Section 1:

Decision Making Process Steps

Decision Making for Business

and Strategic Choices

Prepared by Teddy Bakhos

Introduction:
• “Decision making is the study of identifying
and choosing alternatives based on the
values and preferences of the decision maker.
• Making a decision implies that there are
alternative choices to be considered, and in
such a case we want not only to identify as
many of these alternatives as possible but to
choose the one that best fits with our goals,
objectives, desires, values, and so on…”

– Harris (1980)
Introduction:
• Be a better Decision-Maker:
A key to success in management and in your
career is knowing how to be an effective
“Decision-Maker”.

• What a decision?
Decision is a choice among two or more
alternatives.

Decision making is discussed primarily within

the context of planning; but despite the link
with planning, it is a fundamental element of
the entire management process.
Introduction:
• Organizations make literally hundreds of
decisions each day as they fulfil their
operational requirements.

• Some decisions are small and minor

and can be completed quickly, others
are more complicated and far-reaching
and require more detailed analysis.

• 8 steps in the decision-making process

that is relevant to personal decisions as
it is to corporate decisions.
Decision-Making Process:
1) Identify a Problem:
• Problem: an obstacle that makes it
difficult to achieve a desired goal or
purpose.

• Every decision starts with a problem, a

discrepancy between an existing and a
desired condition.

• Example: Clemens is a sales manager

whose reps need new laptops.
Decision-Making Process:
2) Identify the Decision Criteria:
• Decision criteria are factors that are
important to resolving the problem.
Example:
Clemens decides that memory and storage
capabilities, display quality, battery life,
warranty, and carrying weight are the
relevant criteria in his decision.
Decision-Making Process:
3) Allocate Weights to the Criteria:
• If the relevant criteria are not
equally important, the decision
maker must weight the items in
order to give them the correct
priority in the decision.
• Example:
The weighted criteria for Clemens’
computer purchase.
Decision-Making Process:
4) Develop Alternatives:
List viable alternatives that could solve the problem.
Example: Clemens identifies seven laptops as possible choices.
Decision-Making Process:
5) Analyze Alternatives:
• Having identified the available alternatives, a decision-maker needs to evaluate
each alternative in order to choose the best one.
• Consideration should be given to the advantages and disadvantages as well as
the costs and benefits associated with each option.
• Depending on the situation, evaluation of alternatives may be intuitive (based on
feeling) or based on scientific analysis.
• Most organizations try to use a combination of both. When evaluating alternatives,
managers may consider the potential consequences of alternatives under several
different scenarios.
Decision-Making Process:
6) Select an Alternative:
Choose the alternative that generates the highest total in Steps 4 and 5:
Decision-Making Process:
7) Implement the Alternative:
• Once the decision has been made it needs to be implemented.
• This stage of the process is critical to the success of the decision and is the key to
effective decision making.
• The best alternative is worth nothing if it is not implemented properly.
• In order to successfully implement a decision, managers must ensure that those
who are implementing it fully understand why the choice was made, why it is being
implemented, and are fully committed to its success.
• For this reason many organizations are attempting to push decision making further
down the organization to ensure that employees feel some sense of ownership in
the decisions that are made.
Decision-Making Process:
8) Evaluate Decision Effectivness:
• Once the decision is implemented, it
needs to be evaluated to provide
feedback.
• The process of evaluation should take
place at all managerial levels.
• This step allows managers to see the
results of the decision and to identify any
adjustments that need to be executed.
• In almost all cases some form of
adjustment will be made to ensure a
more favorable outcome.
Characteristics of Decisions:
• Making decisions in an organizational context
requires good judgement and diagnostic skills.

• Most managers advance within an organization

as a result of their ability to make good
decisions.

• The characteristics of decisions faced by most

managers are varied in nature, depending on
the type of decision in question.

• Given that managers make a variety of

decisions during their daily lives we would
expect that decisions would have different
characteristics.
Characteristics of Decisions:
• While decisions vary in nature it is possible to identify some key characteristics that
define managerial decision making in the modern organization, as shown below:
Characteristics of Decisions:
• Some decisions that managers make are routine and well structured and are thus
relatively easy to make.
• Other decisions are poorly structured and lack full information, making them much
more challenging for the manager.
• We can distinguish between Programmed and Non-Programmed decisions:
Characteristics of Decisions:
Programmed Decisions:
• Tend to be well structured, routine and repetitive, occurring on a regular basis.
• They are usually made at lower levels in the organization.
• Have short-term consequences and are based on readily available information.
• A clear method for obtaining a solution can be found and that the decision does not
have to be treated as something new each time it occurs.
• Frequently simple formula can be applied to the situation.
• Examples of programmed decisions include ordering raw materials or office supplies
and calculating holiday pay, sick pay or redundancy payments, etc.
Characteristics of Decisions:
Non-Programmed Decisions:
• New and unstructured, where previously established decision rule cannot be
applied.

• The organisation has no established procedures or records for dealing with the
decision, which can therefore appear to be highly complex.

• Non-programmed decisions tend to occur at higher levels in the organization, with

long-term consequences and require a degree of judgement and creativity.

