Decision Making

Upul Abeyrathne,Dept. of Economics,

University of Ruhuna,Matara

Nature of Decision Making in Organization

• At anytime organizations identify problems• The managers implement alternatives for hundreds of

decisions.• However, managers muddle through these processes.• Decision making is regarded as brain-nervous system of

organizational setting.• Decision making is the end use of information and

control systems• Decisions are made about organization strategy,

structure, innovation and acquisition.

Defining Decision making

• Organizational decision making is the process of identifying and solving problems

Stages of the Decision making Process.

1. Problem identification: Information about environment and organizational conditions is monitored to determine if performance is satisfactory and to diagnose the cause of shortcomings.

2. Problem solution: Alternative courses of action are considered and one alternative is selected and implemented.

Programmed and Nonprogrammed Decisions

• Organizational decisions vary in complexity.

• Programmed Decisions: Repetitive, well defined and procedure for resolving the problem.

• They are well structured because criteria of performance are normally clear, good information is available about current performance, alternatives are easily specified and there is relative certainty that the chosen alternative will be successful.

Nonprogrammed Decisions

• They are novel and poorly defined and no procedure exists for solving the problem.

• They are used when an organization has not seen a problem before and may not know how to respond.

• Clear cut decision criteria are not available. Alternative are fuzzy.

• There is uncertainty where proposed solution solve the problem

Nonprogrammed Decisions

• Many of nonprogammed decisions involves strategic planning due to the fact uncertainty is great and decisions are complex.

• Complex nonprogrammed decisions are regarded as “wicked” Simply defining the problem can turn into a major task.

• Wicked decisions are associated with managers conflict over objectives and alternatives, rapidly changing circumstnances and unclear linkages among decision elements

Nonprogrammed Decisions

• Present day managers and organizations are dealing with a higher percentage of nonprogrammed decisions because of the rapidly changing environment.

Individual Decision Making

• Managers decision making process can be viewed from two perspectives

1. Rational Approach2. Bounded Rationality Approach/perspectiveThe first suggest how managers should try to

make decisionsSecond describe how decisions are made actually

under severe time and resource constrains.

Rational Approach

• This approach stresses the need for systematic analysis of a problem followed by choice and implementation in a logical step by step sequence.

• It is an ideal and not fully achievable in real world.• However, it helps managers to think about

decisions more clearly and rationally. • Managers should try to use systematic decision

making whenever possible.

Eight Steps

• 1. Monitor the Decision Environment. – Monitor internal and external information that will indicate deviations from planned or acceptable behaviour.

• 2. Define the decision problem: The manager responds to deviation , by identifying essential details of the problem where, when who involved, who was affected and how current activities are influenced

• 3. Specifying decision objectives: The manger determines what performance outcomes should be achieved by a decision

Eight Steps

• 4. Diagnose the problem: In this step, the manager digs below the surface to analyze the cause of the problem.

• 5. Develop alternative solutions• 6. Evaluate alternative solutions• 7. Chose the best alternative• 8. Implement chosen alternative

Eight Steps

• The first four steps relate to problem identification state.

• The remaining four relate to problem solution decision making state.

Bounded Rationality

• When organizations are facing little competition and are dealing with well understood issues, managers generally use rational procedures to make decisions.

• However, managers cannot have ideal situation arrive at decisions

• Many decisions are to be taken quickly.• There are wide factors affecting a decision.• Ill Defined nature of problems make systematic decisions

impossible.• Attempt at rational is bounded by enormous complexity of

many problems and time.

Constrains and Tradeoffs

• Not only complexity of problems but also many others make it difficult to engage in rational decisions

• Limited Time, information and resources with complex multi-dimensional issues

• Organizational Constrains: Level of agreement, shared perspectives, cooperation or support, corporate culture and structures and ethical values

Constrains and Tradeoffs

• Personal Constrains: Personal desire for prestige, success, personal decision style, and desire to satisfy emotional needs, cope with pressure, maintain self concept.

Role of Intuition

• Decisions are affected by intuition• In intuition decision making process is

experience, and judgment rather than sequential logic or explicit reasoning are used.

• It is not arbitrary or irrantional because it is based on experience. It is stored in sub consciousness.

Role of Intuition

• Situation of complexity and ambiguity, previous experience and judgment are needed to incorporate intangible elements at both problem level and problem solution level.

• Too simplification of problems tends to be failed.

• A manager needs to walk a fine line between two extremes.

Organizational Decision Making

• Organizational level decisions are not made by a single managers

• Organizational Decisions are dependent on internal structures as well as on the degree of stability or instability of the external environment.

• The literature helps to identify four types of organizational decision making.

Management Science Approach

• It is the analogy to the rational decision making.• It came to being in the context of 2nd World War.• Mathematical Statistical techniques were used to

analyze urgent, large scale military problems.• To analyses many problems• Operation Research Department use mathematical

models to quantify relevant Variables and develop quantitative representations of alternative solutions and the probability of solving problems

Four Type of Model

• Management Science• Carnegie Model• Incremental Model• Garbage

Management Science

• It is excellent when problems are analyzable and when the variables can be identified and measured.

Carnegie Model

• Richard Cyert, James March, Herbert Simon. • The name came After Carnegie Mellon

University.• The insight provided is that decision making in

organization involve a coalition of managers.

• Management Coalition are need for two reasons.

Two Reasons

• Organizational Goals are ambiguous and operative goals of department are often inconsistent.

• Managers tend to be rational but operate with human cognitive limitations.