Management Theory and

Practice

Decision making

1
1. Meaning of Decision making
 Decision Theory
 Decision making can be defined as the process
of choosing between alternatives to achieve a
goal.
 Decision making is a conscious human process
involving both individual and social
phenomenon based upon factual and value
premises which concludes with a choice of one
behavioral activity from among one or more
alternatives with the intention of moving
toward some desired state of affairs.
2
Cont’d…
 Decision Theory
 Decision making is the process of
identifying problems and opportunities,
develop alternative solution, select best
alternatives and implement it.

3
 Cont’d…
 It is part of all managers’ job and common
core to other functions.
 For instance, top level management makes
decision on dealing with mission of
organization and its strategies.
 Middle level management, focus on
implementing strategies, budgets and
resource allocation.
 First level management deals with repetitive
day to day operations
4
 Cont’d…
 Decision making has three elements
 when manager make decisions; they are
choosing or selecting from among
alternatives
 when manager make decisions; when there
are no alternatives, there is no decision-
making , rather it become mandatory
 When managers make decisions, they have
purpose in mind. The purpose in mind is
organizational objectives.
5
2. Decision Making Process
1. Awareness of the problem (Define
the problem)
 The manager needs to become aware
that a problem exists and that is
important enough for managerial
action
2. Identifying the limiting or critical
factors
 Time, personnel, money, facilities……

6
Cont’d…
3. Developing Potential Alternatives
 Developing alternative solutions to the
problem guarantees adequate focus and
attention on the problem.
 It helps managers to fully test the
soundness of every proposal before it is
finally translated into action.

7
Cont’d…
4. Analyze / Evaluate the Alternatives
 The consequences of each alternative
would also be considered.
5. Select the Best Alternative
 The following four criteria are commonly
used for making the right choice among
available alternatives:
The risk
Economy of effort
Timing
Limitation of resources
8
Cont’d…
6. Implement the Decision
 The manager must seek feed-back
regarding the effectiveness.
7. Evaluate and Control
 The system should provide feedback.

9
3. Types of Decisions
 Managers are evaluated by the
decisions they make and, more often,
by the results obtained from their
decisions.
 Managers are usually involved in
making two types of decisions as
indicated below.

10
Cont’d…

1. Programmed Decisions
 A programmed decision is one that is
routine and repetitive.
 Rules and polices are established well
in advance to solve recurring problems
quickly.

11
Cont’d…

2. Non-programmed Decisions
 usually deal with unstructured problems
 Deciding how to restructure an
organization, to improve efficiency,

12
4. Decision Making Conditions

 A decision-maker may not have

13
Cont’d…

 These conditions of knowledge are

14
A. Decision Making Under
Certainty
 A decision is made under conditions of
certainty when a manager knows the precise
outcome associated with each possible
alternative or course of action.
 In such situations, there is perfect
knowledge about alternatives and their
consequences.
 Exact results are known in advance with
complete (100 per cent) certainty. The
probability of specific outcomes is assumed to
be equal to one.
15
Cont’d…

 A manager is simply faced with

16
B. Decision Making Under Risk
 A decision is made under conditions of risk
when a single action may result in more
than one potential outcome, but the
relative probability of each outcome is
known.
 Decisions under conditions of risk are
perhaps the most common.
 In such situations, alternatives are
recognized, but their resulting
consequences are probabilistic and
doubtful. 17
Cont’d…
 While the alternatives are clear, the
consequence is probabilistic and doubtful.
Thus, a condition of risk may be said to
exist.
 In practice, managers assess the likelihood
of various outcomes occurring based on past
experience, research, and other information.
 A quality control inspector, for example,
might determine the probability of number
of `rejects' per production run.

18
C. Decision Making Under
Uncertainty
 A decision is made under conditions of
uncertainty when a single action may result
in more than one potential outcome, but the
relative probability of each outcome is
unknown.
 Decisions under conditions of uncertainty
are unquestionably the most difficult.
 In such situations a manager has no
knowledge whatsoever on which to estimate
the likely occurrence of various alternatives.

19
Cont’d…
 Decisions under uncertainty generally
occur in cases where no historical data
are available from which to infer
probabilities or in instances which are so
novel and complex that it is impossible
to make comparative judgments.
 Selection of a new advertising program
from among several alternatives might
be one such example.

20
5. Models of Decision
Making Process
 There are three suggested models of the
decision making process which is about
how decisions are made and should be
made.
 Each model differs on the assumptions it
makes about the person or persons
making the decision

21
Cont’d…
 These three models are:
 The econologic model, or the
economic man,
 The bounded rationality model or the
administrative man; and
 The implicit favorite model or the
gameman.

22
A. Econologic Model or Economic
Man Model
 The econologic model represents the
earliest attempt to model decision process.
 Briefly, this model rests on two
assumptions:
 It assumes people are economically
rational; and
 That people attempt to maximize
outcomes in an orderly and sequential
process.

23
B. Bounded Rationality Model or
Administrative Man Model
 The bounded rationality model, also
known as the administrative man
model.
 It assumes that people, while they may
seek the best solution, usually settle for
much less because the decisions they
confront typically demand greater
information processing capabilities than
they possess.

24
 Cont’d…
 The concept of bounded rationality attempts to
describe decision processes in terms of three
mechanisms:
 Sequential attention to alternative
solutions: People examine possible solutions
to a problem sequentially.
 If the first solution fails to work it is discarded
and the next solution is considered.
 When an acceptable (that is, `Good enough'
and not necessarily the best') solution is
found, the search is discontinued.
25
Implicit Favorite Model or Gamesman
Model
 This model deals primarily with non-
programmed decisions.
 Non-programmed decisions are decisions
that are novel or unstructured.
 The implicit favorite model developed by
Soelberg (1967) emerged when he
observed the job choice process of
graduating business students and noted
that, in many cases, the students identified
implicit favorites very early in the recruiting
and choice process.
26
Cont’d…
 However, they continued their search for
additional alternatives and quickly
selected the best alternative candidate,
known as the confirmation candidate.
 Next, the students attempted to develop
decision rules the demonstrated
unequivocally that the implicit favorite
was superior to the alternative
confirmation candidate.

27
Any Questions

?
28