Chapter 7: Managerial Decision-Making

Introduction

In today’s world, organizational life includes a series of decisions taken on the basis of certain practices and activities. It is very important for the efficiency, productivity and the continuity of the organization. In order to have proper designs and adapt in environmental changes organizations should improve and update their decision-making mechanisms. Managers are supposed to give decisions to produce the right change which matches with the objectives of the organization. During the decision making process one should give importance to communication and information flow, rely on foresight, having a plan, generate alternative expenses, and incorporate a problem-solving process.

Managerial decision-making is a matter of finding solutions or action plans for problems and providing the maximum benefit for organizational stakeholders. The stage of defining the problem and the stage of solving the problem are two stages that managers cope with when solving the problems. There are two ways the manager can follow in this situation. One is the programmed decisionmaking ,which involves the most efficient and easily repeatable routine operations The other one is nonprogrammed decision-making , which includes the most creative, original and unstructured decisions by which managers help organizations to produce solutions to changing and uncertain situations. When you consider the today’s rapidly changing environment and the involvement of organizations in a global environment, non-programmed decisions should be made more.

Managerial Decision-Making Approaches

One of the Managerial Decision-Making Approaches is rational approach. Under the rational approach to decision making, decisions are generally made based on the quantitative data through a linear process. Founded by Herbert Alexander Simon, this approach is quantitative and normative and tends to observe, identify, explain and predict choices and it involves some 8 steps:

• Define the problem (Highlight causes and related assumptions of the problem, the system, and organizational limitations, or any stakeholder problem).
• Determine the requirements that the solution to the problem must meet(create the conditions that must be fulfilled to solve the problem)
• Establish goals that solving the problem should accomplish (determine the goal that we wish to achieve after solving the problem).
• Identify alternatives that will solve the problem (Care must be taken to ensure that alternatives satisfy requirements).
• Develop evaluation criteria based on the goals (Define criteria as the objective measures of goals to measure how well each alternative leads to goals).
• Select a decision-making tool (choose the easiest and the best solution depending on the nature of the problem).
• Apply the tool to select a preferred alternative (evaluate alternatives against criteria).
• Check the answer to make sure it solves the problem (validate solutions against problem statement).

Bounded Rationality Approach is an approach in which decision-makers do not have all information, which makes a complete evaluation impossible. Bounded rationality is based on the principle of sufficient satisfaction. Bounded rationality claims that decisions do not have to be the best. They must satisfy some desires. Most people think choices that at least provide some minimum standard. The administrative model of decision making was developed as an alternative to the criticized rational decision-making model and is, to a certain extent, based on satisfaction. A manager with limited rationality uses mental methods that simplify the solution and provide shortcuts to make decisions and process information, which is called intuitive decision-making. Especially when uncertainty and complexity are seen in emerging markets, decisionmaking methods that managers are most likely to use are their intuitions. This approach is more often used in nonprogrammed decisions and intuitive decision making has often a balancing or complementary position for rational decision-making.

Another organizational decision models developed by Cyert, James March and Herbert Simon from CarnegieMellon University is called Carneige model. These people adapted the notion of limited rationality to the decision behaviors of managers. One principal of this method is that decision mechanism within a whole organization must not be restricted to just one person. Many managers within the organization are included in the decisions and act as a coalition; in other words, a consensus of managers’ decisions about organizational goals and privileged problems. Bankers, advisors outside the organization and union representatives may be included in this coalition since they must be involved in decision making process.

Another important point about this method is satisficing, which means an alternative production made with limited information just to find solutions for the problems. According to the founders of this method, decisionmaking happens in uncertain environments where there is missing information and ambiguous things are experienced.

Garbage Can Model of Decision Making is another theory which is preferred to be used in complex organizations where organizational anarchy rules, information flow procedures are uncertain and technology usage is low. This model, shortly, means “do it before think about it.”

This model, which tries to combine organizational design and organizational anarchy, states that there is no connection between problems that tried to be solved and solution methods. This approach focuses on the roots of the problems. Decisions made without knowing the roots of the problems have always caused great damages and bankruptcies, unemployed people and created some unsuccessful political efforts. This model can only be used in cases where organizational anarchy rules, which has three structural features:

• Problematic preferences: The aim, preference and alternatives are not well-defined.
• Unclear, poorly understood technology: To make a causal link within the organization is difficult.
• Machine bureaucracy gradually became less useful in managing people: Time-and-motion studies were challenged, which led scholars focusing on the human aspect of management.
• Turnover: Positions are determined to the work and employees are too busy to have interest in other people’s works, which restricts participating in decision-making process.

A decision can be made when four components are combined; problems, potential solutions, participants and preferences (choice opportunities)

Elements that Impact on Decisions

The most important elements impacting on individual decisions are individual bias. To make a decision within an organization makes you perform the decisions within a group dynamic. Cognitive bias means a tendency to make irrational decisions about other people and situations. Knowledge level and automatic behaviors of managers and routines are examples of cognitive biases in strategic decisions.

There are some types of bias in organizational decisions. One of them is overconfidence, which means the individual’s tendency to assume his/her ability or capacity to make a prediction much greater than it normally is. The decisions made with an overconfident attitude may cause to unrealistic predictions as well as ignorance of possible difficulties.

Another type of bias is Anchoring bias which means being stuck in the first information coming to mind, which causes us to not evaluate the following data appropriately.

Confirmation bias is the product of perceptual selectivity. Since the decision maker looks for the information confirming his/ her past choices, he/she tends to ignore the sources that offer contradicting information.

Escalation of commitment is a bias which means that if you also have proofs that prove the truth of the idea against your own idea, you still insist on the accuracy of your own idea.

Frame Effect means that form of information’s presentation influences the decisions greatly importantly. According to the frame effect, the way we define the problem, the words we choose, emphasis, the way we talk, the way we present our knowledge cause individuals to have various attitudes and perceptions and influence their choices.

When you create a false belief that when the result of an event becomes clear, you knew this very result beforehand, it means that you have hindsight bias. If you have hindsight bias, your predictions change retrospectively.

Managers at the decision-making stage may from time to time act with certain reasons such as satisfying other people satisfying other people, avoiding conflict, agreeing with other people or being included in another group. There are two negative effects of this; first is the lack of opposing views and second is that the group increases the confidence related to the view close to their own, both of which harden to make a healthy decision.

Uncertainty is one of the most important obstacles before decision-making. Although the decision to be made is about the future, individuals make their decisions paying attention to their own past experiences. Technological developments are so fast that sometimes managers must make quick and timely decisions. The studies have shown that if decisions made in high-velocity environments are intuitional and irrational, organizations have more success.

Wrong and right decisions of organizations in such environments are compared as this;

• To have a decision that ends up successful, an intuitional attitude in high speed environments must be shown and developments must be timely followed
• Successful businesses are able to quickly find many alternatives in cases requiring high-speed decisions.
• Successful decision-makers are open to each and every kind of suggestion from people surrounding them.
• Fast businesses try to include everyone in the decision-making process.
• Decisions of successful managers are in harmony with organization’s other decisions.

Within some organizations, groups are separated into two for making right decisions and while one group defends the decision, the other tries to disproof it with an antithesis, which may cause to make right decisions.