1. Decision Making in Business
There are two types of decisions namely programmes decisions and non programmed decisions.
• Programmed Decisions – These are made in response to a situation that has occurred enough
times to enable decision rules to be developed. These decisions are frequently made by lower
level managers. The problems to be solved are usually well defined. Formal rules and
regulations would be consulted to enable managers to choose the most appropriate course of
action.
• Non Programmes Decisions –These are made in response to situations that can be unique or
poorly defined and largely unstructured. These decisions usually have important consequences
for the organisation. Creativity is needed to find the best solution to this type of decision.
Stages in the decision making process
• The decision maker needs to be consciously aware of the situation. This involves understanding
the factors that affect the decision to be made, and recognising those elements which are out of
the control of the decision maker, such as the constraints placed on the decision.
• The decision maker needs to recognise the real problem. Before being able to develop a solution
it is important to study and understand the problem fully, especially when multiple or complex
problems exist. The decision maker has to be sure to get to the central issue and so make a
decision that matches the real problem.
• Information needs to be gathered and alternative solutions developed. This is a key stage and is
vital if the best decision is to be made.
• The best solution is decided on
• The decision is implemented. For successful implementation it is necessary for the decision to
be accepted by the organisation, because decisions relate to a chosen course of action that
often requires the cooperation of others. Therefore communication may be important again, for
explaining the decision and the reason for it.
• The implemented decision needs to be monitored and evaluated.
• Any necessary changes or modifications need to be made.
Theories and models of Decision making
Rational Model

2. The classical model of decision making is known as the rational model. Within this, decision making is
seen to be a rational and objective process to achieve predictable results.
Rational model assumes the following which reduces the extent to which this model could be used.
• Decision makers have the necessary information to generate possible alternative options and to
evaluate them
• Managers have time to gather this information and do this evaluation
• Managers are therefore trying for a condition of certainty
• Managers operate in a stable situation where the variables are not changing
• Goals of managers and the strategy they are working to are defined and agreed
• Decision makers make rational choices by selecting the option that will bring most benefit.
Since the rational models of decision making have limited validity, decision making models based on
‘bounded rationality’ is put forward. Bounded rationality refers to a situation where the degree to which
you can be rational is limited.
The bounded rationality model states that decisions need to be made within the constraints and
pressures of organisational life, and so managers have to make the decision ‘that will do’. The term used
to describe this is ‘satisficing’, the practice of choosing an option that may not be the optimal solution,
but one that does satisfy the minimum requirements to achieve a goal or solve a problem.
One of the major problems with the bounded rationality model is that it can lead managers to make the
easiest or first decision possible. It may also result in managers continually using old decisions and
applying them to new situations if they know that the old decision would at least meet the minimum
requirements.
Garbage Can Model
This decision making model is particularly relevant to turbulent situations, and introduces the element
of chance or randomness. This model identifies four streams of activity and decisions are made when
these four streams meet.
• Choice opportunities – these are scheduled or unscheduled meetings where it is expected that
decisions will be made
• Participants – people who have the opportunity to influence decisions – they have different
knowledge and experiences which may contribute to solutions of problems
• Problems – possibly a result of a performance gap – these require attention

3. • Solutions – these are separate from the problems that they may eventually solve – answers
looking for questions
The choice opportunities act as a ‘garbage can’ for the other three constituents: participants, problems
and solutions.
Decision Theory
Decision Theory looks at analyzing decision situations and is mainly used for situations in which there is
one decision maker.
Decision tree has the nature of the decision, source of uncertainty and the payoffs. Basic idea of a
decision tree is to construct a decision tree, attach some values to the outcome indicated by the
decision tree and estimate the best outcome.
The decision which should be chosen is the one with the highest payoff. This is referred to as the
normative theory. What the decision maker selects is known as the positive theory. In a perfect rational
scenario, both these responses should be the same.
This model is based on two main assumptions – decision maker knows the possibilities and the pay offs.
Game Theory Model
This is useful for approaching decisions in management that involve two or more parties. It can be
particularly relevant to decisions involving competitors – other companies who wish to trade in similar
goods and services to similar customers.
There are two main situations in game theory – Zero sum game and non zero sum game. In a zero-sum
game, a gain by one party will result in a loss being incurred by another party. In a non-zero-sum game,
it may be possible for the parties to cooperate to increase the benefits to all.
However, within this type of game, making decisions about cooperation is difficult because it is unclear
whether competitors will actually cooperate and to what extent. Therefore trying to predict the
decisions of competitors becomes important. Study and repetitive research into such games has
produced ideas about how participants may behave.
Game theory is useful for dealing with situations where outcomes depend on the interaction of
individuals, rather than decisions taken independently. The decision making can be said to be
strategically interdependent.
The reason for the decision making to be strategically interdependent is as follows.

