CHAPTER 6:

Managerial Decision Making

 Chapter Outline
Types of Decisions and Problems Personal Decision Framework
Programmed and Nonprogrammed Decisions
Facing Certainty and Uncertainty Why Do Managers Make Bad Decisions?

Decision-Making Models Innovative Decision Making

The Ideal, Rational Model Start with Brainstorming
How Managers Actually Make Decisions Use Hard Evidence
The Political Model Engage in Rigorous Debate
Avoid Groupthink
Decision-Making Steps Know When to Bail
Recognition of Decision Requirement Do a Postmorten
Diagnosis and Analysis of Causes
Development of Alternatives
Selection of the Desired Alternative
Implementation of the Chosen Alternative
Evaluation and Feedback
Types of Decisions and
Problems

 DECISION
 is a choice made from available alternatives

 DECISION MAKING
 is the process of identifying problems and opportunities and
then resolving them
 it involves effort both before and after the actual choice
Categories Of Management
Decisions
1. PROGRAMMED DECISIONS
 involve situations that have occurred often enough to
enable decision rules to be developed and applied in the
future
 are made in response to recurring organizational problems

2. NONPROGRAMMED DECISIONS
 are made in response to situations that are unique, are
poorly defined and largely unstructured, and have
important consequences for the organization
Conditions That Affect the
Possibility of Decision Failure

 CERTAINTY
 means that all the information the decision maker needs is
fully available
 Managers have information on operating conditions,
resource costs or constraints, and each course of action and
possible outcome
 RISK
 means that a decision has clear-cut goals and that good
information is available, but the future outcomes associated
with each alternative are subject to chance of loss or failure
 However, enough information is available to estimate the
probability of a successful outcome versus failure
Conditions That Affect the
Possibility of Decision Failure
 UNCERTAINTY
 means that managers know which goals they want to
achieve, but information about alternatives and future
events is incomplete
 Factors that may affect a decision, such as price, production
costs, volume, or future interest rates are difficult to
analyze and predict
 AMBIGUITY
 the most difficult decision situation
 means that the goals to be achieved or the problem to be
solved is unclear, alternatives are difficult to define, and
information about outcomes is unavailable
Decision-Making Models

 CLASSICAL MODEL
 ADMINISTRATIVE MODEL
Classical Model

 based on rational economic assumptions and manager beliefs about

what ideal decision making should be
 The four assumptions underlying this model are as follows:
1. The decision maker operates to accomplish goals that are known and agreed
upon. Problems are precisely formulated and defined.
2. The decision maker strives for conditions of certainty, gathering complete
information. All alternatives and the potential results of each are calculated.
3. Criteria for evaluating alternatives are known. The decision maker selects the
alternative that will maximize the economic return to the organization.
4. 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.

 is considered to be normative, which means it defines how a decision

maker should make decisions
 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

 is considered to be descriptive, meaning that it describes

how managers actually make decisions in complex
situations rather than dictating how they should make
decisions according to a theoretical ideal
 is based on the work of Herbert A. Simon. Simon
proposed two concepts that were instrumental in
shaping the administrative model: bounded rationality
and satisficing.
o Bounded rationality means that people have limits, or
boundaries, on how rational they can be
o Satisficing means that decision makers choose the first solution
alternative that satisfies minimal decision criteria
Administrative Model

 According to the administrative model:

1. Decision goals often are vague, conflicting, and lack consensus
among managers. Managers often are unaware of problems or
opportunities that exist in the organization.
2. 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.
3. Managers’ searches for alternatives are limited because of
human, information, and resource constraints.
4. 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.
 Another aspect of administrative decision making is intuition
o Intuition represents a quick apprehension of a decision situation
based on past experience but without conscious thought
 Intuitive decision making is not arbitrary or irrational
because it is based on years of practice and hands-on
experience
Political Model

 The third model of decision making is useful for making

nonprogrammed decisions when conditions are uncertain,
information is limited, and managers may disagree about
what goals to pursue or what course of action to take
 Managers often engage in coalition building for making
complex organizational decisions
o A coalition is an informal alliance among managers who support a
specific goal
o Coalition building is the process of forming alliances among
managers

 Without a coalition, a powerful individual or group could

derail the decision-making process
 A global survey suggests that coalition building is
associated with faster implementation of decisions because
managers have developed a consensus about which action
to pursue
Political Model
 Managers always have to anticipate resistance, talk with
people all across the organization, and make sure that their
decisions will benefit the overall organization.
 The political model closely resembles the real environment
in which most managers and decision makers operate
 The political model begins with four basic assumptions:
1. Organizations are made up of groups with diverse interests,
goals, and values. Managers disagree about problem priorities
and may not understand or share the goals and interests of
other managers.
2. Information is ambiguous and incomplete. The attempt to be
rational is limited by the complexity of many problems as well
as personal and organizational constraints.
3. Managers do not have the time, resources, or mental capacity
to identify all dimensions of the problem and process all
relevant information. Managers talk to each other and exchange
viewpoints to gather information and reduce ambiguity.
4. Managers engage in the push and pull of debate to decide goals
and discuss alternatives. Decisions are the result of bargaining
and discussion among coalition members
Characteristics of Classical, Administrative,
and Political Decision – Making Models

Classical Model Administrative Model Political Model

Clear – cut problem and Vague problem and Pluralistic; conflicting
goals goals goals

Condition of certainty Condition of Condition of uncertainty

uncertainty or ambiguity

Full information about Limited information Inconsistent

alternatives and their about alternatives and viewpoints; ambiguous
outcomes their outcomes information

Rational choice by Satisficing choice for Bargaining and

individual for resolving problem using discussion among
maximizing outcome intuition coalition members
Six Steps in the Managerial
Decision-Making Process
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 aspects 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.

