Chapter

1
Decision-Making
© 2007 Prentice Hall, Inc.
All rights reserved.
Decision Making
• Decision
– Making a choice from two or more alternatives.
• The Decision-Making Process
– Identifying a problem and decision criteria and allocating weights to the
criteria.
– Developing, analyzing, and selecting an alternative that can resolve the
problem.
– Implementing the selected alternative.
– Evaluating the decision’s effectiveness.

© 2007 Prentice Hall, Inc. All rights reserved. 6–2

Step 1: Identifying the Problem
• Problem
– A discrepancy between an existing and desired state of affairs.
• Characteristics of Problems
– A problem becomes a problem when a manager becomes aware of
it.
– There is pressure to solve the problem.
– The manager must have the authority, information, or resources
needed to solve the problem.
© 2007 Prentice Hall, Inc. All rights reserved. 6–3
Step 2:define alternative and solutions

• Alternatives are listed (without evaluation)

that can resolve the problem.

© 2007 Prentice Hall, Inc. All rights reserved. 6–4

Step 3: evaluate an Alternative
• Choosing the best alternative
–The alternative with the highest total weight is chosen.

© 2007 Prentice Hall, Inc. All rights reserved. 6–5

 Step 4: choose the Alternative
• Having evaluated the various alternatives, the next step
is to choose the most suitable one.
• for some reason none of the options considered is
suitable, the manager should revert back to Step 2 of
the process and begin again.
 Step 5 :Implementation

Putting the chosen alternative into action.

Conveying the decision to and gaining
commitment from those who will carry out
the decision.

© 2007 Prentice Hall, Inc. All rights reserved. 6–7

Step 6: Evaluating the Decision’s Effectiveness

• The soundness of the decision is judged by its

outcomes.
– How effectively was the problem resolved by
outcomes resulting from the chosen alternatives?
– If the problem was not resolved, what went
wrong?

© 2007 Prentice Hall, Inc. All rights reserved. 6–8

• We can distinguish between programmed and
nonprogrammed decisions
 Programmed decisions tend to be well structured,
routine and repetitive, occurring on a regular basis.
 They are usually made at lower levels in the
organization, have short-term consequences and are
based on readily available information
• Non-programmed decisions, in contrast, are new
and unstructured and consequently a previously
established decision rule cannot be applied.

• In other words, the organization has no established

procedures or records for dealing with the decision,
which can therefore appear to be highly complex.
Decision-making conditions
• certainty, which means that the available alternatives
and their costs or benefits are certain.

• In other words, managers know with certainty that

particular alternatives will lead to definite outcomes
and there is no element of doubt
• risk. Under the risk condition, all available choices
and their potential costs and benefits are known, but
the outcomes are sometimes in doubt.

• So, while the alternatives are known, the outcomes

are unknown
• uncertainty, under which the available alternatives,
the likelihood of their occurrence and the outcomes
are all unknown. Decisions made under uncertainty
are the most difficult to take because of this lack of
concrete knowledge.
Barriers to making good decisions
Barriers to making good decisions
 managers attempt to make good decisions they are faced with many
challenges and barriers.
 decision frame to a decision. A decision frame refers to the perception
held by the manager in terms of gains or losses associated with the
outcome of a decision.
• For example, if an employee received a €1,000 bonus when
everyone else received a €2,000 bonus, should this be viewed
as a gain or as a loss? The answer depends on the individual
and whether the reference point is the employee’s original
salary (gain) or a comparison with others (loss).
 illusion of control’. This essentially means that managers
develop a sense that they can influence outcomes even when
they have no control over events.
 the issue of time. Pressures of time frequently mean that
decisions are rushed.
If managers are under pressure to reach a decision quickly they
may not have time to thoroughly research all of the available
options, and the quality of the decision could suffer accordingly.
Approaches to decision making
• The four most popular approaches to the study of
decision making are:
1. the rational model
2. bounded rationality;
3. the political model
4. escalation to commitment. In
The concept of rationality
• Rationality in relation to decision making refers to a process that is
perfectly logical and objective, whereby managers gather information
objectively, evaluate available evidence, consider all alternatives and
eventually make choices that will lead to the best outcomes for the
organization.

• The rational approach to decision making has its foundations in

traditional economic theory, which argues that managers attempt to
maximize benefits and have the capacity to make complex decisions
quickly
rational approach to decision making assumes that four conditions

1. There is perfect knowledge of all the available

alternatives.
2. There is perfect knowledge of all of the consequences of
the available alternatives.
3. Managers have the capacity to objectively evaluate the
consequences of the available alternatives.
4. Managers have a well-structured and definite set of
procedures to allow them to make optimum decisions.
Bounded rationality
• As we have seen, decisions are made under varying conditions ranging from certainty and risk
to uncertainty. In the current environment managers seldom make decisions under the
conditions of certainty that would be needed to apply a completely rational model .

• a rational manner, they have to apply a less than perfect

form of rationality.
• Herbert Simon called this ‘bounded rationality’, and argued
that decisions taken by managers are bounded by limited
mental capacity and emotions, and by environmental factors
over which they have no control
• Intuition and judgments are therefore used by the
manager to solve problems and make decisions.
Taking a rational approach to problem solving and
decision making involves clear identification of goals,
objectives, alternatives, potential consequences and
their outcomes
The political model
• While the previous approaches have concentrated on the role played by
rationality in the decision making process, the political model
concentrates on the impact of organizational politics on decision
making.

• Power and politics play an important role in the decision-making

process. Power is the ability to influence others. In the context of an
organization power can be viewed as the ability to exert influence over
individuals, work groups or departments. There are five main types of
power found in the organizational setting:
•1. Legitimate power originates from the manager’s position within the organization's
hierarchy. The power is inherent in the hierarchical position the manager occupies.
•2. Reward power originates from the manager’s ability to withhold rewards from
others.
•3. Expert power derives from the expert knowledge and information that an
individual/manager has amassed.
•4. Referent power originates from the charisma or identification that a manager has
developed.
•5. Coercive power is associated with emotional or physical threats to ensure
compliance.
Escalation of commitment
• This approach is particularly concerned with decision makers
who, even in the face of failure, continue to invest resources in a
failing decision.
• For example, an organization may decide to enter a particular
market by introducing a certain product. After a little while it
may become obvious that the product is not suited to that
market.
• The organization, however, continues to increase spending on
advertising and marketing rather than exiting from the market.
Questions