1. 3 Chapter Foundations of Decision Making Copyright ©2011 Pearson Education

2. 3-2 Learning Outcomes Describe the decision-making process Explain the three approaches managers can use to make decisions Describe the types of decisions and decision- making conditions managers face Discuss group decision making Discuss contemporary issues in managerial decision making Copyright ©2011 Pearson Education, Inc. publishing as Prentice Hall

3. 3-3 How do managers make decisions?? – Decision making is typically described as choosing among alternatives ( this view is overly simplistic because decision-making is a process rather than the simple act of choosing among alternatives. Decision making process – is a set of eight steps that begins with identifying a problem; it moves through selecting an alternative that can alleviate the problems and concludes with evaluating the decision’s effectiveness. – This process is applicable to ur own decision- making as its to business decision making. 1-3 Copyright ©2011 Pearson Education

4. 3-4 How Do Managers Make Decisions? Problem A discrepancy between an existing and a desired state of affairs Decision Criteria Factors that are relevant in a decision Copyright ©2011 Pearson Education, Inc. publishing as Prentice Hall

5. 3-5 Copyright ©2011 Pearson Education

6. 3-6 What defines a decision problem?? Decision making process 1.The identification of a problem  Most problems don’t come with neon sings identifying them as such.  Problem identification is subjective.  Problem identification is neither a simple nor an unimportant part of the decision making process. 1-6 Copyright ©2011 Pearson Education

7. 3-7 What defines a decision problem?? How do managers became aware they have a discrepancy  they have to make a comparison btw the current state of affairs and some standards ex past performance, previously set goals. 1-7 Copyright ©2011 Pearson Education

8. 3-8 Decision-Making Process 1.Identification of a problem : For the sake of simplicity we’ll formulate an easy example to which we can all relate to : – the decision of buying a vehicle ( car ). – The manager spent nearly 6000$ on auto repairs over the past few years, and now the car has a blowing engine. – Repair estimate that its not economical to fix the car. – furthermore, convenient public transportation is unavailable. So now we can say that we have a problem

9. 3-9 Decision-Making Process 2) identification of decision criteria : 2) identification of decision criteria : – Decision criteria : Factors that are relevant in a decision. How may I choose my car, on what basis my decision will be based upon.

10. 3-10 Decision-Making Process 2) identification of decision criteria : 2) identification of decision criteria : In our vehicle example the criteria's are: – model { two doors, one door }. – Price – Size – Manufacturer { French, German, American}. – Optional equipment { automatic transmission, side protection impact system, leather interior. These criteria reflect what a manager think is relevant in her \ his decision

11. 3-11 Decision-Making Process 2) identification of decision criteria : 2) identification of decision criteria : – Every decision maker has criteria,whether clearly stated or not,that guides the manager’s decision. – In this step if a manager did not identify a particular factor that means its irrelevant to this decision making – example : ( fuel economy ) wasn’t Identified as a decision criteria in this vehicle example.

12. 3-12 Decision-Making Process 3) Allocation of weights to criteria : 3) Allocation of weights to criteria : – The criteria's are not equally Important, therefore it is necessary to allocate weights to the items listed in step 2. – We give the most important criterion a weight of 10 and then assign weights to the rest against the standards. – We use our personal preferences to assign priorities to the relevant

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14. 3-14 Decision-Making Process 4) Development of alternatives 4) Development of alternatives The decision maker list the alternatives that could succeed in resolving the problem. In our vehicle example the manager listed the following alternatives. – Volvo. – Ford focus. – Pontiac G6 – Mazda CX7. – Audi A6. – Dodge Durango. – BMW 335 – Toyota Camry. – Volkswagen passat. – Isuzu ascender. – Mercedes C230.

15. 3-15 Decision-Making Process 5) Analysis of alternatives:- 5) Analysis of alternatives:- – Once the alternatives has been identified the decision maker must critically analysis each one. – Each alternative is evaluated by apprising (asses it)against the criteria. – The assessment is made by the manager. – We are using 1- 10 scale. – The weights are not included in this table.

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18. 3-18 Decision-Making Process 6) Selection of an alternative :- 6) Selection of an alternative :- – What determines the best choice ? We simply choose the alternative that generate the highest score in step 5. – The choice process is completed in this step The assumptions of scores represent an evaluation of each alternative against the criteria's weights

19. 3-19 Decision-Making Process 7) implementation of the alternative. 7) implementation of the alternative. The decision may fail if it is not implemented properly. – What is decision implementation ? Putting a decision into action.

20. 3-20 Decision-Making Process 8)Evaluation of decision effectiveness. 8)Evaluation of decision effectiveness. – Is to appraises the result – Did the alternative chosen in step 6 and implemented in step 7 accomplished the desired result.

