The Managerial Decision-Making Process

MGT 404MANAGERIAL DECISION MAKING

An Overview of Decision MakingChapter 1

Profile of a DecisionThe Decision-Making ProcessThe Decision MakerThe Decision

Decision Making and Problem SolvingProblem solving is concerned with overcoming obstacles in the path toward an objective.Problem solving may or may not require action.A decision is an act requiring judgment that is translated into action.

Decision Making and Problem Solving (contd)Decision making is much more comprehensive than problem solving.The terms are interrelated, but not interchangeable.

The Significance of Decision MakingDecision making is the one truly distinctive characteristic of managers.Decisions made by top managers commit the total organization toward particular courses of action.

The Significance of Decision Making (contd)Decisions made by lower levels of management implement the strategic decisions of top managers in the operating areas of the organization.Decisions invariably involve organizational change and the commitment of scarce resources.

The Scope of Decision MakingIndividual decision makingGroup decision makingOrganizational decision makingMetaorganizational decision making

(Note: Refer to Figure 1.1)

Figure 1.1 The Scope of Decision MakingGroupOrganizationMetaorganization IndividualDecisionalOutputs(Actions transactions,outcomes)Decisional Inputs(Objectives,information,resources, energy)PermeableBoundaries Interactional LevelsExternal Environment

A Typology of DecisionsDecision-making strategies (Fig. 1.2) l Computational l Judgmental l Compromise l Inspirational

A Typology of Decisions (contd)l Category I - routine, recurring,certainty with regard to the outcomel Category II - nonroutine, nonrecurring, uncertainty with regard to the outcome Decision categories

A Typology of Decisions (contd)l Category I / Computational strategyl Category II / Judgmental strategy Decision combinations

Table 1.1 A Categorization of Decision CharacteristicsCategory I Decisions Category II Decisions

Classifications Programmable; routine; Nonprogrammable; unique;generic; computational; judgmental; creative;negotiated; compromise adaptive; innovative; inspirational

Structure Procedural; predictable; Novel, unstructured,certainty regarding consequential, elusive, andcause/effect relationships; complex; uncertain cause/recurring; within existing effect relationships; non-technologies; well-defined recurring; informationinformation channels; channels undefined, incom-definite decision criteria; plete information; decisionoutcome preferences may criteria may be unknown;be certain or uncertain outcome preferences maybe certain or uncertain

Strategy Reliance upon rules and Reliance on judgment,principles; habitual intuition, and creativity;reactions; prefabricated individual processing;response; uniform heuristic problem-solvingprocessing; computational techniques; rules of thumb;techniques; accepted general problem-solvingmethods for handling processes

Figure 1.2 The Concept of Decision-Making StrategiesKnowledgeRegardingthe OutcomeStrong PreferenceWeak PreferencePreference for the OutcomeComputationalDecision-MakingStrategyCompromiseDecision-MakingStrategyJudgmentalDecision-MakingStrategyInspirationalDecision-MakingStrategyLow Levelof KnowledgeHigh Levelof Knowledge

The Locus of ChoiceTop management makes Category II decisions.Operating management makes Category I decisions. Middle management supervises the making of Category I decisions and supports the making of Category II decisions.

Characteristics of Managerial Decisions (Category II)Long-range organizational objectivesBest choice from among a set of alternativesDecision involves organizational changeDecision requires a commitment of resources

Characteristics of Managerial Decisions (Category II) (contd)Choice is a means to an end, not an end to itselfDecision maker tends to overestimate successSuccess is measurable through objectives attainment

Perspectives on Managerial Decision MakingThe integrative perspectiveThe interdisciplinary perspectiveThe interlocking perspectiveThe interrelational perspective

The Managerial Decision-Making ProcessProcess components are decision-making functions.Decision-making functions are highly interrelated and interdependent.The process is highly dynamic with several subprocesses.The process can accommodate several concurrent Category II decisions.

Figure 2.1 The Decision-Making ProcessSearchingforalternativesImplementingdecisionsFollow-upandcontrolSettingmanagerialobjectivesComparing &evaluatingalternativesThe actof choiceTake correctiveaction as necessaryRenewsearchReviseobjectivesRevise or update objectives

Decision-Making Function No. 1Objectives constitute the foundation for rational decision making.Objectives are the ends for the means of managerial decision making.Attainment of the objective is the ultimate measure of decision success.Setting Managerial Objectives:

Decision-Making Function No. 2The limitations of time and moneyThe declining value of additional informationThe rising cost of additional informationAbort the search in the zone of cost effectivenessSearching for Alternatives:

Figure 2.2 The Cost of Additional InformationCostAveragevalueMarginalvaluePoint ofoptimalityZone ofcosteffectivenessPerfection of information0100%Value and cost of additional information

Decision-Making Function No. 3Alternatives result from the search.There are usually three to five alternatives.One alternative is to do nothing.Alternatives are evaluated using criteria derived from the objective.Comparing and Evaluating Alternatives:

Decision-Making Function No. 3 (contd)Evaluation should include an anticipation of the likely outcome for each alternative.Evaluation should also anticipate obstacles or difficulties at the time of implementation.Also:

Decision-Making Function No. 4The choice is the culmination of the process, not all of it.The choice confronts the decision maker with discernible constraints.The best alternative may not be readily apparent to the decision maker.The Act of Choice:

Decision-Making Function No. 4 (contd)The best choice is likely to ensue from the right approach.The choice should be the alternative most likely to result in the attainment of the objective.Also:

Decision-Making Function No. 5Decision success is a function of decision quality and decision implementation. Implementing Decisions:

Decision-Making Function No. 5 (contd)Observance of operating constraintsInfluence of the decision makerInvolvement of decision implementersAbsence of conflict of interestAreas contributing to decision success:

Decision-Making Function No. 5 (contd)Disregard of timelinessUnlimited additional informationDisregard of risk/reward relationshipsAreas detracting from decision success:

StrategicDecisionQuality1.Compatibility with1.Conflict of interest.operating constraints.

2.Timeliness.2.Risk-reward factor.

3.Optimum amount of3.Understanding theinformation.decision.

4.Influence of thedecision maker.Figure 2.3 Evaluation of Strategic Decision SuccessStrategicDecisionSuccess= f+ f Strategic DecisionImplementation

Decision-Making Function No. 6Follow-up and control is essential to ensure that an implemented decision meets its objective.Performance is measured by observing the implemented decision in relation to its standard derived from the objective.Follow-Up and Control

Decision-Making Function No. 6 (contd)Unacceptable variance from standard performance should elicit timely and appropriate corrective action.Corrective action (subprocess no. 1) may result in the implementation of another alternative (subprocess no. 2), which, if not successful, may result in a revision of the original objective (subprocess no. 3).Also: