UNIT-II

PLANNING AND DECISION-MAKING

CONTENTS

Planning

Essentials of planning

Types of planning

Planning process

Objectives

Management by Objectives

Strategies

Policies and Procedures

Planning premises

Tows matrix

Blue ocean strategy

Portfolio matrix

Premising and forecasting

Decision Making

Importance of decision making

Limitations of rational decision making

Evaluation of alternatives

Selection of alternative

Three approaches

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Programmed and non-programmed decisions

Group decision making

Creativity and Innovation

Definition

According to Killen, “planning is the process of deciding in advance what is to be done,

who is to do it, how it is to be done and when it is to be done".

In the words of Koontz O’Donnell and Weihrich, planning is “an intellectually demanding
process; it requires the conscious determination of course of action and the basing of
decisions on purpose, knowledge and considered estimates”.

To quote G.R Terry “planning is the selecting and relating of facts and the making and
using of assumptions regarding the future in the visualization and formulation of proposed
activities believed necessary to achieve desired results”.

Peter F Drucker and six P’s of planning

Purpose, Philosophy, Premise, Policies, Plans and Priorities

Nature of planning

1. Planning is an intellectual activity

2. Planning involves selection among alternatives

3. Planning is forward-looking

4. Planning is related to objectives

5. Planning is the most basic of all management functions

6. Planning is continual function of management

Importance of planning

1. Minimizes risk and uncertainty

2. Leads to success
3. Focuses attention on the organization’s goals
4. Facilitates control

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 5. Trains executives

Essentials of Planning

An effective and sound plan should have the following features:

(a) Clear objective: The purpose of plans and their components is to develop and facilitate
the realization of organizational objectives. The statement on objectives should be clear,
concise, definite and accurate. It should not be coloured by bias resulting from emphasis
on personal objectives.

(b) Proper understanding: A good plan is one which is well understood by those who
have to execute it. It must be based on sound assumptions and sound reasoning.

(c) Flexible: The principle of flexibility states that management should be able to change
an existing plan because of change in environment without undue extra cost or delay so
that activities keep moving towards the established goals. Thus, a good plan should be
flexible to accommodate future uncertainties.

(d) Stable: The principle of stability states that the basic feature of the plan should not be
discarded or modified because of changes in external
factors such as population trends, technological developments or
unemployment.

(e) Comprehensive: A plan is said to be comprehensive when it covers each and every
aspect of business. It should integrate the various administrative plans so that the whole
organization operates at peak efficiency.

(f) Economical: A plan is said to be good, if it is as economical as possible, depending

upon the resources available with the organization.

Limitation of Planning

1. Lack of reliable data

2. Lack of initiative
3. Costly process
4. Rigidly in organizational working
5. Non acceptability of change

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 6. External limitation
7. Physical Barrier

Principles of planning

1. Principle of contribution to objectives

2. Principle of pervasiveness of planning
3. Principle of limiting factors
4. Principle of flexibility
5. Principle of navigational change
6. principle of commitment

Steps involved planning (Planning process)

1. Being aware of opportunities – Internal and external environment

2. Establishing objectives
3. Collection and forecasting of information
4. Development of planning premises
5. Search of alternatives
6. Evaluation of alternatives
7. Selection of plan and development of derivative plans
8. Formulating derivative plans
9. Quantifying plans by budgeting

Types of Planning (Classification of Planning)

• On the basis of Organization Level: Corporate, Divisional and Functional

Planning
• On the basis of breath or focus: Strategic (long term plan) or Operational (short
term plan), and Tactical planning.
• On the basis of time frame: Short, Medium ,Long term.
• On the basis of specificity: Specific fix or Directional, Flexible plan
• On the basis of frequency of use: Single use, Standing use
• On the basis of resources: Financial, Non-financial

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 • On the basis of usage: Standing or Adhoc plans

(a) Financial and non-financial planning: Financial planning relates to the monetary
aspect of the concern. On the other hand, non-financial planning relates to the
physical resources of the concern.

(b) Formal and informal planning: A planning in black and white is known as formal
planning. Informal planning is only thinking about it and nothing more.

