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The Nature of
Decision Making
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 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 Planning function. However, it is also part of Organizing, Leading and Controlling.
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.
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.
Decision-Making Process. . .
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Decision-Making Process. . .
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Managers make decisions about both problems (undesirable situations) and opportunities (desirable situations).
Cutting 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.
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 decision.
Programmed Decisions. .
Many decisions regarding basic operating systems and procedures and standard organizational transactions fall into this category.
McDonalds employees are trained to make the Big Mac according to specific procedures. Starbucks, and many other organizations, 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-Making Conditions
Decision Making Under Certainty Decision Making Under Risk
Decision Making Under Uncertainty
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.
Lower
Moderate
Higher
Obtain complete and perfect information. Eliminate uncertainty. Evaluate everything rationally and logically
and end up with a decision that best serves the interests of the organization.
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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 norms.
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Evaluating alternatives
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 resources available? 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 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.
b)
c)
4) Selecting an alternative
a) Choosing the best alternative is the real test of decision making. 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.
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a) Managers must evaluate the effectiveness of their decisions did the chosen alternative serve its original 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 way.
Behavioral Aspects. . .
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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]
Behavioral Aspects. . .
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Satisficing is the tendency to search for alternatives only until one is found that meets some minimum standard of sufficiency. 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.
Use 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. . .
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The Classical and Administrative Models paint quite a different picture of decision making. However, each may be used to better understand how managers make decisions. The Classical Model attempts to explain how managers can at least attempt to be more rational and logical in their approach to decisions. The Administrative Model can be used by managers to develop a better understanding of their inherent biases and limitations.
Relationships of the employees to the firm Relationships of the firm to other economic agents