The Managerial Decision-Making ProcessThe Managerial Decision-Making ProcessThe Managerial Decision-Making ProcessThe Managerial Decision-Making Process

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Managerial Decision MakingManagerial Decision Making

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Managerial Decision MakingManagerial Decision Making

An Overview An Overview ofof

Decision Making Decision Making

Chapter 1Chapter 1

Profile of a Profile of a DecisionDecision

The Decision-Making ProcessThe Decision-Making Process The Decision MakerThe Decision Maker The DecisionThe Decision

Decision Making and Decision Making and Problem SolvingProblem Solving

Problem solving is concerned with Problem solving is concerned with overcoming obstacles in the path overcoming obstacles in the path toward an objective.toward an objective.

Problem solving may or may not Problem solving may or may not require action.require action.

A decision is an act requiring A decision is an act requiring judgment that is translated into judgment that is translated into action.action.

Decision Making and Decision Making and Problem SolvingProblem Solving (cont’d)(cont’d)

Decision making is much more Decision making is much more comprehensive than problem comprehensive than problem solving.solving.

The terms are interrelated, but not The terms are interrelated, but not interchangeable.interchangeable.

The Significance of Decision MakingThe Significance of Decision Making

Decision making is the one truly Decision making is the one truly distinctive characteristic of distinctive characteristic of managers.managers.

Decisions made by top managers Decisions made by top managers commit the total organization commit the total organization toward particular courses of action.toward particular courses of action.

The Significance of Decision MakingThe Significance of Decision Making (cont’d)(cont’d)

Decisions made by lower levels of Decisions made by lower levels of management implement the strategic management implement the strategic decisions of top managers in the decisions of top managers in the operating areas of the organization.operating areas of the organization.

Decisions invariably involve Decisions invariably involve organizational change and the organizational change and the commitment of scarce resources.commitment of scarce resources.

The Scope of Decision MakingThe Scope of Decision Making

Individual decision makingIndividual decision making Group decision makingGroup decision making Organizational decision makingOrganizational decision making Metaorganizational decision makingMetaorganizational decision making

(Note: Refer to Figure 1.1)

Figure 1.1 The Scope of Decision MakingFigure 1.1 The Scope of Decision Making

Group

Organization

Metaorganization

Individual

DecisionalOutputs(Actions transactions,outcomes)

Decisional Inputs(Objectives,information,resources, energy)

PermeableBoundaries

Interactional Levels

External Environment

A Typology of DecisionsA Typology of Decisions

Decision-making strategiesDecision-making strategies (Fig. 1.2)(Fig. 1.2)

Computational

Judgmental

Compromise

Inspirational

A Typology of DecisionsA Typology of Decisions (cont’d)(cont’d)

Category ICategory I - routine, recurring, - routine, recurring,

certainty with regard to the outcomecertainty with regard to the outcome

Category IICategory II - - nonroutine, nonroutine,

nonrecurring, uncertainty with regard nonrecurring, uncertainty with regard to the outcometo the outcome

Decision categories

A Typology of DecisionsA Typology of Decisions (cont’d)(cont’d)

Category ICategory I / / Computational strategyComputational strategy

Category IICategory II / / Judgmental strategyJudgmental strategy

Decision combinations

Table 1.1 A Categorization of Decision CharacteristicsTable 1.1 A Categorization of Decision CharacteristicsCategory I Decisions Category II Decisions

Classifications Programmable; routine; Nonprogrammable; unique;generic; computational; judgmental; creative;negotiated; compromise adaptive; innovative; inspirational

Structure Procedural; predictable; Novel, unstructured,certainty regarding consequential, elusive, andcause/effect relationships; complex; uncertain cause/recurring; within existing effect relationships; non-technologies; well-defined recurring; informationinformation channels; channels undefined, incom-definite decision criteria; plete information; decisionoutcome preferences may criteria may be unknown;be certain or uncertain outcome preferences may

be certain or uncertain

Strategy Reliance upon rules and Reliance on judgment,principles; habitual intuition, and creativity;reactions; prefabricated individual processing;response; uniform heuristic problem-solvingprocessing; computational techniques; rules of thumb;techniques; accepted general problem-solvingmethods for handling processes

