Showing posts with label Decision Making. Show all posts
Showing posts with label Decision Making. Show all posts

Techniques for Improving Decision Making

There may be some common errors and difficulties in decision making. Managers need to avoid these errors and difficulties so as to increase the decision quality and improve the end results. There are two types of decision makings i.e. individual decision making and group decision making. Their brief introduction and ideas for improving quality of decision making are given below: 

a) Improving Individual Decision Making 

Individuals think and reason before they act. Under some decision situations, people follow the rational decision making model. But for most people, and for most non-routine decisions, this is probably more the exception than the rule. Few important decisions are simple or unambiguous enough for rational model's assumptions to apply. So, individuals look for solutions that satisfy rather than optimize injecting biases and prejudices into the decision process, and relying on intuition. For the quality improvement in individual decision making, following points can be taken for the considerations. 

1. Analyze the situation 

Adjust our decision making style to the different situations in which you are operating and to the criteria your organization evaluates and rewards. 

2. Be aware of biases and prejudices

We all bring biases to the decisions we make. If you understand the biases influencing your judgment you can begin to change the way you make decisions to reduce those biases. 

3. Combined rational analysis with intuition 

Rational analysis and intuition are not conflicting approaches to decision making. By using both, you can actually improve your decision making effectiveness. As you gain managerial experience, you should feel increasingly confident in imposing your intuitive processes on the top of your rational analysis. 

4. Don't assume that your specific decision style is appropriate for every job 

Your effectiveness as a decision maker will increase if you match your decision style to the requirements of the job. For example, if your decision making style is directive, you will be more effective working with people whose jobs require quick actions. Similarly, an analytic style on the other hand, would work well managing accountants, market researchers, or financial analysts. 

5. Try to enhance your creativity 

Openly or clearly look for novel solutions to the problems in new ways and use analogies. Additionally, try to remove work and organizational barriers that might hamper your creativity. 

6. Others 

Increase information inputs, proper communication, select appropriate timing, increase acceptance and commitment, create supportive environment, change personal negative habits and attitudes, proper reward and punishment system, calculate risk and return etc. for improving quality of individual decision making. 


b) Improving Group Decision Making 

Inspite of problems in group decision making, there are ways to minimize the effect of time constraint, groupthink, group polarization and conformity to peer pressures. Participation, communication, free flow of information, changes of interaction and respect for each individual member in the group are the main factors that lead to improved decision making. Below presented are some important techniques frequently used by organizations in making effective group decisions. 

1. Interacting Group 

Interacting groups are formally created to take a decision on a specific task. In these groups, members meet face to face and rely on both verbal and non-verbal interaction to communicate with each other. Interacting groups often censor themselves and pressure individual members toward the conformity of an opinion. It is the traditional but most common form of group decision making technique. 

2. Brainstorming 

It is one of the most popular forms of interactive group decisions. Under this technique, group members are free to generate different ideas and alternatives to solve novel problems. In other words, interaction is free and open and finally with the accumulation of pooled information and derived judgments, consensus is achieved. It is thus, an interpersonal free exchange and sharing of ideas converted into decision. It is applied during idea generation phase of decision making. Alex Osborn (1953) introduced the concept of brainstorming for the selection of different courses of action. There are different rules for brainstorming which are as follows: 
  • Do not criticize ideas: Members are not allowed to criticize the ideas given by their colleagues during brainstorming. 
  • Provide as many ideas as possible: Another rule for brainstorming is collection of ideas from as many members as possible. All the presented ideas are noted down for further discussion.
  • Speak freely: Every member is free to put ideas no matter how wild they are. The only thing is that ideas are presented without any sort of hesitation. 
  • Build on the ideas of others: Members should build on the different ideas provided by group members. This is the synergy process where ideas are to be modified and simplified by adding others' ideas. 

3. Nominal Group Technique 

The nominal group technique (NGT) was developed to gain the benefits of group participation. This is a structured technique for making decisions where members are invited and familiarized with problems or issues to be solved. Using this technique, members carefully listen and study the problems and they are given 5 to 10 minutes of time to work independently to generate and write down their ideas. Then they describe and clarify their ideas to other group members. To reach in an agreement, there will be voting. 

4. Electronic Meeting 

It is the group decision making technique designed to help decision-making in groups to reach a decision through an interactive, computer based system allowing members for anonymity of comments and aggregation of votes. Issues are presented to the participants and they type their responses onto their computer screen. Individual comments as well as aggregate votes are displayed on a projection screen in the room. 

The major advantages of electronic meetings are anonymity, parallel communication, honesty and speed. Participants can anonymously type any message they want and it flashes on the screen for all to see at the push of participant's keyboard. It allows people to be brutally honest without penalty. And it is fast because chitchat is eliminated, discussions are not digressed and many participants can talk at once without stepping on one another's toe. The future of group meetings undoubtedly will include extensive use of this technology. 

5. The Delphi Technique 

This technique was originally developed by Rand Corporation in the late 1940s to predict the demand for manpower in the organization. Using this technique, a series of questionnaires is distributed among experts for filling in who work independently and avoid any sort of face to face discussions. An intermediary establishes contracts with these experts and accumulated questionnaires. The main jobs of the intermediary are to collect and summarize responses along with the follow-up questionnaires. The panel members again send back their responses. This cycle is repeated until a convergence is reached for with final decision making. 

Delphi Process or Steps 

Step 1: A series of questionnaire is distributed among experts for filling solution independently. 

