Chapter 9 - Decision Making
B-Com Part 2 Management Notes
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Chapter 9 - Decision Making
* Decision Making
* Different Theories of Decision Making
* Policy
* Characteristics of Policy
* Classification of Policies
* Process of policy formulation
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Q.1. "Decision making is the primary test of management." Discuss this statement and explain the process of decision-making.
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Whatever a manager does, he does through decision making. Critically examine this statement.
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What is the significance of decision making? What procedure should be followed in arriving at a correct decision?
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Decision making is the vehicle for carrying managerial workload and discharging the managerial responsibilities. Evaluate the statement and examine the significance of rational decision making in management.
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Decision making is at the care of planning. Discuss this statement and spell out the nature of decision-making.
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Decision making is at the care of planning. Discuss this statement and spell out the nature of decision-making.
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What is decision making? What are the important factors that influence decision making?
Meaning and Definition of Decision Making
Decision making may be reviewed as the process of selecting a course of action from among several alternatives in order to accomplish a desired result. The purpose of decision making is to direct human behaviour and commitment towards a future goal. If there are no alternatives, if no choice is to be made, if there is no other way-out, then there would be not need for decision making. It involves committing the organisation and its resources to a particular choice of course of action thought to be sufficient and capable of achieving some predetermined objective.
Managers at all level in the organisation make decision and solve problems. In fact, decision-making is the process of reducing the gap between the existing situation and the desired situation through solving problems and making use of opportunities. A decision is a course of action consciously selected from available alternatives, with a view to achieving a desired goal. It is an outcome of the judgement and represents a choice and commitment to the same. It is a final resolution of a conflict of needs, means or goals made are the face of uncertainty, complexity and multiplicity. A decision is conclusion reached after consideration it occurs when one option is selected to the exclusion of others - it is rendering of judgement.
Different management scholars have defined Decision making as follows:
George Terry
Decision making is the selection based on some criteria from two or more alternatives.
Heinz Weihrick and Harold Koontz
Decision making is defined as the selection of a course of action among alternatives, it is the care of planning.
Louis Allen
Decision making is the work a manager performs to arrive at conclusion and judgement.
Nature Or Characteristics of Decision Making
Decision making is globally thought to be selection from alternatives. It is deeply related with all the traditional functions of a manager, such as planning, organizing, staffing, directing and controlling. When he performs these functions, he makes decisions. However, the traditional management threorists did not pay much attention to decision making. Infact, the meaningful analysis of decision making process was initiated by Chester Bernard (1938) who commented, The process of decision are largely techniques for narrowing choice.
The nature of decision-making may be clearly understood by its following characteristics features:
1. Decision making is an intellectual process, which involves imagination, reasoning, evaluation and judgement.
2. It is a selection process in which best or most suitable course of action is finalized from among several available alternatives. Such selected alternative provides utmost help in the achievement of organizational goals. The problems for which there is only one selection are most decision problems.
3. Decision making is a goal oriented process. Decisions are made to attain certain goals. A decision is rated good to be extent it helps in the accomplishment of objectives.
4. It is a focal point at which plans, policies, objectives, procedures, etc., are translated into concrete actions.
5. Decision making is a continuous process persuading all organizational activity, at all levels and in the whole universe. It is a systematic process and an interactive activity.
6. Decision making involves commitment of resources, direction or reputation of the enterprise.
7. Decision making is always related to place, situation and time. It may be decision not act in the given circumstances.
8. After decision making it is necessary and significant to communicate its results (decisions) for their successful execution.
9. The effectiveness of decision-making process is enhanced by participation.
Elements of Decision Making
There are following elements in decision making.
* The decision maker.
* The decision problem or goal.
* Attitudes, values and personal goals of the decision maker.
* Assumption with regard to future events and things.
* The environment in which decision is to be made.
* Available known alternatives and their estimated or imagined outcomes.
* Analytical results in the whole perspective.
* The constraints.
* The act of selection or choice.
* Timing of decision.
* Proper communication of decision for its effective execution.
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Q.2. Discuss in brief different theories of Decision-Making.
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What are the principles of Decision-Making? How and why the employee participation in Decision-Making process should be introduced?
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Make out a case for employees participation in Decision-Making
Theories of Decision Making
The most common bases upon which decisions are made are, fact experience, intuition and authority. The decision itself is concerned with the achievement of an objective. Bridging the gap between the basis for the decision and the decision itself is the theory (or technique) used to arrive at the decision. Theories of decision making stem from the manner in which decisions are made.
Ernest Dale has suggested a comprehensive list of theories of decision making as follows
1. Traditional Economic Theory
2. Psychological Theory
3. Mathematical Theory.
1. Traditional Economic Theory Or Marginal Theory
The simplest theory of business decision making is that the decision makers try to maximize profits and that key consider all courses of action open to them in attempting to do. This is the theory held by traditional economists. Although it may be partially true that the decision makers generally have the effect of profits on mind, they may not always attempt to maximize profits. Marginal theory is based on the law of diminishing return. According to this law, with the additional units of inputs (labour and capital), the marginal contribution of each unit is at a decreasing rate. There comes a stage when the marginal return is zero. This is marginal point. A number of decisions in the area of production, sales, marketing, advertising, recruitment, etc are taken by the management on the basis of marginal theory.
2. Psychological Theory
This theory is designed to identify what actually goes on in the decision maker's mind when he makes a decision. Several factors leave an impact on the mind of the decision maker, such as nature, size and purpose of the organisation, manager's aspiration, attitude, habits, personally temperament, political learning's, social and organizational status, technological skill, domestic life, education, experience, level of satisfaction and so on Psychology of a manager has an important bearing on the quality of decisions he makes. As decision making is an intellectual process, these psychological factors cannot be avoided altogether.
One of the best-known psychological theories is Herbert Simon's theory, which explain that the decision maker attempts to satisfies rather maximize. In other words, a manager finds an answer that is good enough. What consequences the manager considers good enough, will depend on what has been achieved in the past.
3. Mathematical Decision Theory
It is not designed to show how decisions are actually made. Rather, it is designed to help the decision maker who is interested in maximizing profits in a given situation, to lay out the alternatives in such a way that he sees the risks and the consequences more clearly. With the development of operations research and computers for handling complex mathematical models, this approach is commonly used by large organizations where decision making problem is very complex. The linear programming, venture analysis, game theory, queuing theory, probability theory, etc are some of the examples of widely used Operations Research technique. Although these techniques provide a good deal of analysis, yet the rational and psychological aspects of decision making cannot be ignored totally. The attitude, intelligence and wisdom of the decision maker shall always have an important impact on the quality of decisions made by him
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Q.3. Policies are guide-posts for managerial action. Discuss this statement and give at least two examples of policies in any area of business management.
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What is Policy? What characteristics do policies have? Also discusses various classifications of an industrial policy.
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What is Policy and What are the essentials of a sound policy?
Meaning and Definition of Policy
A policy is a general statement that guides thinking, action and decision making of managers for the successful achievement or organizational objectives Policies define the limits within which decisions are to be made. This ensures consistent and unified performance and exercise of discretion by managers.
The top managers generally frame the policies. However, a manager at any other level may low down policies within the limits of his authority and also within boundaries set by policies of his seniors.
A policy is not static and may be modified or reviewed in the light of changes in the environment. A policy may be verbal, written or implied.
A well defined policy help the manager to delegate authority without undue fear, because the policy lays down the limits for decisions by the subordinates. Moreover, policies operationalise objectives, speed up decision making, ensure coordination, help in training and orienting employees and ensure proper administrative control.
Different scholars have defined the term policy as follows:
Heinz Weihrich and Harold Kountz
Policies are plans in that they are general statement or understanding that guide or channel thinking in decision making. Not all policies are statements they are often merely implied from the actions of managers.
F.T. Hanker
A policy is a statement, verbal, written or implied of those principles and rules but are set by managerial leadership as guidelines and constraints for the organisation's thought and action.
E.F.I Brech
Policy is a patter of direction for the guidance of those who carry responsibility for the management of the activities of the enterprise.
Dalton McFarland
Policies are planned expressions of the company's official attitudes towards the range of behaviour within which it will permit or desire its employees to act.
George Terry
Policy is a verbal, written or implied overall guide setting up boundaries that supply the general limits and direction in which managerial action will take place.
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Q.4. Describe the characteristics or features of Policy.
Characteristics Or Features of Policy
Policy has the following important features:
1. A policy is a standing, repeat-use plan for answering the recurring problem of the similar nature.
2. It is a guide thinking in decision making. It is not an exact order in which things are done. It provides the framework within which decisions should be taken. It unfolds the broad guidelines for achieving organizational objectives.
3. It allows some amount of judgement or discretion on the part of the executives.
4. It prescribes the course of action selected to guide and determine present and future decisions.
5. It lays down the limits within which decisions are to be made. This ensures consistent and unified performance and exercise of discretion on the part of the executives.
6. Policies are generally framed by top-level management, however, managers at other levels also can frame necessary policies to deal with recurring problems of similar nature, such as departmental policies, divisional policies - formulated at the level of department or division.