• Examples of non-programmed decisions include the decision to try an unproven

technology or to expand into a previously unknown market.
Decision-Making Conditions:
• In general there are three different types of condition under which managers take
decisions: Certainty, Risk and Uncertainty.
Decision-Making Conditions:
1) Certainty:
• This means that the available alternatives
and their costs or benefits are certain.
• Managers know with certainty that particular
alternatives will lead to definite outcomes
and there is no element of doubt.
• Given the current turbulent business
environment it is not surprising that very few
decisions can be made with certainty.
• Only the most minor of decisions can be
taken under a condition of complete
certainty.
Decision-Making Conditions:
2) Risk:
• All available choice, potential costs and benefits are known, but the outcomes are
sometimes in doubt.

• An example of a risk condition is the throw of a die: alternatives (one to six) are
known, but not outcomes – there is a one-in-six chance of each number coming up.

• The probability of certain events can be calculated by the organization using

statistical techniques.

• Objective probability is likelihood of an event occurring based on quantitative data.

Subjective probability is a personal judgement of likelihood of an event occurring.

• In today’s business environment, risk taking is critically important for organizations.

Decision-Making Conditions:
3) Uncertainty:
• The likelihood of available alternatives
occurrence and outcomes are all unknown.
• Decisions made under uncertainty are the
most difficult to take because of this lack of
concrete knowledge.
• Such decisions tend to be ambiguous,
intangible and highly unusual.
• In the current business environment much
decisions are taken under uncertainty.
• Taking decisions under uncertain conditions,
managers require intuition and judgement.
Decision-Making Conditions:
• While decisions taken under conditions of
certainty tend to be the easiest to make and
the most successful, decision failures can
occur in relation to any type of decision.

• Given the additional problems associated

with risk and uncertainty conditions it is not
surprising that there are decision failures in
these conditions.

• Any decision can suffer from adverse

conditions and bad luck, but much decision
failure can be attributed to decision-making
procedures, under the manager’s control.
Good Decisions Barriers:
• Research has shown that managers make better decisions when they follow a
sequential process.
• However, as managers attempt to make good decisions they are faced with many
challenges and barriers.

a) Reference Point:
• Decisions can be framed either in terms of gains or losses, or by a reference point
against which the various options can be evaluated.
• A decision frame refers to the perception held by the manager in terms of gains or
losses associated with the outcome of a decision.
• The same outcome could be viewed as a gain or a loss depending on the
perception and reference point used.
Good Decisions Barriers:
Example:
• If a company made +6% annual revenue
growth, compared to an average rate of
+8% yoy for the sector, should this be
viewed as a gain or a loss?
• The answer depends on the reference
point applied, if we compare it to the
company’s previous figures, it will be
considered as a gain.
• But from a relative perspective, if we
compare it to its peers, it will be viewed
as a loss.
Good Decisions Barriers:
• The nature of decision framing is important
because managers usually tend to avoid
risky options.

• But when facing a choice between losses,

managers will tend to opt for a risky
alternative.

• Choosing between losses is a choice

between risky alternatives: between certain
loss and possibly even greater loss.
Good Decisions Barriers:
b) Psychological Bias:
• Decision making is also susceptible to psychological biases when allowing
subjective biases to interfere with objective decisions.

• Individuals often allow their own personal feelings and emotions to creep into
the decision-making process.

• If a manager has to decide where to relocate the company’s offices.

• One location is very effective but the other one is closer to the manager’s
house.

• Which option will the manager choose? If subjective biases come into play, it
will be the latter.
Good Decisions Barriers:
c) Illusion of Control:
• Managers can also be affected by the ‘Illusion of Control’.
• This essentially means that managers develop a sense that they can influence
outcomes even when they have no control over events.
• Such over-confidence can be very dangerous for decision making, particularly if an
important strategic decision is in question.
• Managers can also pay too much attention to short-term gains at the expense of
long-term sustainable success.
• This has tended to be a feature of national culture in Western societies. Quite often
long-term strategies require short-term pain.
Good Decisions Barriers:
d) Time / Deadline:
• The final barrier to making effective
managerial decisions is the issue of “Time”.
• Pressures of time frequently mean that
decisions are rushed.
• Managers under pressure to reach a
decision quickly may not have time to
exhaustively research all available
options, so the quality of the decision could
suffer accordingly.
• Unless the decision is programmed, it can
be very difficult to do it under pressure.
Approaches to Decision Making:
The four most popular approaches to the study of
decision making are: Rational Model, Bounded
Rationality, Political Model and Escalation to
Commitment.

1) The Concept of Rationality:

• Rationality in decision making refers to a process
that is perfectly logical and objective, whereby
managers:
 Gather information objectively.

 Evaluate available evidence.

 Consider all alternatives.

