Managerial Decision Making

 A decision is a choice from among the available alternatives

 Decision making - the process by which managers respond to

opportunities and threats by analyzing options, and making
decisions about goals and courses of action
 Decision making is a key to effective management
 Each of the four primary management functions requires
effective decision making
 Nearly everything a manager does requires decision making

 Judgment - the “thinking” aspects of the decision-making process

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Managerial Decision Making

Decisions 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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 Types of Problems and Decisions
 Problem Types
 Well-structured: routine, repetitive, normal problems with much
certainty regarding cause-and-effect relationships
 Ill-structured: novel, unknown criteria, have not been encountered
before

 Decision Types
 Programmed: a decision that is repetitive and routine, with a definite
procedure developed for handling it - use management science,
computations, and rules
 Non-programmed: no pre-programmed answer exists because the
problem is complex, extremely important, and/or never before
experienced - reliance is placed on principles and processes with
emphasis on judgment, intuition and creativity

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Decision Making is not Easy
It must be done amid ever-changing factors:

 Unclear information.

 Often conflicting points of view.

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Types of Decisions
Decision making is the process of identifying
problems and opportunities, then resolving them.
Programmed decisions:
 situations that occur often enough to enable decision rules to be
developed.

Nonprogrammed decisions:
 are made in response to situations that are unique, are poorly defined
and largely unstructured.
 many involve strategic planning.

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Programmed and Non-programmed Decision Differences
Programmed
Certainty

 all the information the decision maker needs is fully

available.

Risk

 decision has clear-cut goals.

 good information is available.
 future outcomes associated with each alternative are
subject to chance.

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Programmed and Non-programmed Decision Differences

Non-programmed
Uncertainty
 managers know which goals they wish to achieve.
 information about alternatives and future events is incomplete.
 managers may have to come up with creative approaches to
alternatives.

Ambiguity (Doubtfulness)
 by far the most difficult decision situation.
 goals to be achieved or the problem to be solved is unclear.
 alternatives are difficult to define.
 information about outcomes is unavailable.

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 Organizational
Problem

Low Possibility of Failure High

Certainty Risk Uncertainty Ambiguity

Programmed Nonprogrammed
Decisions Decisions

Problem
Solution

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Selecting a Decision Making Model
Depends on the manager’s personal preference.

Whether the decision is programmed or non-

programmed.

Extent to which the decision is characterized by

risk, uncertainty, or ambiguity.

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Three Decision Making Models
Political
 Political
Model
Model

Administrative
 Administrative
Model
Model

Classical
 Classical
Model
Model

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Classical Model
Accomplishes goals that are known and agreed
upon.
Strives for certainty by gathering complete
information.
Criteria for evaluating alternatives are known.
Decision maker is rational and uses logic.

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Administrative Model
How managers actually make decisions in situations
characterized by non-programmed decisions,
uncertainty, and ambiguity.
Focuses on organizational, rather than economic.
Two concepts are instrumental in shaping the
administrative model.
 bounded rationality: means that people have limits or
boundaries on how rational they can be.
 satisficing: means that decision makers choose the
first solution alternative that satisfies minimal
decision criteria(i.e. Identifies the solution that is
good enough).
Is considered to be descriptive.
It is considered intuitive. 13
Political Model
 Closely resembles the real environment in which most
managers and decision makers operate.

 Decisions are complex.

 Disagreement and conflict over problems and solutions are

normal.

 Coalition building is important. (A coalition is an alliance

among individuals or groups, during which they cooperate
in joint action)

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 Comparisons of:
Classical, Political, & Administrative Models
Classical Model Administrative Model Political Model
 Clear-cut problem and  Vague problem and  Pluralistic; conflicting
goals. goals. (i.e. not goals.
clearly stated or
expressed)

 Condition of certainty.  Condition of

 Condition of
uncertainty.
uncertainty/ambiguity.
 Full information about
alternatives and their  Limited information
 Inconsistent viewpoints;
outcomes. about alternatives
and their outcomes. ambiguous information.
 Rational choice by
individual for  Bargaining and
 Satisfying choice for
maximizing outcomes. resolving problem discussion among
using intuition. coalition members.
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Decision Making Steps
Step 1 - Recognize The Need For A Decision
Managers must first realize that a decision must be made.
 Sparked by an event such as environmental changes

Step 2 - Generate Alternatives

Managers must develop feasible alternative courses of action.
 If good alternatives are missed, the resulting decision is poor.
 It is hard to develop creative alternatives, so managers need to look
for new ideas.
 Some choice must exist in order to make effective decisions. When
there is no choice, there really is no decision to be made

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Decision Making Steps
Step 3 - Evaluate the Alternatives: what are the advantages and disadvantages of
each alternative?

