D.C.

Singhal Decision Making

Managerial Decision Making

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IIFT
July 1, 2014
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Advice from the Cheshire Cat

One day Alice came to a fork in the road
and saw a Cheshire-Cat sitting in a tree.
Alice asked the Cat Would you tell me,
please, which way I ought to go from here?
The Cat said That depends a good deal on
where you want to go
Alice said I dont much care where .
The Cat replied Then it doesnt matter
which way you go. (Either of the roads
will get you there.)
From: Alice's Adventures in Wonderland" by Lewis Carroll (1865) 2
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Session Contents
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What is decision-making?
Importance of good decision-making
2. Decision Making Process
Various steps in decision-making
Evaluating the alternatives
Programmed and Non-programmed Decisions
Rational & Satisficing process for Non-programmed decisions
Decisions under certainty, uncertainty and risk
3. Decision Making Behaviour
Authoritative and Participative Advantages and Disadvantages
MBO approach and Ringi approach
4. Framework for Decision Making in Cross-Cultural Situations
Culture based and situation based approaches
Selecting the approach
5. Group Decision Making in International Organisations
Brainstorming method
Delphi method
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Limitations of traditional group methods
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1. Introduction
What is decision-making? Decision-making is the selection of a
course of action from among alternatives. It is at the core of planning. A
plan cannot be said to exist unless a decision a commitment of
resources, direction, or reputation - has been made. Until that point, there
are only planning studies and analysis.

Decision-making is a central job of managers as they must constantly

choose what is to be done, who is to do it, and when, where, and how it
will be done.

Every aspect of management (planning, organizing, staffing,

coordinating, and controlling) involves decision making. Decision making
is thus a managers most important task. When managers cross national
borders or cultures, the task becomes more difficult since people in
different cultures view problems differently and apply unique decision
making processes. A decision or a decision making process that works in
one culture is often ineffective in another culture. Also, different
situations require different decision making styles
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2. Decision-Making Process
2.1 The process of making a decision comprises seven steps:
1. Identify the decision to be made
2. Gather relevant information
3. Develop alternatives
4. Evaluate the alternatives and prioritize in terms of reaching goal
5. Select the best alternative
6. Take action to develop a plan
7. Review decision and consequences. If the decision has not resolved the
identified need, repeat certain steps, gather more information, and develop
more alternatives..

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2.2 Evaluation of Alternatives. In comparing alternatives, quantitative
factors such as cost and time are important, but so also the qualitative, or
intangible factors which are difficult to measure such as quality of labour
relations, risk of technological change, or international political climate
(e.g. unforeseen war). The decision process may give suitable weightage
to the intangible factors.
In comparing the alternatives, marginal analysis may be used. This
comprises calculating additional profit and additional cost of the
alternative and preferring the one with higher profit compared with
additional cost. Another method of comparison is cost-effective or cost-
benefit analysis which seeks the best ratio of benefit and cost.
Selecting an Alternative. When selecting from among alternatives three
approaches may be used: (1) Experience, (2) Experimentation, and (3)
Research and analysis.
Experimentation

How to select
Reliance on Choice made
from amongst
past
alternatives?

Research and Fig. Bases of selection 6

analysis from among alternatives
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(1) Experience: While past experience is a good guide, it maybe
dangerous if blindly followed since reasons for success or failure in the
past are not known. Also, past situation may not be entirely applicable to
the new problem. With this understood, experience can be a useful guide.
(2) Experimentation: This technique may be most expensive. Besides
even if the experiment has been done, there may be doubt about what is
proved since it may not duplicate the present. Hence experimentation
should be used only after considering other alternatives. Experimentation
may be used in testing a new product in a market before expanding its
manufacture and sales network, applying organizational technique in a
branch or plant before applying over the entire company, or testing a
candidate during his vacation before employing him.
(3) Research and Analysis: This is one of the most effective techniques
for selecting from alternatives. It involves a search for relationships
among the more critical of the variables that bear upon the goals sought.
It is a pencil-and-paper (or computer-and-printout) approach to decision-
making. It is far cheaper than experimentation. For instance, airplane
wings are tested in a wind tunnel. However, simulation may be done of
variables by mathematical terms and relationships on a computer to
provide a solution. This method is also applied to managerial decision-
making. 7
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2.3 Programmed and Non-programmed Decisions
Programmed decision is applied to structured or routine problems. These
kinds of decisions are made especially by lower level managers and non-
managers. Problems at lower levels of the organization are usually
routine and well structured, requiring less decision direction by
managers and non-managers. These decisions are based on precedents,
customs, policies and procedures, and training.
Non-programmed decisions, on the other hand, are used for unstructured
and non-routine problems and are made especially by upper level
managers. This entails analysing current data and information obtained
by systematic investigation to identify and solve a problem. The two
approaches to non-programmed decision-making are (1) Rational process
and (2) Satisficing process.
The rational approach comprises (i) investigation and defining the
problem, (ii) identifying criteria to base the decision, (iii) identifying the
alternatives, (iv) evaluating the alternatives, (v) selecting the optimum
alternative, and (vi) implementing it. The ideal decision presumes the
optimum choice.