(c) Short-range and long-range planning: Short-term planning relates to a period of

less than one year. It is to accomplish objectives in the near future. Medium-term
planning covers a period of over one year but less than three years. A planning
between three to five years is known as long-term planning.

(d) Standing and adhoc planning: Standing plans are permanent in nature and are
meant to be used over and over again. They ensure quick decision and action
whenever need arises. On the other hand, adhoc plans are generally for specific
matters and are prepared only when some need arises.

(e) Administrative and operational planning: Planning is generally done at various

levels of management like top level, middle level, and lower level. Administrative
planning associates with middle level managers and provide guidelines to
operational planning. On the other hand, operational planning associates with lower
levels of management and deals with actual execution of operations. Top level
planning is concerned with fixing of objectives.
Difference between Strategic, Tactical, Operational plans:

a) Strategic Plan

It focuses on the broad future of the organization and incorporates both external
environment demands and internal resources into manager action. These plans cover the
major aspect of organization, including its product, services, finance, technology and
human resources. Its main focus is on next 3 to 5 years.

b) Tactical Plan

Plans that translate strategic plans into specific goals for specific parts of the organization.
They often have shorter time frames and are narrower in scope. Instead of focusing on the

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entire corporation, tactical plans typically affect a single business within an organization
and its product lines.

c) Operational Plan

Plans that translate tactical plans into specific goals and action for small units of the
organization and focus on the near term. They typically focus on the short term, usually
12 month or less. These plans are the least complex of the three and rarely have a direct
effect on other plans outside of the department or unit for which plan was developed.

d) Contingency Plan

Key Differences
Strategic Plans Tactical Plans Operational Plans

Time Horizon Typically 3-5 years Focused on1-2 years in Usually focused on the
future next 12 months or
less
Scope Broadest, the original Normally focused on Most narrow, usually
plans with a view of a strategic unit centered on
the entire departments or smaller
organization. units of the
organization
Complexity The mostcomplex ral Complex but more The least complex
and gene ofbecause specific, with a more because they usually
the different limited domain of focus on small
industries and application homogeneous units.
business potentially
covered.
Impact Have the potential to Affect specific Impact is usually
have a dramatic impact, business units, but the restricted to a specific
both positively and effect on the entire department or
negatively on the organization is organization unit.
survival and success of measured
the organization.

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Interdependence High Moderate Low Interdependence,
Interdependence, must Interdependence, The plans may be linked
take into account the Must take into account to higher level tactical
resources and the resources and and strategic plans but
capabilities of capabilities of several are less interdependent
the entire units within a business on
organization and these plans
its external
environment.

Types of plan

1. Mission
2. Objectives
3. Strategies
4. Policies
5. Procedure
6. Rules
7. Program
8. Budget

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1. Mission

A written declaration of an organization's core purpose and focus that normally remains
unchanged over time. Properly crafted mission statements: (1) serve as filters to separate
what is important from what is not
(2) clearly state which markets will be served and how
(3) communicate a sense of intended direction to the entire organization.

A mission is different from a vision in that the former is the cause and the latter is the
effect, a mission is something to be accomplished whereas a vision is something to be
pursued for that accomplishment. Also called company mission, corporate mission, or
corporate purpose.

The mission statement should have the following qualities:

• Clarity
• Broad and enduring
• Identity and images
• Realistic
• Specific
• Values and beliefs and philosophy In sync with the vision.

Components of mission statements:

• Customers
• Products or service
• Markets
• Technology
• Concerns for survival, growth, and profitability
• Philosophy
• Self-concept
• Concern for public image
• Concern for employees

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 2. Vision
An aspiration description of what an organization would like to achieve or accomplish in
the midterm or long-term future. It is intended to serves as a clear guide for choosing current
and future courses of action.

It is a Direction that a business should pursue in future. It describes the aspirations, beliefs
and values and shapes organization’s strategy. A vision should be brief, focused, clear and
inspirational to an organization’s employees. It should be linked to customers’ needs and
convey a general strategy for achieving the mission.

