DECISION MAKING

DEFINITION OF TERMS: DECISION MAKING The process of identifying and selecting a course of action to solve a specific problem or take advantage of an opportunity. PROBLEM Situation that occurs when as actual affairs differs from a desired state of affairs OPPORTUNITY Situation that occurs when circumstances offer an organization the chance to exceed stated goals and objectives. DIALECTICAL INQUIRY METHOD A method of analysis in which a decision maker determines and negates his or her assumption, and then creates countersolutions based on the negative assumptions, also called the devils advocate method. PROGRAMMED DECISIONS Solutions to routine problems determined by rule, procedure or habit. NANPROGRAMMED DECISIONS Specifics solution created through an unstructured process to deal with non routine problems. CERTAINTY Decision making condition in which managers, have accumulate, measurable and reliable information about the outcome of various alternatives under consideration. RISK Decision-making condition in which managers know the probability a given alternative will lead to a desired goal or outcome.
Page 1

of 41 pages

PROBABILITY A statistical measure of the chance a certain event or outcome will occur. UNCERTAINTY Decision-making condition in which managers face unpredictable external conditions or lack the information needed to establish the probability of certain events. RATIONAL MODEL OF DECISION MAKING A four-step process that helps managers weigh alternatives and choose the alternative with the best chance of success. BRAINSTORMING Decision making and problem solving technique in which individuals or group members try to improve creativity by spontaneously proposing alternatives without concern for reality or tradition. BOUNDED RATIONALITY The concept that managers make the most logical decisions they can within the constraints of limited information and ability. SATISFICE Decision-making technique in which managers accept the first satisfactory decision they uncover. HEURISTIC PRINCIPLES A method of decision making that proceeds along empirical lines, using rules of thumb, to find solutions or answers. GAME THEORY The study of people making interdependent choices. CHAOS THEORY The study of dynamic patterns in large social systems.
Page 2

of 41 pages

Nearly everyone in a top-management position recognizes the intense and continuing opportunity, need, and pressure to make decisions. The shear volume of important yet diverse matters that require deciding can be so overwhelming that some men are driven beyond reasonable limits of endurance. Others find themselves spending all their time and attention deciding on relatively less important matters of the moment, while completely neglecting more important long-range considerations. Still others find that for lack of time to obtain and consider needed and relevant information, important matters are left undecided, with consequent deterioration of morale and loss of operating efficiency. Frequently, to avoid the dire consequences of indecision, important decisions are made with inadequate consideration of the information that is available, with the consequent risk that many of them will be bad decisions. Moreover, lack of a decision often results in merely continuing past practices, thus possibly missing opportunities for progress and an improved competitive position. Deciding can be a crucial bottleneck, especially in the work of the managers at middle and higher levels in the organization structure of a large corporation. Whatever ways can be found, therefore, to enable managers to devote the needed time and attention to the decisions that are most significant to both the short- and long-range future of the business or organization, to seeking and obtaining needed information, and to the development and consideration of a range of worthwhile alternatives are of vital concern. Many experienced and thoughtful presidents, general managers, and other highlevel managers have come to realize that the quality of decision making would be vastly improved if most managers-particularly higher-level managers themselves-would make far fewer decisions, reserving more time and a better atmosphere for unhurried contemplation, and consequently for more deeply decisive treatment of matters rightly and legitimately left to their judgment. The key to better deciding is thus to decentralize as much responsibility as is feasible so as to have to make fewer decisions, but to concentrate on, and bring greater competence and better information to, the more important ones that thus remain to be made. WHAT IS A DECISION? Decision is define as a choice among alternatives. From this definition decision also means the following: a. When managers make decisions they are choosing - they are deciding what to do on the basis of some conscious and deliberate logic or judgment. Even an Page 3 of 41 pages

intuitive decision that they cannot explain is usually is usually based on some judgment they have made in the past. b. Managers have alternatives available when they are making a decision. It does not take a wise manager to reach a decision when there are no other possible choices. It does require wisdom and experience to evaluate several alternatives and select the best one. Managers have a purpose in mind when they make a decision. There would be no reason for carefully making a choice among alternatives unless the decision had to bring them closer to some goal.

c.

WHAT IS DECIDING? Deciding involves bringing to a resolution, making a specific determination to achieve a result, and then at least defining some of the limitations on how to achieve that result. Deciding thus is related to the future. It involves making a choice and selecting from among alternative possibilities. Deciding, therefore, implies freedom-freedom to choose from among alternatives without externally imposed coercion, and freedom to conceive alternatives from which to choose. Freedom to decide is not unlimited, however. Decisions are made within boundaries set up by many constraints, including the following: (a) Prevailing and unalterable features of the total social, political, economic, and technological environment. The individuals interpretation of the legal, moral, ethical, and religious limits to possible courses of action. The totality of the culture that has been inherited and learned by the individual, at least to the extent that he cannot perceive that many possible courses of action are unavailable to him as a result of his subconscious interpretation of custom.

(b)

(c)

Both decision making and freedom involve more than choice alone. Making choices presupposes alternatives, from among which a choice can be made. The visualization of possible alternatives is as much a part of this overall process of deciding as is the actual choosing. A competitor who had the creative imagination to consider more, different, and better alternatives, has left behind a manager, competent at choosing from among some alternatives. Effective deciding is also dependent on: Page 4 of 41 pages

(a) (b)

The ability, accuracy, organization, and use of relevant information. The predictive value of the principles used to estimate possible impacts and consequences. The degree of commitment involved..

(c)

DECISION MAKING - DEFINED Decision making is defined as selection of action from among alternatives; it is the core of planning. A plan cannot be said to exist unless a decision - a commitment of resources, direction or reputation - has been made. Until that point, there are only planning studies and analyses. Managers sometimes see decision making as their central job because they must constantly choose what is to be done, who is to do it and when, where, and occasionally even how it will be done. Decision making is however, only a step in planning, even when it is done quickly and with little thought or when it influences action for only a few minutes. It is also part of everyones daily living. A course of action can seldom be judged alone, because virtually every decision must be geared to other plans. The stereotype of the finger-snapping, button-pushing managerial mogul fades as the requirements of systematic research and analysis preceding a decision come into focus. A managers life is filled with a constant series of decisions - what to do about an employee who is always late, what subject will have top priority at the department meeting the next morning, how to dispose of unserviceable or beyond economic repair and obsolete equipment. Small problem or large, it is the manager who decides what actions need to be taken - or at least arranges for others to decide. Decision making is thus a key part of managers activities. It plays particularly important role, however, when the manager is engaged in planning. Planning involves the most significant and far-reaching decisions a manager can make. When managers plan, they decide such matters as what goals or opportunities their organization will pursue, what resources they will use, and who will perform each required task. If their plans go off track, they decide what they are going to do about them. The entire planning process involves then constantly in a series of decision-making situations. How good their decisions are will play a large role in determining how effective their plans will be. Through the art of decision-making, managers constantly shape and reshape organizations. They decide in what direction they want their organizations to go, and make the plans and decisions to get them there.

Page 5

of 41 pages

I. TIME AND RELATIONSHIPS DECISION MAKING

Time and human relationships are crucial elements in the process of making decisions. Decision making connects the organizations present circumstances to actions that will take the organization into the future. Decision making also draws on the past; past experiences positive and negative play a big part in determining which choices managers see as feasible or desirable. Objectives for the future and thus based, in part, on past experiences. A manager does not make decisions in isolation. While he or she is making decisions, other decisions are being made by people both within the same organization and outside, at other businesses, government offices, and social organizations. When managers project possible consequences of their own decisions, they must be conscious that other peoples decisions may conflict or interact with their own. Decision making thus is a process that managers conduct in relationship with other decision makers.

II. PROBLEM AND OPPORTUNITY FINDING

Decision making deals with problems. A problem arises when an actual state of affairs differs from a desired state of affairs. In many cases, a problem may be an opportunity in disguise. The problem of customer complaints about slow delivery of orders could, for example, also be seen as an opportunity to redesign production processes and customer service. Because managers face many problems and opportunities, it is necessary to look at the factors that help effective managers recognize both problems and opportunities. Then the circumstances that lead managers to act will also be considered. THE PROBLEM-FINDING PROCESS Finding the Problem to Work On Managers do not only wait for problems to come to them. They try to anticipate problems, deciding what to do to prevent them from occurring or what they will do should problems arise. In addition, they actively seek opportunities, deciding first which opportunities to pursue and then what to do to make them a reality. Since there are a great number of problems and opportunities their organization might face, a critically important skill for managers is the ability to select the right problem or opportunity to work on. As Guth and Tagiuri have noted, the types of problems and opportunities managers choose to work on will be influenced by their values and backgrounds. If managers are motivated primarily by economic values, they will want to make decisions on practical matters, such as those involving marketing, production, or profits. If they have a more theoretical orientation, they might be concerned with the long-term problems and
Page 6

of 41 pages

opportunities of their organization. If their orientation is political, they might be more concerned with competing with other organizations, or with their own personal advancement. Clarifying their own values will help them decide what problems and opportunities they would most like to pursue. Remaining sensitive to the values of others will also make it easier for managers to reach decisions that others will accept. The backgrounds and expertise of managers will also influence what they see as problems and opportunities. A study of executives by De Witt C. Dearborn and Herbert A. Simon found that managers from different departments would define the same problem in different terms. In this study, a group of executives were presented with a complex business case and asked to describe what they saw as the most important problem facing the company. According to Dearborn and Simon, each executive tended to be sensitive to only those parts of the case that were related to his or her department. For example, sales and accounting managers tended to see sales as the companys primary problem, and production managers tended to see as most critical an organizational problem apparently involving the companys factory managers. Evidently their individual backgrounds and specialties make managers particularly sensitive to certain types of problems and opportunities. This can sometimes be an advantage, as they may be aware of possibilities that others will ignore. But it has a major disadvantage as well, because it may cause them to overlook many other problems and opportunities for their organizations. As managers, we will have to be particularly careful to avoid seeing all problems as being related to our specialties. Methods of Problem Finding William Pounds has describe for methods managers used to find problems to work on: when there is a deviation from past experience, when there is a deviation from the plan, when other people present problems to the manager, and when competitors outperform the managers organization. 1. Deviation from Past Experience This happens when a previous pattern of performance in the organization is broken. This years expenses have suddenly increased; defective products are suddenly coming; employees absences have increase; basic service to the clientele is not efficient and effective. Events such as these represent a departure from the past and signal the manager that a problem is developed. The manager will then proceed to figure out what the cause of the problem is and what should be done about it.

Page 7

of 41 pages

2. Deviation from a Set Plan If this happens, the managers projections or expectations are not being met. Profit levels are lower than anticipated; a department is exceeding its budget; a project is off schedule. Such events tell the manager that something must be done to get the plan back on course. 3. Other People Present Problems to the Manage Other people often bring problems to the manager. Customers complain about late deliveries; higher-level managers set new performance standards for the managers department; employees resign. Many decisions that managers make daily involve problems presented by others. 4. The Performance of Competitors The performance of the competitors can also create decision-making situations for the managers. Other companies, for example, might develop new processes or improvements in operating procedure. The manager might have to reevaluate processes or procedures in his or her own organization. Competitors within the same organization might also pose problems for the manager. If a company has many plants, for example, top management might compare the performance of each plant. The manager of a plant that is performing below average will have to decide what can be done to bring the plants performance up to par. Pounds suggests that management science technique could also be used to help managers locate problems in addition to solving them. However, such techniques are difficult for many present managers to learn. For this reason, the four methods described above are likely to be the ones most frequently used by managers for the foreseeable future. Problem finding is not always straightforward. Sara Kiesler and Lee Sproull have identified some of the most common errors managers make in sensing problems. They describe three main categories of pitfalls that managers often encounter: false association of events, false expectation of events, and false self-perceptions and social image. For example, during the 1960s and early 1970s, managers at mainframe computer manufacturers had false expectations: They believed that a significant demand for personal computers did not and probably never would exist. Their expectations are at odds with the reality that developed. Here is a case where these managers past experiences were not a reliable guide to future events. The past can play an important part in decision making, but that does not mean that what happened in the past will automatically continue to happen in the future.

Page 8

of 41 pages

OPPORTUNITY FINDING It is not always clear whether a situation faced by a manager presents a problem or an opportunity. The two are often intertwined. For example, missed opportunities create problems for organizations, and opportunities are often found while exploring problems. David B. Gleicher, a management consultant, provides a useful distinction between the two terms. He defines a problem as something that endangers the organizations ability to reach its objectives, and an opportunity as something that offers the chance to exceed objectives. An enormous amount of research has been devoted to problem solving, whereas very little research concerns problem finding and even less concerns opportunity finding. Yet, as Peter Drucker makes clear, opportunities - rather than problems - are the key to organizational and managerial success. Drucker observes that solving a problem merely restores normality, whereas problems must come from the exploitation of opportunities. Drucker links exploitation of opportunities to effectiveness - finding the right things to do, and . . .. (concentrating) resources and efforts on them. When decision making is linked to opportunity finding, it clearly involves choosing actions that can help make a future for the organization.

III. DECIDING TO DECIDE

The idea that managers are problem solvers may conjure up the image of managers sitting behind desks, calmly deciding what to do about every problem that arises. In fact, managers differ widely with regard to what they consider to be a problem and how they elect to deal with it. THRESHOLDS FOR PROBLEM RECOGNITION How big the gap between that actual and desired state of affairs? How does this gap affect our chances of reaching or exceeding goals for the organization? If this gap is a problem, how hard will it to be fix? How quickly do we need to move to fix the problem or to take advantage of an opportunity? These are the sorts of questions managers ask when defining a situation as either a problem or an opportunity. Some of the answers can be found in standards for performance that managers set for their organizations. To answer such questions effectively, managers must use their judgment based on their knowledge of the environment for their organizations. That is why information gathering, through either formal or informal systems, is such an important role of an effective manager.

Page 9

of 41 pages

William Guth and Renato Tagiuri noted that the information gathered is filtered through managers values and backgrounds. Their values and backgrounds also influence the types of problems and opportunities they choose to work on. If managers are motivated primarily by economic values, they usually want to make decisions on practical matters, such as those involving marketing, production or profits. If they are particularly concerned about the natural environment, they might aggressively seek out problems and opportunities with ecological implications. If their orientation is political, they may be more concerned with competing with other organizations or with their own personal advancement. With the current importance of quality and continuous improvement, benchmarking is one type of information gathering that is assuming increasing importance for organizations. In todays climate of strategic alliances and partnerships, industries are more willing to open up and share information. The backgrounds and expertise of managers will also influence what they see as problems and opportunities. A study of executives by De Witt C. Dearborn and Herbert A. Simon found that managers from different departments will define the same problem in different terms. In their study, individual executives tended to be sensitive to those parts of an issue that related to their own departments, defining opportunities and problems from their own particular perspectives. For example, marketing managers want inventory to be high and view low inventory as a problem solving situation. Finance managers, on the other hand, view a high-inventory situation as a problem, preferring low inventory in most cases. Setting Priorities. No manager can possibly handle every problem that arises in the daily course of business. It is important, therefore, that managers learn to established priorities. These priorities can help a manager determine how quickly, how intensively, and how collaboratively he or she must deal with the problem. When doing this, some questions can be useful guides: a. Is the problem easy to deal with? A manager who gives the same level of attention to every problem will get very little work done. Most problems, however, require only a small amount of managers attention. Even if the decision turns out to be wrong, correcting it will be relatively speedy and inexpensive. To avoid getting bogged down in trivial details, effective and efficient managers reserve formal decision-making techniques for problems that truly require them.

Page 10

of 41 pages

b. Might the problem resolve itself? Managers find that an amazing number of time-wasting problems can be eliminated if they are simply ignore. Therefore, managers should rank problems in order of importance. Those at the bottom of the list usually take care of themselves or can be dealt with by others. If one of these problems worsens, it moves to the higher-priority level on the list. c. Is this my decision to make? When confronted with an important problem requiring a decision, a manager must determine if he or she is actually responsible for making the decision. Here a general rule can be of help: The closer the origin of the problem the decision is made, the better. Usually, those who are closest to a problem are in the best position to decide what to do about it. This rule has two corollaries: (a) pass as few decisions as possible to those higher up in the organization, (b) pass as many as possible to those lower down in the organization. When managers refer an issue to someone higher up for a decision, they have to be sure they are not simply passing the bulk instead of being properly cautious. How can managers decide when they should pass the problem on? If our basic rule and its corollaries do not supply the answer, managers can supplement them with a few other questions. Does the issue affect the departments? Will it have a major impact on someone elses area of responsibility? Does it require information available only from a higher level? Does it involve a serious breach of our departmental budget? Is this problem outside my area of responsibility or authority? A yes answer to any of these questions indicates the issue should probably be referred to someone higher ranking in the organization. Note that these questions once again suggest that a manager makes decisions in the context of relationships with others. Sitting alone at a desk is not a useful, or realistic, image of decision making.

IV. THE NATURE OF MANAGERIAL DECISION MAKING

Different problems require different types of decision making. Routine or minor matters, such as a return of merchandise, can be handled by a set producer, a type of programmed decision. More important decisions, such as the location of a new retail outlet, require a nonprogrammed decision, a specific solution created through a less structured process of decision making and problem solving. Because all decisions involve future events, managers must also learn to analyze the certainty, risk and uncertainty associated with alternative courses of action.
Page 11

of 41 pages

TYPES OF DECISION As managers, we will make different types of decisions under different circumstances. When deciding, we will have to consider our choice carefully and extensively. The amount of information we will have available to us when making decision will vary. When choosing a supplier, we will usually do so on the basis of price and past performance. We will be reasonably confident that the supplier chosen will meet our expectations. When deciding to enter a new market, we will be much less certain about the success of our decision. For this reason, we will have to be particularly careful making decisions when we have little past experience or information to guide us. The nature and circumstances of a decision can vary enormously. Managers have to vary their approach to decision making, depending on the particular situation involved. PROGRAMMED DECISIONS Programmed decisions are made with written or unwritten policies, procedures, or rules that simplify decision making in recurring situations by limiting or excluding alternatives. Every organization has written or unwritten policies that simplify decision making in a particular situation by limiting or excluding alternatives. For example, managers rarely have to worry about the salary range for newly hired employee because organizations generally have a salary scale for all positions. Similarly, we will not usually have to think about the routine problems we face during the day. Our habits, or those of our papers, will help us decide quickly what to do about them. Routine procedures exist for dealing with routine problems.

