Decision making

Decision Making

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The Nature of Decision Making

Making effective decisions, as well as recognizing when a bad decision has been made and quickly responding to mistakes, is a key ingredient in organizational effectiveness.

Some experts believe that decision making is the most basic and fundamental of all managerial activities.

Decision making is most closely linked with the Planning function.

However, it is also part of Organizing, Leading and Controlling.

• Decision making is the act of choosing one alternative from among a set of alternatives.

• We have to first decide that a decision has to be made and then secondly identify a set of feasible alternatives before we select one.

Decision-Making Process

• recognizing and defining the

nature of a decision situation

• identifying alternatives

• choosing the ‘best’ [most

effective] alternative and

• putting it into practice.

• Decision-Making Process includes:

Decision-Making Process. . .(continued)

• Optimize some set of factors

such as profits, sales, employee

welfare and market share or

• Minimize loss, expenses or

employee turnover or

• Select best method for going out

of business, laying off

employees, or terminating a

strategic alliance.

Sometimes effective decisions must be

made to:

Decision-Making Process. . .(continued)

Managers make decisions

about both problems

(undesirable situations) and

opportunities (desirable

situations). Cutting costs by 10%

Learning that the company has

earned higher-than-projected

profits

It may take a long time before a

manager can know for sure if

the right decision was made.

Types of Decisions

• Programmed decision is

one that is fairly

structured or recurs with

some frequency (or both).

• Nonprogrammed decision

is one that is unstructured

and occurs much less

often than a programmed

decision.

Programmed Decisions. .

Many decisions regarding

basic operating systems

and procedures and

standard organizational

transactions fall into this

category. McDonald’s employees are

trained to make the Big Mac

according to specific

procedures.

Starbucks, and many other

organizations, use programmed

decisions to purchase new

supplies [coffee beans, cups

and napkins].

Nonprogrammed Decisions. ..

Most of the decisions made by top managers involving strategy and organization design are nonprogrammed.

Decisions about mergers, acquisitions and takeovers, new facilities, new products, labor contracts and legal issues are nonprogrammed decisions.

Managers faced with nonprogrammed decisions must treat each one as unique, investing great amounts of time, energy and resources into exploring the situation from all views.

Intuition and experience are major factors in these decisions.

Decision-Making Conditions

• Decision Making Under

Certainty


Risk


Uncertainty

Decision Making Under Certainty

A state of certainty exists when a decision maker knows,

with reasonable certainty, what the alternatives are and

what conditions are associated with each alternative.

Very few organizational decisions, however, are made

under these conditions.

The complex and turbulent environment in which

businesses exist rarely allows for such decisions.

Decision Making Under Risk

A state of risk exists when a decision maker

makes decisions under a condition in which

the availability of each alternative and its

potential payoffs and costs are all

associated with probability estimate.

Decisions such as these are based on past

experiences, relevant information, the

advice of others and one’s own judgment.

Decision is ‘calculated’ on the basis of

which alternative has the highest probability

of working effectively. [union negotiations,

Porsche’s SUV focus vs high-performance

sports cars]

Decision Making Under Uncertainty

A state of uncertainty exists when a decision maker does not know all of the alternatives, the risks associated with each, or the consequences each alternative is likely to have.

Most of the major decision making in today’s organizations is done under these conditions.

To make effective decisions under these conditions, managers must secure as much relevant information as possible and approach the situation from a logical and rational view.

Intuition, judgment and experience always play major roles in the decision-making process under these conditions.

A View of Decision-Making

Conditions

Level of ambiguity and chances of making a bad decision

Lower Moderate Higher

Rational Perspectives

on Decision Making

Keys to Decision Making

Classical

Decision

Model

Rational

Decision

Making

Classical Decision Model

• An approach to decision making

that tells managers how they

should make decisions.

• Approach assumes that managers

are logical and rational.

• Approach assumes that managers’

decisions will be in the best

interests of the organization.

• Conditions suggested in this

approach rarely, if ever, exist.

The Classical Model of

Decision Making

When faced with a decision situation, managers should…

Obtain complete and perfect information.

Eliminate uncertainty. Evaluate everything rationally

and logically…

…and end up with a decision that best

serves the interests of the organization.

Rational Decision Making

Consists of six (6)

steps that keep the

decision maker focused

on facts and logic and

help guard against

inappropriate

assumptions and

pitfalls.

Designed to help the

manager approach a

decision rationally and

logically.

Rational Decision Making. . .(continued)

1) Recognizing and defining the decision

situation a) Need to ‘define’ precisely what the problem is.

b) Manager must develop a complete

understanding of the problem.

c) Manager must carefully analyze and consider the

situation.