 Make choices leading to the best outcomes for the

organization.
Approaches to Decision Making:
1) The Concept of Rationality:
Such a rational approach to decision making
assumes that four conditions are fulfilled:
 There is perfect knowledge of all the
available alternatives.
 There is perfect knowledge of all of the
consequences of the available alternatives.
 Managers have the capacity to objectively
evaluate the consequences of the available
alternatives.
 Managers have a well-structured and definite
set of procedures to allow them to make
optimum decisions.
Approaches to Decision Making:
1) The Concept of Rationality:
• Although managers rarely have total control
over all the factors that determine how
successful decisions will be, they can ensure a
degree of control over the process used for
decisions.

• It is increasingly clear that few managerial

decisions are taken in a completely rational
manner.

• Some of the most effective and innovative

decisions, used little in the way of rational
guidelines.
Approaches to Decision Making:
2) Bounded Rationality:
• As we have seen, decisions are made under
varying conditions ranging from certainty and risk
to uncertainty.

• In the current environment managers rarely make

decisions under the conditions of certainty
needed to apply a completely rational model.

• For many managers today the rational approach

represents an ideal approach, but one that is
simply not attainable under current conditions of
risk and uncertainty.
Approaches to Decision Making:
2) Bounded Rationality:
• Managers cannot always make decisions under
certainty conditions, so they have to apply a less
than perfect form of rationality.

• Decisions taken by managers are bounded by

limited mental capacity and emotions, plus
environmental factors that they have no control.

• Due to these limitations managers rarely maximize

or take ideal decisions with the best possible
outcomes.
Approaches to Decision Making:
2) Bounded Rationality:
• Intuition and judgment are therefore used by the manager to solve problems and
make decisions.

• Taking a rational approach to problem solving and decision making involves clear
identification of goals, objectives, alternatives, potential consequences and their
outcomes.

• Each of these is in turn evaluated in terms of contribution to the overall aim.

• In judgmental decision making, the response to a decision is usually rapid and

the decision maker cannot usually give a concrete explanation of either the
process by which the decision was reached or the grounds for judging it.
Approaches to Decision Making:
2) Bounded Rationality:
• Another integral part of bounded rationality
approach is that managers seek to “Satisfice”.

• They settle for an alternative which is satisfactory,

rather than continuing to search for the optimal
solution.

• Satisficing may occur because the manager tires

of the decision-making process and seeks to
resolve the problem quickly with the first
minimally acceptable solution rather than
searching further for a better one.
Approaches to Decision Making:
3) The Political Model:
• Previous approaches have concentrated on the
role played by rationality in the decision making
process, while the political model concentrates on
the impact of organizational politics.

• Power and politics play an important role in the

decision-making process.

• Power is the ability to influence others. It can be

viewed as the ability to exercise influence over
individuals, work groups or departments.
Approaches to Decision Making:
3) The Political Model:
There are five main types of power found in the organizational setting:
1. Legitimate: originates from the manager’s position within the organization’s
hierarchy.
2. Reward: originates from the manager’s ability to withhold rewards from others.
3. Expert: derives from the expert knowledge and information that a manager has
accumulated.
4. Referent: originates from the charisma or identification that a manager has
developed.
5. Coercive: is associated with emotional or physical threats to ensure compliance.
Approaches to Decision Making:
3) The Political Model:
• In the decision-making process those who possess
power are clearly an important dynamic.

• Political decision processes are used in situations

where uncertainty, disagreement and lack of
information are common.

• Within organizations it is common to find different

coalitions, all of which possess varying degrees of
power depending on the situation.

• Coalitions can be formed by particular work groups,

teams, managers, functional specialists, external
stakeholders and trade unions.
Approaches to Decision Making:
3) The Political Model:
Each group brings with it certain ideas and values,
coupled with power, in relation to the decision under
discussion.
• It is common for each coalition to defend its own
territory and to ensure that any decisions made
do not negatively impact on its members (both
formal and informal).

• The presence of coalitions therefore adds an

important ingredient to the decision-making
process.
Approaches to Decision Making:
3) The Political Model:
• Different coalitions are likely to possess different
and conflicting objectives.

• In some cases the compromise and outcome will

be a win–lose situation, which means that one
coalition’s gain is another’s loss.

• In other cases a win–win situation can be

generated.

• The political model recognizes that, apart from

actually making the decision, many other factors
are at work, including negotiation, compromise
and power struggles.
Approaches to Decision Making:
3) The Political Model:
• The presence of political forces can be beneficial
to the decision-making process if it means that
a wider range of issues is considered and greater
input and commitment is achieved.

• On the other hand, power struggles may lead to

a lack of focus on key issues and produce
narrowly defined decisions largely following the
self-interest of particular groups.
Approaches to Decision Making:
4) Escalation of Commitment:
• This approach concentrates on why people continue to pursue a failing course of action.
• That’s why commitment to a poor decision often escalates after the initial decision has
been made.

• This approach is particularly concerned with decision makers who, even in the face of
failure, continue to invest resources in a failing decision.
Approaches to Decision Making:
4) Escalation of Commitment:
• For example, an organization may decide to enter a
particular market by introducing a certain product.
• After a while it may become obvious that the product
is not suited to that market.
• The organization, however, continues to increase
spending on advertising and marketing rather than
exiting from the market.
• Escalation of commitment to a failing decision is
often attributed to self-justification and a feeling of
personal responsibility for the decision.