Managerial decision making

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As a leader, one of your major role is decision making. Its your job to make decisions that are in the best interest of the whole organization. You must consider the good of many, not of a few. This is a big responsibility and very often people dont appreciate your efforts.

The decision making process is the one by which managers respond to opportunities and threats by analysing options, and making decisions about goals and courses of action. It¡¦s true that managers at lower levels in organizations could not take important decisions which can affect the whole company strategy if they are treated individually, but they have a cumulative effect on organizational effectiveness. For instance, FORD has redirected the design of its cars by letting designers to ¡§design the kind of cars you would like to drive¡¨ so, maybe the individual designer decision making has not a monumental impact on the company, but if we add the whole designers decisions it will have a great impact on the company effectiveness.

In their activities, managers face many kind of problems that can be classified on three types of problems

- CRISIS PROBLEM




A serious difficulty requiring immediate action. For example a serious sale¡¦s decline on airline¡¦s ticket price due to 11 September fact.

- NON CRISIS PROBLEM

A situation that requires an action but does not have the immediacy and importance. For example an employee who is frequently late, or an invoice that should be paid ¡§small amount¡¨

- OPPORTUNITY PROBLEM

A situation that offers the organization a potential for an important and significant gain if actions are taken appropriately . For example to invest in a new emerging market that can bring a lot of cash flows.

Generally, managerial decision situations are divided into two categories programmed and non programmed.

- PROGRAMMED DECISIONS

Decisions made in routine, repetitive, well structured situations through the use of predetermined decision rules. They may be based on habit or established policies and procedures.

For example determining supplies to be reordered in a factory.

Computer have improved the possibilities for making sophisticated programmed decisions, because they can collect and analyse vast amounts of information that can facilitate programmed managerial decision.

- NON PROGRAMMED DECISIONS

Are those for which predetermined decision rules are impartial because the situation are novel and/or ill structured. Non programmed decisions usually involve considerable amount of uncertainty a condition in which the decision maker must choose a course of action without complete knowledge of the consequences that will follow implementation.

Decisions made under uncertainty involve risk the possibility that a chosen action could lead to losses rather than the intended results.

Examples of NPD select new product line, new promotional activity, new sale¡¦s strategy...

Decision Type

Lower Middle Top

Figure 1 Relationship of decision-making situation to management level in organizations.

As we can see in the figure 1, the proportion of non programmed decisions increases at each level of the hierarchy. Most of decisions made by first line managers and many of those made by middle managers are the programmed type. In contrast, top level managers make comparability few programmed decisions.

1) THE RATIONAL MODEL

Managers optimal decision-makers A decision that meets the objectives , this assumes that managers are rational , they know how to handle information in order to make optimal decisions

) NONRATIONAL MODELS

Difficult to make optimal decisions , does not meet the optimal objectives of the organization , these are satisfying , incremental , and garbage can models they suggest that information-gathering and processing constraints make it difficult for managers to make optimal decisions .

„h Satisficing Decision

Decision that meets the objectives but does not exceed them .Here you do not maximize your satisfies , the reason is

„h Bounded rationality it states that managers have constraints as cognitive capacity , time constraints , ... because

„h Imperfect or inadequate knowledge

„h Time and cost factors that impede the gathering information process

„h Decision makers perceptions about the relative importance of various pieces of data that lead to an overlooking or ignoring critical information

„h The part of human memory that is used in making decisions can retain only a relatively small amount of information at one time .

„h The calculating capacities associated with intelligence limit the degree to which decision makers can determine optimal decisions , even with perfect information .

„h Incremental model

It consists in reducing a problem into at least a tolerable level , by making the smallest response , this can be for a great utility in short term alleviation of a problem , however it¡¦s quit unuseful for the long term.

„h Garbage can model

Decision makers use unplanned and random methods to make nonprogrammed decisions, we can say that the decision occur by chance depending on factors such as the participants involved , the problems faced . This model is most likely used when any goal is preferred to an other , unclear means to solve the problem , or changing participants , however it can lead to serious problems .

1- IDENTIFYING THE PROBLEM

Consist on recognizing the need for a decision Managers must first realize that a decision must be made by identifying the problem. So, we should recognize that a problem exist by identifying organizational problems which are the gap between what is desired and what is achieved.

This first step has three general stages

„h Scanning stage involves scanning the environment for changing circumstances. Thus, the problem is sparked by an event such as environment changes.

„h Categorization stage in this stage we categorize the situation as a problem or non problem.

„h Diagnosis stage by gathering information and diagnosing the problem¡¦s nature and causes.

- GENERATE ALTERNATIVES

managers must develop feasible alternative courses of action. There are many tools of generating new and creative alternatives through brainstorming for instance, which is a technique that encourages group members to generate as many novel ideas as possible on a given topic without evaluating them.

There are four major principles involved in brainstorming technique

„h generating as many ideas as possible. Even if they are wild or difficult to understand.

„h Avoid criticizing ideas while generating possible solutions.

„h Freewheel offer ideas even if they are wild or they can never be used for this specific situation they can be useful for others.

„h Combine and improve on ideas that have been offered.

This kind of creativity can also be used in an individual concept in order to be more performing and to avoid that the resulting decision would be poor.

For example in our case the selling decline due to customer¡¦s dissatisfaction

- To develop a new diversification strategy by launching new product lines with new packages, new tastes, new promotional techniques.

- To administer a market study to know why consumers develop such as reaction ¡§dissatisfaction¡¨, to also know what are the forces and weaknesses of our product.

- To stop selling this product and withdraw it from the market.

- To declare bankruptcy.

- To do nothing...

. EVALUATE ALTERNATIVES

what are the advantages and disadvantages of each alternative? What are the costs and savings involved for each one? Managers should specify criteria for evaluating each alternative. Those criteria are divided into six ones

„h FEASIBILITY

Is it possible to adopt such as alternative within organizational constraints time, budgets, technology and policies. The alternative that does not respect this norm should be eliminated

For example launching a new product by our company is not feasible cause the cash flows are limited due to the decrease of sales so we don¡¦t have the sufficient budget to make a new production process by buying new equipment, making experiments, study markets...

„h QUALITY

Refers to how effectively an alternative solves the problem. Those who partially solve the problem are eliminated at this stage.

„h ACCEPTABILITY

How others who will be affected by the implementation of the alternative will support it.

For example declaring bankruptcy will never be accepted by employees. So we should eliminate it.

„h COSTS

Refers to both the resource levels required and the undesirable side effects of such as decision.

For example to decide to increase advertising on TV for the actual product may cost $8.500, but this will suppose more additional costs and will affect the company current asset by decreasing cashes...

„h REVERSIBILITY

Refers to the decision¡¦s ability to be reversed in case of difficulty.

For example we¡¦ll take the example given in the book ¡§Management, Kathryn M. Bartol and David C.Martin, third edition¡¨, when the Coca-Cola Company ran into difficulties in introducing its new formula for Coke, it was able to reverse the decision by reintroducing its old formula as Coke Classic.

„h ETHICS

An alternative should be compatible with the social and the ethical standards.

4. CHOOSE AMONG ALTERNATIVES

Managers rank alternatives and decide the one that reaches their goals.

5. IMPLEMENT CHOOSE ALTERNATIVE

Managers must now carry out the alternative. Successful implementation depends on two main factors careful planning and sensitivity to those involved in the implementation and/or affected by it. The more difficult is an alternative, the more important it is to plan for effective implementation.

For example if we decide to administer a market study we have got to make written plans , coordination with units inside and outside the organization by training and orienting people charged to administer questionnaires. We should also contact, supermarket responsible to have their agreement to do the study market inside supermarket.

6. MONITORING THE SOLUTION BY LEARNING FROM FEEDBACK

Managers should consider what went right and wrong with the decision and learn for the future. Without feedback, managers never learn from experience and make the same mistake over.

As the nonrational models of managerial decision making suggest , managers usually do not follow those steps outlined before , that lead them to face many barriers to effective decision making , however overcoming those barriers is possible by following sufficient patterns .

1) ACCEPTING THE PROBLEM CHALLENGE

Four basic reaction patterns that characterize the manager¡¦s behaviour when dealing with problems

„h Complacency this reaction occurs either when the manager does not see the signs of danger or he ignores them . This is a real barrier for the effective decision making .

„h Defensive Avoidance when the manager either deny or underestimate the importance of a problem or an opportunity , or deny any responsibility for taking action .That can be presented in forms

„X Rationalization it can happen to me

„X Procrastination it can be taken care of later

„X Buck-passing it¡¦s someone else¡¦s problem

EXP Managers in a company who ignore accounting signs and cash flow evolution , this situation can lead to an eventual collapse .

„h Panic the manager becomes so upset that he has to look for a quick solution to a problem , in his haste he does not notice the disadvantages no consider other potential alternatives

„h Deciding to decide when the manager accept the challenge of facing the problem and follow an effective decision-making process

Table Guidelines for deciding to decide

Appraise credibility of information

Is the source in a position to know the truth ?

If so , is the source likely to be honest ?

Is there any evidence , and how good is it ?

Ascertain importance of threat or opportunity

How likely is a real danger or opportunity ?

If a threat , how severe might be losses be ?

