Decisionmaking in Management

HBL
RecommendedBook:
MakingManagementDecisions
by SteveCooke ,NigelSlack
PresentedBy:ViqarA.Usmani
Pleasewriteaonesentencedefinitionof
decisionmaking.
Theprocessofexaminingyourpossibilities
options,comparingthem,andchoosinga
courseofaction.
The word decision has been derived from the Latin word
"decidere" which means "cutting off".
Thus, decision involves cutting off of alternatives between those
that are desirable and those that are not desirable.
In the words of George R. Terry,
"Decision-making is the selection based on some criteria from
two or
more possible alternatives".
Characteristics of Decision Making

Decision making implies that there are various
alternatives and the most desirable alternative is chosen to
solve the problem or to arrive at expected results.
The decision-maker has freedom to choose an alternative.
Decision-making may not be completely rational but may be
judgmental and emotional.
Decision-making is goal-oriented.
Decision-making is a mental or intellectual process because
the final decision is made by the decision-maker.
(Cont.)
A decision may be expressed in words or may be implied from

behavior.
Choosing from among the alternative courses of operation implies
uncertainty about the final result of each possible course of
operation.
Decision making is rational.
It is taken only after a thorough analysis and reasoning and
weighing the consequences of the various alternatives.
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.
Programmed Decisions: routine, almost automatic

process.
Managers have made decision many times before.

There are rules or guidelines to follow.
Programmed decisions are routine and repetitive and are made within the
framework of organizational policies and rules.

These policies and rules are established well in advance to solve
recurring problems in the organization.
Programmed decisions have short-run impact.
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 mangers
intuition, and judgment.
Non-programmed decisions are decisions taken to meet non-repetitive
problems.
Non-programmed decisions are relevant for solving unique/ unusual
problems in which various alternatives cannot be decided in advance.
A common feature of non-programmed decisions is that they are novel and nonrecurring and therefore, readymade solutions are not available.
Example: Should the firm invest in a new technology?

Classical model of decision making:

a prescriptive model that tells how the
decision should be made.
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.
Unfortunately, mangers often do not have all

(or even most) required information.
Listalternatives
&consequences
Assumesallinformation
isavailabletomanager
Rankeachalternative
fromlowtohigh
Assumesmanagercan
processinformation
Selectbest
alternative
Assumesmanagerknows
thebestfuturecourseof
theorganization
AdministrativeModelofdecisionmaking:
Challenges the classical assumptions that managers have and
process all the information.
As a result, decision making is risky.
Bounded rationality: There is a large numberofalternatives

andinformationisvastsothatmanagerscannotconsiderit
all.
Decisionsarelimitedbypeoplescognitiveabilities.
Incompleteinformation: mostmanagersdonotseeall
alternativesanddecidebasedonincompleteinformation.
Uncertainty
&risk
Ambiguous
Information
Incomplete
Information
Timeconstraints&
informationcosts
Recognizeneedfor
adecision
Frametheproblem
1.
Generate&assessalternatives
Recognize need for a decision:

Managers must Chooseamongalternatives
first realize the need
for which a decision must be made.
Implementchosen
alternative
Learnfromfeedback
A problem is a felt need, a question which needs a solution. In the words

of Joseph L Massie
"A good decision is dependent upon the recognition of the right
problem".
The objective of problem identification is that if the problem is
precisely and specifically identifies, it will provide a clue in finding
a possible solution. A problem can be identified clearly, if managers
go through diagnosis and analysis of the problem.
Recognizeneedfor
Recognizeneedfor
adecision
adecision
Frametheproblem
2. Frame the problem:Chooseamongalternatives

managers must frame problem for which
Implementchosen
decision is to be made.
alternative
Learnfromfeedback
Diagnosing the real problem implies knowing

between what is and what ought to be,
the
Diagnosis gives rise to analysis. Analysis of a problem requires:

Who would make decision?
What information would be needed?
From where the information is available?
gap
Recognizeneedfor
adecision
Frametheproblem
Chooseamongalternatives
Learnfromfeedback
3. Generate alternatives: managers must develop feasible
alternative courses of action.

If good alternatives are missed, the resulting
decision is poor.
It is hard to develop creative alternatives, so
managers need to look for new ideas.
Evaluate alternatives: what are the advantages and
disadvantages of each alternative?
Managers should specify criteria, then evaluate.
Recognizeneedfor
adecision
Frametheproblem
Implementchosen
alternative
Learnfromfeedback
4. Choose among alternatives: managers rank

alternatives and decide.
While ranking, all information needs to be considered.
The decision maker must check proposed alternatives against limits,

and if an alternative does not meet them, he can discard it.
Having narrowed down the alternatives which require serious
consideration The decision maker will go for evaluating how each
alternative may contribute towards the objective supposed to be
achieved by implementing the decision
A decision maker can use several sources for identifying
alternatives:
His own past experiences

Practices followed by others and
Using creative techniques.
Recognizeneedfor
adecision
Frametheproblem
Implementchosen
alternative
Learnfromfeedback
5.Implement choose alternative: managers
must now carry out the alternative.
Often a decision is made and not implemented.
Once the alternative is selected, it is put into action.
The actual process of decision making ends with the choice of an
alternative through which the objectives can be achieved
Recognizeneedfor
adecision
Frametheproblem
Implementchosen
alternative
Learnfromfeedback
6. Learn from feedback: managers should consider what went

right and wrong with the decision and learn for the future.
Without feedback, managers never learn from experience
and might repeat the same mistake.
When the decision is put into action, it brings certain results.
These results must correspond with objectives, the starting point of
decision process, if good decision has been made and implemented
properly.
Thus, results provide indication whether decision making and its
implementation is proper.
Isthepossiblecourseofaction:
Legal?
Ethical?
Economical?
Practical?
Is it legal? Managers must first be sure that

an alternative is legal both in this country and
abroad for exports.
Is it ethical? The alternative must be ethical
and not hurt stakeholders unnecessarily.
Is it economically feasible? Can our
organizations performance goals sustain this
alternative?
Is it practical? Does the management have the
capabilities and resources to do it?
So Far we have seen the decision making as a process, a series of linked

activities, But
it does not bring about the elements contained within a decision.
Without thesekeyelementsitisdifficulttounderstandadecisionfully
ortodiscriminatebetweenthedifferenttypesofmanagement
decision.
The key elements in a decision are:
The decision body.

Who is the person or group of people having authority to make the final
decision?
The decision options.

What are the alternative courses of action between which a choice will
be made?
The uncontrollable factors.

What are the factors which will affect the consequences of a decision
but which cannot be controlled directly by the decision body?
The consequences of each option.

In what terms can the possible results of each of the alternative options
be described?
The Decision Body

By this rather formal term we simply mean the individual or set of
individuals who make the decision.
We assume that, since decision making involves some commitment to
action, the decision body has a reasonable chance of taking the decision
through to implementation.
The most straightforward decision body to understand is the single
decision maker.
Where only one decision maker is involved it is that individuals task to
carry through the decision making process, to evaluate the information
available and interpret the organizations objective.
When more than one decision maker carries responsibility for the
decision, the decision is said to have a multi-decision maker decision
body.
The committee is a typical example of
a multi-decision maker decision body.
The Decision Options

Decision options are the alternative courses of action between which the
decision body must choose.
Options lie at the heart of decision making because, unless there is more
than one way to proceed, then there is no choice to be made and
therefore no decision.
The number of options in a decision can be anything between two and
infinity.
In this sense the simplest decision is that which involves taking a course
of action or doing nothing
the Yes/No decision.
options within a decision can turn out to be a mixture taken from a
continuum which goes between totally defined at the beginning of
the decision process, to completely novel and developed
specifically for the decision in question
Uncontrollable Factors
The uncontrollable factors are those parts of the decision which, although
having an influence on the final outcome, cannot be controlled directly
by the decision body.
For example, if we are deciding how much production capacity to
allocate to a new product, one of the factors which will influence our
decision is the likely demand for the new product.
One way of coping with this is to treat demand as a state of nature,
that is, a state in which the environment takes after, and independent of,
the decision itself.
When more than one uncontrollable factor is involved there could be a
state of nature corresponding to every possible combination of the levels
which the uncontrollable factors can take.
Consequences
For each combination of a decision option and the state of nature, there
will be a consequence.
Thus, if we have N alternative options and M mutually exclusive states
of nature there will be N x M possible consequences.
Mack distinguishes between three levels of consequence.

