STRATEGIC DECISION MAKING

What is Decision Making?

Decision makingThe act of choosing one alternativefrom among a set of alternatives

Dimensions of Strategic Decisions

• Top management Decisions• Are future oriented• Require Large amount of resources• Affect long term prosperity of the

firm• Usually have multifunctional

consequences

Characteristics of Strategic Decisions

◆ They are elusive problems that are difficult to define precisely. ◆ They require an understanding of the problem to find a viable solution. ◆ They rarely have one best solution, but often a series of possible solutions. ◆ Questions about trade-offs and priorities appear in the solutions. ◆ Solution benefits are difficult to assess as to their effectiveness, in part because

they lack a clear final end point against which effectiveness can be judged. ◆ Other problems in the organization are connected to solutions for a focal

problem. ◆ High levels of ambiguity and uncertainty are associated with solutions. ◆ Realizing hoped for benefits has considerable risk. ◆ Strategic decisions have competing interests that prompt key players to use

political pressure to ensure that a choice aligns with their preferences.

Types of Decision Making

1.Programmed decisionA decision that is fairly structured orRecurs with some frequency (or both)2.Non programmed decisionA decision that is relativelyunstructured and occurs much lessoften than a programmed decision

Decision Making Conditions The decisionmaker faces

conditions of….

Certainty Risk Uncertainty

Level of ambiguity and chances of making a bad decision

Perspectives/models of Decision Making

1. Classical or Rational Model- Managers are logical and rational and

that they make decisions that are in the best interests of the organization.

2. Behavioral Model :-Managers are not always logical and

they use intuition, and personal judgements in making decisions

Assumptions of Rational Model• 1. Decision makers have complete

information about the decision situation and possible alternatives.

• 2. They can effectively eliminate uncertainty to achieve a decision condition of certainty.

• 3. They evaluate all aspects of the decision situation logically and rationally.

Steps in Rational Decision Making Process

• Objectives to be achieved are determined.

• Alternative ways of achieving these objectives are identified.

• Each alternative is evaluated.• The best alternative is chosen

Behavioral Model of Decision Making

1. Administrative Model:- Managers(1)use incomplete and imperfect

information, (2) constrained by bounded rationality, (3) tend to “satisfice” when makingdecisions

• Bounded rationalityA concept suggesting that decisionmakers are limited by their values andunconscious reflexes, skills, and habits

• SatisfyingThe tendency to search for alternativesonly until one is found that meets

some minimum standard of sufficiency

Because of the inherent imperfection of information, bounded rationality, and satisficing, the decisions made by a manager may or may not actually be in the best interests of the organization. A manager may choose a particular location for the new plant because it offers the lowest price and best availability of utilities and transportation. Or she may choose the location because it is located in a community where she wants to live.

Intuition

• An innate belief about something,without conscious consideration

Escalation of commitment

• A decision maker’s staying with a decision even when it appears to be wrong

Scope of Strategic Decision Making