Managerial Decision

Making
Chapter 5

Prepared by C.J. Bamforth

LO1 Explain the major types of
problems
Problems can be divided into several types:
1) Opportunity problems is a situation with a potential organisational gain if
the correct action is taken
2) A crisis problem is a difficulty serious enough to need immediate action
3) A non-crisis problem is an issue needing resolution but without the
importance and immediacy of crisis
4) Well structured are straightforward, familiar and easily defined problems
5) Ill structured problems are new or unusual problems where information is
ambiguous or incomplete

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‘The manager’s job is to make decisions impacting organisational success.
Given that the nature of decisions varies by organisational level, failing to make a
decision may significantly affect organisational performance – and the reputation of
the manager responsible for a particular value-creating activity
To deal with these problems, managers adapt one of two decision approaches:
1) Programmed decisions where the decision making process is routine, repetitive, well-
structured and uses pre-determined decision rules. First line managers and middle
management are likely to mainly deal with well structured problems. Computers can
help with programmed, well structured problems which may be complex.
2) Non programmed decisions occur when predetermined decision rules are impractical
due to novel and/or relatively unstructured situations. They usually lead to
considerable uncertainty which increases their level of risk as it is unclear whether
they will lead to losses or the desired results. The frequency of these types of
decisions increases as one becomes more senior.

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LO2 Contrast rational and non rational
descriptive decision making models
The rational decision making model is derived out of economics and assumes that all
factors are taken into consideration when making a decision i.e. that the decision
maker considers all options and chooses an option that will give optimal results.
The non-rational decision making which recognises the limitations of information
gathering and processing, cost and time constraints and difficulties in analysing all
possible alternatives.
Researchers have identified four types of non-rational decision making:
1) Satisfying – where managers seek and consider options until they find one which
looks satisfactory.
2) Incremental – where managers make the smallest possible response to reduce a
problem to a tolerable level.

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3) Rubbish bin – where managers act randomly focusing on problems
as they arise and seeking any solution that fits.
-This strategy is likely when managers have no preferences, are unclear
about how to achieve goals or prefer to make rapid decisions. This is
a highly risky and generally low return strategy.
4) Intuition is the ‘gut feeling for a complex situation or instinct for
quickly grasping key issues based on experience and subconscious
mental processing arising from non-conscious and holistic
associations’ .
Intuition tends to increase with experience and therefore is associated
with more senior managers.

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LO3 Steps in an effective decision
making process

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It consists of a four stage process:
1) Stage 1 is to identify the problem – this involves scanning the environment for
changing circumstances, categorising the results as a problem or not a problem. If
identified as a problem then looking for the problem’s natures and causes.
2) In the second stage alternatives to solve the problem are generated. This is the
creative stage of the process where all options are encouraged and considered.
3) In the third stage, evaluate and choose an alternative: the alternatives are
reduced against the following criteria – feasibility, quality, acceptability, costs,
reversibility (how easy to reverse the decision if it goes wrong), ethics.
4) In the final stage : the chosen solution is implemented and monitored. This
means that assessment criteria must be set up to identify whether the problem is
being resolved.

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LO4 Overcoming barriers in decision
making
There are several barriers that can block effective decision making. These are:
1) Complacency which generally occurs when people do not see or ignore danger or
opportunity signs. This usually comes from poor environmental scanning.
2) Defensive avoidance when individuals deny the significance of the threat or
opportunity or deny responsibility for taking action.
3) Panic when people get upset, and seek frantically to solve the problem.
Pro-active decision making:
These can be overcome by adopting a ‘deciding to decide’ approach – where decision
makers accept the challenge and then follow an effective decision making approach.
Guidelines
– Appraise credibility of information
– Ascertain importance of threat or opportunity
– Determine the need for urgency

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LO5 Decision making biases and
avoiding them(Processing Biases)
There are several types of informational processing biases which influence our
decision making e.g. emotions, habits and motivation. These biases are:
1) Framing – the tendency to decide differently depending on how the problem is
presented. Decision makers are loss-averse i.e. the possibility of a loss is more
painful than the possibility of a gain.
2) Representativeness – the tendency to be overly influenced by stereotypes in
judging the likelihood of occurrences.
3) Availability – the tendency to judge the chances of an occurrence on the basis of
how many like instances or occurrences can be recalled easily.
4) Anchoring and adjustment – the tendency to be influenced by the initial figure or
idea, even if it is subsequently proved to be irrelevant.

