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PRINCIPLES & PRACTICES Part 2 Planning Challenges in the 21st Century

OF MANAGEMENT
Topic

4
Effective
Decision
Making

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 LEARNING OBJECTIVES
When you have finished studying this chapter, you
should be able to:
1. Define decision making.
2. Types of decisions ; Programmed vs Non-
programmed.
3. Conditions under which managers decide.
4. Nature of decision-making process and the seven
steps.
5. Describe the rational–economic model of decision
making and behavioral decision model.
6. Describe the participative approach to decision
making, disadvantage & disadvantage.

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Sources of Organizational and
Entrepreneurial Decisions
• Decision making
 The process through which managers and leaders
identify and resolve problems and capitalize on
opportunities.
• Problem
 A condition that occurs when some aspect of
organizational performance is less than desirable.
• Opportunity
 Any situation that has the potential to provide
additional beneficial outcomes.

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 Classifying Decision Situations
• Programmed decision
 A decision made in response to a situation that is
routine or recurring.
 Example: starting your automobile
• Nonprogrammed decision
 A decision made in response to a situation that is
unique, unstructured, or poorly defined.
 Example: deciding to get a tattoo

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 Responses to Decision Situations

Programmed Nonprogrammed
Decisions Decisions

Alternatives are Alternatives are not

familiar to decision familiar to decision
makers. makers.

Responses are Responses require

routine. creativity.

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 Types of Conditions under Decision-making
• 4 different conditions
 Conditions under certainty
 Knows exactly what the outcome will be as
resources, time available and other factors are
known
 Conditions under risk
 Future conditions are not always known in advance
 Conditions under uncertainty
 Cannot even assign subjective probabilities to each
of the possible states of nature
 Conditions under ambiguity
 Goals to be achieved is unclear
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 Figure 6.1 Seven Steps in the Decision-Making Process

Identifying opportunities
and diagnosing problems

Identifying objectives

Generating alternatives

Evaluating alternatives

Reaching decisions

Choosing implementation strategies

Monitoring and evaluating

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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.

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 Step 2: Identifying Objectives
• 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.

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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.

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 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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 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.

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 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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 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.

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 Figure 6.3 Two Contrasting Decision-Making Models

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 Rational-Economic Model
• A prescriptive framework of how
a decision should be made that
assumes managers have
completely accurate
information.
• Concentrates on how decisions
should be made, not on how
they actually are made

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 Assumptions of the Rational-Economic Model

• Managers have “perfect information.”

• Managers attempt to accomplish objectives that are
known and agreed upon and have an extensive list of
alternatives to choose from.
• Managers are rational, systematic, and logical in
assessing alternatives and their associated probabilities.
• Managers work in the best interests of their
organizations.
• Ethical decisions do not arise in the decision-making
process.

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 Drawbacks of the Rational-Economic Model

• Leaders rarely have access to perfect information.

• Decision makers are limited in their ability to
comprehend and process vast amounts of information.
• Decision makers may lack adequate knowledge about
future consequences of alternatives.
• Personal factors can prevent a decision maker from
acting in a completely rational manner.
• Individual culture and ethical values will influence the
decision process.

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 Behavioral Decision Model
• Acknowledges the human limitations that make
rational decisions difficult to achieve.
 A manager’s cognitive ability to process information is
limited.
 Managers usually attempt to behave rationally within
their limited perception of a situation.
 The complexity of most organizational situations
forces managers to view problems within sharply
restricted bounds.
 The behavior of managers can be considered
rational, but only in terms of their simplified view of
the problem.

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 Concepts/Assumptions Important to the
Behavioral Decision Model
• Bounded Rationality
 Recognizes that people are limited by organizational
constraints such as time, information, resources, and
their own mental capabilities.
• Intuition
 An unconscious analysis based on past experience.
• Satisficing
 The search and acceptance of something that is
satisfactory rather than perfect or optimal.

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 Concepts/Assumptions Important to the
Decision Model (cont’d)
• Escalation of Commitment
 The tendency to increase commitment to a previously
selected course of action beyond the level that would
be expected if the manager followed an effective
decision-making process.

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 Group Considerations in Decision Making
• Group decision making is becoming more
common as organizations focus on improving
customer service and push decision making to
lower levels.

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 Participative Models
• Vroom and Yetton Model
 Helps managers determine when group decision
making is appropriate.
 Postulates that there are five decision-making styles
arranged along a continuum.
 The decision methods become progressively more
participative as one moves from the highly
autocratic style (AI) to the group style (GII), where
the manager allows the group to decide.

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 Vroom and Yetton Decision Styles
Lightly The manager solves the decision problem
autocratic
AI alone using information available at the time.

The manager solves the decision problem alone

AII after obtaining necessary information from
subordinates.
The manager solves the decision problem after
A = Autocratic CI obtaining ideas and suggestions from subordinates
C = Consultative individually. The decision may or may not reflect
their council.
G = Group
The manager solves the decision problem after
CII obtaining ideas and suggestions from subordinates
as a group. The decision may or may not reflect their
council.

The group analyzes the problem, identifies and

GII evaluates alternatives, and makes a decision. The
manager acts as a coordinator of the group of
Highly subordinates and accepts and implements any
democratic solution that has the support of the group

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 Table 6.1 Vroom–Jago Decision-Making Styles

Decide style Leader makes the decision alone and announces or sells it to the
group. Leader uses his/her own expertise and may collect information
from the group to help solve the problem.

Consult individually style Leader presents the problem to group members individually, gets their
ideas and suggestions individually, and then makes the decision.

Consult group style Leader presents the problem to group members in a meeting, gets
their suggestions, and then makes the decision.

Facilitate style Leader presents the problem to the group in a meeting and acts as a
facilitator by defining the problem to be solved and the constraints
within which the decision must be made. Leader seeks concurrence
from group members on a decision.

Delegate Style Leader permits the group to make the decision within prescribed
limits. Group undertakes the identification and diagnosis of the
problem and the development of alternative solutions and makes the
decision on the selection of alternative(s).

Source: Adapted from V. H. Vroom, “Leadership and the Decision-Making Process,” Organizational Dynamics (Spring 2000): 82–94.
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 Situational Contingencies Affecting Decision
Making Participation From Subordinates
• Decision significance
• Importance of commitment
• Leader expertise
• Likelihood of commitment
• Team support
• Team expertise
• Team competence

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 Table 6.2 Advantages and Disadvantages of Group Decision Making

Advantages
• Experience and expertise
of several individuals
available
• More information, data,
and facts accumulated
• Problems viewed from
several perspectives
• Higher member
satisfaction
• Greater acceptance and
commitment to decisions
Disadvantages
• Greater time requirement
• Minority domination
• Compromise
• Concern for individual
rather than group goals
• Social pressure to
conform
• Groupthink
 agreement at-any-cost
mentality

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