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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.

What is Decision Making?


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
Decision-Making Process includes:
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. . .
(continued)

Sometimes effective decisions must be


made to:
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.

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 higherthan-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.
McDonalds 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
Decision Making Under
Risk
Decision Making Under
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 ones own
judgment.
Decision is calculated on the basis of which alternative
has the highest probability of working effectively. [union
negotiations, Porsches 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 todays
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.
See Figure 9.1, page 279.

A View of Decision-Making
Conditions
The decision
maker faces
conditions of:

Certainty

Risk

Uncertainty

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.
See Figure 9.2, page 281.

The Classical Model of Decision


Making
and end up with a
decision that best
serves the interests
of the organization.

Obtain complete and


perfect information.
Eliminate uncertainty.
Evaluate everything
rationally and logically
When faced with a
decision situation,
managers
should

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.

Rational Decision Making. . .

(continued)

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.

Rational Decision Making. . .

(continued)

3) Evaluating alternatives
a)

Each alternative must pass successfully through three


stages before it may be worthy of consideration as a
solution.
1.
2.
3.

b)
c)

Feasibility Is it financially possible? Is it legally possible?


Are there limited human, material and/or informational
resources available?
Satisfactory Does the alternative satisfy the conditions of
the decision situation? [50% increase in sales]
Affordability How will this alternative affect other parts of
the organization? What financial and non-financial costs
are associated?

The manager must put price tags on the consequences of


each alternative.
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.

Rational Decision Making. . .

(continued)

5) Implementing the chosen alternative


a) Managers must consider peoples 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.

Rational Decision Making. . .

(continued)

6) Following up and evaluating the results


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.
[See Figure 9.3 and Table 9.1 ]

Figure 9.3: 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
...and end up with a
decision that may or
may not serve the
interests of the
organization.

When faced with a


decision situation
managers
actually

Use incomplete and


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

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.

Behavioral Forces Influencing Decisions


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.

Behavioral Forces Influencing Decisions


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.

Behavioral Forces Influencing Decisions


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.

Behavioral Forces Influencing Decisions


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