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Introduction to Management

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Chapter 7 : Managerial Decision-making

Significance and Limitations of Rational Decision-making

Managers as Decision-makers

The Rational Model
Non-rational Models

Decision-making Process

Types of Managerial Decisions

Programmed Decisions
Non-programmed Decisions
Decision-making Under Certainty, Uncertainty and Risk

Management Information System vs Decision Support System

The Systems Approach to Decision-making

Group Decision-making

Forms of Group Decision-making

Decision-making Techniques

Chapter Summary

Decision-making describes the process by which a course of action is selected to deal with a specific problem. The success of an organization depends greatly on the decisions of managers. There are two major types of models used by managers to make decisions - (1) rational model and (2) non-rational models. In the rational model, managers engage in rational decision-making processes.

At the time of decision-making, they possess as well as understand all the information that is relevant to their decision. In contrast, non-rational models of managerial decision-making suggest that limitations of information-gathering and information-processing make it difficult for managers to make optimal decisions. The three non-rational models of decision-making discussed in the chapter are: satisficing, incremental, and garbage-can models.

Any decision-making process contains seven basic steps: (1) identifying the problem; (2) identifying resources and constraints, (3) generating alternative solutions, (4) evaluating alternatives, (5) selecting an alternative, (6) implementing the decision, and (7) monitoring the decision. Managerial decisions are of two types - programmed decisions, and non-programmed decisions. Programmed decisions involve simple, common, frequently occurring problems.

They have well-established and understood solutions. Non-programmed decisions deal with unusual or exceptional problems. Based on the degree of certainty involved, every decision-making situation falls into one of three categories: (i) certainty, (ii) risk, and (iii) uncertainty.

In conditions of certainty, the decision-maker knows with reasonable certainty what the alternatives are, what conditions are associated with each alternative and the outcome of each alternative. Under a state of risk, the decision-maker has incomplete information about available alternatives but has a good idea of the probability of particular outcomes of each alternative. Conditions of uncertainty exist when the future environment is unpredictable and everything is in a state of flux. The decision-maker is not aware of all available alternatives, the risks associated with each alternative, or the consequences of each alternative or their probabilities.

In order to carry out managerial functions effectively, managers at all levels require vital information with speed, brevity, precision and economy. A management information system is a computer-based information system that gathers comprehensive data, analyzes and summarizes it, and provides it in a form that is of value to functional managers. A decision support system is an interactive computer system that can be easily accessed and operated by people who are not computer specialists, and who use this system to help them in planning and decision-making.

Major decisions in organizations are often made by groups rather than a single individual. The most common forms of group decision-making are: interacting groups, Delphi groups, and nominal groups. Finally, the different decision-making techniques such as marginal analysis, financial analysis, break-even analysis, ratio analysis and operations research techniques have been discussed. The different operations research techniques discussed in the chapter include: queuing or waiting-line method, linear programming, game theory, simulation, and decision trees.

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