Making

Manageme
nt
Decisions
MBA 4th

Steve Cooke
Nigel Slack
Chapter 1: Decision Making in
Management

Learning Objectives
Good and Bad Decisions
Decision Making or Problem Solving?
Process of Decision Making
Elements of a Decision
The Range of Managerial Work Roles (Henry Mintzberg)
Chapter 1: Decision Making in
Management

Good or Bad Decisions

2 Approaches

1. Outcome of Decision
2. Process of Decision Making
 Chapter 1: Decision Making in
Management

Decision Making or Problem Solving

1. Partly a Problem of Semantics

2. Problem Solving is an Element of Decision Making
3. Decision Making is an Element of Problem Solving
 Chapter 1: Decision Making in
Management

Process of Decision Making

1. Observe
2. Formal Recognition
3. Interpretation/ Diagnosis
4. Definition
5. Set Objectives
6. Determine the Options
7. Evaluate Options
8. Select option
9. Implement
10. Monitor
 Chapter 1: Decision Making in
Management

Process of Decision Making

1. Observe

The manager realizes/ feels that there may be

an opportunity to make decision in:
Organization or its Environment

May not base on hard evidence but may base on:

Intuition
General Feeling that all is not well
 Chapter 1: Decision Making in
Management

Process of Decision Making

2. Formal Recognition

The manager is sufficiently convinced that the

Need for a decision is real because:

Accumulation of Evidence
Evidence is clearly demonstrable
Deviation of a Performance Measure from
some Desired State
This is when the problem cannot be ignored
 Chapter 1: Decision Making in
Management

Process of Decision Making

3. Interpretation/ Diagnosis

There is need for a manager to diagnose the

True Nature of the problem in the presence of a
Set of Stimuli:

Faulty Diagnoses will seriously affect the decisions

making process

Different Perceptions, Interpretations and

Models of the True Nature of the Problem are
proposed
 Chapter 1: Decision Making in
Management

Process of Decision Making

4. Definition

The agreed Interpretation of the problem is

turned into its Operational Form:

Clarifying the Details of the problem

Formalizing a Written Statement
Drawing the Boundaries of the Decision
Chapter 1: Decision Making in
Management
 Chapter 1: Decision Making in
Management

Process of Decision Making

6. Determine Options

The Length and Importance of this depends on

how the Decision has been defined earlier:

Narrow Boundaries >> Options might be

already given

Broader Boundaries >> Creative Options

 Chapter 1: Decision Making in
Management

Process of Decision Making

7. Evaluate Options

Determining the extent to which each of the

Decision Options meets the Decision
Objectives:

Details of Consequences of Each Option are

explained

Use of a Mathematical Model

 Chapter 1: Decision Making in
Management

Process of Decision Making

8. Select Options

The phase of Decision Making Process towards all

the other stages have been working:

Procedure of Selection depends on the Size

and Constitution of Decision Making Body

Single Decision Maker >> Value System and

Interests
Multi-Decision Makers >> Combination of
Debate, Consultation, Delegation or Political
Process
Chapter 1: Decision Making in
Management
 Chapter 1: Decision Making in
Management

Process of Decision Making

10. Monitor

When the Selected Option is implemented, it

should be monitored to see how Effective it is to
solve the original problem:

If the Decision has effectively solved the

problem then the Decision Making Process
Ends here

If not, then it is again the original Observation

Phase and the process starts afresh
 Chapter 1: Decision Making in
Management

The Elements of a Decision

The Key Elements of a Decision are:

1. The Decision Body

2. The Decision Options
3. The Uncontrollable Factors
4. The Consequences of Each Option
 Chapter 1: Decision Making in
Management
The Decision Body

Who is the Person or Group of People (which are often the

representatives of different parts of the organization) e.g.
Committee, having the Authority to make the Final Decision?

Single Decision Maker >> Value System and

Interests
Multi-Decision Makers >> Combination of Debate,
Consultation, Delegation or Political Process

Influences the Options and the Ends

Controls which Options are Considered, which
information is relevant and how each Option is
evaluated
Views of Interested Parties
Personal Interests
 Chapter 1: Decision Making in
Management
The Decision Options

The Alternatives Courses of Actions between which The

Decision Body must choose:
Heart of Decision Making: No Choices, No Decision

Yes/ No Options >> Infinite Options

How Evident/ Discernible at the start of Decision

Making Process

Classification of Decision Options

Given Fully developed at the start of process

Found Ready Made Fully developed & found in
the environment of decision and discovered during
the process
Custom Made Developed Specially for the
decision in question
 Chapter 1: Decision Making in
Management

Uncontrollable Factors

Those parts of the decision which, although having an

influence on the Final Outcome but cannot be controlled by
Decision Body:

Follow the following Three Steps while considering

Uncontrollable Factors:

Indentify the Factors

Indentify the States or Levels which each

Uncontrollable Factors could take

Attempt to Predict the likelihood of these states

 Chapter 1: Decision Making in
Management
Consequences

The Outcomes; for each combination of Decision Option and

the State of Nature, there will be a Consequence.

