University of Bahrain
College of Business Administration
Management & Marketing Department
Chapter Five: Decision Making,
Learning, Creativity and
Entrepreneurship
Dr.Mahmood Asad
MGT230: Chapter5
1
The Nature of Managerial Decision
Making
• Every time managers act to plan, organize,
direct, or control organizational activities, they
make a stream of decisions.
• One of the main tasks facing a manager is to
manage the organizational environment.
Dr.Mahmood Asad
MGT230: Chapter5
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The Nature of Managerial Decision
Making
• Decision Making is the process by which
managers respond to opportunities and
threats by analyzing options, and making
determinations about specific organizational
goals and courses of action.
Dr.Mahmood Asad
MGT230: Chapter5
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The Nature of Managerial Decision
Making
• Decision making in response to opportunities:
– Occurs when managers search for ways to improve
organizational performance to benefit
stakeholders.
Dr.Mahmood Asad
MGT230: Chapter5
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The Nature of Managerial Decision
Making
• Decision making in response to threats:
– Occurs when events inside or outside the
organization are adversely affecting organizational
performance and managers are searching for ways
to increase performance.
Dr.Mahmood Asad
MGT230: Chapter5
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Programmed and Nonprogrammed Decision
Making
PROGRAMMED DECISION MAKING
• Programmed Decision is routine, virtually
automatic decision making that follows
established rules or guidelines.
Dr.Mahmood Asad
MGT230: Chapter5
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Programmed and Nonprogrammed Decision
Making
NONPROGRAMMED DECISION MAKING
• Nonprogrammed Decision is nonroutine decision
making that occurs in response to unusual,
unpredictable opportunities and threats.
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MGT230: Chapter5
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Programmed and Nonprogrammed Decision
Making
1. Intuition is feelings, beliefs, and hunches that
come readily to mind, require little effort and
information gathering and result in on-the-spot
decisions.
2. Reasoned judgment is decisions that take time
and effort to make and result from careful
information gathering, generation of
alternatives, and evaluation of alternatives.
Dr.Mahmood Asad
MGT230: Chapter5
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Programmed and Nonprogrammed Decision
Making
– “Exercising” one’s judgment is a
more rational process than “going
with” one’s intuition.
– Both intuition and judgment often
are flawed and can result in poor
decision making.
– Error is much greater in
nonprogammed decision making
than in progammed decision
making.
Dr.Mahmood Asad
MGT230: Chapter5
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(1) The Classical Model
• Classical Decision Making
Model is a prescriptive model
of decision making that
assumes the decision maker
can identify and evaluate all
possible alternatives and
their consequences and
rationally choose the most
appropriate course of action.
Dr.Mahmood Asad
MGT230: Chapter5
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(1) The Classical Model
– Optimum decision is The most appropriate
decision in light of what managers believe to be
the most desirable future consequences for their
organization.
Dr.Mahmood Asad
MGT230: Chapter5
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Figure 5.1: The Classical Model of Decision Making
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MGT230: Chapter5
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(2) The Administrative Model
• Administrative model is an approach to decision
making that explains why decision making is
inherently uncertain and risky and why managers
usually make satisfactory rather than optimum
decisions.
▫ The administrative model is based on three important
concepts:
1. Bounded rationality
2. Incomplete information
3. Satisficing
Dr.Mahmood Asad
MGT230: Chapter5
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(2) The Administrative Model
1. BOUNDED RATIONALITY
•
Bounded rationality is cognitive limitations that
constrain one’s ability to interpret, process, and act
on information.
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MGT230: Chapter5
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(2) The Administrative Model
2. INCOMPLETE INFORMATION
• Information is incomplete because the full range of decisionmaking alternatives is unknowable in most situations and the
consequences associated with known alternatives are
uncertain.
• Information is incomplete because of risk and uncertainty,
ambiguity, and time constraints.
Dr.Mahmood Asad
MGT230: Chapter5
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Figure 5.2: Why Information is Incomplete
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MGT230: Chapter5
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(2) The Administrative Model
RISK AND UNCERTAINTY
• Risk is the degree of probability that the
possible outcomes of a particular course of
action will occur.
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MGT230: Chapter5
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(2) The Administrative Model
• Uncertainty is probabilities cannot be given
for outcomes and the future is unknown.
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MGT230: Chapter5
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(2) The Administrative Model
AMBIGUOUS INFORMATION
• Ambiguous information is Information that can be
interpreted in multiple and often conflicting ways.
• Look at Figure 5.3.
• Do you see a young woman or an old woman?
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MGT230: Chapter5
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Figure 5.3: Ambiguous
Information: Young Woman
or Old Woman?
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MGT230: Chapter5
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(2) The Administrative Model
TIME CONSTRAINTS AND INFORMATION COSTS
• Managers have neither the time nor money to search for all
possible alternatives and evaluate potential consequences of
those alternatives.
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MGT230: Chapter5
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(2) The Administrative Model
3. SATISFICING
• Satisficing is searching for and choosing an
acceptable, or satisfactory response to
problems and opportunities, rather than
trying to make the best decision.
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MGT230: Chapter5
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Steps in the Decision-Making Process
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MGT230: Chapter5
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(1) Recognize the Need for
a Decision
• Some stimuli usually spark the realization that there is a need
to make a decision.
• Managers can be proactive or reactive in recognizing the need
to make a decision, but managers must recognize this need
and respond in a timely and appropriate way.
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MGT230: Chapter5
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(2) Generate Alternatives
• Manager must generate a set of feasible
alternative courses of action to take in
response to the opportunity or threat.
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(3) Assess Alternatives
• Evaluate the advantages and disadvantages of each
alternative.
• Successful managers use four criteria to evaluate the pros and
cons of alternative courses of action:
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MGT230: Chapter5
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Figure 5.5: General
Criteria for Evaluating
Possible Courses of
Action
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(3) Assess Alternatives
1. Legality: not violate any domestic and
international laws or government regulations.
2. Ethicalness: will not harm any stakeholder group.
3. Economic feasibility: alternatives can be
accomplished given the organization’s
performance goals.
4. Practicality: managers have the capabilities and
resources required to implement the alternative
and not threaten the attainment of other
organizational goals.
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MGT230: Chapter5
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(4) Choose among Alternatives
• Rank the various alternatives and make a
decision.
• When ranking alternatives, managers must be
sure all the information available is brought to
bear on the problem or issue at hand.
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(5) Implement the Chosen Alternative
• When
alternative
implemented,
many
subsequent and related decisions must be made.
• Although the need to make subsequent decisions
to implement the chosen course of action may
seem obvious, many managers make a decision
and then fail to act on it. This is the same as not
making a decision at all.
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(6) Learn from Feedback
• Effective managers always conduct a retrospective analysis to
see what they can learn from past successes or failures.
• Managers must establish a formal procedure with which they
can learn from the results of past decisions. The procedure
include the following steps:
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(6) Learn from Feedback
1. Compare what actually happened to what was
expected to happen as a result of the decision.
2. Explore why any expectations for the decision
were not met.
3. Derive guidelines that will help in future decision
making.
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MGT230: Chapter5
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