5.

0 Decision Making

Lecture Objectives
 To appreciate the concept of decision making
 To learn about the importance of corporate decision
making
 To be able to make rational decisions

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 Defining Decision Making

 Decision making is the process of choosing the best

from among the alternative solution for a given set of
circumstances
 Selection of a course of action from among
alternatives is the core of planning
 It entails identifying the issues, collecting information,
analyzing them and developing alternative solutions

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Importance of Decision Making

 Managers make decisions in all aspects of the

organization
 Managers perform all their functions and
activities through decision making
 Decision making process helps managers
obtain necessary information
 Decision making helps in the formulation of
strategies and implementing them
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 Decision Making Expectations

 Decision must be made by managers in respond to

opportunities and threats by analyzing options and
making decisions about goals and courses of action
 Decision in response to opportunities: managers respond
to ways to improve organizational performance
 Decisions in response to threats: occurs when managers
are impacted by adverse events to the organization

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 Category of Decisions

• Programmed Decisions: routine, almost automatic process

- Manager has made decisions many times before
- There are rules and guidelines to follow
- Example: deciding to reorder supplies

• Non Programmed Decisions: unusual situations that have not been often
addressed
- No rules to follow since the decision is new
- These decisions are made based on information and
manager’s intuition and judgment
- Example: should a business invest in a new technology

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 Decision Making Guide

1. Identify and Select a Course of action to pursue so as

to achieve the stated objective
2. The best alternative is considered for implementation
3. Due to resource constraints not all options will be
pursued
4. Logical decision making is required

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 Decision Making Process
1. Faced with an opportunity or a problem
2. Identify the cause of the problem or opportunity
3. Collect information to shed light on the problem or
opportunity
4. Develop alternative courses of actions
5. Select and implement the best option
6. Assess progress and make adjustment where necessary

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 Evaluating Alternatives

Is the course of action:

- Legal
- Ethical
- Economical
- Practical

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 Problems

 When people mention the word “problem” it often

denotes a negative connotation and so the word
“challenge” is often used instead
 A problem is a deviation from standard or a desired
level of performance
 Before planning and making strategic decisions,
managers must foresee the probable problems the
company will face in the future

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Possible Situation of Problems

1. Someone reports a problem

2. Actions are not going as planned
3. Customers lay complaints
4. Sales/profit declining
5. Employees are not motivated
6. High level of defective products
7. High level of absenteeism
8. High rate of staff turnover

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Approaches to Problem Solving

1. Routine : apply what has been the practice in the

past similar situations
2. Scientific: orderly system for processing information
or order
3. Creative: given freedom to study information for
possible outcomes
4. Quantitative: substituting different values for
variables of the equation

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 Potential Problem Analysis

1. Think of all major potential problems

2. Describe each potential problem to reveal precisely
the what, where and when of it
3. Classify the potential problems by their degree of
risks
4. Identify the possible causes for each high risk
problem and prioritize and concentrate on problems
most threatening to organization plan
5. Assess the probability of occurrence for causes
6. Decide how to handle the most serious problems
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Reasons for failure to follow systematic
procedure

1. Being preoccupied with day to day routine

problems
2. Failure to foresee potential problems
3. Failure to analyze critical consequences of
actions
4. Planned suggestions are infallible

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Guides to Improve Problem Solving

1. Review quickly all elements of the problem

to get a general view of the problem
2. Try a change in the manner which the
problem is expressed . Eg Verbal to
Mathematical
3. Consider working environment and
rearrange space and time characteristics
4. Evaluate your own ideas and those of others
constructively
5. Discuss problem with others
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 Types of Decisions

1. Strategic
2. Operational
3. Major
4. Minor
5. Programmed
6. Non Programmed
7. Individual
8. Group
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 Strategic Decision

• Strategic decisions are related to unified, integrated and

comprehensive issues of the organization
Concerned with:
• Total or major part of organization
• Matching of organizational factors to environmental factors
• Allocation and reallocation of resources
• Values, expectations and goals of organization
• Organizational direction
• Change throughout the organization