Step 2: An intermediary establishes contracts and accumulates questionnaires from experts. 

Step 3: Intermediary summarizes the responses and gives feedback to the panel of experts. 

Step 4: New follow-up questionnaires are prepared and distributed again. 

Step 5: Panel of experts again send back their responses. 

Step 6: Same process is repeated again and again until consensus is reached. 


6. The Step Ladder Technique 

This technique of decision making is effective to reduce the potential inhibiting effects of face to face meeting in group. Under this technique, group members are added one by one at each stage of decision making process so that their input is fresh and clear by the previous discussed point of view. The steps involved in this process are as follows: 

Step 1: Two individuals (eg. A and B) are given the same problem to come up with the solutions. They work independently and bring an independent solution to the problem. 

Step 2: Both A and B sit together and develop solution to the problem and meet with another member (eg. C) who had independently analyzed the problem and arrived at a decision point. 

Step 3: A, B and C meet to discuss on the problem and arrive at a consensus decision, and they are again joined by another member (eg. D), who has independently analyzed the problem and arrived at a decision. 

Step 4: A, B, C and D sit together, discuss on different solutions and make the final decision.


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Public Administration, Public Policy Making and Policy Analysis

There is no such definition of public policy analysis which is accepted or agreed by all academicians or practitioners, research scholars and other concerned as public administration. So, it means there is no single definition of Public Policy Analysis (PPA), which covers the whole range of the study. The most appropriate way is to define the terms Public, Policy and Analysis separately so as to get the clear concept of PPA.

Public

Public means government. So, the focus or attention of this regard is on the governmental actions, but now activities of private and semi-governmental like corporations also come under the boundaries of the public administration. However, public, here means governmental action. Governmental actions are always complex, interdependent and multifaceted as compared to private. For example, the governmental actions like health and education and agricultural production are interdependent.

Policy

Policy is what government says; do or do not do. It indicates the goals or purpose of the government programs. For example, to eliminate poverty, to train human resources etc. Policy is an important ingredient of the programs. Policy cannot be implemented without effective programs.

Policy can be defined as a purposive course of action followed by an actor and factor (government institutions or agencies) or a set of actors while dealing with the problem. Policy without implementation is meaningless.

Policy may be:
  1. Implicit, covert, unstated, latent
  2. Explicit, overt, stated, apparent
1. Implicit Policy: Implicit policies are those policies, which are open to those only who are intimated familiar with programs. Sensitive issues like defense, finance, foreign etc. are the growth of the discipline of public administration.

2. Explicit Policy: Explicit policies are those policies which are open to all the form of constitution, laws, by-laws, rules and regulations, speeches of the leader or top-executive officials in the programs.

Policy (once made is not forever) with the change of time and environment policies have to be changed. Change in policy can be made overtly. Through proposing new policy agenda and taking the responses or opinions of concerned agencies and individual and sometime policies are changed in light of the emergency issues modified to adjust the situation. Sometimes, it may be totally scrapped.

Covertly made like a changes made by a chief executives. For example, policies orientation of the national sports council is to promote sports activity throughout the country whereas during the Panchayet period, the policy orientation was against the actual spirit of the council.

Analysis

Analysis is the process of evaluating and measuring the impact of any particular policy by using appropriate scientific tools and techniques. They help to determine the efficiency and effectiveness of the impact of particular policy.

Analysis means measuring and evaluating the impact of a particular policy. Analysis demands the application of objective and scientific tools and techniques to assess the impact of policy. The objective is to determine the effectiveness and efficiency of the impact of particular policy. Analysis is the concern only after the policy has been implemented. Analysis is to require to know the projected consequences of policy. In addition, analysis is required to measure the impact of a particular policy and also to understand the policy making process.

Another definition of Thomas R states that “Public policy is whatever governments choose to do or not to do.” There is a rough accuracy of this definition.

In its simplest term, policies developed by the governmental bodies and officials (non-governmental actors and factors may of course, influence policy development). According to David Eston, "Public policy stem from the “authority” in a political system, namely elders, paramount important person, chiefs, executives, legislator, judge, administrators, councilors, monarchs, and the like."

Policy without analysis will be like schooling in the darkness


First, public policy is purposive or goal oriented action rather than random or choice behavior is our concern. Public policy in modern political system are not, by and large, things that just happen.

Second, policy consists of course or pattern of actions by governmental officials rather than their separate, discrete decisions. For example, policy involves not only the decisions to enact a law on some topic but also a subsequent decision relating to its implementation and enforcement.

Third, policy is what governments actually do in regulating trade, controlling inflation or promoting public housing, not what they intended to do or say they are going to do.

Fourth, public policy may be either positive or negative in form. Positively, it may involve some form of the government action to affect a particular problem and negatively, it involves a decision by government officials not to take action, to do nothing on some matter or which government involvement is sought.

Lastly, public policy is making never easy; it requires a high sense of responsibility and a willingness to take the initiative as well as to assume risks. There are many other difficulties as well as complete information is unobtainable. The evidence is rarely conclusive; different interest urge different course of action, outcomes are unknown, feedback is irregular, and processes are not properly understood, not even by the participants.

Various types of Policies

Generally, we find six types of policies and they are;
  1. Substantive Policy
  2. Regulatory Policy
  3. Distributive Policy
  4. Redistributive Policy
  5. Capitalization Policy
  6. Ethical Policy
1. Substantive Policy: These are concrete policies which take into account the general welfare and development of the society. It deals with the society as a whole and not with any particular or privileged segments of it. It deals with economic stabilization, education and employment opportunities to all irrespective of caste, color, sex or breed, measures of safety, law and order enforcement, pollution and adulteration eradication etc. in broader term, these policies deals with the stable society living in the inhabitants in a given political system.

2. Regulator Policy: Regulatory policies are those where the trade, business, safety measure, public utilities etc. are regulated by independent organizations having legal personality. These corporations and organizations work on behalf of the government financial autonomy to these organizations. The various example of such organizations or corporations in Nepal are insurance corporations, water supply corporations, electricity authority, transport corporations, financial institutions etc.

3. Distributive Policy: Distributive public policies include all public assistance and welfare programs to society. These differ from the substantive policies as those are for whole of the society but the distributive policies are meant for specific segments of the society. These deal with grant of goods, public welfare and health services. These include policies like sterilization for family planning purpose, vaccination of the children, food relief etc.

4. Redistributive Policy: The prime motive of the redistributive policies is to rearrange the basic programs of the social and economic aims. The rescheduling with the enactment of public policies is made in such a manner whereby the rich have to pay more as taxes in comparison to the poor, certain public goods and welfare services are inappropriately divided among service segments of the society by the distributive policies is also made through the enactment of redistributive policies.

5. Capitalization Policy: Capitalization policies are different than other policies. Under these policies, subsidies are given by the central government to the regional, districts and local level authorities. Sometimes subsidies pertaining to some other important spheres, are also given by the central government. Policies regulating such like issues are known as capitalization public policies.

6. Ethical Policy: Moral and ethical values of the citizens play a significant role in shaping the destiny of a nation. It is not the gold and silver which make the country great but it is always a human beings which establish the greatness of their country by virtue of certain ethical principles. Ethical public policy is separate category from the regulative policies of law and commerce. It is well known fact that corruption is rampant these days and it won’t be wrong to say that is at its peak now. The major reason for it are lack of effective public opinion, improper education and awareness among the masses.


Policy Implementation

Often the policies require some action of execution and implementation. The implementation process has certain activities working within it such as issue and enforcement of directives, funds instruments, loans and grants sanction, gathering and assigning on information, roles and duties assignment among the personnel engaged in implementing.

Administration or Bureaucracy

Most of the activity surrounding policy implementation takes places within administrative or bureaucratic agencies. The implementation of policies is largely done by the bureaucrats as they have control over the resources and legal powers of the government though the bureaucrats and the officials are supposed to carry out the policies on the lines told by the political executives but bureaucrats use their own discretion in implementing a policy decisions. Hence administrative agencies are the primary implementer of public policy. Many other actors may also be involved and they are the legislature, court, pressure groups and community organizations. They may often directly involved in policy implementation or act to influence administrative agencies, or the both.

The Legislature

The administration and implementation of public policy is also made by the legislature. If the policy initiated in the legislature is enacted by the legislature in full details, it would leave little choice with the administrative agencies and bureaucrats for implementing it in their known way. It sounds more logical in democratic political system that the policy should be discussed and questioned in detailed manner by the duly elected representatives of the people. But in actual practice, the work load of legislature has increased upto such an extent that they normally not find enough time, technical expertise to deliberate on these issues.

The Court

The court also implements some of the policies. Normally, it happens when policy is not clearly worded or different interpretation of a policy could be taken up. In such cases, the court gives its verdict and whatever is decided, the court is normally considered final unless the legislature again legislates on that.

Interest Groups

Since the legislature through delegated legislation leaves certain point to be filled in the broad framework of the policy by the administrative agencies, the group struggle shifts from the legislative to the administrative areas. Therefore, when interest groups face unsuccess at the time of policy making, the legislature exercise their influence over the administrative agencies for implementation of those points in the manner which suits the interest of these groups.

Community Organization

Communities have sometime been used for the administration of the government programs. Most common examples are; farmers committees for water, soil conservation, forest conservation etc. Such agencies are also considered important means of enlisting or encouraging people’s participation so as to strengthen the involvement of local people particularly unorganized group. In short, a variety of participants affects the administration of a given policy.

Decision Making

“Decision making is a bridge between thought and action. It is a course of action consciously chosen from among the available relevant alternatives for the purpose of achieving desired objectives.” Manager sometimes see decision making as their central job because they must constantly choose what is to be done, who is to do it and when and where and occasionally even how it will be done. Thus, the power to make decision has been correctly identified with the power to manage.

There are three types of decision which may generally be necessary in organizational settings and they are;
1. Policy decision: They set forth goals and lay down principles covering the conduct of organization.
2. Administrative decision: They translate policies into action and determine means to be used.
3. Ad hoc decision: They are made as and when necessary basis wherever particular cases come up at the point where the job is carried out.

Rationality and Decision Making

Complete rationality can never be achieved, particularly in the area of managing. First, decisions are not for the past but for the future, and the future almost invariably involves uncertainties. Secondly, all the alternatives that might be followed to reach a goal can hardly be recognized, particularly true to do something that has not been done before. Moreover, not all alternatives can be analyzed even with the newest available analytical techniques.

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Buying Center and Types of Buying Center

Meaning of Buying Center

Buying center is the decision making unit of a buying organization. It is composed of all the individuals and units that participate in the business decision-making process. The buying center includes all members of the organization who play a role in the purchase decision process. They share common goals and the risks arising from the decisions. The members includes the actual users of the product or service, those who make the buying decision, those who influence the buying decision, those who do the actual buying and those who control buying information.

The members of the buying center or decision-making unit of the organization fulfill various functions and often engage in complex interactions, both among themselves and with outsiders such as salespeople and suppliers.

Types of Buying Center

The buying center includes all members of the organization who play any of seven roles in the purchase decision process.
  1. Initiators: Initiators are those people who request that something to be purchased. They may be users or others in the organization.
  2. Users: Users are those people who will use the product or services. They are so-called because the work they do in the organization is directly affected by the purchase under consideration. They can range from trainees to executives.
  3. Influencers: Influencers are the people who influence the buying decision. They help to shape criteria by providing useful information. In the complex world of modern business, technical and legal experts often influence buying decisions, although they may have no direct connection with the buying process itself.
  4. Deciders: Deciders are the people who decide on product requirements or on suppliers. They have the final authority over buying decisions. In some cases, they buyer may also be that decider, but in most cases the two roles are performed by separate individuals. For example, engineers have the final say in deciding with suppliers of raw materials to choose.
  5. Approvers: Approvers are the people who authorize the proposed actions of deciders or buyers.
  6. Buyers: Buyers are those people who have formal authority to select the supplier and arrange the purchase items. They can range from the chief of the company to its purchasing agent. They contact suppliers and negotiate business transactions. Buyers often have the power to choose suppliers or to develop lists of suitable suppliers.
  7. Gatekeepers: Gatekeepers are those people who have the power to prevent sellers or information from searching members of the buying center. They can be purchasing agents, salespersons, or secretaries. They control the information flowing into the buying center and they are often the members of the organization who contact suppliers or vendors to solicit a quote for their products.
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Role of Market Segmentation in Marketing Decision Making

Market segmentation is the act of identifying and profiling distinct groups of buyers who might prefer or require varying products and marketing mixes. It is a process of dividing the total market for a good or service into several groups, such that the members of each group are similar with respect to the factors that influence demand. It plays a vital role in marketing decision-making. Market segmentation plays the following roles in marketing decision making. They are:

1. Identification of market opportunities

Without segmentation organization cannot find the needs of customer easily. Organization can identify the market opportunities like most profitable sectors, through well segmentation.

2. Understanding of the customer

A segmentation perspective leads to more precise definition of the market in terms of consumer needs. Segmentation thus improves management’s understanding of the customer and more importantly, why he/she buys.

3. To direct marketing programs

Management, once it understands consumer needs, is in a much better position to direct marketing programs that will satisfy these needs and hence parallel the demands of the market.

4. Strengthen management capabilities

A continuous program of market segmentation strengthens management capabilities in meeting changing market demands.

5. To assess competitive strengths and weakness

Management is better able to assess competitive strengths and weakness of greatest importance; it can identify those segments where competition is thoroughly entered. This will save company resources by forgoing a pitched battle of locked-in competition, where there is little real hope of market gain.

6. Systematic planning

It is possible to assess a firm’s strengths and weakness through identifying market segments. Systematic planning for future markets is thus encourages.

7. Efficient allocation of marketing resources

Segmentation leads to a more efficient allocation of marketing resources. For example, product and advertising appeals can be more easily coordinated. Media plans can be developed to minimize waste through excess exposure. This can result in a sharper brand image, and target consumers will recognize and distinguish products and promotional appeals directed at them.

8. Market objectives

Segmentation leads to a more precise setting of market objectives. Targets are defined operationally, and performance can later be evaluated against these standards.

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Meaning of The Game Theory and Importance of Game Theory

The term ‘game’ represents a conflict between two or more parties. A game is a decision situation with multiple decision makers where each person’s welfare depends on his/her own as well as other individuals’ actions. That is, a game is a decision situation with strategic interactions among all decision makers.

Game theory is a theory of individual rational decisions taken under conditions of less than full information concerning the outcomes of those decisions. This theory examines the interaction of individual decisions given certain assumptions concerning decisions made under risk, the general environment, and the cooperative or non-cooperative behavior of other individuals.

In the words of Richard G. Lipsey and K. Alec Chrystal, “Game theory is an approach to analyzing, rational decision-making behavior in interactive or conflict situation.”

According to N. Gregory Mankiw, “Game theory is the study of how people behave in strategic situations." By ‘strategic’, we mean a situation in which each person, when deciding what actions to take, must consider how others might respond to that action. Game theory is a mathematical technique used to show for example, how oligopoly firms play their game of business.

Importance of Game Theory


Game theory is an analysis that illustrates how choices between two plays affect the outcome of a “game”. Game theory which sounds playful/laughing in its terminology is filled with significance. It has been used by economists to study the interaction of oligopolistic markets, union-management bargaining disputes, countries’ trade policies, international environmental agreements, reputations, conflicts such as games and war and a large number of other situations. Game theory offers insights for politics, warfare, and everyday life as well.
  1. Game theory is commonly used in economics to illustrate interdependent decision-making among oligopoly firms. It illustrates that one firm makes a decision based on the decision expected from the other firm. One key conclusion from the game theory analysis is that firms often make decisions that are “second best” or the “lesser of two evils”. The classic example of such a decision is the prisoners’ dilemma, in which two prisoners both confess to a crime to avoid harsher punishment when not confessing would avoid any punishments.
  2. Thus, game theory has proved to be useful in analyzing suspects of economic behavior such as natural resource depletion and public goods. The theory of cooperative games which allows collaboration between individuals has been used to analyze cartel formation and industrial and labor market collusion.
  3. Game theory is a body of knowledge which is concerned with the study of decision-making in situations where two or more rational opponents are involved under conditions of competition and conflicting interests. It deals with human processes in which an individual decision making unit who can be an individual, a group, a formal or informal organization, or a society, is not in complete control of the other decision making units, the opponents, and is addressed to problems involving conflict, co-operation or both at various levels.
  4. The main objective in the theory of games is to determine the rules of rational behavior in the game situations, in which the outcomes are dependent on the actions of the interdependent players. A game refers to a situation in which two or more players are competing it.
  5. Game theory is quite useful for understanding the behavior of oligopolies. When game theory is applied to oligopoly, the players are firms. Their game is played in the markets, their strategies are their price/output decisions, and the payoffs are their profits. Because the number of firms in an oligopolistic market is small, each firm must act strategically. Each firm knows that its profit depends not only on how much it produces but also on how much the other firms produce. In making its production decision, each firm in an oligopoly should consider how its decision might affect the production decisions of all the other firms.
In summary, a game theory framework can often help us understand the strategic choices available but it does not always help to predict which of many possible outcomes may occur.

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Uses / Significance of Managerial Economics in Business Decision Making

Management is concerned with decision-making. Decision-making needs a balance between simplification of analysis to be manageable and complications for handling a variety of factors and objectives. Managerial economics accomplished several objectives. Moreover, it also needs common sense and good judgment. Managerial economics helps the decision-making process in the following ways:
  1. Managerial economics presents those aspects of traditional economics, which are relevant for business decision-making in real life. It culls from economic theory the concepts, principles and techniques of analysis, which have a bearing on the decision-making process. These are, if necessary, adopted or modified with a view to enable the manager take better decisions. Thus, managerial economics accomplished the objective of building a suitable took kit from traditional economics.
  2. Managerial economics also incorporates useful ideas from other disciplines such as psychology, sociology, etc; if they are found relevant for decision-making. In fact, managerial economics takes the aid of other academic disciplines having a bearing upon the business decisions of a manager in view of the various explicit and implicit constraints subject to which resource allocation is to be optimized.
  3. Managerial economics helps in reaching a variety of business decisions in a complicated environment such as what products and services should be produced? What inputs and production techniques should be used? How much output should be produced and at what prices it should be sold? What are the best sizes and locations of new plants? When should equipment be replaced? And how should the available capital be allocated?
  4. Managerial economics makes a manager a more competent model builder. Thus, he can capture the essential relationship, which characterizes a situation while leaving out the cluttering details and peripheral relationships.
  5. At the level of the firm, where for various functional areas, functional specialists or functional departments exist, such as finance, marketing, personal, production, etc. Managerial economics serves as an integrating agent by coordinating the different areas and bringing to bear on the decisions of each department or specialist the implications pertaining to other functional areas. It thus, enables business decision-making not in watertight compartments but in an integrated perspective, the significance of which lies in the fact that the functional departments or specialists often enjoy considerable autonomy and achieve conflicting goals.
  6. Managerial economics takes cognizance of the interaction between the firm and society and accomplishes the key role of business as an agent in the attainment of social and economic welfare. It has come to be raised that business, apart from its obligations to shareholders, has certain social obligations. Managerial economics focuses attention on those social obligations as constraints subject to which business decisions are to be taken. It serves as an instrument in furthering the economic welfare of the society through socially oriented business decisions.
  7. Managerial economics is helpful in making decisions such as the following: What should be the product-mix? Which is the production technique and the input-mix that is least costly? What should be the level of output and price for the product? How to take investment decisions? How much should the firm advertise and how to allocate an advertisement fund between different media? It has to concede that good decisions require ability to analyze problems logically and clearly.

In summary, the usefulness of managerial economics lies in borrowing and adopting the took-kit from economic theory, incorporating relevant ideas from other disciplines to achieve better business decisions, serving a catalytic agent in the course of decision-making by different functional departments at the firm’s level and finally accomplishing a social purpose through orienting business decisions towards social obligations.
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Characteristics/ Features of Managerial Economics

Different authorities on the subject matter of managerial economics have given differently. However, the following characteristics seem to these viewpoints as:

1. Micro Economic Character

Managerial economics is micro economic in character because it is a unit of study i.e. firm. It only deals the problems of firms but not deal with the entire economy as a unit of study. However, it takes the help of macroeconomic to understand and adjust to the environment in which the firm operates.

2. Choice and Allocation

Managerial economics is concerned with decision-making of economic nature. This implies that managerial economics deals with identification of economic choices and allocation of scarce resources.

3. Goal Oriented

Managerial economics is goal-oriented and prescriptive. It deals with how decisions should be formulated by managers to achieve the organizational goals.

4. Conceptual and Metrical

Managerial economics is both ‘Conceptual and Metrical’. An intelligent application of quantitative techniques to business presupposes considered judgment and hard and careful thinking about the nature of the particular problem to be solved. Managerial economics provides necessary conceptual tools to achieve this. Moreover, it helps the decision-maker by providing measurement of various economic entities and their relationships. This metrical dimension of managerial economics is complementary to its conceptual framework.

5. Pragmatic

Managerial economics is pragmatic. It is concerned with those analytical tools, which are useful in improving decision-making. Economic theory appropriately ignores the variety of backgrounds and training found in individual firms but managerial economics considers the particular environment of decision making.