If an opportunity , how great might the gains be ?

Determine the need for urgency

Is the threat or opportunity likely to occur soon ?

Will it develop gradually , or is sudden change likely?

If some action is urgent , can part be done now and the rest later ?

Source Management book page 150

) SEARCHING FOR SUFFICIENT ALTERNATIVES

Gathering adequate information needs both costs and sufficient time , so that decision makers must evaluate how much time , effort and money should be spent gathering information that will help in making a particular decision .



From the figure below , we can notice that as the decision maker gather more information ( line a ) , the value of the additional information begins to level off at the same time ( line b ) the cost of additional information during the initial search is usually not very high but tends to get much higher as the information collected tends to perfect information , as a result the marginal value of the additional pieces of information (line c ) rises at first to a point of optimality and then starts to decline as cost begins to exceed the value of additional pieces of information

) RECOGNIZING COMMON DECISION MAKING BIASES

Biases that tend to characterize the way that decision makers process information

„h Framing the tendency to make different decisions for one problem presented in two ways .

Exp (management book , page 15 ) Threatened by a superior enemy force , the general faces a dilemma . His intelligence officers say his soldiers will be caught in an ambush in which 600 of them will die unless he leads them to safety by one of two available routes . If he takes the first route , 00 soldiers will be saved . If he takes the second , there¡¦s a one-third chance that 600 soldiers will be saved and a two-thirds chance that none will be saved . Which route should he take ?

Most people would think that he should choose the first route , reasoning that the general should save the 00 rather than risk even higher losses . now we suppose that the situation is as follows

The general again has to choose between two escape routes , but this time his aides tell him that if takes the first , 400 soldiers will die , if he takes the second , there¡¦s a one-third chance that no soldiers will die and a two-thirds chance that 600 soldiers die. Which route should he take ?

In this situation , most people argue that the general should take the second route . their rationale is that with the first route 400 will certainly be dead .With the second route there is at least a one-third chance that no one will die , and casualties will only be 50% higher if the scheme fails .

Interestingly , most people draw the opposite conclusion from these two problems .In the first problem , people favour the first alternative to 1 ; in the second problem , they choose the second alternative 4 to 1 . Yet a close look will reveal that the problems in both cases are exactly the same they are just stated differently. The first problem is stated in terms of lives saved , the second in terms of lives lost .

The prospect theory explains the paradoxical decision pattern exhibited in the general¡¦s dilemmas , it states that decision makers find the prospect of an actual loss more painful than giving up the possibility of a gain .

Exp Karim is a 0 , single and very bright , he majored in anthropology in the university . As a student he used to play piano and he got several awards for that in university quizzes . which of the following statements is more likely ?

- Karim is a bank teller

- Karim is a bank teller and a famous piano player

Most people choose the second alternative , however , according to probability laws , it¡¦s more unlikely to happen then the first alternative , this way of deciding is called representativeness , the tendency to be influenced by stereotypes in making judgements about the likelihood of occurrences .

Exp In a typical english text, does the letter K appear more often as the first letter in a word or as the third letter?

Although most people will choose the first alternative, in reality the letter K is almost twice as likely to appear in the third position, we do this because of a bias called availability, the tendency to judge the likelihood of an occurrence on the basis of the extent to which other like instances or occurrences can be easily be recalled, in this case it¡¦s easier to recall words beginning with K than words with K as a third letter

A newly hired engineer for a computer firm has 4 years¡¦ experience and good all-around qualifications .when asked to estimate the starting salary for this employee , a chemist who had a very little knowledge about the profession or industry guessed an annual salary of 17,000$ . What is your estimate ?

Most people don¡¦t think that the chemist¡¦s guess influenced their own estimate .Yet people tend to give higher salary estimates when the chemist¡¦s estimate is stated as 60,000$ then when it¡¦s 17,000$ .this tendency to be influenced by an initial figure , even when the information is largely irrelevant , is known as anchoring and adjustment .

The decision makers should be careful about those biases , and don¡¦t be overconfident , that is the tendency to be more certain of judgements regarding the likelihood of a future event than one¡¦s actual predictive accuracy

Avoiding the decision escalation phenomenon

When a manager makes decision , it¡¦s often one of a series of decisions about a particular issue , further decisions may be necessary , depending on the results of a previous decision .

Exp if a manager decide to expand the company¡¦s part in the market , he can decide to reduce the product price , however this can harm the margin profit of the company if the sells don¡¦t increase at the percentage expected , so the results of that decision are the causes of another decision , either to re-establish the price at their first level either to reduce the costs and so on .

