CHAPTER 9CHAPTER 9

MANAGERIAL DECISION MANAGERIAL DECISION MAKINGMAKING

Class OverviewClass Overview

Decision making defineDecision making defineTypes of decisions and problemsTypes of decisions and problems Decision making theories or modelsDecision making theories or modelsDecision making stepsDecision making stepsDecision making TreeDecision making TreeProbability theoryProbability theoryGroup decision making techniquesGroup decision making techniques

Decision MakingDecision MakingDecision MakingDecision Making

The act of choosing one alternative from The act of choosing one alternative from available set of alternatives.available set of alternatives.

Decision-Making ProcessDecision-Making Process The process of recognizing and defining the The process of recognizing and defining the

nature of a decision situation, identifying nature of a decision situation, identifying alternatives, choosing the “best” alternative, alternatives, choosing the “best” alternative, and putting it into practice.and putting it into practice.

An effective decision is one that optimizes An effective decision is one that optimizes some set of factors such as profits, sales, some set of factors such as profits, sales, employee welfare, and market share.employee welfare, and market share.

Managers make decisions about both Managers make decisions about both problems and opportunities.problems and opportunities.

Types of Decisions (cont)Types of Decisions (cont)

Programmed DecisionsProgrammed DecisionsA decision that is a fairly structured A decision that is a fairly structured

decision or recurs decision or recurs with some frequency or both.with some frequency or both.Example: Starting your car in the morning.Example: Starting your car in the morning.

Nonprogrammed decisionsNonprogrammed decisionsA decision that is relatively unstructured A decision that is relatively unstructured

and occurs less often than a programmed and occurs less often than a programmed decision.decision.Example: Choosing a vacation destination.Example: Choosing a vacation destination.

Decision-Making ConditionsDecision-Making Conditions

Decision Making Under CertaintyDecision Making Under Certainty

A condition in which the decision maker A condition in which the decision maker knows all the information they know what knows all the information they know what the alternatives are and what conditions the alternatives are and what conditions are associated with each alternative.are associated with each alternative.

Decision Making Under RiskDecision Making Under Risk

A condition in which the availability of A condition in which the availability of each alternative and its potential payoffs each alternative and its potential payoffs and costs associated are subject to and costs associated are subject to chance.chance.

Decision Making Under UncertaintyDecision Making Under Uncertainty

A condition in which the decision maker does A condition in which the decision maker does not have complete information and doesn’t not have complete information and doesn’t know all the alternatives. Here managers know know all the alternatives. Here managers know what goal is to be achieved but information what goal is to be achieved but information about future events is incomplete.about future events is incomplete.

Decision making under Ambiguity:Decision making under Ambiguity:

The goals to be achieved or the problem to be The goals to be achieved or the problem to be solved is unclear, alternatives are difficult to solved is unclear, alternatives are difficult to define and information about outcomes is define and information about outcomes is unavailable.unavailable.

Decision-Making ConditionsDecision-Making Conditions

Decision making under Certainty, Decision making under Certainty, Uncertainty, Risk, and ambiguityUncertainty, Risk, and ambiguity

Organizational problems

Certainty

Low Possibility of failure High

Risk Uncertainty Ambiguity

Problem solution

Programmed Non-programmed Decisions Decisions

Managerial Decision Making Managerial Decision Making ProcessProcess

Recognition of decision requirement

Diagnosis and Analysis of Causes

Development Of alternative

Selection of Desired alternative

ImplementationOf desired alternative

Evaluation andFeed back

Steps in the Decision-MakingSteps in the Decision-Making

Step Detail Example 1.Recognizing and defining the decision situation

Some stimulus indicates that a decision must be made. The stimulus may be positive or negative.

A plant manager sees that employee turnover has increased by 5 percent.

2.Identifying alterna-tives

Both obvious and creative alternatives are desired. In general, the more impor-tant the decision, the more alternatives should be considered.

The plant manager can increase wages, increase benefits, or change hiring standards.

3.Evaluating alterna-tives

Each alternative is evalu-ated to determine its feasibility, its satisfactori-ness, and its conse-quences.

Increasing benefits may not be feasible. Increasing wages and changing hiring standards may satisfy all conditions.

Steps in the Rational Steps in the Rational Decision-Making Process Decision-Making Process

(cont’d)(cont’d)Step Detail Example

4. Selecting the best alternative

Consider all situational factors, and choose the alternative that best fits the manager’s situation.

Changing hiring standards will take an extended period of time to cut turnover, so increase wages.

5. Implementing the chosen alternative

The chosen alternative is implemented into the organizational system.

The plant manager may need permission from corporate headquarters. The human resource department establishes a new wage structure.

6. Following up and evaluating the results

At some time in the future, the manager should ascertain the extent to which the alternative chosen in step 4 and implemented in step 5 has worked.

The plant manager notes that, six months later, turnover has dropped to its previous level.

TYPES OF DECISION MODELSTYPES OF DECISION MODELS

Classical Decision Model

Managers are expected to make Managers are expected to make decisions that are economically decisions that are economically sensible, logical and in the sensible, logical and in the organization best interest.organization best interest.

Basic principles:Basic principles: Humans are rationalHumans are rational We seek to optimize our outcomesWe seek to optimize our outcomes

The classical model suggests that The classical model suggests that decisions are made in a logical series decisions are made in a logical series of stepsof steps

The Classical Model of The Classical Model of Decision MakingDecision Making

When faced with a

decision situation,

managers should. . .

. . . and end up with

a decision that best

serves the interests

of the organization.

