2 Learning ObjectivesUnderstand the nature of managerial decision making, differentiate between programmed and non-programmed decisions, and explain why non-programmed decision making is a complex, uncertain process.Describe the six steps that managers should take to make the best decisions and explain how cognitive biases can lead managers to make poor decisions.
3 Learning ObjectivesIdentify the advantages and disadvantages of group decision making, and describe techniques that can improve it.Explain the role that organizational learning and creativity play in helping managers to improve their decisions.Describe how managers can encourage and promote entrepreneurship to create a learning organization and differentiate between entrepreneurs and intrapreneurs
4 The Nature of Managerial Decision Making The process by which managers respond to opportunities and threats that confront them by analyzing options and making determinations about specific organizational goals and courses of action.A good decision results in the selection of appropriate goals and courses of action that increase organizational performance. Bad decisions result in lower performance.Decision making is central to being a manager, and whenever managers engage in planning, organizing, leading, and controlling, they are constantly making decisions.4
5 The Nature of Managerial Decision Making Decisions in response to opportunitiesoccurs when managers respond to ways to improve organizational performance to benefit customers, employees, and other stakeholder groupsDecisions in response to threatsevents inside or outside the organization are adversely affecting organizational performance
6 Decision Making Programmed Decision Routine, virtually automatic processDecisions have been made so many times in the past that managers have developed rules or guidelines to be applied when certain situations inevitably occurManagers are always searching for ways to improve their decision making in order to improve organizational performance.All decisions made by managers are programmed or nonprogrammed.Most decision-making that relates to day-to-day running of an organization is programmed decision making. Programmed decision-making is possible when managers have the information they need to create rules that will guide decision-making.6
7 Decision Making Non-Programmed Decisions Nonroutine decision making that occurs in response to unusual, unpredictable opportunities and threatsRules do not exist because the situation is unexpected or uncertain and managers lack the information they would need to develop rules to cover it.7
8 Decision Making Intuition Reasoned judgment feelings, beliefs, and hunches that come readily to mind, require little effort and information gathering and result in on-the-spot decisionsReasoned judgmentdecisions that take time and effort to make and result from careful information gathering, generation of alternatives, and evaluation of alternativesTo make decisions in the absence of decision rules, managers may rely upon their intuition or they may make reasoned judgments.Although ‘exercising’ one’s judgment is a more rational process than ‘going’ with one’s intuition, both processes are often flawed and can result in poor decision making. Thus, the likelihood of error is much greater in nonprogrammed decision making than in programmed decision making.Sometimes managers have to make rapid decisions and don’t have the time for a more careful consideration of the issues involved, while at other times, they do have the time available to make reasoned judgments.
9 The Classical Model Classical Model of Decision Making A prescriptive model of decision making that assumes the decision maker can identify and evaluate all possible alternatives and their consequences and rationally choose the most appropriate course of action.The classical model is prescriptive, which means that is specifies how decisions should be made. Managers using this model make a series of simplifying assumptions about the nature of the decision-making process.The model’s premise is that managers have access to all of the information they need to make the optimum decision. It also assumes that managers can easily list and rank each alternative from most to least preferred in order to reach an optimum decision.9
10 The Classical Model Optimum decision The most appropriate decision in light of what managers believe to be the most desirable future consequences for their organization.
11 The Classical Model of Decision Making Figure 7.1
12 The Administrative Model An approach to decision making that explains why decision making is inherently uncertain and risky and why managers usually make satisfactory rather than optimum decisions.It is based upon three important concepts: bounded rationality, incomplete information, and satisficing.12
13 The Administrative Model Bounded rationalityCognitive limitations that constrain one’s ability to interpret, process, and act on information.Incomplete informationBecause of risk and uncertainty, ambiguity, and time constraintsMarch and Simon coined the term bounded rationality to describe the situation in which the number of alternatives a manager must identify is so great and the amount of information so vast that it is difficult for the manager to even come close to evaluating it all before making a decision.Incomplete is information because in most cases the full range of decision-making alternatives is unknown and the consequences associated with known alternatives are uncertain. In other words, information is incomplete because of risk and uncertainty, ambiguity, and time constraints.Risk is present when managers know the possible outcomes of a particular course of action and can assign probabilities to them.Uncertainty exists when the probabilities of alternative outcomes cannot be determined, and future outcomes are unknown. Ambiguous information occurs when the meaning of information is not clear, when it can be interpreted in multiple and often conflicting ways.13
15 Causes of Incomplete Information RiskThe degree of probability that the possible outcomes of a particular course of action will occur.Uncertaintythe probabilities of alternative outcomes cannot be determined and future outcomes are unknown15
16 Causes of Incomplete Information Ambiguous InformationInformation that can be interpreted in multiple and often conflicting ways.Young Woman or Old WomanFigure 7.316
17 Causes of Incomplete Information Time constraints and information costsmanagers have neither the time nor money to search for all possible alternatives and evaluate potential consequencesSatisficingSearching for and choosing an acceptable, or satisfactory response to problems and opportunities, rather than trying to make the best decisionSatisficing is the way managers cope with bounded rationality and incomplete information. Satisficing means that managers explore a limited sample of all potential alternatives.
18 Six Steps in Decision Making Using the work of March and Simon as a basis, researchers have developed a step-by-step model of the decision-making process. There are six steps that managers should consciously follow to make a good decision.Step 1. Recognize Need for a DecisionSparked by an event such as environment changes; can be internal or external. Be it proactive or reactive, it is imperative that managers immediately recognize this need and respond in a timely and appropriate manner.Step 2. Generate AlternativesManagers must develop feasible alternative courses of action.If good alternatives are missed, the resulting decision is poor.It is hard to develop creative alternatives, so managers need to look for new ideas.Step 3. Evaluate AlternativesWhat are the advantages and disadvantages of each alternative?Managers should specify criteria, then evaluate. Successful managers use four criteria to evaluate the pros and cons of alternative courses of action. Often a manager must consider these four criteria simultaneously. Some of the worst managerial decisions can be traced to poor assessment of the alternatives.Step 4. Choose Among AlternativesRank the various alternatives and make a decisionManagers must be sure all the information available is brought to bear on the problem or issue at handStep 5. Implement Chosen AlternativeManagers must now carry out the alternative.Often a decision is made and not implemented.Step 6. Learn From FeedbackManagers should consider what went right and wrong with the decision and learn for the future.Without feedback, managers do not learn from experience and will repeat the same mistake over.Figure 7.418
19 General Criteria for Evaluating Possible Courses of Action STEP THREE - Evaluate alternativesOnce managers have generated a set of alternatives, they must evaluate the advantages and disadvantages of each one. Successful managers use four criteria to evaluate the pros and cons of alternative courses of action. Often a manager must consider these four criteria simultaneously. Some of the worst managerial decisions can be traced to poor assessment of the alternatives.Legality - Is the alternative legal and will not violate any domestic and international laws or government regulations?Ethicalness - Is the alternative ethical and will not bring harm stakeholders unnecessarily?Economic Feasibility - Can organization’s performance goals sustain this alternative?Practicality - Does the management have the capabilities and resources required to implement the alternative?Figure 7.519
20 Feedback ProcedureCompare what actually happened to what was expected to happen as a result of the decisionExplore why any expectations for the decision were not metDerive guidelines that will help in future decision makingSTEP SIX – Learning from FeedbackEffective managers always conduct a retrospective analysis in order to learn from past successes or failures. To ensure that they learn from experience, managers should establish a formal procedure that includes the following steps: