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BBA 100
Dr. Salma Chad
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Managerial Decision Making
• 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
• Decisions in response to threats
Decision Making
• Decision
– A choice from two or more alternatives.
• The Decision-Making Process
– A set of eight steps that include
identifying a problem, selecting an
alternative, and evaluating the
decision’s effectiveness.
The Decision-Making Process
• The eight steps in the decision-making
process
The Decision-Making Process
• The eight steps in the decision-making
process
1. Identifying a problem- “My Sales reps need new
Computers”
2. Identifying decision criteria- Memory and Storage,
Display quality, Better life, Warranty, Carrying Weight
3. Allocating weights to the criteria
Contd.,
4. Developing alternatives-Toshiba, SonyVaio,
Dell, Lenovo,HP,
5.Analyzing alternatives- Toshiba, Sony Vaio,
Dell, Lenovo, HP,
6. Selecting an alternative
7. Implementing the alternative-Toshiba
8. Evaluating decision effectiveness
Step 1: Identifying a Problem
Finding a discrepancy (difference) between an existing
(current) and a desired state of affairs (things are not going
as they should).
Three Characteristics (aspects) of Problems.
A problem is identified when:
– A manager becomes aware (conscious) of it.
– There is pressure to act and solve the problem.
– The resources needed to take action are available
(means, authority, information).
Step 2: Identifying Decision
Criteria
• Managers must determine and list the
relevant criteria the problem identified in
step 1.
– Costs that will be incurred
– Risks likely to be encountered
– Outcomes that are desired
Step 3: Allocating Weights to
the Criteria
Prioritizing the criteria that were identified in step 2 by
assigning a “weight” to each.
Decision criteria are not of equal importance Assigning a
weight to each item places the items in the correct priority
in the decision making process.
Step 4: Developing Alternatives
• Listing viable alternatives that could
resolve the problem.
– Alternatives are only listed without
evaluation.
Step 5: Analyzing Alternatives
• Appraising each alternative’s strengths and
weaknesses against the criteria established
in steps 2 and 3.
– Alternatives are analyzed for their
effectiveness in resolving the issue.
Step 6: Selecting an Alternative
• Choosing the best alternative from among
those considered.
Step 7: Implementing the
Decision
• Putting the chosen alternative into action.
– Conveying the decision to those who
will implement it and gaining their
commitment to the decision.
Slide
Step 8: Evaluating the Decision
Effectiveness
• Evaluating the outcome of the decision to
see if the problem has been resolved.
• The soundness of the decision is judged
by its outcomes.
– How effectively was the problem solved
resulting from the chosen alternatives?
– If the problem was not solved, what went
wrong?
Evaluating Alternatives
Is the possible course of action:
Legal?
Ethical
Economical?
Practical?
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 manager’s intuition, and judgment.
– Example: Should the firm invest in a new
technology?
–
A
General
Decision
Making
Model
Types of Programmed
Decisions
• A Policy
– A general guideline for making a decision
about a structured problem.
• A Procedure
– A series of interrelated steps that a manager
can use to respond (applying a policy) to a
structured problem.
• A Rule
– An explicit statement that limits what a
manager or employee can or cannot do in
carrying out the steps involved in a procedure.
Problems and Decisions (cont’d)
• Non-programmed Decisions
– Decisions that are unique and nonrecurring
– Decisions that generate unique responses.
Unstructured Problems
– Problems that are new or unusual and for which
information is ambiguous or incomplete.
– Problems that will require custom-made solutions.
Types of Problems, Types of
Decisions, and Level in the
Organization
The Classical Model
• Classical model of decision making: a
prescriptive model that tells how the
decision should be made.
The Classical Model
List alternatives
& consequences
Assumes all information
is available to manager
Rank each alternative
from low to high
Assumes manager can
process information
Select best
alternative
Assumes manager knows
the best future course of
the organization
The Administrative Model
• Administrative Model of decision
making: Challenged the classical
assumptions that managers have and
process all the information.
–
As a result, decision making is risky.
Contd.,
Bounded rationality: There is a large
number of alternatives and information is
vast so that managers cannot consider it
all.
–
Decisions are limited by people’s cognitive
abilities.
Incomplete information: most managers do
not see all alternatives and decide based
on incomplete information.
Why Information is Incomplete
Uncertainty
& risk
Ambiguous
Information
Incomplete
Information
Time constraints &
information costs
Incomplete Information
Factors
• Satisficing: Managers explore a limited
number of options and choose an
acceptable decision rather than the optimum
decision.
Making Decisions
• Rational decision making describes choices that
are consistent and value-maximizing within
specified constraints
Assumptions of Rationality
Influences on Decision Making
Certain assumptions of rationality in the decisionmaking process are not always realistic
• Bounded Rationality
– Managers tend to make decisions rationally, but are
often limited (bounded) by their ability to process
information.