• obtain complete

and perfect information

• eliminate uncertainty

• evaluate everything

rationally and logically

Steps in Classical Decision ModelSteps in Classical Decision Model

1. 1. Opportunity or problem of situation Opportunity or problem of situation existsexists

2. Opportunity is recognized to exist2. Opportunity is recognized to exist

3. Opportunity is defined3. Opportunity is defined

4. Alternatives are generated4. Alternatives are generated

5. Information is gathered5. Information is gathered

6. Alternatives are evaluated6. Alternatives are evaluated

7. One alternative is selected7. One alternative is selected

8. Alternative is implemented and 8. Alternative is implemented and evaluated in terms of effectivenessevaluated in terms of effectiveness

Problems with the ModelThe assumptions are flawedThe assumptions are flawed

humans are not perfectly rationalhumans are not perfectly rationalinformation is not costless or completeinformation is not costless or complete

Assumes that all alternatives will Assumes that all alternatives will be consideredbe considered

Assumes that the consequences of Assumes that the consequences of each alternative will be exploredeach alternative will be explored

Assumes that we can cognitively Assumes that we can cognitively cope with all this informationcope with all this information

Administrative Decision ModelAdministrative Decision Model

Acknowledges the real-world Acknowledges the real-world limitations on manager’s decision limitations on manager’s decision making making

Managers in this model operate with Managers in this model operate with bounded rationalitybounded rationality in making in making decisionsdecisions

Recognizes that:Recognizes that:All possible alternatives and their All possible alternatives and their

associated consequences cannot be associated consequences cannot be generated generated

Administrative Model (cont.)Administrative Model (cont.)

Both the available information and the Both the available information and the definition of the situation are likely to definition of the situation are likely to be incomplete and inadequate to some be incomplete and inadequate to some degreedegree

The final decision may be based on The final decision may be based on criteria other than simple optimization criteria other than simple optimization or outcome maximizationor outcome maximization

When managers seek solutions that When managers seek solutions that are “good enough” they are “good enough” they satisficesatisfice, , rather than rather than maximizemaximize

Administrative model of Decision Administrative model of Decision

Making (cont’dMaking (cont’d))Bounded RationalityBounded Rationality

The concept that decision makers are The concept that decision makers are limited by their values and unconscious limited by their values and unconscious reflexes, skills, and habits.reflexes, skills, and habits.

SatisficingSatisficingThe tendency to search for alternatives only The tendency to search for alternatives only

until one is found that meets some until one is found that meets some minimum standard of sufficiency to resolve minimum standard of sufficiency to resolve the problem.the problem.

The Administrative Model of The Administrative Model of Decision MakingDecision Making

When faced with a

decision situation

managers actually…

. . . and end up with a

decision that may or may

not serve the interests

of the organization.

• use incomplete and

imperfect information

• are constrained by

bounded rationality

• tend to satisfice

Other Common Models Of Other Common Models Of Decision Making Decision Making

Political model (Coalition)Political model (Coalition)A political force in decision making A political force in decision making

which consists of an informal alliance which consists of an informal alliance of individuals or groups formed to of individuals or groups formed to achieve a goal.achieve a goal.

IntuitionIntuitionAn innate belief about something without An innate belief about something without

conscious consideration.conscious consideration.

Other Common Models Of Other Common Models Of Decision Making (Cont’d) Decision Making (Cont’d)

Escalation of CommitmentEscalation of CommitmentA decision maker is staying with a A decision maker is staying with a

decision even when it appears to be decision even when it appears to be wrong.wrong.

Risk PropensityRisk PropensityThe extent to which a decision maker The extent to which a decision maker

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

Group decision makingGroup decision makingTechniquesTechniques

Brain stormingBrain stormingNominal Group TechniqueNominal Group TechniqueDelphi TechniqueDelphi Technique

Brain stormingBrain storming

Group membersState ideas

Group leader recordEach idea where Group can read it

Ideas evaluatedOnly after all haveBeen recorded

No comments on ideas at this stage

Nominal Group TechniqueNominal Group Technique

Step 1. Each group member writes down Step 1. Each group member writes down individual ideas on the decisionindividual ideas on the decision

Step 2. Each member present individual ideas Step 2. Each member present individual ideas orally. The ideas are written on the boardorally. The ideas are written on the board

Step 3. when all members present their Step 3. when all members present their ideas, the entire group discuss these ideas.ideas, the entire group discuss these ideas.

Step 4. When discussion is completed, a Step 4. When discussion is completed, a secret ballot is taken to allow members to secret ballot is taken to allow members to support their favorite idea. The idea support their favorite idea. The idea receiving the maximum votes are acceptedreceiving the maximum votes are accepted

The Delphi TechniqueThe Delphi Technique

Step 1. Problem is identifiedStep 1. Problem is identified

Step 2. Group members are asked to offer Step 2. Group members are asked to offer solutions to the problem by providing solutions to the problem by providing anonymous responses to the questionnaire.anonymous responses to the questionnaire.

Step 3. Responses are compiled and send to Step 3. Responses are compiled and send to all group members.all group members.

Step 4. Individual group members are asked Step 4. Individual group members are asked to generate new solutionsto generate new solutions

Step 5. Step 3 and 4 are repeated until a Step 5. Step 3 and 4 are repeated until a consensus solution is reachedconsensus solution is reached

Advantages/Disadvantages of Group Advantages/Disadvantages of Group decisionsdecisions

1.1. Group can generate better solutions then Group can generate better solutions then individual.individual.

2.2. Group decision is generally supported by Group decision is generally supported by them. them.

3.3. ownership.ownership.

DisadvantagesDisadvantages

1.1. Group decision take longer timeGroup decision take longer time

2.2. It cost more than individual decisionIt cost more than individual decision

3.3. Group decision may become contaminated if Group decision may become contaminated if they want to support friendly relationship they want to support friendly relationship

AdvantageAdvantagess