Weihrich and Koontz

8th Edition

© 2010

An International Perspective
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 Chapter Objectives
After studying this chapter, you should be able to:

1. Analyze decision-making as a rational process

2. Develop alternative courses of action with consideration of

the limiting factor

3. Evaluate alternatives and select a course of action from

among them

4. Differentiate between programmed and non-programmed

decisions

5. Understand the differences between decisions made under

conditions of certainty, uncertainty, and risk

6. Recognize the importance of creativity and innovation in

managing
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 Decision Making

Decision making is defined as the

selection of a course of action from
among alternatives.

“Planning requires decision making and choosing from

among alternative future courses of action”.
“Strategy: Planning is done in an environment of
uncertainty”

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Managerial Decision Making
Choice from
Decision available alternatives

The process through which

Decision managers identify and resolve
problems and capitalize on
Making opportunities.
 Decision Making
“The Business executive is by profession a decision maker.
Uncertainty is the opponent, overcoming it is his mission. Whether
the outcome is a consequence of luck or wisdom, the moment of
decision is without doubt the creative event in the life of the
executive.” John Mc Donald.

Managers sometimes see decision making as their central job

because they must constantly choose what is to be done, who is to
do it, and when, where and sometimes how it will be done.

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1. Decision making is a rational process:
Rationality in Decision-making

People acting or deciding rationally are

attempting to reach some goal that
cannot be attained without an action.

So, action ( next planning steps )

follows decision making.

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 Single, well-
defined goal
is to be achieved
All alternatives Problem is
and clear and
consequences unambiguous
are known
Rational
Decision Final choice
Preferences Making will maximize
are clear
payoff

Preferences
No time or cost
are constant
constraints exist
and stable

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 Limited, or "Bounded,"
Rationality
 Limitations of information, time, and
lack of certainty limit rationality, even
though a manager tries earnestly to be
completely rational

 Satisficing is picking a course of action

that is satisfactory or good enough
under the circumstances

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 Satisficing

 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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 Decision Making Process

These steps are similar to planning:

1. Premising
2. Identifying alternatives
3. Evaluating alternatives in terms
of the goal sought
4. Choosing an alternative, that is,
making a decision

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2. Development of alternative courses
of action: Identifying alternatives
Decision making is defined as the selection of
a course of action from among alternatives.

“Whatever a manager does, he does through decision making. Decision-

making lies deeply embedded in the process of management.” Peter
Drucker.

The manager has to take a decision before taking any action. Decision-
making is a pervasive function.

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 DEVELOPMENT OF ALTERNATIVES
AND THE LIMITING FACTOR
 ( While evaluating alternatives ) A limiting
factor is something that stands in the way of
accomplishing a desired objective

 The principle of the limiting factor:

 By recognizing and overcoming those factors
that stand critically in the way of a goal, the
best alternative course of action can be
selected.
 Where a limiting factor can not be overcome,
that alternative is given up.
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 Limiting Factor
 For example, for turning around a manufacturing organization,
the means could be to acquire some capital equipment.

 Then, limiting factor could be cash and credit. Consequently,

the manager’s alternatives would be confined to those, which
would overcome these limiting factors.

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Evaluation of Alternatives in terms of goals sought:
 Factors for consideration:
 Quantitative factors
 Qualitative factors
 Quality of I.R.
 Risk of technological change.
 Unforeseen War
 Prolonged strike
 Economic Recession.
 Marginal analysis
 Cost effective analysis

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 EVALUATION OF ALTERNATIVES:
Quantitative and Qualitative Factors

 Quantitative factors are factors that can be

measured in numerical terms
 Eg:- Time, Fixed Cost, Operating Cost

 Qualitative, or intangible, factors are those that

are difficult to measure numerically
 Eg:- labour relations, risk of technological change,
consumer behaviour, employee morale

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 Evaluation of Alternatives -Marginal
Analysis

Marginal analysis is to compare

additional revenues and the additional
cost arising from increasing output.

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Evaluation of Alternatives - Cost-
effectiveness Analysis

Cost effectiveness analysis or cost benefit

seeks the best ratio of benefit and cost.

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3. Selecting an Alternative.
 Past Experience
 Experimentation
 Research & Analysis
 Programmed Decisions.
 Non programmed decisions. (Fig 8.1 ,Fig 8.2)
 Strategic decisions.

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 SELECTING AN ALTERNATIVE:
Three Approaches

When selecting from among

alternatives, managers can use:

1. Experience

2. Experimentation

3. Research and analysis –.

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Experience

Experience deals with the past.

To some extent, experience is the best

teacher.

However, good decisions must be evaluated

against future events, while experience
belongs to the past.

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Experimentation

Prototype making

Experimentation is often used in scientific

inquiry.

This technique in management should only be

used after considering other alternatives.

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Research and Analysis

Conceptualization of the problem

Develop a mathematical model

It involves a search for relationships among

the more critical of the variables,
constraints, and premises that bear upon the
goal sought.
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4. Difference between programmed and
non-programmed decisions
 Programmed decisions are used for
structured or routine work.
Mostly made by lower level managers

 Non-programmed decisions are used

for unstructured, novel, and ill-defined
situations of a nonrecurring nature.
Mostly made by upper level managers.

They are akin to strategic decision making.

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 Types of Decisions

Programmed Nonprogrammed
Decisions Decisions

Involve situations that Decisions required for

have occurred often and unique and complex
decision rules can be management problems.
developed and applied
Poorly defined
Managers formulate Largely unstructured
decision rules so Important consequences
subordinates can make Uncertainty is great
decisions freeing Routine decision rules for
managers for other tasks. solving the problem do not
exist.
5. DECISION MAKING UNDER
CERTAINTY, UNCERTAINTY,AND RISK

Virtually all decisions are made in an

environment of at least some uncertainty. The
degree will vary from relative certainty to
great uncertainty.

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 Why Information Is Incomplete

7-30 Figure 7.2

 Causes of Incomplete Information
 Risk
 Refers to when managers know the possible outcomes of
a particular course of action and can assign probabilities
to them.
 Uncertainty
 Probabilities cannot be given for outcomes and the
future is unknown.

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6. Creativity and innovation in
decision making

 Creativity refers to the ability and

power to develop new ideas

 Innovation means the use of new ideas

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 Certainty, Risk, Uncertainty
and Ambiguity
All the information Organizational Know Objectives
Problem Don’t Know Probabilities

Low Possibility of Failure High

Certainty Risk Uncertainty Ambiguity

Programmed Nonprogrammed
Decisions Decisions

Clear-cut objectives Objectives Unclear

Know the probabilities Problem Solution Outcomes Unclear
 Decision-Making Approach
• Rationality
• Bounded Rationality
• Intuition

Types of Problems and Decisions

• Well-structured
Decision
- programmed
• Choose best
• Poorly structured
Decision-Making alternative
- nonprogrammed
Process - maximizing
- satisficing
• Implementing
Decision-Making Conditions • Evaluating
• Certainty
Decision Maker Style
• Risk
• Directive
• Uncertainty
• Analytic
• Conceptual
• Behavioral
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 The Creative Process
 The creative process is seldom simple and
linear

 It generally consists of four overlapping

and interacting phases:
 Unconscious scanning
 Intuition
 Insight
 Logical formulation or verification

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 BRAINSTORMING:
The Rules

1. No ideas are criticized

2. The more radical the ideas are, the better

3. The quantity of idea production is stressed

4. The improvement of ideas by others is

encouraged

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Limitations of Traditional Group
Discussions

It would be incorrect to assume that creativity

flourishes only in groups. The usual group
discussion can inhibit creativity.

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The Creative Manager
Virtually all people are capable of being creative, but
degree varies considerably.
Creative people are inquisitive and have many
unusual ideas and averse to status quo.
They are intelligent, rational and take into account
emotional aspects, as well.

Creative people could be disruptive by ignoring

established policies, rules and regulations.
Creativity is not a substitute for managerial
judgment.
It is the manager who must determine and weigh the
risks involved In pursing unusual ideas and
translating
3 them into innovative practices.
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Summary of major principles or guides for planning

 Principle of contributing to objectives.

 Principle of objectives.(verifiable, meaningful and attainable)
 Principle of primacy of planning.
 Principle of efficiency and effectiveness of plans.
 Principle of planning premises.
 Principle of strategy and policy framework.
 Principle of the limiting factor.
 The commitment principle.
 Principle of flexibility.
 Principle of navigational change.

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Was Disneyland Paris built on the wrong assumptions?
 Assumptions are critical for effective strategies; their importance can
be illustrated by the decision to build Euro Disney, which was later
called Disneyland Paris.

 The planning of the venture was done in an uncertain environment and

based on the wrong assumptions. In the early days of this undertaking,
from 1992 to 1994, the company lost more than $1 billion.

 Disney owned 49 percent of the venture, buy its share was later
reduced to 39 percent. So, what went wrong ?

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Was Disneyland Paris built on the wrong assumptions?
 After all, the previous move into Japan was very successful. It was precisely
the problem that the experiences with other ventures became the premises
for the French Disneyland.
 In the United States and Japan, the admission price was gradually raised after
visitors told friends about their enjoyable experience. In contrast, Euro
Disney started with an unsustainable entrance price of more than $40.
 This was very high in comparison with other theme parks. Consequently, the
admission had to be drastically reduced. Later the price was gradually
increased.
 For example in 1996, the one-day adult admission was about $38. But the
initial high price may have resulted in the loss of customers in the early years
of operation.

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 Was Disneyland Paris built on the wrong assumptions?
 Another apparent assumption was that people would stay on average four days
in Disney’s hotels. However, in 1993, the average stay was only two days.
 The theme park opened with about one-third of the rides found at Disney
World in America. Thus, all the rides could be done in one day, requiring a
shorter hotel stay.
 The European tradition of having the main meal at noontime was not taken
into consideration either. The available eating places were overcrowded at
noon and underutilized at other times.
 Rather than wait, visitors left to eat outside the park. In the United States and
Japan people eat throughout the day, thus avoiding long lines in the restaurants.

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Was Disneyland Paris built on the wrong assumptions?
 The mix of merchandise purchases was also different in France from
that in the United States – Europeans bought fewer high-margin items.
 These few illustrations seem to indicate that Disney did not sufficiently
test its premises for the Euro Disney venture.
 Using the assumptions based on previous successes may prove to be
very costly. A careful analysis of cultural habits and observations of
other theme parks may have prevented making plans based on incorrect
assumptions.

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