 In most decisions, a manager will want to achieve several objectives or

satisfy several criteria

 Examples of criteria for buying a car: price, manufacturer, model, warranty,

service, reliability, repair record etc.
 Measure alternatives against previously determined and weighted criteria

 Involves being able to forecast future events

 Under perfectly rational conditions, a rational decision maker could

carefully assess potential consequences of each alternative

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Decision Making Steps
Step 6 - Choose Among Alternatives: managers rank
alternatives and decide.
 When ranking, all information needs to be considered
 Under perfect conditions - would be straightforward

Step 7 - Implement the Chosen Alternative: managers must

now carry out the alternative

Step 8 - Evaluate the Decision (Learn from Feedback):

managers should consider what went right and wrong with
the decision and learn for the future
 Without feedback, managers never learn from experience and
make the same mistake over and over again.
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Evaluating Alternatives
Is it legal? Managers must first be sure that an
alternative is legal both in this country and abroad for
exports.

Is it ethical? The alternative must be ethical and not

hurt stakeholders unnecessarily.

Is it economically feasible? Can our organization’s

performance goals sustain this alternative?

Is it practical? Does the management have the

capabilities and resources to do it?

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Cognitive Biases
A cognitive bias is a pattern of deviation in judgment that occurs in particular
situations.
 Suggests decision makers use heuristics to deal with
bounded rationality.
 A heuristic is a rule of thumb to deal with complex
situations.
 If the heuristic is wrong, however, then poor decisions
result from its use.

 Systematic errors can result from use of an incorrect

heuristic.
 These errors will appear over and over since the rule
used to make decision is flawed.
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Types of Cognitive Biases
 Prior hypothesis bias: manager allows strong prior beliefs
about a relationship between variables and makes decisions
based on these beliefs even when evidence shows they are
wrong.

 Representativeness: decision maker incorrectly generalizes

a decision from a small sample or one incident.

 Illusion of control: manager over-estimates their ability to

control events.

 Escalating commitment: manager has already committed

considerable resource to project and then commits more
even after feedback indicates problems.

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Improved Group Decision Making
 Devil’s Advocacy: one member of the group acts as the devil’s
advocate and critiques the way the group identified alternatives.
 Points out problems with the alternative selection.

 Dialectical inquiry: two different groups are assigned to the

problem and each group evaluates
Improved the other
Group Decision group’s alternatives.
Making
 Top managers then hear each group present their alternatives
and each group can critique the other.

 Promote diversity: by increasing the diversity in a group, a wider

set of alternatives may be considered

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Organizational Learning &
Creativity
 Organizational Learning: Managers seek to improve member’s ability to
understand the organization and environment so as to raise effectiveness.

The learning organization: managers try to improve the

people’s ability to behave creatively to maximize
organizational learning

 Creativity: is the ability of the decision maker to discover novel ideas

leading to a feasible course of action.

A creative management staff and employees are the key to

the learning organization

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Creating a Learning Organization
 Senge suggests top managers follow several steps to build in
learning:
 Personal Mastery: managers empower employees and allow them
to create and explore.
 Mental Models: challenge employees to find new, better methods
to perform a task.
 Team Learning: is more important than individual learning since
most decisions are made in groups.
 Build a Shared Vision: people share a common mental model of
the firm to evaluate opportunities.
 Systems Thinking: know that actions in one area of the firm
impacts all others.
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Individual Creativity
Organizations can build an environment supportive
of creativity.
Many of these issues are the same as for the learning
organization.
Managers must provide employees with the ability to
take risks.
If people take risks, they will occasionally fail.

Thus, to build creativity, periodic failures must be

rewarded.
This idea is hard to accept for some managers.

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Building Group Creativity
Brainstorming: group members introduce all possible solutions
before evaluating any of them

Four main rules of brainstorming:

 avoid criticizing others’ ideas
 share even wild suggestions
 offer as many suggestions and supportive comments as possible
 build on others’ suggestions

Production blocking:
 a potential problem with brainstorming
 Members cannot absorb all the information being presented
during the session and can forget their own alternatives

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Building Group Creativity
Nominal Group Technique: a group process where
members are a group in name only - do not attempt to
agree as a group on any solution

Nominal Group Process:

each member writes down his or her ideas
ideas are presented orally and recorded for all to see
ideas are discussed simultaneously for clarity
members individually rank and secretly vote on each
proposed solution (idea)
the idea with the most individual votes is accepted

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Building Group Creativity
Delphi Technique: a group process where members
do not actually meet - usually very time-consuming

Delphi Technique Process:

A problem is identified
Facilitator asks experts for solutions
Experts’ opinions are compiled and analyzed for
common factors
Experts’ opinions are resubmitted for review of
results and request for opinions
Process is continued until a consensus is reached

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Group Decision Making
Advantages
 Groups can accumulate more
knowledge and facts
 Groups have a broader
perspective and consider more
alternative solutions
 Individuals who participate in the
decision making process are
more satisfied with the decisions
and are more likely to support it
 Group decision process serves an
important communication
function as well as a political
function
Disadvantages
 Groups often work more slowly
than individuals
 Group decisions involve
considerable compromise which
may lead to less than optimal
decision
 Groups are often dominated by
one individual or a small clique,
thereby negating many of the
virtues of group procedures
 Over-reliance on group decisions
can inhibit management’s ability
to act quickly and decisively
when necessary
 Groupthink –biased decision as
striving for agreement
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