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LO6 The advantages & disadvantages
of group decision making

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Improving group decision making

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Group decision making can be enhanced by considering the following:
1) Involving only those whose information and knowledge are important to the
decision quality.
2) Thinking carefully about the group design or composition i.e. including
those with unique or varied perspectives. This is particularly important now
where globalisation increases the likelihood of working with others from
diverse backgrounds.
3) Including those whose focus is on company rather than individual goals.
4) Utilising one or several of the following techniques:
a) Devil’s advocacy – including individuals prepared to challenge
underlying assumptions and raise concerns.
b) Dialectical inquiry – where a situation is approached from two
opposite viewpoints.

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c) Real-options analysis – focusing on any decision that creates an opportunity, but not
an obligation. Four examples are:
- immediate entry (useful when organisations can get immediate benefits from timing
and exclusivity)
- immediate exit (useful when organisations benefit by reversing their commitments)
- delayed entry (useful for avoiding irreversible uncertainty) and delayed exit (useful
because delays a full commitment).
d) Computer assisted group decision making tools – these help individuals and
groups to process the huge amount of data that organisations collect about their
operations, vendors and customers.
This data is useful in helping make decisions about: customer attrition, customer
retention, customer segmentation, cross-selling, fraud detection, risk management,
sales forecast, payment or default analysis and internal control.

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LO7 Creativity – Three basic ingredients
and four stages
Supporting skills needed are domain and creativity relevant
skills and motivation

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Creativity involves two types of thinking:
1) Convergent thinking – converging thinking to one point and one solution using a logical
decision making process. This approach helps managers to define the problem and
evaluate possible solutions.
2) Divergent thinking – solving problems by generating new ways of looking at them.
• Both thinking types require three basic ingredients:
a) Domain-relevant skills i.e. expertise in the area where the creativity is to occur.
b) Creativity-relevant skills i.e. ability to explore new directions or new ways of doing
things. The ability to abandon unproductive avenues and to persist with finding a solution.
c) Task motivation i.e. the person must be interested in the task itself not the rewards that
may be gained from carrying out the task.
The creativity process has four stages – preparation (gathering information), incubation
(thinking subconsciously about the problem using divergent thinking), illumination (this
is when a new insight is gained), verification (This is when the insight is checked to make
sure it is valid).

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LO8 How to enhance group creativity
There are several techniques for enhancing group creativity such as:
1) Brainstorming is where group members generate as many novel ideas as
possible without evaluation. This ensures that no idea is criticised and that
individuals are encouraged to build on others’ ideas.
2) Nominal group technique – this is a technique that combines individual
and group creativity processes in a way that preserves each in the creation
process.
Group members are first presented with a problem. Individuals then work on their own
ideas, which they present one by one to the group.
New ideas are recorded. Then the group works together to clarify and evaluate issues.
Finally members silently and independently vote on the ideas so that the end is a ranked
list.
This technique develops many options whilst also preserving group satisfaction

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Conclusion
• Managers face programmed and unprogrammed decisions in their work.
• These can be solved using rational or non-rational decision making styles.
• All decision making styles are biased by an individual’s feelings, emotions
and perspectives.
• Following an effective decision making process helps to minimise the impact
of these biases.
• Group decision making, if properly managed, can improve decision making
quality and creativity.
• Various decision making and planning tools are available to help improve the
decision making process.
• Group decision making can have significant advantages over individual
decision making because it introduces multiple viewpoints and perspectives.
However group decision making can also result in groupthink

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