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Engineering Economics and Financial Accounting (EEFA) ,
Unit - 01
Managerial Decisions - By C.R.SANKARAN
Yr / Sem / Dept - III / 5 / IT
Managerial Decision Making - People in organizations all over are concerned with making decisions.
More so if one is manager. Decision making is a complex process. Decisions are more based on the goals
and objectives of the business.Where the goals and objectives are specific and well defined, there decision
making is relatively an easy and comfortable job. Decision making is with: process of selection of the best
alternative from the available alternative courses of action. Managers see decision making as their central
job because they must constantly choose what is to be done, who is to do it, and when, where and
occasionally even how it will be done. Managers taking decisions must have a clear understanding of the
goals/objectives of their business. Also it is necessary that they should study the pros and cons of each of
the alternative courses of action by which a goal can be reached under the given circumstances. They must
know the limitations and constraints.
They must have the necessary information and the ability to analyze and evaluate alternatives in the light
of the goal sought. They must have a desire to arrive at a solution by selecting the best alternative that
satisfies the goal achievement. The managerial decision problem may have several alternative solutions.
The decision problem may pertain to any of the following:

Whether to manufacture product A or product B

Whether to drop product X and in its place introduce a new product Z

Whether to increase 'the price or reduce it to increase the sales revenue for a given product or
service

Whether to accept the export order or not at a reduced price

Whether to acquire machine X or machine Y

Whether to use capital intensive production process or labour intensive method of production and
so on.

whether to promote employee X or employee Y to the higher position in the organization?
Every firm faces managerial decision problems and every firm may find several alternative solutions
available. The firm should identify the alternatives available, collect the necessary information, evaluate
each alternative carefully based on the available information and ranks the alternatives in order and
choose the best alternative among the available alternatives. There are certain fundamental principles or
concepts that are all pervasive in managerial decision making and the knowledge of the concepts will help
in taking the right decisions.
Basic Concepts in Decision Making - The managers, irrespective of levels in the organization, profusely
apply the following concepts in the process of taking decisions:
1. The Opportunity Cosi Concept: - Opportunity cost refers to the value that must be foregone in using a
resource for one specific purpose or in undertaking one specific activity. In other words, it is the value of
the next best/alternative sacrificed. It arises because of the fact that resources are scarce. A resource that is
used for one purpose cannot be used for something else at the same time. Suppose Amar gets a job offer of
Rs 2,60,000 per annum in an exporting company after completing his B.Tech. If Amar wants to do MBA
and turns down the job offer, the opportunity cost of doing an MBA for Amar is the salary foregone for
two years.
2. The incremental concept: - When we consider changes in the level of output or costs or incomes,
incremental concept is referred to. How much is the additional cost incurred for an additional volume of
10,000 units? If i have to earn an additional income of say Rs 2,00,000, how much more should I produce?
These are the cases where incremental concept is made use of.
3. The Discounting Principle: - The process of converting the future cash flows into their present values
is called discounting. Suppose a firm will be receiving Rs. 10 000 at the end of one year from now, what is
its present value? The present value of Rs 10,000 received at the end of one year from now is determined
based on the discount factor (also called present worth factor). There are ready made tables that specify
the present value of a rupee receivable at the end of a given period based on given discount rate. At a
discount factor of 10 per cent, the present value of Re 1 is 0.9091 and hence for Rs 10,000 receivable at
the end of one year from now, it is Rs 9 091.
4. The Concept of Time Perspective: - Money can earn a certain interest rate through its investment for a
period of time, usually one year. This implies that a rupee received at some future date is not worth as
such a rupee in hand at present. It is the relationship between interest and time that leads to the concept of