A programmed decision, is applied to structured or routine problems, whether complex or uncomplicated. If a problem recurs, and if its component elements can be defined, predicted, and analyzed, then it may be a candidate for programmed decision making. An example of a programmed decision is the reordering of standard inventory items. This kind of decision is used for routine and repetitive work; it relies primarily on previously established criteria. It is, in effect, decision making by precedent. To some extent, of course, programmed decisions limit our freedom of action - it is not really us but our organization that really decides what to do. However, programmed decisions are actually intended to be liberating. The policies, rules or procedures by which we make programmed decisions save time, allowing us to devote attention to other, more important activities. For example, deciding how to handle customer complaints on an individual basis would be time-consuming and costly, but a policy stating exchanges will be permitted on all purchases within 14 days simplifies matters considerably. The customer service representative is then freed to deal with thornier issues.
Page 12

of 41 pages

Programmed decisions are obviously the easiest for managers to make. It is quicker and simpler to refer to a policy rather than to think some problem through on ones own. We should note, however, that effective managers could lean on policy as a time saver but remain alert for any exceptional cases. NONPROGRAMMED DECISIONS Nonprogrammed decisions deal with unusual or exceptional problems. If a problem has not come up often enough to be covered by a policy or is so important that it deserves special treatment, it must be handled as a nonprogrammed decision. Problems such as how to allocate an organizations resources, what to do about a failing product line, how community relations should be improved - in fact, most of the significant problems the manager will face - usually require nonprogrammed decisions. More and more organizations have made their commitment to social responsibility a matter of policy involving both programmed and nonprogrammed decisions. For example, San Miguel Corporation, the beer company in the Philippines has the policy of giving educational scholarships to deserving poor students of the country. Thus, how much to spend on charity is a programmed decision. Exactly how the money is spent, however, is a nonprogrammed decision. A committee made up of all ranks of employees decides where the money will be allocated. As one moves up the organizational hierarchy, the ability to make nonprogrammed decisions becomes more important. For this reason, most management-development programs try to improve managers abilities to make nonprogrammed decisions, usually by teaching them to analyze problems systematically and to make logical decisions. In fact, strategic decisions, in general, are nonprogrammed decisions, since they require subjective judgments. The ability to make good nonprogrammed decisions helps to distinguish effective managers from ineffective managers. Managers have to rely heavily on their problemsolving ability, creativity, and judgment when they make nonprogrammed decisions. Established procedures are of little use to them, since the important problems confronting them will usually require new or original solutions. For this reason, most management training programs try to improve a managers ability to make nonprogrammed decisions usually by trying to teach managers to make their decisions in a logical manner. Most decisions are neither completely programmed or completely nonprogrammed; they are a combination of both. Upper-level managers make most nonprogrammed decisions; this is because upper-level managers have to deal with unstructured problems. Problems at lower levels of the organization are often routine and well structured, requiring less decision discretion by managers and nonmanagers.

Page 13

of 41 pages

DECISIONS UNDER CERTAINTY, RISK AND UNCERTAINTY Virtually all decisions are made in an environment of at least some uncertainty. However, the degree will vary from relative certainty to great uncertainty. There are certain risks in making decisions. In a situation involving certainty, people are reasonably sure about what will happen when they make a decision. The information is available and is considered to be reliable, and the cause and effect relationships are known. In a risk situation, factual information may exist, but it may be incomplete. To improve decision making, one may estimate the objective probabilities of an outcome by using, for example, mathematical models. On the other hand, subjective probability, based on judgment and experience, may be used. Fortunately, there are a number of tools available that make managers make more effective decisions. In a situation of uncertainty; on the other hand, people have only a meager data base, they do not know whether or not the data are reliable, and they are very unsure about whether or not the situation may change. Moreover, they cannot evaluate the interactions of the different variables. For example, a corporation that decides to expand its operation in a strange country may know little about the countrys culture, laws, economic environment, and politics. The political situation may be so volatile that even the experts cannot predict a possible change in government. It is stated earlier that managers have a purpose in mind when they make a decision; that is, they decide to do something because they wish to bring about some desired goal. This means that decisions (like plans) are concerned with the future: managers decide to hire a new employee because they believe the employee is best suited to do the work that will be available; they decide to reinvest a portion of their companys profits in new equipment, because they believe that this is the best way to help their company grow. Unfortunately, the future is not often safe and predictable. Managers make their decisions on the basis of information they have in the present. This information is usually (but not always) inadequate for them to be able to predict with complete confidence what the future will be like. For example, managers hire a new employee on the basis of the employees past experience, as recorded n his or her resume, or by references. But managers cannot be completely certain how well the employee will actually work out in their organization.

Page 14

of 41 pages

In general, managers can make decisions under three possible conditions: Certainty, Risk, and Uncertainty. a. CERTAINTY Under conditions of certainty, we know our objective and have accurate, measurable, reliable information about the outcome of each alternative we are considering. Managers have enough information to know exactly what the outcome of their decisions will be. For example, in an enterprise, you have to decide what to do with your organizations profits. You know that if you decide to invest the profits in government bonds, they will earn a predictable rate of return. You make your decision based on which expected outcome you prefer. b. RISK Risk occurs whenever we cannot predict an alternatives outcome with certainty, but we do have enough information to predict the probability it will lead to the desired state. Conditions of certainty are the exception rather than the rule in todays complex, rapidly changing organizations. Managers must usually try to predict in a less certain way the consequences of their decisions. Sometime, however, managers can know the probabilities of the various possible outcomes associated with a decision, even though they cannot be completely certain which particular outcome will actually occur. (Technically, we would call this knowing the probability distribution associated with future events.) In such cases, conditions of risk is said to exist. Under conditions of risk, managers can determine exactly (within a small margin or error) the probable result of each of the alternatives available to them. They can then decide what to do on the basis of which probable outcome is most desirable. All intelligent decision makers dealing with uncertainty like to know the size and nature of the risk they are taking in choosing a course of action. One of the deficiencies in using the traditional approaches of operations research for problem solving is that many of the data used in model are merely estimates and others are based upon probabilities. The ordinary practice is to have staff specialists come up with best estimates. However, new techniques have been developed that give a more precise view of risk. Virtually every decision is based on the interaction of important variables, many of which have an element of uncertainty but, perhaps, a fairly high degree of probability. Thus, the wisdom of launching a new product might depend on a number of critical variables: the cost of introducing the product, the cost of producing it, the capital investment needed, the price that can be set, the size of the potential market, and its share of the total market.

Page 15

of 41 pages

Attitude toward risk In order to give probabilities practical meaning in decision making. It is necessary to understand the individual decision makers aversion to, or acceptance of, risk. This varies not only with the individual but also with the size of the risk, the level of the manager in an organization, and the source of the funds involved. Higher-level managers are accustomed to taking larger risks than are lower-level managers, and their decision areas tend to involve larger elements of risk. A company president may have to take great risks in launching a new product, selecting an advertising program, or choosing a vice-president, while a first-level supervisors risk taking may be limited to hiring or promoting semiskilled workers or approving vacation schedules for subordinates. c. UNCERTAINTY Under conditions of uncertainty, little is known about the alternatives or their outcomes. Uncertainty arises from two possible sources. First, managers may face external conditions that are partially or entirely beyond their control, such as the weather - an important factor for a three-day festival held in outdoor tents. Second and equally important, the manager may not have access to key information. When we do not know the exact probabilities attached to the alternatives available to us, a condition of uncertainty exists. Most managerial decisions involve varying degrees of uncertainty. There are usually too many variables or too many unknown facts that can affect a decision for managers to be able to predict precisely its probable outcome. In such cases, managers frequently use their experience, judgment, and intuition to assign approximate probabilities to each of the alternatives available to them. By so doing, they may be able to narrow the range of choices they have and simplify the decision. For example, let us assume that we are managers or director in our own offices and want to purchase new equipment (e.g., computers and accessories). There are two suppliers competing for the sale. One supplier dealt with us before: his equipment is good and his service is reliable. We cannot be certain that this suppliers past performance will continue into the future, but we can be fairly confident that he will meet our expectations. Our office has never used the other supplier. He insists his somewhat more expensive equipment will outlast the competition. We have no way of gauging the validity of these claims or the integrity of the supplier. But having had some experience with similar equipment, we can calculate very loosely the probable life of the equipment and its productivity. We might, for example, see a 50 percent probability that the equipment will do better than the equipment from the old supplier, a 30 percent probability that it will be pretty much the same, and a 20 percent probability that his equipment will do a better job.
Page 16

of 41 pages

It will not always be possible to assign even approximate probabilities to the available alternatives. However, managers will almost always have at least some vague sense of which future events are more likely than others. If managers increase the price of a product, they may not know what the effect on total revenues will be, but it is almost always safe to assume they will lose some customers. Even in conditions of almost total uncertainty, an educated guess, an intuitive insight, or a hunch will help managers make the right decision. In making decisions, all managers must weigh alternatives, many of which involve future events that are difficult to predict, such as a competitors reaction to a new price list, interest rates in three years, or the reliability of a new supplier. Decision-making situations are frequently categorized on a continuum ranging from certainty (highly predictable), though risk, to uncertainty (highly unpredictable) DECISIONS TREES AND DECISION MAKING One the best ways to analyze a decision is to use so-called decision trees. Decision trees depict, in the form of a tree, the decision points, chance, events and probabilities involved in various courses that might be undertaken. A common problem occurs in business when a new product is introduced. Managers must decide whether to install expensive permanent equipment to ensure production at the lowest possible cost or to undertake cheaper, temporary tooling that will involve a higher manufacturing cost but lower capital investments and will result in lower losses if the product does not sell as well as estimated. The decision tree approach makes it possible to see at least the major alternatives and the fact that subsequent decisions may depend upon events in the future. By incorporating the probabilities of various events into the tree, managers can also comprehend the true probability of a decisions leading to the desired results. The best estimate may really turn out to be quite risky. One thing is certain: Decision trees and similar decision techniques replace broad judgments with focus on the important elements in a decision, bring out into the open premises that are often hidden, and disclose the reasoning process by which decisions are made under uncertainty. Managers sometimes face complex problems in which the possible outcomes of each of the alternative solutions available to them will be hard to foresee. In such cases, they would like to have some way to reduce the element of doubt and uncertainty in the decisions they reach, since each decision or alternative will usually involve some commitment of precious resources. Decision trees were developed to help managers make a series of decisions involving uncertain events. A decision tree is a device that displays graphically the various actions that a manager can take and how these actions will relate to the various future events that can occur.

Page 17

of 41 pages

V. THE RATIONAL MODEL OF DECISION MAKING

The Limits of Rational Decision Making It is said that managers must often make decisions when the information they have is incomplete. One reason for this is that managers cannot always foresee the consequences of their decisions. Of course, if they knew in advance the outcome of a decision, they could easily tell if it was a correct one. But, in reality, they must make decisions without full knowledge of what future will bring. Another reason managers have incomplete information when making decisions is that they rarely consider or are even aware of all the alternatives available to them. Most decisions involve too many complex variables for one person to be able to examine them all fully. As a simple example, let us assume we have to decide what name to give a new product. We have available all the words in the dictionary (plus many new words we can invent), but for us to go through the entire dictionary to select a product name would obviously be impractical. What we will probably do is select several possible names, test each in the marketplace, and then choose the one that has the greatest customer approval. Many other - and perhaps better - possible names will never be considered. The fact that managers often makes decisions without knowing all the alternatives available to them and all their possible consequences means that there is a limit to how logical or rational their decisions can be. In organizational life, managers act within what Herbert Simon has called bounded rationality: that is, they make the most logical decisions they can, limited by their inadequate information and by their ability to utilize that information. Rather than making the best or ideal decision, managers more realistically settle for a decision that will adequately serve their purposes. In Simons terms, they satisfice, or reach a satisfactory decision, rather than maximize, or reach the optimal decision. As managers, we will rarely have the mental, time, or information we need to make perfect decisions. This does not mean, of course that managers give up trying to make the best possible decisions. It simply means they recognize that at some point it will become too expensive, time-consuming, or difficult to try to acquire additional information or attempt to analyze it. Managers who weigh their options and calculate optimal levels of risk are using the rational model of decision making. This model is especially useful in making nonprogrammed decisions. It helps managers go beyond a priori reasoning, the assumption that there is an obvious solution already existing and simply waiting to be found.

Page 18

of 41 pages

No approach to decision making can guarantee that a manager will always make the right decision. But managers who use a rational, intelligent, and systematic approach are more likely than other managers to come up with high-quality solutions. This belief has guided managers for many, many years. The following are the four stages of rational decision making: STAGE 1 : INVESTIGATE THE SITUATION A thorough investigation has three aspects: problem definitions, diagnosis, and identification of objectives. a. DEFINE THE PROBLEM Confusion in problem definition arises in part because the events or issues that attract the managers attention may be symptoms of another more fundamental and pervasive difficulty. A manager may be concerned about an upsurge in employee resignations, but this is not a problem unless it interferes with the achievement of organizational objectives. If the individuals resigning are relatively low performers, and more qualified replacements can be readily found, the resignations may represent an opportunity than a problem. Curing the turnover problem, then, may be the last thing the manager should do. Defining the problem in terms of the organizational objectives that are being blocked helps to avoid confusing symptoms with problems. b. DIAGNOSE THE CAUSES All this underscores the importance of diagnosing the causes of the problem. Managers can ask a number of diagnostic questions. It involves, in some way, human relationships: What changes inside and or outside the organization may have contributed to the problem? What people are most involved with the problem situation? Do they have insights or perspectives that may clarify the problem? Do their actions contribute to the problem? Causes, unlike symptoms, are seldom apparent, and managers sometimes have to rely on intuition to identify them. Different individuals, whose views of the situation are inevitably shaped by their own experiences and responsibilities, may perceive very different causes for the problem. It is up to the manager to put all the pieces together and come up with as clear a picture as possible. c. IDENTIFY THE DECISION OBJECTIVES Once the problem has been defined and the cause(s) diagnosed, the next step is to decide what would constitute an effective solution. Most problems consist of several elements, and manager is unlikely to find one solution that will work for all of them. Page 19 of 41 pages

If a solution enables managers to achieve organizational objectives, it is a successful one. However, more ambitious objectives may be appropriate. The immediate problem may be an indicator of future difficulties a manager can prevent by taking early action. Or the problem may offer the opportunity to improve, rather than merely restore, organizational performance. What should be noted about all three aspects of problem investigation is the importance of a managers education about the world and his or her imagination! STAGE 2 : DEVELOP ALTERNATIVES This stage may be reasonably simple for most programmed decisions but not so simple for complex nonprogrammed decisions, especially if there are time constraints. Too often, the temptation to accept the first feasible alternative prevents managers from finding the best solutions for their problems. To prevent this, no major decision should be made until several alternatives have been developed. To increase their creativity at this task, some managers turn to individual or group brainstorming, in which participants spontaneously propose alternatives even if they seem unrealistic or fantastic. STAGE 3 : EVALUATE ALTERNATIVES AND SELECT THE BEST ONE AVAILABLE Once managers have developed a set of alternatives, they must evaluate each one on the basis of three key questions: 1. IS THIS ALTERNATIVE FEASIBLE? Does the organization have the money and other resources needed to carry out this alternative? Replacing all obsolete equipment might be an ideal solution, but it is not feasible if the company is already near bankruptcy. Does the alternative meet all the organizations legal and ethical obligations? Closing a plant to save costs, for example, involves a complicated web of legal and ethical obligations to displaced workers. Is the alternative a reasonable one given the organizations strategy and internal politics? Any solution is only as effective as the support it wins within the organization. Therefore, in evaluating an alternative, managers must try to anticipate what would happen if employees fail to support and implement it wholeheartedly. 2. IS THE ALTERNATIVE A SATISFACTORY SOLUTION? To answer, managers need to consider two additional questions. First, does the alternative meet the decision objectives? Second, does the alternatives have an acceptable chance of succeeding? (This assumes that chance can be calculated: in conditions of uncertainty, of course, this may be difficult or impossible. Managers Page 20 of 41 pages

should realize, too, that the definition of acceptable may differ from organization and from person to person, depending on the organizations culture and the risktolerance of those involved in the decision. 3. WHAT ARE THE POSSIBLE CONSEQUENCES FOR THE REST OF THE ORGANIZATION? Because an organization is a system of interrelated parts and exists among other systems, managers must try to anticipate how a change in one area will affect other areas - both now and in the future. Cutting back research and development, for example, might save money in the short term but could cripple the organization in the long run. If the decision might affect people in other departments, they too should be consulted. Competitors may also be affected by the decision; their reactions will have to be taken into account. Can competitors respond to a new marketing strategy or a new product? Alternatives with negative consequences should be eliminated, of course, and alternatives with positive consequences will usually be favored over those with merely neutral consequences. STAGE 4 : IMPLEMENT AND MONITOR THE DECISION Once the best available alternative has been selected, managers are ready to make plans to cope with the requirements and problems that may be encountered in putting it into effect. Implementing a decision involves more than giving appropriate orders. Resources must be acquired and allocated as necessary. Managers set up budgets and schedules for the actions they have decided upon, allowing them to measure progress in specific terms. Next, they assign responsibility for the specific tasks involved. They also set up a procedure for progress reports and prepare to make corrections if new problems should arise. Budgets, schedules, and progress reports are all essential to performing the management functions of control. Potential risks and uncertainties that have been identified during the earlier evaluation-of-alternatives stages must also be kept in mind. There is a natural human tendency to forget possible risks and uncertainties once a decision is made. Managers can counteract this failing by consciously taking extra time to reexamine their decisions at this point and to develop detailed plans for dealing with these risks and uncertainties. After managers have taken whatever steps are possible to deal with potential adverse consequences, actual implementation can begin. Ultimately, a decision (or a solution) is no better than the actions taken to make it a reality. A frequent error of managers is to assume that once they make a decision, action on it will automatically follow. Even if a decision is a good one, if others are unwilling or unable to carry it out, then the decision will not be effective. Actions taken to implement a decision must be monitored. Are things working according to plan? What is happening in the internal and external environments as a Page 21 of 41 pages

result of the decision? Are people performing according to expectations? What is the competition doing in response? Decision making is a continual process for managers and a continual challenge of dealing with other human beings over time.

THE NATURE OF MANAGERIAL DECISION MAKING Defining the Decision-Making Process The idea that managers are decision makers may conjure up an image of managers sitting behind their desks, calmly deciding what to do about every problem that arises. In fact, only mediocre managers try to solve every problem thrust upon them by subordinates, superiors, and peers. Effective managers conserve their time and energy for those problems that really require their decision-making ability. Minor problems are either handled by snap judgment or feel or shunted of to a subordinate. Thus, when managers are presented with a problem, the first thing they should do is ask themselves of one or more of the following questions: 1. Is the problem easy to deal with? Some problems are difficult and expensive to deal with, others are not. Such questions are whether or not to acquire a subsidiary obviously require extensive consideration. Most problems, however, rarely require a small amount of the managers attention. For example, if a bond paper supplier finds that some of the bond papers are not substance twenty, he or she might quickly decide to order a better grade of paper, which is within the standard. Such quick decisions are justified because they resolve insignificant problems. Even if the decision turns out to be wrong, it will be relatively easy and inexpensive to correct. Effective managers reserve the formal decision-making process for those problems that require it. Otherwise, they get bogged down in trivialities. 2. Might the problem resolve itself? When presented with a problem, too few managers ever ask themselves. What would happen if I did nothing about this? An amazing number of time wastes can eliminated if they are left untouched. The classic illustration of this principle concerns Luke, who was reputed to let incoming mail pile on his desk for three weeks. When he analyzed his mail at the end of that time, he would find that most matters had been resolved in the interim.

Page 22

of 41 pages

Effective managers adopt a more active policy, based on the same idea: They placed first things first. When they have more problems than they can handle at a given time - and they almost always have - they rank them in order of importance and deal with them one at a time. Those problems at the end of the list that they never get to usually take care of themselves or are dealt with by others. If one of those problems worsens, it simply achieves a higher priority and is then handled by the manager. 3. Is this my decision to make? Let us assume we are confronted with an important problem requiring a decision. We still must determine if we are responsible for making the decision. Here a general rule can be of one help: The closer to the origin of the problem the decision is made, the better. This rule has two corollaries: (a) Pass a few decisions as possible to those higher up, and (b) pass as many as possible to those lower down. It is usually those who are closest to the problem who is in the best position to decide what to do about it. When managers refer an issue to someone higher up for a decision, they have to be sure they are not simply passing the buck instead of being properly cautious. (Referring a matter to a subordinate is not passing the buck, because managers still retain ultimate responsibility.) On the one hand, managers are usually closer to the problem than their superiors; on the other hand, they must pass on all decisions that can better or more appropriately made by someone else. How can they decide when they should pass a problem on to a superior? If our basic rule and its corollaries do not supply the answer, managers can supplement them with a few basic questions: - Does the issue affect other departments? - Will it have a major impact on the superiors area of responsibility? - Does it require information available only at a higher level? - Does it involve a serious breach of our departmental budget? - Will I get into trouble if I do not consult my superior about this? If managers answer yes to questions like these, it is likely that the issue should be referred to as superior. If a manager is faced with a problem or issue that is difficult to deal with, if it is an important problem that will not resolve itself, and if the manager must decide what to do about it, then he or she is in a decision-making situation. It will require the careful, logical, decision-making process.

Page 23

of 41 pages

THE DECISION-MAKING PROCESS Many managers who must make a decision rely on informal decision-making methods to give them guidance. They may, for example, rely on tradition and make the same decisions that were made for similar problems or opportunities in the past. They may also appeal to authority: that is, they will make a decision based on what an expert or a higher-level manager suggests should be done. Finally, they may use what philosophers call a priori reasoning: they will assume that the most reasonable or obvious solutions to a problem is the correct one. Such methods may be useful in some cases. In others, however, they may lead the manager to make the wrong decisions. For example, one company was plagued by a serious quality problem: too many of the parts it was making were returned because of defects. The obvious management decision was to tighten up quality control procedures. However, this did not solve the problem. Further investigation revealed that the real culprit was excess worker fatigue caused by faulty ventilation system. In this case, the correct solution to the problem was not the most obvious one. The following approach to decision making does not guarantee that a manager will always make the right decision. It is, however, a rational, logical, and systematic approach to decision making. As such, managers who use it are more likely than other managers to come up with more and better solutions to the problems they face. Rational Decision Making The basic process of rational decision making involves diagnosing and defining the problem, gathering and analyzing the facts relevant to the problem, developing and evaluating alternatives solutions to the problem, selecting the most satisfactory alternative, and converting this alternative into action. There are several stages in this process. Stage 1: Diagnose and Define the Problem. The origin of the problem is not always obvious. For example, a newly appointed president of a large chain of retail stores had to reverse his firms long-term sales decline. He knew it could be due for poor selling procedures, sharp competition or the saturation of old markets. But when he dug deeper, he found that the cause of the problem was the tight-fisted control of the firm by the previous president. Every expenditure over P50,000 required presidential approval, and no store manager could stock shelves with items of his or her choosing. The result was that no store could move quickly enough to meet changes in customer demand.

Page 24

of 41 pages

If managers are to remedy a situation, they must first find out what the real problem is. One way to do this is to ask, What past action or lack of action might have caused this situation to arise? In this way, managers can focus upon the events in customer demand. As part of the process of defining the problem, managers should also begin to determine which parts of the problem they must solve and which parts they should or would like to solve. Most problems involve several elements, and it is unlikely a manager will find a solution that will work for all of them. Managers therefore need to distinguish between their musts and their shoulds so that they will have a basis for proposing and evaluating alternative solutions. For example, let us assume that we have a staffing problem. We must hire someone who must do a good job in a difficult position at a certain salary. We should hire someone who has had experience and who will fit in well with others in the organization. We can eliminate from consideration all candidates who do not meet our musts criteria; and we will evaluate all the other candidates by how well they meet our shoulds Stage 2 : Gather and Analyze the Relevant Facts. Once managers have determined and defined their problem, they must begin to decide what they are going to do about it. To accomplish this, they must first determine what facts they will need to make a good decision and then try to obtain as much of this information as possible. They can ask themselves such question as: Who in our organization is most directly affected by the problem? Can they tell us more of about its practical effects? Could they suggest how the problem might be solved? How are our customers or clients affected by our problem and what do they think should be done about it? Has anyone ever experienced a similar type of problem? Are there certain solutions that people in our organization will oppose? What resources will be available to help us solve the problem? Managers will rarely get all the answers they needed to such questions. At some point, however, they should have enough information to be able to formulate possible solutions. Stage 3: Develop Alternatives No major decisions should be made until several alternative solutions have been developed. Otherwise managers may be tempted to adopt the first solution they find, and the first solution is not always the correct one. Developing alternatives allows managers to resist an understandable inclination to solve their problem quickly and makes it more likely that they will reach effective decisions. Possible alternatives will often suggests themselves after managers have analyzed problem and gathered information about it. In addition, managers may use their imagination to come up with other possible solutions to their problem. For example, if we could be faced with a high employee turnover rate, we could obviously (1) raise salaries, (2) increase benefits, and (3) reduce the workload.
Page 25

of 41 pages

Any one of these solutions (or all of them) might apply. But if we investigate further, we might find that other alternatives available to us include (4) do nothing - the expense of raising salaries might wipe out the gain of a stabilized work force, (5) redesign the work area to make it more pleasant, (6) dismiss or retrain those supervisors who are disliked by employees. Stage 4: Evaluate the Alternatives Once managers have developed a set of alternatives, they must evaluate them to see how effective each would be. Effectiveness can be measured by two criteria: how realistic the alternative is in terms of the goals and resources of the organization, and how well the alternative will help solve the problem. Evaluating alternatives in light of the goals and resources of the organization is an important part of the decision-making process. The alternatives may seem logical, but if they cannot be implemented in the organization, they will be of little use. For example, if our sales are high but our profits are declining, we may want to reduce the overhead costs. But if we find that costs have already been cut sharply, or that further cuts would reduce the quality of our product, this alternative would be less feasible. Similarly, alternatives that would strain our organizations resources would also be less desirable than others. The alternatives must also be evaluated in terms of how well they would solve the musts and shoulds of the problem. In some cases managers may be able to experiment with possible solutions by trying one or more of the alternatives in different parts of their organization to see which is most effective. Usually they will just use their knowledge, judgment, and experience to decide which alternatives are most attractive. When they complete their evaluation, they rank the alternatives in hierarchy, that is, from most desirable to least desirable. Their top choice will be the alternative that would best solve all the elements of their problem at the lowest cost to their organization. Stage 5: Select the Best Alternative This might seem to be an obvious step; after all, the managers have already determined what their best alternative is. However, this best alternative will be based on the amount of information available to the managers and their imperfect judgment. More likely than not, it will also represent a compromise between all the various factors that have been considered. Thus, it is possible that their best alternative will still not adequately solve their problems, in which case managers would have to begin the decision-making process again. For example, let us assume our problem is the low productivity of one of our departments. We might believe that productivity would be most conveniently increased if we dismissed the department supervisor. But our investigation discovers that the supervisor is extremely popular and that low departmental morale would result if the Page 26 of 41 pages

