The Managerial The Managerial Decision-MakingDecision-Making

ProcessProcess

Topic 2Topic 2

Decision-MakingDecision-MakingThinking of decision-making as a Thinking of decision-making as a processprocess has a long intellectual has a long intellectual tradition:tradition:

John Dewey in his book John Dewey in his book How We How We ThinkThink (1910) characterized it as (1910) characterized it as consisting of (1) defining the problem, consisting of (1) defining the problem, (2) identifying the alternatives, and (3) (2) identifying the alternatives, and (3) choosing the best one.choosing the best one.

Rowe & Boulgarides, 1994Rowe & Boulgarides, 1994

1.1. Formulation of the problemFormulation of the problem

2.2. Search for alternative solutionsSearch for alternative solutions

3.3. Analysis of alternativesAnalysis of alternatives

4.4. Selection of alternativeSelection of alternative

5.5. ActionAction

6.6. EvaluationEvaluation

Most theories accept the idea that Most theories accept the idea that decision-making consists of a number of decision-making consists of a number of steps or stages such as: recognition, steps or stages such as: recognition, formulation, generation of alternatives, formulation, generation of alternatives, search, selection, & action. search, selection, & action.

Process is a series of steps, actions, Process is a series of steps, actions, functionsfunctions

The Managerial Decision-Making ProcessThe Managerial Decision-Making Process Process components are decision-making Process components are decision-making

functions. (I.e. integrated) (components of functions. (I.e. integrated) (components of decision-making are the functions of decision-decision-making are the functions of decision-making.)making.)

Decision-making functions are highly Decision-making functions are highly interrelated and interdependentinterrelated and interdependent

The process is highly dynamic with 3 principal The process is highly dynamic with 3 principal subprocesses.subprocesses.

1. Taking Corrective Action1. Taking Corrective Action

2. Renewing The Search2. Renewing The Search

3. Revising Objectives3. Revising Objectives

Figure 2.1 The Decision-Making ProcessFigure 2.1 The Decision-Making Process

SearchingSearchingforfor

alternativesalternatives

ImplementingImplementingdecisionsdecisions

Follow-upFollow-upandand

controlcontrol

SettingSettingmanagerialmanagerialobjectivesobjectives

Comparing &Comparing &evaluatingevaluating

alternativesalternatives

The actThe actof choiceof choiceTake Take

correctivecorrectiveaction as action as necessarynecessary

RenewRenewsearchsearch

ReviseReviseobjectivesobjectives

Revise or Revise or update update objectivesobjectives

Decision-Making Function No. 1Decision-Making Function No. 1

Objectives constitute the foundation for Objectives constitute the foundation for rational decision making.rational decision making. (A decision-(A decision-maker must first set goals to ensure a fruitful maker must first set goals to ensure a fruitful decision-making process)decision-making process)

Objectives are the ends for the means of Objectives are the ends for the means of managerial decision making.managerial decision making.

Attainment of the objective is the ultimate Attainment of the objective is the ultimate measure of decision success.measure of decision success.

Setting Managerial Objectives: Setting Managerial Objectives: Objectives that are relevant, practical, challenging, Objectives that are relevant, practical, challenging, measurable, flexible, cost effective, ones where measurable, flexible, cost effective, ones where accountability can be discerned, etc.accountability can be discerned, etc.

Decision-Making Decision-Making Function No. 1 (cont’d)Function No. 1 (cont’d)

Objectives are commitments to action, Objectives are commitments to action, and their attainment requires decisions and their attainment requires decisions that represent purposive investments of that represent purposive investments of various types of resources.various types of resources.

Objectives provide a yardstick for Objectives provide a yardstick for measuring the performance of individual measuring the performance of individual managers and of the total organization.managers and of the total organization.

Decision-Making Function No. 2Decision-Making Function No. 2

The limitations of time and money (because of The limitations of time and money (because of this, decision-makers often have to consider this, decision-makers often have to consider several possible alternatives at the same time)several possible alternatives at the same time)

The declining value of additional informationThe declining value of additional information

-get the facts but remember you cannot get all -get the facts but remember you cannot get all the factsthe facts

-get only the information you need and use it-get only the information you need and use it

-seek simplicity-seek simplicity

-strive to avoid biases-strive to avoid biases

Searching for Alternatives:Searching for Alternatives:

Decision-Making Function No. 2Decision-Making Function No. 2

The rising cost of additional The rising cost of additional information (beyond some point information (beyond some point additional information is all cost additional information is all cost and no value.)and no value.)

