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McGraw-Hill 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill 2003 The McGraw-Hill Companies, Inc. All rights reserved.

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Chapter

3 Managerial DecisionMaking

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Learning Objectives

After studying Chapter 3, you will know:

the kinds of decisions you will face as a manager

how to make rational decisions

the pitfalls you should avoid when making decisions the pros and cons of using a group to make decisions

the procedures to use in leading a decision-making group

how to encourage creative decisions

the processes by which decisions are made in organizations

how to make decisions in a crisis

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Lack of

Structure

Risk

Conflict

Uncertainty

Characteristics Of Managerial Decisions

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5/30McGraw-Hill 2003 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill 2003 The McGraw-Hill Companies, Inc. All rights reserved.

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(cont.)

Lack of structure

the usual state of affairs in managerial decision making

programmed decisions- decisions that have been encountered

and made in the past

have objectively correct answers

are solvable by using simple rules, policies, or numerical

computations

nonprogrammed decisions- new, novel, complex decisions

having no proven answers

decision maker must create or impose a method for making the

decision

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Comparison Of Types Of Decisions

Programmed Decisions Nonprogrammed Decisions

Problem

Procedure

Business

example

Frequent, repetitive, routine.

Much certainty regarding

cause and effect relationships.

Dependence on policies,

rules, and definite procedures.

Periodic reorders of inventory.

Novel, unstructured. Much

uncertainty regarding cause and

effect relationships.

Necessity for creativity, intuition,

tolerance for ambiguity, creative

problem solving.

Diversification in new products

and markets.

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(cont.)

Uncertainty and risk

certainty- have sufficient information to predict precisely the

consequences of ones actions

uncertainty- have insufficient information to know the

consequences of different actions

cannot estimate the likelihood of various consequences of their

actions

risk- available information permits estimation of the

likelihood of various consequences

probability of an action being successful is less than 100 percent,

and losses may occur

good managers prefer to managerisk

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Conflict

opposing pressures from different sources

occurs at two levels

psychological conflict - individual decision makers: perceive several attractive options

perceive no attractive options

conflict between individuals or groups

few decisions are without conflict


(cont.)

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Identifying anddiagnosing

the problem

Generating

alternative

solutions

Evaluating

alternatives

Evaluating

the decision

Implementing

the decision

Making the

choice

The Stages Of Decision Making

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Stages Of Decision Making

Identifying and diagnosing the problem recognize that a problem exists and must be solved

problem - discrepancy between current state and:

pastperformance

currentperformance of other organizations

futureexpected performance

decision maker must want to resolve the problem and have the

resources to do so

Generating alternative solutions ready-made solutions- ideas that have been tried before

may follow the advice of others who have faced similar problem

custom-made solutions- combining new ideas into solutions

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Stages Of Decision Making (cont.)

Evaluating alternatives

determining the value or adequacy of the alternatives

predict the consequences that will occur if the various options

are put into effect managers should consider several types of consequences

success or failure of the decision will affect the track record of

the decision maker

contingency plans- alternative courses of action that can beimplemented based on how the future unfolds

contingency plans are necessary to prepare for different scenarios

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Making the choice

maximize- a decision realizing the best possible outcome

requires searching thoroughly for a complete range of

alternatives

each alternative is carefully assessed

compare one alternative to another

satisfice- choose an option that is acceptable although not

necessarily the best or perfect

compare the choice with the goal, not against other options

search for alternatives ends when an okay solution is found

optimizing- achieving the best possible balance among

several goals

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Implementing the decision

those who implement the decision must:

understandthe choice and why it was made

be committedto its successful implementation

cant assume that things will go smoothly during

implementation

identi fy potential problems

identi fy potential opportunities always expect the unexpected

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List the resources and

activities required to

implement each step

Estimate the time needed

for each step

Determine how things will

look when the decision

is fully operational

Implementation

Plan

Order the steps necessaryto achieve a fully

operational decision

Assign responsibility foreach step to specific

individuals

Steps In The Implementation Plan

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Evaluating the decision

collecting information on how well the decision is working

evaluation is useful whether the feedback is positive or

negative

if decision appears inappropriate, the process cycles back to

the first stage

The best decision

nothing can guarantee a best decision must be confident that the proceduresused are likely to

produce the best decision given the circumstances

vigilance- decision maker carefully and conscientiously executes

all stages of decision making 3 16

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Barriers To Effective Decision Making

Psychological biases

biases that interfere with objective rationality

i l lusion of control- a belief that one can influence events

even when one has no control over what will happen

f raming effects- how problems or decision alternatives are

phrased or perceived

subjective influences can override objective facts

discount the future- weigh short-term costs and benefitsmore heavily than longer-term costs and benefits

the avoidance of short-term costs or the seeking of short-term

rewards may result in negative long-term consequences

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Barriers To Effective Decision Making

(cont.)