supervisor were dismissed. Our best alternative might then be retraining the supervisor or offering financial incentives to the employees to increase productivity. This would be longer-term, more expensive alternative for our organization, but it might be the best one considering all the relevant factors involved. Stage 6: Analyze the Possible Consequences of the Decision Once managers have selected their best alternative, they must try to anticipate what problems will occur when implementing their decision. For example, there is often great resistance in organizations to change. Managers must determine how willing their subordinates will be to carry out their decision and what might happen if their decision is not implemented wholeheartedly. There may be practical problems involved in implementing the decision, such as the need to obtain additional funding. Other departments in the organization that might be affected by the decision have to be consulted. Competitors may be affected by the decision, and their reactions will have to be taken into account. Sometimes detailed analysis of such considerations may cause managers to reject their first choice and substitute another alternative that might be more workable. Usually, however, analyzing the possible consequences of their decision will simply allow managers to take the necessary steps to deal with them. To some extent, of course, managers will have already considered the possible outcomes of their decision while evaluating all the alternatives available to them. Here, however, they are examining one decision in much greater detail. By so doing, it will be easier for them to implement their decision effectively. In addition, they will prevent smoothing over the weaknesses of their decision. There is a human tendency to ignore possible problems and alternatives once a decision is made. By taking the extra time to reexamine their decision at this point, managers can counteract this tendency. Stage 7: Implement the Decision After managers have taken whatever steps possible to keep adverse consequences from arising, they can implement their decision. Ultimately, no decision is better that the action taken to make it a reality. If the decision is a good one, but subordinates are not willing or able to carry it out, then it is unlikely the decision will be very effective. A frequent error of managers is to assume that once they make a decision, action on it will automatically follow. Effective implementation of a decision involves much the same steps as implementation of plans. First, managers set up a budget or a schedule for the action they have decided upon, so they can measure its progress in specific terms. There must also be clearly assigned responsibility for carrying out the action. Next, managers set up a procedure for regular, periodic reports on the progress of the action, and they must be prepared to take appropriate measures should some problem arise. Finally, managers set up an early warning system to let them know as soon as possible of some problem with
Page 27

of 41 pages

the action. In all likelihood, the quicker managers can go to work on a problem, the less drastic their corrective measures will have to be. EVALUATING THE IMPORTANCE OF A DECISION Since managers not only must make correct decisions but also must make them as needed and as economically as possible, and since they must do this often, guidelines to the relative importance of decisions are useful. Decisions of lesser importance do not require thorough analysis and research, and they may even be safely delegated without endangering an individual managers basic responsibility. The importance of a decision also depends upon the extent of responsibility, so what may be of practically no importance to a corporation president may be of great importance to a selected head. If a decision commits the enterprise to heavy expenditure of funds or to an important personnel program, such as a program for management appraisal and training, or if the commitment can be fulfilled only over a long period, such as by the construction of a new chemical plant, it should be subjected to suitable attention at an upper level of management. Some plans can be easily changed, some have built into them the possibility of a future change of direction, and others involve action difficult to reverse. Clearly, decisions that involve inflexible courses of action must be more carefully evaluated than decisions that can be easily changed. If the goals, inputs, restrictions, and variables can be accurately measured, as with definite inputs in a production machine shop, the importance of the decision, other things remaining the same, tends to be less than if the inputs are difficult to quantify, as in pricing a new consumer product or deciding on its style. In situations where the impact of a decision on people is great, its importance is high. A doctors mistake in a hospital can be fatal to the patient. No one making a decision that affects other people can afford to overlook the needs of those people who accept the decision. IMPROVING THE EFFECTIVENESS OF DECISIONS Because decision making is such an important part of their job, managers are often evaluated for their ability in this area. However, such an evaluation is not as easy as it may seem. An apparently excellent decision - that is, one based on information that has been gathered, analyzed and evaluated effectively - might turn out poorly because of unforeseeable event. Conversely, an unlikely and unpredictable event might turn a bad or illogical decision into a fortunate choice. Even if a decision works as well as predicted, a manager can never be completely sure another one would not have been equally effective or even better.
Page 28

of 41 pages

For these reasons, many managers agree that decisions should be evaluated on the basis of the situation at the time they were made, rather than second-guess after the results are in. Norman Maier has isolated two criteria by which a decisions potential effectiveness can be appraised. The first is the objective quality of the decision, and the second is the acceptance of the decision by those who must execute it. The objective quality of the decision is determined by how well the manager carries out the formal decision-making process. In other words, if the manager fully diagnoses the problem, scrupulously gathers and evaluate facts, and develops alternatives, the decision that result should have high objective quality. Maier suggests that where the problem is largely a technical one, a quality decision may be enough to solve it. If people are involved in the problem, however, then a quality decision may be sufficient, according to Maier. The acceptance of the people involved may also be required to make if effective. A difficulty arises for managers if quality considerations conflict with acceptance considerations. The decision that would objectively work best might not be acceptable to the people affected. On the other hand, the decision most favored by subordinates might not be the best one to make. Traditionally, this dilemma has been resolved by leaving the final responsibility for making the decision in the hands of the manager. The manager then has to compel or persuade subordinates to obey the decision. The problem with this approach is that it is not always appropriate. Sometimes subordinates may resist a decision because they are aware of the alternatives and approaches that were not considered in the original analysis. In such cases, a decision that a manager make will fail because he or she will be unable to convince subordinates to carry it out willingly. Maier suggests that managers should evaluate each type of problem to see how important it will be for the solution to have quality and/or acceptance. Managers can then tailor their decision to the particular problem and thus increase its effectiveness. To Maier, decision-making situation can be classified in three ways: 1. Those where high quality is important but high acceptance is not

The manager who properly carries out the formal decision-making process can effectively solve such problems. They may include such technical matters as purchasing, engineering, and finance - problems where the application of specialized knowledge is the major consideration. Acceptance by subordinates cannot be completely ignored, but the managers major emphasis should be on reaching an objectively good decision. 2. Those where high acceptance is important but high quality is not

Group decision making can best solve such problems, because if subordinates do not accept the solution it is likely to fail. Making up schedules for a department and Page 29 of 41 pages

dividing office space fairly are examples of problems best solved though group discussion. In such situations, the managers role is to present the problem to subordinates and to act discussion leader. 3. Those where both high quality and high acceptance are important

A possible change in production methods that requires the retraining of employees would be an example of this type of problem. It could be solved either by the traditional method of the manager acting alone or through group decision making. For managers skilled in handling group decisions, the latter would be preferable. There is strong evidence that motivation is increased when individuals are involved in the decisionmaking process. Lester Coch and John French provided a dramatic demonstration of the effectiveness of participation in decision making in a classic study they conducted four decades ago. A manufacturing company encountered resistance from production workers when it tried to institute changes in production methods. The researchers decided to divide the workers in three groups: one group did not participate in planning production changes; another group participated through worker representatives; and the third group participated totally in planning the changes. The first group resisted the changes that were instituted and showed a sharp decrease in productivity. The second group showed some improvement in productivity. The last group, however, was the most comfortable with the changes and showed dramatic gains in efficiency and production. Matching the Decision-Making Approach to the Problem In an extension of Maiers work, Victor Vroom and Philip Yetton have developed a method to help managers decide when and to what extent they should involve subordinates in solving particular problem. First, Vroom and Yetton isolated five styles of decision making. 1. 2. Managers make the decision themselves with information on hand. Managers make the decision themselves but first get more information from their subordinates. Managers discuss the problem with appropriate subordinates individually, but make the decision themselves. Managers discuss the problem with their subordinates as a group, but still make the decision themselves with or without letting the groups ideas influence them. Managers arrange for group discussion, but this time have subordinates add and evaluate alternatives with them and arrive at the decision by consensus. Managers accept and implement the decision even if it is not theirs. Page 30 of 41 pages

3.

4.

5.

Types of Management Decision Styles 1. You solve the problem or make the decision yourself, using information available to you at that time. You obtain the necessary information your subordinate(s), then decide on the solution to the problem yourself. You may or may not tell your subordinates what the problem is in getting information with them. The role played by your subordinates in making the decision is clearly one of providing the necessary information to you, rather than generating or evaluating alternative solutions. You share the problem with relevant subordinates individually, getting their ideas and suggestions without bringing them together as a group. Then you make the decision that may or may not reflect your subordinates influence.

2.

3.

4. You share the problem with your subordinates as a group, collectively obtaining their ideas and suggestions. Then you make the decision that may or may not reflect your subordinates influence. 5. You share a problem with your subordinates as a group. Together you generate and evaluate alternatives and attempt to reach agreement (consensus) on a solution. Your role is much like that of chairman. You do not try to influence the group to adopt your solution, and you are willing to accept and implement any solution that has the support of the entire group.