Decision Options (N) & Mutually Exclusive States

of Nature (M) then there will be NXM
Consequences

Primary Consequences: which are the

straightforward statements of the operational
results
Surrogate Consequences: which are the
interpretation of the results
Evaluated Consequences: which are the
measure of the worth or the utility of the outcome
to the decision body
 Chapter 1: Decision Making in
Management
The Range of Managerial Work Roles
 Chapter 2: Content & Context of
Management Decisions

Learning Objectives
Types of Management Decisions
The Decision Environment
The Approach to Decision Making
 Chapter 2: Content & Context of
Management Decisions

Types of Management Decisions

1.Strategic or Operational
2.Structured or Unstructured
3.Dependent of Independent
 Chapter 2: Content & Context of
Management Decisions
1. Strategic or Operational : How much organization a
decision
Strategic encompasses
Decisions
Set the intended Direction of the Organization (Future of the Organization)
Relate the Organization to its Environment
Broad in Scope
Long Term
Carried out by Senior Managers
Relatively Unconstrained
Infrequent
Encompass Large part of the Organization
High Degree of Risk/ Uncertainty due to ever changing or High Rate of Change
in Environment
Operational Decisions
Concerned with Input/ Output Relationship of a Department
Routine and Predictable
Short Term
Carried Out by Lower/ Mid Level Managers
Repetitive
May only Concerned with small part of the Organization
Low Risk
 Chapter 2: Content & Context of
Management Decisions
2. Structured or Unstructured : How well defined the
decision is?
Structured Decisions

Well defined

Decision Body is defined

Extent of Decision
Decision Options
Evaluation Criteria
Procedure to reach Option Choice is well understood

Unstructured Decisions

The opposite of a Structured Decision

 Chapter 2: Content & Context of
Management Decisions
3. Dependent or Independent : How connected the decision
is with others?
2 Scales

The scale representing the Degree of Influence of Past and Possible

Future Decisions

The scale representing the Degree of Influence across other Areas of the
Organization
 Chapter 2: Content & Context of
Management Decisions

The Decision Environment

1.Core and Boundary Decisions

2.Functional Area and Boundary Decisions

3.Environment Defined

A. The Specific Environment

B. The General Environment

4.Complexity, Change and Perceived Uncertainty

 Chapter 2: Content & Context of
Management Decisions
The Decision Environment

1.Core and Boundary Decisions

Core Decisions: The decisions which lie deep within the

Organizations Environment

Inputs from within the Organization and Outputs go

back into the Organization
Taken at all levels of Organization but mainly
Operational in Nature

Boundary Decisions: These lie at the Boundaries of

Organizations Environment

Managers are concerned to manage the Interface

between the Organization and its Environment
The relationship may be Strategic or Operational

 Chapter 2: Content & Context of
Management Decisions
The Decision Environment

2. Functional Area and Boundary Decisions

Every Functional Area of an Organization is involved in both

Core and Boundary Decisions
But some will lay more stress on either Core or Boundary
Decisions

Example:

Operations Function
Marketing Department
 Chapter 2: Content & Context of
Management Decisions
The Decision Environment

3. Environment Defined

The Totality of Circumstances (of whatever kind) under

which the Organization Operates:

Organizations do not deal with all parts of their Environment

Much of the Total Potential Environment can be considered
Inactive for any decision

The Environment of an Organization can be:

A. Specific Environment
B. General Environment
 Chapter 2: Content & Context of
Management Decisions

The Decision Environment

A. Specific Environment

Of the Total Environment of any Organization it is the part

which:

The organization relates directly and on a more or less

Regular Basis e.g.

Customers
Suppliers
Local Government
Local Groups
Trading Standards Authorities
 Chapter 2: Content & Context of
Management Decisions

The Decision Environment

B. General Environment

The Environmental Features which are Common to

Large Number of Organizations (may be within the same industry
or may be not) at the Same Time form General Environment e.g.

Technical
Legal
Political
Economic
Demographic
Ecological
Cultural
 Chapter 2: Content & Context of
Management Decisions

The Decision Environment

Complexity, Change and Perceived Uncertainty

Simple or Complex Environment:

An environment is Simple if it has Fewer Elements and

which are probably Similar to each other and Well
Understood.
A Complex Environment has Large number of Factors
which may be Different from each other and their inter-
relationship difficult to comprehend.

