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Summary Chapter 9 - Managerial Decision Making
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My Chapter 9 notes about Managerial Decision Making
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Chapter 9 - Managerial Decision makingTypes of Decisions and Problems
A decision is a choice made from available alternatives. Many people assume that making a
choice is the major part of decision-making, but it is only a part of it. Decision-making is the
process of identifying problems and opportunities and then resolving them. Decision-making
involves effort both before and after the actual choice.
Programmed and nonprogrammed decisions
Management decisions typically fall into two categories: programmed and nonprogrammed.
Programmed decisions involve situations that have occurred often enough to enable
decision rules to be developed and applied in the future. Programmed decisions are made in
response to recurring organizational problems. Once managers formulate decision rules,
subordinates and others can make the decision, freeing managers for other tasks.
Programmed decisions include reordering office supplies, and selecting freight routes for
product delivery. Nonprogrammed decisions are made in response to situations that are
unique, are weakly defined and largely unstructured, and have important consequences for
the organization. Many nonprogrammed decisions are related to strategic planning because
uncertainty is great and decisions are complex. Nonprogrammed decisions include acquiring
a company, building a new factory, develop a new product or service, enter a new
geographical market, or relocate headquarters to another city.
Facing certainty and uncertainty
One primary difference between programmed and nonprogrammed decisions relates to the
degree of certainty or uncertainty that managers deal with in making the decisions. Every
decision situation can be organized on a scale, there are four positions: certainty, risk,
uncertainty, and ambiguity. Certainty means that all the information the decision-maker
needs is fully available. Managers have information on operating conditions, resource costs
or constraints, and each course of action and possible outcome. Risk means that a decision
has clear-cut goals and that good information is available, but the future outcomes
associated with each alternative are subject to some change 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 a price, production costs, volume or future interest rate, are difficult to
analyze and predict. Managers may have to make assumptions from which to influence the
decision, even though it will be wrong if the underlying assumptions are incorrect. Ambiguity
means that the goal to be achieved or the problem to be solved is unclear, alternatives are
difficult to define and information about outcomes is unavailable.
Decision-making models
The approach that managers use to make decisions usually falls into 3 categories. The
classical model, the administrative model or the political model.
The Ideal, rational model
The classical model of decision-making is based on rational economic assumptions and
, managerial beliefs about what ideal decision-making should be. The four underlying
assumptions are:
1. The decision-maker operates to accomplish goals that are known of and agreed on.
Problems are required to be precisely formulated and defined.
2. The decision-maker strives for conditions of high certainty, gather complete
information. All alternatives and the potential results of each are calculated.
3. Criteria for evaluating alternatives are known. The decision-maker selects the
alternative that will maximize the economic return to the organization.
4. The decision-maker is rational and uses logic to assign values, order preferences,
evaluate alternatives and make the decision that will maximize the attainment of
organization goals.
The classical model of decision-making is considered to be normative, meaning it defines
how a decision-maker should make decisions. The ideal, rational approach of the classical
model is often unattainable by real people in real organizations. The classical model is most
useful when applied to a programmed decision and to decisions characterized by certainty or
risk.
How managers actually make decisions
The administrative model is considered to be descriptive in nature, meaning that it describes
how managers actually make decisions in complex situations, rather than dictating how they
should make decisions according to a theoretical ideal. This model recognizes the human
and environmental limitations that affect the way managers can pursue a rational decision-
making process. There are 2 concepts that are important in shaping the administrative
model: bounded rationality and satisficing. Bounded rationality means that people have their
limits or boundaries on how rational they can be. Satisficing means that decision-makers
choose the first solution alternative that satisfies minimal decision criteria. The administrative
model relies on assumptions that are different from those of the classical model and focuses
more on organizational factors that influence individual decisions.
1. Decision goals often are vague, conflicting and lack consensus among managers.
Managers are often unaware of problems or opportunities that exist in the
organization.
2. Rational procedures are not always used, and, when they are, they are confined to a
simplistic view of the problem that does not capture the complexity of real
organizational events.
3. Managers’ searches for alternatives are limited because of human, information and
resource constraints.
4. Most managers settle for a satisficing rather than a maximizing solution, partly
because they have limited information
Another aspect of administrative decision-making is intuition. Intuition represents a quick
apprehension of a decision situation based on past experience but without conscious
thought. Intuitive decision making is not arbitrary or irrational because it is based on years of
practice and hands-on experience. Managers walk a fine line between two extremes: making
arbitrary decisions without careful study and rely obsessively on rational analysis. Managers
need to take a balanced approach by considering both rationality and intuition as important
components of effective decision-making.
The Political Model
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