6.3 Programmed and Nonprogrammed Decisions

Managers face two main types of decisions: programmed and nonprogrammed. Programmed decisions are routine and follow set procedures, while nonprogrammed decisions tackle unique, complex situations. Understanding these differences helps managers approach decision-making more effectively.

The decision-making process involves six key steps, from recognizing the problem to evaluating results. Managers use heuristics and tools like cost-benefit analysis to navigate challenges. Recognizing bounded rationality and satisficing helps managers make practical choices in real-world scenarios.

Types of Managerial Decisions

Programmed vs nonprogrammed decisions

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• Programmed decisions involve routine, repetitive situations with clear, specific procedures for making the decision
  • Often made by lower-level managers or employees
  • Reordering supplies when inventory reaches a certain level (office supplies, raw materials)
  • Processing payroll according to established guidelines
  • Handling customer complaints based on company policies (refunds, replacements)
• Nonprogrammed decisions arise in unique, complex, or novel situations with no established procedures or decision rules
  • Require creativity, judgment, and more information
  • Often made by higher-level managers
  • Deciding whether to enter a new market (international expansion, new product category)
  • Developing a new product line to meet changing consumer preferences
  • Responding to a crisis or unexpected event (natural disaster, data breach)
  • May involve intuition when faced with incomplete information or time constraints

Heuristics in programmed decision-making

• Heuristics simplify complex problems and enable quick judgments by using simple, efficient rules or mental shortcuts
• Availability heuristic judges the likelihood of an event based on how easily examples come to mind
  • Assuming a product is popular because of frequent advertisements (billboards, social media ads)
• Representativeness heuristic judges the probability of an event based on its similarity to a typical case
  • Assuming a job candidate will perform well because they resemble a successful employee (similar education, experience)
• Anchoring and adjustment heuristic makes an initial estimate (anchor) and adjusts it based on additional information
  • Estimating the value of a used car based on the original price and adjusting for age and condition (mileage, wear and tear)

Six-step nonprogrammed decision process

1. Recognize and define the problem or opportunity
   • Identify the discrepancy between the current state and the desired state
   • Gather relevant information to understand the situation (market research, financial data)
2. Generate alternative solutions
   • Brainstorm potential courses of action
   • Encourage creative thinking and consider a wide range of options (in-house development, partnerships, acquisitions)
3. Evaluate alternatives
   • Assess the feasibility, risks, and potential outcomes of each alternative
   • Consider the resources required and the impact on stakeholders (employees, customers, investors)
   • Conduct a risk assessment to identify potential threats and opportunities
4. Choose the best alternative
   • Select the option that best meets the decision criteria and aligns with organizational goals
   • Consider the trade-offs and potential consequences of each choice (short-term vs long-term benefits)
   • Use a decision tree to visualize and analyze complex decision scenarios
5. Implement the chosen alternative
   • Develop a plan to put the decision into action
   • Allocate resources and assign responsibilities (budgets, personnel, timelines)
   • Communicate the decision and its rationale to relevant parties (employees, partners, media)
6. Evaluate the results
   • Monitor the outcomes of the implemented decision
   • Assess whether the desired results were achieved (key performance indicators, customer feedback)
   • Make adjustments as needed based on feedback and changing circumstances (market conditions, competitor actions)

Decision-Making Challenges and Tools

• Bounded rationality recognizes that decision-makers have limited information, cognitive abilities, and time
• Satisficing involves choosing the first acceptable solution rather than the optimal one due to constraints
• Cost-benefit analysis helps evaluate alternatives by comparing the expected costs and benefits of each option