Static or Dynamic Environment: An Environment is Static if it

is Stable and Unchanging and Dynamic Environment is Subject to
change which possibly may be difficult to forecast
 Chapter 2: Content & Context of
Management Decisions
The Approach to Decision Making
The Character of decision is shaped by the decision itself but
also by The Approach of the Decision Maker:

Managers Discretion:

The Power or The Right to decide, choose is called as

Discretion
The way Manager Sees a Decision and the Decision
which is formalized may be different

Purpose:

Either to make any solution more Useful or to Simplify

it for easy Analysis
 Chapter 2: Content & Context of
Management Decisions

The Approach to Decision Making

Managers Use/ Exercise their Discretion in Two Ways and
thus there are Two Approaches to Decision Making

The focus of these approaches is on the Decision Elements

1. Boundary Discretion: What and How Many Decision

Elements to include in Decision Making

2. Treatment Discretion: The Way Decision Elements are

Treated
 Chapter 2: Content & Context of
Management Decisions
The Approach to Decision Making

1. Boundary Discretion

Decision Making Body: Single Decision Maker or

Multi-Decision Makers

Objectives are to be Simple with Single Measure or

have Several Objectives with different Measures

Range of Options be Limited to those which are

Immediately Discernable or it be Widened through
Comprehensive Research

Number of Uncontrollable Factors: All or one Single

Most?

Consequences can be described by a Single

 Chapter 2: Content & Context of
Management Decisions
The Approach to Decision Making

2. Treatment Discretion

Controllable Factors:

Should we describe Controllable Factors by taking

their Most Likely Values or Range of Values?
Should we treat Factors as Controllable which are
Partly within Our Control?

Consequences:

Should we know the each Possible Consequence

with Certainty
Or we assume that each Combination of Decision
Options and States of Nature could produce
Range of Possible Consequences
 Chapter 2: Content & Context of
Management Decisions
The Approach to Decision Making

Impact:

The Approach or Discretion used by Manager

affects:

Where the Decision is placed in the Three

Dimensions of Decision i.e.
Strategic Operational
Unstructured Structured
Interdependent Independent
 Chapter 2: Content & Context of
Management Decisions
Assignment # 1

Mr. Janbaz Khan is in the process of buying his Marriage Dress .

Indentify Decision Elements in this case i.e.

Decision Body

Decision Options

Uncontrollable Factors

Consequences
Chapter 6: Modeling

Learning Objectives
What is a Model?
Forms or Levels of Models
The Uses of Modeling
The Process of Modeling
Two Alternatives to Conventional Mathematical Modeling
Chapter 6: Modeling

What is a Model?

A Model is an Explicit Statement of our Image of Reality:

It is a representation of the relevant Aspects of a

Decision concerning to Decision Maker
It represents the Decision Area by Structuring and
Formulizing the Information the Decision Maker
possesses
Eventually it is an Abstraction of a Complex Reality
Chapter 6: Modeling

Forms or Levels of Models

1.Verbal Descriptive Models

2.Analogue Models
3.Relationship Models
Chapter 6: Modeling

Forms or Levels of Models

1.Verbal Descriptive Models: Such models only communicate

The Gist of Reality.

Descriptive Models only provide Necessary

Information on which decisions can be made.

The information is simplified in Two Ways:

Deliberate Exclusion: Leaving out what has

happened by making a Judgment of Relative
Importance of Events

Compression & Aggregation: Simplifying several

Comments, Reactions and Events into one Over All
Result
Chapter 6: Modeling

Forms or Levels of Models

2. Analogue Models: The Comparison of Observed

Situation with Analogues Situation.

Analogue Models represent One Set of Properties

with an other.

Analogue Models rely on Implications and

Associations to describe the Underlying Structure of
a Problem

They do not explain The Relationship between the

Various Elements which give Problem its Character
Chapter 6: Modeling

Forms or Levels of Models

3. Relationship Models: Influence Relationships are

Implied between Elements or Events in a Decision
Situation.

The relationships may be Quantified

At this Level, the Model is capable of being translated into

a Formal Language e.g. Mathematical Symbols
Chapter 6: Modeling

The Uses of Models

Models can be used to aid Decisions in many ways and at All

Stages in Decisions: Models are used for:

Enhancing Understanding
Stimulating Creativity
Evaluating Alternatives
Chapter 6: Modeling

The Uses of Models

Enhancing Understanding

A model acts as a Vehicle for Communication

The information is shared with other related managers

It initiates debate until a consensus view of the Decision is

achieved

Helps in understanding Challenges, Assumptions and

the Relationships among Various Assumptions
Chapter 6: Modeling

The Uses of Models

Stimulating Creativity

Models provide a tool for communicating our Perceptions

of a Problem and thus Open Challenge and Debate

Through debate New Ideas are generated

Also we get New Factors and New Alternatives for the

Solution of the Problem
Chapter 6: Modeling

The Uses of Models

Evaluating Alternatives

Models are used for Evaluation both Directly and

Indirectly

Direct Evaluation: Indentifying Single Best Option

or the Option which will prove Satisfactory for the
Decision Maker

Indirect Evaluation:

The Models can be used to predict the Behavior

of a Certain System (Set of Variables under a
Specified Conditions).
The behavior of the System (Prediction) is then
Chapter 6: Modeling

The Process of Modeling

Essential Pre-requisites to the Development of Models are

Understanding Key Variables with the Decision

A knowledge of Pattern of Influence between the Variables

(relationship between variables)

An Appreciation of the Range of Alternative Approaches

available in the Field of Symbolic Modeling

Cause Effect Diagrams

Major Mathematical Models
Alternatives to Mathematical Models
Heuristics
Simulation Models
Chapter 6: Modeling

The Process of Modeling

Understanding Key Variables with the Decision

Variable: A variable in a decision is some element which takes

on different value

Parameter: A decision Element which has a constant value

over a Period of Time

Types of Variables

Exogenous Variables
Endogenous Variables
Chapter 6: Modeling

The Process of Modeling

Understanding Key Variables with the Decision

Exogenous Variables:

Independent Inputs to the Model which may be

affecting the decisions
They can be Controllable or Uncontrollable

Endogenous Variables:

Out Put of the decision (the consequences)

They are generated by the Interaction between
Endogenous Variables
Chapter 6: Modeling

The Process of Modeling

A knowledge of Pattern of Influence between the Variables
(relationship between variables)

An Appreciation of the Range of Alternative Approaches available

in the Field of Symbolic Modeling:

Cause Effect Diagrams:

The simplest way of indicating that some

Relationship exists between Factors within a
Decision is to show the Direction of Influence by
Arrows on a Cause Effect Diagram

Can be drawn from working Backwards from

Endogenous Variables to Exogenous
Variables

Disadvantage: Unable to describe the Nature of

Chapter 6: Modeling

The Process of Modeling

An Appreciation of the Range of Alternative Approaches available
in the Field of Symbolic Modeling:

Cause Effect Diagrams

Chapter 6: Modeling

The Process of Modeling

An Appreciation of the Range of Alternative Approaches available
in the Field of Symbolic Modeling:

Mathematical Models:

The Use of Symbols to describe the Decision

Variables and Relationship between them

The most Convenient Set of Symbols for this task

are Conventional Mathematical Symbols since
there are well established Rules for their
Manipulation
Chapter 6: Modeling

The Process of Modeling

An Appreciation of the Range of Alternative Approaches available
in the Field of Symbolic Modeling:

Mathematical Models:
Chapter 6: Modeling

The Process of Modeling

An Appreciation of the Range of Alternative Approaches available
in the Field of Symbolic Modeling:

Operational Research:

Building Quantitative Models to aid the Managers

in their Decision Making is the Keystone of
Operational Research (OR)

An Approach to aid Management Decisions

through Modeling

Producing Powerful Standard Models

For Example:

Allocation Models
Chapter 6: Modeling
Chapter 6: Modeling

The Process of Modeling

An Appreciation of the Range of Alternative Approaches available
in the Field of Symbolic Modeling:
Simulation Modeling: Simulation is a Model of a
Procedure expressed in Precise Symbols

Simulation Models rely on a Statement of a

Procedure which underlies the Logical
Relationship between Variables

It usually takes Form of a Flow Chart which explain

Interrelationship between Variables

Simulation Model is used to Execute the

Procedure described in Flow Chart and the
Behavior of the System being Modelled is
Simulated

Simulation Models explore the Consequences of a

Chapter 6: Modeling

The Process of Modeling

An Appreciation of the Range of Alternative Approaches available
in the Field of Symbolic Modeling:
Corporate Modeling:
Corporate Models are used to aid Corporate
Decisions

The differ from other Models because of the

Nature of the Variables involved specially
Endogenous Variables

Corporate Modeling considers wide range of

social, legal, technological etc. variables and an
equally broad collection of Objectives.
Term Corporate Modeling has to mean:
Models which use Conventional Accounting
Measures & Relationships
Chapter 7: Modeling Uncertainty