6. Normative

Managerial economics belongs to normative economics rather than positive economics. In other words, it is prescriptive rather than descriptive. The main body of economic theory confines itself to descriptive hypothesis, attempting to generalize about the relations among different variables without judgment about what is desirable or undesirable. Managerial economics firstly tells what aims and objectives a firm should pursue and secondly, it tells how best to achieve these aims in particular situations.

7. Multi-disciplinary

Managerial economics is related with different disciplines such as Statistics, Mathematics, Management, Operational Research, Psychology etc.
Similarly, managerial economics provides a link between traditional economics and the decision sciences for managerial decision-making.

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Meaning of Managerial Economics 

Managerial economics is an application of economic theories and tools of decision science in solving business problems.

Forward planning and decision making are the two important functions of a business executive. It may be defined as a process of selecting a particular – course of action from among number of alternative courses of action. There would be no scarcity, no price of action and of course no economics whether there is any limitation of resources. But factors of production are limited and can be put in alternative
uses. Hence, questions of choice arise. Decision-making involves making choice or making decision for attaining desired goal. The rationale of good decision-making lies in its capacity to build high result from scare resources. Forward planning means established plans for the future plans for various things that are made like production, pricing, capital, raw material, labor, wage etc.

Managerial decisions are made where the outcomes associated with each possible course of action are known with certainty. All major managerial decisions are made under conditions of uncertainty. The manager must select a course of action from the observed alternatives. Decision making of forward planning is difficult due to uncertainty. The manager may unknown of future sales, costs, profits, capital situations etc. So, that the decisions should be made on the basis of past data and current information as well as future is predicted as accurately as possible.

The managers should confront uncertainty and the main problem is arranging uncertainty, which drives to risk and is the chances, in which expected result might not occur, or there is a chance of loss. The uncertainty area are numerous such as market demand, production cost, pricing, environmental factors, financing and profits which influence revenue, production, use of allocation of resources, spending outlays, profit and create problems in raising capital, pricing, etc.

Due to these, decisions will have to be made in conditions of uncertainty and must formulate plans for the future. In this condition, managerial economics is of considerable help. Economic theory deals with demand, pricing cost, production, composition, profit etc. these concept aided by accounting, statistics, and mathematics help to solve business problems. The economic analysis can be used towards solving business problems constitutes the subject matter of management economics.
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Meaning of Managerial Economics | Difference between Managerial Economics and Traditional Economics

Managerial economics is an application of economic theory and method to practice the managerial decision-making or solving business problems. It uses the tools and techniques of economic analysis to solve managerial problems or to achieve the firm’s desired objectives. So that managerial economics is very important to entrepreneurs in decision making and forward planning of a business.

Managerial economics is economics applied in decision making. It is a branch of economics that serves as a link between abstract theory and managerial practice. It is based on economic analysis for identifying problems, organizing information and evaluating alternatives.

Managerial economics is by nature goal oriented and prescriptive and aims at maximum achievement of objectives. Many economists and thinkers have given various definitions of managerial economics in their words. According to Prof. Pappas and Brigham, “Managerial economics is designed to provide a rigorous treatment of those aspects of economic theory and analysis that are most useful for managerial decision analysis.” They more added that, “Managerial economics is the application of economic theory and methodology to business administration practice. More specifically, managerial economic analysis and solve the managerial problems.”

In the words of Prof. D.C. Hague, “Managerial economics is a fundamental academic subject which seeks to understand and to analyze the problems of business decision making.” This definition states that it should be finalized the business problem for decision-making. 

Prof. Savage and Small defined as, “Managerial economics is concerned with business efficiency, the function of managerial economists being the efficient direction of business organization to make a productive enterprises out of material and human resources.”

In the words of Hynes, “Managerial economics is the study of allocation of resources available to a firm among the activities of that unit.” Managerial economics is the integration of economic theory with business practice for the purpose of facilitating decision-making and forward planning by management.

Most of the definitions of managerial economics is related to decision making are more acceptable. Managerial economics is the science of decision making which provides a link between two disciplines that are economics and business management.

In short, the use of economic theory and methods to analyze and improve the managerial decision-making process combines the study of theory and practice to gain a useful and practical perspective. From both economics and decision sciences, managerial economics provides an integrative and comprehensive framework for solving managerial decision.

Managerial economics links traditional economics with the decision sciences to develop important tools for managerial decision-making. Although managerial economics is comparatively a new subject in the early part of 1950s, it was known as business economics in the beginning. The term of managerial economics gradually has become popular and displaced the business economics.

It is closely related to traditional economics that is based on the theories and principles such as demand analysis, production analysis, price theories and practice, theory of profit and market structure which are the subject matter of micro economic theory. But there is little bit differences between managerial economic and traditional economic theory because managerial economics seeks the help of other disciplines such as accounting, management, statistics, mathematics to get optimal solutions to the decision problems.

