Fundamentals of Management Making Decisions

Chapter 8
Making Decisions
By
Dr. Doaa Saleh
Fundamentals of Management Making Decisions

Overview

Introduction Theories of Business

Management Ethics
(Ch. 1)
(Ch. 2) (Ch. 3)
Fundamentals of Management Making Decisions

Objectives
1. A fundamental understanding of the term decision

2. An understanding of each element of the decision situation

3. An ability to use the decision-making process

Fundamentals of Management Making Decisions

Definitions
• Decision:
Is a choice made between two or more available alternatives.

• Decision Making:
Is the process of choosing the best alternative for reaching objectives.
Fundamentals of Management Making Decisions

Decisions Types
• Decision can be categorized based on:
• How much time a manager must spend making them?
• What proportion of the organization must be involved in making them?
• Which organizational functions they focus on?
• Programmed decision:
routine and repetitive
• Non-programmed decision:
one-shot decision
Fundamentals of Management Making Decisions

Decisions Types
Fundamentals of Management Making Decisions
The Responsibility for Making Organizational
Decisions
Who will make the decision?
1. Decision Scope:
The proportion of the total management system that the decision will affect.

2. levels of management:
Lower, Middle, or Upper Level.
Fundamentals of Management Making Decisions

Making Decision Responsibility Rationale

Fundamentals of Management Making Decisions

Consensus

• Definition:
Is an agreement on a decision by all the individuals involved in making
that decision.
• Advantages:
• It focuses “several heads” on the decision.
• Employees are more likely to be committed to implementing a
decision if they helped make it.
• Disadvantages:
• it often involves time-consuming discussions relating to the decision
Fundamentals of Management Making Decisions

Elements of the Decision Situation

• The Decision Makers

Weak DM usually is receptive, exploitative, hoarding, or marketing oriented
• Goals to Be Served
• Relevant Alternatives
• Ordering of Alternatives
• Choice of Alternatives
Fundamentals of Management Making Decisions
The Rational Decision-Making Process
Model
Fundamentals of Management Making Decisions
The Rational Decision-Making Process
Assumptions
1. Humans are economic beings with the objective of maximizing
satisfaction or return.
2. All alternatives and their possible consequences are known.
3. Decision makers have some priority system to guide them in ranking
the desirability of each alternative.
Fundamentals of Management Making Decisions
The Rational Decision-Making Process
Listing Alternative Solutions
Limitations on the number of problem-solving alternatives available:
1. Authority factors.
2. Biological or human factors.
3. Physical factors.
4. Technological factors.
5. Economic factors.
Fundamentals of Management Making Decisions
The Rational Decision-Making Process
Listing Alternative Solutions
Fundamentals of Management Making Decisions
The Rational Decision-Making Process
Listing Alternative Solutions
Which is the better, to have higher or fewer number of alternatives?
• Generally, generating more alternatives would usually lead to more
effective decision making.
• However, having too many alternatives may actually demotivate
decision makers.
Fundamentals of Management Making Decisions
The Rational Decision-Making Process
Selecting the Most Beneficial Alternative
Alternatives should be evaluated in these steps:
• List the potential effects of each alternative.
• Assign a probability factor to each of the potential effects.
• Compare each alternative’s expected effects and the respective
probabilities of those effects.
Fundamentals of Management Making Decisions
The Rational Decision-Making Process
Implementing the Chosen Alternative

Develop an action plan to implement the chosen alternative, giving it

all supportive chances of success.
Fundamentals of Management Making Decisions
The Rational Decision-Making Process
Gathering Problem-Related Feedback

Feedback determines the implemented alternative’s effect on problem

If problem is not solved, seek out and implement another alternative
Fundamentals of Management Making Decisions

DM Conditions: Risk and Uncertainty

• Risk:
Refers to situations in which statistical probabilities can
be attributed to alternative potential outcomes.
• Uncertainty:
Refers to situations where the probability that a
particular outcome will occur is not known in advance.
Alpha Inc. Open a new branch in China Beta Inc.
Opened 10 branches No past experience in
Risk
in China before China

Uncertainty
Fundamentals of Management Making Decisions

Decision-Making Tools
• Subjective:
Intuition
Experience
Rule of Thumbs
• Objective:
Probability Theory
Decision Trees
Fundamentals of Management Making Decisions
Decision-Making Tools
Probability Theory
• Is a decision-making tool used in risk situations.
• Probability refers to the likelihood that an event or outcome will
actually occur.

𝐸𝑉 = 𝐼 ∗ 𝑃
• 𝐸𝑉: is the expected value for the alternative considered.
• 𝐼: is the income that alternative would produce.
• 𝑃: probability of producing that income
Fundamentals of Management Making Decisions
Decision-Making Tools
Probability Theory
Fundamentals of Management Making Decisions
Decision-Making Tools
Decision Trees
• Is a graphic decision-making tool typically used to evaluate decisions
involving a series of steps.
• Stygian Chemical Company decides whether to build a small or a large
plant to manufacture a new product with an expected life of 10 years.
• If the choice is to build a large plant, the company could face high or low average
product demand, or high initial and then low demand.
• If the choice is to build a small plant, the company could face either initially high
or initially low product demand. If the small plant is built and product demand is
high during an initial two-year period, management could then choose whether
to expand the plant. Whether the decision is made to expand or not to expand,
management could then face either high or low product demand.
Fundamentals of Management Making Decisions
Decision-Making Tools
Decision Trees
Fundamentals of Management Making Decisions
Decision-Making Tools
Decision Trees
• The financial consequence of each different course of action must be
compared.
1. Study estimates of investment amounts necessary for building a large plant,
for building a small plant, and for expanding a small plant.
2. Weigh the probabilities of facing different product demand levels for
various decision alternatives.
3. Consider projected income yields for each decision alternative.
• Net expected gain: is defined in this situation as the expected value
of an alternative minus the investment cost.
Fundamentals of Management Making Decisions
Group Decision Making
Advantages and Disadvantages
• Advantages:
• A group can generally come up with more and better decision alternatives.
• A group can draw on collective, diverse organizational experiences as the foundation
for decision making.
• The members of that group tend to support the implementation of the decision
more fervently.
• Disadvantages:
• It takes longer to make a group decision because groups must take the time to
present and discuss all the members’ views.
• group decisions cost the organization more than individual decisions do simply
because they take up the time of more people in the organization.
• Groupthink: group members’ efforts to maintain friendly relationships among
themselves.
Fundamentals of Management Making Decisions
Group Decision Making
Brainstorming
Fundamentals of Management Making Decisions
Group Decision Making
Brainstorming
• Advantages:
Encouraging the expression of as many useful ideas as possible
• Disadvantages:
Wasting the group’s time on ideas that are wildly impractical
Fundamentals of Management Making Decisions
Group Decision Making
Nominal Group Technique
1. Each group member writes down individual ideas on the decision or
problem being discussed.
2. Each member presents individual ideas orally. The ideas are usually
written on a board for all other members to see and refer to.
3. After all members present their ideas, the entire group discusses
these ideas simultaneously. Discussion tends to be unstructured
and spontaneous.
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.
Fundamentals of Management Making Decisions
Group Decision Making
Nominal Group Technique
• Advantages:
Its secret ballot, offers a structure in which individuals can support or
reject an idea without fear of recrimination
• Disadvantages:
Group members have no way of knowing why individuals voted the way
they did
Fundamentals of Management Making Decisions
Group Decision Making
Delphi Technique
1. A problem is identified.
2. Group members are asked to offer solutions to the problem by providing
anonymous responses to a carefully designed questionnaire.
3. Responses of all group members are compiled and sent out to all group
members.
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.
5. Steps 3 and 4 are repeated until a consensus problem solution is
reached.
Fundamentals of Management Making Decisions
Group Decision Making
Delphi Technique
• Advantages:
Ideas can be gathered from group members who are too geographically
separated or busy to meet face to face
• Disadvantages:
Members are unable to ask questions of one another
Fundamentals of Management Making Decisions

Overview

Introduction Theories of Business

Management Ethics
(Ch. 1)
(Ch. 2) (Ch. 3)