Source. A New Look at Managerial Decision Making by Victor H. Vroom, Organizational Dynamics

The authors then suggests several questions that managers can ask themselves to help determine which decision-making style to use for the particular problem they are facing. (a) Do we have enough information or skill to solve the problem on our own? If not, then style 1, where we make the decision ourselves, would be inappropriate. (b) Do we need to make a high-quality decision, which our subordinates are likely to disagree with? If so, style 5, where we seek the consensus of the group, would not be appropriate. In this case, giving up our authority to make the final decision would probably mean that the decision would not have the objective quality the problem requires.

Page 31

of 41 pages

(c) Is the problem structured? That is, do we know what information we need and where to get it? If not, then styles 4 and 5, which allow for the greatest group interaction, would be preferable. The other styles would either keep us form getting the information we need or supply us with information in inefficient manner. (d) Is the acceptance of the group critical for the success of the decision? Then styles 1 and 2, which involve subordinates the least, would not be appropriate. (e) If acceptance of the decision is important, are our subordinates likely to disagree among themselves about which is the best solution? Then styles 4 and 5, which involve group decision making, are preferable. Only within the group can differences between subordinates be discussed openly and ultimately resolved. The other styles might leave some subordinates dissatisfied with the decision. (f) Is acceptance of the decision the most critical factor? Then style 5 would be the most logical choice, since it maximizes the one relevant consideration: acceptance of the decision by the group. The approach still leaves managers with a great deal of flexibility, since there are many problems where more than one management style will apply. For example, let us assume we are suddenly faced with the problem of high employee turnover. We investigate and find that employee morale is low because a recent change in company policy regarding overtime pay. Obviously, group ideas and acceptance will be important in devising a solution for this problem. We can either meet with members of the group individually (style 3) or meet with the entire group at once (style 5). Vroom suggests that where several management styles are possible, managers select the one that would cost them least in terms of time or resources. In this case, meeting with the entire group at once would clearly be the least time-consuming way to approach our problem. THE IMPORTANCE AND LIMITATIONS OF RATIONAL DECISION MAKING Decision making was considered a part of planning. Given an awareness of an opportunity and a goal, the decision process is really the core of planning. Thus, the process leading to making a decision might be thought of as (1) premising, (2) identifying alternatives, (3) evaluating alternatives in terms of goals sought, and (4) choosing an alternative, that is, making a decision. Rationality in Decision Making It is frequently said that effective decision making must be rational. But what is rationality? When is a person thinking or deciding rationally? People acting or deciding rationally are attempting to reach some goal that cannot be attained without action. They must have a clear understanding of alternative courses Page 32 of 41 pages

by which a goal can be reached under existing circumstances or limitations. They also must have the information and the ability to analyze and evaluate alternatives in the light of the goal sought. Finally, they must have a desire to come to the best solution by selecting the alternative that most effectively satisfies goal achievement. People seldom achieve complete rationality, particularly in managing. In the first place, since no one can make decisions affecting the past, decisions must operate for the future, and the future almost invariably involves uncertainties. In the second place, it is difficult to recognize all the alternatives that might be followed to reach a goal; this is particularly true when decision making involves opportunities to do something that have not been done before. Moreover, in most instances, not all alternatives can be analyzed, even with the newest available analytical techniques and computers. Limited or Bounded Rationality A manager must settle for limited rationality, or bounded rationality. In other words, limitations or information, time, and certainty limit rationality even a manger tries earnestly to be completely rational. Since managers cannot be completely rational in practice, they sometimes allow their dislike of risk - the desire to play it safe - to interfere with their desire to reach the best solution under the circumstances. Herbert Simon has called this satisficing, that is, picking a course of action that is satisfactory or good enough under the circumstances. Although many managerial decisions are made with a desire to get by as safely as possible, most managers do attempt to make the best decisions they can within the limits of rationality and in the light of the size and nature or risks involved. Cost Effectiveness Analysis An improvement on, or variation of, traditional marginal analysis is cost effectiveness, or cost benefit, analysis. Cost effectiveness analysis seeks the best ratio or benefits and costs; this means, for example, finding the least costly way of reaching an objective or getting the greatest value for given expenditures. In its simplest terms, cost effectiveness analysis is a technique for choosing the best plan when the objectives are less specific than sales, costs, or profits. For example, a defense objective may be deterring or repelling enemy attack, a social objective may be reducing air pollution or retraining the unemployed, and a business objective may be participating in social objectives through a program of training unemployables. Nonquantifiable objectives can sometimes be given some fairly specific measures of effectiveness. In a program with the general objective of improving employee morale, for example, a company can measure effectiveness by such verifiable factors as employee turnover, absenteeism, or volume of grievances and can supplement these measurements with such subjective input as the judgment of qualified experts.
Page 33

of 41 pages

The major features or cost effectiveness analysis are that it focuses on the results of a program, helps weigh the potential benefits of each alternative against its potential cost, and involves a comparison or the alternatives in terms of the overall advantages. Although the decision on cost effectiveness involves the same steps as any planning decision, its major distinguishing features are the following: 1. Objectives are normally oriented to output or end result and are usually not precise.

2. Alternatives ordinarily represent total systems, programs, or strategies for meeting objectives. 3. The measures of effectiveness must be relevant to objectives and set in terms as precise as possible, although some may not be subject to quantification. 4. Cost estimates may include nonmonetary as well as monetary costs. 5. Decision standards, while definite but not usually as specific as cost or profit, may include achieving a given objective at least cost, achieving it with resource available, or providing for a trade-off cost for effectiveness, particularly in the light of the claims of other programs. When selecting form among alternatives, managers can use the three basic approaches: (1) Experience, (2) Experimentation, and (3) Research and analysis. Experience Reliance on past experience probably plays a larger part than it deserves in decision making. Experienced managers usually believed, often without realizing it, that the things they have successfully accomplished and the mistakes they have made furnish almost infallible guides to the future. This attitude is likely to be more pronounced the more experience a manager has had and the higher in an organization he or she has risen. To some extent, experience is the best teacher. The very fact that managers have reached their position appears to justify their past decisions. Moreover, the process of thinking problems through, making decisions, and seeing programs succeed or fail does make for a degree of good judgment. Many people, however, do not profit by their errors, and there are managers who seem never to gain the seasoned judgment required by modern enterprise. Relying on past experience as a guide for future action can be dangerous, however. In the first place, most people do not recognize the underlying reasons for their mistakes or failures. In the second place, the lessons of experience may be entirely inapplicable to new problems. Good decisions must be evaluated against future events, while experience belongs to the past. Page 34 of 41 pages

On the other hand, if a person carefully analyzes experience, rather than blindly following it, and if he or she distills from experience the fundamental reasons for success or failure, then experience can be useful as a basis for decision analysis. A successful program, a well-managed company, a profitable product promotion, or any other decision that turns out well may furnish useful data for such distillation. Just as scientists do not hesitate to build upon the research of others and would be foolish indeed merely to duplicate it, managers can learn much from others. Experimentation An obvious way to decide from among alternatives is to try one of them and see what happens. Experimentation is often used in scientific inquiry. People often argue that it should be employed more often in managing that the only way a manager can make sure some plans are right - especially in view of the intangible factors - is to try the various alternatives and to see which is best. The experimental technique is likely to be the most expensive of all techniques, especially if a program requires heavy expenditures in capital and personnel and if the firm cannot afford to vigorously attempt several alternatives. Besides, after an alternative has been tried, there may still be doubt about what it proved, since the future may not duplicate the present. This technique, therefore, should be used only after considering other alternatives. On the other hand, there are many decisions that cannot be made until the best course of action can be ascertained by experiment. Even reflections on experience or the most careful research may not assure managers of correct decisions. Experimentation is used in other ways. A firm may test a new product in a certain market before expanding its sale nationwide. Organizational techniques are often tried in a branch office or plant before being applied over an entire company. A candidate for a management job may be tested in the job during the incumbents vacation. Research and Analysis One of the most effective techniques for selecting from alternatives when major decisions are involved is research and analysis. This approach means solving a problem by first comprehending it. It thus involves a search for relationships among the more critical of the variables, constraints, and premises that bear upon the goal sought. It is the pencil-and-paper (or, better, the computer-and-printout) approach to decision making. Solving a planning problem requires breaking it into its component parts and studying the various quantitative and qualitative factors. Study and analysis are likely to be far cheaper than experimentation. Hours of time and reams of paper used for analyses usually cost much less than trying the various alternatives. Page 35 of 41 pages

A major step in the research-and-analysis approach is to develop a model simulating the problem. Thus, architects often make models of buildings in the form of extensive blueprints or three-dimensional renditions. But the most useful simulation is likely to be a representation of the variables in a problem situation by mathematical terms and relationships. Conceptualizing a problem is a major step toward its solution. The physical sciences have long relied on mathematical models to do this, and it is encouraging to see this method being applied to managerial decision making. One of the most comprehensive research-and-analysis approaches to decision making is operations research since it is an important tool for production and operations management.

