0. The Managerial Decision-Making Process
Topic 2
The Managerial Decision-Making Process

1. Decision-Making
Thinking of decision-making as a process has a long intellectual tradition:
John Dewey in his book How We Think (1910) characterized it as consisting of (1) defining the problem, (2) identifying the alternatives, and (3) choosing the best one.

2. Rowe & Boulgarides, 1994 Formulation of the problem
Search for alternative solutions
Analysis of alternatives
Selection of alternative
Action
Evaluation

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

4. The Managerial Decision-Making Process
Process components are decision-making functions. (I.e. integrated) (components of decision-making are the functions of decision-making.)
Decision-making functions are highly interrelated and interdependent
The process is highly dynamic with 3 principal subprocesses.
1. Taking Corrective Action
2. Renewing The Search
3. Revising Objectives

5. Figure 2.1 The Decision-Making Process
Revise
objectives
Setting
managerial
objectives
Searching
for
alternatives
Comparing &
evaluating
alternatives
Revise or update objectives
Renew
search
Follow-up
and
control
Implementing
decisions
The act
of choice
Take
corrective
action as necessary

6. Decision-Making Function No. 1
Setting Managerial Objectives: Objectives that are relevant, practical, challenging, measurable, flexible, cost effective, ones where accountability can be discerned, etc.
Objectives constitute the foundation for rational decision making. (A decision-maker must first set goals to ensure a fruitful decision-making process)
Objectives are the ends for the means of managerial decision making.
Attainment of the objective is the ultimate measure of decision success.

7. Decision-Making Function No. 1 (cont’d)
Objectives are commitments to action, and their attainment requires decisions that represent purposive investments of various types of resources.
Objectives provide a yardstick for measuring the performance of individual managers and of the total organization.

8. Decision-Making Function No. 2
Searching for Alternatives:
The limitations of time and money (because of this, decision-makers often have to consider several possible alternatives at the same time)
The declining value of additional information
-get the facts but remember you cannot get all the facts
-get only the information you need and use it
-seek simplicity
-strive to avoid biases

9. Decision-Making Function No. 2
Searching for Alternatives: (cont’d)
The rising cost of additional information (beyond some point additional information is all cost and no value.)
Abort the search in the zone of cost effectiveness

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

11. Decision-Making Function No. 3
Comparing and Evaluating Alternatives:
Alternatives result from the search and are evaluated through (1) judgment, (2) bargaining and analysis.
Make a list of all the possible alternatives you have, including the choice of doing nothing. Thus, one alternative is to do nothing. Often a non-decision is harmful to your organization, but sometimes the decision to do nothing is useful or at least better than the alternatives, so it should always be included in the decision-making process (so perhaps no decision is good, perhaps disastrous).

12. Having Only 2 Choices
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 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 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 more alternatives seem very desirable, we become blinded to any drawbacks. The Buriden’s Ass method simply focuses on the drawbacks.
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 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 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 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 have little rings; you might worry about damaging it. And so on.

13. Having Only 2 Choices (cont’d)
Now, what are the drawbacks of the furniture? It will wear out eventually and be gone, while the ring should last a lifetime; you might worry about staining or damaging the furniture; furniture isn’t “romantic” like diamonds; and so on.
Only 2 choices is rare in the decision-making process---Though it often characterizes the inexperienced decision-maker---an either/or philosophy

14. Decision-Making Function No. 3 (cont’d)
There are usually three to five alternatives.
Actually, there are usually multiple alternatives, but the best way to think about alternatives is to think in terms of 3-5 or perhaps a better way to say it is “best of few” because it involves limiting the number of alternatives to three or four or five or six.
Alternatives are evaluated using criteria derived from the objective.

15. Decision-Making Function No. 3 (cont’d)
Does each alternative meet all the criteria needed to accomplish the objective?
What are the pros and cons of each alternative?
How do you as a manager/leader (I.e. decision-maker) feel about each choice?

16. Decision-Making Function No. 3 (cont’d)
Evaluation should also anticipate obstacles or difficulties at the time of implementation.
3 possible states:
(1) Certainty—knowledge of consequences of each alternative
(2) Uncertainty—lack of knowledge of consequences of each alternative
(3) Risk—assumptions about alternatives

17. Decision-Making Function No. 4
The Act of Choice:
The choice is the culmination of the process, not all of it.
The choice confronts the decision maker with discernible constraints.
The best alternative may not be readily apparent to the decision maker. (Remember, research tells us we spend a lot of managerial time (approx 50%) correcting bad decisions.)

18. Decision-Making Function No. 5
Implementing Decisions:
Samuel Trull tells us:
Decision success is a function
of decision quality
and
decision implementation.

19. Decision Quality
Decision Quality: Rating of whether decision is good or bad—A good decision is a logical one based on the available information and reflecting the preferences of the decision-maker.
In judging decision quality, consider the following:
Decision must meet stated objective(s) thoroughly and completely.
Decision must meet stated objectives efficiently, with concern over cost, energy, side effects.
Decision must take into account valuable by-products or indirect advantage.

20. Decision Implementation
Decision Implementation: Those who must implement the decision or who will be affected by it must accept it both intellectually & emotionally.
A decision that may be technologically brilliant but that is sociologically stupid will not work. Only decisions that implemented, and implemented with thoroughness (and preferably enthusiasm) will work the way they are intended to.

21. Decision-Making Function No. 5 (cont’d)
Areas contributing to decision success:
Observance of operating constraints
Influence of the decision maker
Involvement of decision implementers
Absence of conflict of interest

22. Decision-Making Function No. 5 (cont’d)
Areas detracting from decision success:
Disregard of timeliness
Unlimited additional information
Disregard of risk/reward relationships
So, Trull’s study showed that managerial decision-makers need to improve in the areas of timing, determining the value of additional information and evaluating risk-reward relationships.

23. Decision-Making Function No. 6
Follow-Up and Control
Follow-up and control is essential to ensure that an implemented decision meets its objective. (Proper sequence of activities in follow-up & control is establishing standards, measuring performance, & taking corrective action.)
Performance is measured by observing the implemented decision in relation to its standard derived from the objective.