2. Diagnosis and Analysis of Causes

Once a problem or an 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.
3. Development of alternatives
The next stage is to 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 and in fact usually are already available within the
organization’s rules and procedures. Nonprogrammed
decisions, however, 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. However, studies find that limiting the search for
alternatives is a primary cause of decision failure in
organizations.
4. Selection of the Desired Alternative

Once feasible alternatives are developed, one must be

selected. At this stage, managers try to select the most
promising of a several alternative courses of action. The best
alternative solution is one which best it’s the overall goals and
values of the organization and achieves the desired result
using the fewest resources. Managers want to select the choice
with the least amount of risk and uncertainty. Because some
risk is inherent for most non programmed decisions, managers
try to gauge the prospects for success. They might rely on
their intuition
and experience to estimate whether a given course of action is
likely to succeed. Basing choices on overall goals and values
can also guide the selection of alternatives.
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. This step is similar to the
idea of strategy execution described in Chapter 5. The
ultimate success of the chosen alternative depends on
whether it can be translated into action. Sometimes an
alternative never becomes reality because managers lack
the resources or the energy needed to make things
happen. Implementation may require discussion with
people affected by the decision. Communication,
motivation, and leadership skills must be used to see that
the decision is carried out. When employees see that
managers follow up on their decisions by tracking
implementation success, they are more committed to
positive action.
6. Evaluation and 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. Decision making
is not completed when a manager or board of directors
votes yes or no. Feedback provides decision makers with
information that can precipitate a new decision cycle.
The decision may fail, thus generating a new analysis of
the problem, evaluation of alternatives, and selection of
a new alternative. Many big problems are solved by
trying several alternatives in sequence, each providing
modest improvement. Feedback is the part of the
monitoring that assesses whether a new decision needs
to be made.
Personal Decision Framework
1. 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.

2. Managers with an analytical style like to consider

complex solutions based on as much data as they
can gather. These individuals carefully consider
alternative s and often base their decisions on
objective, rational data from management control
system and other sources. They search for the best
possible decision based on the information available.
3. 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 alternative
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.

4. The behavioral style is often the style adopted by

managers having a deep concern for others as
individuals. Managers using this style like talk to
people one – on – one, understand their feelings
about the problem, and concerned with the
personal development of others and may make
decisions that help others achieve their goals.
 6-5 Why Do Managers Make Bad
Decisions?
1. Being influenced by initial impressions. When considering
decisions, the mind often gives disproportionate weight to the first
information it receives, these initial impressions, statistics, or
estimates act as an anchor to our subsequent thoughts and
judgments.
2. Justifying past decisions. Many managers fall into the trap of
making choices that justify their past decisions, even if those
decisions no longer seem valid.
3. Seeing what you want to see. People frequently look or
information that supports their existing instinct or point of view
and avoid information that contradicts it.
4. Perpetuating the status quo. Managers may base decisions on
what has worked in the past and fail to explore new options, dig
for additional information, or investigate new technologies..
5. Being influenced by emotions. If you’ve ever made a decision
when you were angry, upset, or being ecstatically happy, you
might already know the danger of being influenced by emotions.
6. Overconfidence. Most people overestimate their ability to
predict uncertain out- comes.
 6-6 Innovative Decision
Making
The ability to make fast, widely supported, high-
quality decisions on a frequent basis is critical
skill in today’s fast-moving organizations.”
Considering that managers are under pressure to
decide quickly and that biases creep in and cloud
judgment, how do managers ever make good
decisions? Some innovative techniques can help
managers watch out for and avoid mistakes
caused by cognitive biases. It is difficult for most
managers to see their own biases, but they can
build in mechanisms that neutralize or reduce
bias related decision errors at the organizational
level.
 1. Start With Brainstorming

Brainstorming uses a face-to-face interactive group to

spontaneously suggest a wide range of alternatives for decision
making. The keys to effective brainstorming are that people can
build on one another’s ideas; all ideas are acceptable, no matter
how crazy they seem; and criticism and evaluation are not
allowed. The goal is to generate as many ideas as possible.

2. Use Hard Evidence

Using hard evidence can help take the emotion out of the
decision-making process, keep people from relying on faulty
assumptions, and prevent managers from “seeing what they
want to see,” as described earlier. Evidence-based decision making
means a commitment to make more informed and intelligent
decisions based on the best available facts and evidence. It means
being alert to potential biases and seeking and examining the
evidence with rigor. Managers practice evidence-based decision
making by being careful and thoughtful than rather than carelessly
relying on assumptions, past experience, rules of thumb, or
intuition.
 3. Engage in Rigorous Debate
An important key to better decision making is to encourage a
rigorous debate of the issue at hand. Good managers recognize that
constructive conflict based on divergent points of view can bring a
problem into focus, clarify people’s ideas, stimulate creative, and
improve limit the role of bias, create a broader understanding of
issues and alternatives, and improve decision quality.

4. Avoid Groupthink
It is important for managers to remember that some disagreement
and conflict is much healthier than blind agreement. Pressures for
the conformity exist in almost any group, and particularly when
people in a group like one another, they tend to avoid anything that
might create disharmony. Groupthink refers to the tendency of
people in groups to suppress contrary opinions. 75 When people slip
into groupthink, the desire for harmony out weighs concerns over
decision quality. Group members emphasize maintaining unity rather
than realistically challenging problems and alternatives. People
censor their personal opnions and are reluctant to criticize the
opinions of others.
 5. Know When to Bail
In a fast-paced environment, good managers encourage
risk taking and learning from mistakes, but they also
aren’t hesitant to pull the plug on something that isn’t
working.

6. Do a Postmortem
To improve decision making, managers need to reflect and
learn from every decision they make. When people review
the results of their decisions, they learn valuable lessons
about how to do things better in the future.