MANAGERIAL DECISION

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

 Decision making: the process by which managers respond to opportunities and

threats by analyzing options, and making decisions about goals and courses of
action.
 Decisions in response to opportunities: managers respond to ways to improve
organizational performance.
 Decisions in response to threats: occurs when managers are impacted by adverse
events to the organization.
TYPES OF DECISION MAKING
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?
DECISION-MAKING CONDITIONS
The decision
maker faces
conditions of...

Certainty Risk Uncertainty

Level of ambiguity and chances of making a bad decision

Lower Moderate Higher

Figure 4.1
STEPS IN THE RATIONAL
DECISION-MAKING PROCESS
Step Detail
1. Recognizing and Some stimulus indicates
defining the decision that a decision must be
situation made. The stimulus may be
positive or negative.
2. Identifying alterna- Both obvious and creative
tives alternatives are desired. In
general, the more important
the decision, the more
alternatives should be
considered.
3. Evaluating alterna- Each alternative is evalu-
tives ated to determine its
feasibility, its
satisfactoriness, and its
consequences.
Example
A plant manager sees that
employee turnover has
increased by 5 percent.
The plant manager can
increase wages, increase
benefits, or change hiring
standards.
Increasing benefits may not
be feasible. Increasing
wages and changing hiring
standards may satisfy all
conditions.
Table 4.1a
STEPS IN THE RATIONAL
DECISION-MAKING PROCESS (CONT’D)
Step Detail
4. Selecting the best Consider all situational
alternative factors, and choose the
alternative that best fits the
manager’s situation.
5. Implementing the The chosen alternative is
chosen implemented into the
alternative organizational system.
6. Following up and At some time in the future,
evaluating the the manager should ascertain
results the extent to which the
alternative chosen in step 4
and implemented in step 5
has worked.
Example
Changing hiring standards will
take an extended period of time
to cut turnover, so increase
wages.
The plant manager may need
permission from corporate
headquarters. The human
resource department establishes
a new wage structure.
The plant manager notes that, six
months later, turnover has
dropped to its previous level.
EVALUATING ALTERNATIVES
Figure 6.5
Is the possible course of action:

Legal?
Ethical
Economical?

Practical?
EVALUATING ALTERNATIVES IN THE
DECISION-MAKING PROCESS

Are the alternative’s

Is the alternative Is the alternative Retain for further
Yes Yes consequences Yes
feasible? satisfactory? consideration
affordable?

No No No

Eliminate from Eliminate from Eliminate from

consideration consideration consideration

Figure 4.3
Types of Decision Making
1. Individual Decision Making
2. Group Decision Making
INDIVIDUAL DECISION MAKING
THREE APPROACHES
THE CLASSICAL THEORY- RATIONAL MODEL

 Rational model of decision making:

 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.
Disadvantage
Unfortunately, mangers often do not have all (or even most)
required information.
BEHAVIOURAL THEORY
THE ADMINISTRATIVE MODEL
 Administrative Model of decision making:

This model assumes that when the manager faces a decision

situation
Incomplete information :He uses incomplete information as he
does not see all alternatives and decide based on incomplete
information.

Bounded rationality: There is a large number of alternatives and

information is vast so that managers cannot consider it all
COGNITIVE BIASES AND DECISION
MAKING
 Suggests decision makers use heuristics to deal with bounded
rationality.
 A heuristic is a rule of thumb (enquiry, investigation, data
collection, analysis and framing of rules) to deal with
complex situations.
 If the heuristic is wrong, however, then poor decisions
result from its use.
GROUP DECISION MAKING
Many decisions are made in a group setting.
 Groups decision making can call on combined skills, and abilities.
There are some disadvantages with groups:
Group think: Biased decision making resulting from group
members striving for agreement.
 Usually occurs when group members rally around a central manger’s
idea (CEO), and become blindly committed without considering
alternatives.
 The group tends to convince each member that the idea must go
forward.
 IMPROVED GROUP DECISION
MAKING
1. Devil’s Advocacy
2. Dialectical inquiry
DEVIL’S ADVOCACY V.
DIALECTIC INQUIRY
Devil’s Advocacy Dialectic
Presentation of
Inquiry
Alter. 1 Alter. 2
alternative

Critique of Debate the two

alternative alternatives

Reassess Reassess
alternative alternatives
accept, modify, reject accept 1 or 2, combine