Learning Objectives
Certainty, Uncertainty and Risk
Chapter 7: Modeling Uncertainty

Options, Elements, States of Nature,

Consequences
Chapter 7: Modeling Uncertainty

Options, Elements, States of Nature,

Consequences
Chapter 7: Modeling Uncertainty

Certainty &
Uncertainty

Certain Uncertai
ty nty
Chapter 7: Modeling Uncertainty

Certainty

When managers take certain decisions, they are Reasonably

Confident of the Precise Nature of Consequences of any
Option Chosen

Under state of Uncertainty Only one State of Nature is

Possible

If any Variation which is possible will not affect the

Consequences of choosing a Particular Option

The decision is considered to be Insensitive to

Uncontrollable Factors

However, this does not imply that the Decision Making

Process will be particularly Easy or Straightforward
Chapter 7: Modeling Uncertainty

Uncertainty

Under Conditions of Uncertainty we cannot predict the

Consequences of any Decision

We have very Little Confidence in our View of what States

of Nature are Possible

We are also not Confident about the Likelihood of

Occurrence of any State of Nature

Our Understanding of the Structure of the Decision will

be Poor

Information regarding decision will be Limited and

Ambiguous
Chapter 7: Modeling Uncertainty

Risk
When Conditions of Certainty do not exist but we are able
to make Confident Predictions regarding the Probabilities
that any Particular State will Occur then:

Decision is said to be Occurring Conditions of Risk

Most Management Decisions lie between Total Uncertainty

and Risk This area is referred to as Plain Uncertainty

We can usually Indentify the States which are Likely to

Occur

We have Sufficient Knowledge to predict the Likelihood of

the Occurrence of Each State

Under Risk, it useful for Decision Makers to proceed as if the

have Confidence in their Estimates of Possibilities
Chapter 9: Decision Objectives

Learning Objectives
Types of Organizational Objectives
Strategic and Operational Objectives
Multiple Objectives
Implicit and Explicit Objectives
Efficiency and Effectiveness
Intrinsic and Extrinsic Objectives
Setting Decision Objectives
Chapter 9: Decision Objectives

Types of Organizational Objectives

Primary Objectives: These reflect the Fundamental Reason for
the Organizations Existence
Primary Objectives may include Survival of the Company,
Independence form Outside Control, Profit etc.
Strategic Objectives: These guide the Organizations Long Term
Direction towards the achievement of Primary Objectives
Strategic objectives may include Developing Innovative Products,
Keep presence in a Particular Market, Fund Projects from internal
sources only etc.

Operational Objectives: Interpretation of an Organizations Strategic

Objectives into Manageable Terms for Short Term Decision Making.

Operational Objectives may include Controlling Budgets, Giving In

time Delivery, Managing Unit Costs etc.
Chapter 9: Decision Objectives

Strategic and Operational Objectives

Strategic and Operational Objectives have Different

Purposes and are expressed in Different Ways
Operational Level Objectives are shaped by whatever Strategic
Objectives are adopted

There are different Layers of Objectives Broad at the Beginning

(Strategic Objectives) and becoming More Specific as they approach
Operational Level

The Means End Chain

Chapter 9: Decision Objectives

Means Ends Chain

If Objectives are present at Different Levels in an Organization
then,
An Objective to one Decision Maker will be Means of Achieving a
Higher Objective for a Higher Decision Maker

In Practice, Means Ends Chains are Interconnected in a Complex

Manner.

Mean- Ends Chains then explain

How? When moving Downwards from Strategic Objectives that

How the Objective will be achieved

Why? When moving Upward from Lower Level the Chain answers
why an Objective should be achieved.
Chapter 9: Decision Objectives

Multiple Objectives
Organizations pursue More than one Objective at the same
time:

A company wants to Increase Rate of Return, Grow in the

Market, Make Innovative Products etc.
Multiple Objectives can be Conflicting or they can be Compatible
with each other

Multiple Objectives can compete with each other for resources even if
they are not Conflicting

When an Organization is pursuing Multiple Objectives, then Priorities

may be set for each Objective

The prioritization may Set Constraints for other Objectives

The prioritization should not be Strict and Managers should be willing to

Chapter 9: Decision Objectives

Multiple Objectives
Organizations pursue More than one Objective at the same
time:

A company wants to Increase Rate of Return, Grow in the

Market, Make Innovative Products etc.
Multiple Objectives can be Conflicting or they can be Compatible
with each other

Multiple Objectives can compete with each other for resources even if
they are not Conflicting

When an Organization is pursuing Multiple Objectives, then Priorities

may be set for each Objective

The prioritization may Set Constraints for other Objectives

The prioritization should not be Strict and Managers should be willing to