2) Identifying alternatives a) Managers must realize that their alternatives may

be limited by legal, moral and ethical norms,

authority constraints, available technology,

economic considerations and unofficial social

norms.


3) Evaluating alternatives

a) Each alternative must pass successfully

through three stages before it may be worthy of consideration as a solution.

1. Feasibility – Is it financially possible? Is it legally possible? Are there limited human, material and/or informational resources available?

2. Satisfactory – Does the alternative satisfy the conditions of the decision situation? [50% increase in sales]

3. Affordability – How will this alternative affect other parts of the organization? What financial and non-financial costs are associated?

b) The manager must put ‘price tags’ on the consequences of each alternative.

c) Even an alternative that is both feasible and satisfactory must be rejected if the consequences are too expensive for the total system.

Rational

Decision Making.

. .(continued)

4) Selecting an alternative a) Choosing the best alternative is the real test of

decision making.

b) Optimization is the goal because a decision is likely

to affect several individuals or departments.

c) Finding multiple acceptable alternatives may be

possible; selecting one and rejecting the others

may not be necessary.


5)Implementing the chosen alternative

a) Managers must consider people’s

resistance to change when implementing

decisions.

b) For some decisions, implementation is

easy; for others, very difficult or time

consuming.

c) Operational plans are very useful in

implementing alternatives.

d) Managers must also recognize that even

when all of the alternatives and their

consequences have been evaluated as

precisely as possible, unanticipated

consequences are still likely.


a) Managers must evaluate the

effectiveness of their decisions – did the

chosen alternative serve its original

purpose?

b) If the implemented alternative

appears not to be working, the

manager has several choices:

1. Another previously identified

alternative might be adopted or

2. Recognize that the situation was not

correctly defined and start the

process all over again or

3. Decide that the alternative has not

been given enough time to work or

should be implemented in a different

way.

6) Following up

and evaluating

the results

Evaluating Alternatives in the

Decision-Making Process

Behavioral Aspects of Decision Making

• Sometimes decision making must

reflect subjective considerations

(tastes, etc.)

• Other behavioral aspects include:

political forces, intuition, escalation

of commitment, risk propensity and

ethics.

Behavioral Aspects. . . (continued)

The Administrative Model of Decision Making

Herbert A Simon, a Nobel Prize winner in

Economics, developed the model to describe

how decisions are often made rather than to

prescribe how they should be made.

Argues that decision makers have incomplete

and imperfect information, are constrained by

‘bounded rationality’ and tend to ‘satisfice’

when making decisions.

Bounded rationality suggests that decision

makers are limited by their values and

unconscious reflexes, skills and habits.

[American vs foreign automakers]

Behavioral Aspects. . . (continued)

Satisficing is the tendency to search for alternatives only until one is found that meets some minimum standard of sufficiency.

Rather than conducting an exhaustive search for the best possible alternative, decision makers tend to search only until they identify an alternative that meets some minimum standard of sufficiency.

The Administrative Model of

Decision Making

When faced with a decision situation

managers actually…

Use incomplete and imperfect

Information. Are constrained by bounded rationality. Tend to satisfice…

...and end up with a decision that may or

may not serve the interests of the organization.

Behavioral

Aspects. . . (continued)

The Classical and Administrative

Models paint quite a different

picture of decision making.

However, each may be used to

better understand how managers

make decisions.

The Classical Model attempts to

explain how managers can at least

attempt to be more rational and

logical in their approach to

decisions.

The Administrative Model can be

used by managers to develop a

better understanding of their

inherent biases and limitations.

Behavioral Forces Influencing Decisions

Political Forces in Decision Making

Coalition - an informal alliance of

individuals or groups formed to

achieve a common goal

[stockholders, directors, parliament

blocs, etc]

Impact of a coalition may be positive

or negative.

Managers must recognize when to

use coalitions, how to assess if they

are acting in the best interest of the

organization and how to control their

negative effects.


Intuition – is an innate belief about

something, without conscious

consideration.

Deciding to do something because

it ‘feels right’ or one has a ‘hunch’.

Feeling is based on years of

experience and practice in making

decisions in similar situations; may

help managers make occasional

decisions without going through an

a-to-z process.


Escalation of Commitment –

occurs when a decision maker

stays with a decision even

when it appears to be wrong.

[Pan Am holdings]

Decision makers must guard

against sticking too long with

an incorrect decision.

However, managers should

not ‘bail out’ of a seemingly

incorrect decision too soon.


Risk Propensity – the extent to which a decision maker is willing to gamble when making a decision.

Organizational culture is a prime ingredient in encouraging different levels of risk.


Ethics

Managerial ethics involves a

wide variety of decisions:

Relationships of the firm to

its employees [closing a dept to

save money]

Relationships of the

employees to the firm

Relationships of the firm to

other economic agents

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Decision making

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