Abort the search in the zone of Abort the search in the zone of cost effectivenesscost effectiveness

Searching for Alternatives: (cont’d)Searching for Alternatives: (cont’d)

OptimalityOptimalityThe point of optimality is that point on The point of optimality is that point on the marginal-value curve where the next the marginal-value curve where the next unit of information will decline in value unit of information will decline in value and one less unit will result in a loss in and one less unit will result in a loss in value. Because of the difficulty of value. Because of the difficulty of identifying a precise point of optimality, identifying a precise point of optimality, decision makers may elect to pursue decision makers may elect to pursue additional information within a zone of additional information within a zone of cost effectiveness.cost effectiveness.

Decision-Making Function No. 3Decision-Making Function No. 3

Alternatives result from the search and are Alternatives result from the search and are evaluated through (1) judgment, (2) bargaining evaluated through (1) judgment, (2) bargaining and analysis.and analysis.

Make a list of all the possible alternatives you have, Make a list of all the possible alternatives you have, including the choice of doing nothing. Thus, one including the choice of doing nothing. Thus, one alternative is to do nothing. Often a non-decision alternative is to do nothing. Often a non-decision is harmful to your organization, but sometimes the is harmful to your organization, but sometimes the decision to do nothing is useful or at least better decision to do nothing is useful or at least better than the alternatives, so it should always be than the alternatives, so it should always be included in the decision-making process (so included in the decision-making process (so perhaps no decision is good, perhaps disastrous).perhaps no decision is good, perhaps disastrous).

Comparing and Evaluating Alternatives:Comparing and Evaluating Alternatives:

Having Only 2 ChoicesHaving Only 2 Choices Buriden’s Ass. This method of decision making is used when two or more Buriden’s Ass. This method of decision making is used when two or more

equally attractive alternatives are faced. (From an old fable of an ass equally attractive alternatives are faced. (From an old fable of an ass placed between two equally nice bales of hay. The ass couldn’t decide placed between two equally nice bales of hay. The ass couldn’t decide which bale to turn to because they were both so attractive, and so it which bale to turn to because they were both so attractive, and so it starved to death from indecision.) The method is simply to list all the starved to death from indecision.) The method is simply to list all the negative points or drawbacks about each decision. That is, when two or negative points or drawbacks about each decision. That is, when two or more alternatives seem very desirable, we become blinded to any more alternatives seem very desirable, we become blinded to any drawbacks. The Buriden’s Ass method simply focuses on the drawbacks.drawbacks. The Buriden’s Ass method simply focuses on the drawbacks.

For example, suppose you’re a young lady about to become engaged. Mr. For example, suppose you’re a young lady about to become engaged. Mr. Right asks you, “Darling, would you rather have a $4,000 diamond Right asks you, “Darling, would you rather have a $4,000 diamond engagement ring or $4,000 worth of furniture for our new Swiss chalet?” engagement ring or $4,000 worth of furniture for our new Swiss chalet?” You find these to be both very attractive alternatives, so you decide to use the You find these to be both very attractive alternatives, so you decide to use the Buriden’s Ass method to decide between them. What are the drawbacks of Buriden’s Ass method to decide between them. What are the drawbacks of the ring? It might get stolen or lost; it isn’t useful like furniture; people the ring? It might get stolen or lost; it isn’t useful like furniture; people might think you married Mr. Right for his money (or that he had to buy your might think you married Mr. Right for his money (or that he had to buy your consent with a big rock); it might make your friends feel bad because they consent with a big rock); it might make your friends feel bad because they have little rings; you might worry about damaging it. And so on.have little rings; you might worry about damaging it. And so on.

Having Only 2 Choices (cont’d)Having Only 2 Choices (cont’d)

Now, what are the drawbacks of the furniture? It will wear out Now, what are the drawbacks of the furniture? It will wear out eventually and be gone, while the ring should last a lifetime; you eventually and be gone, while the ring should last a lifetime; you might worry about staining or damaging the furniture; furniture might worry about staining or damaging the furniture; furniture isn’t “romantic” like diamonds; and so on.isn’t “romantic” like diamonds; and so on.

Only 2 choices is rare in the decision-making process---Only 2 choices is rare in the decision-making process---Though it often characterizes the inexperienced Though it often characterizes the inexperienced decision-maker---an either/or philosophydecision-maker---an either/or philosophy

Decision-Making Function No. 3 (cont’d)Decision-Making Function No. 3 (cont’d)

There are usually three to five alternatives.There are usually three to five alternatives. Actually, there are usually multiple Actually, there are usually multiple

alternatives, but the best way to think about alternatives, but the best way to think about alternatives is to think in terms of 3-5 or alternatives is to think in terms of 3-5 or perhaps a better way to say it is “best of few” perhaps a better way to say it is “best of few” because it involves limiting the number of because it involves limiting the number of alternatives to three or four or five or six.alternatives to three or four or five or six.

Alternatives are evaluated using criteria Alternatives are evaluated using criteria derived from the objective.derived from the objective.

