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Managerial Decision Making

MSE 608B (Final Project) Professor: Mark Rajai

Done By: Abdulellah Alhagbani Nasser Alromaih Yaser Aljuwaid

Table of contents:

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Introduction....3-4 Evolution of Rationality.....4 Management Leadership and Decision Makers.....4-5 Managerial Decision Making. 5-6 - Programmed Decision..6 - Non-programmed Decision..6 Managerial Decision Making Under Risk and Uncertainty.7 Managerial Decision Making: Cognitive Style...8-9 Case Study.. 10 References... 11

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Managerial Decision Making

Introduction Decision making is the most important part of managers job, and it is the process of identifying and selecting a course of action to solve a specific problem. Moreover, decision is outcome that is a choice of different alternatives. In the past, man merely made decisions on matters of where to get food and which of those available are good to eat and which are not. However, as man evolved and population grew, mans decision making also got more complicated and the things that he has to make decisions on likewise expanded, that is, mans problems are no longer confined to just about food, they now included matters that affect not just mans immediate family but those that involved other people in the community and even include those outside ones community; it now covered themes such as governance of communities, money matters, crime punishment, how many children to have and the options of whether one should have a child or not, how to compete in business just to mention a few. In addition, mans decision making activities are no longer confined to finding a way to solve problems, at present, decision making also covers the manifold ways of solving problems, as in finding the best possible solution from among the many solutions available and using different approaches and various tools in order to arrive at a solution or at a decision. Compared to his predecessor, who only makes simple choices when making a decision, contemporary man has to go through several processes to aid him in coming up with the best decision obtainable. To illustrate, below is how a decision is arrived at: 3|Page

This treatise will attempt to show how the art, process and function of decision making is a vital facet in management-related tasks and why it is necessary for those occupying leadership roles and positions to learn and to master the art of decision making in order for them to become effective and successful in their management undertakings. This paper likewise elaborates on specific processes, paradigms and models of decision making and how they relate to managerial functions.

Evolution of Rationality In the area of making decisions, there is what is referred to as the source branded as the evolution of rationality (Maldonato,2010). In other words, as man struggles for survival, he also learns that the course of action he has formulated is dependent on the accuracy of information he has obtained and the corresponding timeliness of his decision making are all vital to his survival. This evolutionary pressure propelled the human mind to amass voluminous information in order to provide man with a logical foundation for his decisions. As expected though, the strategies being formulated were based on the limited cognitive assimilations of human beings; this limited cognition has influences on human knowledge of the real world coupled with human drive and environmental pressures (Maldonato,2010). This rationality evolution is obviously a non-ideal take on decision making, particularly since there are a number of extremely complicated viewpoints within the realm of decision making and especially where management function is concerned. However, what can be gained from this stand point is that decision making is viewed as a

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primeval function of human beings as they complete the many human endeavors that they plunge into. In its entirety, it is always about survival of man as he makes his way through diverse circumstances and the many odds that he has to surmount, overpower or take control of (Maldonato,2010). This treatise will attempt to show the art, process and function of decision making plays a vital role in managerial tasks and will endeavor to illustrate the essential demands of management roles especially where leadership is concerned. In addition, this paper will undertake to discuss the different processes, paradigms and models on decision making specific to managerial functions.

Management Leadership and Decision Makers Beside the daily problems that managers face in their everyday business operations, arriving at quality managerial decisions is a huge challenge for managers. With the stiff competition in the business world, the challenge to excel can be painstakingly difficult. Hence, the success of a business greatly depends upon the decision making capabilities of managers. However, it is not just about decision making per se that is being talked about here, we are referring to quality decision making which has been designated as a competence that every responsible manager must acquire as well as being a discipline that must be practiced (Wang,2010). Another challenge concerns the frequency of making decisions. There are important decisions that have to be made with regard to the implementation of plans, strategies and directives of an organization and there are also those vital decisions that have to be made in the course of operating and supporting a business. Briefly then, managerial decision making is not a one-time event, rather it is part and parcel of the journey of continuous learning and improvement (Wang, 2010). When it comes to corporate or organizational decision making, the conceptualization of decisions has also taken a special treatment. It has been regarded as the specific allocation of real resources which is required when there is something to be implemented (Wang, 2010). Decisions and implementations are two major components of 5|Page

a bigger process and need to be taken together, never apart, separate or independent of each other. Logically, if nothing has been implemented then the decision remains a concept. Once there is implementation, real resource allocation will come in and will be necessary (Wang, 2010). This is the reason why managerial decision making becomes imperative because there are resources involved and as it was characterized, a decision is all about choosing the best alternative to achieve a goal with finite resources, whether tangible or intangible (Wang, 2010).

