Decision making

Principles of Management (BSP 150)

Presented By Sekela Kaonga Munyati
Learning objectives:
At the end of this topic, students should be able to;
 Define decision making and discuss types of decisions.
 Discuss rational perspectives on decision making, including the steps in
rational decision making.
 Describe the administrative aspects of decision making.
 Discuss group and team decision making, including the advantages and
disadvantages of group and team decision making and how it can be more
effectively managed.
 Discuss the different types of decision making tools.
Managerial Decision Making

 Decision making can refer to either a specific act or a general process. Decision making per se is
the act of choosing one alternative from among a set of alternatives. The decision making
process, however, is much more than this. One step of the process, for example, is that the
person making the decision must both recognize that a decision is necessary and identify the set
of feasible alternatives before selecting one.
 Hence, the decision-making process includes recognizing and defining the nature of a decision
situation, identifying alternatives, choosing the “best” alternative, and putting it into practice.
 The word best, of course, implies effectiveness. Effective decision making requires that the
decision maker understand the situation driving the decision. Most people would consider an
effective decision to be one that optimizes some set of factors, such as profits, sales, employee
welfare, and market share. In some situations, though, an effective decision may be one that
minimizes losses, expenses, or employee turnover. It may even mean selecting the best method
for going out of business, laying off employees, or terminating a strategic alliance.
Managerial Decision Making

 We should also note that managers make decisions about both problems and
opportunities. For example, making decisions about how to cut costs by 10
percent reflects a problem; an undesirable situation that requires a solution.
 But decisions are also necessary in situations of opportunity. Learning that the
firm is earning higher-than-projected profits, for example, requires a
subsequent decision. Should the extra funds be used to increase shareholder
dividends, reinvest in current operations, or expand into new markets? Of
course, it may take a long time before a manager can know if the right
decision was made.
Managerial Decision Making

 Decision making: the process by which managers respond to opportunities and

threats by analysing options, and making decisions about goals and courses of
action.
 Decisions in response to opportunities: managers respond to ways to improve
organizational performance.
 Decisions in response to threats: occurs when managers are impacted by adverse
events to the organization.
Types of Decisions and Problems

 Programmed decisions (routine/adaptive) - repetitive decision that can be

handled by a routine approach.
 Are easier to make because they relate to a situation encountered before,
they are usually routine (taken to solve structured problems)
Structured Problems
 Involve goals that clear.
 Are familiar (have occurred before).
 Are easily and completely defined—information about the problem is available and
complete.
Types of Programmed Decisions

 Policy
 A general guideline for making a decision about a structured problem.
 E.g. accept all customer-returned merchandise
 Procedure
 A series of interrelated steps that a manager can use to respond (applying a policy) to
a structured problem.
 E.g. follow all procedures when hiring
 Follow all steps for completing merchandise return documentation.
 Rule
 An explicit statement that limits what a manager or employee can or cannot do.
 E.g only recruit candidates with an undergraduate degree or more
 Managers must approve all refunds over K50.00
Types of Decisions and Problems

 Non-programmed decisions ( innovative) are unique and unusual. There is a

lot of uncertainty and risk involved regarding the decision (taken to solve
unstructured problems)
 Decisions that generate unique responses.
 unstructured Problems
 Problems that are new or unusual and for which information is ambiguous or
incomplete.
 Problems that will require custom-made solutions.
 E.g. introducing a new product on the market
Programmed versus Nonprogrammed
Decisions
Decision Making Models

 Three types of decision making models

 Classical model of decision making
 Administrative
 Intuition
Decision Making Models

 Classical model of decision making (rational model): is a prescriptive

approach that tells managers how they should make decisions. It rests on the
assumptions that managers are logical and rational and that they make
decisions that are in the best interests of the organization.
 Assumes managers have access to all the information needed to reach a decision.
 Managers can then make the optimum decision by easily ranking their own
preferences among alternatives.
 Series of steps that individuals or teams should follow to increase the likelihood
that their decisions will be logical and well-founded.
 Unfortunately, managers often do not have all (or even most) required
information.
The Classical Model

List alternatives and Assumes all information is

consequences available to manager

Rank each alternatives Assumes manager can process

from low to high information

Assumes manager knows the best

Select best alternative
future course for the organization
Steps in Rational Decision Making

1. Define and diagnose the problem/opportunity.

 Being aware of the problem and their possible causes (internal and external environment)
2. Generate alternatives: managers must develop feasible alternative courses of
action.
 If good alternatives are missed, the resulting decision is poor.
 It is hard to develop creative alternatives, so managers need to look for new ideas.
3. Evaluate alternatives: what are the advantages and disadvantages of each
alternative?
 Managers should specify criteria, then evaluate.
Evaluating Alternatives

