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Presentation on theme: "Chapter 6 DECISION MAKING: THE ESSENCE OF THE MANAGER’S JOB"— Presentation transcript:

© Prentice Hall, 2002 6-1

2 Learning Objectives Outline the steps in the decision-making process
You should learn to: Outline the steps in the decision-making process Explain why decision making is so pervasive in organizations Describe the rational decision maker Contrast the perfectly rational and boundedly rational approaches to decision making Explain the role that intuition plays in the decision-making process © Prentice Hall, 2002 6-2

3 Learning Objectives (cont.)
You should learn to: Identify the two types of decision problems and the two types of decisions that are used to solve them Differentiate the decision conditions of certainty, risk, and uncertainty Describe the different decision-making styles © Prentice Hall, 2002 6-3

4 Decision Making must be such that it exerts pressure to act
Decisions choices from two or more alternatives all organizational members make decisions Decision-Making Process a comprehensive, 8-step process Step 1 - Identifying a Problem problem - discrepancy between an existing and a desired state of affairs must be such that it exerts pressure to act manager is unlikely to characterize a situation as a problem unless s/he has resources necessary to act © Prentice Hall, 2002 6-4

5 Some cautions about problem identification
Some cautions about problem identification include the following: 1. Make sure it’s a problem and not just a symptom . 2. Problem identification is subjective\personal judgment. 3. Before a problem can be determined, a manager must be aware of any discrepancies. 4. Discrepancies can be found by comparing current results with some standard. 5. Pressure must be exerted on the manager to correct the discrepancy. 6. Managers aren’t likely to characterize some discrepancy as a problem if they perceive that they don’t have the authority, money, information, or other resources needed to act on it. Example. Buying a new laptop computer by a sale’s representative. 6 -

6 The Decision-Making Process
Allocation of Weights to Criteria Problem Identification Identification of Decision Criteria Development of Alternatives “My salespeople need new computers” Price Weight Warranty Screen type Reliability Screen size Reliability Screen size Warranty Weight Price Screen type 3 Acer Compaq Gateway HP Micromedia NEC Sony Toshiba a Analysis of Alternatives Selection of an Alternative Implementation of an Alternative Acer Compaq Gateway HP Micromedia NEC Sony Toshiba Acer Compaq Gateway HP Micromedia NEC Sony Toshiba Gateway Evaluation of Decision Effectiveness © Prentice Hall, 2002 6-6

7 Decision Making (cont.)
Decision-Making Process (cont.) Step 2 - Identifying Decision Criteria decision criteria - what’s relevant in making a decision. What factors are relevant in making a decision (buying a computer). Step 3 - Allocating Weights to the Criteria must weight the criteria to give them appropriate priority in the decision. Not all criteria are equally important. Step 4 - Developing Alternatives list the viable alternatives that could resolve the problem without evaluating them Step 5 - Analyzing Alternatives each alternative is evaluated against the criteria. Each alternative is evaluated by appraising it against the criteria established in step 2. © Prentice Hall, 2004 6-7

8 Assessed Values of Notebook Computer Alternatives Against Decision Criteria
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9 Evaluation of Laptop Computer Alternatives Against Criteria and Weights
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10 Decision Making (cont.)
Decision-Making Process (cont.) Step 6 - Selecting an Alternative choosing the best alternative from among those considered Step 7 - Implementing the Alternative implementation - conveying the decision to those affected by it and getting their commitment to it participation in decision-making process inclines people to support the decision decision may fail if it is not implemented properly Step 8 - Evaluating Decision Effectiveness determine whether the problem is resolved © Prentice Hall, 2002 6-10

Decision making is important to every aspect of a manager’s job. A. Decision making is part of all four managerial functions. In performing these functions, managers are often called decision makers. (See Exhibit 6.5 on p. 155.) 6 -

12 Decisions in the Management Functions
© Prentice Hall, 2002 6-12

13 The Manager As Decision Maker
Rational Decision Making. Should be objective and logical. decisions are consistent, value-maximizing choices within specified constraints managers assumed to make rational decisions Assumptions of Rationality - decision maker would: be objective and logical carefully define a problem have a clear and specific goal select the alternative that maximizes the likelihood of achieving the goal make decision in the firm’s best economic interests managerial decision making seldom meets all the tests. The answer: bounded rationality. © Prentice Hall, 2002 6-13

14 Assumptions Of Rationality
Single, well- defined goal is to be achieved Problem is clear and unambiguous All alternatives and consequences are known Rational Decision Making Preferences are clear Final choice will maximize payoff Preferences are constant and stable No time or cost constraints exist © Prentice Hall, 2002 6-14

15 Bounded/limited rationality
In spite of these limits to perfect rationality, managers are expected to “appear” rational as they make decisions. But because the perfectly rational model of decision making isn’t realistic, managers tend to operate under assumptions of: bounded rationality, which is behavior that is rational within the parameters of a simplified decision-making process that is limited (or bounded) by an individual’s ability to process information. 6 -

16 The Manager As Decision Maker (cont.)
Bounded Rationality: within the parameters of a simplified decision-making process: satisfice - accept solutions that are “good enough” rather than maximizing payoffs. escalation of commitment - increased commitment to a previous decision despite evidence that it may have been wrong. strongly influenced by the organization’s culture, internal politics, power considerations. - refusal to admit that the initial decision may have been flawed/defected 3. Intuitive © Prentice Hall, 2002 6-16

17 The Manager As Decision Maker (cont.)
Role of Intuition intuitive decision making - subconscious process of making decisions on the basis of experience and accumulated judgment does not rely on a systematic or thorough analysis of the problem generally complements a rational analysis © Prentice Hall, 2002 6-17

18 What Is Intuition? Intuition Experienced- based decisions Values or
Decisions based on experience Decisions based on ethical values or culture Decisions based on feelings and emotions Experienced- based decisions Values or ethics-based decisions Affect- initiated decisions Intuition Subconscious mental processing Cognitive- based decisions Decisions based on subconscious data Decisions based on skills, knowledge, or training © Prentice Hall, 2002 6-18

19 Types of Problems and Decisions
Well-Structured Problems - straightforward, familiar, and easily defined. In handling this situation, a manager can use: ex. Student missed the final exam for management 1. Programmed Decision - used to address structured problems. It is a repetitive decision that can be handled by a routine approach. minimize the need for managers to use discretion facilitate organizational efficiency There are three possible programmed decisions: procedure - series of interrelated sequential steps used to respond to a structured problem. Ex. Buying computer by procurement department. rule - explicit statement of what to do or not to do. Ex. Rules about absenteeism. policy - guidelines or parameters for decision making rather than specifically stating what should or should not be done. Ex. Customer always comes first. © Prentice Hall, 2002 6-19

20 Types of Problems and Decisions
Poorly-Structured Problems - new, unusual problems for which information is ambiguous or incomplete. These problems are best handled by: ex. Investing in new unproven technology. Nonprogrammed Decisions - used to address poorly- structured problems. produce a custom-made response more frequent among higher-level managers few decisions in the real world are either fully programmed or nonprogrammed © Prentice Hall, 2002 6-20

21 Types Of Problems, Types Of Decisions, And Level In The Organization
Top Lower Well-structured Ill-structured Type of Problem Programmed Decisions Nonprogrammed Decisions © Prentice Hall, 2002 6-21

22 Decision-Making Conditions
Certainty is a situation in which a manager can make accurate decisions because the outcome of every alternative is known. This isn’t characteristic of most managerial decisions. idealistic rather than realistic. More common is the situation of risk in which the decision maker is able to estimate the likelihood of certain outcomes. Exhibit 6.9 on p. 163 shows an example of how a manager might make decisions under risk. © Prentice Hall, 2002 6-22

23 Expected Value for Revenues from the Addition of One Ski Lift
© Prentice Hall, 2002 6-23

24 Decision-Making Conditions
Uncertainty is a situation in which the decision maker has neither certainty nor reasonable probability estimates available. a. The choice of alternative is influenced by the limited amount of information available. b. It’s also influenced by the psychological orientation of the decision maker. 1) An optimistic manager will follow a maximax choice (maximizing the maximum possible payoff). See Exhibit 6.10 on p. 164. 2) A pessimistic one will pursue a maximin choice (maximizing the minimum possible payoff). See Exhibit 6.10 on p. 164. 3) The manager who desires to minimize the maximum regret will opt for a minimax choice. See Exhibit 6.11 on p. 165. © Prentice Hall, 2002 6-24

25 Payoff Matrix © Prentice Hall, 2002 6-25

26 Regret Matrix © Prentice Hall, 2002 6-26

27 Decision-Making Styles
Managers have different styles when it comes to making decisions and solving problems. One perspective proposes that people differ along two dimensions in the way they approach decision making. (See Exhibit 6.12 on p. 166.) 1. One dimension is an individual’s way of thinking—rational or intuitive. The other is the individual’s tolerance for ambiguity—low or high. 2. These two dimensions lead to a two by two matrix with four different decision-making styles. a. The directive style is one that’s characterized by low tolerance for ambiguity and a rational way of thinking. b. The analytic style is one characterized by a high tolerance for ambiguity and a rational way of thinking. c. The conceptual style is characterized by an intuitive way of thinking and a high tolerance for ambiguity. d. The behavioral style is one characterized by a low tolerance for ambiguity and an intuitive way of thinking. 3. Most managers realistically probably have a dominant style and alternate styles, with some relying almost exclusively on their dominant style and others being more flexible depending on the situation. 6 -

