Topic 4 Managerial Decision Making

Topic
4
Managerial Decision
Making
PowerPoint Presentation by Wessex Press, Inc.
© 2016 Wessex Press, Inc. All rights reserved.

LEARNING OUTCOMES
When you have finished studying this chapter, you
should be able to explain:
1 2 3
The nature of the decision- The basic classifications for The rational-economic model of
making process and each of its managerial decisions. decision making.
seven steps.
4 5 6 7
The behavioral decision The participative The advantages and The list of various
model and its related approach to decision disadvantages of techniques used to
concepts of bounded making. participative decision improve participative
rationality, intuition, making. decision making.
satisficing, and
escalation of
commitment.
6–2
LEARNING OUTCOMES
1 2 3
The nature of the The basic classifications for The rational-economic model of
decision-making process managerial decisions. decision making.
and each of its seven
steps.
4 5 6 7
satisficing, and
escalation of
commitment.
6–3
Sources of Organizational and Entrepreneurial Decisions
• Decision making
 The process through which managers and leaders
identify and resolve problems and capitalize on
opportunities.
• Problem
 A condition that occurs when some aspect of
organizational performance is less than desirable.
• Opportunity
 Any situation that has the potential to provide
additional beneficial outcomes.
6–4
Figure 6.1 Seven Steps in the Decision-Making Process
Identifying opportunities
1 and diagnosing problems
2
Identifying objectives
3
Generating alternatives
4
Evaluating alternatives
5
Reaching decisions
6
Choosing implementation strategies
7
Monitoring and evaluating
6–5
Step 1: Identifying Opportunities
and Diagnosing Problems
• The clear identification of opportunities or the
diagnosis of problems that require a decision.
• An assessment of opportunities and problems
will only be as accurate as the information on
which it is based.
Current & desired
6–6
Step 1: Identifying Opportunities
and Diagnosing Problems
Problem:
A discrepancy between an existing and a desired
state of affairs.
– compare the current state of affairs with some standard,
which can be past performance, previously set goals, or the
performance of another unit within the organization or in
another organization.
– E.g: A car is no longer worth repairing, then the best
decision may be to purchase another car.
© Pearson Education Limited 2015

© 2016 Wessex Press, Inc. All rights reserved. 4-7
Step 2: Identifying Objectives
• Objectives reflect the results the organization
wants to attain. Also called targets, standards or
ends.
 The quantity and quality of the desired results should
be specified, for these aspects will ultimately guide
the decision maker in selecting the appropriate
course of action.
 Objectives can be measured on a variety of
dimensions (monetary units, output per hour, % of
defects, etc.) and whether the objectives are long-
term versus short-term.
6–8
Step 2: Identifying Objectives
Relevant Factors:
– Price
– Interior Comfort
– Durability
– Repair Record
– Performance
– Handling

Step 3: Generating Alternatives
• Once an opportunity has been identified or a
problem diagnosed correctly, a manager
develops various ways to solve the problem and
achieve objectives.
• The alternatives can be standard and obvious as
well as innovative and unique.
6–10
Step 3: Generating Alternatives
• Decision maker only

lists the alternatives and
does not attempt to
appraise them in this
step.

Step 4: Evaluating Alternatives
• Determining the value or adequacy of the
alternatives generated.
• Predetermined decision criteria may be used in
the evaluation process.
 Quality desired
 Anticipated costs Weight x score
 Benefits
 Uncertainties
 Risks
6–12
1. Most important
criterion assigned a
weight of 10.
2. Other weights
assigned against this
standard.

• Critically analyzing each alternative by appraising it against the

criteria.
• The strengths and weaknesses of each alternative become evident
when compared with the criteria and weights.
Step 5: Reaching Decisions
• Decision making is commonly associated with
making a final choice.
• Although choosing an alternative would seem to
be a straightforward proposition, in reality the
choice is rarely clear-cut.
6–15
Step 5: Reaching Decisions
• Multiply each alternative assessment against its weight

Step 6: Choosing Implementation Strategies
• The bridge between reaching a decision and

evaluating the results.
• The keys to effective implementation are:
 Sensitivity to those who will be affected by the
decision.
 Proper planning and consideration of the resources
necessary to carry out the decision.
6–17
Step 7: Monitoring and Evaluating
• No decision-making process is complete until
the impact of the decision has been evaluated.
• Managers must observe the impact of the
decision as objectively as possible and take
further corrective action if it becomes
necessary.
6–18
LEARNING OUTCOMES
1 2 3
The nature of the decision-
making process and each of its
The basic The rational-economic model of
decision making.
seven steps. classifications for
managerial decisions.
4 5 6 7
satisficing, and
escalation of
commitment.
6–19
Classifying Decision Situations
• Programmed decision
• A decision made in response to a situation that is
routine or recurring.
• Non-programmed decision
• A decision made in response to a situation that is
unique, unstructured, or poorly defined.
6–20
Responses to Decision Situations
Nonprogrammed
Programmed Decisions
Decisions
Alternatives are not

Alternatives are familiar
familiar to decision
to decision makers.
makers.
Responses require
Responses are routine.
creativity.
6–21
Figure 6.3 Two Contrasting Decision Models
6–22
LEARNING OUTCOMES
1 2 3
The nature of the decision-
making process and each of its
The basic classifications for
managerial decisions.
The rational-economic
seven steps. model of decision
making.
4 5 6 7
satisficing, and
escalation of
commitment.
6–23
(1) Rational-Economic Decision Model
• A prescriptive framework of how a
decision should be made that
assumes managers have completely
accurate information.
• Concentrates on how decisions
should be made, not on how they
actually are made
6–24
Assumptions of the Rational-Economic Model
• Managers have “perfect information.”

• Managers attempt to accomplish objectives that are
known and agreed upon.
• Managers have an extensive list of alternatives to
choose from.
• Managers are rational, systematic, and logical in
assessing alternatives and their associated probabilities.
• Managers work in the best interests of their
organizations.
• Ethical decisions do not arise in the decision-making
process.
BEST
6–25
Drawbacks of the Rational-Economic Model
 Leaders rarely have access to perfect information.

 Decision makers are limited in their ability to
comprehend and process vast amounts of information.
 Decision makers may lack adequate knowledge about
future consequences of alternatives.
 Personal factors can prevent a decision maker from
acting in a completely rational manner.
 Individual culture and ethical values will influence the
decision process.
6–26
LEARNING OUTCOMES
1 2 3
seven steps.
4 5 6 7
The behavioral The participative The advantages and The list of various
decision model and approach
making.
to decision disadvantages of
participative decision
techniques used to
improve participative
its related concepts making. decision making.
of bounded
rationality, intuition,
satisficing, and
escalation of
commitment.
6–27
(ii) Behavioral Decision Model
• Acknowledges the human limitations that make
rational decisions difficult to achieve.
 A manager’s cognitive ability to process information is
limited.
 Managers usually attempt to behave rationally within
their limited perception of a situation.
 The complexity of most organizational situations
forces managers to view problems within sharply
restricted bounds.
 The behavior of managers can be considered
rational, but only in terms of their simplified view of
the problem.
6–28
Concepts Important to the
Behavioral Decision Model
• Bounded Rationality
 Recognizes that people are limited by organizational
constraints such as time, information, resources, and
their own mental capabilities.
• Intuition (six sense)
 An unconscious analysis based on past experience.
• Satisficing
 The search and acceptance of something that is
satisfactory rather than perfect or optimal.
Good enough
6–29
Concepts Important to the Decision
Model (cont’d)
• Escalation of Commitment
 The tendency to increase commitment to a previously
selected course of action beyond the level that would
be expected if the manager followed an effective
decision-making process.
• Reasons for escalation of commitment:

– Managers feel responsible for negative consequences and try to justify
their previous decisions.
– Managers wish to demonstrate consistency
– Managers worry that if they change course, others may call the
original decision a mistake or failure.
6–30
LEARNING OUTCOMES
1 2 3
seven steps.
4 5 6 7
The behavioral decision
model and its related
The The advantages and
disadvantages of
The list of various
techniques used to
concepts of bounded participative participative decision improve participative
rationality, intuition,
satisficing, and
approach to making. decision making.
escalation of decision
commitment. making.
6–31
Group Considerations in Decision Making
• Group decision making is becoming more

