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Managerial Decision
Making
1 2 3
The nature of the decision- The basic classifications for The rational-economic model of
making process and each of its managerial decisions. decision making.
seven steps.
4 5 6 7
The behavioral The participative The advantages and The list of various
decision model and its approach to decision disadvantages of techniques used to
related concepts of making. participative decision improve participative
bounded rationality, making. decision making.
intuition, satisficing,
and escalation of
commitment.
6–2
© 2016 Wessex Press, Inc. All rights reserved.
LEARNING OUTCOMES
When you have finished studying this chapter, you
should be able to explain:
1 2 3
The nature of the The basic classifications for The rational-economic model of
managerial decisions. decision making.
decision-making process
and each of its seven
steps.
4 5 6 7
The behavioral The participative The advantages and The list of various
decision model and its approach to decision disadvantages of techniques used to
related concepts of making. participative decision improve participative
bounded rationality, making. decision making.
intuition, satisficing,
and escalation of
commitment.
6–3
© 2016 Wessex Press, Inc. All rights reserved.
Sources of Organizational and
Entrepreneurial Decisions
• Decision making
The process through which managers and leaders
identify and resolve problems and capitalize on
opportunities.
• Problem
A condition that occurs when some aspect of
organizational performance is less than desirable.
• Opportunity
Any situation that has the potential to provide
additional beneficial outcomes.
6–4
© 2016 Wessex Press, Inc. All rights reserved.
Figure 6.1 Seven Steps in the Decision-Making Process
Identifying opportunities
1 and diagnosing problems
2
Identifying objectives
3
Generating alternatives
4
Evaluating alternatives
5
Reaching decisions
6
Choosing implementation strategies
7
Monitoring and evaluating
6–5
© 2016 Wessex Press, Inc. All rights reserved.
Step 1: Identifying Opportunities
and Diagnosing Problems
• The clear identification of opportunities or the
diagnosis of problems that require a decision.
• An assessment of opportunities and problems
will only be as accurate as the information on
which it is based.
Current & desired
6–6
© 2016 Wessex Press, Inc. All rights reserved.
Step 1: Identifying Opportunities
and Diagnosing Problems
Problem:
A discrepancy between an existing and a desired
state of affairs.
– compare the current state of affairs with some standard,
which can be past performance, previously set goals, or the
performance of another unit within the organization or in
another organization.
– E.g: A car is no longer worth repairing, then the best
decision may be to purchase another car.
6–8
© 2016 Wessex Press, Inc. All rights reserved.
Step 2: Identifying Objectives
Relevant Factors:
– Price
– Interior Comfort
– Durability
– Repair Record
– Performance
– Handling
6–10
© 2016 Wessex Press, Inc. All rights reserved.
Step 3: Generating Alternatives
Benefits
Uncertainties
Risks
6–12
© 2016 Wessex Press, Inc. All rights reserved.
Step 4: Evaluating Alternatives
1. Most important
criterion assigned a
weight of 10.
2. Other weights
assigned against this
standard.
6–15
© 2016 Wessex Press, Inc. All rights reserved.
Step 5: Reaching Decisions
6–17
© 2016 Wessex Press, Inc. All rights reserved.
Step 7: Monitoring and Evaluating
• No decision-making process is complete until
the impact of the decision has been evaluated.
• Managers must observe the impact of the
decision as objectively as possible and take
further corrective action if it becomes
necessary.
6–18
© 2016 Wessex Press, Inc. All rights reserved.
LEARNING OUTCOMES
When you have finished studying this chapter, you
should be able to explain:
1 2 3
The nature of the decision- The basic The rational-economic model of
making process and each of its decision making.
seven steps. classifications for
managerial decisions.
4 5 6 7
The behavioral The participative The advantages and The list of various
decision model and its approach to decision disadvantages of techniques used to
related concepts of making. participative decision improve participative
bounded rationality, making. decision making.
intuition, satisficing,
and escalation of
commitment.
6–19
© 2016 Wessex Press, Inc. All rights reserved.
Classifying Decision Situations
• Programmed decision
• A decision made in response to a situation that is
routine or recurring.
• Non-programmed decision
• A decision made in response to a situation that is
unique, unstructured, or poorly defined.
6–20
© 2016 Wessex Press, Inc. All rights reserved.
Responses to Decision Situations
Nonprogrammed
Programmed Decisions
Decisions
Responses require
Responses are routine.
creativity.
6–21
© 2016 Wessex Press, Inc. All rights reserved.
Figure 6.3 Two Contrasting Decision Models
6–22
© 2016 Wessex Press, Inc. All rights reserved.
LEARNING OUTCOMES
When you have finished studying this chapter, you
should be able to explain:
1 2 3
The nature of the decision- The basic classifications for The rational-economic
making process and each of its managerial decisions.
seven steps. model of decision
making.
4 5 6 7
The behavioral The participative The advantages and The list of various
decision model and its approach to decision disadvantages of techniques used to
related concepts of making. participative decision improve participative
bounded rationality, making. decision making.
intuition, satisficing,
and escalation of
commitment.
6–23
© 2016 Wessex Press, Inc. All rights reserved.
(1) Rational-Economic Decision Model
• A prescriptive framework of how a
decision should be made that
assumes managers have completely
accurate information.
• Concentrates on how decisions
should be made, not on how they
actually are made
6–24
© 2016 Wessex Press, Inc. All rights reserved.
Assumptions of the Rational-Economic
Model
• Managers have “perfect information.”
• Managers attempt to accomplish objectives that are
known and agreed upon.
• Managers have an extensive list of alternatives to
choose from.
• Managers are rational, systematic, and logical in
assessing alternatives and their associated probabilities.
• Managers work in the best interests of their
organizations.
• Ethical decisions do not arise in the decision-making
process.
BEST
6–25
© 2016 Wessex Press, Inc. All rights reserved.
Drawbacks of the Rational-Economic
Model
Leaders rarely have access to perfect information.
Decision makers are limited in their ability to
comprehend and process vast amounts of information.
Decision makers may lack adequate knowledge about
future consequences of alternatives.
Personal factors can prevent a decision maker from
acting in a completely rational manner.
Individual culture and ethical values will influence the
decision process.
6–26
© 2016 Wessex Press, Inc. All rights reserved.
LEARNING OUTCOMES
When you have finished studying this chapter, you
should be able to explain:
1 2 3
The nature of the decision- The basic classifications for The rational-economic model of
making process and each of its managerial decisions. decision making.
seven steps.
4 5 6 7
The behavioral The participative The advantages and The list of various
decision model and approach to decision disadvantages of techniques used to
its related concepts making. participative decision improve participative
making. decision making.
of bounded
rationality, intuition,
satisficing, and
escalation of
commitment. 6–27
© 2016 Wessex Press, Inc. All rights reserved.
(ii) Behavioral Decision Model
• Acknowledges the human limitations that make
rational decisions difficult to achieve.
A manager’s cognitive ability to process information
is limited.
Managers usually attempt to behave rationally within
their limited perception of a situation.
The complexity of most organizational situations
forces managers to view problems within sharply
restricted bounds.
The behavior of managers can be considered
rational, but only in terms of their simplified view of
the problem.
6–28
© 2016 Wessex Press, Inc. All rights reserved.
Concepts Important to the
Behavioral Decision Model
• Bounded Rationality
Recognizes that people are limited by organizational
constraints such as time, information, resources, and
their own mental capabilities.
• Intuition (six sense)
An unconscious analysis based on past experience.
• Satisficing
The search and acceptance of something that is
satisfactory rather than perfect or optimal.
Good enough
6–29
© 2016 Wessex Press, Inc. All rights reserved.
Concepts Important to the Decision
Model (cont’d)
• Escalation of Commitment
The tendency to increase commitment to a previously
selected course of action beyond the level that would
be expected if the manager followed an effective
decision-making process.
1 2 3
The nature of the decision- The basic classifications for The rational-economic model of
making process and each of its managerial decisions. decision making.
seven steps.
4 5 6 7
The behavioral The The advantages and The list of various
decision model and its disadvantages of techniques used to
related concepts of participative participative decision improve participative
bounded rationality, approach to making. decision making.
intuition, satisficing,
and escalation of decision
commitment. making.
6–31
© 2016 Wessex Press, Inc. All rights reserved.
Group Considerations in Decision
Making
• Group decision making is becoming more
common as organizations focus on improving
customer service and push decision making to
lower levels.
6–32
© 2016 Wessex Press, Inc. All rights reserved.
Situational Contingencies Affecting
Decision Making Participation
1. Decision significance
2. Importance of commitment
3. Leader expertise
4. Likelihood of commitment
5. Team support
6. Team expertise
7. Team competence
6–33
© 2016 Wessex Press, Inc. All rights reserved.