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Engineering Economics and Financial Accounting (EEFA) ,
Unit - 01
Managerial Decisions - By C.R.SANKARAN
Yr / Sem / Dept - III / 5 / IT
the time value of money and this is based on the time perspective. In other words, time value of money
refers to equal rupee amounts at different points of time which do not have equal value if the interest rate
is greater than zero. All the recurring deposits, fixed deposits in the bank operate on this principle.
Steps in the Decision Making Process
Once the objectives or goals of the firms are clearly known. The decision making process starts. The
following are the essential steps in the decision making process:
a) Identify the Problem: - If the problem is not identified correctly, any solution to a wrong problem may
create more problems. The problem once identified must be defined and formulated. Then diagnose the
problem and check up how urgent it is to reach the solution. In other words, assess how costly is the
problem likely to be if it is not solved and how expensive is the solution. Severe immediate problems are
not given serious attention and with the result they are not diagnosed systematically and extensively. On
the other hand, milder problems are given relatively higher attention.
b) Collect Necessary and Relevant Information: - In order to determine the scope and the root cause of
the problem, necessary information must be collected. For example, if the firm is losing its market share,
then external variables about the economy, availability of disposable income, competitors' promotional
techniques such as advertising, trends in people's tastes and attitudes,etc.,can be studied through published
reports or through surveys conducted by the firm and the effects of these variables can be studied on the
internal variables of cost, quality and promotion of the-given project. The relevant and timely information
will help the manager in taking the right decision and enable him to contribute optimally to the realization
of the goals of the firm. Excessive information is costly and inadequate information will not help the
manager in taking the right decision. The information must be relevant, adequate and timely.
c) The Collected Information is Subjected to a Systematic in-depth Study: - The quality of the
decision depends upon the quality and preciseness of information. The information about the decision
problem must be as accurate as possible. This helps in diagnosing the problem properly and in finding the
very cause of the problem.
d) Identifying resources and Constraints: - Before the efforts are made to solve the problem, a manager
must critically evaluate the resources available for use in reaching the solution and also find out what
could be the possible constraints. There may be difficulty in finding a solution to the problem due to these
constraints. The problems with no resource constraints are the easiest to solve. The manager must take
into consideration the resources and constraints, that are relevant to the decision problem. For ex- ample,
the problem may be how to increase sales revenue in rupee terms. Sales revenue can be increased by
increasing the prices but highly competitive market may be the constraint. If the price is increased,
customers may be lost to the competitors and sales quantities may decline and the sales revenue may fall
drastically instead of increasing. When there are a large number of firms supplying the product, it will be
difficult for the firm to increase the price. The solution may be found in cutting the costs and in expanding
the sales in physical units without increasing the price. The resource available to the firm include time,
money, human resource, expertise, materials and information. In other words, the other resources may be
men (managerial skills and qualified staff), money, machinery (technology) and materials. The optimal
allocation of these resources is essential for effective decision making.
Development Criteria for Choosing the Best Course of Action:
Criteria are generally developed so that the alternative courses of action can be compared against a set
standard and should be established as early in the decision malting process as possible so that alternatives
that do not measure up can be discarded or omitted. This enables to design different courses of action and
the best can be selected. While selecting the best course of action, the objectives of the firm should be
borne in mind. The solution should not go against the very objectives or goals of the firm.
1. Generation and Development of Alternatives: Once the problem is diagnosed, all possible solutions
to the decision problem must be considered. One of the most significant steps in decision making is to
develop alternatives. Every decision problem requires a solution. There are alternative choices to any
course of action. If we think of only one course of action clearly we have not thought hard enough. In the
words, the ability to develop alternatives is often as important as selecting correctly from among them.
2. In searching for alternatives, some of the resources that can be drawn up are:

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Engineering Economics and Financial Accounting (EEFA) ,
Unit - 01
Managerial Decisions - By C.R.SANKARAN
Yr / Sem / Dept - III / 5 / IT

The past experience of the decision maker, who may find similarities between the current problem
and previous problems encountered and successfully solved.

Drawing on the experience of experts on technical aspects of the problem-for example, a
production problem can best be solved with the expert advice of engineers and production managers who
have the relevant background.

Considering the responses of the persons who know best, i.e., the ultimate consumers. For
example, many products launched in the market have miserably failed because the consumer opinion has
not been taken seriously. Most firms try a new product as a pilot project to measure the consumer
responses and to elicit consumer opinion before going into full scale production. This can be achieved by
consumer surveys. . .