Managerial Decision Making The decision making process was depicted as involving the identification of problems and opportunities and then resolving them (Daft and Marcic,2011) and this will not be complete unless there is implementation. It is an acknowledged fact that decision making is not an easy task yet it is imperative that it be done along with dynamically changing aspects such as vague information and conflicting points of view (Daft and Marcic,2011). One way to make the process more manageable for those occupying management roles would be for them to classify the kind of decisions they have to make and categorize them under programmed and non programmed decisions (Daft and Marcic,2011). Programmed decisions are those that involve situations which take place habitually enough as to enable the development of decision rules or guidelines (Daft and Marcic,2011). On the other hand, non programmed decisions are those that respond to situations which can be described as unique, poorly defined and largely unstructured (Daft and Marcic,2011). The strategic planning and determination, formulation and establishment of organizational directions can be considered a non programmed decision by virtue of its significance to the future of that organization. Given the nature of this type decision, it is surmised that this forms part of the more challenging and difficult aspects in the dynamics of decision making. These two types of decisions are specifically based on four decisive factors namely: certainty, risk, uncertainty and ambiguity (Daft and Marcic,2011). The certainty criterion is represented all the information a decision maker needs is fully available to him; whereas there is ambiguity when future outcomes of non-programmed decisions such as strategic plans are hazy or blurred (Daft and Marcic,2011). It is especially important to use this criteria because it serves as the determinant for possibilities of failure. In other words, when the organizational problem falls under the certainty criterion, the possibility of

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failure is low while those that fall under ambiguity have a high likelihood of failing (Daft and Marcic,2011).

Managerial Decision Making under Risk and Uncertainty The presumption made here is that to engage in decision making for programmed decisions will have to be based on the established rules. Further, making programmed decisions will involve information that is readily available to managers thus making the probability of failure very low. But as decisions move further into the spectrum of the aforementioned criteria, so does the possibility of failure. This signifies that there should be focused and dedicated processing for such decisions. In a study conducted by the International Journal for Computer Science, one of the main problems identified by the manager respondents in the face of risk-laden decisions is the lack of information and precise objective data (Riabacke,2006). In addition, it was found out that doing risk and probability estimations, most managers would base their decisions on inadequate information and intuition (Riabacke,2006). This became especially true when managers do not possess the essential proficiencies of approximating 7|Page

various types of risks (Riabacke,2006) which justifies the requirement of ability in decision making. In these instances of risk and uncertainty in decision making, the goal would be to make the best possible decision while also decreasing chances of failure. In the study of Riabacke, it was suggested that a prescriptive computer-based approach is a good way to resolve discrepancies in the decision making process. Using computers to aid in decision making creates a distancing between the decision maker and the process. Likewise, it was inferred that Today's good decisions are driven by data and that in the business context, an amazing diversity of data is available for inspection and analytical insight. Business managers and professionals are increasingly required to justify decisions on the basis of data and that they need statistical model-based decision support systems (Arsham, 2011). To make sure that data and information would not come lacking, it is important for data to be collected according to a well developed plan especially since valid information on a conjecture needs to be obtained (Arsham, 2011). Using data laden approach to decision making, Arsham proposes the following statistically based decision making process that can be used over again:

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In addition, it was cited how fortunately the probabilistic and statistical methods for analysis and decision making under uncertainty are more numerous and powerful today than ever before while also subscribing to the suggestion made earlier on computer based decision making stating that the computer makes possible many practical applications (Arsham,2011).

Managerial Decision Making: Cognitive Style Despite the advantage of basing decisions from data, statistics and figure-driven methodologies, the value of making decisions based on cognitive styles cannot be discounted. An article from the University of Tulsa cites how basing from the strategic decision made by 749 senior managers and executives, Hough concluded that the use of associative, low-effort heuristics based on impersonal information allowed iNtuiting/Thinking (NT) managers to make higher quality strategic decisions than managers with other styles (UT,2011). This is in reference to managers who have gained the ability to rely on their intuition to rapidly incorporate logical conclusions into choices, resulting in quicker and more decisions in a given period (UT,2011). To add, there is also such a thing known as practical wisdom which basically proposes that the process of decision making must not only be reliant on facts but must factor in values as well (Mel,2009). It was asserted that the employment of data in making decisions can be referred to as instrumental rationality which has its own merits but must be put into perspective and this is because many times, managers make decisions under conditions of uncertainty (Mel,2009). They end up simply satisfying certain elements of business such as their stakeholders. With the inclusion of practical rationality as reinforced by practical wisdom, what is humanly good in each situation is thereby considered. In other words, practical wisdom in decision-making, without excluding instrumental rationally, adds the ethical dimension in each stage of the decision-making process. Moral reasoning by practical wisdom, far from applying rules, considers the situation as a whole and seeks to discover what is good in each particular situation (Mel,2009). With many ethical conflicts and issues that have been reported as of late, there is value in considering this particular paradigm in decision making. 9|Page

Contrary to all these, an article in the Harvard Business School newsletter reports on the suggestion of Michael Mauboussin that intuition serves us well in stable environments where feedback from previous decisions is clear and where cause-and-effect relationships can be identified (Heskett,2010). It is wiser, says Mauboussin to be more careful in our approach by giving due value to mathematical models and systematicallycollected data (Heskett,2010).

