CHAPTER 9

MANAGERIAL DECISION
MAKING
 Class Overview

 Decision making define

 Types of decisions and problems
 Decision making theories or models
 Decision making steps
 Decision making Tree
 Probability theory
 Group decision making techniques
 Decision Making
Decision Making
 The act of choosing one alternative from
available set of alternatives.
Decision-Making Process
 The process of recognizing and defining the nature of
a decision situation, identifying alternatives, choosing
the “best” alternative, and putting it into practice.
 An effective decision is one that optimizes
some set of factors such as profits, sales,
employee welfare, and market share.
 Managers make decisions about both
problems and opportunities.
 Types of Decisions (cont)
Programmed Decisions
A decision that is a fairly structured decision or
recurs
with some frequency or both.
Example: Starting your car in the morning.
Nonprogrammed decisions
A decision that is relatively unstructured
and occurs less often than a programmed
decision.
Example: Choosing a vacation destination.
 Decision-Making Conditions

Decision Making Under Certainty

A condition in which the decision maker knows
all the information they know what the
alternatives are and what conditions are
associated with each alternative.
Decision Making Under Risk
A condition in which the availability of each
alternative and its potential payoffs and costs
associated are subject to chance.
 Decision-Making Conditions
 Decision Making Under Uncertainty
A condition in which the decision maker does not
have complete information and doesn’t know all the
alternatives. Here managers know what goal is to be
achieved but information about future events is
incomplete.
Decision making under Ambiguity:
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 under Certainty, Uncertainty,
Risk, and ambiguity

Organizational
problems

Low Possibility of failure High

Certainty Risk Uncertainty Ambiguity

Programmed Non-programmed
Decisions Decisions

Problem solution
Managerial Decision Making Process

Recognition of Diagnosis and

Development
decision Analysis of
Of alternative
requirement Causes

Selection of Implementation Evaluation and

Desired Of desired Feed back
alternative alternative
 Steps in the Decision-Making
Step Detail Example
1.Recognizing and Some stimulus indicates A plant manager sees that
defining the decision that a decision must be employee turnover has
situation made. The stimulus may increased by 5 percent.
be positive or negative.
2.Identifying alterna- Both obvious and creative The plant manager can
tives alternatives are desired. In increase wages, increase
general, the more impor- benefits, or change hiring
tant the decision, the more standards.
alternatives should be
considered.
3.Evaluating alterna- Each alternative is evalu- Increasing benefits may not
tives ated to determine its be feasible. Increasing
feasibility, its satisfactori- wages and changing hiring
ness, and its conse- standards may satisfy all
quences. conditions.
 Steps in the Rational
Decision-Making Process (cont’d)
Step Detail Example

4. Selecting the best Consider all situational factors, Changing hiring standards will take
alternative and choose the alternative that an extended period of time to cut
best fits the manager’s turnover, so increase wages.
situation.

5. Implementing the The chosen alternative is The plant manager may need
chosen alternative implemented into the permission from corporate
organizational system. headquarters. The human resource
department establishes a new wage
structure.

6. Following up and At some time in the future, the The plant manager notes that, six
evaluating the manager should ascertain the months later, turnover has dropped
results extent to which the alternative to its previous level.
chosen in step 4 and
implemented in step 5 has
worked.
TYPES OF DECISION MODELS
 Classical Decision Model
 Managers are expected to make decisions
that are economically sensible, logical and
in the organization best interest.
 Basic principles:
 Humans are rational
 We seek to optimize our outcomes
 The classical model suggests that
decisions are made in a logical series of
steps
The Classical Model of Decision
Making

• obtain complete
. . . and end up with
When faced with a and perfect information
a decision that best
decision situation, • eliminate uncertainty
serves the interests
managers should . . . • evaluate everything
of the organization.
rationally and logically
 Steps in Classical Decision Model

1. Opportunity or problem of situation exists

2. Opportunity is recognized to exist
3. Opportunity is defined
4. Alternatives are generated
5. Information is gathered
6. Alternatives are evaluated
7. One alternative is selected
8. Alternative is implemented and evaluated in
terms of effectiveness
 Problems with the Model
 The assumptions are flawed
 humans are not perfectly rational
 information is not costless or complete

 Assumes that all alternatives will be

considered
 Assumes that the consequences of each
alternative will be explored
 Assumes that we can cognitively cope
with all this information
 Administrative Decision Model

 Acknowledges the real-world

limitations on manager’s decision
making
 Managers in this model operate with
bounded rationality in making decisions
 Recognizes that:
 All possible alternatives and their
associated consequences cannot be
generated
 Administrative Model (cont.)
 Both the available information and the
definition of the situation are likely to be
incomplete and inadequate to some degree
 The final decision may be based on criteria
other than simple optimization or outcome
maximization
 When managers seek solutions that are
“good enough” they satisfice, rather than
maximize
 Administrative model of Decision Making
(cont’d)
 Bounded Rationality
 The concept that decision makers are limited by
their values and unconscious reflexes, skills, and
habits.

 Satisficing
 The tendency to search for alternatives only until
one is found that meets some minimum standard
of sufficiency to resolve the problem.
 The Administrative Model of
Decision Making

• use incomplete and

. . . and end up with a
When faced with a imperfect information
decision that may or may
decision situation • are constrained by
not serve the interests
managers actually… bounded rationality
of the organization.
• tend to satisfice
 Other Common Models Of
Decision Making
Political model (Coalition)
 A political force in decision making which
consists of an informal alliance of
individuals or groups formed to achieve a
goal.
Intuition
 An innate belief about something without
conscious consideration.
 Other Common Models Of
Decision Making (Cont’d)
Escalation of Commitment
A decision maker is staying with a decision
even when it appears to be wrong.

Risk Propensity
 The extent to which a decision maker
is willing to gamble when making
a decision.
 Group decision making
Techniques
 Brain storming
 Nominal Group Technique
 Delphi Technique
 Brain storming

Group leader record Ideas evaluated

Group members
Each idea where Only after all have
State ideas
Group can read it Been recorded

No comments
on ideas at
this stage
 Nominal Group Technique
Step 1. Each group member writes down individual
ideas on the decision
Step 2. Each member present individual ideas
orally. The ideas are written on the board
Step 3. when all members present their ideas, the
entire group discuss these ideas.
Step 4. When discussion is completed, a secret
ballot is taken to allow members to support their
favorite idea. The idea receiving the maximum
votes are accepted
 The Delphi Technique
Step 1. Problem is identified
Step 2. Group members are asked to offer
solutions to the problem by providing
anonymous responses to the questionnaire.
Step 3. Responses are compiled and send to all
group members.
Step 4. Individual group members are asked to
generate new solutions
Step 5. Step 3 and 4 are repeated until a
consensus solution is reached
 Advantages/Disadvantages of Group
decisions
Advantages
1. Group can generate better solutions then
individual.
2. Group decision is generally supported by them.
3. ownership.
Disadvantages
1. Group decision take longer time
2. It cost more than individual decision
3. Group decision may become contaminated if
they want to support friendly relationship