Lecture 3

MANAGERIAL DECISION MAKING

DR. KHOLOUD HOSSAM

CONTENTS
 Decision definition.
 Decision making importance.
 Decision in managerial functions.
 Decision types.
 Programed decision.
 Non-programed decision.
 Programed versus non-programed decision.
 Factors affecting decision.
CONTENTS
 Decision making models.
 Classical model.
 Administrative model.
 Political model.
 Characteristics of decision making models.
 Decision making steps (Step from 1 to 6).
 Decision styles.
 Directive style.
 Analytical style.
 Conceptual style.
 Behavioral style.
 Personal decision framework.
 Conclusion.
DECISION DEFINITION
 Decision is a choice made from available
alternatives.

 Decision making is the process of identifying

problems and opportunities and then resolving
them. Decision making involves effort both
before and after the actual choice.
DECISION MAKING IMPORTANCE
 Good decision making is a vital part of good
management because decisions determine how
the organization solves problems, allocates
resources, and accomplishes its goals.
 Every organization, whether it grows, prospers,
or fails as a result of decisions made by its
managers.
DECISIONS IN MANAGERIAL FUNCTIONS
DECISION TYPES

 Management decisions typically fall into one of

two categories:
 Programmed decisions
 Non-programmed decisions
PROGRAMED DECISIONS
 Programmed decisions involve situations that
have occurred often enough to enable decision
rules to be developed and applied in the future.
Also, they are made in response to recurring
organizational problems.
 For example:
 The types of skills required to fill certain jobs,
 The reorder point for manufacturing inventory,
 Selection of freight routes for product deliveries.
NON- PROGRAMMED DECISIONS
 Non- programmed decisions are made in
response to situations that are unique, are poorly
defined and largely unstructured, and have
important consequences for the organization.

 Many of these decisions are complex and a have

a great amount of uncertainty.
PROGRAMED VERSUS NON PROGRAMED DECISIONS
FACTORS AFFECTING DECISIONS
 Decisions differ according to the amount of
certainty, risk, uncertainty, or ambiguity in the
situation.
 Certainty is a situation in which all the information
the decision maker needs is fully available.
 Risk means that a decision has clear-cut goals and
good information is available, but the future outcomes
associated with each alternative are subject to chance.
FACTORS AFFECTING DECISIONS (CONT.)
 Uncertainty occurs when managers know which
goals they want to achieve, but information about
alternatives and future events is incomplete.

 Ambiguity is a condition in which the goals to be

achieved or the problem to be solved is unclear,
alternatives are difficult to define, and information
about outcomes is unavailable. The most difficult
decision situation that managers face.
DECISION MAKING MODELS
 The approach that managers use to make
decisions usually falls into one of three models:
 The classical model.
 The administrative model.
 The political model.
 The choice of model depends on the manager’s
personal preference, whether the decision is
programmed or non-programmed, and the degree
of uncertainty associated with the decision.
THE CLASSICAL MODEL
 Classical model of decision making is based on
rational economic assumptions and manager
beliefs about what ideal decision making should
be.
 Sometimes we called it “Ideal, rational model”.
 There are four assumption underlying this model:
THE CLASSICAL MODEL (CONT.)
 The decision maker operates to accomplish goals
that are known and agreed on. Problems are
precisely formulated and defined.

 The decision maker strives for conditions of

certainty, gathering complete information. All
alternatives and the potential results of each are
calculated.
THE CLASSICAL MODEL (CONT.)
 Criteria for evaluating alternatives are known.
The decision maker selects the alternative that
will maximize the economic return to the
organization.

 The decision maker is rational and uses logic to

assign values, order preferences, evaluate
alternatives, and make the decision that will
maximize the attainment of organizational goals.
THE CLASSICAL MODEL (CONT.)
 The classical model of decision making is
considered to be normative, which means that it
defines how a decision maker should make
decisions.

 The model value is it helps decision makers be

more rational and not rely entirely on personal
preference in making decisions.
THE CLASSICAL MODEL (CONT.)
 The classical model is most useful when applied
to programmed decisions and to decisions
characterized by certainty or risk because
relevant information is available and probabilities
can be calculated.
ADMINISTRATIVE MODEL
 The administrative model relies on assumptions
that differ from those of the classical model and
focuses on organizational factors that influence
individual decisions.
 The administrative model recognizes the human
and environmental limitations that affect the
degree to which managers can pursue a rational
decision-making process.
ADMINISTRATIVE MODEL (CONT.)
 According to the administrative model:
 Decision goals often are vague, conflicting, and lack
consensus among managers. Managers often are
unaware of problems or opportunities that exist in the
organization.

 Rational procedures are not always used, and, when

they are, they are confined to a simplistic view of the
problem that does not capture the complexity of real
organizational events.
ADMINISTRATIVE MODEL (CONT.)
 Managers’ searches for alternatives are limited
because of human, information, and resource
constraints.

 Most managers settle for a satisficing rather than a

maximizing solution, partly because they have limited
information and partly because they have only vague
criteria for what constitutes a maximizing solution.
ADMINISTRATIVE MODEL (CONT.)
 The administrative model includes the concepts
of bounded rationality and satisficing and
describes how managers make decisions in
situations that are characterized by uncertainty
and ambiguity.
 Bounded rationality means that people have the time
and cognitive ability to process only a limited amount
of information on which to base decisions.
ADMINISTRATIVE MODEL (CONT.)
 Satisficing means choosing the first alternative that
satisfies minimal decision criteria, regardless of
whether better solutions are presumed to exist.