Case: Computer Wars and Fast Thinking Compaq was at the top of its game in 1998 being the largest seller of personal computers while also being Forbes Company of the Year yet within a span of two short years, it lost $2 billion as it fell victim to Dell Computers (Weygandt, Kimmel and Kieso,2010). Dell came up with a new supply chain design that enabled them to sell computers which had the specific requirements of their clients shipped within 24 hours 10 | P a g e

without spending a single cent on inventory. Lacking timely response, Compaq had no choice but to merge with HP. HP meanwhile also lost significant market share to Dell on account of the latters price strategies that HP could not compete with. The threat increased as Dell too began selling printers which led many to believe that Dell would soon reign supreme in the computing world. But HP quickly gained its footing. By 2008, it managed to mount a 3-year turnaround gaining $100 billion in sales and landing the title as biggest technology company in the world. HP did this feat by adopting lean manufacturing practices that enabled them to compete with Dell in pricing while also developing innovative designs and successful retail marketing. As an extension of their products, HP also got into consulting and data storage services because they realized that selling equipment can be a limited source of revenue while ongoing services provide high margin and continued revenue stream and in most cases also an opportunity to make more hardware sales (Weygandt, Kimmel and Kieso,2010). It was elucidated previously that one of the important aspects of decision making in the context of survival would be formulation of the most critical ones in a timely fashion. In this case, HP had been quick in making decisions on strategy adjustments in response to the mounting threat being posed by Dell Computer. Had it prolonged another moment later, it might have ended up in the same boat as Compaq. It is noteworthy how HP had managed to regain its dominance by making quick and strategic decisions where operations were concerned while also the decision to expand services to create revenue streams, both overtly critical in gaining the ability to compete in pricing but more importantly to gain leverage to get back on track. It was imperative to address growth of Dell early on because it would have become ingrained as a primary provider of computers. And as one expert observer commented, The longer you take to make a decisionthe farther away you are from the reality that exists at this moment and that a delayed decision, no matter the greatness of it, loses its sheen (Heskett,2010).

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References: (1) Arsham, H. "Statistical Thinking for Managerial Decisions." 2011. University of Baltimore. 18 Nov 2011 <http://home.ubalt.edu/ntsbarsh/Businessstat/opre504.htm#rrstatthink>. (2) Daft, R.L. and D. Marcic. Understanding Management . Mason, OH: South Western Cengage Learning, 2011. (3) Heskett, J. "Making Right Choices: Art or Science?" 2 Dec 2010. Working Knowledge Harvard Business School. 18 Nov 2011 <http://hbswk.hbs.edu/item/6475.html>. (4) "What's the Best Way to Make Careful Decisions?" 4 Feb 2010. Working Knowledge Harvard Business School. 18 Nov 2011 <http://hbswk.hbs.edu/item/6339.html>. (5) Maldonato, M. Decision Making: Towards an Evolutionary Psychology of Rationality. UK: Sussex Academic Press, 2010. (6) Mel, D. "PRACTICAL WISDOM IN THE MANAGERIAL DECISIONMAKING PROCESS." 24 Aug 2009. University of St. Thomas. 18 Nov 2011 <http://www.stthomas.edu/cathstudies/cst/conferences/PracticalWisdom/Practical Wisdom/Melepaper.pdf>. (7) Riabacke, A. "Managerial Decision Making Under Risk and Uncertainty." IAENG International Journal of Computer Science (2006). (8) UT. "Cognitive Style and Managerial Decision-Making." 2011. The University of Tulsa. 18 Nov 2011 <http://www.utulsa.edu/academics/colleges/Collins-College-ofBusiness/bus-dept-schools/Department-of-Management-andMarketing/Research/Cognitive-Style-and-Managerial-Decision-Making.aspx>. (9) Wang, C. Managerial Decision Making Leadership: The Essential Pocket Strategy Book. San Francisco, CA: John Wiley & Sons, 2010. (10) Weygandt, J.J., P.D. Kimmel and D.E. Kieso. Managerial Accounting: Tools for Business Decision Making. Hoboken, NJ: John Wiley & Sons, 2010.

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