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 Operational Decisions

 Concerns the operational activities which are

routine in nature
 Require less analysis and concentration
 Do not change the organizational direction
Example: paying of suppliers bills

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 Major Decisions

 Decisions which affect the policies of the

organization
 Influences almost all the functional areas
 Decisions do not repeat frequently

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 Minor Decisions

 These are unimportant decisions of

organization
 Affects only one functional area
 Most of these decisions made at lower levels

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 Programmed Decisions

 Decisions made based on company policy, budget

procedure etc
 Are made in response to routine and repetitive
situations or problems
 Management develops programs for repetitive issues

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 Non Programmed Decisions

 Non repetitive, complex and most important , novel

and unstructured
 Management can not formulate a program for the
decisions are they are novel
 Requires creative problem solving procedures

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 Individual Decisions

 As individuals we do make decisions

 The decisions are mostly routine, simple and
repetitive
 They are also programed decisions

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 Group Decisions

 Organization being made up of individuals must make

group decisions
 Group decisions include strategic, non programmed,
complex and strategic
 Team and committee decisions are group decisions

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 Analyzing Situations
 Situations of Certainty
 Risk Situations : only have probabilities
 Uncertainty situation: no information

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Individual Barriers to Decision Making

1. Overconfidence
2. Use of outdated data
3. Lack of consultation
4. Emotions
5. Time pressure

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 Group Decision Making

Many decisions are made in group settings:

 to reduce cognitive biases
 calls on combined skills and abilities
 Reduce external influence
 Ensures guidelines are adhered
 Minimizes chances of making mistakes

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 Disadvantages of Group Decision
Making

1. Group thinking: biased decision making resulting from

group members striving for agreement
2. No clear sense of accountability
3. No commitment to decisions not in one’s favor
4. Possibility of buck passing

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 Tools and Techniques of Decision
Making
1. Operational Research
2. Decision Tree: generation of alternative
solution
3. Linear Programming: optimal resource
allocation
4. Brainstorming: uninterrupted discussion
5. Devil Advocate: opposite
6. Dialetic Decision Methods: developing
alternatives and further developing
alternatives on the alternatives
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Devils Advocate and Dialectical Inquiry

 Devil’s advocate: one member of the group acts as

the devils advocate and critiques the way the group
identified the alternative (points problems)
 Dialectical Inquiry: two different groups assigned
same problem and each evaluate each other’s
alternatives
 Promote diversity: by increasing diversity in a group,
a wider set of alternatives may be considered

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 Operational Research

 The application of specific methods, tools and

techniques to operations of systems with optimum
solution to the problems
 It presents in logical approach the real problem by
quantifying the variables of the problem
 It concentrates on goals with a problem to reaching
the goal

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 Creativity

Creativity is the ability of the decision maker to discover

novel ideas leading to a feasible course of action
• A creative management and employees are key to leading
organizations
• Managers try to improve employees’ ability to behave
creatively to maximize organizational learning
• Employees must be challenges so as to become more
creative and innovative

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 Individual Creativity

 Organizations can build an environment supportive of

creativity through:
- issues identified for learning organizations
- provide employees with ability to take risks
- Failure should not be a deterrent
• To build creativity periodic failures must be rewarded
but often hard to be accepted by certain managers

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 Building Group Creativity

1 Nominal Group Technique: provides a more structured

way to generate alternatives in writing
- Avoids the production blocking problem
- Similar to brainstorming except members are given time
to first write down the alternatives
- Alternatives are listed
- Discussion on alternatives then takes place

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 Building Group Creativity

2. Delphi Technique: provides for a written format without

having all managers meeting face to face
* Problem distributed to managers in writing and are
asked to generate written alternatives
* Responses received and summarized by top managers
* Compiled and sent back for feedback and ranking
* Process continues until consensus is reached

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 Tutorial Questions

Q1. What is the importance of decision making ?

Q2. Discuss the need to make informed decisions.
Q3. Discuss the approaches to decision making.
Q4. Why is decision making becoming an issue of
concern?
Q5. Discuss the importance of the rational decision making
process

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