Three basic elements of vision namely:

• An organizations fundamental reason for existence beyond just making money
• Its timeless, unchanging core value. The core value define the enduring character of
an organization that organization that remain unchanged as it experience changes in
technology, competition and management styles, etc.
• Huge and audacious but achievable aspirations for its future.

VISION AND MISSION OF MERSK:

Mission:
"Improving life for all by integrating the world. There's a reason we strive to go all the way,
every day, to deliver a more connected, agile and sustainable future for global logistics. It is
our purpose.”
Vision:
"At Maersk, our vision is to transform the flow of the foods, goods, data and materials that
sustain people, businesses and economies the world over. To enable the exchange of
ideas, culture and trust for a truly integrated world where value is created for
everyone."

VISION AND MISSION OF HINDUSTAN SHIPYARD

Mission:
Updated on 20 Aug 2022
“To continuously innovate and improve financial performance in construction & repair of
vessels within contractual time, cost and quality standards.”

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Vision:
Updated on 20 Aug 2022
“To be an internationally competitive and modern shipyard for construction, repair and refitting
of ships & submarines and achieve Mini Ratna status by 2026.”

MISSION AND VISION OF COCHIN PORT TRUST

Mission:

The Mission of the Cochin Port Authority is to provide dependable, cost-effective Port
services through modern and efficient infrastructure coupled with high quality, customer
friendly services. The Port shall manage its assets and resources for optimal economic use
to the Nation and the community. The Port shall strive to be the main catalyst for the
economic development of the region, with a strong commitment to environmentally sound
policies and safe practices. The Board of Trustees, the employees and all stakeholders of
the Port shall work as a team in an open, positive, collaborative and cooperative manner.
In pursuit of this Mission, the Port Authority shall be guided by the principles of integrity,
ethical behaviour, professional excellence, service to the community and respect for every
individual.

Vision:

The vision of the Cochin Port is to serve the country as:

A public service provider
An economic development facilitator
A Business enterprise
An environmental conservator

3. Objectives
Objectives are goals or aims that the management wishes the organization to achieves in
pursuit of its mission. These are the end points or pole-star towards which all business
activities like organizing, staffing, directing and controlling are directed.

Objective:

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“Objectives are goals established to guide the efforts of the company and each of its
components.”

“Organization goal is the desire state of affair, which the organization attempt to realize.”

“It indicates the endpoint of a management programme”

Characteristics of Objective

1. Objectives from a hierarchy.

2. Objectives from a network.
3. Multiplicity of objective

4. Long and short range objective.

Importance of Objective

1. Verifiable
2. Legitimacy
3. Direction
4. Coordination
5. Benchmarks for success
6. Motivation

Areas Needing Objective

1. Market Standing
2. Innovation
3. Productivity
4. Physical and financial resources
5. Workers performance and attributes.
6. Profitability
7. Public and social responsibility

8. Performance and development

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Management By Objective

“It is a process whereby superior and subordinate managers of an organization jointly

identify its common goal; define each individual major areas of responsibility in terms of
result expected of him and use these measures as guides for operating the unit and assessing
the contribution of each of its members.”- George Odiome

According to John Humble, MBO is "a dynamic system which seeks to integrate the
company's needs to clarify and achieve its profits and growth goals with the manager's
need to contribute and develop himself. It is a demanding and rewarding style of managing
a business."

MBO is a joint goal setting process in which goals are agreed upon between the managers
and each subordinate. These goals then become standards used to evaluate the individual's
performance. This goal setting process cascades down the organization so that all
managers are setting goals that help the company achieve its goals.