VI. THE RATIONAL MODEL IN PERSPECTIVE

The rational model conjures up an image of the decision maker as a super calculating machine. But we know that managers must make decisions within tight time constraints and with less information than they would like to have. Three concepts have emerged over the years to help managers put their decision making in perspective: bounded rationality and satisficing, heuristics, and biases. These concepts are neither good nor bad per se. Rather, they help us keep in mind that we human beings do have limits as we use our minds to confront the world. BOUNDED RATIONALITY AND SATISFICING In trying to describe the factors that affect decision making, Herbert Simon, among others, has proposed a theory of bounded rationality. This theory points out that decision makers must cope with inadequate information about the nature of the problem and its possible solutions, a lack of time or money to compile more complete information, an inability to compile large amounts of information, and the limits of their own intelligence. Instead of searching for the perfect or ideal decisions, managers frequently settle for one that will adequately serve their purposes. In Simons terms, they satisfice, or accept the first satisfactory decision they uncover, rather than maximize, or search until they find the best possible decision. What the effective decision maker learns to do is satisfice with a clear sense of goals for the organization in mind. HEURISTICS Research by Amos Tversky and Daniel Kahneman has extended Simons ideas on bounded rationality. They have demonstrated that people rely on heuristic principles, or rules of thumb, to simplify decision making. Loan officers, for example, may screen mortgage applicants by assuming people can afford to spend no more than 35 percent of
Page 36

of 41 pages

their income on housing. Three heuristics show up repeatedly in human decision making. These are general cognitive guides people use intuitively. a. AVAILABILITY People sometimes judge an events likelihood by testing it against their memories. In principle, it is easier to recall frequently occurring events. Thus events that are more readily available in memory are assumed to be more likely to occur in the future. This assumption is based on the experience of a life-time, and it seems reasonable enough. However, human memory is also affected by how recently an event occurred and how vivid the experience was. Thus, a risk manager recently caught in a flood is likely to overestimate the importance and frequency of flooding the next time he or she procures insurance. b. REPRESENTATIVENESS People also tend to assess the likelihood of an occurrence by trying to match it with a preexisting category. For example, employers may rely on stereotype of sexual, racial, or ethnic groups to predict an individual job candidates performance. In a similar way, product managers may predict the performance of a new product by relating it to other products with proven track records. In fact, however, each individual product is a new commodity, nor just the representative of a group, and should be judge accordingly. c. ANCHORING AND ADJUSTMENT People do not pull decisions out of thin air. Usually, they start with some initial value, or anchor, and then make adjustments to that value in order to arrive at a final decision. Salary decisions, for example, are routinely calculated by assuming last years salary to be an initial value to which an adjustment must be made. Unfortunately, depending heavily on the single factor of initial value tends to obscure relevant criteria. In addition, different initial values lead to different decisions. DECIDING WHO DECIDES The rational model provides no guidance in who should make a decision, and often Who will decide? is the first decision a manager must make. This decision can be complicated. If a number of different people will be affected by the decision - as is often the case - the decision process must be guided by the prospects of their accepting the decision. Traditionally, the final responsibility for making decisions belongs to managers. But this approach is not always appropriate. Even a well-thought-out managerial decision may fail if the manager is unable to convince others to carry it out willingly. And Page 37 of 41 pages

sometimes others have excellent factors that were not considered in the original analysis. On the other hand, employees may implement a decision loyally even though they disagree with it - with poor results because the decision is poor. Thus, more and more often employees are being involved in the decision-making process.

VII. DECIDING ADAPTIVELY

Rational decision making proceeds on the belief that managers can transform a complicated web of facts, assumptions, objectives, and educated guesses into a clear decision that people at the organization can act on. There is a strong faith in all this that the world can be influenced through managers mental capabilities. Decision making then, is an effort to exercise control over the organizations destiny. This has been a distinctive management belief for more than a century. This faith has been challenged in recent years. More and more, an adaptive approach to decision making has emerged as a way to think about what managers can and cannot expect to accomplish. This adaptive approach turns on the assumption that the link between an organizational action (the result of a decision) and the consequences of that action is far messier and far more unpredictable than rational decision makers believe. According to adaptive thinking, the results of a decision action are jointly approach by what your organization does and what other organizations are doing at the same time. Two versions of the adaptive approach to decision making are game theory and chaos theory. 1. GAME THEORY It is the study of people making interdependent choices. A game is a situation involving at least two people in which each person makes choices based, in part, on what he or she expects the other to do. Game theory highlights the explicit role of human relationships and interactions in decisions. Games were first used in planning nuclear armament build-ups after World War II. Currently, game theory is used in such business decisions as competitive pricing. We experience games all the time. For our understanding of decision making, the key point is that in a game the outcome is jointly produced. Hence, a game theory perspective requires that we view decision making as a process of two decision makers adapting to each others presence at the same time. Each can decide rationally but also adaptively.

Page 38

of 41 pages

2. CHAOS THEORY It is the study of dynamic patterns in large social systems. Chaos theory thus is descendant of systems theory. Chaos theorists pay close attention to the turbulence of a system. Under conditions of turbulence, not only is the future completely unpredictable, but present circumstances are likely unstable, too. In this way, turbulence differs from certainty, risk and uncertainty, which are comparatively stable conditions under which managers can at least choose an attainable objective. Ralph Stacey argues that chaos is a pattern of three states: equilibrium, disequilibrium, and bounded instability. The task of decision makers is to keep the organization in the third state because that is where organizations can innovate. Decision making becomes a continual process of adaptation to forces largely beyond a decision makers control. It is likely surfing a huge wave of Diamond Head, a wave that never hits shore! THE SYSTEMS APPROACH AND DECISION MAKING Decisions cannot usually made, of course, in a close-system environment. As already emphasized, many elements of the environment of planning lie outside the enterprise. In addition, every department or section of an enterprise is a subsystem of the entire enterprise; managers of these organizational units must be responsive to the policies and programs of other organizational units and of the total enterprise. Moreover, people within the enterprise are a part of the social system, and their thinking and attitudes must be taken into account whenever a manager makes a decision. Furthermore, even when managers construct a closed-system model, as they may do with operations research decision models, they do so simply to have workable program to solve. But in so doing, they make certain assumptions as to the environmental forces that heavily influence their decision, they enter inputs into their calculations as they are or appear to be at any given time, and they change the construction of their model when forces and developments beyond its boundaries so required. Saying that managers take into account the various elements in the system environment of their problem does not mean, however, that they abdicate their role as decision makers. Someone must select a course of action from among alternatives, taking into account events and forces in the environment of a decision. It is often feasible, or advisable, to democratize the decision process to the extent that for all decisions a vote is taken from subordinates or the many other persons who may have some immediate or remote interest in the decision. At some point a decision has to be made.

Page 39

of 41 pages

DECISION SUPPORT SYSTEMS Decision Support Systems (DSSs) use computers to facilitate the decision-making process of semistructured tasks. These systems are designed not to replace managerial judgment but to support it and to make the decision process more effective. Decision support systems also help managers react quickly to changing needs. It is clear, then, that the design of an effective system requires a thorough knowledge of how managers make decisions. The availability of minicomputers and microcomputers, as well as of communication networks, makes it possible to access and utilize a great deal of information at low cost. Thus DSS gives managers an important tool for decision making under their own control. Although there are similarities between management information systems (MISs) and DSSs, there are also differences. Traditionally, the designers of MIS were technical experts, and managers (who had to make the decisions) had only minor inputs. In contrast, DSS focuses on the decision-making process and on managers who, in cooperation with the technical professionals, design the system suitable for a particular position. Managers having access to data bases in DSS, can manipulate data and explore the effectiveness of alternative courses of action.

Page 40

of 41 pages

SUMMARY
Managers make decisions that must be carried by others. The types of decisions they make, and the conditions under which they make them, will vary. They must therefore tailor their decision-making approach to their particular problems and circumstances. Programmed decisions are those that are suggested by habit of policy. Nonprogrammed decisions are those that are new or original. Most important decisions will be nonprogrammed: they will require careful and logical consideration. The conditions under which managers make decisions will vary with the amount of information they. Under condition of certainty, managers know precisely what the results will be of each of the alternatives available to them. Under conditions of risk, they know within a small margin of error the probable outcome of each alternative. Under conditions of uncertainty, the probabilities are not known precisely. Frequently managers must estimate probable outcomes in order to be able to make a decision. Most management decisions are made under some degree of uncertainty. This is one reason why managers try to reach satisfactory, rather than ideal decisions. Managers do not only wait for problems to arise but also actively look for problems and opportunities. Nor do all problems that managers face require the formal decisionmaking process. One of the most significant responsibilities of managers is deciding which problems and opportunities should receive their full attention. When managers face an important problem or opportunity, and it is their responsibility to decide what to do about it, they can best arrive at a good, rational decision by using the formal decision-making approach. This involves seven stages: (1) Diagnose and define the problem; (2) gather and analyze the relevant facts; (3) develop alternatives; (4) evaluate the alternative; (5) select the best alternative; (6) Analyze the possible consequences of the decision; and (7) implement the decision. In evaluating the alternatives, it is often wise to seek insights and reactions from subordinates, especially if their acceptance of the decision is necessary for the decision to succeed. The most effective decisions are those that have the appropriate level of objective quality as well as the appropriate level of subordinate support. The extent to which managers and subordinates should make the decision together will depend on the particular type of problem involved.

Page 41

of 41 pages