common as organizations focus on improving
customer service and push decision making to
lower levels.
6–32
Situational Contingencies Affecting Decision Making Participation
1. Decision significance
2. Importance of commitment
3. Leader expertise
4. Likelihood of commitment
5. Team support
6. Team expertise
7. Team competence
6–33
LEARNING OUTCOMES
1 2 3
seven steps.
4 5 6 7
The behavioral decision The participative The advantages The list of various
model and its related approach to decision and disadvantages techniques used to
concepts of bounded making. improve participative
rationality, intuition, of participative decision making.
satisficing, and decision making.
escalation of
commitment.
6–34
Table 6.2 Advantages and Disadvantages of Group
Decision Making
Advantages Disadvantages
• Experience and expertise • Greater time
of several individuals requirement
available
• Minority domination
• More information, data,
• Compromise
and facts accumulated
• Concern for individual
• Problems viewed from
rather than group goals
several perspectives
• Social pressure to
• Higher member
conform
satisfaction
• Groupthink –
• Greater acceptance and
agree-at-any-cost
commitment to decisions
6–35
LEARNING OUTCOMES
1 2 3
seven steps.
4 5 6 7
concepts of bounded making. participative decision
rationality, intuition, making. improve
satisficing, and participative
escalation of decision making.
commitment.
6–36
Techniques for Quality in Group
Decision Making
1) Brainstorming
2) Nominal Group Technique
3) Delphi Technique
4) Devil’s Advocacy Approach
5) Dialectical Inquiry
6–37
1) Brainstorming
• Brainstorming
 A technique to enhance creativity by encouraging
group members to generate as many novel ideas as
possible on a given topic without evaluating them.
• Rules of Brainstorming
 Freewheeling is encouraged.
 Ideas are not criticized as they are being generated.
 Quantity is encouraged.
 The wilder the ideas, the better.
 Piggyback or combine on previously stated ideas.
 No Ideas are evaluated until after all alternatives are
generated.
6–38
Other Decision-Making Techniques
• 2) Nominal Group Technique (NGT)
 A structured process designed to stimulate creative group
decision making where agreement is lacking or the
members have incomplete knowledge concerning the
nature of the problem.
 Ind. list ideas & present the ideas without discussion
 Members vote on the idea independently – rank order
/rating
• 3) Delphi Technique
 Uses experts to make predictions and forecasts about
future events without meeting face-to-face.
 Collect & summaries opinion anonymity – shared. Process
continued many rounds until consensus emerges
6–39
Other Decision-Making Techniques
• 4) Devil’s Advocacy Approach
 Deal with complex & strategic decision - debate
 Appoints an individual or subgroup to critic a
propose decision
 question the assumptions of the choice.
• 5) Dialectical Inquiry
 Approaches a decision from two opposite points and
structures a debate between conflicting view.
 Present arguments in support their position
 Team – divergent & Innovative ideas
6–40
Ethical and Social Implications in Decision Making
• Many leading companies look beyond the bottom-

line profitability and include a component of ethical
behavior and social responsibility into their business
decisions.
 Toyota – commitment to sustainability
 Walt Disney – zero-barrier pools so that handicapped
bathers can simply enter the pool
 Burger King – hire more welfare recipients
 General Motors – equip family cars with infrared-sensing
device that unlock trunk if anyone is trapped inside
6–41
Implications for Leaders
 Be able to recognize quickly problems and
opportunities that call for a decision.
 Be able to recognize the different time frames
and scopes of strategic decisions versus
operational decisions.
 Be equipped with all the tools and techniques
that can aid in making strategic decisions.
6–42
Implications for Leaders
 Be able to recognize the different decision-
making environments in which their operational
decisions will be made.
 Have an awareness and understanding of the
various quantitative tools that can aid in
making operational decisions.
6–43

Topic 4 Managerial Decision Making

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PowerPoint Presentation by Wessex Press, Inc.

© 2016 Wessex Press, Inc. All rights reserved.

© Pearson Education Limited 2015

© Pearson Education Limited 2015

• Decision maker only

© Pearson Education Limited 2015

© Pearson Education Limited 2015

• Critically analyzing each alternative by appraising it against the

• Multiply each alternative assessment against its weight

• The bridge between reaching a decision and

Alternatives are not

• Managers have “perfect information.”

 Leaders rarely have access to perfect information.

• Reasons for escalation of commitment:

• Group decision making is becoming more

• Many leading companies look beyond the bottom-

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