Handout #1 Midterm _al_cronico_

MANAGERIAL DECISION MAKING

Decision – a choice made from available alternatives.

Decision-making – process of identifying problems and opportunities and then resolving them. Involves effort both
before and after the actual choice.

Types of Decisions and Problems

1. Programmed Decisions – involve situations that have occurred often enough to enable decision rules to be
developed and applied in the future.

- made in response to reoccurring organizational problems.

2. Non-programmed Decisions – made in response to situations that are unique, are poorly defined and largely
unstructured and have important consequences for the organization.

Conditions that Affect the Possibility of Decision Failure

1. Certainty – all information that the decision maker needs is fully available.

2. Risk – decision has clear-cut goals and that good information is available but the future outcomes associated with
each alternative are subject to chance. However enough information is available to allow the probability of a
successful outcome for ach alternative to be estimated.

Statistical Analysis – used to calculate the probabilities of success or failure.

■ Measure of risk captures the possibility that future event will render the alternative unsuccessful.

3. Uncertainty – managers know which goals they want to achieve but information about alternatives and future
events is in incomplete.

■ Many problems have no clear-cut solution, but managers rely on creativity, judgment, intuition, and experience to
craft a response.

4. Ambiguity and Conflict

Ambiguity – goals to be achieved or the problem to be solved is unclear, alternatives are difficult to define and
information about outcomes is unavailable.

– far the most difficult decision situation.

Wicked Decision Problem – created by highly ambiguous situation.

- Associated with conflicts over goals and decision alternatives, rapidly changing
circumstances, fuzzy information unclear links among decision elements and the
inability to evaluate whether a proposed solution will work.

DECISION-MAKING MODELS

1. Classical Model – Normative

- This is based on rational economic assumptions and manager beliefs about what ideal decision making
should be. This model has arisen within the management literature because managers are expected to make decisions
that are economically sensible and in the organization’s best economic interests.

1
Handout #1 Midterm _al_cronico_

- most useful when applied to programmed decisions and to decisions characterized by certainty or
risk because relevant information is available and probabilities can be calculated.

Normative – defines how a decision maker should make decisions.

■ The ideal, rational model of the classical model is often unattainable by real people in real organizations but the
model has value because it helps decision makers be more rational and not rely entirely on personal preference in
making decisions.

■ The growth of quantitative decision techniques that use computers has expanded the use of classical approach.
Quantitative methods help reduce risk by calculating the probability of success.

Four Assumptions

a. The decision maker operates to accomplish goals that are known and agreed on – problems are precisely
formulated and defined.

b. The decision maker strived for conditions of certainty gathering complete information – all alternatives and the
potential results of each are calculated.

c. Criteria for evaluating alternatives are known – the decision maker selects the alternative that will maximize
economic return to the organization.

d. The decision maker is rational and uses logic to assign values, order preferences, evaluate alternatives and make
decision that will maximize the attainment of organizational goals.

2. Administrative Model – Descriptive

- based in the work of Herbert A. Simon.

- recognizes the human and environmental limitations that affect the degree to which managers can pursue
a rational decision-making process.

Descriptive – describes how managers actually make decisions in complex situations rather than dictating how they
should make decisions.

Herbert A. Simon – proposed two concepts that are instrumental in shaping the administrative model. -

Concepts of Herbert Simon

a. Bounded Rationality

b. Satisficing

3. Political Model

- used for non-programmed decisions.

■ Often managers engage in coalition building for making complex organizational decisions. Without a coalition a
powerful individual or group could detail the decision-making process.

Coalition – informal alliance among managers who support a specific goal.

Coalition Building – process of forming alliances among managers.

- gives several managers an opportunity to contribute to decision making, enhancing their

commitment to the alternative that is ultimately adopted.

2
Handout #1 Midterm _al_cronico_

Four Basic Assumptions

1. Organizations are made up of groups with diverse interests, goals and values – managers disagree about
problem priorities and may not understand or share the goals and interests of other managers.

2. Information is Ambiguous and incomplete – the attempt to be rational is limited by the complexity of many
problems as well as personal and organizational constraints.

3. Managers do not have the time, resources or mental capacity to identify all dimensions of the problem and
process all relevant information – Managers talk to each other and exchange viewpoints to gather information and
reduce ambiguity.

4. Managers engage in the push and pull of debate to decide goals and discuss alternatives – decisions are the
result of bargaining and discussion among coalition members.

How Managers Make Decisions

1. Bounded Rationality and Satisficing – conceptualize by Herbert Simon

a. Bounded Rationality – people have limits or boundaries on how rational they can be.

b. Satisficing – decision makers choose the first solution alternative that satisfies minimal decision criteria.

2. Intuition – represents a quick apprehension of a decision situation based on past experience but without conscious
thought.

■ Intuitive decision making is not arbitrary or irrational because it is based on years of practice and hands-on
experience that enables managers to quickly identify solutions without going through painstaking computation.

■ Effective managers use a combination of rational analysis and intuition in making complex decisions undder time
pressure.

■ Good intuitive decision making is based on an ability to recognize patterns at lightning speed.