Evaluating alternatives and selecting the best among the available ones. This is the most difficult
part of the decision making process. Finding the optimal choice requires the consideration of the possible
impact of all alternatives to be made in such a manner that the chosen one will not only meet the
requirements of the objectives but also eliminate the root cause of the problem. Here, a business
economist can render the necessary help to the manager. Certain basic concepts in business economics
will help in evaluating the alternatives. .
Types of Managerial Decisions - The decisions taken by managers can be broadly classified as follows:
(a) Personal and organizational decisions - Personal decisions cannot be delegated whereas
organizational delegations can generally be delegated. Organizational decisions contribute to the
achievement of personal goals. Also personal decisions affect the future of an organization. Imagine that
you are a regional manager of a nationalism bank, for some personal reason, you want to resign from your
job. This decision may affect the bank. Hence there is always conflict between organizational goals and
personal goals. 'The main duty of the manager is to integrate personal and organizational goals .
(b) Basic and routine decisions Basic decisions are strategic, unique in nature and one-time. They set the direction for the organization as
a whole. They involve a commitment of huge funds for relatively long periods. Where should the plant be
located? What should be my organizational structure? to how much increment in wages can I agree while
negotiating with the workers and what would be the total commitment for the origination? It is the
responsibility of the top management to get involved in taking basic decisions.
Routine decisions - deal with everyday issues such as fixing the daily production targets, appointing a
new worker on the shop floor, the geographical area is to be assigned to a given sales person and so on.
Routine decisions are highly repetitive. Managers at different levels keep taking some routine decisions
day in and day out. Routine decisions individually may not affect the organization, but when viewed in
total perspective, they determine the success or failure of the organization. If there are 100 decisions taken
in an organization in a given time frame, 90 percent of them constitute routine decisions.
(c) Programmed and non-programmed decision
Programmed decisions are routine and repetitive in nature and are handled through structured or standard
operating procedures. How does an Automatic Teller Machine ( ATM ) of a bank operate? It asks you a
series of standard questions and if you answer all these questions correctly, you can draw cash or carry out
a particular transaction.
non-programmed decisions are unique and less frequent and require managers to use their discretion and
judgement. For instance, whether to sanction a housing loan to an applicant or not? Though the loan
sanction procedures are standardized, such decisions still call for managerial judgement and discretion
judgement to decide on the merits of each case.
Classification Based on Degree of complexity and Outcome Uncertainty
The following questions are raised to classify the managerial decisions based on complexity and outcome
uncertainty:
(a) How complex is the problem in terms of factors associated with it?
(b) What is the degree of certainty associated with each of the outcomes?
Based on the answers to the above questions the managerial decisions can be classified into:
(a) Mechanistic decisions - If a decision is a routine and repetitive in nature, it is called mechanistic
decision. Here the number of variables in decision making is relatively limited. There are clear cut

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Engineering Economics and Financial Accounting (EEFA) ,
Unit - 01
Managerial Decisions - By C.R.SANKARAN
Yr / Sem / Dept - III / 5 / IT
alternatives for taking mechanistic decisions and each alternative has a well defined outcome. If I know
how many computers get sold in a computer exhibition (from my experience, 1 have been participating in
the industrial exhibition for the last one decade), I can work out how to procure these computers, seeks
bank finance to support this activity. Normally, employees are, used to provide mechanistic decisions over
a period of time. The process of taking mechanistic decisions can be standardized through a check list,
flow chart matrices or decision trees. Mechanistic decisions have a low degree of problem complexity and
a relatively low degree of outcome uncertainty. In other words. they are easy to handle with high degree of
success.
(b) Analytical decisions - Analytical decisions are complex in nature as they have a large number of
decision variables. But the outcome of each alternative can be computed. Problems pertaining to
engineering, production,maintenance, project management, fall under this category.these are complex in
nature, yet, they can be solved. Operations research and Management Science provide an array of tools
and techniques such as linear programming, inventory models, queuing theory, PERT/CPM to determine
optimal solutions. Analytical decisions have a high degree of problem complexity and a relatively low
degree of outcome uncertainty. In other words they are complex but can be solved.
(c) Judgmental decisions - Where there are a limited number of decision variables and each decision
alternatives has unknown outcomes, it is called a judgmental decision. Managers take judgemental
decisions while dealing with problems in most of the functional areas of management such as personnel,
marketing, R&D,etc. Judgmental decisions call for sound judgement to optimize their impact on
organizational performance. The outcome uncertainty is relatively high accompanied by lower degree of
problem complexity.
(d) Adaptive decisions - Where there are a large number of decision variables with a lot of uncertainty
over the outcome, it is a case of adaptive decisions. Even managers find it difficult to reach consensus on
decision strategies. Such decisions cannot be structured for easy solutions. Managers of diverse technical
skills are normally required to handle such decisions. Adaptive decisions are so sensitive that they are very
much affected by the external environment. Even implementation strategy needs to be appropriately
changed with every development in the external environment.
Decisions Classified Based on Degree of Certainty of Outcome - Managers may not have complete
knowledge about decision alternatives as in case of adaptive decisions with high problem complexity or
about outcome uncertainty..
Types of managerial decisions
Adaptive decisions (such as Long-term
corporate planning)
Judgmental decisions (such as marketing,  It involves a large number of
sales promotion, investment and other staff decision Variables Where there is a
relatively high degree of uncertainty.
recruitment)
 Here problems have limited number Of  Problems cannot be structured.
 It may require the skills and
High decision variables.
 Outcomes of decision alternatives are contribution from managers of diverse
unknown.
technical background. Highly sensitive
 Require sound judgement to maximize to the new developments in technology
the possibility Of desired outcomes
and external environment.
Outcome
 Managers may vary in their approach
uncertainty
to understand the nature of such.
Mechanistic decisions (day-to-day routine Analytical decisions (complex problems
and scheduled activities)
in the areas of production, finance and
 Routine and repetitive in nature
other areas)
 Limited number of decision variables
 Involve a large number of decision
variables
Low  The outcome of each alternative is clear
 Can be solved through structured  The problems are complex but can be
solutions
solved through operations research
 Charts, lists, matrices, decision trees are techniques such as linear programming,
network analysis, queuing theory, etc.
the tools to simplify mechanistic decisions
High
Low Problem complexity

