Business Decision

Making

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A Core Function
 Managers are responsible for effective and efficient
execution of these organizational functions.

 A typical manager performs a number of functions

that are categorized as:
 Interpersonal
 Informational
 Decisional
 One of the key traits that distinguish managers from
operatives is the ability to make Independent
Decisions.

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What is Decision-Making?

The word decision is defined as:

“A choice between two or more alternatives”.
Thus decision-making can be defined as:
“the selection of a course of action from among
alternatives ”.

The process of choosing the most appropriate

alternative from a given set of alternatives.

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Types of problems decision makers face

Managerial decision making typically centers on three

types of problems:
 Crisis
A crisis problem is a serious difficulty requiring immediate action.
 Non-Crisis
A non-crisis problem is an issue that requires resolution but does not
simultaneously have the importance and immediacy characteristics of a
crisis.
 Opportunity Problems
An opportunity problem is a situation that offers strong potential for
significant organizational gain if appropriate actions are taken.

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Differences in decision making situations

• There are two situation

 Programmed Decision Making
Programmed Decisions are those made in routine, repetitive, well-
structured situations through the use of predetermined decision rules.

 Non-Programmed Decision Making

Non-programmed Decisions are those for which predetermined
decision rules are impractical because the situations are novel and/or
relatively ill structured.

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Strategic Decisions

• Administrative decisions
• Routine or Operating decisions

Individual and Group decisions

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Decision-Making Process
1) Identifying a problem
2) Identifying decision criteria
3) Allocating weights to criteria
4) Developing alternatives
5) Analyzing alternatives
6) Selecting an alternative
7) Implementing the alternative
8) Evaluation (of decision effectiveness)

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Herbert Simon Model

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Making Rational Decisions
A series of steps that decision makers should consider if their
goal is to maximize the quality of their outcomes.

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Rational Economic Man Model
• By Adam Smith, it states that managers are always rational
and choose the alternative which provides maximum gain.
• A rational decision maker has a clear idea of the problem to
be solved and he is fully objective and logical in approach.
Assumptions
1. Decision maker has a clear and well defined goal
2. Is rational and uninfluenced by emotions
3. Can identify the problem clearly and precisely
4. He knows all the alternatives available, with consequences
5. Can rank all consequences according to preferences
6. Has full freedom to choose the best alternative.

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Bounded Rationality
A critique of the rational man model. Administrative man he
says is the way decisions are actually made.

He says there are limits on decision making:

1. Bounded rationality: imperfect information about goals
and courses of action and relation of means to ends. Only
perceive a few of the possible decisions, courses of action,
dimly perceive means end relation.
2. Bounded discretion: constraints on optimizing, prior
commitments, moral and ethical standards, laws, and
social standards.
Forced to make decisions that are just good enough.
Called Satisficing. Search for a needle in the haystack.
Optimize is to look for the sharpest. Satisfied is to search
until you find the needle that is just sharp enough to do the
job.
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Bounded Rational: Causes

1. Inadequate goal formulation

2. Vaguely defined problems
3. Imperfect knowledge
4. Limited time and resources
5. Human Limitations
6. Power Politics
7. Environmental Dynamics

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Group Decision-making

The group members interact with each other, discuss

the problem and make a collective decision.
The factors requiring group decisions include:
1. Involving sensitive issues
2. High cost alternatives
3. Involving very high risk factor
4. Strategic impact

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Group Decisions: Advantages

1. Acceptance of group members

2. Coordination is easier
3. Communication is easier
4. Existence of large alternatives
5. More information can be processed
6. Diversity of experience and perspectives

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Group Decisions: Disadvantages

1. Take longer time

2. Group can be indecisive
3. Groups can compromise
4. Groups can be dominated
5. Groups can “play games”
6. Victim to Groupthink - group members over look
other available alternatives for the sake of complete
consensus

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Decision Making with Quantitative Tools

1. Marginal Analysis – Comparison of additional revenues from additional

costs to point where the cost resulting MC=MR

2. Cost Effectiveness Analysis – Cost Benefit Analysis

3. Risk Analysis – Determination of the nature and size of risk involved

4. Linear Programming – Technique for determination of optimum

combination of limited resources to minimize cost or to maximise profits.

5. Operations Research- Scientific analysis of decision problems

6. Decision Tree- Graphic method used for identifying the available

alternatives and the risk and outcome associated with each alternative.

7. Network Analysis- Analysis of a project into small interconnected in a

logical order. CPM and PERT

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Decision Making with Qualitative Tools

1. Brainstorming - A group creativity technique by which a group tries to

find a solution for a specific problem by gathering a list of ideas
spontaneously contributed by its members.

2. Delphi Technique - A structured communication technique, originally

developed as a systematic, interactive forecasting method which relies
on a panel of experts. the experts answer questionnaires in two or
more rounds. After each round, a facilitator provides an anonymous
summary of the experts’ forecasts from the previous round as well as
the reasons they provided for their judgments. Thus, experts are
encouraged to revise their earlier answers in light of the replies of other
members of their panel. It is believed that during this process the range
of the answers will decrease and the group will converge towards the
"correct" answer.

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3. Nominal Group Technique- A decision making method for use
among groups of many sizes, who want to make their decision quickly, as by
a vote, but want everyone's opinions taken into account (as opposed to
traditional voting, where only the largest group is considered) . Facilitators
will encourage the sharing and discussion of reasons for the choices made
by each group member, thereby identifying common ground, and a plurality
of ideas and approaches. This diversity often allows the creation of a hybrid
idea (combining parts of two or more ideas), often found to be even better
than those ideas being initially considered. The numbers each solution
receives are totalled, and the solution with the lowest (i.e. most favored) total
ranking is selected as the final decision.

4. Simulation – Imitation of some real thing available, state of affairs, or

process. The act of simulating something generally entails representing
certain key characteristics or behaviours of a selected physical or abstract
system.

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?

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