Managerial decision making

1. Managerial Decision-Making
Rey Lugtu
www.reylugtu.com

2. What’s the big deal about
decision-making?

3. Decision Making
• Decisions are choices made from two or more
alternatives.
• The decision making process is a set of steps
that include identifying a problem, selecting an
alternative, and evaluating the decisions
effectiveness.
• A problem is a discrepancy between an existing
and a desired state of affairs.

4. The Significance of Decision
Making
 Decision making is the one truly
distinctive characteristic of
managers.
 Decisions made by top
managers commit the total
organization toward particular
courses of action.

5. The Significance of Decision
Making (cont’d)
 Decisions made by lower levels of
management implement the strategic
decisions of top managers in the
operating areas of the organization.
 Decisions invariably involve
organizational change and the
commitment of scarce resources.

6. Model of the Decision-Making
Process
Identify
Existing
Problem
List
Alternative
Problem
Solutions
Select
Most
Beneficial
Alternative
Implement
Chosen
Alternative
Gather
Problem-
Related
Feedback
6
Setting
managerial
Objectives

7. Decision Making Approaches
1. Rationality
• Describes decisions that are consistent and value-maximising
within specified constraints.
2. Rounded rationality
• Behaviour that is rational within the parameters of a simplified
model that captures the essential features of a model.
3. Intuition
• An unconscious process of making decisions on the basis of
experience and accumulated judgement.

8. Decision-Making Function No. 1
 Objectives constitute the foundation
for rational decision making.
 Objectives are the ends for the
means of managerial decision
making.
 Attainment of the objective is the
ultimate measure of decision
success.
Setting Managerial Objectives:

9. Decision-Making Function No.
2
 The limitations of time and money
 The declining value of additional
information
 The rising cost of additional
information
 Abort the search in the zone of cost
effectiveness
Searching for Alternatives:

10. Additional Factors that Limit a Manager’s Number
of Acceptable Alternatives
Discretionary Area
(Acceptable Courses of Action)
Moral and
Ethical Norms
Unofficial
Social Norms
Legal
Restrictions
Formal Policies
and Rules
7

11. Why Information Is Incomplete
Figure 7.2

12. Decision-Making Function No.
3
 Alternatives result from the search.
 There are usually three to five
alternatives.
 One alternative is to do nothing.
 Alternatives are evaluated using
criteria derived from the objective.
Comparing and Evaluating
Alternatives:

13. Decision-Making Function No.
3 (cont’d)
 Evaluation should include an
anticipation of the likely outcome
for each alternative.
 Evaluation should also anticipate
obstacles or difficulties at the
time of implementation.
Also:

14. Figure 7.5
General
Criteria for
Evaluating
Possible
Courses of
Action

15. Decision-Making Function No.
4
 The choice is the culmination of the
process, not all of it.
 The choice confronts the decision
maker with discernible constraints.
 The best alternative may not be readily
apparent to the decision maker.
The Act of Choice:

16. Decision-Making Function No.
4 (cont’d)
 The best choice is likely to ensue
from the right approach.
 The choice should be the
alternative most likely to result in
the attainment of the objective.
Also:

17. Decision-Making Function No.
5
Implementing Decisions:
Decision success is a function
of decision quality
and
decision implementation.

18. Decision-Making Function No.
5 (cont’d)
 Observance of operating constraints
 Influence of the decision maker
 Involvement of decision
implementers
 Absence of conflict of interest
Areas contributing to decision
success:

19. Decision-Making Function No.
5 (cont’d)
 Disregard of timeliness
 Unlimited additional information
 Disregard of risk/reward
relationships
Areas detracting from decision
success:

20. Decision-Making Function No.
6
 Follow-up and control is essential to
ensure that an implemented decision
meets its objective.
 Performance is measured by
observing the implemented decision
in relation to its standard derived
from the objective.
Follow-Up and Control

21. The Scope of Decision Making
 Individual decision making
 Group decision making
 Organizational decision making

22. Decision Programming Continuum
Programmed
(Routine)
Decisions
Nonprogrammed
(Non-routine)
Decisions
5

23. A Typology of Decisions
l Category I – Programmed,
routine, recurring,
certainty with regard to the
outcome
l Category II – Non-programmed
non-routine, nonrecurring,
uncertainty with regard to the
outcome
 Decision categories

24. A Categorization of Decision Characteristics
Category I Decisions Category II Decisions
Classifications Programmable; routine; Nonprogrammable; unique;
generic; computational; judgmental; creative;
negotiated; compromise adaptive; innovative; inspirational
Structure Procedural; predictable; Novel, unstructured,
certainty regarding consequential, elusive, and
cause/effect relationships; complex; uncertain cause/
recurring; within existing effect relationships; non-
technologies; well-defined recurring; information
information channels; channels undefined, incom-
definite decision criteria; plete information; decision
outcome preferences may criteria may be unknown;
be certain or uncertain outcome preferences may
be certain or uncertain
Strategy Reliance upon rules and Reliance on judgment,
principles; habitual intuition, and creativity;
reactions; prefabricated individual processing;
response; uniform heuristic problem-solving
processing; computational techniques; rules of thumb;
techniques; accepted general problem-solving
methods for handling processes

25. Decision Making Conditions
• There are three conditions that managers may face as
they make decisions:
1. Certainty
• A situation in which a manager can make accurate decisions
because the outcome of every alternative is known.
2. Risk
• Those conditions in which the decision maker is able to estimate
the likelihood of certain outcomes.
3. Uncertainty
• A situation in which a decision maker has neither certainty nor
reasonable probability estimates available.

