© Farhan Mir 2007 IMS Management Thoughts & Practices MBA & BBA Lecture 6 (Decision Making the Essence of Managerial Job) By: Farhan Mir

© Farhan Mir 2007 IMS Learning Outcomes Describe the steps in the decision- making process Identify the assumptions of the rational decision-making model Explain the limits to rationality Define certainty, risk, and uncertainty as they relate to decision making Describe the actions of the bounded- rational decision maker

© Farhan Mir 2007 IMS Learning Outcomes (…) Identify the two types of decision problems and the two types of decisions that are used to solve them Define heuristics and explain how they affect the decision-making process Identify four decision-making styles

© Farhan Mir 2007 IMS How are decisions made in organizations?  Decision making. The process of choosing a course of action for dealing with a problem or opportunity. Many Methods can be adopted by various managers for making decisions, one of these is called the “Systematic Decision Making” (Also known as the “Rational Model of Decision Making”)

© Farhan Mir 2007 IMS How are decisions made in organizations?  Steps in systematic decision making. Recognize and define the problem or opportunity. Identify and analyze alternative courses of action, and estimate their effects on the problem or opportunity. Choose a preferred course of action. Implement the preferred course of action. Evaluate the results and follow up as necessary.

© Farhan Mir 2007 IMS Six Steps in Decision Making Figure 7.4

© Farhan Mir 2007 IMS Identify Problem The Decision-Making Process Select Alternative Implement Alternative Evaluate Results 1 Develop Alternatives Analyze Alternatives Develop Decision Criteria Allocate Weights to Criteria

© Farhan Mir 2007 IMS Step 1: Identify a Problem The difference between what is and what it ought to be

© Farhan Mir 2007 IMS Step 2: Decision Criteria  Factors that are relevant in making the decision Price Interior comfort Durability Repair record Performance Handling

© Farhan Mir 2007 IMS Determining the relative priority of each of the criteria Step 3: Allocating Weights

© Farhan Mir 2007 IMS Problem: To purchase a new car CriterionWeight Price10 Interior comfort8 Durability5 Repair record5 Performance3 Handling1

© Farhan Mir 2007 IMS Step 4: Alternatives Generate a list of possible vehicle manufacturers

© Farhan Mir 2007 IMS Assessing the value of each alternative by making a value judgment of the feature Step 5: Analyzing Alternatives

© Farhan Mir 2007 IMS Concluding Steps in Making a Decision Step 6: Select the “best” Step 7: Implement decision Step 8: Evaluate decision

© Farhan Mir 2007 IMS Assumptions Of Rationality Rational Decision Making Problem is clear and unambiguous Single, well- defined goal is to be achieved All alternatives and consequences are known Preferences are clear Preferences are constant and stable No time or cost constraints exist Final choice will maximize payoff FOM 4.12

© Farhan Mir 2007 IMS How are decisions made in organizations?  The systematic decision-making process may not be followed where substantial change occurs and many new technologies prevail.  Novel decision techniques may yield superior performance in certain situations.  Ethical consequences of decision making must be considered.

© Farhan Mir 2007 IMS What are the useful decision making models?  Decision making realities. Managers face complex choice processes. Decision making information may not be available. Bounded rationality and cognitive limitations affect the way people define problems, identify alternatives, and choose preferred solutions.

© Farhan Mir 2007 IMS What Makes Decision Making so Difficult? Complexity Uncertainty Organizational & Environment Pressure Individual Decision Making Limitations Experience, Beliefs & Perceptions of the Decision Maker Results!!!! Satisfying (sounds like….guess!!!!) Focusing on highly visible choices So managers make decisions in Bounded Rationality Key bounding constraints are time, uncertainty and other organizational and cultural influences

© Farhan Mir 2007 IMS How do intuition, judgment, and creativity affect decision making?  Intuition. The ability to know or recognize quickly and readily the possibilities of a given situation. A key element of decision making under risk and uncertainty.

© Farhan Mir 2007 IMS How do intuition, judgment, and creativity affect decision making?  Judgmental heuristics. Simplifying strategies or “rules of thumb” used to make decisions. Makes it easier to to deal with uncertainty and limited information. Can lead to systematic errors that affect the quality and/or ethics of decisions.

© Farhan Mir 2007 IMS How do intuition, judgment, and creativity affect decision making?  Types of heuristics. Availability heuristic — bases a decision on recent events relating to the situation at hand. Representativeness heuristic — bases a decision on similarities between the situation at hand and stereotypes of similar occurrences

© Farhan Mir 2007 IMS How do intuition, judgment, and creativity affect decision making?  Creativity factors. Creativity in decision making involves the development of unique and novel responses to problems and opportunities. Creativity is especially important in a dynamic environment full of nonroutine problems.

© Farhan Mir 2007 IMS Types of Decisions

© Farhan Mir 2007 IMS Problems Well-Structured vs. ill-Structured Straightforward Familiar Easily-defined New or unusual Ambiguous information Incomplete information

© Farhan Mir 2007 IMS Structured and Unstructured Problems

© Farhan Mir 2007 IMS Decisions are classified as: Unstructured: Non-routine, decision maker provides judgment, evaluation, and insights into problem definition, no agreed-upon procedure for decision making Structured: Repetitive, routine, handled using a definite procedure Managers and Decision Making

© Farhan Mir 2007 IMS Programmed and Non- programmed Decisions Programmed Decision Routine, virtually automatic decision making that follows established rules or guidelines. Managers have made the same decision many times before. There are rules or guidelines to follow based on experience with past decisions. Example: Disciplinary action to be taken concerning a tardy employee.

© Farhan Mir 2007 IMS Procedure Rule Policy Programmed Decision

© Farhan Mir 2007 IMS Programmed and Non- programmed Decisions Non-Programmed Decisions Non-routine decision making that occurs in response to unusual, unpredictable opportunities and threats. The are no rules to follow since the decision is new. Decisions are made based on information, and a manager’s intuition, and judgment. Example: Deciding to invest in additional production equipment to meet forecasted demand.

© Farhan Mir 2007 IMS Types of Decision and Management Levels

© Farhan Mir 2007 IMS Programmed Decisions Non-programmed Decisions Relationship of Problems, Decisions, and Level Type of Problem Level Ill-Structured Well-Structured Top Lower

© Farhan Mir 2007 IMS How can the decision-making process be managed?  Reasons for decision making failure. Managers too often copy others’ choices and try to sell them to subordinates. Managers tend to emphasize problems and solutions rather than successful implementation. Managers use participation too infrequently.

© Farhan Mir 2007 IMS Analytical BehavioralDirective Conceptual Decision-Making Styles RationalIntuitive Way of Thinking Low High Tolerance for Ambiguity Source: S. P. Robbins, Supervision Today (Upper Saddle River, NJ: Prentice Hall, 1995), page 111.

© Farhan Mir 2007 IMS Decision-Making and National Culture Differs from one country to another Need to recognize what is acceptable Managers can expect high payoff if they can accommodate the diversity