The Nature of Decision Making

Decision Makingwww.humanikaconsulting.comThe Nature ofDecision MakingMaking effective decisions, as well as recognizing when a bad decision has been made and quickly responding to mistakes, is a key ingredient in organizational effectiveness.

Some experts believe that decision making is the most basic and fundamental of all managerial activities.Decision making is most closely linked with the Planningfunction.However, it is also part of Organizing, Leading andControlling.Decision making is the act of choosing one alternative from among a set of alternatives.We have to first decide that a decision has to be made and thensecondlyidentifyaset offeasible alternatives before we select one.Decision-MakingProcessDecision-Making Process includes:

recognizinganddefiningthe nature of a decision situation

identifying alternativeschoosingthebest (most effective] alternative and

putting it into practice.Decision-MakingProcess.. .(continued)Sometimeseffectivedecisionsmustbe made to:

Optimizesomesetoffactors such as profits, sales, employee welfare and market share or

Minimizeloss,expensesor employee turnover or

Select best method for going out ofbusiness, laying off employees, or terminating a strategic alliance.Decision-MakingProcess.. .(continued)(undesirable opportunities situations).situations)and(desirableCutting costs by 10%Learning that the company has earned higher-than-projected profits

It may take a long time before a manager can know for sure if the right decision was made.ManagersmakedecisionsaboutbothproblemsTypesofDecisionsProgrammed decisionis onethat is fairly structured or recurs with some frequency (or both).

Nonprogrammed decision is one that is unstructured andoccurs much less often than a programmed decision.Programmed Decisions. .Many decisions regarding basic operating systems and standard procedures trainedtomaketheBig Mactoaccordingspecificprocedures. Starbucks,andmanyotherorganizations, use programmed decisions to purchase new supplies [coffee beans, cups and napkins].Nonprogrammed Decisions. ..Most of the decisions made by top managers involving strategy and organization design are nonprogrammed.Decisions about mergers, acquisitions and takeovers, new facilities, new products, labor contracts and legal issues are nonprogrammed decisions.Managers faced with nonprogrammed decisions must treat each one as unique, investing great amounts of time, energy and resources into exploring the situation from all views.Intuition and experience are major factors in these decisions.Decision-MakingConditionsDecision CertaintyMakingUnderDecision RiskMakingUnderDecisionMaking UncertaintyUnderDecision Making Under CertaintyA state of certainty exists when a decision maker knows, with reasonable certainty, what the alternatives are and what conditions are associated with each alternative.

Very few organizational decisions, however, are made under these conditions.

The complex and turbulent environment in which businesses exist rarely allows for such decisions.Decision Making Under RiskA state of risk exists when a decision maker makes decisions under a condition in which the availability of each alternative and its potential payoffs and costs are all associated with probability estimate.Decisions such as these are based on past experiences, relevant information, the advice of others and ones own judgment.Decision is calculated on the basis of which alternative has the highest probability of working effectively. [union negotiations, Porsches SUV focus vs high-performance sports cars]Decision Making Under UncertaintyAstate of uncertaintyexistswhena decision maker does not know all of the alternatives, the risks associated with each, or the consequences each alternative is likely to have.Most of the major decision making in todays organizations is done under these conditions.To make effective decisions under these conditions, managers must secure as much relevant information as possible and approach the situation from a logical and rational view.Intuition, judgment and experience always play major roles in the decision- making process under these conditions.AViewofDecision-MakingConditionsLevel of ambiguity and chances of making a bad decisionLowerModerateHigherRational Perspectiveson Decision MakingKeys to Decision Making

Classical

Decision

Model

Rational

Decision

MakingClassical DecisionModelAnapproachtodecisionmakingthattellsmanagershowthey should make decisions.

Approach assumes that managers are logical and rational.

Approach assumes that managers decisions will be in the best interests of the organization.

Conditions suggested in this approach rarely, if ever, exist.TheClassical ModelofDecision MakingWhen faced with a decision situation, managers shouldObtain complete and perfect information.Eliminate uncertainty. Evaluateeverything rationallyand logicallyand end up with a decision that best serves the interests of the organization.Rational Decision MakingConsistsof stepsthatsix(6)keepthedecision maker focused on facts and logic andhelp guard inappropriate assumptions pitfalls.againstandDesigned managertohelpthe approachadecisionrationallyand logically.Rational Decision Making. . .(continued)Recognizinganddefiningthedecision situation

Need to define precisely what the problem is.

Managermustdevelopacomplete understanding of the problem.

Manager must carefully analyze and consider thesituation.Rational Decision Making. . .(continued)Identifying alternatives

Managers must realize that their alternatives may be limited by legal, moral and ethical norms, limited authority, economic constraints, available technology etc. Rational Decision Making. . .(continued)

3)Evaluating alternativesEach alternative must pass successfully through three stages before it may be worthy of consideration as a solution.Feasibility Is it financially possible? Is it legally possible? Are there limited human, material and/or informational resources available?Satisfactory Does the alternative satisfy the conditions of the decision situation? [50% increase in sales]Affordability How will this alternative affectother parts of the organization? What financial and non-financial costs are associated?The manager must put price tags on the consequences of each alternative.Even an alternative that is both feasible and satisfactory must be rejected if the consequences are too expensive for the total system.Rational Decision Making.. .(continued)

4)Selecting an alternativeChoosingthebestalternativeistherealtestofdecision making.

