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Chapter

3
Managerial Decision Making

McGraw-Hill/Irwin
Management, 7/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.
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Learning Objectives
After studying Chapter 3, you will know:
 The kinds of decisions you will face as a manager
 How to make rational decisions
 The pitfalls you should avoid when making decisions
 The pros and cons of using a group to make
decisions
 The procedures to use in leading a decision-making
group
 How to encourage creative decisions
 The processes by which decisions are made in
organizations
 How to make decisions in a crisis
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Lack of Structure
 Programmed Decisions  Non-programmed
 Decisions Decisions
encountered and  New, novel, complex
made before, having decisions having no
objectively correct proven answers
answers, and solvable
by using simple rules,
policies, or numerical
computations
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Uncertainty and Risk

We operate in an environment— the Internet—
where there’s an enormous amount of
uncertainty. You can’t be sure what’s going to
happen tomorrow, never mind next year. The
danger is that the uncertainty can lead to
paralysis. You spend so much time trying to
nail down all the possibilities and risks, you
never get around to taking action. And if that
happens—if you become indecisive—you’re
dead.
- George Conrades
Chairman and CEO Akamai Technologies
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Uncertainty and Risk

 Certainty is the state that exists when
decision makers have accurate and
comprehensive information
 Uncertainty is the state that exists when
decision makers have insufficient information
 Risk is the state that exists when the
probability of success is less than 100%, and
losses may occur
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Conflict
 Conflict exists when the manager must
consider opposing pressures from different
sources; occurs at two levels
 Psychological conflict occurs when several
options are attractive, or when non of the
options is attractive
 Interpersonal conflict
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Stages of Decision Making

 Ideal decision making process will have six
stages
 Identify and diagnose the problem
 Generate alternative solutions
 Evaluate alternatives
 Make the choice
 Implement the decision
 Evaluate the decision
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The Best Decision

 To make the best decision
managers must use
vigilance
 Vigilance is a process in
which a decision maker
carefully executes all
stages of the decision
making process
 Research shows that when
managers use a rational
decision making process
they tend to make better
decisions
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Barriers to Effective Decision Making

 Psychological Biases
 Time Pressures
 Social Realities
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Decision Making in Groups

 The basic philosophy for group decision
making is that ‘two heads are better than
one’
 Group performance is a function of two
variables
 How effectively the group capitalizes on
potential advantages
 How effectively the group minimizes potential
problems
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Decision Making in Groups

 Potential Advantages  Potential Disadvantages

 Larger pool of  One Person dominates
information
 Satisficing
 More perspectives and
 Group thing
approaches
 Goal displacement
 Intellectual stimulation
 People understand the
decision
 People are committed to
the decision
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Managing Group Decision Making

 There are three
factors for effectively
managing group
decision making
 Appropriate
leadership style
 Constructive use of
disagreement and
conflict
 The enhancement of
creativity
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Brainstorming
 Brainstorming is a
commonly used technique
used to encourage
creativity
 It is a process in which
group members generate
as many ideas about a
problem as they can;
criticism is withheld until
all ideas have been
proposed
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Organizational Decision Making

 Managers and groups make decisions within
organizations
 Three additional concepts and process a
manager must consider when making a
decision include
 Constraints on decision makers
 Organizational decision processes
 Decision making during a crisis
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Constraints on Decision Makers

 Managers face various constraints that
include:
 Capital or product markets may make an
expensive new venture impossible
 Legal restrictions may restrain the kinds of
international business activities in which a
firm can participate
 Labor unions may defeat a contract proposal
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Organizational Decision Making Models

 Historically organizational decision making
was viewed as a rational process
 Simon challenged this view by proposing an
alternative to the rational decision making
process called bounded rationality
 Other decision making processes include
 Incremental model
 Coalition model
 Garbage can model
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Decision Making During Crisis

 During crisis managers must make decisions
under a great deal of pressure
 The organization should be prepared for
crises in advance
 Managers should take time to create an
effective crisis management plan
 During a crisis don’t pretend nothing
happened rather communicate and reinforce
the organization’s values
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Questions for Crisis Planning

 What kinds of crises could your company
face?
 Can your company detect a crisis in its early
stages?
 How will it manage a crisis if one occurs?
 How can it benefit from a crisis after it has
passed?
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Looking Ahead
 Chapter 4: Planning and Strategic Management
 How to proceed through the basic steps in any planning
process
 How strategic planning integrates with tactical and
operational planning
 Why I is important to analyze both the external
environment and the internal resources of the firm
before formulation a strategy
 The choices available for corporate strategy
 How companies can achieve competitive advantage
through business strategy
 How core competencies provide the foundation for
business strategy
 The keys to effective strategy implementation