Chapter 4

Managerial Decision making

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 What is Decision Making?

▪ Decision making is defined as a rational choice

among alternatives.
▪ There have to be options to choose from; if there
are not, there is no choice possible and no decision.
▪ Decision making is process, not a lightning-bolt
occurrence.
▪ In making the decision, a manager is making a
judgment-reaching a conclusion-from a list of
known alternatives.
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Decision Making is Universal
▪ Decision making is a part of all managers’ jobs.
▪ A manager makes decisions constantly while
performing the function of planning,
organizing, staffing, directing, and controlling.
▪ Decision making is not a separate, isolated
function of management but a common core to
the other function

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▪ Managers at all levels of the organization are
engaged in decision making.
▪ The decisions made by top management,
dealing with the mission of the organization and
strategies for achieving it, have an impact on the
total organization.
▪ Middle-level managers, in turn, focus their
decision making on implementing the strategies,
as well as on budget and resource allocations.
▪ Finally, first-level management deals with
repetitive day-to-day operations.
▪ Decision making is indeed universal.
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Decision-Making Conditions
1. Decision-making under Certainty
• When managers know with certainty what
their alternatives are and what conditions are
associated with each alternative, a state of
certainty exists.
• Decisions under certainty are those in which
the external conditions are identified and
very predictable; i.e. we are reasonably sure
what will happen when we make a decision.

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2. Decision-making under Risk
• A more common decision-making situation is under
risk.
• Under the state of risk, the availability of each
alternative, the likelihood of its occurrence and its
potential payoffs and costs are associated with
probability estimates; i.e. decisions under risk are those
in which probabilities can be assigned to the expected
outcomes of each alternative.
• In a risk situation, managers may have factual
information, but it may be incomplete. Example
metrology

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3. Decision-making under Uncertainty
• Under this condition the decision maker does
not know what all the alternatives are, what the
probability of each will occur is or what
consequences each is likely to have.
• This uncertainty comes from the dynamism of
contemporary organizations and their
environment.
• Big multi-national corporations assume these
kinds of decisions.
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• Decision-making under uncertainty is the most
ambiguous and there is high chance of making
poor decisions.
• In decision-making under uncertainty,
probabilities cannot be assigned to surrounding
conditions such as competition, government
regulations, technological advances, the over all
economy, etc.

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 Types of Decisions
➢ Although managers in large business
organizations, government offices, hospitals, and
schools may be separated by background, lifestyle,
and distance, they all sooner or later must share the
common experience of making decisions.

➢ They all will face situations involving several

alternatives and an evaluation of the outcomes.
➢ In this section, we will discuss various types of
decisions.

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Cont…
▪ The decision-making is like being a pioneer.
▪ Reliance on experience, judgment, and
other people's experiences can assist the
manager is assessing the value of alternatives.
E.g. Innovation of new machine, journey of
discoverers.

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1. Programmed Decisions
• Programmed decisions are the decisions
managers make in response to repetitive and
routine problems.
• If a particular situation occurs often, managers
will develop a routine procedure for handling it.

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Cont…
2. Nonprogrammer Decisions
• When a problem has not arisen in exactly the
same manner before, or is complex or extremely
important, it may require a non programmed
decision.
• Decisions are termed non programmed when
they are novel and unstructured problems.
• Making such decision is clearly a creative
process.
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• The two classifications-programmed and non
programmed-are broad, yet it is important to
clearly differentiate between them.

• The managements of most organizations face

great numbers of programmed decisions in their
daily operations.

• Such decisions should be made without

expending unnecessary time and effort.

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▪ Reaching non programmed decisions, however,
is more complicated and requires the expenditure
of lots of money worth of resources every year.
▪ Government organizations make non
programmed decisions to manufacture new
products.
▪ Hospitals and schools make non programmed
decision that influence patients and students years
later.
▪ Unfortunately, very little is known about this
type of decision making.
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• In most organizations, programmed decisions are
handled through policies.
• In some organizations and industries,
management scientists have developed
mathematical models that help ease the type of
decisions.
• Non programmed decisions, however, are usually
handled by general problem-loving processes,
judgment, intuition, and creativity.

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 Types of Decisions and level of Management

▪ Problem that arise infrequently and have a great deal

of uncertainty surrounding them are often of a strategic
nature and must be the concern of top management.
▪ Problems that frequently and have fairly certain
outcomes should be the concern of lower level of
management.
▪ Middle manager in most organization concentrates
mostly on programmed decisions.
▪ The nature of the problem, how frequently it arises,
and the degree of certainty surrounding should dictate
at what level of management the decision should be
made.
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Cont…
Decision-making has three elements (parts)
1. When managers make decisions; they are
choosing or selecting from among alternatives.
2. When managers make decisions, they have
available alternatives. When there are no
alternatives, there is no decision-making, rather
it become mandatory.
3. When managers make decisions, they have
purpose in mind. The purpose in mind is
organizational objectives.

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 Continuum of Decision situations
Well-structured Partially Structured Ill-structured (Non-
(programmed) programmed)
1. Specification of decision 1. Only part of decision 1. Decision procedure
procedure agreed in process can be completely cannot be completely
advance of resolution specified & structured structured in advance of
resolution

2. Little managerial 2. Manager makes final 2. Individuals resolve each

involvement at time of resolution from structured situation on the basis of
each resolution portion of his/her experience & judgment
experience & intuition

3. Repeated resolutions 3. Different managers may 3. Different managers may

with same data yield same agree on certain data reach different conclusions
results
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Why Do Managers
Make Poor Decisions?

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• Lack of adequate time

• Failure to define goals
• Using unreliable sources of information
• Fear of consequences
• Focusing on symptoms rather than causes
• Reliance on Hunch and Intuition

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 The Decision-Making process

The decision-making process has seven steps. They

are logical and simple in themselves, but they are all
essential to the process:
i. Define the problem
ii.Identify the limiting or critical factors.
iii.Develop potential alternatives.
iv.Analyze the alternatives.
v. Select the best alternative or combination of best
alternatives.
vi.Implement the solution.
vii.Establish a control and evaluation system.

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i. Define the problem
• What is the particular problem you have to
resolve?
• Defining the problem is the critical step.
• The accurate definition of a problem affects all
the steps that follow; if a problem is inaccurately
defined, every step in the decision-making
process will be based on that incorrect point.

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• Is there a good method for a manager to use to
define the problem? Yes.
• A manager needs to focus on the problem, not
the symptoms.
• According to peter Drucker, “the most
common source of mistakes in management
decisions is the emphasis on finding the right
answer rather than the right question.”

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2. Identify the limiting or critical factors
▪ Once the problem is defined, the manager needs to
develop the limiting or critical factors of the problem.
▪ Limiting factors are those constraints that rule out
certain alternative solutions.
▪ One common limitation is time.
▪ If a new product has to be on the dealer’s shelves in
one month, any alternative that takes more than one
month will be eliminated.
▪ Resources such as personnel, money, facilities, and
equipment are most common limiting or critical
factors that narrow down the range of possible
alternatives.

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3. Develop potential alternatives
• Alternative solutions for a manager faced with
the problem of trying to maintain scheduled
production may be to start an extra work shift, to
regular schedule overtime, to increase the size of
the present work force by hiring employees, or to
do nothing.
• Doing nothing about a problem sometimes is
the proper alternative, at least until the situation
has been thoroughly analyzed.
• Occasionally, just the passing of time provides
a cure.
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➢ Sources for alternative include experience,
other persons whose opinions and judgments are
respected, the practice of successful managers,
group opinions through the use of task forces and
committees, and the use of outside sources,
including managers in other organizations.

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Cont’d
4. Analyze the alternatives
• The purpose of this step is to decide the
relative merits of each of the alternatives.
• What are the positives and negatives (the
advantages and disadvantages) of each
alternative?
• Do any alternatives conflict with the critical
(limiting) factors that you identified earlier?
If so, they must be automatically discarded.
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5. Select the best alternatives
▪ By this point, the alternatives have been listed along
with their corresponding advantages and
disadvantages.
▪ Which should be selected?
▪ Sometimes the optimal solution is a combination of
several of the alternatives.
▪ In trying to select an alternative or combination of
alternatives, you must be reasonable enough to find a
solution that appears to offer the fewest serious
disadvantages and the most advantages.
▪ Take care not to solve one problem and create
another with your choice.

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6. Implement the solution
• Managers are paid to make decisions, but they
are also paid to get results from these decisions.
• A decision that just sits there hoping someone
will put it into effect may as well never have
been made.
• Everyone involved with it must know what he
or she must do, how to do it, why, and when.
• Additionally, a good alternative half-heartedly
applied by uncommitted persons will often
create problems, not solve them.
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7. Establish a control & evaluation system

• This system should provide feedback on
how well the decision was implemented, what
results are positive or negative and what
adjustments are necessary to get the results
that were wanted when the solution was
chosen

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Cont’d
• For a manager who uses this decision-making
process, the probability for success in decisions
should be improved. Why? Because it provides a
step-by-step roadmap for the manager to move
logically through decision making.

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• Is the decision-making process all a manager
needs to master to be successful in decision
making?
• No; the manager must be aware of the
environment in which he or she makes decisions.

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 THANK YOU!!!!!!!!

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