1. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Management: A Pacific Rim Focus 5e by Bartol, Tein, Matthews, Sharma Slides prepared by Rob Lawrence, Victoria University (Australia) 5–15–1 CHAPTER 5 MANAGERIAL DECISION MAKING

2. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Management: A Pacific Rim Focus 5e by Bartol, Tein, Matthews, Sharma Slides prepared by Rob Lawrence, Victoria University (Australia) 5–25–2 LECTURE OUTLINE The nature of managerial decision making Managers as decision makers Effective decision making - steps in the process Overcoming barriers to effective decision making Group decision making: managing diversity Promoting innovation: creativity in decision making

3. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Management: A Pacific Rim Focus 5e by Bartol, Tein, Matthews, Sharma Slides prepared by Rob Lawrence, Victoria University (Australia) 5–35–3 DECISION MAKING The process by which managers identify problems and try to resolve them

4. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Management: A Pacific Rim Focus 5e by Bartol, Tein, Matthews, Sharma Slides prepared by Rob Lawrence, Victoria University (Australia) 5–45–4 NATURE OF MANAGERIAL DECISION MAKING Types of problems faced: Crisis problems Serious: require immediate action Non-crisis problems Require resolution but not both immediate and important Opportunity problems Opportunity for organisational gain IF appropriate action taken

5. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Management: A Pacific Rim Focus 5e by Bartol, Tein, Matthews, Sharma Slides prepared by Rob Lawrence, Victoria University (Australia) 5–55–5 NATURE OF MANAGERIAL DECISION MAKING Decision-making situations: Programmed decisions Routine, repetitive, well-structured situations by use of pre-determined decision rules. Non-programmed decision-making Pre-determined decision rules are impractical due to novel &/or ill-structured situations. The element of risk Possibility that a chosen decision could lead to losses rather than intended results.

6. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Management: A Pacific Rim Focus 5e by Bartol, Tein, Matthews, Sharma Slides prepared by Rob Lawrence, Victoria University (Australia) 5–65–6 MANAGERS AS DECISION MAKERS Models of managerial decision making: Rational model Model suggesting managers engage in completely rational decision processes, ultimately making optimal decisions, and possess and understand all information relevant to their decisions at the time they make them. Non-rational models Models suggesting information gathering and processing limitations make it difficult for managers to make optimal decisions.

7. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Management: A Pacific Rim Focus 5e by Bartol, Tein, Matthews, Sharma Slides prepared by Rob Lawrence, Victoria University (Australia) 5–75–7 NON-RATIONAL MODELS Satisficing model Managers seek alternatives only until they find one which looks satisfactory, rather than seeking an optimal decision. Incremental model Managers make the smallest response possible to reduce the problem to at least a tolerable level. Rubbish bin model Managers behave in virtually a random way in making non- programmed decisions. Intuitive model Relying on instincts or “gut feel”.

8. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Management: A Pacific Rim Focus 5e by Bartol, Tein, Matthews, Sharma Slides prepared by Rob Lawrence, Victoria University (Australia) 5–85–8 FACTORS LIMITING RATIONAL DECISIONS Inadequate information about issues and alternatives Time and cost factors Limited perceptions (overlooking important information) Human memory holds relatively little information Limited mental calculating capacity

9. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Management: A Pacific Rim Focus 5e by Bartol, Tein, Matthews, Sharma Slides prepared by Rob Lawrence, Victoria University (Australia) 5–95–9 THE FOUR STEP MODEL Take in Figure 5.1 from Page 157

10. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Management: A Pacific Rim Focus 5e by Bartol, Tein, Matthews, Sharma Slides prepared by Rob Lawrence, Victoria University (Australia) 5–10 EFFECTIVE DECISION MAKING Steps to effective decision making: Identify the problem Scan for change, categorise as problem/non-problem, diagnose nature and cause. Generate alternative solutions Uncritically brainstorm to develop alternatives, combine and improve ideas. Evaluate and choose an alternative Feasibility, quality, cost, reversibility, ethics, acceptability. Implement and monitor Plan and implement, evaluate effect on others, monitor.

11. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Management: A Pacific Rim Focus 5e by Bartol, Tein, Matthews, Sharma Slides prepared by Rob Lawrence, Victoria University (Australia) 5–11 OVERCOMING BARRIERS TO EFFECTIVE DECISION MAKING Complacency Individuals either do not see signs of danger/opportunity, or avoid them. Defensive avoidance Individuals either deny the importance of a danger/ opportunity or deny any responsibility for taking action. Panic Individuals become so upset they frantically seek a way to solve the problem. Deciding to decide Decision makers accept the challenge and follow an effective decision-making process.

12. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Management: A Pacific Rim Focus 5e by Bartol, Tein, Matthews, Sharma Slides prepared by Rob Lawrence, Victoria University (Australia) 5–12 DECIDING TO DECIDE: GUIDELINES Appraise credibility of information Ascertain importance of threat or opportunity Determine need for urgency

13. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Management: A Pacific Rim Focus 5e by Bartol, Tein, Matthews, Sharma Slides prepared by Rob Lawrence, Victoria University (Australia) 5–13 DECISION-MAKING BIAS Framing Tendency to make different decisions depending on how a problem is presented. Prospect theory Decision makers find the prospect of an actual loss more painful than giving up the possibility of a gain. Representativeness Tendency to be overly influenced by stereotypes in making judgments about the likelihood of occurrences.

14. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Management: A Pacific Rim Focus 5e by Bartol, Tein, Matthews, Sharma Slides prepared by Rob Lawrence, Victoria University (Australia) 5–14 DECISION-MAKING BIAS Availability Tendency to judge the likelihood of an occurrence on the basis of the extent to which other like instances can easily be recalled. Anchoring and adjustment Tendency to be influenced by an initial figure, even when the information is largely irrelevant. Overconfidence Tendency to be more certain of judgments regarding the likelihood of a future event than one’s actual predictive accuracy warrants.

15. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Management: A Pacific Rim Focus 5e by Bartol, Tein, Matthews, Sharma Slides prepared by Rob Lawrence, Victoria University (Australia) 5–15 DECISION ESCALATION Situation signalling possibility of escalating commitment and accelerating losses May take two forms: Non-rational escalation Sunk costs

16. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Management: A Pacific Rim Focus 5e by Bartol, Tein, Matthews, Sharma Slides prepared by Rob Lawrence, Victoria University (Australia) 5–16 DECISION ESCALATION Non-rational escalation Tendency to increase commitment to a previously selected course of action beyond the level expected if the manager followed an effective decision-making process. Sunk costs Costs which, once incurred, are not recoverable and should not enter into considerations of future courses of action.

17. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Management: A Pacific Rim Focus 5e by Bartol, Tein, Matthews, Sharma Slides prepared by Rob Lawrence, Victoria University (Australia) 5–17 DECISION ESCALATION ‘Escalating commitment and accelerating losses’ Non-rational escalation: increased commitment of resources beyond rational limits Sunk costs: not recoverable, and should not influence decision-making

18. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Management: A Pacific Rim Focus 5e by Bartol, Tein, Matthews, Sharma Slides prepared by Rob Lawrence, Victoria University (Australia) 5–18 GROUP DECISION MAKING Advantages: More information and knowledge focused in issues Greater number and diversity of alternatives Improved acceptance and understanding of final decisions Develops group members’ skills and knowledge for the future

19. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Management: A Pacific Rim Focus 5e by Bartol, Tein, Matthews, Sharma Slides prepared by Rob Lawrence, Victoria University (Australia) 5–19 GROUP DECISION MAKING Disadvantages: More time-consuming Disagreement can cause delays and hard feelings Open to individual dominance ‘Groupthink’ may arise

20. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Management: A Pacific Rim Focus 5e by Bartol, Tein, Matthews, Sharma Slides prepared by Rob Lawrence, Victoria University (Australia) 5–20 ENHANCING GROUP DECISION MAKING Devil’s advocates (consider negative aspects) Dialectical inquiry (like a debate… For and Against) Real-options analysis (decisions which create options for future beneficial decisions) Computer-assisted group decision making (Groupware)

21. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Management: A Pacific Rim Focus 5e by Bartol, Tein, Matthews, Sharma Slides prepared by Rob Lawrence, Victoria University (Australia) 5–21 PROMOTING INNOVATION: CREATIVITY IN DECISION MAKING ‘Creativity is the cognitive process of developing an idea, concept, commodity or discovery viewed as novel by its creator or target audience.’

22. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Management: A Pacific Rim Focus 5e by Bartol, Tein, Matthews, Sharma Slides prepared by Rob Lawrence, Victoria University (Australia) 5–22 CREATIVITY IN DECISION MAKING Creativity requires both: Convergent thinking Attempting to move logically to a problem solution. Divergent thinking Generating new ways of viewing a problem and seeking novel alternatives.

23. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Management: A Pacific Rim Focus 5e by Bartol, Tein, Matthews, Sharma Slides prepared by Rob Lawrence, Victoria University (Australia) 5–23 CREATIVITY IN DECISION MAKING Three basic ingredients necessary for creativity: Domain-relevant skills Expertise in a field relevant to the problem Creativity-relevant skills Skills in generating novel ideas, approaches, modes of thinking about problems Task motivation Interest in the task for its own sake, a desire to resolve the problem

24. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Management: A Pacific Rim Focus 5e by Bartol, Tein, Matthews, Sharma Slides prepared by Rob Lawrence, Victoria University (Australia) 5–24 STAGES OF CREATIVITY PREPARATION Gathering information, defining problem, generating alternatives INCUBATION Subconscious mental activity, divergent thinking ILLUMINATION Insights gained, breakthroughs made VERIFICATION Test validity of insight, logical thinking

25. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Management: A Pacific Rim Focus 5e by Bartol, Tein, Matthews, Sharma Slides prepared by Rob Lawrence, Victoria University (Australia) 5–25 ENHANCING GROUP CREATIVITY Brainstorming Group members generate as many novel ideas as they can on a topic, without evaluation or criticism Nominal group technique (NGT) Enhances creativity and decision making by integrating individual work and group interaction within ground rules

26. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Management: A Pacific Rim Focus 5e by Bartol, Tein, Matthews, Sharma Slides prepared by Rob Lawrence, Victoria University (Australia) 5–26 Brainstorming Better group creativity Better group creativity Nominal group technique Nominal group technique TECHNIQUES TO ENHANCE GROUP CREATIVITY

27. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Management: A Pacific Rim Focus 5e by Bartol, Tein, Matthews, Sharma Slides prepared by Rob Lawrence, Victoria University (Australia) 5–27 LECTURE SUMMARY Nature of managerial decision making Crisis and non-crisis problems, programmed and non- programmed decisions Managers as decision makers Rational and non-rational models (satisficing, incremental, rubbish bin) Effective decision making The four step model - identify, generate alternatives, evaluate and choose, implement and monitor.

28. Copyright  2008 McGraw-Hill Australia Pty Ltd PPTs t/a Management: A Pacific Rim Focus 5e by Bartol, Tein, Matthews, Sharma Slides prepared by Rob Lawrence, Victoria University (Australia) 5–28 LECTURE SUMMARY Barriers to effective decision making Deciding to decide Complacency, defensive avoidance, panic, decision-making bias, decision escalation Group decision making Advantages and disadvantages, enhancing group diversity and performance Creativity in decision making Divergent and non-divergent thinking, necessary skills, techniques for enhancing group creativity