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The satisficing approach assumes that there is an incompleteness of

necessary information to optimise. Hence, the decision makers satisfice,
that is, they select the first choice that is good enough and meets the
minimum criteria and do not identify other choices. An advantage of
satisficing over rational approach is that it is quicker and thus less
expensive. A disadvantage is that you may be foregoing a better solution.
[Satisficing = satisfy + suffice. The aim is an adequate result rather than
optimal or best solution. It is a term coined by economist Herbert Simon in 1947]

Most decisions are neither completely programmed nor completely non-

programmed but are combinations of both.

2.4 Decision Making Under Certainty, Uncertainty, and Risk

The decisions made in an environment vary from relative certainty to great
uncertainty. Hence, there are certain risks involved in making decisions.
In a situation involving certainty, people are reasonably sure what will
happen when they make the decision. The information is considered
reliable and the cause and effect relationships are known.

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On the other hand, in a situation of uncertainty, people have little
information, they do not know if it is reliable and whether it may change.
For example, a company that decides to expand to an unfamiliar country
may know little about its culture, laws, economic environment, and
politics. The political situation may be very volatile and possible change in
government cannot be predicted.
In a situation with risks, factual information may exist, but may be
incomplete. To improve decision making, one may estimate the probability
of an outcome using, say, mathematical models. On the other hand
subjective probability may be used based on judgment and experience.
Decision makers dealing with uncertainty like to know the degree and the
nature of the risk they are taking in choosing a course of action. The
deficiency of using operations research for problem solving is that the
data used are merely estimates and others based on probabilities. The
ordinary practice is to have specialists provide best estimates.
Virtually, every decision is based on the interaction of a number of
variables of which many have uncertainty but perhaps a high probability.
Thus, launching a new product might depend on a number of variables
such as the cost of introducing the product, the cost of producing it, the
capital investment required, the selling price set for the product, the size
of market and the market share it will represent. 10
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3. Decision Making Behaviour

Decision makers use two basic types of behaviour:
Authoritative and
Participative.
In authoritative behaviour, decision makers decide alone what is to be
done and/or how it is to be done and tell subordinates. However, they may
consult their subordinates about decisions before they finalize them.
In participative behaviour, decision makers ask their subordinates what
should be done and/or how it should be done, and together they reaching
agreement and/or consensus.
Both approaches have advantages and disadvantages.
An advantage of the authoritative approach is that decisions can be made
quickly. A disadvantage is that not involving the subordinates can lead to
their demoralization that may lead to sabotage and slow implementation.
An advantage of the participative approach is that it can lead to greater
subordinate satisfaction and performance, especially when participation
makes work more challenging for them and their inputs can result in higher
quality decisions. A disadvantage is that the decision process can take too
long even though the decision can be implemented faster. 11
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It should be noted that the concept of authoritative or participative
decision-making behaviour is explained from a Western cultural
perspective. Some cultures may not even have such a perspective. For
example, people in Western culture perceive the authoritarian decision
maker in a negative way while the same decision-making behaviour
perceived favourably in some cultures.
Many Westerners perceive participative decision-making behaviour
positively. But in many cultures it is perceived negatively, viewing the
participative decision maker as not being capable to decide.
In applying participative decision making approach, some managers use
the management by objectives (MBO) approach while others use the
ringi approach (especially used in the Japanese organizations). In MBO
approach, the manager and subordinate jointly set the objectives for
subordinate to achieve, agree on method of measurement and evaluation,
and the manager plays the role of a facilitator. In the ringi approach the
manager has a meeting with the group responsible for carrying out the
decision. In the meeting all issues are considered and all members
contribute to the discussion of options, facts, and philosophy of the
decision. When the decision is reached, everyone involved knows what he
must do and execution can proceed quickly.
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The MBO approach is likely to work best in individualistic cultures such

as the US where the individuals prefer to work on their own while the ringi
approach is likely to work best in group oriented, collectivist cultures
such as Japan where people like to work in groups.
Subordinates views as to how they should be used in the decision
making process vary from culture to culture, as do managers views. For
example, French executives tend to assume that the authority to make
decisions is a given right of office and privilege of rank, and hence they
make decisions authoritatively. On the other hand, executives in
Netherlands, Scandinavia, and the UK expect their decisions to be
challenged, discussed, or more probably, made on a consultative group
basis.
Which approach works best authoritative or participative? Different
situations and cultures require dissimilar behaviour, and the decision
makers have to be flexible in their decision making style when confronted
with varying situations and when crossing national boundaries and
cultures. Failure to apply the right decision making behaviour will result
in ineffective decisions and make the enterprise less competitive.

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4. Frameworks for Decision-Making

4.1 The Approaches. Decision makers are confronted with the problem
of determining which decision making behaviour (DMB) authoritarian or
participative is applicable in a given situation. Based on past studies
and research findings, two contingency frameworks have been developed
that can assist cross-cultural managers in determining the appropriate to
the situation.

The first framework, labeled the country related cultural framework

identifies certain cultural dimensions and their impact on DMB. This
framework is culture specific and assumes that different societies
possess distinct and relatively stable cultures that serve as determinants
of DMB.

The second framework, labeled the universal factors model , identifies

various situations and their impact on DMB. This model is culture free. It
assumes that certain situational factors have an impact on DMB in all
cultures.

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Frameworks for
Decision Making

Country Related Universal Factors Model-

Cultural Framework- Culture Free
Culture Specific Based on Situational Factors

Cultural Factors Situational Factors

[Link]- Distance [Link] Work
[Link] vs. Environment
.
Collectivism [Link] Motivation
[Link] Avoidance [Link] Maturity
[Link] vs. Level
Femininity [Link] Level and
[Link] Functions

Modify for situation

Decide

Fig. How to Decide which Approach is best

Authoritative or Participative? 15
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4.2 The Country Related Cultural Framework

The key study used in this framework was conducted by Professor Geert
Hofstede who developed a topology comprising five cultural dimensions(1)
by which a society can be classified: power-distance, uncertainty
avoidance, individualism, masculinity, and Confucianism. The ensuing
description discusses whether DMB tends to lean toward authoritarian or
participative based on the five cultural dimensions (see Table 1).

Note: (1) See Annexure 1

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Table 1 The Country Related Cultural Factors Model

Factors DMB
Large power distance A
Small power distance P
Low individualism A
High individualism:
Employees show low concern for organization well-being A
Employees show high concern for organization well-being P
Strong uncertainty avoidance A
Weak uncertainty avoidance P
High masculinity A
Low masculinity P
Confucianism A
DMB = Decision making behaviour leaning toward
A = Authoritarian ; P = Participative

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4.3 The Universal Factors Model

Many theorists argue that, irrespective of societys culture, individuals
are forced to adopt attitudes and behaviours that comply with imperatives
of industrialization. The theorists hold that DMB is influenced not so
much by broad cultural factors as by varying situational factors, such as
subordinates work environment, motivation, maturity level, and
managerial level and functions. These situations and the DMB behaviour
associated with each are presented in Table 2.

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Table 2 The Universal Factors Model
Factors DMB
Subordinates Work Environment
Crisis conditions A
Ambiguous conditions A
Competent individuals Pe
Individuals Motivation
Need for affiliation individuals Ac
Need for achievement individuals Pe
Need for power individuals Pe
Individuals Maturity Level
Low maturity individuals A
Low-to-moderate maturity individuals Ac
Moderate-to-high maturity individuals P
High maturity individuals Pe
Managerial Level and Functions
Upper level managers Pe
Lower level managers A
Structured functions A
Unstructured functions P
DMB = Decision making behaviour leaning toward
A = Authoritative ; Ac = Authoritative/Consultative
P = Participative; Pe = Participative/Extensive 19
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Implications of the Two Frameworks for Cross-Cultural Decision Making
The two frameworks have some implications for cross-cultural decision-
making. The country related cultural factors framework can serve as a
general starting point for analysis. For example, it may be stated that
culturally the British tend to be highly individualistic and the Portuguese
tend to be less individualistic. But it would be risky to make a blanket
decision based on this belief, as not all British rank high on individualism,
nor do all Portuguese rank low on individualism. Thus, each specific
situation must be studied. For instance, Honda learned that to penetrate
European market it was important to adopt a locally oriented approach and
build up a new way of doing work in a host country i.e. blend its corporate
culture with the culture of the host country.
Decision makers also need to determine to what extent the individuals in
different situations and culture tolerate or expect different DMB. They need
to be flexible in their approach to making decisions in different situations
and across cultures and understand that the behaviour that works in one
situation or culture will not necessarily work in another. Otherwise they may
make costly blunders.
Hence before a corporation sends someone abroad, it must identify the
effective management style for that place and select and train the right
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person for the assignment. Time and effort thus spent will avoid blunders.
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5. Group Decision Making