The difference between managerial economics and traditional economics can be summarized as follows:
Managerial EconomicsTraditional Economics
  • Managerial economics concerns with the application of economic principles to the problems of the firm.
  • Managerial economics is only microeconomics in character. It studies the problems of a firm but it does not concern with the individual unit. It does not also study the macroeconomic phenomenon.
  • Only the theory of profit is studied in managerial economics. Because it is concerned primarily with entrepreneurial decision and value theory.
  • Managerial economics adopts, modifies and reformulates economic models to suit the specific conditions and serves the specific problem solving process and it also modifies and enlarges it.
  • Managerial economics introduces certain feedback such as objectives of the firm, multi-product nature of manufacture, behavioral constraints, environmental aspects, legal constraints, constraints on resources availability etc. It attempts to solve the real life, complex business problems with the aid of tool subjects, e.g., mathematics, statistics, econometrics, accounting, operation research and so on.
  • Traditional economics deals with the body to the principles itself.                                          
  • But traditional economics consists of both micro and macroeconomics. It studies the individual unit and the economy as a whole.
  • In traditional economics, the microeconomics is a branch under which are studied all the theories of factor pricing such as rent, wages, interest and profit.
  • Economic theory hypothesizes economic relationships and builds economic models and it also give the simplified model.
  • Economic theory makes certain assumptions, thus, embodying a combination of certain complexities assumed away in economic theory.                                                                                                                                                                                                                                                                                 

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Concept of Gain-sharing | Main Features of Gain Sharing | Benefits of Gain Sharing

Gain sharing are a formula-based company or factory wide bonus plan, which provides for employees to share in the financial gains made by a company as a result of its improved performance.

The formula determines the share by reference to a performance indicator such as added value or another measure of productivity. In some schemes, the formula also incorporates performance measure relating to quality, customer service, and delivery or cost reduction.

Gain sharing differs from profit sharing in that the later is based on more than improved productivity. A number of factors outside the individual employees control, such as depreciation procedure, bad debt expenses, taxation and economic changes, contribute to profit. Gain sharing aims to relate its payouts more specifically to productivity and performance improvements within the control of employees. Fundamentally the aim of gain sharing is to improve organizational performance by creating a motivated and committed work force who wants to be part of a successful company.

More specifically, the aims of gain sharing are to:
  • Establish and communicate clear performance and productivity targets. Encourage more objective and effective means of measuring organizational or factory performance.
  • Increase focus on performance improvements in the area of productions, quality, costumes service, delivery and costs.
  • Encourage employees to participate with managements in the improvement of operating methods.
  • Share a significant proportion of performance gain with the employees who have collectively contributed to improvements.

Main features of gain sharing are as following:
  1. Ownership: The success of a gain sharing plan depends on creating a feeling of ownership that first applies to the plan and then extends to the operation. 
  2. Involvement: The involvement aspect of gain sharing means that the information generated on company results is used as basis for giving employees the opportunity to make suggestions on ways to improve performance and by empowering them to make decisions concerning this implication.
  3. Communications: Gain sharing plans all always based on key performance measures such as added value. The company has therefore to ensure that everyone involved knows exactly what are happening in these performances areas. Why it is happening and what can be done about it.
  4. Formula: The traditional forms of gain sharing are the station plan (measures employment costs as a proportion of total sales) the Ruckus plan (similar but a proportion of sales use the costs of materials and supplies) and impression can establish standard). There all however may be variations on these plans based on added value and other performance measure. There is no such thing as a standard formula - there is at all plenty of choices.

Benefits of Gain Sharing:

The potential benefits of gain sharing are that it:
  • Forces the attention of all employees on the key issues affecting performance. 
  • Enlists the support of all employees to proposals, poor improving performance, not just a selected group.
  • Supports programmes for empowering employees – decision taking can be pushed down the organization hierarchy and employees can be given more control over their work.
  • Engage team work and cooperation’s at all levels.
  • Promote better communication about issues concerning work and productivity.
  • Encourages trust between employees and the company.
  • Creates a win - win environment in which everyone gains as productivity rises.

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Group Decision Making

Decision making is the process whereby a final but best choice is made among the alternative available. Group decision making is collective decision making by group members. Group offer an excellent vehicle for performing many of the stages in the decision making process. They work for information gathering. If the group is composed of individual with diverse background, the alternatives generated should be more critical. When the final support is agreed upon there are more people in a group decision to support and implement it. 

Group decision making is emerging as an important tool of management in all organizations. It is the concepts of participatory management in which team working is gaining popularity. The decision making groups can be classified as formal groups, informal groups, permanent groups and temporary groups. All these groups are involved in some kind of decision making activities. The group members share ideas, analyze them and agree upon a decision to implement. Studies show that the group often has values, feelings and reactions quite different from those of which manager supposes they have. If handled in a right way, groups usually make better decisions than individuals acting alone.

In other words, group decision making involves many people and ensures that every member understands the purpose of the decision and his/her part in implementation. Conflicts and dissent can be openly discussed and resolved in the process. Since the people who have to implement the decisions are aware of the goals, group decisions are more likely to be translated into actions.



Decisions are taken either by an individual or by a group. Individuals are very creative and they will have the ability to make decisions individually and effectively. Most creative ideas come from interactions and the participatory effects of individuals in groups. In a group, members effectively identify problems, choose alternatives and evaluate decisions. Such decisions are mostly unbiased and very effective because members bring heterogeneous inputs to the problem and make evaluation of inputs following the interaction process. In fact, it is not possible to generalize whether individuals or groups are better decision makers. It depends on the activities and abilities of the individuals and groups and also on the kind of task being under taken.

There are two types of group decision-making sessions. First is free discussion in which the problem is simply put on the table for the group to talk about. The other kind of group decision making is developmental discussion or structured discussion. Here the problem is broken down into steps or smaller parts with specific goals.

Group decisions may be more effective in case of following situations.
  1. When the time is sufficient.
  2. When decision is important and is non-planned or non-programmed in nature.
  3. When enough information is available on the basis of which members may act rationally.
  4. When participants are committed to the decision.
  5. When the opinions of the members from divergent areas are important in reaching a solution.
  6. When wider range of critical observations is required and
  7. When lower level management is encouraged to participate in decision making.