 Following should be noted when evaluating a list of alternatives; Is the

possible course of action:
 Is it legal? Managers must first be sure that an alternative is legal both in this
country and abroad for exports.
 Is it ethical? The alternative must be ethical and not hurt stakeholders
unnecessarily.
 Is it economically feasible? Can our organization’s performance goals sustain
this alternative?
 Is it practical? Does the management have the capabilities and resources to
do it?
Steps in Rational Decision Making

4. Choose among alternatives: managers rank alternatives and decide.

 When ranking, all information needs to be considered.
5. Implement the chosen alternative: managers must now carry out the
alternative.
 Often a decision is made and not implemented.
6. Learn from feedback: managers should consider what went right and wrong
with the decision and learn for the future.
 Without feedback, managers never learn from experience and make the same mistake
over.
The Administrative Model

Administrative Model of decision

making: Challenged the classical assumptions that managers have and
process all the information.
 As a result, decision making is risky.
 the model holds that managers (1) use incomplete and imperfect information,
(2) are constrained by bounded rationality, and (3) tend to “satisfice” when
making decisions.
 Bounded rationality: There is a large number of alternatives and information is
vast so that managers cannot consider it all.
 the model suggests that decision makers are limited by their values and unconscious
reflexes, skills, and habits
 Incomplete information: most managers do not see all alternatives and decide
based on incomplete information.
The Administrative Model

 Incomplete information exists due to many issues:

 Risk: managers know a given outcome can fail or succeed and probabilities can be
assigned.
 Uncertainty: probabilities cannot be given for outcomes and the future is
unknown.
 Many decision outcomes are not known such as a new product introduction.
 Ambiguous information: information whose meaning is not clear.
 Information can be interpreted in different ways.
 Time constraints and Information costs: Managers do not have the time or
money to search for all alternatives.
 This leads the manager to again decide based on incomplete information.
The Administrative Model

 Satisficing: Managers explore a limited number of options and choose an

acceptable decision rather than the optimum decision.
 This is the response of managers when dealing with incomplete information.
 Managers assume that the limited options they examine represent all options.
 This concept suggests that rather than conducting an exhaustive search for
the best possible alternative, decision makers tend to search only until they
identify an alternative that meets some minimum standard of sufficiency.
 A manager looking for a site for a new plant, for example, may select the
first site she finds that meets basic requirements for transportation, utilities,
and price, even though further search might yield a better location. People
satisfice for a variety of reasons.
The Administrative Model

 Managers may simply be unwilling to ignore their own motives (such as

reluctance to spend time making a decision) and therefore may not be able to
continue searching after a minimally acceptable alternative is identified.
 The decision maker may be unable to weigh and evaluate large numbers of
alternatives and criteria.
 Also, subjective and personal considerations often intervene in decision
situations. Because of the inherent imperfection of information, bounded
rationality, and satisficing, the decisions made by a manager may or may not
actually be in the best interests of the organization. A manager may choose a
particular location for the new plant because it offers the lowest price and
best availability of utilities and transportation. Or she may choose the site
because it is located in a community where she wants to live.
The Role of Intuition in Decision
making
 Intuitive decision making:
 Making decisions on the basis of experience, feelings, and accumulated
judgment.
 Intuition is an innate belief about something, without conscious
consideration. Managers sometimes decide to do something because it “feels
right” or they have a “hunch.”
 This feeling usually is not arbitrary, however. Rather, it is based on years of
experience and practice in making decisions in similar situations. An inner
sense may help managers make an occasional decision without going through
a full-blown rational sequence of steps.
The Role of Intuition
Decision-Making Styles

 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 decisions.
 Behavioral
 Avoid conflict by working well with others and being receptive to suggestions.
Group Decision Making

 Occurs when individuals collectively make decisions from a list of

alternatives.
 In more and more organizations today, important decisions are made by
groups and teams rather than by individuals.
 Managers can typically choose whether to have individuals or groups and
teams make a particular decision. Thus knowing about forms of group and
team decision making and their advantages and disadvantages is important.
Group Decision Making

Many decisions are made in a group setting. There are a number of advantages
with group decision making.
 Generate more complete information and knowledge
 Generate more diverse alternatives
 More accurate decisions
 Increased acceptance of a solution
 Increased legitimacy
 Establishes team spirit
Group Decision Making

There are some disadvantages with group decision making:

