Chapter Four

Decision Making
 1. Definition of Decision Making

Decision is choice made from available

alternatives.

Decision Making is a process of identifying

problems and opportunities and resolving them.
 2. Importance of Decisions
Basically some decisions are more
important than other. The importance of
decisions can be seen from:
The degree of influence the decision has
on the future business activities
The impact of the decision on other
functional areas
Recurrence of the decision
 3. Categories of Decision
 Programmed and non programmed
 Major and minor
 Routine and strategic
 Simple and complex
A) Programmed Decisions
 a simple, routine matter for which a manager
has an established decision rule
B) Non-programmed Decisions
 a new, complex decision that requires a
creative solution
 Categories of Decision Cont’d
C) Major and Minor
 Categorized based on the importance.

D) Routine and Strategic

Routine decisions are:
 repetitive decisions and are called tactical or
household decisions.
 supportive to the major decisions and have a main
purpose of achieving efficiency.
 Strategic decisions are long range decisions that
have significant impact on the entire organization.
 4. Decision Making Conditions
 Virtually all decisions are made in an
environment of at least some uncertainty.
 The degree will vary from relatively certain to
great uncertainty.
The conditions under which decisions are made
includes: Certainty, Risk, Uncertainty, Ambiguity
 Decision Making Conditions Cont’d
A) Decision making under Certainty:
 Decision makers are relatively sure about what will happen when they
make decisions.
 Information is available and is considered to be reliable and cause and
effect relationship are known.

B) Decision making under Risk

● decision has clear-cut goals
● good information is available
● future outcomes associated with each alternative are subject to chance
Attitude towards risk
 Decision maker’s aversion to or acceptance of risk depends on:
 Individual difference
 Size of the risk
 Level of management in organization
 Source of funds involved
 Decision Making Conditions Cont’d
C) Decision making under 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
D) Decision making Ambiguity
 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
 5.Decision Making Techniques
1. Group Decision Making
 Group problem solving directs the manager in the role of
facilitators and consultant.
 Compare to individual decision making , group can provide more
input and better decision.
2. Nominal Group Technique (NGT)
 It is eliciting written questions, ideas, and reactions from group
members.
Consists of :
 Silently generating ideas in written.
 Round-robin presentation by group members of their ideas on a flip
chart.
 Discussing each recorded idea and evaluate.
 Voting individually on priority ideas, with group solution being
derived mathematically through rank ordering.
 Decision making techniques Cont’d
3. Delphi Technique
 It is judgments on a particular topic are systematically gathered
from participants who do not meet face to face.
 Useful when expert opinions are needed .
4. Brainstorming
 The idea generating technique wherein a Group members meet
and generate diverse ideas about the nature, cause , definition, or
solution to a problem without regard to questions of feasibility
or practicality.
 Through this technique, individuals are encouraged to identify a
wide range of ideas. Usually, one individual is assigned to
record the ideas on a chalkboard.
 most effective at the beginning, once a problem has been stated
 most effective for simple, well-defined problems
 Decision making techniques Cont’d
5. Fishbone diagram (causes and effect)
 Is drawn after a brainstorming session, the central problem is
visualized as the head of the fish, with the skeleton divided into
branches showing contributing causes of different parts of the
problem.
6. Pareto Analysis
 Selecting the Most Important Changes To Make.
 It uses the Pareto principle - the idea that by doing 20% of work
you can generate 80% of the advantage of doing the entire job
 is a formal technique for finding the changes that will give the
biggest benefits.
 Decision making techniques Cont’d
7. Paired Comparison Analysis
 Working Out the Relative Importance of Different Options.
 helps you to work out the importance of a number of
options relative to each other.
 particularly useful where you do not have objective data to
base this on.
 easy to choose the most important problem to solve, or
select the solution that will give you the greatest advantage .
 Decision making techniques Cont’d
8. Six thinking hats - Looking at a Decision from All Points of
View
 It is used to look at decisions from a number of
important perspectives.
 This forces you to move outside your habitual
thinking style, and helps you to get a more rounded
view of a situation.
'6 Thinking Hats‘
How to the Tool:
 Each 'Thinking Hat' is a different style of thinking.
 Decision making techniques Cont’d
White Hat:
 With this thinking hat you focus on the data
available. Look at the information you have, and see
what you can learn from it.
Red Hat:
 you look at problems using intuition, gut reaction,
and emotion .
 Try to understand the responses of people who do
not fully know your reasoning.
Black Hat:
 look at all the bad points of the decision .
 Decision making techniques Cont’d
Yellow Hat:
 The yellow hat helps you to think positively.
 It is the optimistic viewpoint that helps you to see all the
benefits of the decision and the value in it
Green Hat:
 The Green Hat stands for creativity.
 This is where you can develop creative solutions to a problem
Blue Hat:
 The Blue Hat stands for process control.
 This is the hat worn by people chairing meetings.
When running into difficulties because ideas are running dry,
they may direct activity into Green Hat thinking.
 When contingency plans are needed, they will ask for Black Hat
thinking,
 Decision making techniques Cont’d
9. Decision grid:
 is a matrix for comparing multiple options when there are
also several criteria to consider.
 It has many names, including Pugh matrix, solution matrix,
decision making matrix, decision grid, problem selection
grid.
 It is a rational model and is also classed as a
visual decision tool.
 When the complexity of the decision increases these
decision making tools and techniques can prove useful.
 Especially as the number of options and criteria increase.
 6. Decision-Making Process
 
Evaluation Recognition of
and Decision
Feedback Requirement


Implementation Diagnosis
of Chosen Decision- and Analysis
Alternative Making of Causes
Process


Selection of Development of
Desired Alternatives
Alternative


17
 7. Decision Making Model
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
7.1 Three Decision-Making Models

 Classical model
 Administrative Model
 Political Model
 A) Classical Model
Logical decision in the organization’s best economic
interests
Assumptions
 Decision maker operates to accomplish goals that are known
and agreed upon
 Decision maker strives for condition of certainty – gathers
complete information
 Criteria for evaluating alternatives are known
 Decision maker is rational and uses logic
Normative = describes how a manager should make decision
and provides guidelines for reaching an ideal outcome for the
organization
B) Administrative Model - Herbert A. Simon
 Managers actually make decisions in difficult
situations characterized by non-programmed
decisions, uncertainty, and ambiguity
 Two concepts are instrumental in shaping the
administrative model
● Bounded rationality: 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
Administrative Model Cont’d
 Decision goals often are vague, conflicting
and lack consensus among managers;
 Rational procedures are not always used
 Managers’ searches for alternatives are limited
 Managers settle for a satisficing rather than a
maximizing solution
 Based on intuition (uncertainty, limited facts
& data, time, less scientific predictability)

Descriptive = how managers actually make

decisions - not how they should
 C) Political Model
 Closely resembles the real environment in
which most managers and decision makers
operate
 Useful in making non-programmed decisions
 Decisions are complex
 Disagreement and conflict over problems and
solutions are normal
Coalition = informal alliance among managers
who support a specific goal
 7.2 Characteristics of Decision Making Models

Classical Administrative Political

- Clear-cut problem and goal - Vague problem and goals - Pluralistic; conflicting goals

- Condition of certainty - Condition of uncertainty - Condition of uncertainty/ambiguity

- Full information about - Limited information about - Inconsistent viewpoints;

alternatives and their outcomes alternatives and their outcomes ambiguous information

- Rational choice by individual - Satisficing choice for resolving - Bargaining and discussion

for maximizing outcomes problem using intuition among coalition members