Chapter 3
Decision
Making
PowerPoint Presentation by Charlie Cook
Copyright © 2005 South-Western.
All rights reserved.
Decisions
• Decision defined
 A choice among competing alternatives and the
implementation of the chosen alternative; all
decisions have a time horizon or scope.
• Strategic decisions
 Have a long-term perspective; they are related to an
organization’s overall strategy.
• Tactical decisions
 Have a shorter time scope; entail choices that must
be made in the near term.
 Must be consistent with the organization’s strategy.
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Conditions Affecting Decisions
• Certainty
 The decision maker has complete information of the
probabilities of the outcomes of each alternative.
• Uncertainty
 The decision maker has absolutely no knowledge of
the probabilities of the outcomes of each alternative.
• Risk
 The decision maker has some probabilistic estimate
of the outcomes of each alternative.
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The Decision Making Process
• Decision making process defined
 A series of related steps or stages (a choice among alternative
courses of action) leading to an action, an outcome, and
assessment.
• Managerial decision making
 From managerial perspective, a decision is an action that
someone takes and is subsequently accountable for.
 Managerial decision-making process
 Is often fragmented and rapid, responding to interruptions
and unexpected events.
 Involves reason and emotion, risk and uncertainty, and
imagination and knowledge.
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Types of Managerial Decisions
• Programmed decision
 If a particular situation occurs often, a solution is
designed in the form of a routine procedure.
• Non-programmed decision
 Decisions are unstructured, novel, or unique one-time
situations that require a choice among existing
alternatives.
 There is no established procedure for handling the
problem.
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Types of Managerial Decisions (cont’d)
• Proactive decision
 A decision made in anticipation of an external change
or other conditions.
 Rational, proactive approach can prevent problems
from developing.
• Reactive decision
 An after-the-fact decision made in response to
external changes.
 Suggests a lack of planning and strategy.
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Types of Managerial Decisions (cont’d)
• Intuitive decisions
 Involve the use of estimates, guesses, or hunches to
decide among alternative courses of action.
• Systematic decisions
 Result from a logical, organized analytic process.
 Systematic decision-making requires
 A clear
set of objectives.
 A relevant information base.
 Rational and creative generation, implementation, and
assessment of alternatives.
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Types of Managerial Decisions (cont’d)
• Mintzberg’s strategic decision categories
 Entrepreneurial decisions—inventive decisions that
strategic managers make about the nature of the
product and the future of the organization.
 Adaptive decisions—reactive responses to
environmental conditions.
 Planning decisions—proactive as well as reactive
decisions that develop specific reactions to reduce
uncertainties related to growth, uniqueness, and
efficiency.
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Decision Models
• Rational decision model
 A prescriptive model
 Advises
the decision maker how decisions should be
made.
 Bases a decision on a logical, factual analysis that
leads the decision maker to an optimal decision.
 Rational decision model assumes:
 People
attempt to make logical decisions.
 The alternative chosen offers the greatest benefits.
 There is little uncertainty and risk in the decision.
 Decision makers rely on rules and procedures to reach
a decision.
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Decision Models (cont’d)
• Rational decision model (cont’d)
 Most appropriate for:
 Programmed
decisions.
 Situations where all the alternatives are known.
 Unambiguous decisions.
 Situations where information is readily available.
 Individual decision making.
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Decision Models (cont’d)
• Administrative decision model
 A descriptive model
 Makes
more realistic assumptions about the decision
context and human nature.
 Describes how people actually make decisions, not how
they should make them.
 Administrative decision model assumes:
 Limited
information processing ability.
 Non-programmed decisions.
 Preferences of individuals or group.
 Alternatives are unclear.
 Greater participation through group decision making.
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Decision Models (cont’d)
• Administrative decision model (cont’d)
 Satisficing
 To
seek a satisfactory decision, one that’s good enough
but not perfect.
 The first alternative that proves to be a satisfactory
alternative (solution) is the one chosen.
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Decision Models (cont’d)
Movie Decision Model Matrix
Exhibit 3 . 1
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Decision Models (cont’d)
• Political decision model
 Political decisions are:
 Non-programmed
decisions ruled by political concerns
rather than a logical analysis of the situation.
 Not the best decision, but the alternative (decision) that
will be accepted by the groups involved in the decision.
 More political the more diverse are the participants in
the decision-making process.
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Political Decision Model (cont’d)
• Political decision model (cont’d)
 Characteristics of political decisions:
 Are
non-programmed.
 Contain ambiguous information.
 Entail low consensus on goals among stakeholders.
 Involve groups that can influence the decision process.
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Decision Models (cont’d)
Decision-Making Models
Rational
Administrative
Political
Decision Type
Programmed
Non-programmed
Non-programmed
Decision Outcome
Optimal
Satisficed
Negotiated
Degree of Objectivity
High
Moderate
Moderate to low
Exhibit 3 . 2
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The Decision-Making Process
• Step 1: Identify and define the problem
 Problem: realization that a discrepancy exists
between a desired state and current reality.
 Problem identification factors:
 Perceptual
inaccuracies.
 Defining problems in terms of solutions.
 Identifying symptoms as problems.
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The Decision-Making Process (cont’d)
• Step 2: Establish decision criteria
 Determine significance of each problem according to:
 Urgency:
amount of time available to solve a problem.
 Impact: seriousness of a problem’s effect.
 Growth tendency: future consequences of a problem.
• Step 3: Weight criteria
 Weighting: process of ranking importance of decision
criteria.
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The Decision-Making Process (cont’d)
• Step 4: Develop alternatives
 Examine organization’s internal and external
environment for solutions to problem.
• Step 5: Evaluate alternatives
 Select alternatives that will produce most favorable
outcomes and least unfavorable outcomes.
• Step 6: Decide on a solution
 Select a particular solution to achieve a
predetermined objective.
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The Decision-Making Process (cont’d)
• Step 7: Implement the decision
 Implementation may be more important than the
actual choice of alternative.
• Step 8: Feedback and evaluation
 System of control and evaluation necessary to make
sure actual results are consistent with original
objectives.
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The Decision-Making Process (cont’d)
Steps in a
Typical DecisionMaking Process
Exhibit 3 . 3
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Factors That Influence Decision Making
Exhibit 3 . 4
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Factors That Influence Decisions (cont’d)
• Individual values
 Values influence decision-making process in following
ways:
 Establishing
goals and objectives.
 Developing alternatives.
 Selecting a solution.
 Implementing.
 Following up.
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Factors That Influence Decisions (cont’d)
• Personality
 Personality variables
 Introversion-extroversion,
conscientiousness, altruism,
ability to deal with new situations, and neuroticism.
 Situational variables
 Variables
related to the decision context or the external
(physical and social) situation.
 Interaction variables
 The
combined, unique effect of personality and the
situation.
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Factors That Influence Decisions (cont’d)
• Risk tolerance
 A low-risk tolerance decision maker will establish
different objectives, evaluate alternatives differently,
and select different alternatives from a decision
maker who has high risk tolerance.
 Framing: decision maker’s perception of decision’s
possible outcomes in relation to gains or losses.
 Individuals more likely to take risks when a choice is
perceived as being between losses than when it is
perceived as being between gains.
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Factors That Influence Decisions (cont’d)
• Cognitive dissonance theory
 A conflict exists among an individual’s various
cognitions (attitudes, beliefs, and intentions) about
the consequences of a particular decision after the
decision has been made.
 Anxiety increases when:
 The
decision is important
psychologically or financially.
 There are a number of foregone
alternatives.
 The foregone alternatives have
many favorable features.
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Factors That Influence Decisions (cont’d)
• Reducing cognitive dissonance
 Seek information that supports the wisdom of the
decision.
 Selectively perceive (distort) information in a way that
supports the decision.
 Adopt a less favorable view of the foregone
alternatives.
 Minimize importance of the negative aspects of the
decision and exaggerate importance of the positive
aspects.
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Factors That Influence Decisions (cont’d)
• Decision-making styles
 Analytical—seeks a rational decision and has a high
tolerance for ambiguity.
 Directive—seeks a rational decision and has a low
tolerance for ambiguity.
 Behavioral—seeks an intuitive decision and has a low
tolerance for ambiguity.
 Conceptual—seeks an intuitive decision and has a
high tolerance for ambiguity.
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Factors That Influence Decisions (cont’d)
Source: Based on A. J. Rowe, J.D. Boulgarides, and M. R. McGrath, Managerial Decision Making, Modules in Management Series
(Chicago: SRA, 1984); A. J. Rowe and J. D. Boulgarides, Managerial Decision Making ( Englewood Cliffs, N.J.: Prentice Hall, 1994); G.
M. Marakas, Decision Support Systems in the Twenty-First Century, 2nd ed. (Upper Saddle River, N.J.: Prentice Hall, 2002).
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Exhibit 3 . 5
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Group Decision Making
• Disadvantages of group decision making
 Groupthink—the tendency of the group to be swayed
collectively can negate the benefits of group decision
making.
 Empowerment—allowing more people in the
organization access to the decision-making process
may make for lower-quality decision.
 Corporate governance—may dictate who can be part
of the decision-making process.
 Politics—may lead to decisions favoring the dominant
political coalition in the organization.
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Group Decision Making (cont’d)
• Advantages of group decision making
 Establishing goals and objectives
 Groups
are superior because of their greater collective
knowledge.
 Developing alternatives
 Groups
can ensure a broad search in the various
functional areas of the organization.
 Evaluating alternatives
 The
collective judgment of the group benefits from its
wider range of viewpoints.
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Group Decision Making (cont’d)
• Advantages of group decision making (cont’d)
 Making a decision
 Group
interaction and consensus results in the
acceptance of more risk.
 Decision implementation
 Responsibility
for effective implementation rests with
individual manager, not with group that made decision.
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Group Decision Making (cont’d)
• Creativity in group decision making
 Brainstorming
 Groups
are expected to produce imaginative solutions
to organizational problems.
– No idea is too ridiculous.
– Each idea presented belongs to the group.
– No idea can be criticized.
 Delphi technique
 Involves
achieving non-interactive consensus on a topic
through sequential questionnaires that are summarized
and used as feedback of opinions from earlier
responses.
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Group Decision Making (cont’d)
• Creativity in group decision making (cont’d)
 The Nominal Group Technique (NGT)
 A process
that brings about consensus through a
prescriptive method of group interaction:
– Individuals initially do not speak to one another.
– Each person writes ideas on a pad of paper.
– A structured sharing (listing) of ideas takes place.
– Each idea is discussed before a vote is taken.
– Ideas are prioritized by ranking or voting.
– The group decision is the mathematically pooled outcome
of the individual votes.
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