Decision Making

Types of Decisions
Types of Decisions
• Managers in all kinds of organizations face different types of problems and decisions as they do
their jobs.
• Depending on the nature of the problem, a manager can use one of two different types of
decisions.
• STRUCTURED PROBLEMS AND PROGRAMMED DECISIONS
• Structured problems
• Problems are straightforward.
• The decision maker’s goal is clear
• Problem is familiar
• Information about the problem is easily defined and complete
• Programmed decision: A repetitive decision that can be handled by a routine approach.
• The manager doesn’t have to go to the trouble and expense of going through an involved decision process
• The “develop-the-alternatives” stage of the decision-making process either doesn’t exist or is given little
attention.
• Instead, the manager relies on one of three types of programmed decisions: procedure, rule, or policy.
Procedure
• A procedure is a series of sequential steps a manager uses to respond
to a structured problem. The only difficulty is identifying the problem.
• Example: A purchasing manager receives a request from a warehouse
manager for 15 PDA handhelds for the inventory clerks. The
purchasing manager knows how to make this decision by following
the established purchasing procedure.
Rule
• A rule is an explicit statement that tells a manager what can or cannot
be done.
• Rules are frequently used because they’re simple to follow and
ensure consistency.
• For example, rules about lateness and absenteeism permit
supervisors to make disciplinary decisions rapidly and fairly.
Policy
• The third type of programmed decisions is a policy, which is a guideline for
making a decision.
• A policy establishes general parameters for the decision maker rather than
specifically stating what should or should not be done.
• Policies typically contain an ambiguous term that leaves interpretation up
to the decision maker.
• Examples
• The customer always comes first and should always be satisfied.
• We promote from within, whenever possible.
• Employee wages shall be competitive within community standards
UNSTRUCTURED PROBLEMS AND
NONPROGRAMMED DECISIONS
• Un structured Problems are problems that are new or unusual and
for which information is ambiguous or incomplete.
• Nonprogrammed decisions are unique and nonrecurring and involve
custom-made solutions.
• Example: Whether to build a new manufacturing facility in China is an
example of an unstructured problem.
• The problem facing restaurant managers in New York City who must
decide how to modify their businesses to comply with the new law.
Decision Making Conditions
• When making decisions, managers may face three different
conditions: certainty, risk, and uncertainty.
• CERTAINTY. The ideal situation for making decisions is one of
certainty, which is a situation where a manager can make accurate
decisions because the outcome of every alternative is known.
• Exact and complete information of the consequences of every
decision option
• Decision maker knows alternatives and their outcomes well
Example
• For example, when North Dakota’s state treasurer decides where to
deposit excess state funds, he knows exactly the interest rate being
offered by each bank and the amount that will be earned on the
funds
• RISK. A far more common situation is one of risk, conditions in which the
decision maker is able to estimate the likelihood of certain outcomes.
• Under risk, managers have historical data from past personal experiences
or secondary information that lets them assign probabilities to different
alternatives.
• Available alternatives and their consequences are known but they are
risky
• Alternatives are assessed by calculating the expected probability value of
their outcome . The outcome with the maximum payoff is selected
Example
• Suppose that you manage a Colorado ski resort and you’re thinking about
adding another lift. Obviously, your decision will be influenced by the
additional revenue that the new lift would generate, which depends on
snowfall. You have fairly reliable weather data from the last 10 years on
snowfall levels in your area—three years of heavy snowfall, five years of
normal snowfall, and two years of light snow. And you have good
information on the amount of revenues generated during each level of
snow. You can use this information to help you make your decision by
calculating expected value—the expected return from each possible
outcome—by multiplying expected revenues by snowfall probabilities. The
result is the average revenue you can expect over time if the given
probabilities hold
• Uncertainty. Under these conditions, the choice of alternative is
influenced by the limited amount of available information and by the
psychological orientation of the decision maker.
• An optimistic manager will follow a maximax choice (maximizing the
maximum possible payoff); a pessimist will follow a maximin choice
(maximizing the minimum possible payoff); and a manager who desires
to minimize his maximum “regret” will opt for a minimax choice
• Decision maker is not aware of the risks or outcomes of decision
alternatives
• Decision maker can use MaxiMin or Max-Max criterion
Example
• A marketing manager at Visa has determined four possible strategies
(S1, S2, S3, and S4) for promoting the Visa card throughout the West
Coast region of the United States. The marketing manager also knows
that major competitor MasterCard has three competitive actions
(CA1, CA2, CA3) it’s using to promote its card in the same region. For
this example, we’ll assume that the Visa manager had no previous
knowledge that would allow her to determine probabilities of success
of any of the four strategies. She formulates the matrix shown in to
show the various Visa strategies and the resulting profit depending on
the competitive action used by MasterCard.

Decision Making

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Types of Decisions

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