Principles of Management

31st October 2020

 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.
Decision Making Process
 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.
 Step 2: Identifying Decision Criteria
• Decision criteria are factors that are important (relevant)
to resolving the problem.
 Costs that will be incurred (investments required)
 Risks likely to be encountered (chance of failure)
 Outcomes that are desired (growth of the firm)

Step 3: Allocating Weights to the Criteria

Assigning a weight to each item places the items in the correct
priority order of their importance in the decision making process.
 Step 4: Developing Alternatives
• Identifying viable alternatives
 Alternatives are listed (without evaluation) that can resolve the
problem.

Step 5: Analyzing Alternatives

• Appraising each alternative’s strengths and
weaknesses
 An alternative’s appraisal is based on its ability to resolve the
issues identified in steps 2 and 3.
Step 6: Selecting an Alternative
• Choosing the best alternative
 The alternative with the highest total weight is chosen.

Step 7: Implementing the Decision

• Putting the chosen alternative into action.
 Conveying the decision to and gaining commitment
from those who will carry out the decision.
Step 8: 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?
Making Decisions……..
• Rationality
• Managers make consistent, value-maximizing
choices with specified constraints.
 Assumptions are that decision makers:
 Are perfectly rational, fully objective, and logical.
 Have carefully defined the problem and identified all viable
alternatives.
 Have a clear and specific goal
 Will select the alternative that maximizes outcomes in the
organization’s interests rather than in their personal
interests.
Making Decisions (cont’d)
• Bounded Rationality
 Managers make decisions rationally, but are limited
(bounded) by their ability to process information.
 Assumptions are that decision makers:
 Will not seek out or have knowledge of all alternatives
 Will satisfice—choose the first alternative encountered
that satisfactorily solves the problem—rather than
maximize the outcome of their decision by considering
all alternatives and choosing the best.
Influences on Decision Making
• The Role of Intuition
 Intuitive decision making
 Making decisions on the basis of experience, feelings,
and accumulated judgment.
Problems and Decisions
• Structured Problems
 Involve goals that clear,
 Are familiar (have occurred before),
 Are easily and completely defined—information about
the problem is available and complete,
• Programmed Decision
 A repetitive decision that can be handled by a routine
approach.
Types of Programmed Decisions
• A Policy
 A general guideline for making a decision about a
structured problem.
• A Procedure
 A series of interrelated steps that a manager can use
to respond (applying a policy) to a structured problem.
• A Rule
 An explicit statement that limits what a manager or
employee can or cannot do in carrying out the steps
involved in a procedure.
Policy, Procedure, and Rule Example
• Policy
 Accept all customer-returned merchandise.
• Procedure
 Follow all steps for completing merchandise return
documentation.
• Rules
 Managers must approve all refunds over $50.00.
 No credit purchases are refunded for cash.
Problems and Decisions (cont’d)
• Unstructured Problems
 Problems that are new or unusual and for which
information is ambiguous or incomplete.
 Problems that will require custom-made solutions.
• Nonprogrammed Decisions
 Decisions that are unique and nonrecurring.
 Decisions that generate unique responses.
Decision-Making Conditions
• Certainty
 A ideal situation in which a manager can make an
accurate decision because the outcome of every
alternative choice is known.
• Risk
 A situation in which the manager is able to estimate
the likelihood (probability) of outcomes that result
from the choice of particular alternatives.
Decision-Making Conditions
• Uncertainty
 Limited or information prevents estimation of outcome
probabilities for alternatives associated with the
problem and may force managers to rely on intuition,
hunches, and “gut feelings”.
 Maximax: the optimistic manager’s choice to maximize
the maximum payoff
 Maximin: the pessimistic manager’s choice to maximize
the minimum payoff
 Minimax: the manager’s choice to minimize his
maximum regret.
Decision-Making Styles
• Dimensions of Decision-Making Styles
 Ways of thinking
 Rational, orderly, and consistent
 Intuitive, creative, and unique

 Tolerance for ambiguity

 Low tolerance: require consistency and order
 High tolerance: multiple thoughts simultaneously
Decision-Making Styles (cont’d)
• Types of Decision Makers
 Directive
 Use minimal information and consider few alternatives.
 Analytic
 Make careful decisions in unique situations.
 Conceptual
 Maintain a broad outlook and consider many
alternatives in making long-term decisions.
 Behavioral
 Avoid conflict by working well with others and being
receptive to suggestions.
Decision-Making Biases and Errors
• Heuristics
 Using “rules of thumb” to simplify decision making.
• Overconfidence Bias
 Holding unrealistically positive views of one’s self and
one’s performance.
• Immediate Gratification Bias
 Choosing alternatives that offer immediate rewards
and that to avoid immediate costs.
Decision-Making Biases and Errors
(cont’d)
• Anchoring Effect
 Fixating on initial information and ignoring subsequent
information.
• Selective Perception
 Selecting organizing and interpreting events based on
the decision maker’s biased perceptions.
• Confirmation Bias
 Seeking out information that reaffirms past choices
and discounting contradictory information.
Decision-Making Biases and Errors
(cont’d)
• Framing Bias
 Selecting and highlighting certain aspects of a situation
while ignoring other aspects.
• Availability Bias
 Losing decision-making objectivity by focusing on the most
recent events.
• Representation Bias
 Drawing analogies and seeing identical situations when
none exist.
• Randomness Bias
 Creating unfounded meaning out of random events.
Decision-Making Biases and Errors
(cont’d)
• Sunk Costs Errors
 Forgetting that current actions cannot influence past events
and relate only to future consequences.
• Self-Serving Bias
 Taking quick credit for successes and blaming outside
factors for failures.
• Hindsight Bias
 Mistakenly believing that an event could have been
predicted once the actual outcome is known (after-the-fact).
Decision Making for Today’s World
• Guidelines for making effective decisions:
 Know when it’s time to call it quits.
 Practice the five “whys”.
 Be an effective decision maker.
• Habits of highly reliable organizations (HROs)
 Are not tricked by their success.
 Defer to the experts on the front line.
 Let unexpected circumstances provide the solution.
 Embrace complexity
 Anticipate, but also anticipate their limits
Characteristics of an Effective Decision-
Making Process
• It focuses on what is important.
• It is logical and consistent.
• It acknowledges both subjective and objective
thinking and blends analytical with intuitive thinking
• It requires only as much information and analysis as
is necessary to resolve a particular dilemma.
• It encourages and guides the gathering of relevant
information and informed opinion.
• It is straightforward, reliable, easy to use, and flexible.
Thank You