Features of MBO

1. Operational Technique
2. Comprehensive technique
3. Participative management
4. Result oriented
5. Systems approach
6. Concentration on key areas

Advantages of MBO

1. Unity of planning
2. Clarifying the contribution of each unit as well as each job
3. It makes the job meaningful and worthwhile
4. Increases productivity
5. Facilitate coordination of efforts and resources
6. It improves communication and organization structure

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 7. MBO provides a realistic means of analyzing training needs and opportunities for
growth on the basis of measurement of performance against accepted standards

Steps in MBO

1. Setting of organizational objectives

2. Formulation of departmental objectives
3. Establishing goals or targets of subordinates
4. Establishing check-points or key result areas
5. Follow-up and periodic review of progress
6. Appraisal of performance and counselling

Difficulties in MBO

1. Difficulty in setting Quantitative targets

2. Emphasis on short-term goals
3. Resistance to change
4. Lack of training
5. Lack of follow-up
6. Rigidity
7. Limited application
8. Costly process

Effective implementation of MBO

1. Top management support

2. Education about MBO
3. Active participation in goal setting
4. Decentralization of authority
5. Orientation of executives
6. Integration of MBO programme.

Management by Exception MBE:

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 Management by exception (MBE) is a practice where only significant deviations from a
budget or plan are brought to the attention of management. The idea behind it is
that management's attention will be focused only on those areas in need of action
Strategy

It is an integrated and coordinated set of commitment and action designed to exploit firms
internal strength and external opportunities with view to gain a competitive advantage.

Key elements

1. Scope
2. Goals
3. Comprehensive, well integrated plans of action
4. Competitive advantage
5. Terrain (Environment)
6. Logic

Features of Strategic Planning

1. It is long term in nature

2. Responsibility of top level management
3. Looking to its external environment for threat and opportunity
4. Looking inside organization for finding our strength and weakness
5. It tries to equip the organization with capabilities needed to confront future
uncertainties
6. It provides for coherence in organization policies, decision and activities overtime
7. It sets the direction of organization activity

Significance of Strategic Planning

1. Every business should have a strategy or an or an overall plan of action to meet the
challenges of environment in future
2. It clarifies the objective of organization towards which resources will be directed

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 3. It facilitates implementation of policies and long range plans for achieving
organization goals
4. Companies that do strategic planning are able to predict the outcome of planning
better than other companies
5. It is very useful to fight competition in the market and to have control over market
6. It facilitates environmental scanning

Strategy is all about winning, capturing mind share and conquering markets

Limitation of Strategic Planning

1. It requires a considerable investment in time, money and human resources.

2. It is too costly process
3. It requires trained person to make use of opportunity
4. It may sometime restrict the organization to comparatively risk free options.

Levels of strategy
1. Corporate strategy (BCG
matrix)

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Red Ocean and Blue Ocean strategy

2. Business level (Porter)

3. Functional Level

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Strategy formulation and implementation

4. Determination of mission or purpose.

5. Environmental scanning
6. Organizational analysis
7. Developing strategic alternative
8. Evaluation of strategic alternatives
9. Formulation of strategy
10. Execution of strategic plan

Policies

Meaning

Policies are “general statements or understandings which guide thinking and action”.

Characteristics of a policy

1. Policy is an expression of intentions of top management

2. Policy is stated in broad terms

3. Policy is long lasting

4. Policy is developed with the active participation of top management

5. Policy is in writing

Advantages of policies

1. By making policy decisions on frequently recurring problems, the top management

provides guidelines to lower management
2. Policies help managers at various levels to act with confidence without the need for
consulting the superiors every time. This ensures promptness of action
3. Policies facilitate better administrative control
4. By setting up of policies the management ensures that decisions made will be
consistent and in tune with the objectives and interest of enterprises

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 5. Policies secure coordination and integration of efforts in
accomplishing the organizational objectives
6. Policies save time and effort by prior deciding problems in repetitive situations

Limitation of policies

1. Policies repeatedly used plans and they bring about rigidity in operation
2. Policy may not cover all problems
3. Policies are no substitute for human judgment
4. Policies may not be ever lasting

Types of policies

2. Functional policies
3. Internal policies a. Basic policy
b. General policy
c. Departmental policy
4. External policies
5. Appealed policies
6. Stated or explicit policies
7. Unstated or implied policies

Phases of policy making and policy use:

• Policy formulation
• Policy communication
• Policy application
• Policy review and appraisal
Procedure

“It is a series of related tasks that make up the chronological sequence and the established
way of performing the work to be accomplished”

It is a systematic way of handling regular events.