Some benefits of Group Work

  1. It provides learning. Groups are better than individuals at understanding problems.
  2. People readily take ownership of problems and their solutions. They take responsibility.
  3. Group members have their egos embedded in the decision and so they will be committed to the solution.
  4. Groups are better than individuals at catching errors.
  5. A group has more information (knowledge) than any one member. Groups can combine this knowledge to create new knowledge. More and more creative alternatives for problem-solving can be generated and better solutions can be derived.
  6. A group may produces synergy during problem solving.
  7. Working in a group may stimulate the creativity to the participants and the process.
  8. A group may have better and more precise communication working together.
  9. Risk propensity is balanced. Groups moderate high-risk takers and encourage conservatives.

Advantages of Group Decision Making

The group decision making offer the following advantages: 
  • Compared to an individual, the groups usually have a greater knowledge, expertise, and skill base to make better decisions. 
  • Larger number of members provides more perspective of the problem. As such, the narrow vision of a single perspective is avoided in making decisions.
  • With large numbers of group members, the participation also increases that helps to reach at a quality decision.
  • Following increased group participation, comprehensive of final decision arrived at is usually high. 
  • Generates more information, ideas and solutions. 
  • Builds team feelings. 
  • Communicates information to more people improving understanding and morale. 
  • Increases commitment and acceptance to the solution. 
  • Shares responsibility 
  • Builds interpersonal and leadership skills. 
  • Particularly suitable to non-programmed decision making. 

Disadvantages of Group Decision Making

All is not good with group decision making. It suffers from the following disadvantages: 
  • Group decision making is a time consuming process.
  • Influence groups usually manipulate the group decision in a direction of their linking and interest.
  • Sometimes decisions made by the group members are simply a compromise between the various views and options offered by the group members. 
  • Requires better group management and communication skills.
  • May create conflict between supporters of different views. 
  • Minority domination. 
  • Domination of vocal, few who talk the loudest and the longest. 
  • Ambiguous (unclear) responsibility.

Issues Related to Group Decision Making

There is no doubt that a group can make effective decisions which are accepted by all members with full ownership to implement these for their collective success. All members have the equal opportunity to participate and share information in course of selecting best alternative from among set of alternatives. However, in spite of these advantages, the nature of group dynamics will affect its effectiveness. Some of the constraining factors in group decision making are as follows:

1. Groupthink

Groupthink refers to the tendency of the members of a highly cohesive group to lose their evaluative capabilities or abilities. It describes situations in which group pressures for conformity deter the group from critically appraising unusual, minor or unpopular views. In a groupthink process, members are in a very cohesive situation. They do not like to criticize or evaluate one another's ideas and statements. This tendency obviously leads to agreement without creative discussion among the members. This occurs because of strong pressure on individual members to maintain harmonious group relations. Therefore, it is taken as a disease that attacks many groups and can dramatically hinder their performance.

2. Group shift or Group Polarization

The group shift can be viewed actually as a special case of groupthink. It refers to the tendency of groups to make more extreme decisions than individuals working alone. An individual feels uncomfortable to form a high risk opinion alone. However, if she/he meets in a group, she/he may be ready to accept a high level of risk. Thus, individual opinion may differ after meeting in the group. When the individual gets social support from other members, she/he will be ready to take more risk. Similarly, when all members agree or believe in the same cause through reasoning and discussion, it will help the individual to take more risk than before.

3. Time Constraints

Generally, groups take a long time for organization, co-ordination and socialization. If groups are larger, there will be problems of communication and interaction, and will take long time to make decisions. It is not possible to speak to all members at one time and thus time will be a constraining factor for individuals in presenting personal views. When people cannot present their personal ideas, there might be fewer chances for creative ideas to come forward for making effective group decisions.

4. Conformity to Peer Pressure

Group norms refer to the informal rules and expectations that groups establish and they will guide group members to behave at work place. They work as pressure to follow the behavior among group members. Thus, even at the time of strong disagreement of an individual member, she/he cannot present creative ideas due to the effect of group pressure to agree to group ideas. In such a situation, if an individual tries to put his/her ideas, other members may warn or punish him/her to discourage such ideas in the future.

Potential Dysfunctions of Group Work (Process Losses)

  • Social pressure of conformity may result in group-think (people begin to think alike and not tolerate new ideas – yielding to conformance pressures).
  • It is a time-consuming, slow process (only one member can speak at a time).
  • Lack of coordination of meeting work and poor meeting planning.
  • Inappropriate influences (domination of time, topic, opinion by one or few individuals; fear of contributing because of the possibility of flaming and so on).
  • Tendency of group members to rely on others to do most of the work.
  • Tendency to produce compromised solutions of poor quality.
  • Non-productive time (socializing, preparing, waiting for late-comers-air-time fragmentation).
  • Tendency to repeat what was already said (because of failure to remember of process).
  • High cost meeting (travel, participation etc).
  • Tendency of groups to make riskier decisions than they should.
  • Incomplete or inappropriate use of information.
  • Too much information (information overload).
  • Few information cues.
  • Incomplete or incorrect task analysis.
  • Inappropriate or incomplete representation in the group.
  • Attention blocking.
  • Attenuation blocking.
  • Concentration blocking.
  • Slow feedback.
Source: Turban, E. et. al. (2005), Decision Support Systems and Intelligent Systems.
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