Aside from decision making by individuals, more and more international
organizations are now making important decisions using inputs from
groups comprising employees and sometimes outsiders. Such group
decision making may be done face-to-face or by internet connection
which has the advantage not only of members not being required to move
from their offices in different geographical locations, but also members
not being influenced by decisions of other members (such as in in face-
to-face groups with large power-distance).
For group decision making, several techniques are developed. Two of
these techniques are Brainstorming and the Delphi method. These are
briefly described in the succeeding sections.
5.1 Brainstorming
The brainstorming is a group (or individual) creativity technique by which
to find a solution to a specific problem by gathering a list of ideas
spontaneously contributed by its member(s). The technique was
developed by Madison Avenue advertising executive Alex Osborn and
published it in his 1953 book, "Applied Imagination." Since then,
researchers have made many improvements to his original technique.
The technique now has several variations. 21
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Brainstorming comprises the following steps:
1. Prepare the Group The group should include members from a wide
range of disciplines to generate a wide variety of ideas. Appoint one
person to record the ideas. Write down the ideas so that everyone can see
them such as on a whiteboard.
2. Present the Problem Clearly define the problem to be solved, and
lay out any criteria that must be met. The rules are:
No ideas are to be criticized
The more radical the ideas are, the better
The number of ideas generated is stressed
The improvement of ideas by others is encouraged
3. Guide the Discussion Once everyone has shared their ideas, start a
group discussion to develop other people's ideas, and use them to create
new ideas. Building on others' ideas is one of the most valuable aspects of
group brainstorming.
4. Take Action After the brainstorming session, analyse the ideas
generated and select the best one(s) using various tools.
When managed well, brainstorming can help you generate radical
solutions to problems. Brainstorming can also encourage people to
commit to solutions, because they have provided input and played a role in
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5.2 The Delphi Method
The Delphi method relies on a panel of experts to answer questionnaires
in two or more rounds. The method is based on the assumption that
group judgments are more valid than individual judgments. The person
coordinating the Delphi method is known as a facilitator or leader, and
facilitates the responses of their panel of experts, who are selected for a
reason, usually that they hold knowledge on an opinion or view.
To start the initial round, questionnaires sent to a panel of experts whose
responses are kept anonymous. After each round, a facilitator provides
an anonymous summary of the experts responses from the previous
round as well as the reasons they provided for their judgments.
Thus, experts are encouraged to revise their earlier answers in light of the
replies of other members of their panel. It is believed that during this
process the range of the answers will decrease and the group will
converge towards the "correct" answer.
Finally, the process is stopped after a pre-defined stop criterion (e.g.
number of rounds, achievement of consensus, stability of results) and the
mean or median scores of the final rounds determine the results.
Application: Science and technology forecasting, public policy issues,
sales of a new product, feasibility of new projects, etc.
Note: "Delphi" refers to the Oracle of Delphi , a site in Greek mythology where prophecies were
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passed on. The method developed in the 50s by the RAND Corporation.
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5.3 Some limitations of Traditional Group Discussions
Sometimes group discussions may inhabit creativity. For example
Group members may pursue an idea to the exclusion of other
alternatives.
Experts on a topic may not be willing to express their ideas in a group for
fear of being ridiculed.
Lower level managers may be inhabited in expressing their views in a
group with higher level managers.
Pressures to conform can discourage the expression of deviant
opinions.
The need for getting along with others can be stronger than the need for
exploring creative but unpopular alternatives to the solution of a problem
Since the need is to arrive at a decision, groups may not make the effort
of searching for data relevant to a decision.

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Avoiding Groupthink Groupthink is a phenomenon that occurs when

the desire for a group consensus overrides peoples common sense
desire to present alternatives, critique a position, or express an
unpopular opinion. The desire for group cohesion effectively drives out
good decision-making and problem solving.

Some well known examples of groupthink are:

The Challenger Space Shuttle disaster where the engineers knew of
some faulty parts before take-off, but they did not want negative press so
they pushed ahead with the launch.

Another example is the Bay of Pigs invasion, where President

Kennedy made a decision and the people around him supported it despite
their own concerns

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Annexure 1. Hofstedes Dimensions of Culture
The cross-cultural researcher Geert Hofstede proposed a paradigm (or
model) to study the impact of national culture on individual behaviour. He
developed a topology consisting of five national cultural dimensions by
which a society can be classified. He scored each country on a scale
approximately of 0 to 100 for each dimension. The higher the score, the
more prominent is the dimension in that society. The dimensions are:

(i) Power-distance [PDI] (i.e. relative comfort of cultures with distance

between less powerful and more powerful)

(ii) Individualism vs. Collectivism [IDV] ( i.e. cultures that place individual
self-interest over interest of group or me vs. 'we)

(iii) Uncertainty avoidance [UAI] (i.e. cultures that are uncomfortable under
situations of risk or unpredictability)

(iv) Masculinity vs. Femininity [MAS] (i.e. Masculinity stresses performance

while femininity stresses quality-of-life)

(v) Confucianism or Long Term Orientation [LTO] (i.e. respect for tradition
and fulfilling social obligations)
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