 Intuition is an aspect of administrative decision

making that refers to a quick comprehension of a
decision situation based on past experience but
without conscious thought.
POLITICAL MODEL
 The political model of decision making is useful
for making non programmed decisions when
conditions are uncertain, information is limited,
and there are manager conflicts about what goals
to pursue or what course of action to take.
 Most organizational decisions involve many
managers who are pursuing different goals, and
they have to talk with one another to share
information and reach an agreement.
POLITICAL MODEL (CONT.)
 Managers often engage in coalition building for
making complex organizational decisions.

 A coalition is an informal alliance among managers

who support a specific goal.
 Coalition building is the process of forming alliances
among managers.
POLITICAL MODEL (CONT.)
 For example: a manager who supports a specific
alternative, such as increasing the corporation’s
growth by acquiring another company, talks
informally to other executives and tries to
persuade them to support the decision.
CHARACTERISTICS OF DECISION MAKING MODELS
DECISION MAKING STEPS
 Whether a decision is programmed or non
programmed, and regardless of whether managers
choose the classical, administrative, or political
model of decision making, There are six steps
typically associated with effective decision
processes.
DECISION MAKING STEPS (CONT.)
STEP 1: RECOGNITION OF DECISION REQUIREMENT

 Managers confront a decision requirement in the

form of either a problem or an opportunity.
 A problem occurs when organizational
accomplishment is less than established goals. Some
aspect of performance is unsatisfactory.
 An opportunity exists when managers see potential
accomplishment that exceeds specified current goals.
Managers see the possibility of enhancing
performance beyond current levels.
STEP 1: RECOGNITION OF DECISION REQUIREMENT

 Awareness of a problem or opportunity is the first

step in the decision-making sequence, and it
requires information from internal and external
environment.

 Some information comes from periodic financial

reports, performance reports and other come
from informal sources like take with other
managers, opinions and advice of experts.
STEP 2: DIAGNOSIS AND ANALYSIS OF CAUSES

 Once a problem or opportunity comes to a manager’s

attention, the understanding of the situation should be
refined.
 Diagnosis is the step in the decision-making process in which
managers analyze underlying causal factors associated with
the decision situation.

 By looking at a situation from different angles, managers

can identify the true problem. In addition, they often
discover opportunities that they didn’t realize were there.
STEP 3: DEVELOPMENT OF ALTERNATIVES
 Generate possible alternative solutions that will
respond to the needs of the situation and correct
the underlying causes.

 For a programmed decision, feasible alternatives

are easy to identify; in fact, they usually are
already available within the organization’s rules
and procedures.
STEP 3: DEVELOPMENT OF ALTERNATIVES

 Non programmed decisions require developing

new courses of action that will meet the
company’s needs. For decisions made under
conditions of high uncertainty, managers may
develop only one or two custom solutions that
will satisfice for handling the problem.
STEP 4: SELECTION OF THE DESIRED ALTERNATIVE

 In this stage, managers try to select the most

promising alternative from several alternatives
courses of action.
 Managers want to select the choice with the least
amount of risk and uncertainty.
 Choosing among alternatives also depends on
managers’ personality factors and willingness to
accept risk and uncertainty.
STEP 4: SELECTION OF THE DESIRED ALTERNATIVE

 Selection of an alternative depends partly on

managers’ risk propensity (their willingness to
undertake risk with the opportunity of gaining an
increased payoff).
STEP 5: IMPLEMENTATION OF THE CHOSEN ALTERNATIVE

 The implementation stage involves the use of

managerial, administrative, and persuasive abilities
to ensure that the chosen alternative is carried out.

 Successful implementation may require discussion,

trust building, and active engagement with people
affected by the decision. Communication,
motivation, and leadership skills must be used to
see that the decision is carried out.
STEP 6: EVALUATION & FEEDBACK
 In the evaluation stage of the decision process,
decision makers gather information that tells them
how well the decision was implemented and whether
it was effective in achieving its goals.

 Feedback is important because decision making is an

ongoing process. It provides decision makers with
information that can precipitate a new decision cycle.
DECISIONS STYLES
 In fact, significant differences distinguish the ways in
which individual managers may approach problems and
make decisions concerning them. These differences can
be explained by the concept of personal decision styles.

 Personal decision styles refer to distinctions among

people with respect to how they evaluate problems,
generate alternatives, and make choices. Research has
identified four major decision styles: directive,
analytical, conceptual, and behavioral.
DIRECTIVE DECISION STYLE
 The directive style is used by people who prefer
simple, clear-cut solutions to problems.
Managers who use this style often make
decisions quickly because they do not like to deal
with a lot of information and may consider only
one or two alternatives. People who prefer the
directive style generally are efficient and rational
and prefer to rely on existing rules or procedures
for making decisions.
ANALYTICAL DECISION STYLE
 Managers with an analytical style like to
consider complex solutions based on as much
data as they can gather. These individuals
carefully consider alternatives and often base
their decisions on objective, rational data from
management control systems and other sources.
They search for the best possible decision based
on the information available.
CONCEPTUAL DECISION STYLE
 People who tend toward a conceptual style also
like to consider a broad amount of information.
However, they are more socially oriented than
those with an analytical style and like to talk to
others about the problem and possible alternatives
for solving it. Managers using a conceptual style
consider many broad alternatives, rely on
information from both people and systems, and
like to solve problems creatively.
BEHAVIORAL DECISION STYLE
 The behavioral style is often the style adopted
by managers having a deep concern for others as
individuals. Managers using this style like to talk
to people one on one, understand their feelings
about the problem, and consider the effect of a
given decision on them. People with a behavioral
style usually are concerned with the personal
development of others and may make decisions
that help others achieve their goals.
PERSONAL DECISION FRAMEWORK
CONCLUSION
 A manager’s personal decision style influences
how he or she makes decisions.
 Decision styles are differences among people
with respect to how they perceive problems and
make choices.
 Most experienced managers use several different
styles or a combination of styles depending on
the decision situation.