Group think: biased decision making resulting from group members striving for agreement.
 Usually occurs when group members rally around a central manger’s idea (CEO), and become
blindly committed without considering alternatives.
 The group tends to convince each member that the idea must go forward.
 Time consuming
 Minority domination (the inequality of group members can create an opportunity for one
or more groups to dominate others
 Pressure to conform to group think
 Ambiguous responsibility for the decision ( its unclear who is accountable for the final
outcome)
 Confrontation can damage team spirit
Improved Group Decision Making

 Devil’s Advocacy: one member of the group acts as the devil’s advocate and
critiques the way the group identified alternatives.
 Points out problems with the alternative selection.
 Dialectical inquiry: two different groups are assigned to the problem and each
group evaluates the other group’s alternatives.
 Top managers then hear each group present their alternatives and each group can
critique the other.
 Promote diversity (gender, race,skills,experinnce): by increasing the diversity
in a group, a wider set of alternatives may be considered.
Decision Making for Today’s World

 Guidelines for making effective decisions:

 Understand cultural differences.
 Know when it’s time to call it quits.
 Use an effective decision-making process.
 Consider the STEEPLE factors as much as possible
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
Decision making tools

 Flow Charts:
 Flow charts provide a visual description of the steps in a process or work
activity.
 The sequences of events that make up the process are shown.
 Generally flow charts begin with inputs, show the transformation of these
inputs and end with outputs.
Flow Charts

 The charts help to visualize and understand how things are currently being
done and,
 How they can be done directly to improve the processes.
 Within the charts are decision points where a decision maker is expected to
make a decision.
How to draw a flowchart

1. Describe the process to be charted e.g. the purchasing process

2. Start with a 'trigger' event, the objective of the process
3. Note each successive action concisely and clearly
4. Go with the main flow (put extra detail in other charts)
5. Make cross references to supporting information
6. Follow the process through to a useful conclusion (end at a 'target' point), e.g. achieve the
objective of the purchasing process
Flow chart may be assessing the
quality of the material
Fish bone diagrams

 The Fish Bone or Ishikawa diagram is also known as the “cause and effect” diagram.
 It was proposed by Professor Kaoru Ishikawa in the 1960s, who pioneered quality
management processes.
 The tool helps to identify, sort, and display known or possible causes of the problem.
 It displays the relationship between a given outcome and all the factors that
influence the outcome.
 It is a generic tool that can be applied to myriad managerial decisions.
 The effect or result is the head of the fish bone, while the causes are the bones or
ribs growing out of the spine.
 The fish-bone chart can be used to see how different causes can lead to a problem.
 Once the causes have been identified and analysed, corrective measures can be
implemented.
Steps in Constructing a FD

 Step 1: Identify and clearly define the outcome or effect (positive or

negative) to be analysed by the model.
 Step 2: Identify the possible root causes, the basic reasons, for a specific
effect, problem, or condition.
 Step 3: Analyse existing problems so that corrective action can be taken.
 The fishbone diagram only identifies factors that warrant further
investigation.
Identify causes of a defective product
Does it look familiar?
Decision Trees and Capacity Decision

 A decision tree is a graphic display of the decision process that indicates decision alternatives, states
of nature and their respective probabilities and payoffs for each combinational alternatives and states
of nature.
 Decision trees are most useful for problems that includes sequential decisions and states of nature.
 Two symbols are used in decision trees and these are:
 A square for a decision node, from which one of several alternatives may be selected.
 A circle for a state of nature node out of which one state of nature will occur.
Steps Constructing Decision Trees

1. Define the problem or decision to be made.

2. Draw the decision tree.
3. Assign the probabilities to the states of nature.
4. Estimate payoffs for each possible combination of alternatives and states of
nature.
5. Solve the problem by computing expected monetary values (EMV) for each state
of nature node. This is done by working backwards that is by starting at the
right hand side of the tree and working backwards to the decision nodes on the
left.
6. For each decision node, we select the one with the highest EMV (or minimum
cost). Then those decision alternatives not selected are eliminated from further
consideration.
Example

A company manufacturing Yako soap is faced with three capacity decision alternatives:
a) To construct a large plant
b) To construct a small plant
c) To do nothing
If they construct a large plant, there is a 50% chance of a favourable market. A
favourable market is expected to yield K200,000 while an unfavourable market
will lead to a loss of K180,000.
Constructing a small plant would yield K100,000 if the market is favourable and a loss
of K20,000 if it is not favourable. There are equal chances of having a favourable
or unfavourable market. Doing nothing will yield no returns.
What should Yako limited do?
Other decision making tools

 Probability theory
 Game theory
 Linear programing
 Risk analysis
END