The Managerial Decision-Making Process MGT 404 Managerial Decision Making Chapter 1 An Overview of Decision Making Profile of a Decision n The Decision-Making Process n The Decision Maker n The Decision Decision Making and Problem Solving n Problem solving is concerned with overcoming obstacles in the path toward an objective. n Problem solving may or may not require action. n A decision is an act requiring judgment that is translated into action. Decision Making and Problem Solving (cont’d) n Decision making is much more comprehensive than problem solving. n The terms are interrelated, but not interchangeable. The Significance of Decision Making n Decision making is the one truly distinctive characteristic of managers. n Decisions made by top managers commit the total organization toward particular courses of action. The Significance of Decision Making (cont’d) n Decisions made by lower levels of management implement the strategic decisions of top managers in the operating areas of the organization. n Decisions invariably involve organizational change and the commitment of scarce resources. The Scope of Decision Making n Individual decision making n Group decision making n Organizational decision making n Metaorganizational decision making (Note: Refer to Figure 1.1) Figure 1.1 The Scope of Decision Making Decisional Inputs (Objectives, information, resources, energy) Metaorganization Organization Group Interactional Levels Individual Decisional Outputs Permeable Boundaries (Actions transactions, outcomes) External Environment A Typology of Decisions n Decision-making strategies (Fig. 1.2) l Computational l Judgmental l Compromise l Inspirational A Typology of Decisions n (cont’d) Decision categories l Category I - routine, recurring, certainty with regard to the outcome l Category II - nonroutine, nonrecurring, uncertainty with regard to the outcome A Typology of Decisions (cont’d) n Decision combinations l Category I / Computational strategy l Category II / Judgmental strategy Table 1.1 A Categorization of Decision Characteristics Category I Decisions Category II Decisions Classifications Programmable; routine; generic; computational; negotiated; compromise Nonprogrammable; unique; judgmental; creative; adaptive; innovative; inspirational Structure Procedural; predictable; certainty regarding cause/effect relationships; recurring; within existing technologies; well-defined information channels; definite decision criteria; outcome preferences may be certain or uncertain Novel, unstructured, consequential, elusive, and complex; uncertain cause/ effect relationships; nonrecurring; information channels undefined, incomplete information; decision criteria may be unknown; outcome preferences may be certain or uncertain Strategy Reliance upon rules and principles; habitual reactions; prefabricated response; uniform processing; computational techniques; accepted methods for handling Reliance on judgment, intuition, and creativity; individual processing; heuristic problem-solving techniques; rules of thumb; general problem-solving processes Figure 1.2 The Concept of Decision-Making Strategies Knowledge Regarding the Outcome Strong Preference Weak Preference High Level of Knowledge Computational Decision-Making Strategy Compromise Decision-Making Strategy Low Level of Knowledge Judgmental Decision-Making Strategy Inspirational Decision-Making Strategy Preference for the Outcome The Locus of Choice n Top management makes Category II decisions. n Operating management makes Category I decisions. n Middle management supervises the making of Category I decisions and supports the making of Category II decisions. Characteristics of Managerial Decisions (Category II) n Long-range organizational objectives n Best choice from among a set of alternatives n Decision involves organizational change n Decision requires a commitment of resources Characteristics of Managerial Decisions (Category II) (cont’d) n Choice is a means to an end, not an end to itself n Decision maker tends to overestimate success n Success is measurable through objectives attainment Perspectives on Managerial Decision Making n The integrative perspective n The interdisciplinary perspective n The interlocking perspective n The interrelational perspective The Managerial Decision-Making Process n Process components are decisionmaking functions. n Decision-making functions are highly interrelated and interdependent. n The process is highly dynamic with several subprocesses. n The process can accommodate several concurrent Category II decisions. Figure 2.1 The Decision-Making Process Revise objectives Setting managerial objectives Revise or update objectives Follow-up and control Take corrective action as necessary Searching for alternatives Comparing & evaluating alternatives Renew search Implementing decisions The act of choice Decision-Making Function No. 1 Setting Managerial Objectives: n Objectives constitute the foundation for rational decision making. n Objectives are the ends for the means of managerial decision making. n Attainment of the objective is the ultimate measure of decision success. Decision-Making Function No. 2 Searching for Alternatives: n The limitations of time and money n The declining value of additional information n The rising cost of additional information n Abort the search in the zone of cost effectiveness Value and cost of additional information Figure 2.2 The Cost of Additional Information Average value Point of optimality Zone of cost effectiveness 0 Perfection of information Cost Marginal value 100% Decision-Making Function No. 3 Comparing and Evaluating Alternatives: n Alternatives result from the search. n There are usually three to five alternatives. n One alternative is to do nothing. n Alternatives are evaluated using criteria derived from the objective. Decision-Making Function No. 3 (cont’d) Also: n Evaluation should include an anticipation of the likely outcome for each alternative. n Evaluation should also anticipate obstacles or difficulties at the time of implementation. Decision-Making Function No. 4 The Act of Choice: n The choice is the culmination of the process, not all of it. n The choice confronts the decision maker with discernible constraints. n The best alternative may not be readily apparent to the decision maker. Decision-Making Function No. 4 (cont’d) Also: n n 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. Decision-Making Function No. 5 Implementing Decisions: Decision success is a function of decision quality and decision implementation. Decision-Making Function No. 5 (cont’d) Areas contributing to decision success: n Observance of operating constraints n Influence of the decision maker n Involvement of decision implementers n Absence of conflict of interest Decision-Making Function No. 5 (cont’d) Areas detracting from decision success: n Disregard of timeliness n Unlimited additional information n Disregard of risk/reward relationships Figure 2.3 Evaluation of Strategic Decision Success Strategic Strategic Decision = f Decision + f Success Quality Strategic Decision Implementation 1. Compatibility with operating constraints. 1. Conflict of interest. 2. Timeliness. 2. Risk-reward factor. 3. Optimum amount of information. 3. Understanding the decision. 4. Influence of the decision maker. Decision-Making Function No. 6 Follow-Up and Control n Follow-up and control is essential to ensure that an implemented decision meets its objective. n Performance is measured by observing the implemented decision in relation to its standard derived from the objective. Decision-Making Function No. 6 Also: (cont’d) n Unacceptable variance from standard performance should elicit timely and appropriate corrective action. n 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).