Decision making: process, types, conditions and models
A decision is a choice among alternatives. Managers follow an eight-step process, but real decisions are limited by bounded rationality, risk and uncertainty.
The decision-making process (Robbins and Coulter)
If the result is poor, go back to step 1 and check whether the problem was defined correctly.
Weighting criteria to choose a delivery van
A Kandy bakery must choose one of two vans. Criteria and weights: price 5, fuel economy 3, load space 2. Scores out of 10: Van A scores price 8, fuel 6, space 5. Van B scores price 6, fuel 9, space 8. Which van should it choose?
- Van A: (8 × 5) + (6 × 3) + (5 × 2) = 40 + 18 + 10 = 68
- Van B: (6 × 5) + (9 × 3) + (8 × 2) = 30 + 27 + 16 = 73
- Compare: 73 is greater than 68.
Van B scores 73 against Van A's 68, so the bakery selects Van B (step 6), then buys it (step 7) and checks fuel bills later (step 8).
Types of problems and decisions
| Point | Programmed decision | Non-programmed decision |
|---|---|---|
| Problem type | Structured: familiar, clear, information complete | Unstructured: new, unusual, information incomplete |
| Handled by | Procedures, rules and policies | A unique, custom-made solution |
| Usually made by | Lower-level managers | Top managers |
| Example | Reordering stock when it falls to a set level | Whether to enter a new export market |
Decision-making conditions
| Condition | Meaning | Example |
|---|---|---|
| Certainty | The outcome of every alternative is known | Placing money in a fixed deposit with a stated return |
| Risk | Outcomes are uncertain, but their probabilities can be estimated | Using past sales records to estimate festival-season demand |
| Uncertainty | No reliable probabilities; the choice depends on the decision maker's attitude: maximax (optimist), maximin (pessimist) or minimax regret | Launching a new product in the middle of a currency crisis |
Rational model vs bounded rationality
Evidence-based management means using the best available evidence to improve decisions.
For a Cargills store manager, reordering rice when stock falls below a set level is a programmed decision. Deciding whether to build a new distribution centre during a currency crisis is a non-programmed decision under uncertainty, made by top management.
Short answer: “What is bounded rationality?” Herbert Simon's idea that managers decide rationally only within limits of information, time and ability, so they satisfice rather than maximize.
Structured question: “Distinguish programmed from non-programmed decisions.” Programmed: routine, structured problems, handled by rules and procedures, lower levels. Non-programmed: unique, unstructured problems needing custom solutions, top levels. One example each.
Essay: “Explain the decision-making process with an example.” Define a decision, draw the eight steps, work a weighted-criteria example, then note the conditions (certainty, risk, uncertainty) and bounded rationality.
Eight steps: Problem, Criteria, Weights, Alternatives, Analyse, Select, Implement, Evaluate: 'Please Check Which Answer Actually Succeeds In Exams'.