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Principles of Management

Managing Decision MakingManaging Decision Making

Lecture 6Lecture 6

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Managerial Decision Making: the process by which managers respond to opportunities and threats by analyzing options, and making decisions about goals and courses of action.

Programmed Decisions: routine, almost automatic process.– Managers have made decision many times before.– There are rules or guidelines to follow.– Example: Deciding to reorder office supplies.

Non-programmed Decisions: unusual situations that have not been often addressed.– No rules to follow since the decision is new.– These decisions are made based on information, and a

manger’s intuition, and judgment. – Example: Should the firm invest in a new technology?

Types of Decision MakingTypes of Decision Making

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The Classical ModelThe Classical Model Classical model of decision making: a

prescriptive model that tells how the decision should be made.– Assumes managers have access to all the

information needed to reach a decision.– Managers can then make the optimum

decision by easily ranking their own preferences among alternatives.

Unfortunately, mangers often do not have all (or even most) required information.

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The Classical ModelThe Classical Model

List alternatives & consequences

Rank each alternative from low to high

Select bestalternative

Assumes all informationis available to manager

Assumes manager canprocess information

Assumes manager knowsthe best future course of

the organization

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The Administrative ModelThe Administrative Model Administrative Model of decision making:

Challenged the classical assumptions that managers have and process all the information.– As a result, decision making is risky.

Bounded rationality: There is a large number of alternatives and information is vast so that managers cannot consider it all.– Decisions are limited by people’s cognitive abilities.

Incomplete information: most managers do not see all alternatives and decide based on incomplete information.

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Why Information is IncompleteWhy Information is Incomplete

UncertaintyUncertainty& risk& risk

AmbiguousAmbiguousInformationInformation

Time constraints &information costs

IncompleteIncompleteInformationInformation

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Organizational Decision Making Constraints on decision makers

– organizations cannot do whatever they wish• face various constraints on their actions

Models of organizational decision processes (cont.)– incremental model - major decisions arise through a

series of smaller decisions

• piecemeal approach to larger solutions

– coalitional model - groups with differing preferences use power and negotiation to influence decisions

• used when people disagree about goals or compete for resources

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Figure : Seven Steps in the Decision-Making Process

Identifying opportunities and diagnosing problems

Identifying objectives

Generating alternatives

Evaluating alternatives

Choosing implementation strategies

Monitoring and evaluating

Reaching decisions

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Step 1: Identifying Opportunities and Diagnosing Problems The clear identification of opportunities or the diagnosis of

problems that require a decision. An assessment of opportunities and problems will only be

as accurate as the information on which it is based.

Objectives reflect the results the organization wants to attain. Also called targets, standards or ends.– The quantity and quality of the desired results should be

specified, for these aspects will ultimately guide the decision maker in selecting the appropriate course of action.

– Objectives can be measured on a variety of dimensions (monetary units, output per hour, % of defects, etc.) and whether the objectives are long-term versus short-term.

Step 2: Identifying Objectives:

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Step 3: Generating Alternatives Once an opportunity has been identified or a problem

diagnosed correctly, a manager develops various ways to solve the problem and achieve objectives.

The alternatives can be standard and obvious as well as innovative and unique.

Step 4: Evaluating Alternatives Determining the value or adequacy of the alternatives

generated. Predetermined decision criteria may be used in the

evaluation process.– Quality desired

– Anticipated costs

– Benefits

– Uncertainties

– Risks

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Evaluating AlternativesEvaluating 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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Step 5: Reaching Decisions

Decision making is commonly associated with making a final choice.

Although choosing an alternative would seem to be a straightforward proposition, in reality the choice is rarely clear-cut.

Step 6: Choosing Implementation Strategies The bridge between reaching a decision and evaluating the

results. The keys to effective implementation are:

– Sensitivity to those who will be affected by the decision.

– Proper planning and consideration of the resources necessary to carry out the decision.

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Figure: Keys to Effective Implementation of Decisions

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List the resources andactivities required toimplement each step

Estimate the time neededfor each step

Determine how things willlook when the decision

is fully operational

ImplementationPlan

Order the steps necessaryto achieve a fully

operational decision

Assign responsibility foreach step to specific

individuals

Steps In The Implementation Plan

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Step 7: Monitoring and Evaluating

No decision-making process is complete until the impact of the decision has been evaluated.

Managers must observe the impact of the decision as objectively as possible and take further corrective action if it becomes necessary.