Decision making and its techniques

Meaning of decision making

Decision making is the process of identifying a problem or opportunity, developing alternative courses of action, evaluating them and choosing the most suitable one to achieve an objective. It is central to every managerial function: planning, organising, directing and controlling all require choices. Decisions may be programmed (routine, covered by rules) or non-programmed (new and unstructured), and are taken under conditions of certainty, risk or uncertainty.

The decision-making process usually involves: defining the problem; gathering information; identifying alternatives; evaluating them; selecting the best; implementing the decision; and following up.

Techniques of decision making

A. Quantitative techniques (used where factors can be measured)

1. Marginal (incremental) analysis: comparing the additional revenue and additional cost of an extra unit or an extra option.
2. Break-even analysis: finding the volume at which revenue equals cost, to judge the profitability of output, price and product decisions.
3. Decision trees: diagramming alternative choices, the chance events that follow, their probabilities and pay-offs, to choose the option with the best expected value.
4. Pay-off matrix and probability theory: calculating expected values of alternatives under risk.
5. Linear programming: finding the best allocation of limited resources among competing uses.
6. Simulation and models: testing alternatives on a model before acting.
7. Cost–benefit analysis: comparing the total costs and benefits, including non-financial ones, of projects.

B. Qualitative techniques (used for new problems or where judgement is needed)

1. Judgement, intuition and experience.
2. Brainstorming: free generation of ideas in a group, with evaluation postponed.
3. Nominal group technique: silent individual idea generation, round-robin sharing, discussion and private ranking.
4. Delphi technique: anonymous rounds of expert opinion until consensus emerges.
5. Heuristics: rules of thumb drawn from experience.
6. Participative and consensus decision making: involving those affected.

Example. A bakery deciding whether to open a second outlet uses break-even analysis to see how many sales a day would cover the new rent and staff, a decision tree to weigh the chances of high and low demand, and a brainstorming session with staff to choose a location and product range.

Conclusion

Quantitative techniques bring precision where data exist; qualitative techniques bring creativity and judgement where they do not. The choice of technique depends on how well structured the problem is, how much reliable data exist, the time and cost available, and how important acceptance by others is. Good managers combine both, and remember that the quality of a decision also depends on how well it is implemented.