28 The Manager As A Decision Maker (cont.)
Decision-Making Styles two dimensions define the approach to decision making way of thinking - differs from rational to intuitive tolerance for ambiguity - differs from a need for consistency and order to the ability to process many thoughts simultaneously define four decision-making styles Directive - fast, efficient, and logical Analytic - careful and able to adapt or cope with new situations Conceptual - able to find creative solutions Behavioral - seek acceptance of decisions © Prentice Hall, 2002 6-28

29 Decision-Making Styles
High Low Tolerance for Ambiguity Analytic Conceptual Directive Behavioral Rational Intuitive Way of Thinking © Prentice Hall, 2002 6-29

30 Managing Workforce Diversity
Diversity in Decision Making Advantages - diverse employees: provide fresh perspectives offer differing interpretations of problem definition increase the likelihood of creative and unique solutions Disadvantages - diverse employees: require more time to reach a decision may have problems of communication may create a more complex, confusing, and ambiguous decision-making process may have difficulty in reaching agreement © Prentice Hall, 2002 6-30

31 Overview Of Managerial Decision Making
Decision-Making Approach Rationality Bounded Rationality Intuition Types of Problems and Decisions Well-structured - programmed Poorly structured - nonprogrammed Decision Choose best alternative - maximizing - satisficing Implementing Evaluating Decision-Making Process Decision-Making Conditions Certainty Risk Uncertainty Decision Maker Style Directive Analytic Conceptual Behavioral © Prentice Hall, 2002 6-31

32 Discussion In the first step of the decision-making process, how do managers know when there is a problem? Before something can be characterized as a problem (a discrepancy between an existing and a desired state of affairs), managers have to be aware of the discrepancy, they have to be under pressure to take action, and they must have the resources necessary to take action. 6 -

33 Discussion Why is the allocation of weights to criteria important in making decisions? because all criteria are not equally important, so the decision maker must weight the items in order to give them the correct priority 6 -

34 Discussion How do managers develop, analyze, select, and implement alternatives and then assess whether the decision was effective? Developing alternatives requires decision makers to list the viable alternatives that could resolve the problem. In analyzing alternatives, the decision maker assesses the strengths and weaknesses of each alternative as it compares with the established criteria and weights. Selecting an alternative is simply a matter of identifying the one with the highest weighted score. In the implementation phase, the decision is conveyed to those affected and their commitment to it is obtained. To assess whether the decision was effective, managers should ask whether it accomplished the desired result. 6 -

35 Discussion Describe decision making from the rationality and bounded rationality viewpoints. Managerial decision making is assumed to be rational; that is, managers are assumed to make consistent, value-maximizing choices within specified constraints. In bounded rationality, managers construct simplified models that extract the essential features from problems without capturing all their complexity. Then, given information processing limitations and constraints imposed by the organization, managers attempt to behave rationally within the parameters of the simple model. The result is a satisficing decision rather than a maximizing one. 6 -

36 Discussion Why is decision making often described as the essence of the manager’s job? As shown in Exhibit 6.5, decisions are made in all four functions of management. Almost anything a manager does in terms of planning, organizing, leading, and controlling involves decision making. The pervasiveness of decision making in management explains why managers are often called decision makers. 6 -

37 Discussion How might an organization’s culture influence the way in which managers make decisions? An organization’s culture might influence how managers make decisions by emphasizing how much risk taking is permitted and by the importance placed on effectiveness of the decisions made. For example, if the organizational culture rewards decisions that reinforce the status quo, chances are good that those types of decisions will be made. 6 -

38 Discussion “As managers use computer and software tools more often, they’ll be able to make more rational decisions.” Do you agree or disagree with that statement? Why? Although computer and software tools will allow managers to more easily gather information and analyze it, it’s doubtful that utilizing computers will allow managers to be more rational. If we look at the assumptions of rationality (problem clarity, goal orientation, known options, clear preferences, and so forth as shown in Exhibit 6.6), it’s obvious that even by adding computers to the decision-making process, managers’ decision making still won’t be perfectly rational. 6 -


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