It is guide to action as they routinize the way certain recurring jobs to be performed. The
establishment of various procedures tends to impart systematized order in place of
confusion in the organization.
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Advantages of Procedure

1. Minimize the burden of decision making

2. Leads to simplification of work flow 3. Brings
coordination in the organization.
4. Serves as a tool of control by enabling the managers to evaluate the performance
of their subordinate.

Limitation of Procedure

1. Brings rigidity in the performance of operations

2. Other more effective way of doing a job may not be given attention
3. Procedure need to be revised and updated constantly.
Method

“Method is the mechanical or manual means by which each operation is performed.”

It means an established manner of doing an operation. Thus, method is more limited scope
than a procedure because it deals with the task that is only one step of procedure

Rules

Every organization attempts to operate in a orderly way by laying down certain rules. The
rules are the simplest and the most specific type of standing plans. They are used for
guiding what may or may not be done.

It is more rigid that policy. A rule may not be a part of procedure.

Projects

It may be defined as a complex cluster of related activities with a distinct objective and a
definite competition time period. Major plans can be decomposed into smaller a number
of projects each with a clear cut set of objective.

The task of executing the project is put under the charge of a project manager.

Programs

“It is a sequence of activities directed towards the achievement of certain objectives.”

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 It can be defined as “the concrete scheme of action worked out by the managers to
accomplish certain objective. “It lays down the definite steps which will be taken to
accomplish a given task.

Budgets

A budget is single use plan since it is drafted for a particular period of time. Making a
budget is clearly planning.

A budget forces an enterprise to make in advance a numerical complication of expected

cash flow, expenses and revenue, capital outlays or machine hour utilization.

Advantages

1. It serves as job description.

2. It presents the objectives of the enterprise in financial and quantitative term.
3. It provides a standard by which actual operation can be measured and by which
variation could be controlled.

Strategy vs Policy
Strategy Policy
Deals with the strategic decision that govern the It offers guidelines for managers to take
long term health of an enterprise. appropriate decision.
It means of putting policy into effect within It’s a general course of action wit no define time
certain time limit limit
Deals with those decision which have not been It is a guide to action in areas of repetitive
encountered before enquire the same form, for activity
which no predefines and explicit set responses
exist in organization
Deals with crucial decision whose Once policy decision are formulated these can
implementation requires constant attention of be delegated and implemented by others
top management independently.

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Planning Premises

Meaning

“Planning premises constitute the framework within which planning is done”.

They provide the bedrock upon which future course of action is based .In order to have
effective planning, the plan must be based on sound premises. Therefore, the premises
should be based on systematic forecasting

Types of planning premises

Internal

The internal premises include those originating from sales forecast, the existing policies
and programs of the organization, capital investment policies, philosophy of
management etc

External

These are derived from the external environment of the business .they relate to the
political, economical social and technological forces in which the organization operates
and the conditions which influence the demand for the organization’s product

Controllable

Factors like material, money and machines are controllable to a great extent

Semi-controllable

These are those assumptions about future which are under the partial control of business
like labour relations and marketing strategy

Non-controllable

These are entirely beyond the scope of business as, for instance, government policy,
international trade agreements, wars, natural calamities, innovations etc

Tangible & intangible

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 Tangible premises are those premises which capable of
being expressed in terms of quantitative units

Intangible premises are not measurable quantitatively

Forecasting

1. Business forecasting: Is an estimate or prediction of future developments in business such

as sales, expenditures, and profits.

1. Definition of 'Forecasting': The use of historic data to determine the direction of future
trends. Forecasting is used by companies to determine how to allocate their budgets for an
upcoming period of time. This is typically based on demand for the goods and services it
offers, compared to the cost of producing them.

Essential elements in business forecasting:

• Developing the ground work

• Estimating future business
• Comparing the actual with estimated results Refining the forecast process.

Steps in forecasting:

• Understanding the problem

• Developing the ground work
• Selecting and analyzing data Estimating future events

Techniques of foresting

• Time series analysis

• Regression analysis
• Econometric models Extrapolation
• Historical perspective
• Panel consensus method

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 • Delphi method
• Morphological research method Relevance tree method.

