The Nature of Decision Making

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The Nature of Decision Making

• Making effective decisions, as well as
  recognizing when a bad decision has been made and
  quickly responding to mistakes, is a key
  ingredient in organizational effectiveness.
• Some experts believe that decision making is the
  most basic and fundamental of all managerial
  activities.
• Decision making is most closely linked with the
  Planning function.
• However, it is also part of Organizing, Leading
  and Controlling.

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What is Decision Making?

• Decision making is the act of choosing one
  alternative from among a set of alternatives.
• We have to first decide that a decision has to be
  made and then secondly identify a set of feasible
  alternatives before we select one.

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Decision-Making Process

• Decision-Making Process includes
• recognizing and defining the nature of a
  decision situation
• identifying alternatives
• choosing the best most effective alternative
  and
• putting it into practice.

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Decision-Making Process. . .(continued)

• Sometimes effective decisions must be made to
• Optimize some set of factors such as profits,
  sales, employee welfare and market share or
• Minimize loss, expenses or employee turnover or
• Select best method for going out of business,
  laying off employees, or terminating a strategic
  alliance.

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Decision-Making Process. . .(continued)

• Managers make decisions about both problems
  (undesirable situations) and opportunities
  (desirable situations).
• Cutting costs by 10
• Learning that the company has earned
  higher-than-projected profits
• It may take a long time before a manager can know
  for sure if the right decision was made.

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Types of Decisions

• Programmed decision is one that is fairly
  structured or recurs with some frequency (or
  both).
• Nonprogrammed decision is one that is
  unstructured and occurs much less often than a
  programmed decision.

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Programmed Decisions. . .

• Many decisions regarding basic operating systems
  and procedures and standard organizational
  transactions fall into this category.
• McDonalds employees are trained to make the Big
  Mac according to specific procedures.
• Starbucks, and many other organizations, use
  programmed decisions to purchase new supplies
  coffee beans, cups and napkins.

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Nonprogrammed Decisions. . .

• Most of the decisions made by top managers
  involving strategy and organization design are
  nonprogrammed.
• Decisions about mergers, acquisitions and
  takeovers, new facilities, new products, labor
  contracts and legal issues are nonprogrammed
  decisions.
• Managers faced with nonprogrammed decisions must
  treat each one as unique, investing great amounts
  of time, energy and resources into exploring the
  situation from all views.
• Intuition and experience are major factors in
  these decisions.

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Decision-Making Conditions

• Decision Making Under Certainty
• Decision Making Under Risk
• Decision Making Under Uncertainty

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Decision Making Under Certainty

• A state of certainty exists when a decision maker
  knows, with reasonable certainty, what the
  alternatives are and what conditions are
  associated with each alternative.
• Very few organizational decisions, however, are
  made under these conditions.
• The complex and turbulent environment in which
  businesses exist rarely allows for such decisions.

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Decision Making Under Risk

• A state of risk exists when a decision maker
  makes decisions under a condition in which the
  availability of each alternative and its
  potential payoffs and costs are all associated
  with probability estimate.
• Decisions such as these are based on past
  experiences, relevant information, the advice of
  others and ones own judgment.
• Decision is calculated on the basis of which
  alternative has the highest probability of
  working effectively. union negotiations,
  Porsches SUV focus vs high-performance sports
  cars

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Decision Making Under Uncertainty

• A state of uncertainty exists when a decision
  maker does not know all of the alternatives, the
  risks associated with each, or the consequences
  each alternative is likely to have.
• Most of the major decision making in todays
  organizations is done under these conditions.
• To make effective decisions under these
  conditions, managers must secure as much relevant
  information as possible and approach the
  situation from a logical and rational view.
• Intuition, judgment and experience always play
  major roles in the decision-making process under
  these conditions.
• See Figure 9.1, page 279.

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A View of Decision-Making Conditions
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Rational Perspectives on Decision Making

• Keys to Decision Making
• Classical
• Decision
• Model
• Rational
• Decision
• Making

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Classical Decision Model

• An approach to decision making that tells
  managers how they should make decisions.
• Approach assumes that managers are logical and
  rational.
• Approach assumes that managers decisions will be
  in the best interests of the organization.
• Conditions suggested in this approach rarely, if
  ever, exist.
• See Figure 9.2, page 281.

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The Classical Model of Decision Making
When faced with a decision situation, managers
should
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Rational Decision Making

• Consists of six (6) steps that keep the decision
  maker focused on facts and logic and help guard
  against inappropriate assumptions and pitfalls.
• Designed to help the manager approach a decision
  rationally and logically.

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Rational Decision Making. . .(continued)

• Recognizing and defining the decision situation
• Need to define precisely what the problem is.
• Manager must develop a complete understanding of
  the problem.
• Manager must carefully analyze and consider the
  situation.

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Rational Decision Making. . .(continued)

• Identifying alternatives
• Managers must realize that their alternatives may
  be limited by legal, moral and ethical norms,
  authority constraints, available technology,
  economic considerations and unofficial social
  norms.