Time pressures

todays economy places a premium on acting quickly and

keeping pace

in order to make timely and high-quality decisions one must:

focus on real-time information

involve people more effectively and eff iciently

rely on trusted experts

take a realistic view of conflict Social realities

many decisions result from intensive social interactions,

bargaining, and politicking

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Potential Advantages

1. Larger pool of information

2. More perspectives and

approaches

3. Intellectual stimulation

4. People understand the

decision

5. People are committed to

the decision

Pros And Cons Of Using A Group To

Make Decisions

Potential Disadvantages

1. One person dominates

2. Satisficing

3. Groupthink - team spirit

discourages disagreement

4. Goal displacement - new

goals replace original goals

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Leadership1. Avoid domination

2. Encourage input

3. Avoid groupthink

and satisficing

4. Remember goals

Effective Group

Decision Making

Constructive Conflict1. Air legitimate

differences

2. Stay task-focused

3. Be impersonal

4. Play devils advocate

Managing Group Decision Making

Creativity1. Brainstorm

2. Avoid criticizing

3. Exhaust ideas

4. Combine ideas

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Leadership style

leader should attempt to minimize process-related problems

leader should:

avoid dominating the discussion encourage less vocal members to express themselves

mitigate pressures for conformity

stay alert to groupthink and satisficing

prevent group from losing sight of the primary objective

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i i i ki

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(cont.)

Constructive conflict a certain amount of constructiveconflict should exist

cogni tive confl ict- issue-based differences in perspectives or

judgments

a constructive type of conflict

can air legitimate differences of opinion and develop better ideas

affective conf l ict- emotional disagreement directed toward

other people that is likely to be destructive conflict

two techniques used to purposely program cognitive conflict

devils advocate- has the job of criticizing others

dialectic- structured debate comparing two conflicting courses of

action

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i i i ki

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(cont.)

Encouraging creativity

creativity is essential to survival and involves:

creation- bringing a new thing into being

synthesis- joining two previously unrelated things

modification- improving something or giving it new application

to become creative one must:

recognize creative potential in little opportunities

obtain sufficient resources

escape from work once in awhile and read widely

brainstorming- group generates ideas about a problem

evaluation of ideas is postponed until all have been proposed

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O i i l D i i M ki

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Organizational Decision Making

Constraints on decision makers organizations cannot do whatever they wish

MarketHuman

Financial

Constraints

LegalOrganizational

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O i i l D i i M ki ( )

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HeadingOrganizational Decision Making (cont.)

Models of organizational decision processes bounded rationali ty- decision makers cannot be truly

rational because:

they have imperfect, incomplete information about alternatives

the problems they face are so complex

human beings cannot process all the information to which they

are exposed

time is limited

people in the organization have conflicting goals

when the conditions above hold, perfectly rational decision

making gives way to more biased, subjective decision

processes

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O i ti l D i i M ki ( t )

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Models of organizational decision processes (cont.) incremental model- major decisions arise through a series of

smaller decisions

piecemeal approach to larger solutions

coalitional model- groups with differing preferences use

power and negotiation to influence decisions

used when people disagree about goals or compete for resources

garbage can model- a chaotic process leading to seemingly

random decisions

occurs when people are unsure of their goals and what should be

done

a dramatic departure from rationality in decision making

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O i ti l D i i M ki ( t )

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Negotiations and politics

negotiations necessary to galvanize the preferences of

competing groups and individuals

organizational poli tics- people try to influence decisions to

promote their own interests

use power to pursue hidden agendas

create common goals- helps to make decision making a

collaborative rather than a competitive process

Decision making in a crisis

stress and time constraints make decisions less effective

should be prepared for crises in advance

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Mi k A i H N T

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HeadingMistaken Assumptions: How Not To

Handle Crisis Management

We dont have a crisis.We can handle a crisis.

Crisis management is a luxury we cant afford.

If a major crisis happens, someone else will rescue us.

Accidents are just a cost of doing business.

Most crises are the fault of bad individuals; therefore, theres not muchwe can do to prevent them.

Only executives need to be aware of our crisis plans; why scare our

employees or members of the community?

We are tough enough to react to a crisis in an objective and rational

manner.

The most important thing in crisis management is to protect the good

image of the organization through public relations and advertising

campaigns.

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Plan For Crisis Management

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HeadingPlan For Crisis Management

Evaluation and

Diagnostic Actions

Communication

Actions

Strategic

Actions

Crisis

ManagementTechnical and

Structural ActionsPsychological andCultural Actions

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Organizational Decision Making (cont )

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Emergent strategies

the strategy that evolves from all the activities engaged in by

people throughout the organization

result from dynamic processes in which people engage in

discovery, implement decisions, and reconsider the initial

decision after discovering new things by chance

emergent strategies may start at any organizational level

emergent strategies are generally the result of constructive

processes

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Emergent Strategies

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Heading

Choice

Set objectives

Generate options

Evaluate and selectacceptable, feasible,

suitable option

DiscoverySystematic gathering

and analysis of

the facts

Monitoring

outcomes of

actions

Action

Implementing

chosen option

Correcting

deviations fromfrom plan

Emergent Strategies

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