Decision making is crucial for running a business enterprise which faces a large number of problems requiring decisions such as; which product to be produced, what price to be charged, what quantity of the product to be produced, what and how much advertisement expenditure to be made to promote the sales, how much investment expenditure to be incurred. These are some of the problems which require decisions to be made by managers.
The 5 steps involved in managerial decision making process are explained below:
• Establishing the objective: The first step in the decision making process is to establish the objective of the business enterprise. Basically, the most important objective of a private business enterprise is to maximize profits. However, a business firm may have some other objectives such as maximization of profits but to follow benefit-cost criterion. According to this criterion, a public enterprise should evaluate all social costs and benefits when making a decision whether to build an airport, a power plant or a steel plant.
• Defining the problem: The second step in the decision making process is the one of defining or identifying the problem. Defining the nature of the problem is important because, decision making is for the sole purpose of creating a solution to a problem. For, instance, a cotton textile firm may find that its profits are declining. It needs to investigate the causes of the decreasing profits whether it is the wrong pricing policy, bad labour, management relations, or the use of outdated technology.
• Identifying possible alternative solution: Once the problem has been identified, the next step is to find out alternative solutions to the problem. This will require considering the variables that have an impact on the problem. In this regard, various hypotheses can be developed which will become alternative courses for the solution of a problem.
• Evaluating alternative courses of action: The next step is to evaluate the alternative courses of action. This requires the collection and analysis of the relevant data. The data and information so obtained can be used to evaluate the outcome or results expected from each possible course of action. The optimum solution will be one that helps to achieve the established objective of the firm. The crucial role of a business manager is to determine optimal courses of action and decision making under the legal constraints or financial constraints.
• Implementation of decision: After the alternative courses of action have been evaluated and optimal course of action selected, the final step is to implement decision. The implementation of the decision requires constant monitoring so that expected results from the optimal course of action are obtained. It should be noted that once a course of action is implemented to achieve the established objectives, changes in it may become necessary from time to time in response, in changes, in conditions or firm’s operating environment on the basis of which decisions were taken
