Decision Making

Lecture # 4
HIMS
 The Decision-Making Process

Individuals at all levels and in all areas of organizations make decisions. That is, they make choices from two or more
alternatives. For instance,
top-level managers make decisions about their organization's goals, where to locate manufacturing facilities, what
new markets to move into, and what products or services to offer.

Middle and lower-level managers make decisions about setting weekly or monthly production schedules, handling
problems that arise, allocating pay raises, and selecting or disciplining employees.

But making decisions isn't something that just managers do. All organizational members make decisions that affect
their jobs and the organization they work for.
8 – Steps of Decision-Making Process

Step 1: Identifying a Problem

Step 2: Identifying Decision Criteria / factors that require consideration

Step 3: Allocating Weights to the Criteria

Step 4: Developing Alternatives

Step 5: Analyzing Alternatives based on factors identified

Step 6: Selecting an Alternative

Step 7: Implementing / Selecting the best suited Alternative

Step 8: Evaluating Decision Effectiveness

The Pervasiveness of Decision Making

Everyone in an organization makes decisions, but decision making is particularly important in a manager's job.
decision making is part of all four managerial functions. That is why managers—when they plan, organize, lead,
and control—are frequently called decision makers. In fact, we can say that decision making is synonymous with
managing.
The Manager as Decision Maker

Although we've described the steps in the decision-making process, we still don't know much about the manager as
a decision maker and how decisions are actually made in organizations. How can we best describe the decision-
making situation and the person who makes the decisions? We look at those issues in this section. We'll start by
looking at three perspectives on how decisions are made.
Making Decisions: Rationality, Bounded Rationality, and Intuition
Managerial decision making is assumed to be rational. By that we mean that managers make consistent, value-
maximizing choices within specified constraints. What are the underlying assumptions of rationality, and how
valid are those assumptions?

Assumptions of Rationality
- The problem is clear and unambiguous
- A Single, well defined goal is to be achieved Example
- All consequences and alternatives are known Opening of LC in case of any issues with bank
- Preferences are clear
- Preferences are constant and stable
- No time and cost restraints exist
- Final choice will maximize payoff.
 Example
The Manager as Decision Maker
Product not selling in the market

Bounded Rationality Despite the limits to perfect rationality, managers are expected to follow a rational process
when making decisions. Managers know that "good" decision makers are supposed to do certain things: identify
problems, consider alternatives, gather information, and act decisively but prudently. Managers, thus, are
expected to exhibit the correct decision-making behaviors. By doing so, managers signal to their superiors, peers,
and subordinates that they are competent and that their decisions are the result of intelligent and rational
deliberation. However, certain aspects of the decision-making process are not realistic with respect to how
managers make decisions. Instead, managers tend to operate under assumptions of bounded rationality; that
is, they behave rationally within the parameters of a simplified decision-making process that is limited (or
bounded) by an individual's ability to process information. Because they can't possibly analyze all information on
all alternatives, managers satisfice rather than maximize. That is, they accept solutions that are "good enough."
They are being rational within the limits (bounds) of their information processing ability.

Since most decisions that managers make don't fit the assumptions of perfect rationality, they instead make those
decisions using a boundedly rational approach. That is, they make decisions based on alternatives that are
satisfactory. However, keep in mind that their decision making also may be strongly influenced by the
organization's culture, internal politics, power considerations, and by a phenomenon called escalation of
commitment, which is an increased commitment to a previous decision despite evidence that it may have been
wrong. Example
Launch of space shuttle
The Manager as Decision Maker

Role of Intuition What role does intuition play in managerial decision making? Managers regularly use their
intuition, and it may help improve their decision making. What is intuitive decision making? It's a subconscious
process of making decisions based on experience and accumulated judgment. Researchers studying managers'
use of intuitive decision making identified five different aspects of intuition,
- Decision based on experience
- Decision based on feelings and emotion
- Decision based on skills, knowledge and training
- Decision based on Ethical values and culture
- Decision based on data from sub-conscious mind

Example
Sales tax adjustment against other business
Revaluation of assets for insurance
Charter a flight for delivery
Types of Problems and Decisions

Well-Structured Problems and Programmed Decisions

Some problems are straightforward. The goal of the decision maker is clear, the problem is familiar, and information
about the problem is easily defined and complete.

- A procedure is a series of interrelated sequential steps that a manager can use for responding to a structured
problem.
- A rule is an explicit statement that tells a manager what he or she can or cannot do.
- A policy It provides guidelines to channel a manager's thinking in a specific direction. In contrast to a rule, a
policy establishes parameters for the decision maker rather than specifically stating what should or should not
be done. Policies typically contain an ambiguous term that leaves interpretation up to the decision maker.

Poorly Structured Problems and Nonprogrammed Decisions

poorly structured problems, which are problems that are new or unusual and for which information is ambiguous
or incomplete. When problems are poorly structured, managers must rely on nonprogrammed decision making in
order to develop unique solutions. Nonprogrammed decisions are unique and nonrecurring.
Example
Return of goods procedure
No gift acceptance from anyone rule
Policy of having three quotes atleast
Decision-Making Conditions

Certainty
The ideal situation for making decisions is one of certainty, that is, a situation in which a manager can make
accurate decisions because the outcome of every alternative is known. He is certain about the outcomes of each
alternative. As you might expect, this condition isn't characteristic of most managerial decision situations. It's
more idealistic than realistic.
Risk
A far more common situation is one of risk, those conditions in which the decision maker is able to estimate the
likelihood of certain alternatives or outcomes. The ability to assign probabilities to outcomes may be the result
of personal experiences or secondary information.
Uncertainty
What happens if you have a decision to make when you're not certain about the outcomes and can't even
make reasonable probability estimates? We call such a condition uncertainty. Managers do face decision-
making situations of uncertainty. Under conditions of uncertainty, the choice of alternative is influenced by the
limited amount of information available to the decision maker.
Example
There is no space in warehouse leave it port or rent warehouse or
delay shipment.
Opening a new outlet of your store while your competitor is also
present in that area
Your business main ingredients are imported from risky countries like
India.
Decision-Making Styles

Directive style. People using the directive style have low tolerance for ambiguity and are
rational in their way of thinking. They're efficient and logical. Directive types make fast decisions and focus on
the short run. Their efficiency and speed in making decisions often result in their making decisions with
minimal information and assessing few alternatives.

Analytic style. Decision makers with an analytic style have much greater tolerance for ambiguity than do
directive types. They want more information before making a decision and consider more alternatives than a
directive-style decision maker does. Analytic decision makers are best characterized as careful decision makers
with the ability to adapt or cope with unique situations.

Conceptual style. Individuals with a conceptual style tend to be very broad in their outlook and will look at
many alternatives. They focus on the long run and are very good at finding creative solutions to problems.

Behavioral style. Decision makers with a behavioral style work well with others. They're concerned about the
achievements of subordinates and are receptive to suggestions from others. They often use meetings to
communicate, although they try to avoid conflict. Acceptance by others is important to this decision-making
style.