Ch 8 - Decision Making Process

Management: Chapter 8 - Decision Making

Learning Outcomes

• Describe the eight steps in the decision-making process.

• Explain how to effectively implement decisions.

• Explain different ways managers make decisions.

• Classify decisions and decision-making conditions.

• Explain design thinking as a way to make decisions and effectively implement them.

The Decision-Making Process

• Definition: A decision is defined as making a choice from two or more alternatives.

Steps in the Decision-Making Process

Step 1: Identification of a Problem

• Definition of Problem: A discrepancy between an existing and desired state of affairs.

• Characteristics of Problems:

  • Recognized by awareness.

  • There is pressure to solve the problem.

  • The manager must have the authority, information, or resources needed to resolve the problem.

Step 2: Identification of Decision Criteria

• Definition: Criteria that define what is relevant in making a decision.

• Important Factors:

  • Costs that will be incurred (investments required).

  • Risks likely to be encountered (chance of failure).

  • Desirable outcomes (e.g., growth of the firm).

  • Additional factors can be included as needed.

Step 3: Allocation of Weights to Criteria

• Purpose: Decision criteria are not of equal importance; assigning a weight ensures priority order in the decision-making process.

Step 4: Development of Alternatives

• Definition: Identifying viable alternatives to resolve the problem.

• Methodology: Alternatives are listed without evaluation at this stage.

Step 5: Analyze Alternatives

• Objective: Appraise each alternative’s strengths and weaknesses.

• Criteria for Appraisal: Based on the ability to resolve issues identified in Steps 2 and 3.

Step 6: Selecting an Alternative

• Goal: Choose the best alternative, typically the one with the highest total weight.

• Consideration: What if the “best alternative” does not seem like the right one?

Step 7: Implement the Alternative

• Action: Putting the chosen alternative into action by conveying the decision to affected parties and gaining their commitment.

Step 8: Evaluation of Decision Effectiveness

• Assessment: The soundness of the decision is judged based on outcomes:

  • Evaluating how effectively the problem was resolved by outcomes resulting from the chosen alternatives.

  • Analyzing what went wrong if the problem was not resolved.

Ensuring Effective Decision Implementation

• Importance: A decision that fails in the implementation stage is deemed a worthless effort.

• Strategies for Success: (To be discussed in groups)

The Manager as Decision Maker

Rational Decision Making

• Definition: Making decisions that are consistent and value-maximizing within specified constraints.

Assumptions of Rationality

• The problem is clear and unambiguous.

• A single, well-defined goal is to be achieved.

• All alternatives and consequences are known.

• Preferences are clear and stable.

• No time or cost constraints exist.

• The final choice will maximize payoff.

Bounded Rationality

• Definition: Assumes decision makers will not seek all alternatives.

• Key Attributes:

  • Decision-makers will satisfice (accept solutions that are “good enough”).

  • They can be influenced by the escalation of commitment, which is the increased commitment to a previous decision despite evidence suggesting it may have been wrong.

Role of Intuition

• Definition: Making decisions based on experience, feelings, and accumulated judgment.

• Statistical Insight: One-third of managers and other employees emphasize “gut feeling” over cognitive problem solving.

Types of Decisions and Decision-Making Conditions

Structured Problems

• Definition: Problems that are straightforward, familiar, and easily defined.

• Example: Programmed Decision – A repetitive decision handled by a routine approach.

Unstructured Problems

• Definition: Problems that are new or unusual with ambiguous or incomplete information.

• Example: Non-programmed Decisions – Unique and nonrecurring, requiring custom-made solutions.

Decision-Making Conditions

• Certainty: Decision maker can make accurate decisions as the outcome of every alternative is known.

• Risk: Decision maker is capable of estimating the likelihood of certain outcomes.

Design Thinking and Decision Making

• Definition: A human-centered, iterative process and a solution-based approach for solving problems.

• Five Steps of Design Thinking:

  1. Empathize

  2. Define the Problem

  3. Ideate

  4. Prototype

  5. Test

Review Questions

• What is a decision?

• What are the steps in the decision-making process?

• What is bounded rationality?

• What is intuition and why does it matter in decision making?

• What types of decision-making situations (problems) do managers encounter, and what kind of decision should they make as a result?