Decision Making(DM)

• Every manager strives to do making good

decisions.

• Quality of managerial decisions…organizational

success or failure…

•Defining ….
•Choosing Among Alternatives.
• DM is a comprehensive process: 8 steps…..

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• Identifying a problem: step 1
– Existence of a problem.
– Discrepancy between an existing and a desired state of
affairs.
• Awareness of discrepancy.
– Standards…past performance…previously set goals…performance of
other unit…

• Pressure to take action.

– Organizational policies, deadlines, financial crises, expectations of
boss, upcoming performance evaluation…

• Must have resources necessary to take action.

– Authority, budget, information or other resources….

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• Identifying decision criteria(DC): step 2

– DC: What is relevant in making a decision? What

factors?

– E.g. price , product model, manufacturer, standard

features, optional equipments, service warranties,
service support after purchase…; guide decisions.

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• Allocating weights to the criteria: step 3
– Give correct priority… degree of importance to you.
– Highest to lowest weight.

• Developing alternatives: step 4

– List viable alternatives. No evaluation.

• Analyzing alternatives: step 5

– Critically analyze each.
– Compare each alternative … criteria and weights…
evident strengths and weaknesses…
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 – Personal assessment by manager… may relatively objective.
• Selecting an alternative: step 6
– Choose the best alternative.

• Implementing the alternative: step 7

– Putting the decision into action.
– Conveying decision to those affected.

• Evaluating decision effectiveness: step 8

– Whether problem have been resolved… accomplished
desired result…
– If problem is found to still exist. Was the problem incorrectly
defined?...question about each step.

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• DM is part of all four managerial functions.
– Decision Making: Essence of the manager’s job…
synonymous with managing.

PLANING
• What are the organizations’ long-term objectives?
• What strategies will best achieve these objectives?
• What should the organizations’ short-term objectives be?
• How difficult should individual goals be?
ORGANIZATION
• How many subordinate should I have report directly to me?
• How much centralization should there be in the
organization?
• How should jobs be designed?
• When should the organization implement a different
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structure?
LEADING
• How do I handle employees who appear to be low in motivation?
• What is the most effective leadership style in a given situation?
• How will a specific change affect worker productivity?
• When is the right time to stimulate conflict?

CONTROLLING
• What activities in the organization need to be controlled?
• How should these activities be controlled?
• When is a performance deviation significant?
• What type of management information system should the
organization have?

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• Rational decision making.
– Assume managers decisions to be rational.

• Consistent,

• Value-maximizing Choices,

• Specified constraints.

– Perfectly rational: fully objective and logical.

• Define problem carefully.

• Clear specific goals.
• All steps in DM process consistently lead towards an alternative
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that maximizes the goal.
 Assumptions of Rationality
• Problem clarity. In rational decision making the problem is clear and
unambiguous. The decision maker is assumed to have complete
information regarding the decision situation.

• Goal orientation. In rational decision making there is no conflict

over the goal. Whether the decision involves purchasing a new
computer, selecting a new college to attend, choosing the proper
price for a new product, or picking the right job applicant to fill a
vacancy, the decision maker has a single, well-defined goal that he
or she is trying to reach.

• Known options. It is assumed that the decision maker is creative,

can identify all the relevant criteria, and can list all the viable
alternatives. Further, the decision maker is aware of all the possible
consequences of each alternative.
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• Clear Preference. Rationality assume that the criteria and
alternatives can be ranked according to their importance.

• Constance Preference. In addition to a clear goal and preferences it is

assumed that the specific decision criteria are constant and that the
weights assigned to them are stable over time.

• No time or cost constraints. The rational DM can obtain full

information about criteria and alternatives because it is assumed that
there are no time or cost constraints.

• Maximum payoff. The rational decision maker always chooses the

alternative that will yield the maximum economic payoff.

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 Limits of Rationality
• There are limits to an individuals’ information-processing capacity.
Most people can hold only about seven pieces of information in
short term-memory. When decisions become complex, individuals
tend to create simple models that allow them to reduce the
problem to understandable dimensions.
• Decision makers tend to intermix solutions with problems. The
definition of a problem often includes a rough description of an
acceptable solution. This clouds the objectivity of both the
alternative generation stage and the alternative evaluation stage of
the decision process.
• Perceptual biases can distort identification. We know that “except
in detective stories, the fact don’t speak for themselves; they must
be interpreted.” The decision maker’s background, position in the
organizations’ interests, and past experiences focus his or her
attention on certain problems and not others. The organizations’
culture can also distort a managers’ perceptions; “managers
sometimes don’t see what they believe can’t be there.”
• Many decision makers select information more for its accessibility
than for its quality. Important information, therefore, may carry less
weight in a decision than information that is easy to get.
• Decision makers tend to commit themselves prematurely to a
specific alternative early in the decision process, thus biasing the
process toward choosing that alternative.
• Evidence that a previous solution is not working does not always
generate a search for new alternatives. Instead, it frequently
initiates an escalation of commitment whereby the decision maker
further increases the commitment of resources to the previous
course of action in an effort to demonstrate that the initial decision
was not wrong. For example, studies of the events leading up to the
Challenger disaster point to an escalation of commitment by
decision makers to launch the shuttle on that fateful day event
though the initial decision was questioned by certain individuals.
Although most decision situations don’t have the tragic conclusion
that this one did, managers should be alert to the problems
associated with escalation of commitment. 14
• Prior decision precedents constrain current choices. Decisions are
rarely simple, discrete events. They are more aptly described as
points in a stream of choices. Most decision are really an
accumulation of sub decisions made over long periods of time.
• Organizations are made up of divergent interest that make it difficult
even impossible, to create a common effort toward a single goal.
Decisions are there for rarely directed toward achieving an overall
organizational goal. Instead, there is a constant bargaining among
managers, who perceive problems differently and prefer different
alternatives. The existence of divergent interests ensure that there
will be differences in goals, alternatives, and consequences.
Bargaining is needed to achieve compromise and support for
implementing the final solution. Consequently, “where you stand
depends on where you sit” in ambiguous and contradictory
situations, decisions are largely the outcome of power and political
influences.
• Organizations place time and cost constraints on decision makers,
which in turn limit the amount of search managers can undertake.
Thus, new alternatives similar to old ones tend to be sought.

• Despite the potential for diversity, a strong conservative bias exists in

most organizational cultures. Most organizational cultures reinforce
the status quo, which discourages risk taking and innovation. In such
cultures, employees are frequently rewarded for being “team
players” and for not “making waves,” and wrong choices have more
of an impact on a decision makers’ career than does the
development of new ideas. So decision makers spend more effort
trying to avoid mistakes than in developing innovative ideas.

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• Bounded rationality.

– “Behaviour that is rational within the parameters of a

simplified model that captures the essential features of a
problem”.

– Given information processing limitations and constraints

imposed by the organization.

– Satisficing(good enough) decisions rather than maximizing

one.

– DM process influenced by decision maker’s self-interest,

organization’s culture, internal politics, power considerations.
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 TWO VIEWS OF THE DECISION-MAKING PROCESS
DECESION-MAKING STEP PERFECT RATIONALITY BOUNDED RATIONALITY
1. Problem formulation An important and relevant A visible problem that reflects the
organizational problem is managers’ interests and back-
identified. ground is identified.
2. Identification of decision All criteria are identified A limited set of criteria are
criteria identified
3. Allocation of weights to criteria All criteria are evaluated and A simple model is constructed to
rated in terms of their importance evaluate and rate the criteria; the
to the organizations’ goal. decision makers’ self-interest
strongly influences the ratings.

4. Developments of alternatives A comprehensive list of all A limited set of similar

alternatives is developed alternatives is identified.
creatively.
5. Analysis of alternatives All alternatives are assessed Beginning with a fevered
against the decision criteria and solution, alternatives are assessed,
weights; the consequence for each one at a time, against the decision
alternative are known. criteria.

6. Selection of an alternative Maximizing decision; the one Satisficing decision; the search
with the highest economic continues until a solution is found
outcome (in terms of the that is satisfactory and sufficient,
organizations’ goal) is chosen. at which time the search stops.
7. Implementation of alternatives Since the decision maximizes the Politics and power considerations
single, well-defined goal, all will influence the acceptance of,
organizational members will and commitment to, the decision.
embrace the solution

8. Evaluation The decisions’ outcome is Measurement of the decisions’

objectively evaluated against the results are really so objective as
original problem. to eliminate self-interests of the
evaluator; possible escalation of
resources to prior commitments in
spite of both previous failures and
strong evidence that allocation of
additional resources is not
warranted.
 Types of decisions
Programmed decisions.

A repetitive decision that can be handled by a routine

approach.

Non programmed decisions.

Unique decisions that require a custom-made solution.

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Decision-making styles

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 Group Decision Making
• Decisions far-reaching impact…..
– Committees
– Task forces
– Review panels.
– Study teams, etc

• 40% time in group meetings. Formulating problems,

arriving at solutions, determine means for implementing
solutions.

• Identify when groups should be preferred.

– Effectiveness: accurate, creativity, acceptance, speed…size
– Efficiency: Poor….
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 Advantages
Individual and group decisions each have their own set of strengths. Neither is
ideal for all situations. Let’s review the advantages that group decisions have
over individual decisions.

1.Provides more complete information. There is often truth to the saying that
two heads are better than one. A group brings a diversity of experience and
perspectives to the decision process that an individual, acting alone, cannot.

2.Generates more alternatives. Because groups have a greater amount and

diversity of information, they can identify more alternatives than an individual.
This is particularly evident when group members represent deferent specialties.
For, a team made up of representatives from engineering, accounting,
production, marketing, and personnel will generate alternatives that reflect
their diverse specialties. Such a multiplicity of ‘worldview's often yields a greater
array of alternatives.

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3. Increases acceptance of solutions. Many decisions fail after the
final choice has been made because people not accept the
solution. However, if the people who will be affected by a certain
solution and who will help implement it get to participate in the
process itself, they will be more likely to accept it and to
encourage others to accept it as well. Group members are
reluctant to fight or undermine a decision they have helped
develop.
4. Increases legitimacy. The group decision-making process is
consistent with democratic ideals and therefore decisions made by
groups may be perceived as more legitimate than decision made
by one person. The fact that the individual decision maker has
complete power and has not consulted others can create a
perception that a decision was made autocratically and arbitrarily.
 The major disadvantages
1. Time consuming. It takes time to assemble a group. In addition, the interaction
that takes place once the group is in place is frequently inefficient. The result is
that group almost always take more time to reach a solution than it would take
an individual making the decision alone.
2. Minority domination. Members of a group are never perfectly equal. They may
differ in rank in the organization, experience, knowledge about the problem,
influence with other members, verbal skills, assertiveness, and the like. This
creates the opportunity for one or more members to use their advantages to
dominate others in the group. A dominant minority frequently can have an
excerssive influence on the final decision.
3. Pressures to conform. Social pressures to conform in groups can lead to a
phenomenon called groupthink. This is a form of conformity in which group
members withhold deviant, minority, or unpopular views in order to give the
appearance of agreement. Groupthink undermines critical thinking in the group
and eventually harms the quality of the final decision.
4. Ambiguous responsibility. Group members share responsibility, but who is
actually responsible for the final outcome? In an individual decision, it is clear
who is responsible. In a group decision, the responsibility of any single member
is diluted.
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 DELPHY TECHNIQUE

1. The problem is identified, and members are asked to provide

possible solutions through a series of carefully designed
questionnaires.
2. Each member anonymously and independently completes the
first questionnaire.
3. Results of the first questionnaire are compiled at a central
location, transcribed, and copied.
4. Each member receives a copy of the results.
5. After viewing the results, members are again asked for their
solutions. The initial results typically triggers new solutions or
cause changers in the original position.
6. Steps 4 and 5 are repeated as often as necessary until a
consensus is reached.
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