• Satisficing
– Because they cannot possibly analyze all
information on all alternatives, managers
accept solutions that are “good enough”.
They satisfice rather than maximize.
Influences on Decision Making
Decision making may be influenced by the
organization’s culture, internal politics, power
considerations and by…
– Escalation of Commitment
• An increasing or continued commitment to a
previous decision despite evidence that the
decision may have been wrong.
Influences on Decision Making
• The Role of Intuition
• Intuitive decision making
• Making decisions on the basis of experience,
feelings, and accumulated judgment.
• Intuition or “gut feeling” and rational analysis
complement each other.
What is Intuition?
Source: Based on L.A. Burke and M.K. Miller. “Taking the Mystery Out of Intuitive
Decision Making.” Academy of Management Executive. October 1999. pp. 91–99.
Cognitive Biases
•Suggests decision makers use heuristics
to deal with bounded rationality.
•Systematic errors can result from use of
an incorrect heuristic.
–
These errors will appear over and over since
the rule used to make decision is flawed.
Types of Cognitive Biases
Prior Hypothesis
Representativeness
Illusion of Control
Escalating Commitment
Cognitive
Biases
Types of 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.
Group Decision Making
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 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
• Devil’s Advocacy: one member of the group acts
as the devil’s advocate and critiques the way the
group identified alternatives.
– Points out problems with the alternative
selection.
• Dialectical inquiry: two different groups are
assigned to the problem and each group evaluates
the other group’s alternatives.
– Top managers then hear each group present
their alternatives and each group can critique
the other.
Devil’s Advocacy v. Dialectic
Inquiry
Devil’s Advocacy
Presentation of
alternative
Dialectic Inquiry
Alter. 1
Alter. 2
Critique of
alternative
Debate the two
alternatives
Reassess
alternative
Reassess
alternatives
accept, modify, reject
accept 1 or 2, combine
Organizational Learning &
Creativity
• Organizational Learning: Managers seek to
improve member’s ability to understand the
organization and environment so as to raise
effectiveness.
• Creativity: is the ability of the decision
maker to discover novel ideas leading to a
feasible course of action.
Senge’s Learning Organization
Principles
Develop Personal
Mastery
Encourage
Systems
Thinking
Build Shared
Vision
Build complex,
challenging
mental models
Promote Team
Learning
Creating a Learning Organization
Senge suggests top managers follow
several steps to build in learning:
–
–
–
–
–
Personal Mastery
Mental Models
Team Learning
Build a Shared Vision
Systems Thinking
Individual Creativity
• Organizations can build an environment
supportive of creativity.
–
–
–
Many of these issues are the same as for the
learning organization.
Managers must provide employees with the
ability to take risks.
If people take risks, they will occasionally fail.
• Thus, to build creativity, periodic failures
must be rewarded.
Building Group Creativity
• Brainstorming: managers meet face-to-face
to generate and debate many alternatives.
• Production blocking is a potential problem
with brainstorming.
•
Members cannot absorb all information being
presented during the session and can forget their
own alternatives.
Building Group Creativity
• 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.
Building Group Creativity
• Delphi Technique: provides for a written
format without having all managers meet
face-to-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.
Making Decisions
• Decision-Making Styles
– Directive: Use minimal information and consider few
alternatives.
– Analytic: Make careful decisions in unique situations.
– Conceptual: Maintain a broad outlook (wide perception) and
consider many alternatives in making long-term decisions.
– Behavioral: Avoid conflict by working well with others and
being receptive (accept) to suggestions.
Quantitative Techniques for
Planning and Decision Making
• Gantt Chart- A chart that depicts the
planned and actual progress of work
during the life of the project (Time and
Activity chart)
• PERT (Programmed Evaluation Review
Technique)- A network model used to
track the planning activities required to
complete a large-scale, non-repetitive
project.
Contd.,
• Critical Path Method- The path through the
PERT network that includes the time
consuming sequence of events and
activities
• Break Even-Analysis- A method of
determining relationship between total
costs and total revenues at various levels
of production
Contd.,
Decision Trees• A decision tree provides a quantitative
estimate of a best alternative.
• It is a tool for estimating the outcome of a
series of decisions
• When the sequences of the major
decisions are drawn, they resemble a tree
with branches
Overview of Managerial Decision
Making
Decision Making for Today’s World
Characteristics of an Effective Decision-Making Process
1 - It focuses on what is important.
2 - It is logical and consistent.
3 - It acknowledges both subjective and objective thinking
and blends (mixes) analytical with intuitive (instinctive)
thinking.
4 - It requires only as much information and analysis as is
necessary to resolve a particular dilemma.
5 - It encourages and guides the gathering of relevant
information and informed opinion.
6 - It is straightforward (free from ambiguity), reliable, easy
to use, and flexible.
Bribes are common practice in many countries
Transparency International ranks countries based on Bribe Payers Index
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