Optimization is the goal because a decision is likely to affect several individuals or departments.

Finding multiple acceptable alternatives may be possible; selecting one and rejecting the others may not be necessary.Rational Decision Making. . .(continued)Implementing the chosen alternativeManagers must consider peoples resistance to change when implementing decisions.For some decisions, implementation is easy; for others, very difficult or time consuming.Operationalplansareveryusefulinimplementing alternatives.Managers must also recognize that even when all of the alternatives and their consequences have been evaluated as precisely as possible, unanticipated consequences are still likely.Rational Decision Making. . .(continued)a)Managersmustevaluatetheeffectiveness of their decisions did thechosenalternativeserveitsoriginal purpose? If the implemented alternative appears not to be working the manager has several choices:Anotherpreviouslyidentifiedalternative might be adopted orRecognize that the situation was not correctly defined and start the process all over again orDecide that the alternative has not been given enough time to work or should be implemented in a different way.6) Following up and evaluating the resultsEvaluating Alternatives in the Decision-Making ProcessTABLE 9.1

Steps in the Ra1tionalDecision-making ProcessAlthough the presumptions of the classical decision model rarely exist,managers can still approach decision making with rationality. By following the steps of rational decision making, managers ensure that they are learning as much as possible about the decision situation and its alternatives.StepDetailExample1. Recognizing and definingSome stimulus indicates that a decisionA plant manager sees that employeethe decision situationmust be made. The stimulus may beturnover has increased by 5 percent. positive or negative.2. Identifying alternativesBoth obvious and creative alternatives areThe plant manager can increasedesired. In general, the more important thewages , increase benefits, or changedecision. the more alternatives should behiring standards. generated.3. Evaluating alternativesEach alternative is evaluated to determineIncreasing benefits may not beits feasibility, its satisfactoriness. and itsfeasible. Increasing wages and consequences.changing hiring standards maysatisfy all conditions.4. Selecting the bestConsider all situational factors and chooseChanging hiring standards will take alternative the alternative that best fits the manager'san extended period of time to cutsituation.turnover, so increase wages.5. Implementing theThe chosern alternative is implemented intoThe plant manager may need chosen alternativethe organizational system. permission from corporateheadquarters.The human resource department establishes a new wage structure.6. Following up and At some time in the future, the managerThe plant manager notes that, six evaluating the resultsshould ascertain the extent to which the months later.turnover dropped toalternative chosen in step 4 andits previous level.implemented in step 5 has worked.Behavioral Aspects of Decision MakingSometimes decision making must reflectsubjective considerations (tastes, etc.)

Other behavioral aspects include: political forces, intuition, escalation of commitment, risk propensity and ethics.Behavioral Aspects. . . (continued)The Administrative Model of Decision Making Herbert A Simon, a Nobel Prize winner in Economics, developed the model to describe how decisions are often made rather than to prescribe how they should be made. Argues that decision makers have incomplete and imperfect information, are constrained by boundedrationality and tend to satisfice when making decisions. Bounded rationalitysuggeststhatdecision makersare limited by their values and unconsciousreflexes, skills and habits. [American vs foreign automakers]Behavioral Aspects. . .(continued)Satisficingisthetendencyto searchfor alternatives only untilone is found that meets someminimum standard of sufficiency.

Rather than conducting an exhaustive search for the best possible alternative, decision makerstend to search only until they identify an alternative thatmeetssomeminimum standard of sufficiency.TheAdministrative ModelofDecision MakingWhen faced with adecision situationmanagers actuallyUse incomplete and imperfect Information.Are constrained by bounded rationality.Tend to satisfice...and end up with a decision that may or may not serve the interests of the organization.Behavioral Aspects. . . (continued) TheClassicalandAdministrativeModels picture However,paint quitea ofdecisiondifferent making.eachmaybeusedtobetterunderstandhowmanagersmake decisions. TheClassical Modelattemptsto explain how managers can at least attemptto be more rational and logical in their approach to decisions. TheAdministrative Modelcanbe usedby managers to develop a betterunderstanding of their inherent biases and limitations.Behavioral Forces Influencing DecisionsPolitical Forces in Decision MakingCoalition-aninformal alliance of or groups formed to achieve a

Common goalImpact of a coalition may be positiveor negative.Managers must recognize when to use coalitions, how to assess if they are acting in the best interest of the organization and how to control their negative effects.Behavioral Forces Influencing DecisionsIntuitionisaninnatebeliefabout something,without conscious consideration.

Deciding to do something because it feels right or one has a hunch.Feeling is based on years of experience and practice in making decisions in similar situations; may helpmanagersmakeoccasional decisions without going through an a-to-z process.Behavioral Forces Influencing DecisionsEscalation of Commitment occurs when a decision maker stayswith a decision even when it appears to be wrong. [Pan Am holdings]

Decision makers must guard against sticking too long with an incorrect decision.

However, managers should not bail out of a seemingly incorrect decision too soon.Behavioral Forces Influencing DecisionsRisk Propensity the extent to which a decision maker is willing to gamble when making a decision.Organizationalcultureisainprimeingredientencouraging levels of risk.differentBehavioral Forces Influencing DecisionsEthics

Managerialethicsinvolve a wide variety of decisions:

Relationships of the firm to its employees

Relationships of the employees to the firmRelationships of the firm to other economic agents