2. The Nature of
Making effective decisions, as well as recognizing when
a bad decision has been made and quickly responding to
mistakes, is a key ingredient in organizational
Some experts believe that decision making is the most
basic and fundamental of all managerial activities.
Decision making is most closely linked with the Planning
However, it is also part of Organizing, Leading and
3. • 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
then secondly identify a set
of feasible alternatives before
we select one.
4. Decision-Making Process
• Decision-Making Process includes:
• recognizing and defining the
nature of a decision situation
• identifying alternatives
• choosing the ‘best’ [most
effective] alternative and
• putting it into practice.
5. Decision-Making Process. . . (continued)
Sometimes effective decisions must be
• Optimize some set of factors
such as profits, sales, employee
welfare and market share or
• Minimize loss, expenses or
employee turnover or
• Select best method for going out
of business, laying off
employees, or terminating a
6. Decision-Making Process. . . (continued)
Managers make decisions
about both problems
(undesirable situations) and
Cutting costs by 10%
Learning that the company has
It may take a long time before a
manager can know for sure if
the right decision was made.
7. Types of Decisions
• Programmed decision is
one that is fairly
structured or recurs with
some frequency (or both).
• Nonprogrammed decision
is one that is unstructured
and occurs much less
often than a programmed
8. Programmed Decisions. .
Many decisions regarding
basic operating systems
and procedures and
transactions fall into this
McDonald’s employees are
trained to make the Big Mac
according to specific
Starbucks, and many other
organizations, use programmed
decisions to purchase new
supplies [coffee beans, cups
9. Nonprogrammed Decisions. ..
Most of the decisions made by
top managers involving strategy
and organization design are
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
Intuition and experience are
major factors in these decisions.
11. Decision Making Under Certainty
A 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.
12. Decision Making Under Risk
A 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 one’s own judgment.
Decision is ‘calculated’ on the basis of
which alternative has the highest probability
of working effectively. [union negotiations,
Porsche’s SUV focus vs high-performance
13. Decision Making Under Uncertainty
A state of uncertainty exists when a
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
today’s organizations is done under
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.
14. A View of Decision-Making
Level of ambiguity and chances of making a bad decision
Lower Moderate Higher
16. Classical Decision Model
• An approach to decision making
that tells managers how they
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.
17. The Classical Model of
Obtain complete and
perfect information. …and end up with a
When faced with a
Eliminate decision that best
uncertainty. Evaluate serves the interests
everything rationally of the organization.
18. Rational Decision Making
Consists of six (6)
steps that keep the
decision maker focused
on facts and logic and
help guard against
Designed to help the
manager approach a
decision rationally and
19. Rational Decision Making. . . (continued)
1) Recognizing and defining the decision
a) Need to ‘define’ precisely what the problem is.
b) Manager must develop a complete
understanding of the problem.
c) Manager must carefully analyze and consider the
20. Rational Decision Making. . . (continued)
2) Identifying alternatives
a) Managers must realize that their alternatives may
be limited by legal, moral and ethical norms,
authority constraints, available technology,
economic considerations and unofficial social
21. Rational Decision Making. . . (continued)
3) Evaluating alternatives
a) Each alternative must pass successfully
through three stages before it may be worthy of
consideration as a solution.
1. Feasibility – Is it financially possible? Is it
legally possible? Are there limited
human, material and/or informational
2. Satisfactory – Does the alternative satisfy
the conditions of the decision situation?
[50% increase in sales]
3. Affordability – How will this alternative
affect other parts of the organization?
What financial and non-financial costs are
b) The manager must put ‘price tags’ on the
consequences of each alternative.
c) Even an alternative that is both feasible and
satisfactory must be rejected if the
consequences are too expensive for the total
4) Selecting an alternative
a) Choosing the best alternative is the real test of
b) Optimization is the goal because a decision is likely
to affect several individuals or departments.
c) Finding multiple acceptable alternatives may be
possible; selecting one and rejecting the others
may not be necessary.
23. Rational Decision Making. . . (continued)
5)Implementing the chosen alternative
a) Managers must consider people’s
resistance to change when implementing
b) For some decisions, implementation is
easy; for others, very difficult or time
c) Operational plans are very useful in
d) 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.
24. Rational Decision Making. . . (continued)
6) Following up a) Managers must evaluate the
and evaluating effectiveness of their decisions – did the
chosen alternative serve its original
the results purpose?
b) If the implemented alternative
appears not to be working, the
manager has several choices:
1. Another previously identified
alternative might be adopted or
2. Recognize that the situation was not
correctly defined and start the
process all over again or
3. Decide that the alternative has not
been given enough time to work or
should be implemented in a different
27. Behavioral Aspects of Decision Making
• Sometimes decision making must
reflect subjective considerations
• Other behavioral aspects include:
political forces, intuition, escalation
of commitment, risk propensity and
28. 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
‘bounded rationality’ and tend to ‘satisfice’
when making decisions.
Bounded rationality suggests that decision
makers are limited by their values and
unconscious reflexes, skills and habits.
[American vs foreign automakers]
29. Behavioral Aspects. . .
Satisficing is the tendency to
search for alternatives only
until one is found that meets
some minimum standard of
Rather than conducting an
exhaustive search for the best
possible alternative, decision
makers tend to search only
until they identify an alternative
that meets some minimum
standard of sufficiency.
30. The Administrative Model of
Use incomplete and
...and end up with a
When faced with a decision that may or
decision situation may not serve the
Are constrained by
managers actually… interests of the
Tend to satisfice…
Aspects. . . (continued)
The Classical and Administrative
Models paint quite a different
picture of decision making.
However, each may be used to
better understand how managers
The Classical Model attempts to
explain how managers can at least
attempt to be more rational and
logical in their approach to
The Administrative Model can be
used by managers to develop a
better understanding of their
inherent biases and limitations.
32. Behavioral Forces Influencing Decisions
Political Forces in Decision Making
Coalition - an informal alliance of
individuals or groups formed to
achieve a common goal
[stockholders, directors, parliament
Impact of a coalition may be positive
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
33. Behavioral Forces Influencing Decisions
Intuition – is an innate belief about
something, without conscious
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
help managers make occasional
decisions without going through an
34. Behavioral Forces Influencing Decisions
Escalation of Commitment –
occurs when a decision maker
stays with 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.
35. Behavioral Forces Influencing Decisions
Risk Propensity – the extent
to which a decision maker
is willing to gamble when
making a decision.
Organizational culture is a
prime ingredient in
levels of risk.
36. Behavioral Forces Influencing Decisions
Managerial ethics involves a
wide variety of decisions:
Relationships of the firm to
its employees [closing a dept to
Relationships of the
employees to the firm
Relationships of the firm to
other economic agents