Figure 1.2 The Concept of Decision-Making StrategiesFigure 1.2 The Concept of Decision-Making Strategies

KnowledgeRegarding

the Outcome Strong Preference Weak Preference

Preference for the Outcome

ComputationalDecision-Making

Strategy

CompromiseDecision-Making

Strategy

JudgmentalDecision-Making

Strategy

InspirationalDecision-Making

Strategy

Low Levelof Knowledge

High Levelof Knowledge

The Locus of ChoiceThe Locus of Choice

Top management makes Category II Top management makes Category II decisions.decisions.

Operating management makes Operating management makes Category I decisions. Category I decisions.

Middle management supervises the Middle management supervises the making of Category I decisions and making of Category I decisions and supports the making of Category II supports the making of Category II decisions.decisions.

Characteristics of Managerial DecisionsCharacteristics of Managerial Decisions (Category II)(Category II)

Long-range organizational objectivesLong-range organizational objectives Best choice from among a set of Best choice from among a set of

alternativesalternatives Decision involves organizational Decision involves organizational

changechange Decision requires a commitment of Decision requires a commitment of

resourcesresources

Characteristics of Managerial Decisions Characteristics of Managerial Decisions

(Category II)(Category II) (cont’d)(cont’d)

Choice is a means to an end, not an Choice is a means to an end, not an end to itselfend to itself

Decision maker tends to overestimate Decision maker tends to overestimate successsuccess

Success is measurable through Success is measurable through objectives attainmentobjectives attainment

Perspectives on Managerial Perspectives on Managerial Decision MakingDecision Making

The integrative perspectiveThe integrative perspective The interdisciplinary perspectiveThe interdisciplinary perspective The interlocking perspectiveThe interlocking perspective The interrelational perspectiveThe interrelational perspective

The Managerial The Managerial Decision-Making ProcessDecision-Making Process

Process components are decision-Process components are decision-making functions.making functions.

Decision-making functions are highly Decision-making functions are highly interrelated and interdependent.interrelated and interdependent.

The process is highly dynamic with The process is highly dynamic with several subprocesses.several subprocesses.

The process can accommodate several The process can accommodate several concurrent Category II decisions.concurrent Category II decisions.

Figure 2.1 The Decision-Making ProcessFigure 2.1 The Decision-Making Process

SearchingSearchingforfor

alternativesalternatives

ImplementingImplementingdecisionsdecisions

Follow-upFollow-upandand

controlcontrol

SettingSettingmanagerialmanagerialobjectivesobjectives

Comparing &Comparing &evaluatingevaluating

alternativesalternatives

The actThe actof choiceof choiceTake Take

correctivecorrectiveaction as action as necessarynecessary

RenewRenewsearchsearch

ReviseReviseobjectivesobjectives

Revise or Revise or update update objectivesobjectives

Decision-Making Function No. 1Decision-Making Function No. 1

Objectives constitute the foundation Objectives constitute the foundation for rational decision making.for rational decision making.

Objectives are the ends for the means Objectives are the ends for the means of managerial decision making.of managerial decision making.

Attainment of the objective is the Attainment of the objective is the ultimate measure of decision success.ultimate measure of decision success.

Setting Managerial Objectives:Setting Managerial Objectives:

Decision-Making Function No. 2Decision-Making Function No. 2

The limitations of time and moneyThe limitations of time and money The declining value of additional The declining value of additional

informationinformation The rising cost of additional The rising cost of additional

informationinformation Abort the search in the zone of cost Abort the search in the zone of cost

effectivenesseffectiveness

Searching for Alternatives:Searching for Alternatives:

Figure 2.2 The Cost of Additional InformationFigure 2.2 The Cost of Additional Information

Cost

Averagevalue

Marginalvalue

Point ofoptimality

Zone ofcosteffectiveness

Perfection of informationPerfection of information00 100%100%

Val

ue

and

V

alu

e an

d

cost

of

add

itio

nal

info

rmat

ion

cost

of

add

itio

nal

info

rmat

ion

Decision-Making Function No. 3Decision-Making Function No. 3

Alternatives result from the search.Alternatives result from the search. There are usually three to five There are usually three to five

alternatives.alternatives. One alternative is to do nothing.One alternative is to do nothing. Alternatives are evaluated using Alternatives are evaluated using

criteria derived from the objective.criteria derived from the objective.

Comparing and Evaluating Comparing and Evaluating Alternatives:Alternatives:

Decision-Making Function No. 3 Decision-Making Function No. 3 (cont’d)(cont’d)

Evaluation should include an Evaluation should include an anticipation of the likely outcome for anticipation of the likely outcome for each alternative.each alternative.

Evaluation should also anticipate Evaluation should also anticipate obstacles or difficulties at the time of obstacles or difficulties at the time of implementation.implementation.

Also:Also:

Decision-Making Function No. 4Decision-Making Function No. 4

The choice is the culmination of the The choice is the culmination of the process, not all of it.process, not all of it.

The choice confronts the decision The choice confronts the decision maker with discernible constraints.maker with discernible constraints.

The best alternative may not be readily The best alternative may not be readily apparent to the decision maker.apparent to the decision maker.

The Act of Choice:The Act of Choice:

Decision-Making Function No. 4 Decision-Making Function No. 4 (cont’d)(cont’d)

The best choice is likely to ensue The best choice is likely to ensue from the right approach.from the right approach.

The choice should be the alternative The choice should be the alternative most likely to result in the most likely to result in the attainment of the objective.attainment of the objective.

Also:Also:

Decision-Making Function No. 5Decision-Making Function No. 5

Implementing Decisions:Implementing Decisions:

Decision success is a function Decision success is a function

of decision quality of decision quality

and and

decision implementation.decision implementation.

Decision-Making Function No. 5 Decision-Making Function No. 5 (cont’d)(cont’d)

Observance of operating constraintsObservance of operating constraints Influence of the decision makerInfluence of the decision maker Involvement of decision Involvement of decision

implementersimplementers Absence of conflict of interestAbsence of conflict of interest

Areas contributing to decision Areas contributing to decision success:success:

Decision-Making Function No. 5 Decision-Making Function No. 5 (cont’d)(cont’d)

Disregard of timelinessDisregard of timeliness Unlimited additional informationUnlimited additional information Disregard of risk/reward Disregard of risk/reward

relationshipsrelationships

Areas detracting from decision Areas detracting from decision success:success:

StrategicStrategicDecisionDecisionQualityQuality

1.1. Compatibility withCompatibility with 1.1. Conflict of Conflict of interest.interest.operating constraints.operating constraints.

2.2. Timeliness.Timeliness. 2.2. Risk-reward Risk-reward factor.factor.

3.3. Optimum amount ofOptimum amount of 3.3. Understanding Understanding thetheinformation.information. decision.decision.

4.4. Influence of theInfluence of thedecision maker.decision maker.

Figure 2.3 Evaluation of Strategic Figure 2.3 Evaluation of Strategic Decision SuccessDecision Success

StrategicStrategicDecisionDecisionSuccessSuccess

= = ff + + ff Strategic DecisionStrategic DecisionImplementationImplementation

Decision-Making Function No. 6Decision-Making Function No. 6

Follow-up and control is essential to Follow-up and control is essential to ensure that an implemented decision ensure that an implemented decision meets its objective.meets its objective.

Performance is measured by Performance is measured by observing the implemented decision observing the implemented decision in relation to its standard derived in relation to its standard derived from the objective.from the objective.

Follow-Up and ControlFollow-Up and Control

Decision-Making Function No. 6 Decision-Making Function No. 6 (cont’d)(cont’d)

Unacceptable variance from standard Unacceptable variance from standard performance should elicit timely and performance should elicit timely and appropriate corrective action.appropriate corrective action.

Corrective action (Corrective action (subprocess no. 1subprocess no. 1) may ) may result in the implementation of another result in the implementation of another alternative (alternative (subprocess no. 2subprocess no. 2), which, if ), which, if not successful, may result in a revision of not successful, may result in a revision of the original objective (the original objective (subprocess no. 3subprocess no. 3).).

Also:Also: