DECISION MAKING

Decision making is a process of identifying and

selecting a course of action to deal with a specific
problem or take advantage of an opportunity.
 The problem finding process
(Four situations which should alert managers)

• A deviation from past experience

– Falling sales as compared to the last year
• A deviation from a set plan
– Productivity not increased as expected
• Other people
– Customers, employees resignations etc.
• The performance of competitors
– New products by the competitors, new
management techniques etc.
 Common errors managers make in
sensing problems

India will not have market for luxury goods

• False association of events
• False expectation of events
• False self-perception and social image
 Deciding to Decide
• Thresholds for problem recognition
• How big is a gap between the actual and desired
state of affairs?
• How does this gap affect our chances of reaching
or exceeding goals for the organization?
• How hard is it to fix this problem?
• How quickly do we need to move to fix this
problem?

• Setting priorities
– It helps manager to determine how, how intensively,
and how collaboratively he/she must deal with the
problem.
 Deciding to Decide
• Is the problem easy to deal with?
– Most problems require only a small amount of
attention.
– Formal decision making techniques.
• Might the problem resolve itself?
– Give attention to higher priority problems
• Is this my decision to make?
– The closer to the origin of the problem the
decision is made, the better.
 The Nature of Managerial Decision Making
• Programmed decision: solutions to routine problems
determined by rule, procedure, or habit
• (Routine, repetitive)
• Eg. What to do if an employee comes late?
• How to float tenders for an old product?
• Products once purchased would be replaced within a week.

• Non programmed decisions: Specific solutions created

through an unstructured process to deal with non routine
problems
• (Unique, one-shot)
• Eg. How to continue the production if a considerable
number of people suddenly resign?
• How to deal with an agitated crowd
 Decision-Making Level
Il-Structured Top

Nonprogrammed
Decisions

Level
Type

Programmed
Decisions

Well-Structured Lower
Decision-Making
Conditions

Certainty Risk

Uncertainty
 Decision-Making Conditions
• Certainty
– The implication that the outcome of every possible alternative is
known.
– Objective is known, have measurable, reliable information about the
outcome of each alternative.
– Eg What will be the cost of production of a new product?
– Eg Investment in government bonds or certificates of deposits

• Risk
– The probability that a particular outcome will result from a given
decision.
– Eg. What will be our sales when a new competitor enters the
market?
– Eg. What would be the number of accidents if we use safety
measures.

• Uncertainty
– A condition under which there is not full knowledge of the problem
and reasonable probabilities for alternative outcomes cannot be
determined.
– Eg. What would be the effect of advertisement on sales?
The continuum of decision making
conditions and managerial control

Certainty Risk Uncertainty

High Managerial Control Low

The Rational model of decision making
• Involves weighing the options and
calculating optimal levels of risks
• Useful in making non programmed
decisions
• Helps managers to go beyond a
thinking that an obvious solutions
already exists and we need to wait for
it.
 The Rational model of decision making
• STAGE 1: INVESTIGATE THE SITUATION

• Define the problem

– What exactly is the problem?
• Diagnose the causes
– What changes inside or outside the organization may have
contributed to the problem
– What people are most involved with the problem situation
– Do they have insights or perspectives that may clarify the
problem?
– Do their actions contribute to the problem?
• Identify the decision objectives
– What do you want to achieve with the decision which you
would take?
• STAGE 2: DEVELOP ALTERNATIVES
• Seek creative alternatives
• Resort to group decision making/brainstorming
• Wait for the best solution
 The Rational model of decision making
• STAGE 3: EVALUATE ALTERNATIVES
AND SELECT THE BEST ONE
AVAILABLE
• Is this alternative feasible?
– Factors like capital, organization’s
strategy, internal politics should be
considered.
 The Rational model of decision making
• Is the alternative a satisfactory solution?
– Does the alternative meet the decision objectives?
– Does the alternatives have an acceptable chance of
succeeding?
– Definition of ‘applicable' may vary among organizations
and persons.
• What are the possible consequences for the rest of the
organization?
– What can be the short and long term effects of the
decision?
– Eg. Cutting back R&D expenses may affect long term
objectives
– Eg. Tolerating a misconduct will have long term effect.
– What is its effect on other departments/Section?
– What is its effect on competitiors/How will competitors
respond to the decision?
 The Rational model of decision making
• STAGE 4: IMPLEMENT AND MONITOR THE DECISION
• Plan implementation
• Implement plan
• Monitor implementation and make necessary adjustments

• Tendency to forget possible risks and uncertainties once the

decision is made.
• This can be tackled by consciously taking extra time to
reexamine the decision and develop detailed plans for
dealing with risks and uncertainties.
 Rational Decision-Making Model
4 5
2 +
TECH A1
A1 A1
Set Decision
Criteria A2
A2 A2
1 6
Problem A3 Choice

Identify and Make Optimal

Define Problem A4 Decision

3
Criteria An
An An
Weight
the Criteria Generate Evaluate
Alternatives Alternatives
 Rational Decision-Making Model
4 5
2 +
TECH A1
A1 A1
Take strict action/
Give another chance A2
A2 A2
1 6
Problem A3 Choice

Frequent Suspend
Absenteeism A4

3
Criteria An A1 – Let go
An An
What would be A2 – Give
the effect on Generate Evaluate warning
organization Alternatives Alternatives
A 3 – Suspend

A 4 – Terminate
Bounded rationality and satisficing
• Theory of bounded rationality
• This theory tries to describe the factors that affect decision
making
• Points out that decision makers must cope with inadequate
information about the nature of the problem,
• a lack of time or money to have complete information,
• an inability to remember large amounts of information and
• limits of their own intelligence.
• In this process manager frequently settle for one decision
that will adequately serve their purpose.
• Consequently, they go for the first satisfactory solution
rather than searching for the other better solutions.
 A Model of Bounded Rationality

Ascertain Set Identify a

the Need “Satisficing” Limited Set
for a Decision Criteria of Alternatives

Compare Select the

Alternatives First “Good
Against Criteria Enough” Choice

Yes
Expand A “Satisficing”
Simplify No
Search for Alternative
the Problem
Alternatives Exists
Bounded rationality and satisficing
• Heuristic principles: A method of decision making that proceeds
along empirical lines, using rules of thumb, to find solutions or
answers
• Availability
– Based on the memory
– Recent and vivid experiences are more fresh in memory
– Eg. Experiences of a war
• Representativeness
– Comparison with preexisting category.
– Eg. People with sports background are more sincere employees
– Eg. Predicting performance of a new product by relating it to
other products with proven track records.
• Anchoring and adjustment
Decisions based on a single criteria/past data
Depending heavily upon single criteria
Purchase decision
Making Appropriate Choices

Availability Representative
Heuristic Heuristic

Anchoring and
adjustment
Individual Versus Group
Decision Making
Strengths of Strengths of
Individuals Groups

Speed Input and Diversity

Clear Accountability Higher-Quality Decisions

Consistent Values Increased Acceptance

 Improving
Decision Making
• Analyze the situation
• Acknowledge biases
• Blend analysis and intuition
• Match decision making with job
requirements
• Stimulate creativity
 Ethical Decision Guidelines
 How did this problem occur?
 Could you define the problem differently?
 To whom or what are you loyal?
 What is your intention in making this decision?
 Could your intentions be misunderstood?
 How does your intention compare with the likely outcome?
 Whom could your decision injure?
 Can you talk to those who will be affected before deciding?
 Are you confident in the long-run validity of your position?
 Could you disclose your decision to your boss or family?
 Would you like for your decision to be headline news?