Chapter 4

Decisions making as
a
Management Function
1-1
 Decision-Making: The Essence of the Manager’s Job

The Decision-Making Process

Define decision and decision-making process.
Describe the eight steps in the decision-making process.
The Manager as Decision Maker
Discuss the assumptions of rational decision making.
Describe the concepts of bounded rationality, satisficing, and
escalation of commitment.
Explain intuitive decision making.
Contrast programmed and nonprogrammed decisions.
Decision Making
• Decision
 Making a choice from two or more alternatives.
 Managers make decisions about both problems and opportunities.
 For example, making decisions about how to cut costs by 10 percent
reflects a problem—an undesirable situation that requires a solution.
 But decisions are also necessary in situations of opportunity.
Learning that the firm is earning higher-than-projected profits, for
example, requires a subsequent decision.
e.g. Should the extra funds be used to increase shareholder dividends, reinvest in
current operations, or expand into new markets?
 The Decision-Making Process
 Identifying a problem and decision criteria and allocating weights
to the criteria.
 Developing, analyzing, and selecting an alternative that can resolve
the problem.
 Implementing the selected alternative.
 Evaluating the decision’s effectiveness.
The Decision-Making Process
Step 1: Identifying the Problem
• Problem
 A discrepancy between an existing and desired state of affairs.
 is deviation/gap from expectation

• Characteristics of Problems
 A problem becomes a problem when a manager becomes aware of it.
 The manager must have the authority, information, or resources
needed to solve the problem.
Step 2: Identifying Decision Criteria
• Decision criteria are factors that are important
(relevant) to resolving the problem.
 Costs that will be incurred (investments required)
 Risks likely to be encountered (chance of failure)
 Outcomes that are desired (growth of the firm)

Step 3: Allocating Weights to the Criteria

• Decision criteria are not of equal importance:
 Assigning a weight to each item places the items
in the correct priority order of their importance in
the decision making process.
Criteria and Weights for Computer Replacement Decision

Criterion Weight
Memory and Storage 10
Battery life 8
Carrying Weight 6
Warranty 4
Display Quality 3
Step 4: Developing Alternatives
• Identifying viable alternatives
 Alternatives are listed (without evaluation) that can
resolve the problem.

Step 5: Analyzing Alternatives

• Appraising each alternative’s strengths and
weaknesses
 An alternative’s appraisal is based on its ability to
resolve the issues identified in steps 2 and 3.
Assessed Values of Laptop Computers Using Decision
Criteria(10pts each)
Step 6: Selecting an Alternative
• Choosing the best alternative
 The alternative with the highest total weight is
chosen.

Step 7: Implementing the Alternative

• Putting the chosen alternative into action.
 Conveying the decision to and gaining commitment
from those who will carry out the decision.
Exhibit 6–4 Evaluation of Laptop Alternatives
Against Weighted Criteria
Step 8: Evaluating the Decision’s Effectiveness
• The soundness of the decision is judged by its
outcomes.
How effectively was the problem resolved by
outcomes resulting from the chosen alternatives?
If the problem was not resolved, what went wrong?
 Making Decisions
• Perspectives on how managers make decisions

1. Rationality
 Managers make consistent, value-maximizing choices.
 After all, managers have all sorts of tools and techniques to help them
be rational decision makers
 Assumptions are that decision makers:
 Are perfectly rational, and fully objective.
 Have carefully defined the problem and identified all viable alternatives.
 Have a clear and specific goal
 Will select the alternative that maximizes outcomes in the organization’s
interests rather than in their personal interests.
Assumptions of Rationality
Making Decisions (cont’d)
2. Bounded Rationality- More Realistic Approach
Managers make decisions rationally, but are limited (bounded)
by their ability to process information.
Most decisions managers make don’t fit the assumption of perfect
rationality.
No one can possibly analyze all information on all alternatives so
they . . . • satisfice—that is, accept solutions that are “good
enough,” rather than spend time and other resources trying to
maximize.
 Cont’d
 satisfice—choose the first alternative encountered that
satisfactorily solves the problem—rather than maximize the
outcome of their decision by considering all alternatives and
choosing the best.
 Accepting a first job offer that was satisfactory (good
enough) even though it was not exactly what you have wanted.
In such case you behaved in a bounded-rationality manner by
accepting it.
 Escalation of commitment: an increased commitment to a
previous decision despite evidence that it may have been
wrong.
• For example, when people buy stock in a company, they sometimes
refuse to sell it even after repeated drops in price
 Cont..
• Most decisions that managers make don’t fit the
assumptions of perfect rationality, so they satisfice.
• However, keep in mind that their decision making is also likely
influenced by a phenomenon called escalation of commitment,
an increased commitment to a previous decision despite
evidence that it may have been wrong.
• Why would decision makers escalate commitment to a bad
decision?
• Because they don’t want to admit that their initial decision
may have been flawed.
• Rather than search for new alternatives, they simply
increase their commitment to the original solution.
Discussion
Was your decision about what college or university to attend a
rational decision?
Did you go through each step in rational decision making? If
not, why not?
The Role of Intuition
3. Intuitive decision making
 Making decisions on the basis of experience, feelings, and
accumulated judgment.
 “Intuition is only the sum total of your life experiences.
 Researchers studying managers’ use of intuitive decision making have
identified five different aspects of intuitions.
What is Intuition?
 Types of Problems and Decisions
a) Programmed Decision/Structured Problems
 Involve goals that clear.
 Are familiar (have occurred before).
 Are easily and completely defined—information about the problem is
available and complete.
 Examples
 when a customer returns a purchase to a store, or a college’s handling of a
student wanting to drop a class.
 A repetitive decision that can be handled by a routine approach.
Types of Programmed Decisions
• Policy
A general guideline for making a decision about a structured problem.
 The customer always comes first and should always be satisfied.
 We promote from within, whenever possible.
 Employee wages shall be competitive within community standards
• Procedure
 A series of interrelated steps that a manager can use to respond (applying
a policy) to a structured problem.
• Rule
 An explicit statement that limits what a manager or employee can or
cannot do. Example. rules about lateness and absenteeism permit
supervisors to make disciplinary decisions rapidly and fairly.
Policy, Procedure, and Rule Examples
• Policy
 Accept all customer-returned merchandise.
• Procedure
 Follow all steps for completing merchandise return documentation.
• Rules
 Managers must approve all refunds over $50.00.
 No credit purchases are refunded for cash.
b) Non-programmed Decisions/Unstructured Problems
 Problems that are new or unusual and for which information is
ambiguous or incomplete.
 Problems that will require custom-made solutions.
 Decisions that are unique and nonrecurring.

Example ;
 To add a product to the existing product line,
 To reorganize a company,
 To acquire another firm
Programmed versus Non-programmed Decisions
Decision-Making Conditions
1. Certainty
 A situation in which a manager can make an accurate decision because
the outcome of every alternative choice is known.
Suppose For example, that managers at ETH Airlines make a decision to buy
new jumbo jets.
• there are only two companies in the world that make jumbo jets; Boeing and
Airbus, ETH Airlines knows its options exactly
2. Risk
• A situation in which the manager is able to estimate the likelihood
(probability) of outcomes that result from the choice of particular alternatives.
• Suppose, for example, that a labor contract negotiator for a company
receives a “final” offer from the union right before a strike deadline. The
negotiator has two alternatives: to accept or to reject the offer.
Decision-Making Conditions
3. Uncertainty
• The decision maker does not know all the alternatives, the risks
associated with each, or the likely consequences of each alternative.
Under these conditions, the choice of alternatives is influenced by the
limited amount of available information and by the psychological
orientation of the decision maker.
• An optimistic manager will follow a maximax choice (maximizing the
maximum possible payoff);
• A pessimist will follow a maximin choice (maximizing the minimum
possible payoff)
• If the manager is a pessimist, s/he’ll assume that only the worst can occur.
 Group Decision Making
• It’s a rare organization that doesn’t use committees, task forces, review
panels, study teams, or other similar groups to make decisions.
• Advantages
1. More information and knowledge are available.
2. More alternatives are likely to be generated.
3. More acceptance of the final decision is likely.
4. Better decisions generally emerge.
• Disadvantages
1. The process takes longer than individual decision making, so it is costlier.
2. One person may dominate the group.
3. Groupthink may occur- A situation that occurs when a group or team’s desire for
consensus to reach the best possible decision.
When is group decision effective
• It depends on the criteria for defining effectiveness, such as
1. accuracy,
2. speed,
3. creativity, and
4. acceptance.
• Group decisions tend to be more accurate. On average, groups tend to
make better decisions than individuals, although groupthink may occur.
• However, if decision effectiveness is defined in terms of speed,
individuals are superior.
• If creativity is important, groups tend to be more effective than
individuals.
• And if effectiveness means the degree of acceptance the final solution
achieves, the nod again goes to the group.
Cont’d
• The effectiveness of group decision making is also influenced by the size
of the group.
• The larger the group, the greater the opportunity for heterogeneous
representation.
• On the other hand, a larger group requires more coordination and more
time to allow all members to contribute.
• This means that groups probably shouldn’t be too large: A minimum of 5 to
a maximum of about 15 members is best.
• Groups of 5 to 7 individuals appear to be the most effective.
• You can’t consider effectiveness without also assessing efficiency.
• Yet, with few exceptions, group decision making consumes more work
hours than does individual decision making