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Engineering Economics and Financial Accounting (EEFA) ,
Unit - 01
Managerial Decisions - By C.R.SANKARAN
Yr / Sem / Dept - III / 5 / IT
Decisions under certainty: - When the manager knows clearly about the precise outcome associated with
each of the alternatives, then he is said to take decisions under certainty.here the probability of outcomes
is assumed to be equal to one. In such decisions, the manager's responsibility is to identify the alternatives
for a given problem and select the best alternative that gives maximum return or minimum cost. The scope
to take decisions with certainty is relatively low because the business environment is initially uncertain
and it is very rare to have precise knowledge about the outcomes of each alternative for a given problem.
Decisions Under Risk: - A manager is said to take decisions under risk when a single action may result
in more than one potential outcome. The manager can determine the relative probability of each potential
outcome. For instance, if I want to sell a product for Rs.50, there are two alternatives here. The product
may get sold or may not yet sold. The probability of a sale is saying 60 percent and not getting sold is 40
per cent. Decisions under risk are the most common decisions the managers are entangled within their
routine. For instance,

The quality manager wants to know the probability of number of rejects per production run. .

The industrial relations manager wants to know the probability of employees calling off a strike,
the finance manager is interested in the probability of obtaining the sanction of loan from a bank.

The R&D mannerly interested in ascertaining the probability of striking gold though the new
patent.

The employees are interested in knowing about the probability of getting the salaries on time.

The principal of the college insists on knowing how many students will turn out to be
entrepreneurs in case they are given special inputs on entrepreneurship and its associated risks and
returns.

The students are interested in the probability of securing a job through the campus selections.
Thus, decisions under risk are the most common feature of our day to day life also.
Decisions Under uncertainty:- In uncertainty, a single action may result in more than one potential
outcome but the manager has no scope to identify the probability of each potential alternative. It is
because there may not be any evidence of past data in support of happening or non- happening of a given
event and making decisions under conditions of uncertainty is a very complex task. The managers have to
consider a large number of factors and several of them are uncontrollable and thus enhance the complexity
of the problem. Uncertainty arises when it is difficult to predict changes and to estimate accurately the
likelihood of events including possible profit and losses. in many cases, manv management decision are
based on uncertainty as the circumstances do not repeat themselves and there is little past data available to
guide. Launching a new product, and committing huge sums for R&D are a few cases of decisions where
the managers have to work more on the merits of the case or by intuition rather the any reliable
information available. Most of the times, the managers have to weigh and evaluate several factors
associated with the decision and reach a probable solution for the given problem.
Techniques Used in the Process of Decision Making
1. Brain Storming : - this is a technique used to generate as many ideas as possible from a given group of people
on a selected problem. Normally, the members of the group are the employees of the same firm or outside experts
in a particular field. The idea is that when people interact freely, they will generate creative and practical ideas.
Brainstorming provides a platform for discussion and spontaneous thinking. The larger the ideas generated, the
larger is the possibility to arrive at an acceptable solution for a given problem. Brainstorming technique is widely
used in both the academics and industry despite the fact that it is costly and time consuming.
2. Synectics: - this is a Greek word that means 'the fitting together of diverse elements' . The main idea of synectics
is to stimulate novel and even bizarre alternatives through the joining together of distinct and apparently irrelevant
ideas. Synectics group contains members of different backgrounds and training. An experienced leader plays an
effective role in leading synectics group. He gives a problem to the group and allows them to react. After the nature
of the problem is thoroughly reviewed and analyzed, the group leader facilitates a shift from the conventional
thinking to visualizing the problem from a totally pew perspective. In this process, the members drop their
traditional or conventional mindset and try to see the problem from different viewpoints. The group leader makes
use of techniques such as role playing, analogies paradoxes metaphors and thought-provoking exercises. These
induce fantasies arid novel ideas that will modify the existing thought pattern of the members and generate new
ideas and alternatives for the given problem. Synectics is a time consuming and costly expertise.
3. Creative Thinking: - One needs to be creative to generate as many alternatives as possible to a given problem.
Particularly in research and development, the need for creative thinking need not be overemphasized. Effective