CHARACTERISTICS OF CLASSICAL, ADMINISTRATIVE AND POLITICAL DECISION-MAKING

MODELS

CLASSICAL MODEL ADMINISTRATIVE MODEL POLITICAL DECISION-

Clean-cut problem and goals
Condition of certainty
Full information about alternatives
and their outcomes
Rational choice by individual for
maximizing outcomes
Vague problem and goals
Condition of Uncertainty
Limited information about
alternatives and their outcomes
Satisficing choice for resolving
problems using intuition
MAKING MODEL
Pluralistic conflicting goals
Conditions of uncertainty or
ambiguity
Inconsistent viewpoints , ambiguous
information
Bargaining and discussion among
coalition members

3
Handout #1 Midterm _al_cronico_

DECISION MAKING PROCESS

Recognition of
Decision
Requirement

Evaluation and Diagnosis and

Feedback Analysis of
Causes

Implementation of
Chosen Development
Alternative of Alternatives

Selection of
Desired
Alternative

1. Recognition of Decision Requirement – requires surveillance of the internal and external environment for issues
that merit executive attention.

- resembles the military concept of gathering intelligence.

Problem – occurs when organizational accomplishment is less than established goals.

Opportunity – exists when managers see potential accomplishment that exceeds specified current goals.

Sources of Information

1. Formal

2. Informal

2. Diagnosis and Analysis of Causes

Diagnosis –step in the decision-making process in which managers analyze underlying causal factors associated
with the decision situation

Questions to Ask in Analyzing Causes

1. What is the state of disequilibrium affecting us? 3. Where did it occur?

2. When did it occur? 4. How did it occur?

4
Handout #1 Midterm _al_cronico_

5. To whom did it occur? 7. What is the interconnectedness of events?

6. What is the urgency of the problem? 8. What result came from which activity?

3. Development of Alternatives – generate possible alternative solutions that will respond to the needs of the
situation and correct the underlying causes.

■ For programmed decision, feasible alternatives are easy to identify and in fact usually are already available
within the organization’s rules and procedures. For non-programmed decisions, it requires developing new courses
of action that will meet the company’s needs. For decisions made under conditions of high uncertainty, managers
may develop only one or two custom solutions that will satisfice for handling the problem.

Decision alternatives – tools for reducing the difference between the organization’s current and desired
performance.

4. Selection of Desired Alternative – managers tries to select the most promising of several alternative courses of
action.

Best alternative - one in which the solution best fits the overall goals and values of the organization and achieves
the desired results using the fewest resources.

Risk propensity – willingness to undertake risk with the opportunity of gaining an increased payoff.

4. Implementation of the Chosen Alternative – involves the use of managerial, administrative and persuasive
abilities to ensure that the chosen alternative is carried out.

■ Ultimate success of the chosen alternative depends on whether it can be translated into action.

■ Communication, motivation and leadership skills must be used to see that the decision is carried out.

5. Evaluation and Feedback – decision makers gather information that tells them how well the decision was
implemented and whether it was effective in achieving its goals.

Feedback – important because decision making is an ongoing process.

- Provides decision makers with information that can precipitate a new decision cycle.

WHY MANAGERS MAKE BAD DECISIONS?

1. Being influenced by initial impressions

2. Justifying past decisions

3. Seeing what you want to see.

4. Perpetuating the status quo.

5. Being influenced by emotions.

6. Overconfidence.

THINGS TO REMEMBER IN GROUP DECISION MAKING

1. Start with Brainstorming

Brainstorming – uses a face-to-face interactive group to spontaneously suggest a wide range of alternatives for
decision making.

5
Handout #1 Midterm _al_cronico_

- highly effective for quickly generating a wide range of alternate solutions to a problem.

GOAL: Generate as many ideas as possible.

■ Keys to effective brainstorming are that people can build on one another’s ideas.

DISADVANTAGES:

People in a group often want conform to what others are saying.

Others are concerned about pleasing the boss or impressing colleagues.
Some people have social inhibitions that limit their participation in a group session or make it difficult to
come up with ideas in a group setting.

Electronic Brainstorming – also called brainwriting

- brings people together in an interactive group over a computer network.

- one member writes an idea another reads it and another idea and so on.

ADVANTAGES:

People can write their ideas freely.

Social inhibitions and concerns are avoided.
Encourages participation.
Potentially can be done with groups made up of employees from around the world that increase diverse
alternatives.

2. Engage in Rigorous Debate

Approach:

a. Ensure that the group is diverse in terms of age and gender, functional area of expertise, hierarchical level, and
experience with the business.

Devil’s Advocate – role that challenging the assumptions and assertions made by the group.

b. Have group members develop as many alternatives as they can as quickly as they can.

c. Use of counterpoint.

Counterpoint – breaks a decision-making group into two subgroups and assign them different, often competing
responsibilities.

3. Avoid Groupthink

Groupthink – tendency of people in groups to suppress contrary opinions.

■ When people slip into groupthink, the desire for harmony outweighs concerns over decision quality. Group
members emphasize maintaining unity rather than realistically challenging problems and alternatives. They
censor their personal opinions and are reluctant to criticize the opinions of others.

3. Know When to Bail

Escalating Commitment – Managers block or distort negative information because they don’t want to be
responsible for a bad decision or they might simply refuse to accept that their solution is wrong.

4. Act with Speed

5. Don’t Ignore Crisis

6
Handout #1 Midterm _al_cronico_