Managerial Decision making

“Walt Disney Company has four major strategic business units: movies (including Pixar and Touchstone),theme parks (Walt Disney World and Disneyland), consumer products (the Disney Store), and television (the ABC/Disney Television Group and ESPN). Place each of these SBUs on the BCG matrix based on your knowledge of them.”

CHAPTER 8 MANAGERIAL DECISION MAKING: Planning

decision elements.12 Sometimes managers will come up with a “solution” only to realize that they hadn’t clearly defi ned the real problem to begin with.13 Managers have a diffi cult time coming to grips with the issues and must conjure up reasonable scenarios in the absence of clear information.

DECISION-MAKING MODELS The approach managers use to make decisions usually falls into one of three types—the classical model, the adminis- trative model, or the political model. The choice of model depends on the manager’s personal preference, whether the decision is programmed or nonprogrammed, and the degree of uncertainty associated with the decision.

The Ideal, Rational Model The classical model of decision making is based on ratio- nal economic assumptions and manager beliefs about what ideal decision making should be. This model has arisen within the management literature because managers are expected to make decisions that are economically sensible and in the organization’s best economic interests. The four assumptions underlying this model are as follows:

1. The decision maker operates to accomplish goals that are known and agreed on. Problems are precisely formulated and defi ned.

2. The decision maker strives for conditions of certainty, gathering complete infor- mation. All alternatives and the potential results of each are calculated.

3. Criteria for evaluating alternatives are known. The decision maker selects the alternative that will maximize the economic return to the organization.

4. The decision maker is rational and uses logic to assign values, order preferences, evaluate alternatives, and make the decision that will maximize the attainment of organizational goals.

The classical model of decision making is considered to be normative, which means it defi nes how a decision maker should make decisions. It does not describe how managers actually make decisions so much as it provides guidelines on how to reach an ideal outcome for the organization. The ideal, rational approach of the clas- sical model is often unattainable by real people in real organizations, but the model has value because it helps decision makers be more rational and not rely entirely on personal preference in making decisions.

The classical model is most useful when applied to programmed decisions and to decisions characterized by certainty or risk because relevant information is available and probabilities can be calculated. For example, new analytical software programs automate many programmed decisions, such as freezing the account of a customer who has failed to make payments, determining the cell phone service plan that is most appropriate for a particular customer, or sorting insurance claims so that cases are handled most effi ciently.14 Airlines use automated systems to optimize seat pricing, fl ight scheduling, and crew assignment decisions. Retailers such as the Home Depot and Gap use software programs to analyze sales data and decide when, where, and how much to mark down prices. Many companies use systems that capture informa- tion about customers to help managers evaluate risks and make credit decisions

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