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Engineering Economics and Financial Accounting (EEFA) ,
Managerial Decisions - By C.R.SANKARAN

Unit - 01
Yr / Sem / Dept - III / 5 / IT

managers need to be both analytic and creative both at conscious and subconscious levels to seek both individual
and group involvement in generating alternatives. The following stages in the creative process are normally
evident among the managers involved in creative thinking :
Stage
Type
Behaviours
Saturation - after investigating problems in all directions, the manager
is fully familiar with its nature, causes and effects
Deliberation - the manager at this stage keeps on thinking and
Preparation
Conscious
rethinking over theses ideas, analyzing and challenging them, viewing
them from different directions.
Incubation - here the managers relaxes, turning the problem to the
unconscious mind.
Latent period Unconscious
Illumination - here the manager comes out with a possible answer dramatic, perhaps offbeat, but fresh and new.
Verification - here the manager expresses the idea, tests it against the
correction of appropriateness.
Presentation
Conscious
Accommodation - at this stage, the manager tries for the solution out on
other people and other problems.
4. Operation Research Techniques - Management science and operations research contain a host of very useful
techniques such as linear programming, payoff matrix, simulation, decision trees; queuing theory, network analysis
etc. All these techniques are much used to evaluate the given alternatives for a problem. Enterprise Resource
Planning (ERP) packages from leading software giants such as Oracle, SAP,Baan and other IT firms are extremely
useful to evaluate alternate scenarios.
Can vision Making process be Made more effective - Most of the managers tend to the serious task of decision
making very lightly. The following are the likely reason for this attitude. It is also explained how such problems
should be dealt with.

The following barriers turn out design making process more challenging.
1. Evaluating before investigation - The tendency to evaluate the alternatives before investigating into their pros
and cons will invalidate the evaluation exercise.
2. Equating new and old experience - Most of the managers are impatient and the moment new idea is given, they
try to equate new and old experiences and jump to conclusions. Give a trial to new idea and check for the results.
3. Ignoring the new and innovative solutions - Most of the managers tend to think of the available alternatives.
They get so much obsessed with the available alternatives they ignore for new and innovative solutions.
4. Dealing with a problem on the face value - Managers quite frequently take it for granted based on the face
value of the problems. They fail to go into the details and ask questions that might illuminate reasons behind the
more obvious aspects of the Problem.
5. Focussing on single goals rather than on multiple goals - goals vary as prob1ems vary. Managers more often
lose sight of this fact. They tend to concentrate their decisions toward a single goal ignoring the fact that most
problems involve multiple goal: to be realised simultaneously.
6. Confusing symptoms and problems - Managers in their tight schedules and hurry to reach solution mistake
symptom itself as a problem. In this process, real problems are ignored and tend to suggest remedial measure to a
particular symptom, not for the whole problem, and investigate into the whole problem by carefully analyzing all
tile symptoms and then try to identify a solution.
7. Overlooking unsolvable problems - the managers tend to ignore difficult-to-solve problems and more often
concentrate only on easy-to-solve problems. Public opinion, customer feedback, employee appraisals constitutes
main sources of information about unsolvable problems. The managers should necessarily keep their eyes and ears
identify such unsolvable problems.
8. Responding automatically or acting before thinking - it is essential that the managerial actions should follow a
deep thinking and analysis of the given problem. When managers tend to response automatically or act before
thinking, the quality of action tend to suffer.
Decision making is a complex process and calls for analytical, logical thinking that cannot be developed overnight.
it is a long drawn process. The managers should be encouraged to attend periodic in-house training programs for
overcoming the above barriers and enhance their decision making skills over a period of time. pro-active
organizations sponsor their junior / senior managers to premier management institutes for executive development
programs as an incentive for their meritorious performance.

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