Unit 3

(Managerial Decision
making)

Definition

It is a process of choosing a course of actions from two or

more alternatives.
- J. W. Duncan
The process through which managers identify
organizational problems and attempt to resolve them.
- Bartol and Martin
The process by which a course of action is selected as the
way to deal with a specific porblem.
- Stoner and Wankel

Importance of Decision-Making

Decision making is a skill that cuts across every

thing managers do. Managers have to decide
what to produce, how to produce, how to
motivate, how to control and so on. The
decision making process describe the elements
of an organization that accepts and processes
information inputs and transforms them into
useful conclusion, making a good decision is a
difficult exercise.

Cont.

It is prerequisite for every managerial functions.

It involves problem finding and problem solving.
It a process of selecting the course of action to
solve the problem
It is situational- certainty, uncertainty, risk.

Process of Decision-Making

There are two approaches the a manager can use

for decision-making

Informal approach
Formal approach

Informal approach:
Past experience
Expert opinion
Prior reasoning (requisite course of action)

Formal approach: steps of decision-making

Identification of problem.
Establishment of objectives.
Generating alternatives.
Evaluation of alternatives.
Selection of an alternative.
Implementation of the alternative.
Monitoring of the effects of implementation.

Decision making Environment

Open System:

A System that interfaces and interacts with its

environment , by receiving inputs from and delivering
outputs to the outside, is called an open system.

An open system is system which continuously interacts

with its environment.

It reacts to changes in the environment .

Ex. Business organization, Hospital system, university
system

Cont

Closed System:

A system that does not interact with the environment

nor changes with the change in environment is termed
as a closed system.
Closed systems are rare in business area but often
available in physical systems that we use in our day to
day work.
Neither take any input from the environment nor gives
any output to the environment.
Ex: Project Management.

The decision process

Identify & define
The problem

Gather
Information

Develop
alternatives

Revise

Evaluate
alternatives
Certainty

Risk

Uncertainty

Select
alternatives
Implement
decision
Evaluate
& control

1)

Certainty: The decision maker has a

complete knowledge of the outcome of
each alternative

2)

Uncertainty: The decision maker has

absolutely no knowledge of the
probability of outcome of each alternative

Cont
3) Risk:
The decision maker has some probabilistic
estimate of the outcome of each decision.
Condition of risk occurs when the decision
maker has enough information to allow
the use of probability in evaluating the
alternatives.

Cont..

Decisions with risk:

Probability can be assigned based on

a. Logic or deduction: This is Objective probability. This
reflects the historical evidence. Ex. Getting head/tail for
a tossed coin. Or getting a number on rolling dice etc.
b. Past experience is with empirical evidence.
c. Subjective estimate due to intelligence

Types of decisions

Programmed decisions
Non Programmed decisions

Programmed decisions

Non-programmed
decisions

Nature of
problem

structured, routine, well

defined

Unstructured, novel,
ill-defined

Recurrence of
problem

Repetitive

Non-repetitive

Method of
solving

Pre-set policies/standard Managerial initiative

rules

Judgment

Objective

Subjective

Probability of
outcome

Certainty

Uncertainty

Level of mgmt.

Middle/lower

Top level

Types

organizational,
operational, research,
opportunity

Personal/strategic/crisis
intuitive/problem solving

Structured

Which are repetitive and need a definite

routine and procedure to deal with them,
e.g. stock is below 15 %, so an order need to
be place with a supplier.

Unstructured

require knowledge, insight, and evaluation.

They may well crop up without warning, and
the right decision can be critical.

Decision Model
Classical Model

Administrative Model

Clear-cut problem and goals.

unclear problem and goals

Condition of certainty.

Condition of uncertainty

Full information about alternatives

and their outcomes.

Limited information about alternatives

and their outcomes

Rational choice by individual for

maximizing outcomes.

Satisfying choice for resolving

problem using intuition

Decisions Making Process

Decision making is a process which the decision

maker uses to arrive at a decision. The core of this
process is described by Herbert Simon in a model.
He describes the model in four phases as shown in
below:
(a) Intelligence
(b) Design
(c) Choice
(d) Implementation

Intelligence

It consists of identifying the problems

occurring in the organization.
Intelligence indicates why, where and with
what effects a situation occurs.
This broad set of information gathering
activities is required to inform managers
how well the organization is performing and
to let them know where problems exist.

Design

In this stage, the individual designs possible solutions to

the problems. This activity may require more intelligence
so that the manager can decide if a particular solution is
appropriate.
In the design phase, the manager develops a model of
the problem situation on which he can generate and
tests the different decisions to facilitate its
implementation. If the model developed is useful in
generating the decision alternatives, he then further
moves into phase of selection called as choice.

Choice

It consists of choosing among solution alternatives. Here

a manager can use information tools that can calculate
and keep track of the consequences, costs and
opportunities provided by each alternative designed in
this stage.
In the phase of choice, the manager evolves a selection
criterion such as maximum profit, least cost, minimum
waste, least time taken, and highest utility. The criterion
is applied to the various decision alternatives and the
one which satisfies the most is selected.

Implementation

This is the final stage of decision making when the

individual puts the decision into effect and reports on the
progress of the solutions.

In these four phases,

if the manager fails to reach a decision, he starts
the process all over again from the intelligence phase
where additional data and information are collected, the
decision making model is refined, the selection criteria is
changed and a decision is arrived at.

Decision Making Tools

Linear Programming Models

Probability Theory
Game Theory
Queuing Theory
Monte-Carlo Method