Limitations of forecasting

• Rule of thumb forecasts only

• Unreliable
• Lack of sufficient information
• Limitations of techniques used

Decision making

Definition

According to Stephen P. Robbins, “decision making is defined as the selection of a

preferred course of action from two or more alternatives.”

According to McFarland “A decision is an act of choice where in an executive forms a

conclusion about what must be done in a given situation.”

A decision represents a course of behavior chosen from a number of possible alternatives.

Decision making is a process of selection from a set of alternative courses of action which
is thought to fulfill the objective of solving problem more satisfactorily than others.

Elements of Decision making

1. The decision maker

2. The decision problem
3. The environment in which decision is made
4. Objective of decision maker
5. The alternative course of action
6. The outcome expected from various alternative
7. The final choice of the alternative

Characteristics of Decision making:

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 1. Goal oriented
2. Alternatives-It is a process of choosing a course of action from among the
alternative course of action
3. Analytical-intellectual- It is a human process involving to a great extent the
application of intellectual abilities
4. Dynamic process- It is always related to the environment
5. Pervasive function
6. Continuous activity
7. Commitment of time, effort and money- It involves a time dimension and time lag
8. Human and social process
9. Integral part of planning
10. Deliberation and reasoning

Importance of Decision making

1. Implementation of managerial function: Without decision making different

managerial function such as planning, organizing, directing, controlling, staffing
can’t be conducted. In other words, when an employee does, s/he does the work
through decision making function. Therefore, we can say that decision is important
element to implement the managerial function.

2. Pervasiveness of decision making: the decision is made in all managerial

activities and in all functions of the organization. It must be taken by all staff.
Without decision making any kinds of function is not possible. So it is pervasive.

3. Evaluation of managerial performance: Decisions can evaluate managerial

performance. When decision is correct it is understood that the manager is
qualified, able and efficient. When the decision is wrong, it is understood that the
manager is disqualified. So decision making evaluate the managerial performance.

4. Helpful in planning and policies: Any policy or plan is established through

decision making. Without decision making, no plans and policies are performed. In
the process of making plans, appropriate decisions must be made from so many
alternatives. Therefore decision making is an important process which is helpful in
planning.

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 5. Selecting the best alternatives: Decision making is the process of selecting the
best alternatives. It is necessary in every organization because there are many
alternatives. So decision makers evaluate various advantages and disadvantages of
every alternative and select the best alternative.

6. Successful operation of business: Every individual, departments and organization

make the decisions. In this competitive world; organization can exist when the
correct and appropriate decisions are made. Therefore correct decisions help in
successful operation of business.

Steps involved in Decision making:

1. Awareness of the problem

2. Diagnose and state the problem

3. Develop the alternatives

4. Evaluate the alternatives

5. Select the best (most beneficial) alternatives

6. Implement and verify the decision

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Evaluation of Alternative in Decision Making:

Quantitative and Qualitative Factors

1. Marginal analysis
2. Cost effectiveness analysis

Selection of Alternative in Decision Making- 3 Approaches:

Managers can use three basic approaches:

1. Experience
2. Experimentation
3. Research and analysis

Types of Decision making(Manager Decision at various levels)

1. Basic And Routine Decisions

Basic decisions are concerning with unique problems or situations. they are one- time
decisions demanding large investments

Routine decisions are repetitive in nature. They require little deliberation and are generally
concerned with short term commitments

2. Personal vs Organizational decisions

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According to Barnard decisions can be divided on the basis of the environment in which
they are made

Decisions to watch television, to study, to retire early are examples of personal decisions.
Such decisions pertain to managers as individuals.

Organizational decisions are made by managers in their official or formal capacity as

controllers of organizational resources

3. Individual vs. group decisions

Individual decisions are taken by a single individual. Group decisions are the decisions are
taken by a group of individuals.

4. Programmed and Un-programmed decisions

Differences Between Programmed and Non-Programmed Decisions

PROGRAMMED DECISIONS NON-PROGRAMMED DECISIONS

Concerned with relatively routine Concerned with unique and novel
problems, they are structured and problems they are unstructured , non
repetitive in nature repetitive and ill-defined
Solutions are offered in accordance to There are no pre-established policies or
some habit , rule or procedure procedures to rely on. Each situation is
different and needs a creative solution
Such decisions are relatively simple and Such decisions are relatively complex and
have a small impact have a long-term impact
The information relating to these The information relating to these
problems is readily available problems is not readily available
They consume very little time and effort They demand a lot of executive time ,
since they are guided by predetermined discretion and judgments
rules, policies and procedures
Made by lower executives Top management responsibility

5. Rational vs. Irrational

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Rational Method:

A method for systematically selecting among possible choices that is based on reason and
facts. In a rational decision making process, a business manager will often employ a series
of analytical steps to review relevant facts, observations and possible outcomes before
choosing a particular course of action.

According to Fred Luthans “If appropriate means are chosen to reach desired ends, the
decision is said to be rational.”

Rationality is the ability to follow a systematically, logical, through approach in decision

making. Thus if a decision is taken after thorough analysis, reasoning and weighing the
consequences of various alternative such a decision will be called as rational decision.

Dimension to determine rationality:

• The extent to which a given action satisfies human interest.

• Feasibility of means to the given end
• Consistency

Problem faced in Rational Decision:

• The ends to be attained are often incompletely stated.

• Means cannot be separated completely from ends.
• The means ends terminology obscures the role of the time element in decision
making.

Limitation of Rational Decision making:

1. Lack of complete knowledge: Decision makers do not have complete knowledge of

all the facts surrounding the problems. They cannot foresee future events with complete
accuracy. Therefore, it is not always possible to choose the optimum solution.

2. Time and cost constraints: The search for decision is stopped as soon as the minimum
acceptable level of rationality is reached. Most decisions involve too many complex
variables all of which cannot be examined fully by a decision maker. It is not always
possible to identify all possible alternatives due to time and cost constraints.

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3. Multiplicity of goals: A decision making situation may involve multiple goals all of
which cannot be maximized simultaneously. It is not possible to maximize goals when a
suitable quantitative measure of progress is not available.

4. Uncertain environment: The environment of decision making is often uncertain. The

making and implementation of decisions are influenced by several uncontrollable factors.
Therefore, the consequences of various alternatives cannot be anticipated accurately.

The outcome of a decision can be known only in future. It is not always possible to foresee
future events and the anticipated consequences of various alternatives may differ from
those actually realized.

[Link] effects on other areas: A decision in one area may have an adverse effect on
another area of operations. For example, a decision to produce high quality goods may
result into increase in cost of production and; may not be possible to sell the product with
sufficient profit margin.

6. Human factors: it is the main limits on rational decision making. Personal value
systems, perceptions, economic and social factors, etc., are the main human limits on
rationality. Every decision maker is a human being and his” decisions are influenced by
his personal beliefs, attitudes and biases.

7. Individual perception and attitude: The manner of decision making is influenced by

an individual's perception regarding the problems and their solutions. The Perception of
one decision maker maybe different from that of the other. While making decisions, an
individual is likely to seek the protection of his self-interest and decision making power.
Collection of information, evaluation of alternatives, choice of decision and attitude
towards change may all get disported due to personal and political reasons.

8. Biases and individual interest: A decision maker may take decisions which are the
best in terms of his own personal interest rather than what is in the best interest of the
organization. Lack of support and acceptance by subordinates, lack of trust by superiors,
legal restrictions, moral and ethical standards, formal policies and procedures, ineffective
communication, incorrect timing of the decisions are also sources of limits on rationality.
9. Lack of sufficient information: The decision maker may not be able to gather and
process all information. He may gather information which he thinks pertinent to the
decision. In such situation, decisions are made within a hounded rationality. Every

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manager is concerned with the limits of rationality how they can be overcome so that the
most rational alternative may be selected for solving the problem.

Types of Rationality:
• Objectively Rational
• Subjectively Rational
• Consciously Rational
• Deliberately Rational
• Organizationally Rational
• Personally Rational

Individual Decision making:

Excessive information affects problem processing and tasking, which affects decision-
making. Crystal C. Hall and colleagues described an "illusion of knowledge", which means
that as individuals encounter too much knowledge it can interfere with their ability to make
rational decisions.