4. • The outcomes of one player’s decisions are dependent upon the decisions of other players and
vice versa
• Therefore, players need to take account of others’ decisions in making their own decisions if
they have an interest in the outcomes and are to influence them accordingly.
There are two branches of game theory.
• Cooperative theory assumes that communication and binding (enforceable) agreements can be
secured between players, everyone shares the same objectives and is interested in the
collective good – coalitions or groups of players are analyzed
• Non-cooperative theory makes no such assumptions – it is concerned with situations where
individuals are assumed to have self interested motives.
The object in game theory is usually to identify equilibrium outcomes to particular games. Equilibrium is
a proposed solution of a game – it is a combination of strategies that are believed most likely – so, in
fact, they are predictions.
Refer to the note given in the study guide (Page 74 to 83)
Strategy
What is strategy?
The pattern or plan that integrates an organization’s major goals, policies, and action sequences into a
cohesive whole. (Mintzberg)
Mission Statement
Mission statement is a general declaration of the overarching purpose of the business, and is closely
related to the culture of the organisation.
Objectives
Objectives should be Specific (should say exactly what it is), Measurable (should be able to measure it),
Achievable, Realistic (should not be an over statement of the founders or the companies vision) and
Time bound (a time frame has to be there – 3 years, 3 months etc.)
Therefore we say objectives should be SMART.
According to Peter Drucker search for one right objective is not very effective in reality. According to
Drucker focus on profit as the only objective may endanger the survival of the organisation itself by not

5. focusing on the long term. Peter Drucker put forward eight areas which the managers could use to
focus on in terms of setting objectives.
- Market standing
- Productivity
- Physical and financial resources
- Profitability
- Manager performance and development
- Worker performance and attitude
- Public responsibility
Strategy formulation
The formulation of a business strategy is similar to that of the general decision making process.
Strategy makers first need to be aware of the current situation of the organisation as well as the
external environment.
All possible strategies need to be identified and then evaluated.
The best strategy then has to be chosen.
A plan of action needs to be devised to implement the strategy.
Monitoring and adapting of the strategy
Characteristics of strategic decisions
• Strategic decisions are likely to be concerned with or affect the long term direction of an
organisation.
• Strategic decisions are normally about trying to achieve some advantage for the organisation,
e.g. over competition.
• Strategic decisions are likely to be concerned with the scope of an organisation’s activities: does
(and should) the organisation concentrate on one area of activity or should it have many?
• Strategy can be seen as the matching of the activities of an organisation to the environment in
which it operates.

6. • However, strategy can also be seen as building on or ‘stretching’ an organisation’s resources and
competences to create opportunities or to capitalise on them.
• Strategies may require major resource changes for an organisation.
• Strategic decisions are therefore likely to affect operational decisions.
• An organisation’s strategy is affected not only by environmental forces and resource availability,
but also by the values and expectations of those that have power in and around the
organisation.
Analysing the environment
SWOT Analysis
SWOT refers to Strengths, Weaknesses, Opportunities and Threats. S and W are internal factors while O
and T are external factors. Organisation has complete control over S and O while the organisation has
limited control over O and T.

7. Boston Consultancy Group Matrix
This tool also allows a business to direct its business strategy. This looks at the products of a business
from two angles, market share and growth. This can also be a framework about short term profitability
and long term sustainability.
Different businesses will have different cash flows and thus the organisation would require a well
balanced portfolio of such businesses to ensure longevity and survival. According to the model, the
strategic approach towards dogs is to disinvest or withdraw since the earnings will be low and there
would be no improvement in profits. Stars are good prospects and require investment to enable future
growth. Problem children have the potential to become stars but can also turn into dogs if not handled
properly. Cash cows are presently in a strong position and there is not much need to spend money on
them. However, the good cash flows from cash cows should be invested in stars and at times in problem
children.
The BCG-model has been criticised over the by researchers. Day (1986) is of the opinion that such a
model is not designed for developing new business opportunities and also tends to inhibit creative
thinking. According to Gelderman (2003), the strategic recommendation for dogs is too drastic,
especially in the context of mature markets with slow growth rates. The validity of the model’s
fundamental assumptions about the relationship between market share and profitability has also been
questioned (Jacobson and Aaker, 1985).
Strategic management literature advocates the matching of competitive strengths with environmental
opportunities for optimum resource allocation (Eng, 1999). The business and product portfolio concepts
have been a natural extension of this thinking, where a common feature of most portfolio models is that
one axis represents the environment and the other represents the organisation’s capability (Brown,
1991). Thus, the business and product portfolio models encompass three components of strategy
(Barney and Griffin, 1992). These are:

8. • However, strategy can also be seen as building on or ‘stretching’ an organisation’s resources and
competences to create opportunities or to capitalise on them.
• Strategies may require major resource changes for an organisation.
• Strategic decisions are therefore likely to affect operational decisions.
• An organisation’s strategy is affected not only by environmental forces and resource availability,
but also by the values and expectations of those that have power in and around the
organisation.
Analysing the environment
SWOT Analysis
SWOT refers to Strengths, Weaknesses, Opportunities and Threats. S and W are internal factors while O
and T are external factors. Organisation has complete control over S and O while the organisation has
limited control over O and T.