Decision Making

Introduction
• Quite literally, organizations operate by people making
decisions. A manager plans, organizes, staffs, leads, and
controls his or her team by executing decisions. The
effectiveness and quality of those decisions determine how
successful a manager will be.
• A decision is a choice made from at least two alternatives
while decision-making involves the selection of one
alternative from two or more possible alternatives, based
upon some criteria.
What is Decision Making?
• Decision-making is the process of identifying and selecting a
course of action to solve a specific problem. Decision-making
involves the selection of one alternative from two or more
possible alternatives, based upon some criteria. Decision-
making is the art and science of giving thought to, and
making a choice or judgment about an idea or a problem.
Nature of Decision making
• Which machine do we buy? When should we computerize?
How do we cope with declining productivity? How do we
adjust to a new government regulation? All of us have to
make decisions every day. Some decisions are relatively
straightforward and simple: Is this report ready to send to my
boss now? Others are quite complex: which of these
candidates should I select for the job?
 Steps in Decision making
• Managers are constantly called upon to make decisions in
order to solve problems. Decision making and problem
solving are ongoing processes of evaluating situations or
problems, considering alternatives, making choices, and
following them up with the necessary actions. Sometimes
the decision-making process is extremely short, and mental
reflection is essentially instantaneous. In other situations,
the process can drag on for weeks or even months. The
entire decision-making process is dependent upon the right
information being available to the right people at the right
times.
• The decision-making process involves the following steps:
1. Define the problem.
2. Identify limiting factors.
3. Develop potential alternatives.
4. Analyse the alternatives-feasibility, effectiveness & consequences
5. Select the best alternative.
6. Implement the decision.
7. Establish a control and evaluation system.
Conditions That Influence Decision Making
• Managers make problem-solving decisions under three
different conditions: certainty, risk, and uncertainty. All
managers make decisions under each condition, but risk and
uncertainty are common to the more complex and
unstructured problems faced by top managers.
Certainty
• Decisions are made under the condition of certainty when
the manager has perfect knowledge of all the information
needed to make a decision. This condition is ideal for
problem solving. The challenge is simply to study the
alternatives and choose the best solution.
• When problems tend to arise on a regular basis, a manager
may address them through standard or prepared responses
called programmed decisions. These solutions are already
available from past experiences and are appropriate for the
problem at hand.
• A good example is the decision to reorder inventory automatically
when stock falls below a determined level. Today, an increasing
number of programmed decisions are being assisted or handled
by computers using decision-support software.
• Structured problems are familiar, straightforward, and clear with
respect to the information needed to resolve them. A manager
can often anticipate these problems and plan to prevent or solve
them. For example, personnel problems are common in regard to
pay raises, promotions, vacation requests, and committee
assignments, as examples. Proactive managers can plan processes
for handling these complaints effectively before they even occur.
Risk
• In a risk environment, the manager lacks complete
information. This condition is more difficult. A manager may
understand the problem and the alternatives, but has no
guarantee how each solution will work. Risk is a fairly
common decision condition for managers.
• When new and unfamiliar problems arise, nonprogrammed
decisions are specifically tailored to the situations at hand.
The information requirements for defining and resolving
nonroutine problems are typically high.
• Although computer support may assist in information
processing, the decision will most likely involve human
judgment. Most problems faced by higher-level managers
demand nonprogrammed decisions. This fact explains why
the demands on a manager’s conceptual skills increase as he
or she moves into higher levels of managerial responsibility.
• A crisis problem is an unexpected problem that can lead to
disaster if it’s not resolved quickly and appropriately. No
organization can avoid crises, and the public is well aware of
the immensity of corporate crises in the modern world.
• Managers in more progressive organizations now anticipate
that crises, unfortunately, will occur. These managers are
installing early-warning crisis information systems and
developing crisis management plans to deal with these
situations in the best possible ways.
Uncertainty
• When information is so poor that managers can’t even assign
probabilities to the likely outcomes of alternatives, the
manager is making a decision in an uncertain environment.
This condition is the most difficult for a manager. Decision
making under conditions of uncertainty is like being a
pioneer entering unexplored territory.
• Uncertainty forces managers to rely heavily on creativity in
solving problems: It requires unique and often totally
innovative alternatives to existing processes. Groups are
frequently used for problem solving in such situations. In all
cases, the responses to uncertainty depend greatly on
intuition, educated guesses, and hunches — all of which
leave considerable room for error.
• These unstructured problems involve ambiguities and
information deficiencies and often occur as new or
unexpected situations. These problems are most often
unanticipated and are addressed reactively as they occur.
Unstructured problems require novel solutions. Proactive
managers are sometimes able to get a jump on unstructured
problems by realizing that a situation is susceptible to
problems and then making contingency plans.
Personal Decison-Making Styles
• Managerial decision making depends on many factors,
including the ability to set priorities and time decisions
correctly. However, the most important influence on
managerial decision making is a manager’s personal
attributes or his or her own decision-making approach. The
three most common decision models are as follows:
• Rational/logical
• Intuitive
• Predisposed
• Regardless of the model favored by a manager,
understanding personal tendencies and moving toward a
more rational model should be the manager’s goal. The best
decisions are usually a result of a blend of the decision
maker’s intuition and the rational step-by-step approach.
These models are described as follows:
Rational/Logical decision model
• This approach uses a step-by-step process, similar to the
seven-step decision-making process described earlier in this
slide. The rational/logical decision model focuses on facts
and reasoning. Reliance is on the steps and decision tools,
such as payback analysis, decision tree, and research —.
Through the use of quantitative techniques, rationality, and
logic, the manager evaluates the alternatives and selects the
best solution to the problem.
Intuitive decision model
• The managers who use this approach avoid statistical
analysis and logical processes. These managers are decision
makers who rely on their feelings about a situation. This
definition could easily lead one to believe that intuitive
decision making is irrational or arbitrary. Although intuition
refers to decision making without formal analysis or
conscious reasoning, it is based on years of managerial
practice and experience. These experienced managers
identify alternatives quickly without conducting systematic
analyses of alternatives and their consequences.
• When making a decision using intuition, the manager
recognizes cues in the situation that are the same as or
similar to those in previous situations that he or she has
experienced; the cues help the manager to rapidly conduct
subconscious analysis. Then a decision is made.
Predisposed decision model
• A manager who decides on a solution and then gathers
material to support the decision uses the predisposed
decision model approach. Decision makers using this
approach do not search out all possible alternatives. Rather,
they identify and evaluate alternatives only until an
acceptable decision is found. Having found a satisfactory
alternative, the decision maker stops searching for additional
solutions. Other, and potentially better, alternatives may
exist, but will not be identified or considered because the
first workable solution has been accepted.
• Therefore, only a fraction of the available alternatives may
be considered due to the decision maker’s information-
processing limitations. A manager with this tendency is likely
to ignore critical information and may face the same decision
again later.