A. The Rational Economic Model:

Assumptions:

1. Decision making is a goal oriented process

2. All choice is known
3. Order of preferences
4. Maximum advantage

Bounded Rationality

Bounded rationality is the idea that when individuals make decisions, their rationality is
limited by the information they have, the cognitive limitations of their minds, and the time
available to make the decision.

Decision-makers in this view act as satisfiers who can only seek a satisfactory solution,
lacking the ability and resources to arrive at the optimal one. Herbert A. Simon proposed

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bounded rationality as an alternative basis for the mathematical modeling of decision-
making, as used in economics, political science and related disciplines.
Causes of Bounded rationality

Factors intervene in being perfectly rational:

1. Impossible to state the problem accurately
2. Not fully aware of problem
3. Imperfect knowledge
4. Limited time and resources
5. Cognitive limits
6. Politics

B. The Administrative Model:

1. They do not have full information about the problem.
2. They do not possess knowledge of all the possible alternatives solutions to the
problems and their consequences
3. They do not have the ability to possess competitive and technical environment.
4. They do not have sufficient time and resource to conduct an exhaustive search for
alternative solution to the problems.

Group Decision making:

Group decision-making (also known as collaborative decision-making) is a situation faced

when individuals collectively make a choice from the alternatives before them. The
decision is then no longer attributable to any single individual who is a member of the
group.

Most of the organizational decisions are made in group context only because they offer the
advantage of experience, wide knowledge and mutual [Link] group decision- making
is different in process and outcome from individuals in the following ways

1. Conformity
2. Group thinking
3. Superiority
4. Risk shift

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Techniques of group decision-making:

• Brainstorming
• Synetics
• Nominal group technique
• The Delphi technique

Advantages and disadvantages of group decision-making:

Advantages Disadvantages
Can provide more information Groups are notorious time wasters. They may waste lot
of time and energy , clowning around and getting
organized
It can generate a greater number of Group create pressures towards conformity
alternatives
People understand the decisions better It may be very costly to secure participation from several
because they saw heard it develop individuals in decisions-making process

It leads to greater creativity It is easy to pass the buck and avoid responsibility

Managers can make decisions on the basis of rationality, bounded rationality, or

intuition.

1. Rational decision making. Managerial decision making is assumed to be rational—

that is, making choices that are consistent and value-maximizing within specified
constraints. A rational manager would be completely logical and objective. Rational
decision making assumes that the manager is making decisions in the best interests of the
organization, not in his/her own interests. The assumptions of rationality can be met if the
manager is faced with a simple problem in which:
a. Goals are clear and alternatives limited,
b. Time pressures are minimal and the cost of finding and evaluating
alternatives is low,
c. The organizational culture supports innovation and risk taking, and
d. Outcomes are concrete and measurable.

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2. Bounded rationality: As the perfectly rational model of decision making isn’t
realistic, managers tend to operate under assumptions of bounded rationality, which is
decision-making behavior that is rational, but limited(bounded) by an individual’s ability
to process information. Under bounded rationality, managers make satisfying decisions, in
which they accept solutions that are “good enough.” Managers’ decision making may be
strongly influenced by the organization’s culture, internal politics, power considerations,
and by a phenomenon called escalation of commitment, an increased commitment to a
previous decision despite evidence that it may have been wrong.

3. Intuitive decision making: Managers also regularly use their intuition. Intuitive
decision making is a subconscious process of making decisions on the basis of experience
and accumulated judgment. Although intuitive decision making will not replace the
rational decision making process, it does play an important role in managerial decision
making.
Creativity and Innovation:

1. Creative Process

It consists of four overlapping and interacting phase: Unconscious scanning, Intuition,

Insight, and Logical Formulation

2. Brainstorming

Rules in brainstorming session as follows:

a. No ideas are even criticized

b. The more radical ideas are, the better
c. The quantity of idea production is stressed
d. The improvement of ideas by others is encouraged

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