Primary consequences,
which are the straightforward statements of the operational results of an
event.
Surrogate consequences,
which are the interpretation of the event expressed in whatever measures
we are using to describe the outcomes.
Evaluated consequences,
which are a measure of the worth or utility of the outcome to the decision
body.
This latter set of consequences will be a reflection of the decision bodys
preference or value structure.
DECISIONMAKINGUNDERVARIOUSCONDITIONS
The conditions for making decisions can be divided into three types.
Namely
a) Certainty
b) Uncertainty and
c) Risk
Virtually all decisions are made in an environment to at least some
uncertainty However;
the degree will vary from relative certainty to great uncertainty.
There are certain risks involved in making decisions.
a) Certainty:
In a situation involving certainty, people are reasonably sure

about what will happen when they make a decision.
The information is available and is considered to be
reliable, and the cause and effect relationships are known.
b) Uncertainty
In a situation of uncertainty, on the other hand, people have only a

meager database, they do not know whether or not the data are
reliable, and they are very unsure about whether or not the situation
may change.
Moreover, they cannot evaluate the interactions of the different

variables.
For example, a corporation that decides to expand its Operation to an
unfamiliar country may know little about
the country, culture, laws, economic environment, and politics.
The political situation may be volatile that even experts cannot predict
a possible change in government.
c) Risk
In a situation with risks, factual information may exist, but it may be

incomplete.
To improve decision making One may estimate the objective probability of
an outcome by using, for example, mathematical models On PresentedBy:ViqarA.Usmani
the other hand,
subjective probability, based on judgment and experience may be used
All intelligent decision makers dealing with uncertainty

like to know the degree and nature of the risk they are
taking in choosing a course of action.
One of the deficiencies in using the traditional
approaches of operations research for problem solving
is that many of the data used in model are merely
estimates and others are based on probabilities.
The ordinary practice is to have staff specialists coming
up with best estimates.
Suggests
decision makers use heuristics to deal

with bounded rationality.
A heuristic is a rule of thumb to deal with complex
situations.
If the heuristic is wrong, however, then poor
decisions result from its use.
errors can result from use of an

incorrect heuristic.
Systematic
These errors will appear over and over since the

rule used to make decision is flawed.
Prior Hypothesis
Representativeness
Illusion of Control
Escalating Commitment
Cognitive
Biases
Prior hypothesis bias: manager allows strong prior
beliefs about a relationship between variables and

makes decisions based on these beliefs even when
evidence shows they are wrong.
Representativeness: decision maker incorrectly
generalizes a decision from a small sample or one
incident.
Illusion of control: manager over-estimates their ability
to control events.
Escalating commitment: manager has already
committed considerable resource to project and then
commits more even after feedback indicates problems
Many decisions are made in a group setting.
Groups tend to reduce cognitive biases and 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 mangers idea (CEO), and become blindly
committed without considering alternatives.
The group tends to convince each member that the
idea must go forward.
Devils Advocacy: one member of the group acts

as the devils advocate and critiques the way the
group identified alternatives.
Points out problems with the alternative selection.
Top managers then hear each group present their

alternatives and each group can critique the other.
Dialectical inquiry: two different groups are

assigned to the problem and each group evaluates
the other groups alternatives.
Promote diversity: by increasing the diversity in a
group, a wider set of alternatives may be
considered.
DevilsAdvocacy
Presentationof
alternative
DialecticInquiry
Alter.1
Alter.2
Critiqueof
alternative
Debatethetwo
alternatives
Reassess
alternative
accept,modify,reject
Reassess
alternatives
accept1or2,combine
Organizational Learning: Managers seek to improve

members ability to understand the organization and
environment so as to raise effectiveness.
The learning organization: managers try to improve the

peoples ability to behave creatively to maximize
organizational learning .
Creativity: is the ability of the decision maker to

discover novel ideas leading to a feasible course of
action.
A creative management staff and employees are the key to

the learning organization.
Buildcomplex,
challenging
mentalmodels
DevelopPersonal
Mastery
Encourage
Systems
Thinking
BuildShared
Vision
PromoteTeam
Learning
Peter Senges vision of a learning organization

is a group of people who are continually enhancing their
capabilities to create what they want to create.
According to Peter Senge (1990: 3) learning organizations are:
organizations where people continually expand their capacity to
create the results they truly desire, where new and expansive
patterns of thinking are nurtured, where collective aspiration is set
free, and where people are continually learning to see the whole
together.
Peter M. Senge (1947- ) was named a