Decision-Making Function No. 3 Decision-Making Function No. 3 (cont’d)(cont’d)

Does each alternative meet Does each alternative meet allall the criteria the criteria needed to accomplish the objective?needed to accomplish the objective?

What are the pros and cons of each What are the pros and cons of each alternative?alternative?

How do you as a manager/leader (I.e. How do you as a manager/leader (I.e. decision-maker) feel about each choice?decision-maker) feel about each choice?

Decision-Making Function No. 3 Decision-Making Function No. 3 (cont’d)(cont’d)

Evaluation should also anticipate obstacles or Evaluation should also anticipate obstacles or difficulties at the time of implementation.difficulties at the time of implementation.

3 possible states:3 possible states:

(1) Certainty—knowledge of (1) Certainty—knowledge of consequences of each consequences of each alternativealternative

(2) Uncertainty—lack of knowledge of (2) Uncertainty—lack of knowledge of consequences of each alternativeconsequences of each alternative

(3) Risk—assumptions about (3) Risk—assumptions about alternativesalternatives

Decision-Making Function No. 4Decision-Making Function No. 4

The choice is the culmination of the process, The choice is the culmination of the process, not all of it.not all of it.

The choice confronts the decision maker The choice confronts the decision maker with discernible constraints.with discernible constraints.

The best alternative may not be readily The best alternative may not be readily apparent to the decision maker. apparent to the decision maker. (Remember, research tells us we spend a lot (Remember, research tells us we spend a lot of managerial time (approx 50%) correcting of managerial time (approx 50%) correcting bad decisions.)bad decisions.)

The Act of Choice:The Act of Choice:

Decision-Making Decision-Making Function No. 5Function No. 5

Implementing Decisions:Implementing Decisions:

Samuel Trull tells us:Samuel Trull tells us:

Decision success is a function Decision success is a function

of decision quality of decision quality

and and

decision implementation.decision implementation.

Decision QualityDecision Quality Decision Quality: Rating of whether decision is Decision Quality: Rating of whether decision is

good or bad—A good decision is a logical one good or bad—A good decision is a logical one based on the available information and reflecting based on the available information and reflecting the preferences of the decision-maker.the preferences of the decision-maker.

In judging decision quality, consider the following:In judging decision quality, consider the following:

1.1. Decision must meet stated objective(s) thoroughly and Decision must meet stated objective(s) thoroughly and completely.completely.

2.2. Decision must meet stated objectives efficiently, with Decision must meet stated objectives efficiently, with concern over cost, energy, side effects.concern over cost, energy, side effects.

3.3. Decision must take into account valuable by-products Decision must take into account valuable by-products or indirect advantage.or indirect advantage.

Decision ImplementationDecision Implementation Decision Implementation: Those who must Decision Implementation: Those who must

implement the decision or who will be implement the decision or who will be affected by it must accept it both affected by it must accept it both intellectually & emotionally.intellectually & emotionally.

A decision that may be technologically A decision that may be technologically brilliant but that is sociologically stupid will brilliant but that is sociologically stupid will not work. Only decisions that implemented, not work. Only decisions that implemented, and implemented with thoroughness (and and implemented with thoroughness (and preferably enthusiasm) will work the way preferably enthusiasm) will work the way they are intended to.they are intended to.

Decision-Making Function No. 5 Decision-Making Function No. 5 (cont’d)(cont’d)

Observance of operating constraintsObservance of operating constraints Influence of the decision makerInfluence of the decision maker Involvement of decision Involvement of decision

implementersimplementers Absence of conflict of interestAbsence of conflict of interest

Areas contributing to decision Areas contributing to decision success:success:

Decision-Making Function No. 5 Decision-Making Function No. 5 (cont’d)(cont’d)

Disregard of timelinessDisregard of timeliness Unlimited additional informationUnlimited additional information Disregard of risk/reward relationshipsDisregard of risk/reward relationships

So, Trull’s study showed that managerial So, Trull’s study showed that managerial decision-makers need to improve in the decision-makers need to improve in the areas of timing, determining the value of areas of timing, determining the value of additional information and evaluating additional information and evaluating risk-reward relationships.risk-reward relationships.

Areas detracting from decision Areas detracting from decision success:success:

Decision-Making Function No. 6Decision-Making Function No. 6

Follow-up and control is essential to Follow-up and control is essential to ensure that an implemented decision ensure that an implemented decision meets its objective. (Proper sequence of meets its objective. (Proper sequence of activities in follow-up & control is activities in follow-up & control is establishing standards, measuring establishing standards, measuring performance, & taking corrective action.)performance, & taking corrective action.)

Performance is measured by observing Performance is measured by observing the implemented decision in relation to its the implemented decision in relation to its standard derived from the objective.standard derived from the objective.

Follow-Up and ControlFollow-Up and Control