Lecture 4

Decision Making

Chapter 5
Decision Making, Learning, Creativity,
and Entrepreneurship

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Learning Objectives
1. Understand the nature of managerial decision
making, differentiate between programmed and
nonprogrammed decisions, and explain why
nonprogrammed decision making is a complex,
uncertain process.
2. Describe the six steps that managers should take to
make the best decisions.
3. Identify the advantages and disadvantages of group
decision making, and describe techniques that can
improve it
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The Nature of Managerial

Decision Making
Decision Making
The process by which managers respond to
opportunities and threats by analyzing options,
and making determinations about specific
organizational goals and courses of action

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Decision Making
Programmed Decision
Routine, virtually automatic decision making that
follows established rules or guidelines.
Managers have made the same decision many times
before
There are rules or guidelines to follow based on
experience with past decisions
Rule 1: When the storage shelves are three-quarters empty,
order more copy paper
Rule 2: When ordering paper, order enough to fill the shelves

Little ambiguity involved

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Decision Making
Non-Programmed Decisions
Nonroutine decision making that occurs in
response to unusual, unpredictable opportunities
and threats.
Occurs when there are no ready-made decision
rules

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Decision Making
Intuition
feelings, beliefs, and
hunches that come
readily to mind,
require little effort
and information
gathering and result
in on-the-spot
decisions

Reasoned judgment
decisions that take
time and effort to
make and result from
careful information
gathering, generation
of alternatives, and
evaluation of
alternatives

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The Classical Model

of Decision Making
A prescriptive model of decision making that
assumes the decision maker can identify and
evaluate all possible alternatives and their
consequences and rationally choose the most
appropriate course of action
Optimum decision: Most appropriate decision in
light of what managers believe to be the most
desirable consequences for the organization

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The Classical Model

of Decision Making
Figure 5.1

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The Administrative Model

of Decision Making
An approach to decision making that explains why

decision making is inherently uncertain and risky and why

managers usually make satisfactory rather than optimum
decisions
This model is based on three important concepts:
Bounded rationality: cognitive limitations that constrain
ones ability to interpret, and process information before
making a decision
Incomplete information: even if managers had unlimited
ability to evaluate information, they still would not be able
to arrive a the optimum decision because they would have
incomplete information (see next slide for its reasons)
Satisficing: searching for and choosing an acceptable, or
satisfactory response to problems and opportunities, rather
than trying to make the optimum decision

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Why Information Is Incomplete?

Figure 5.2

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Causes of Incomplete Information

Risk
possible outcomes and their probabilities of
occurrence can be estimated
Uncertainty
the probabilities of alternative outcomes cannot be
determined and future outcomes are unknown
Ambiguous Information
Information that can be interpreted in multiple and
often conflicting ways.
Time constraints and information costs
managers have neither the time nor money to search
for all possible alternatives and evaluate potential
consequences
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Six Steps in Decision Making

Figure 5.4

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Decision Making Steps

Step 1. Recognize the Need for a Decision
Sparked by an event such as environment changes.
Managers must first realize that a decision must be
made.
Managers who actively pursue opportunities to use
organizations skills, competencies, and resources
create the need to make decisions
Managers can thus be reactive or proactive in
recognizing the need to make a decision
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Decision Making Steps

Step 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

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Decision Making Steps

Step 3. Assess Alternatives
What are the advantages and disadvantages of each
alternative?
Managers should specify criteria, then evaluate.
Legality: not violate any laws or government
regulations
Ethicalness: ethical and will not unnecessarily
harm any stakeholder group
Economic feasibility: have the best net financial
payoff (cost-benefit analysis should be done)
Practicality: organization has the required
capabilities and resources; the alternative will not
threaten the attainment of other goals
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General Criteria for Evaluating

Possible Courses of Action
Figure 5.5

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Decision Making Steps

Step 4. Choose among Alternatives
Rank the various alternatives and make a decision
Sometimes more than one alternative may be
chosen if they are not mutually exclusive

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Decision Making Steps

Step 5. Implement Chosen Alternative
Managers must now carry out the alternative
Managers should take up the responsibility for
making the follow-up decisions necessary to achieve
the goal
Sufficient resources must be provided

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Decision Making Steps

Step 6. Learn from Feedback
Compare what happened to what was expected to
happen
Explore why any expectations for the decision were
not met
Derive guidelines that will help in future decision
making

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Group Decision Making

Superior to individual making in the following
aspects:

Choices less likely to fall victim to bias

Able to draw on combined skills of group members
Improve ability to generate feasible alternatives
Allows managers to process more information and to
correct one anothers errors
Probability of the decision being implemented
successfully increases

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Group Decision Making

Groups take longer time than individuals to make
decision
Decisions can be undermined by biases caused by
groupthink
Groupthink
A pattern of faulty and biased decision making that
occurs in groups whose members strive for
agreement among themselves at the expense of
accurately assessing information relevant to a
decision
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Group Decision Making

Devils Advocacy
Technique to counteract groupthink
Critical analysis of a preferred alternative, made in
response to challenges raised by a group member
who, playing the role of devils advocate, defends
unpopular or opposing alternatives for the sake of
argument.

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Diversity Among Decision Makers

Promoting diversity improves group decision
making
Bringing together managers of both genders
from various ethnic, national, and functional
backgrounds broadens the range of life
experiences and opinions
Diverse groups are sometimes less prone to
groupthink
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Promoting Group Creativity

Brainstorming
Managers meet face-to-face to generate and debate many
alternatives.
One manager describes in broad outline the problem the
group is to address
Group members share their ideas and generate
alternatives
Each alternative is described, group members are not
allowed to criticize it until all alternatives are listed; and
one member records the alternatives on a flip chart
Group members are encouraged to be as innovative and
radical as possible
When all are listed, the pros and cons of each are
discussed and a short list created

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Building Group Creativity

Nominal Group Technique
A decision-making technique in which group
members write down ideas and solutions, read
their suggestions to the whole group, and discuss
and then rank the alternatives

Delphi Technique
A decision-making technique in which group
members do not meet face-to-face but respond in
writing to questions posed by the group leader
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Reference
McGraw-Hill Education (2014). BUS10306
Management customized text, Chapter 4.

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