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Rational Decision Making. . .(continued)

• Evaluating alternatives
• Each alternative must pass successfully through
  three stages before it may be worthy of
  consideration as a solution.
• Feasibility Is it financially possible? Is it
  legally possible? Are there limited human,
  material and/or informational resources
  available?
• Satisfactory Does the alternative satisfy the
  conditions of the decision situation? 50
  increase in sales
• Affordability How will this alternative affect
  other parts of the organization? What financial
  and non-financial costs are associated?
• The manager must put price tags on the
  consequences of each alternative.
• Even an alternative that is both feasible and
  satisfactory must be rejected if the consequences
  are too expensive for the total system.

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Rational Decision Making. . .(continued)

• Selecting an alternative
• Choosing the best alternative is the real test of
  decision making.
• Optimization is the goal because a decision is
  likely to affect several individuals or
  departments.
• Finding multiple acceptable alternatives may be
  possible selecting one and rejecting the others
  may not be necessary.

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Rational Decision Making. . .(continued)

• Implementing the chosen alternative
• Managers must consider peoples resistance to
  change when implementing decisions.
• For some decisions, implementation is easy for
  others, very difficult or time consuming.
• Operational plans are very useful in implementing
  alternatives.
• Managers must also recognize that even when all
  of the alternatives and their consequences have
  been evaluated as precisely as possible,
  unanticipated consequences are still likely.

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Rational Decision Making. . .(continued)

• Following up and evaluating the results
• Managers must evaluate the effectiveness of their
  decisions did the chosen alternative serve its
  original purpose?
• If the implemented alternative appears not to be
  working, the manager has several choices
• Another previously identified alternative might
  be adopted or
• Recognize that the situation was not correctly
  defined and start the process all over again or
• Decide that the alternative has not been given
  enough time to work or should be implemented in a
  different way.
• See Figure 9.3 and Table 9.1

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Figure 9.3 Evaluating Alternatives in the
Decision-Making Process
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Behavioral Aspects of Decision Making

• Sometimes decision making must reflect subjective
  considerations (tastes, etc.)
• Other behavioral aspects include political
  forces, intuition, escalation of commitment, risk
  propensity and ethics.

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Behavioral Aspects. . . (continued)

• The Administrative Model of Decision Making
• Herbert A Simon, a Nobel Prize winner in
  Economics, developed the model to describe how
  decisions are often made rather than to prescribe
  how they should be made.
• Argues that decision makers have incomplete and
  imperfect information, are constrained by
  bounded rationality and tend to satisfice
  when making decisions.
• Bounded rationality suggests that decision makers
  are limited by their values and unconscious
  reflexes, skills and habits. American vs foreign
  automakers

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Behavioral Aspects. . . (continued)

• Satisficing is the tendency to search for
  alternatives only until one is found that meets
  some minimum standard of sufficiency.
• Rather than conducting an exhaustive search for
  the best possible alternative, decision makers
  tend to search only until they identify an
  alternative that meets some minimum standard of
  sufficiency.

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The Administrative Model of Decision Making
When faced with a decision situation
managers actually
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Behavioral Aspects. . . (continued)

• The Classical and Administrative Models paint
  quite a different picture of decision making.
  However, each may be used to better understand
  how managers make decisions.
• The Classical Model attempts to explain how
  managers can at least attempt to be more rational
  and logical in their approach to decisions.
• The Administrative Model can be used by managers
  to develop a better understanding of their
  inherent biases and limitations.

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Behavioral Forces Influencing Decisions

• Political Forces in Decision Making
• Coalition - an informal alliance of individuals
  or groups formed to achieve a common goal
  stockholders, directors, parliament blocs, etc
• Impact of a coalition may be positive or
  negative.
• Managers must recognize when to use coalitions,
  how to assess if they are acting in the best
  interest of the organization and how to control
  their negative effects.

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Behavioral Forces Influencing Decisions

• Intuition is an innate belief about something,
  without conscious consideration.
• Deciding to do something because it feels right
  or one has a hunch.
• Feeling is based on years of experience and
  practice in making decisions in similar
  situations may help managers make occasional
  decisions without going through an a-to-z
  process.

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Behavioral Forces Influencing Decisions

• Escalation of Commitment occurs when a decision
  maker stays with a decision even when it appears
  to be wrong. Pan Am holdings
• Decision makers must guard against sticking too
  long with an incorrect decision.
• However, managers should not bail out of a
  seemingly incorrect decision too soon.

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Behavioral Forces Influencing Decisions

• Risk Propensity the extent to which a decision
  maker is willing to gamble when making a
  decision.
• Organizational culture is a prime ingredient in
  encouraging different levels of risk.

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Behavioral Forces Influencing Decisions

• Ethics
• Managerial ethics involves a wide variety of
  decisions
• Relationships of the firm to its employees
  closing a dept to save money
• Relationships of the employees to the firm
• Relationships of the firm to other economic agents