

Dv. Mgr

Dept.
Mgr.

Dv. Mgr.

Dept.
Mgr.

Dv. Mgr.

Dept.
Mgr.

Informal Organization
Chess group

Dept.
Mgr.

ORGANIZATIONAL DIVISION: THE DEPARTMENT

One aspect of organizing is the establishment of
departments. The word department designates a distinct
area, division, or branch of an organization over which a
manger has authority for the performance of specified
activities. A department, as the term is generally used, may
be the production division, the sales department, the West
Coast branch, the market research section, or the accounts
receivable unit.
In some enterprises, departmental
terminology is loosely applied; in others, especially large
ones, a stricter terminology indicates hierarchical
relationships. Thus, a vice-president may head a division, a
director, a department; a manager, a branch; and a chief, a
section. In some organizations, the bureaucratic structure
is replaced by an emphasis on teamwork.

ORGANIZATION LEVELS AND THE SPAN OF MANAGEMENT

While the purpose of organizing is to make human cooperation effective, the
reason for levels of organization is the limitations of the span of management.
In other words, organization levels exists because there is a limit to the
number of persons a manager can supervise effectively, even though this
limit varies depending on situations. The relationships between the span of
management and the organizational levels. A wide span of management is
associated with few organizational levels; a narrow span, with many levels.
Choosing the Span
The number of persons (subordinates) that a manager supervises or manages
is called his span of control This span can not be indefinitely expanded,
although what is an effective span of control may vary depending on the
individual managers ability or on the nature and variety of the activities
involved. As an example, it may be less demanding to supervise ten persons
performing identical gardening jobs than to supervise five middle manages
performing different tasks such as purchasing, marketing, production, and
finance. Generally, the more complex and varied the activities are under a
managers supervision, the small is the span of control in which he can
manage effectively.

Organization with Narrow Span

ADVANTAGES

DISADVANTAGES

Close supervision
Superiors tends to get
Close control
subordinates work
Fast communication between
Many levels of management
subordinates and superiors
High costs due to many levels
Excessive distance between lowest
level and top level

Organization with Wide Spans

ADVANTAGES
DISADVANTAGES
Superiors are forced to
Tendering of overloaded superiors to
delegate
become decision bottlenecks
Clear policies must be made Danger of superiors loss of control
Subordinates must be careRequires exceptional quality of
fully selected
managers

Since the limits on managers span of control give rise to

hierarchies in large organizations, the narrower are the
spans of control of managers in an organization, the taller
or more multilayered, will be the organization, other things
being equal. Conversely, the wider are the spans of control
of the managers in an organization, the flatter or less
layered will be the hierarchies, other things being equal. The
tallness or flatness of an organization is a matter of some
importance.
Problems with Organization Levels
There is a tendency to regard organization and
departmentation as ends in themselves and to gauge the
effectiveness of organization structures in terms of clarity
and completeness of departments and hierarchical
organization and the creation of multiple levels, are not
completely desirable in themselves.

In the first place, levels are expensive.

more effort and money are devoted to
additional managers, the staffs to assist
coordinating departmental activities, plus
personnel.

As they increase, more and

managing, because of the
them, and the necessity of
the costs of facilities for the

In the second place, departmental levels complicate communication.

An enterprise with many levels has greater difficulty communicating
objectives, plans, and policies downward through the organization
structure than does a firm in which the top manager communicates
directly with employees. Omissions and misinterpretations occur as
information passes down the line. Levels also complicate communication
from the firing line to the commanding superiors, which is every bit as
important as downward communication. It has been well said that levels
are filters of information.
Finally, numerous departments and levels complicate planning and
control. A plan that may be definite and complete at the top level loses
coordination and clarity as it is subdivided at lower levels. Control
becomes more difficult as levels and managers are added, at the same
time the complexities of planning and difficulties of communication make
this control more important.

FACTORS DETERMINING AN EFFECTIVE SPAN

The number of subordinates a manager can effectively
manage depend on the impact of underlying factors. Aside
from such personal capacities as comprehending quickly,
getting along with people, and commanding loyalty and
respect, the most important determinant is a managers
ability to reduce the time he or she spends with
subordinates. This ability naturally varies with managers
and their jobs, but several factors materially influence the
number and frequency of such contacts and therefore the
span of management.
1) Subordinate training
The better the training of subordinates. The fewer the
number for necessary superior-subordinate relationships.
Well trained subordinates require not only less of their
managers time but also less contact with their managers.