Strategist of the Century by the Journal of Business
Strategy,
one of 24 men and women who have had the greatest
impact on the way we conduct business today
Senge suggests top managers follow several steps to build

in learning:
Personal Mastery: managers empower employees and

allow them to create and explore.
Mental Models: challenge employees to find new, better
methods to perform a task.
Team Learning: is more important than individual learning
since most decisions are made in groups.
Build a Shared Vision: a people share a common mental
model of the firm to evaluate opportunities.
Systems Thinking: know that actions in one area of the
firm impacts all others.
Organizationscanbuildanenvironment
supportiveofcreativity.
Manyoftheseissuesarethesameasforthe
learningorganization.
Managersmustprovideemployeeswiththe
abilitytotakerisks.
Ifpeopletakerisks,theywilloccasionallyfail.
Thus,tobuildcreativity,periodicfailures
mustberewarded.
Thisideaishardtoacceptforsomemanagers.
Brainstorming: managers meet face-to-face

to generate and debate many alternatives.
Group members are not allowed to evaluate

alternatives until all alternatives are listed.
Be creative and radical in stating alternatives.
When all are listed, then the pros and cons of each
are discussed and a short list created.
Production blocking is a potential problem

with brainstorming.
Members cannot absorb all information being

presented during the session and can forget their own
alternatives.
Nominal Group Technique: Provides a more

structured way to generate alternatives in
writing.
Avoids the production blocking problem.

Similar to brainstorming except that each member is
given time to first write down all alternatives he or she
would suggest.
Alternatives are then read aloud without discussion until
all have been listed.
Then discussion occurs and alternatives are ranked.
Delphi Technique: provides for a written

format without having all managers meet faceto-face.
Problem is distributed in written form to managers who

then generate written alternatives.
Responses are received and summarized by top
managers.
These results are sent back to participants for feedback,
and ranking.
The process continues until consensus is reached.
Delphi allows distant managers to participate.

After going through the details lets answer the following question:
How central decision making is in management activity?
The truth may well be, that we still now know very little of the answers
to this question.
Although a great deal has been written on the role of the manager, very
little of it has examined what managers actually do in practice.
In most of the books and written material, authors tends to describe and
stress in What managers Ought to do, instead, what managers
actually do.
We will study in detail, this phenomenon in coming lectures, but lets us
have a picture of what is a Manager?

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more possible alternatives".

Characteristics of Decision Making

A decision may be expressed in words or may be implied from

Decision making: the process by which

Decisions in response to opportunities:

Decisions in response to threats: occurs when

Programmed Decisions: routine, almost automatic

Managers have made decision many times before.

framework of organizational policies and rules.

recurring problems in the organization.

Programmed decisions have short-run impact.

Example: Deciding to reorder office supplies.

Example: Should the firm invest in a new technology?

Classical model of decision making:

Assumes managers have access to all the

Unfortunately, mangers often do not have all

Bounded rationality: There is a large numberofalternatives

Recognize need for a decision:

A problem is a felt need, a question which needs a solution. In the words

2. Frame the problem:Chooseamongalternatives

Diagnosing the real problem implies knowing

Diagnosis gives rise to analysis. Analysis of a problem requires:

3. Generate alternatives: managers must develop feasible

alternative courses of action.

4. Choose among alternatives: managers rank

While ranking, all information needs to be considered.

The decision maker must check proposed alternatives against limits,

A decision maker can use several sources for identifying

His own past experiences

5.Implement choose alternative: managers

must now carry out the alternative.

Often a decision is made and not implemented.

Once the alternative is selected, it is put into action.

The actual process of decision making ends with the choice of an

alternative through which the objectives can be achieved

6. Learn from feedback: managers should consider what went

Is it legal? Managers must first be sure that

So Far we have seen the decision making as a process, a series of linked

The key elements in a decision are:

The decision body.

The decision options.

The uncontrollable factors.

The consequences of each option.

The Decision Body

The Decision Options

Mack distinguishes between three levels of consequence.

In a situation involving certainty, people are reasonably sure

In a situation of uncertainty, on the other hand, people have only a

Moreover, they cannot evaluate the interactions of the different

In a situation with risks, factual information may exist, but it may be

All intelligent decision makers dealing with uncertainty

decision makers use heuristics to deal

errors can result from use of an

These errors will appear over and over since the

Prior hypothesis bias: manager allows strong prior

beliefs about a relationship between variables and

Many decisions are made in a group setting.

Groups tend to reduce cognitive biases and can call

There are some disadvantages with groups:

Usually occurs when group members rally around

Devils Advocacy: one member of the group acts

Points out problems with the alternative selection.

Top managers then hear each group present their