LEARNING OUTCOMES
When you have finished studying this chapter, you
should be able to explain:
1 2 3
The nature of the decision- The basic classifications for The rational-economic model of
making process and each of its managerial decisions. decision making.
seven steps.
4 5 6 7
The behavioral The participative The advantages The list of various
decision model and its approach to decision techniques used to
and disadvantages
related concepts of making. improve participative
bounded rationality, of participative decision making.
intuition, satisficing, decision making.
and escalation of
commitment.
6–34
© 2016 Wessex Press, Inc. All rights reserved.
Table 6.2 Advantages and Disadvantages of Group
Decision Making
Advantages Disadvantages
• Experience and expertise •Greater time
of several individuals requirement
available
•Minority domination
• More information, data,
•Compromise
and facts accumulated
•Concern for individual
• Problems viewed from
rather than group goals
several perspectives
•Social pressure to
• Higher member
conform
satisfaction
•Groupthink –
• Greater acceptance and
agree-at-any-cost
commitment to decisions
6–35
© 2016 Wessex Press, Inc. All rights reserved.
LEARNING OUTCOMES
When you have finished studying this chapter, you
should be able to explain:
1 2 3
The nature of the decision- The basic classifications for The rational-economic model of
making process and each of its managerial decisions. decision making.
seven steps.
4 5 6 7
The behavioral The participative The advantages and The list of various
decision model and its approach to decision disadvantages of
techniques used to
related concepts of making. participative decision
bounded rationality, making. improve
intuition, satisficing, participative
and escalation of decision making.
commitment.
6–36
© 2016 Wessex Press, Inc. All rights reserved.
Techniques for Quality in Group
Decision Making
1) Brainstorming
2) Nominal Group Technique
3) Delphi Technique
4) Devil’s Advocacy Approach
5) Dialectical Inquiry
6–37
© 2016 Wessex Press, Inc. All rights reserved.
1) Brainstorming
• Brainstorming
A technique to enhance creativity by encouraging
group members to generate as many novel ideas as
possible on a given topic without evaluating them.
• Rules of Brainstorming
Freewheeling is encouraged.
Ideas are not criticized as they are being generated.
Quantity is encouraged.
The wilder the ideas, the better.
Piggyback or combine on previously stated ideas.
No Ideas are evaluated until after all alternatives are
generated.
6–38
© 2016 Wessex Press, Inc. All rights reserved.
Other Decision-Making Techniques
• 2) Nominal Group Technique (NGT)
A structured process designed to stimulate creative group
decision making where agreement is lacking or the
members have incomplete knowledge concerning the
nature of the problem.
Ind. list ideas & present the ideas without discussion
Members vote on the idea independently – rank order
/rating
• 3) Delphi Technique
Uses experts to make predictions and forecasts about
future events without meeting face-to-face.
Collect & summaries opinion anonymity – shared. Process
continued many rounds until consensus emerges
6–39
© 2016 Wessex Press, Inc. All rights reserved.
Other Decision-Making Techniques
• 4) Devil’s Advocacy Approach
Deal with complex & strategic decision - debate
Appoints an individual or subgroup to critic a
propose decision
question the assumptions of the choice.
• 5) Dialectical Inquiry
Approaches a decision from two opposite points and
structures a debate between conflicting view.
Present arguments in support their position
Team – divergent & Innovative ideas
6–40
© 2016 Wessex Press, Inc. All rights reserved.
Ethical and Social Implications in Decision
Making
• Many leading companies look beyond the bottom-
line profitability and include a component of ethical
behavior and social responsibility into their business
decisions.
Toyota – commitment to sustainability
Walt Disney – zero-barrier pools so that handicapped
bathers can simply enter the pool
Burger King – hire more welfare recipients
General Motors – equip family cars with infrared-sensing
device that unlock trunk if anyone is trapped inside
6–41
© 2016 Wessex Press, Inc. All rights reserved.
Implications for Leaders
Be able to recognize quickly problems and
opportunities that call for a decision.
Be able to recognize the different time frames
and scopes of strategic decisions versus
operational decisions.
Be equipped with all the tools and techniques
that can aid in making strategic decisions.
6–42
© 2016 Wessex Press, Inc. All rights reserved.
Implications for Leaders
Be able to recognize the different decision-
making environments in which their operational
decisions will be made.
Have an awareness and understanding of the
various quantitative tools that can aid in
making operational decisions.
6–43
© 2016 Wessex Press, Inc. All rights reserved.