26. Decision Making Style
1. Directive
• DM style that is characterised by a low tolerance for ambiguity and
a rational way of thinking.
2. Analytical
• DM style that is characterised by a high tolerance for ambiguity
and a rational way of thinking.
3. Conceptual
• DM style that is characterised by a high tolerance for ambiguity
and an intuitive way of thinking.
4. Behavioural
• DM style that is characterised by a low tolerance for ambiguity and
an intuitive way of thinking.

27. Decision-Making Styles
Analytic Conceptual
Directive Behavioral
RATIONAL INTUITIVE
Way of Thinking
ToleranceforAmbiguity
HIGH
LOW

28. Additional Factors that Limit a Manager’s Number
of Acceptable Alternatives
Discretionary Area
(Acceptable Courses of Action)
Moral and
Ethical Norms
Unofficial
Social Norms
Legal
Restrictions
Formal Policies
and Rules
7

29. Why Information Is Incomplete
Figure 7.2

30. The Blind Men and the Elephant
Four blind men come across an elephant
They decide to feel the elephant to determine
what sort of creature it is.

31. One blind man feels the back leg of the elephant.
He says, "An elephant is like a tree."

32. The second blind man feels the trunk.
He says, "An elephant is like a snake."

33. The third blind man feels the tail.
He says, "An elephant is like a rope."

34. The fourth blind man pats the side.
He says, "An elephant is like a wall."

35. The wise man tells them,
“All of you are right."

36. Group Decision Making
• Superior to individual
making
• Choices less likely to fall
victim to bias
• Able to draw on combined
skills of group members
• Improve ability to generate
feasible alternatives

37. Group Decision Making
• Allows managers to process more information
• Managers affected by decisions agree to
cooperate

38. Group Decision Making
Groupthink
– Biased decision making resulting from group members
striving for agreement.
• Usually occurs when group members rally around a central
manager’s idea , and become blindly commit to the idea
without considering alternatives.
• The group’s influence tends to convince each member that the
idea must go forward.

39. Improved Group Decision Making
• Devil’s Advocacy
– A group member who defends unpopular or opposing
alternatives for the sake of argument
– One member of the group who acts as the devil’s
advocate by critiquing the way the group identified
alternatives and pointing out problems with the
alternative selection.

40. Improved Group Decision Making
• Dialectical Inquiry
– Two different groups are assigned to the problem and each group
evaluates the other group’s choice of alternatives.
– Top managers then hear each group present their alternatives and
each group can critique the other.
• Promote Diversity
– Increasing the diversity in a group may result in consideration of a
wider set of alternatives.

41. Organizational Learning and Creativity
• Organizational Learning
– Managers seek to improve a employee’s desire and
ability to understand and manage the organization and
its task environment so as to raise effectiveness.
• The Learning Organization
– Managers try to maximize the people’s ability to
behave creatively to maximize organizational learning.

42. Senge’s Principles for Creating a Learning
Organization
Figure 7.8

43. Organizational Learning and Creativity
Creativity
– 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.

44. Building Group Creativity
The Brainstorming Process
Group members
state ideas
Group leader
records each
idea where
group can
read it
Ideas evaluated
only after
all have been
recorded
No comments
on ideas at
this stage
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45. Building Group Creativity
Nominal Group Technique
Step 1: Each group member writes down individual ideas on the
decision or problem being discussed.
Step 2: Each member presents individual ideas orally. The ideas
are usually written on a board for all other members to see
and refer to.
Step 3: After all members present their ideas, the entire group
discusses these ideas simultaneously. Discussion tends
to be unstructured and spontaneous.
Step 4: When discussion is completed, a secret ballot is taken to
allow members to support their favorite ideas without
fear. The idea receiving the most votes is adopted
and implemented.
10

46. Building Group Creativity
The Delphi Technique
Step 1: A problem is identified.
Step 2: Group members are asked to offer solutions to the problem
by providing anonymous responses to a carefully
designed questionnaire.
Step 3: Responses of all group members are compiled and sent out
to all group members.
Step 4: Individual group members are asked to generate a new
individual solution to the problem after they have studied the
individual responses of all other group members compiled
in Step 3.
Step 5: Steps 3 and 4 are repeated until a consensus problem
solution is reached.
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47. End