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 everyone’s 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. premising2. identifying alternatives3. evaluating alternatives in terms of goal sought4. choosing an alternative, that is, making a decision

Rationality in Decision MakingIt 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 ALTERNATIVESOnce 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 FactorsIn 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 AnalysisEvaluating 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 AnalysisA 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 APPROACHESWhen selecting from among alternatives, the

managers can use three basic approaches: 1) experience, 2) experimentation, 3) research and analysis.

Experimentation How to Reliance on select from Choice the past among made

Alternatives

Research and

Analysis

Bases for Selecting from Among Alternative Courses of Action

1) ExperienceReliance 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) ExperimentationAn 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 AnalysisOne 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 DecisionsA 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 TO DECISION MAKING UNDERUNCERTAINTY

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 manager’s 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 makingIn 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 MAKINGDecisions cannot usually be made, of course, in a closed-

system 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 ORGANIZATIONMany writers on management distinguish between formal and

information organization. Both types are found in organization.

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

Informal Organization Informal Organization Informal Organization Morning coffee Bowling team Chess group regulars

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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 manager’s 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 manager’s 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 workFast 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 DISADVANTAGESSuperiors are forced to Tendering of overloaded superiors to delegate become decision bottlenecksClear policies must be made Danger of superior’s loss of controlSubordinates must be care- Requires 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. As they increase, more and more effort and money are devoted to managing, because of the additional managers, the staffs to assist them, and the necessity of coordinating departmental activities, plus the costs of facilities for the personnel.

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 manager’s 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 trainingThe 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.

2) Clarity of Delegation of AuthorityAlthough 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 manager’s time and attention.

3) Clarity of PlansMuch of the character of a subordinate’s 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 supervisor’s time will be required.

4) Use of objective StandardsA 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 ChangeCertain 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 TechniquesThe 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 NeededIn 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 people’s performance and discussing it with them.

8) Variation by Organization LevelSeveral 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 FactorsThere 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 BalanceThere 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 FORENTREPRENEURING 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, goal-oriented charge to utilize the enterprise’s 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.