Clarity of Delegation of Authority

Although training enables manages to reduce the frequency and
extensiveness of time-consuming contacts, the principal cause of the heavy
time burdens of superior-subordinate relationships is to be found in poorly
conceived and confused organization. The most serious symptom of poor
organization affecting the span of management is inadequate or unclear
authority delegation. If a manager clearly delegates authority to undertake a
well-defined task, a well-trained subordinate can get it done with a minimum
of the managers time and attention.

2)

3) Clarity of Plans
Much of the character of a subordinates job is defined by the plans to be put
into effect. If these plans are well-defined, it they are workable, if the
authority to undertake them has been delegated, and if the subordinate
understand what is expected, little of a supervisors time will be required.
4) Use of objective Standards
A manager must find out, either by personal observation or through use of
objective standards, whether subordinates are following pans. Obviously
good objective standards, revealing with ease any deviations from plans
enable managers to avoid many time-consuming contacts and to direct
attention to exceptions of points critical to the successful execution of plans.

5)

Rate of Change
Certain enterprises change much more rapidly than others.
The rate of change is an important determinant of the degree to
which policies can be formulated and the stability of policies
maintained.
It may explain the organization structure of
companies railroad, banking, and public utility companies, for
example operating with wide spans of management or, on the
other hand, the very narrow span of management.

6) Communication Techniques
The effectiveness with which communication techniques are
used also influences the span of management.
Objective
standards of control are a kind of communication device, but
many other techniques reduce the time spent with subordinates.
7)

Amount of Personal Contact Needed

In many instances, face-to-face meetings are necessary Many
situations cannot be completely handled with written reports,
memorandums, policy statements, planning documents, or other
communications that do not involve personal contact.

An executive may find it valuable and stimulating to subordinates to

meet and discuss problems in the give-and-take of a conference. Some
problems are of such political delicacy that they can be handled only in
ace-to-face meetings. This is also true when it comes to appraising
peoples performance and discussing it with them.
8) Variation by Organization Level
Several research projects have found that the size of the effective span
differs by organization level. In one major study, the researchers
developed and tested a model to take this variable into account and
found that the degree of specialization by individuals (person
specialization) was the most important variable affecting span,
although technology and size were also tested, since previous research
had concentrated on these. The study revealed that (1) when a greater
number of specialties was supervised, effective spans were narrower at
lower and middle levels of organization but were increased at upper
levels, primarily because top level manages were most concerned with
the interface of the enterprise with its external environment, strategic
planning, and major policy matters; (2) routinness (lack of variety of
work) of an operation appeared to have little effect at any level; and (3)
size (in terms of personnel) had little effect at lower levels but a positive
effect at middle levels.

9) Other Factors
There are other factors that affect the span of management. For
example, a manager who is competent and well trained can effectively
supervise more people than one who is not. Furthermore, simple tasks
may allow for a wider span than tasks that are complex and include a
great variety of activities. There are still other factors that favor a wider
span of management, such as the positive attitudes of subordinates
toward assumption of responsibility, as well as their willingness to take
reasonable risks.
Similarly, with more mature subordinates, the
superior may delegate more authority thus widening the span.
10) The Need for Balance
There can be no doubt that, despite the desirability of a flat
organization structure, the span of management is limited by real and
important restrictions. Managers may have more subordinates than
they can manage effectively, even though they delegate authority, carry
on training, formulate plans and policies clearly, and adopt efficient
control and communication techniques. It is equally true that as an
enterprise grows, the span of management limitations force an increase
in the number of levels simply because there are more people to
supervise.

ORGANIZATIONAL ENVIRONMENT FOR

ENTREPRENEURING AND INTRAPRENEURING
At times special organizational arrangements need to be made
for fostering and utilizing entrepreneurship. Entrepreneurship
is thought to apply to managing small businesses, but some
authors expand the concept to apply also to large organizations
and to managers carrying out entrepreneurial roles through
which they initiate changes to take advantage of opportunities.
Although it is common to search entrepreneurial personality
The essence of entrepreneurship is innovation, that is, goaloriented charge to utilize the enterprises potential. As
entrepreneurs, managers try to improve the situation.
The distinction between the intrapreneur and the entrepreneur.
Specifically, an intrapreneur is a person who focuses on
innovation and creativity and who transforms a dream or an
idea into a profitable venture by operating within the
organizational environment. The entrepreneur is a person who
does the same, but outside the organizational settings.