Such situations are called escalation situations , those are situations that signal the strong possibility of escalating commitment and accelerating losses

Nonrational escalation the tendency to increase commitment to a previously selected course of action beyond the level that would be expected if the manager followed an effective decision making process , also called escalation phenomenon .

Many organizations encourage decisions made by more than one person to take advantage of the diversity of outlooks.

ADVANTAGES DISADVANTAGES

„h More information and knowledge is focused on the issues.

„h An increased number and diversity of alternatives can be developed.

„h Greater understanding and acceptance of the final decision are likely.

„h Members develop knowledge and skills for future use. „h More time consuming

„h Disagreements may delay decisions and cause hard feelings.

„h The monopoly of one or a few group members.

„h Groupthink may cause members to overemphasize achieving agreement.

Improving group decision making processes

In order to benefit from the group decision making advantages, and to avoid gaps involved, a manager should follow a number of steps to enhance the process

- Involving the group in decisions when the information and knowledge of the group are important to decision quality.

- Using diversity to configure the group helps to benefit from new behaviours, new cultures and ethnics backgrounds. Heterogeneous groups face difficulties at first, but gradually learn how to profit from this diversity and began to be more effective than the homogeneous group.

- Carefully considering other important aspects in group composition, for instance, by including someone who is skilled at encouraging the ideas of others in order to avoid the monopoly appearance.

- To set up specific tools to avoid a groupthink-type phenomenon. For example by designing a Devil¡¦s inquiry ¡§a person who is assigned the role to be sure that the negative aspects of each attractive alternative are considered¡¨ or by designing a Dialectical inquiry ¡§a procedure in which a decision situation is approached from two opposite points of view¡¨.

Computer-Assisted Group Decision Making

Through the computer¡¦s assistance, technology has given the opportunity to improve group decision making. For instance, teleconferencing, communication between employees via telephone or computers using specific software called Groupware ¡§software designed to support collaborative efforts among group members, such as scheduling meetings, holding meetings, sharing documents...¡¨there are also Group Decision-Support Systems which help decision makers to solve problems that are not well structured. Indeed groupware facilitate communication among group members whereas group decision-support systems helps them to make a decision.

As a leader the manager is stuck with decision making. Its his job to make decisions that are in the best interest of the whole organization. he must consider the good of many, not of a few. In this section we are going to discuss not the decision itself, but style.

Democratic decision making is when the leader gives up ownership and control of a decision and allows the group to vote. Majority vote will decide the action.

Advantages disadvantage

„h A fairly fast decision

„h A certain amount of group participation.

„h no responsibility

An individual is not responsible for the outcome. In fact, even the group feels no real responsibility because some members will say, I didnt vote for that.. Lack of group and personal responsibility seems to disqualify this style of decision making; however, the democratic style does have its place in business.

Autocratic decision making is when the leader has the total control and ownership of the decision. He is the only responsible for the good or bad results of a decision. He does not ask for any suggestions from outside sources and decides from his own internal information and perception of the situation.

In case of emergency situation, the autocratic style is the best choice.

Advantages disadvantage

„h A very fast decision

„h Personal responsibility by the leader, for the outcome „h no responsibility

„h lost of the leader¡¦s credibility if the outcome for the decision is not positive, members of the organization begin to feel they could have done a better job themselves.

„h If the employee is personally affected by the decision but not included when the decision is made, morale and effort may or may not suffer.

Collective - Participative decision making is when the leader involves the members of the organization. Other perspectives of the situation are discovered because the leader deliberately asks and encourages others to participate by giving their ideas, perceptions, knowledge, and information concerning the decision. The leader maintains total control of the decision because, although outside information is considered, the leader alone decides. The leader is also completely responsible for the good or bad outcome as a result of the decision.

Advantages disadvantage

„h group participation and involvement

„h the individual is informed before the decision is implemented (no surprises) and usually feels good about personal involvement

„h If the leader is a good communicator, and listens carefully to the information collected, he or she will usually have a more accurate understanding of the situation and make a better decision

„h a slow decision making

„h time consuming decision

„h less security, because so many people are involved in the decision.

Consensus decision making is when the leader gives up total control of the decision. The complete group is totally involved in the decision. The leader is not individually responsible for the outcome. The complete organization or group is now responsible for the outcome. This is not a democratic style because everyone must agree and buy in on the decision. If total commitment and agreement by everyone is not obtained the decision becomes democratic.

Advantages disadvantage

„h group commitment and responsibility for the outcome.

„h Teamwork and good security

„h A more accurate decision is usually made, with a higher probability of success, because so many ideas, perspectives, skills and brains were involved in the creation. „h a very slow and extremely time consuming decision.

„h a lot of work getting everyone in the organization involved.

„h It takes skill and practice for a group to learn how to work together.



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