7. Departmental or divisional policies are formulated within the limits of the authority of hte respective in charge and also within the limits set by the organizational policies.
8. A policy is not static. Policies are reviewed and modified from time to time as per requirements or demands of the changing environment.
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Q.5. Describe the Various types / Classification of Policies.
Classification of Policies
A number of policies are used in an enterprise in order to attain the organizational objectives. Policies may be classified as follows:
(A) On the Basis of Source
According to their source, origin or emergence, policies may be of the following kinds:
1. Originated Policy
It is also known as formulated policy. It is a policy deliberately formulated by top management to guide decision-making at lower levels, board of directors, the chief executive, the executive committee of the board or heads of the major departments or divisions. Such policies are broad in scope and affect usually the whole organisation or its major segments. These policies are often written ones, typically in the form of a policy manual of the organisation and flow down.
2. Appealed Policy
It is a policy formulated on the appeal or request of subordinates for filling the gaps left by originated policies. In other words, when a subordinates refers an exceptional problem of recurring nature not covered by existing policies, to his superior and appeals for a policy decision. When the superior makes decision in such a case, it becomes a precedent (policy) for future action. Such policies may be formulated at any level and are in the nature of flowing upward policies.
3. Imposed Policy
It is a policy, which an organisation is compelled to adopt due to some outside forces, such as the government and its regulatory agencies, trade association, trade unions.
(B) On the Basis of Functions
Policies are needed in all areas of business of an enterprise. These may be classified on the basis of different managerial functions as follows:
1. Production Policy
Raw material, purchase policy, repairs and maintenance policy, technology adoption and development policy, quality control policy, inventory policy and research and development policy are some examples in the category. Indent for the purchase of raw materials should be made at least a week in advance is an example of Raw Materials Purchase Policy.
2. Human Resource Policy
Examples in this category are recruitment policy, training policy, employee career development policy, wages and salary policy, placement policy, promotion policy and transfer policy, employee participation policy. Any vacancy shall be filled first by promotion from within the organisation and then, if need be, from outside sources Is an example of Recruitment Policy.
3. Marketing Policy
Capital structure policy, packaging policy, distribution policy, advertising policy, customer service policy, credit policy, market research policy and important examples in this category. Customer's complaint must be responded within the next day is an example of Customer Service Policy.
4. Finance Policy
Capital structure policy, fixed capital policy, working capital policy, investment policy, research policy, divident policy are some examples in this category. Excess capital, if any should be invested for short term only, preferably in limited company shares registered in stock exchange is an example of Investment Policy.
5. Accounting Policy
Inventory valuation policy, depreciation policy, provisions policy (for bad debts etc) deferred revenue expenditure policy etc. are examples in this category. Deferred revenue expenditure (e.g., a huge amount spent on advertisment) should be spread over the years of its benefit generation and written off every year accordingly, is an example of Deferred Revenue Expenditure Policy.
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Q.6. Describe the process of policy formulation.
Process of Policy Formulation
Policy formation is a creative and analytical phase of planning. It is based on the underlying objectives of the organisation. Policy formulation process involves various steps or activities and their analysis in order arrive at a decision. The important steps involved in policy formulation may be briefly described as follows:
1. Understanding of Corporate Objectives
Organizational objectives are the starting point for policy formulation. They are ultimate results, which an organisation tries to achieve. They provide the foundation for policy formulation.
2. Analysis of the Environment
The basic purpose of policies is to integrate the organisation with its environment; hence the policy makers must know the nature and other feature of the organisation environment. This requires a comprehensive analysis of the environment - its opportunities and threats.
3. Internal Analysis
The policy makers should be fully conversant with the strengths and weaknesses of the organisation. They should clearly identify the factors which are critical for the success of the organisation.
4. Definition of Policy Area
Policy makers should then specify clearly the areas, which require policies to be made.
5. Choice Or Selection of Policy
After evaluation of different policy alternatives, the most appropriate or suitable policy alternative is selected. This is the stage where the manager arrives at the right policy in the concerned area.
6. Communication and Implementation of Policy
The selected policy is communicated in clear words to those who are supposed to implement it. Implementation of policy is the operative aspect of policy whereby it is put into action. The concerned people apply the policy when problematic situations arise or when they normally do their jobs.
7. Review and Modification of Policy
The correctness of a policy is perceived when it is put into practice. On the basis of feedback from the executors of the policy, a periodical review is carried out and wherever necessary, desired modification are made in the policy from time to time. Sometimes outdated or obsolete policies are reconstituted or reframed.
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