The Managerial Decision-Making Process MGT 404 Managerial Decision Making

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).