Decision Making

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 The Nature of
Decision Making

Making effective decisions, as well as recognizing when

a bad decision has been made and quickly responding to
mistakes, is a key ingredient in organizational
effectiveness.
Some experts believe that decision making is the most
basic and fundamental of all managerial activities.
Decision making is most closely linked with the Planning
function.
However, it is also part of Organizing, Leading and
Controlling.
• Decision making is the act of
choosing one alternative from
among a set of alternatives.

• We have to first decide that a

decision has to be made and
then secondly identify a set
of feasible alternatives before
we select one.
 Decision-Making Process

• Decision-Making Process includes:

• recognizing and defining the

nature of a decision situation
• identifying alternatives
• choosing the ‘best’ [most
effective] alternative and
• putting it into practice.
Decision-Making Process. . . (continued)

Sometimes effective decisions must be

made to:
• Optimize some set of factors
such as profits, sales, employee
welfare and market share or
• Minimize loss, expenses or
employee turnover or
• Select best method for going out
of business, laying off
employees, or terminating a
strategic alliance.
Decision-Making Process. . . (continued)

Managers make decisions

about both problems
(undesirable situations) and
opportunities (desirable
situations).
Cutting costs by 10%
Learning that the company has
earned higher-than-projected
profits
It may take a long time before a
manager can know for sure if
the right decision was made.
 Types of Decisions

• Programmed decision is
one that is fairly
structured or recurs with
some frequency (or both).
• Nonprogrammed decision
is one that is unstructured
and occurs much less
often than a programmed
decision.
Programmed Decisions. .
Many decisions regarding
basic operating systems
and procedures and
standard organizational
transactions fall into this
category.
McDonald’s employees are
trained to make the Big Mac
according to specific
procedures.
Starbucks, and many other
organizations, use programmed
decisions to purchase new
supplies [coffee beans, cups
and napkins].
Nonprogrammed Decisions. ..
Most of the decisions made by
top managers involving strategy
and organization design are
nonprogrammed.
Decisions about mergers, acquisitions
and takeovers, new facilities, new
products, labor contracts and legal
issues are nonprogrammed decisions.
Managers faced with
nonprogrammed decisions must
treat each one as unique,
investing great amounts of time,
energy and resources into
exploring the situation from all
views.
Intuition and experience are
major factors in these decisions.
 Decision-Making Conditions

• Decision Making Under

Certainty

• Decision Making Under

Risk

• Decision Making Under

Uncertainty
 Decision Making Under Certainty

A state of certainty exists when a decision maker knows,

with reasonable certainty, what the alternatives are and
what conditions are associated with each alternative.
Very few organizational decisions, however, are made
under these conditions.
The complex and turbulent environment in which
businesses exist rarely allows for such decisions.
Decision Making Under Risk
A state of risk exists when a decision maker
makes decisions under a condition in which
the availability of each alternative and its
potential payoffs and costs are all
associated with probability estimate.
Decisions such as these are based on past
experiences, relevant information, the
advice of others and one’s own judgment.
Decision is ‘calculated’ on the basis of
which alternative has the highest probability
of working effectively. [union negotiations,
Porsche’s SUV focus vs high-performance
sports cars]
Decision Making Under Uncertainty

A state of uncertainty exists when a

decision maker does not know all of the
alternatives, the risks associated with
each, or the consequences each
alternative is likely to have.
Most of the major decision making in
today’s organizations is done under
these conditions.
To make effective decisions under
these conditions, managers must
secure as much relevant information as
possible and approach the situation
from a logical and rational view.
Intuition, judgment and experience
always play major roles in the decision-
making process under these conditions.
A View of Decision-Making
Conditions

Level of ambiguity and chances of making a bad decision

Lower Moderate Higher

Rational Perspectives
on Decision Making
Keys to Decision Making

Classical
Decision
Model

Rational
Decision
Making
 Classical Decision Model
• An approach to decision making
that tells managers how they
should make decisions.
• Approach assumes that managers
are logical and rational.
• Approach assumes that managers’
decisions will be in the best
interests of the organization.
• Conditions suggested in this
approach rarely, if ever, exist.
 The Classical Model of
Decision Making

Obtain complete and

perfect information. …and end up with a
When faced with a
Eliminate decision that best
decision situation,
uncertainty. Evaluate serves the interests
managers should…
everything rationally of the organization.
and logically…
Rational Decision Making
Consists of six (6)
steps that keep the
decision maker focused
on facts and logic and
help guard against
inappropriate
assumptions and
pitfalls.

Designed to help the

manager approach a
decision rationally and
logically.
 Rational Decision Making. . . (continued)

1) Recognizing and defining the decision

situation
a) Need to ‘define’ precisely what the problem is.
b) Manager must develop a complete
understanding of the problem.
c) Manager must carefully analyze and consider the
situation.
Rational Decision Making. . . (continued)

2) Identifying alternatives
a) Managers must realize that their alternatives may
be limited by legal, moral and ethical norms,
authority constraints, available technology,
economic considerations and unofficial social
norms.
 Rational Decision Making. . . (continued)

3) Evaluating alternatives

a) Each alternative must pass successfully

through three stages before it may be worthy of
consideration as a solution.
1. Feasibility – Is it financially possible? Is it
legally possible? Are there limited
human, material and/or informational
resources available?
2. Satisfactory – Does the alternative satisfy
the conditions of the decision situation?
[50% increase in sales]
3. Affordability – How will this alternative
affect other parts of the organization?
What financial and non-financial costs are
associated?
b) The manager must put ‘price tags’ on the
consequences of each alternative.
c) Even an alternative that is both feasible and
satisfactory must be rejected if the
consequences are too expensive for the total
system.
Rational
Decision Making.
..
(continued)

4) Selecting an alternative
a) Choosing the best alternative is the real test of
decision making.
b) Optimization is the goal because a decision is likely
to affect several individuals or departments.
c) Finding multiple acceptable alternatives may be
possible; selecting one and rejecting the others
may not be necessary.
Rational Decision Making. . . (continued)

5)Implementing the chosen alternative

a) Managers must consider people’s
resistance to change when implementing
decisions.
b) For some decisions, implementation is
easy; for others, very difficult or time
consuming.
c) Operational plans are very useful in
implementing alternatives.
d) Managers must also recognize that even
when all of the alternatives and their
consequences have been evaluated as
precisely as possible, unanticipated
consequences are still likely.
Rational Decision Making. . . (continued)

6) Following up a) Managers must evaluate the

and evaluating effectiveness of their decisions – did the
chosen alternative serve its original
the results purpose?
b) If the implemented alternative
appears not to be working, the
manager has several choices:
1. Another previously identified
alternative might be adopted or
2. Recognize that the situation was not
correctly defined and start the
process all over again or
3. Decide that the alternative has not
been given enough time to work or
should be implemented in a different
way.
Evaluating Alternatives in the
Decision-Making Process
 Behavioral Aspects of Decision Making

• Sometimes decision making must

reflect subjective considerations
(tastes, etc.)

• Other behavioral aspects include:

political forces, intuition, escalation
of commitment, risk propensity and
ethics.
Behavioral Aspects. . . (continued)

The Administrative Model of Decision Making

 Herbert A Simon, a Nobel Prize winner in
Economics, developed the model to describe
how decisions are often made rather than to
prescribe how they should be made.
 Argues that decision makers have incomplete
and imperfect information, are constrained by
‘bounded rationality’ and tend to ‘satisfice’
when making decisions.
 Bounded rationality suggests that decision
makers are limited by their values and
unconscious reflexes, skills and habits.
[American vs foreign automakers]
Behavioral Aspects. . .
(continued)

Satisficing is the tendency to

search for alternatives only
until one is found that meets
some minimum standard of
sufficiency.

Rather than conducting an

exhaustive search for the best
possible alternative, decision
makers tend to search only
until they identify an alternative
that meets some minimum
standard of sufficiency.
The Administrative Model of
Decision Making

Use incomplete and

...and end up with a
imperfect
When faced with a decision that may or
Information.
decision situation may not serve the
Are constrained by
managers actually… interests of the
bounded rationality.
organization.
Tend to satisfice…
 Behavioral
Aspects. . . (continued)

 The Classical and Administrative

Models paint quite a different
picture of decision making.
However, each may be used to
better understand how managers
make decisions.
 The Classical Model attempts to
explain how managers can at least
attempt to be more rational and
logical in their approach to
decisions.
 The Administrative Model can be
used by managers to develop a
better understanding of their
inherent biases and limitations.
Behavioral Forces Influencing Decisions

Political Forces in Decision Making

Coalition - an informal alliance of

individuals or groups formed to
achieve a common goal
[stockholders, directors, parliament
blocs, etc]
Impact of a coalition may be positive
or negative.
Managers must recognize when to
use coalitions, how to assess if they
are acting in the best interest of the
organization and how to control their
negative effects.
Behavioral Forces Influencing Decisions

Intuition – is an innate belief about

something, without conscious
consideration.

Deciding to do something because

it ‘feels right’ or one has a ‘hunch’.
Feeling is based on years of
experience and practice in making
decisions in similar situations; may
help managers make occasional
decisions without going through an
a-to-z process.
Behavioral Forces Influencing Decisions

Escalation of Commitment –
occurs when a decision maker
stays with a decision even
when it appears to be wrong.
[Pan Am holdings]
Decision makers must guard
against sticking too long with
an incorrect decision.
However, managers should
not ‘bail out’ of a seemingly
incorrect decision too soon.
Behavioral Forces Influencing Decisions

Risk Propensity – the extent

to which a decision maker
is willing to gamble when
making a decision.

Organizational culture is a
prime ingredient in
encouraging different
levels of risk.
Behavioral Forces Influencing Decisions

Ethics
Managerial ethics involves a
wide variety of decisions:
Relationships of the firm to
its employees [closing a dept to
save money]

Relationships of the
employees to the firm
Relationships of the firm to
other economic agents
For Better 1ndONEsia