Decision Making in Management

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PROFESSOR: Good
decision-making is a vital part

of good management because
decisions determine

how the organization solves
problems, allocates resources,

and accomplishes its goals.

This course describes
decision-making in detail.

We'll look at several
decision-making models

and the steps managers
should take when

making important decisions.

The course also explores
some of the biases

that managers use to
make bad decisions

and examines some
specific techniques

for innovative decision-making
in a fast-changing environment.

A decision is a choice made
from available alternatives.

Decision-making is the
process of identifying

problems and opportunities
and then resolving them.

Management decisions
typically fall

into one of two categories--
programmed and nonprogrammed.

Let's take a look.

Programmed decisions
are made in response

to a situation that has occurred
often enough to enable managers

to develop decision rules that
can be applied in the future.

Programmed decisions
are made in response

to recurring
organizational problems.

The decision to reorder paper
and other office supplies

when inventories drop
to a certain level

is a programmed decision.

Other programmed decisions
concern the types of skills

required to fill certain jobs--

the reorder point for
manufacturing inventory

and selection of freight routes
and other product deliveries.

Once managers formulate
decision rules,

subordinates and others
can make the decision,

thus freeing managers
for other tasks.

Managers in every industry
face nonprogrammed decisions

every day.

Many nonprogrammed decisions are
related to strategic planning

because uncertainty is great,
and decisions are complex.

Decisions to develop a
new product or service,

acquire a company, create a new
division, build a new factory,

enter a new geographical market,
or relocate a headquarters

to another cities are all
nonprogrammed decisions.

One primary difference between
programmed and nonprogrammed

decisions relates to the
degree of uncertainty, risk,

or ambiguity that managers deal
with in making the decision.

In a perfect world, management
would have all the information

necessary for making decisions.

In reality, however, some
things are unknowable.

Thus, some decisions will
fail to solve the problem

or attain the desired outcome.

Managers try to
obtain information

about decision
alternatives that will

reduce decision uncertainty.

Every decision situation
can be organized on a scale

according to the
availability of information

and the possibility of failure.

The four positions on the
scale are certainty, risk,

uncertainty, and ambiguity.

Whereas programmed decisions can
be made in situations involving

certainty, many situations that
managers deal with every day

involve at least some
degree of uncertainty

and require nonprogrammed
decision-making.

Certainty means that all
the information the decision

maker needs is fully available.

Managers have information
on operating conditions,

resource costs, and
constraints, and each course

of action and possible outcome.

Risk means that a decision
has clear-cut goals

and good information
is available,

but future outcomes associated
with each alternative

are subject to some
chance of loss or failure.

However, enough information
is available to estimate

the probability of a successful
outcome versus failure.

Uncertainty means
that managers know

which goals they
wish to achieve,

but information about
alternatives and future events

is incomplete.

Factors that may affect a
decision, such as price, product

costs, volumes, or
future interest rates

are difficult to
analyze and predict.

Managers may have
to make assumptions

from which to
forge the decision,

even though it might be wrong if
the assumptions are incorrect.

Ambiguity is by far the most
difficult decision situation.

Ambiguity means that
the goals to be achieved

or the problem to be
solved are unclear.

Alternatives are
difficult to define,

and information about
outcomes is unavailable.

Ambiguity is what students would
feel if an instructor created

student groups and told each
group to complete a project

but gave the groups no topic,
direction, or guidelines

whatsoever.

In some situations, managers
involved in a decision

create ambiguity
because they see things

differently and disagree
about what they want.

Managers in
different departments

often have different
priorities and goals

for a decision, which can
then lead to conflicts

over decision alternatives.

So, as you can see,
good decision-making

is a vital part of
good management.

But decision-making
is not always easy.

The six steps
typically associated

with effective decision-making
are recognition of the decision

requirement,
diagnosis and analysis

of causes, development
of alternatives,

selection of a
desired alternative,

implementation of
selected alternative,

and evaluation and feedback.

A problem occurs when an
organizational accomplishment

is less than established goals.

Some aspect of performance
is unsatisfactory.

An opportunity
exists when managers

see potential
accomplishment that exceeds

specified current goals.

Managers see the possibility
of enhancing performance

beyond current levels.

Awareness of a
problem or opportunity

is the first step in the
decision-making sequence,

and it requires surveillance
of the internal and external

environment for issues that
merit executive attention.

Some information in
this process comes

from periodic financial
reports, performance reports,

and other sources that are
designed to discover problems

before they are too serious.

Managers also take advantage
of informal sources.

They talk with other
managers, gather opinions

on how things are
going, and seek advice

on which problems
should be tackled

and which
opportunities embraced.

Once a problem or opportunity
comes to a manager's attention,

the understanding of the
situation should be refined.

Diagnosis is the step in
the decision-making process

in which managers analyze
underlying causal factors

associated with the
decision situation.

Many times, the real problem
lies hidden behind the problem

that managers think exists.

By looking at a situation
from different angles,

managers can identify
the true problem.

In addition, they often
discover opportunities

they didn't realize were there.

Managers should ask
a series of questions

to specify underlying causes.

They include the
following-- what

is the state of
disequilibrium affecting us?

When did it occur?

Where did it occur?

How did it occur?

To whom did it occur?

What is the urgency
of the problem?

What's the interconnectedness
of the events?

And what result came
from which activity?

Some experts recommend
continually asking

why to get to the
root of a problem.

A technique is sometimes
called "the 5 Whys."

It's a question-asking
method used

to explore the root cause
underlying a particular problem.

The first why generally produces
a superficial explanation

for the problem, and each
subsequent why probes deeper

into the causes of the problem
and potential solutions.

The next stage is to generate
possible alternative solutions

that will respond to the
needs of the situation

and correct the
underlying causes.

Decision alternatives
can be thought

of as tools for
reducing the difference

between the organization's
current and desired performance.

Smart managers tap
into the knowledge

of people throughout
the organization

and sometimes even outside
the organization for decision

alternatives.

Once feasible alternatives are
developed, one must be selected.

In this stage,
managers try to select

the most promising of several
alternative courses of action.

The best alternative
solution is the one

that best fits the overall goals
and values of the organization

and achieves the desired results
using the fewest resources.

Managers want to select
the choice with the least

amount of risk and uncertainty.

Because some risk is inherent
with most nonprogrammed

decisions, managers try to
gauge the prospects for success.

They might rely on their
intuition and experience

to estimate whether a
given course of action

is likely to succeed.

Basing choices on
overall goals and values

can also guide the
selection of alternatives.

Choosing among
alternatives also depends

on a manager's personality
factors and willingness

to accept risk and uncertainty.

Risk propensity
is the willingness

to undertake risk
with the opportunity

of gaining an increased payoff.

The level of risk a manager
is willing to accept

will influence the analysis
of the costs and benefits

to be derived from any decision.

Now, implementation
is all about the use

of managerial, administrative,
and persuasive abilities

to ensure that the chosen
alternative is carried out.

The ultimate success
of a chosen alternative

depends on whether it can
be translated into action.

Sometimes an alternative
never becomes reality

because managers lack the
resources or energy needed

to make things
happen, or they've

failed to involve people and
achieve buy-in for the decision.

Successful implementation
may require discussion,

trust building, and
active engagement

with people affected
by the decision.

Communication, motivation,
and leadership skills

must be used to see that
the decision is carried out.

When employees see that managers
follow up on their decisions

by tracking
implementation success,

they are more committed
to positive action.

In the evaluation stage
of the decision process,

our last phase, decision
makers gather information

that tells them how well
the decision was implemented

and whether it was effective
in achieving its goals.

Feedback helps managers
make better decisions.

Decision-making is
an ongoing process.

It's not completed when a
manager or board of directors

makes a decision.

Feedback provides
decision makers

with information that can
perpetuate a new decision cycle.

The decision may
fail, thus generating

a new analysis of a problem,
evaluation of alternatives,

and selection of an alternative.

Many big problems are solved
by trying several alternatives

in sequence, each providing
modest improvement.

Feedback is part
of the monitoring

that assesses whether a new
decision needs to be made.

The decision-making process
typically involves these six

steps that we've talked about--

recognizing the
need for a decision,

diagnosing causes,
developing alternatives,

selecting an alternative,
implementing that alternative,

and evaluating
decision effectiveness.

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