21. 3-21 Decision Implementation The decision may still fail if its not implemented properly Putting a decision into action; includes conveying the decision to the persons who will be affected by it and getting their commitment to it. The persons who's going to implement the decision may achieve better outcome if they have participated in the making of it. Copyright ©2011 Pearson Education, Inc. publishing as Prentice Hall

22. 3-22 Common Errors in the Decision- Making Process Heuristics or ( rules of thumb)  Heuristics refers to experience-based techniques for problem solving, learning, and discovery  Rules of thumb helps in making sense of complex,uncertain and ambiguous info.  Managers use both concept to simplify their decision making, but that doesn't make it always reliable due to the errors and biases that may occur in processing and assessing the info Copyright ©2011 Pearson Education

23. 3-23 Common Errors in the Decision- Making Process Overconfidence bias when managers think they know everything, hold unrealistically positive view of themselves and their performance. The immediate gratification bias describe decision makers who want immediate rewards and avoid immediate cost. Selective perception bias when decision makers selectively organize and interpret events based on their biased perception. Copyright ©2011 Pearson Education

24. 3-24 Common Errors in the Decision- Making Process The representative bias when decision makers asses the likelihood of an event based on how closely it resembles other events ( seeing identical situation where they don't exist) The sunk costs error happens when decision makers forget that current choices cant correct the past. + plus other biases (book pg89) Copyright ©2011 Pearson Education

25. 3-25 Copyright ©2011 Pearson Education

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27. 3-27 3 approaches managers use to make decisions Rational Model assumes – that managers’ decision making will be rational, objective, logical and consistent choices to maximize value – The problem faced would be clear and unambiguous – the decision maker would have a clear and specific goal – know all possible alternatives and consequences – Decisions are made in the best interest of an org Copyright ©2011 Pearson Education, Inc. publishing as Prentice Hall

28. 3-28 3 approaches managers use to make decisions The bounded rationally which says that managers make decision rationally, but are limited by their ability to process info.  managers cant possibly analyse all info  Managers accept solutions that are good enough rather than maximizing decision by searching all possible alternative and then choosing the best.  Decision making is also influenced by org’s culture and internal politics and by a phenomenon called Escalation of commitment is an increase commitment to a pervious decision despite evidence that it may have been wrong Copyright ©2011 Pearson Education

29. 3-29 the intuitive decision-making models The third approach for decision making. The idea here is that there may be absolutely no reason or logic to the decision making process. there is an inner knowing, or intuition, or some kind of sense of what the right thing to do is. People can feel it in their heart, or in their bones, or in their gut and so on. There are also a variety of ways for people to receive information, either in pictures or words or voices. It can complement both bounded rationally and rational decision making. The advantage of having the limited info due to past experiences.

30. 3-30 How Do Problems Differ? Structured Problem – A straightforward, familiar, and easily defined problem – Customer wanting to return his purchase Unstructured Problem – A problem that is new or unusual for which information is ambiguous or incomplete. - ex: Decision to enter new market segment, to merge two organization Copyright ©2011 Pearson Education

31. 3-31 Types of decision. Types of decisions Programmed decision Non-programmed decision

32. 3-32 What Are Programmed and Nonprogrammed Decisions? Programmed-routine Decisions – A repetitive decision that can be handled using an specific approach that been designed specially for solving them ex, returning a product. structured problems It is the most efficient way to handle structured problems Manager do not have to go to the trouble and expense of an involved decision process. It relay heavily on pervious solutions. Copyright ©2011 Pearson Education, Inc. publishing as Prentice Hall

33. 3-33 Three guide lines to make a programmed decisions Procedure : – A series of interrelated sequential steps that can be used to respond to a well-structured problem (policy implementation). Rule : – An explicit statement that tells managers what they ought or ought not to do (limits on procedural actions). Policy : – A general guide that establishes parameters for making decisions about recurring problems.

34. 3-34 Difference between policy and rule? Example :- – policy :- "All organizations must not discriminate on the basis of race, color, creed, or sexual orientation." – A rule :- "All organizations that discriminate on the basis of race, color, creed, or sexual orientation will be disbanded. "

35. 3-35 Non-programmed decisions Non-programmed decisions : – They are unique and nonrecurring decision that requires a custom made solution. – Suitable for un- structured problems. – The issue is new, a different set of environmental factors exist. – Example : Deciding whether to acquire another organization. Deciding which global markets offer the most potential

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37. 3-37 Types of Problems, Types of Decisions, and Level in the Organization structured problems structured problems requires programmed decision making un structured problems un structured problems requires non programmed decision making - Lower level manager always face repetitive problems, why?? because they handle the routine decision – Top level managers are concerned with decisions which are unique and difficult and requires more managerial skills. – Most decisions full somewhere in between.

38. 3-38 What Decision Making Conditions Do Managers Face? Certainty – A situation in which a decision maker can make accurate decisions because all outcomes of alternatives are known (ideal situation) Uncertainty – A situation in which a decision maker has neither certainty nor reasonable probability estimates available ( the choice of alternative is influenced by the limited amount of available info + perspective of the manager Risk – A situation in which a decision maker is able to estimate the likelihood of certain outcomes( most likely) secondary info, past info and personal experiences are used. Copyright ©2011 Pearson Education

39. 3-39 Making decisions in groups. Many decision in organizations especially important decisions that have far reaching effects on organizational activities and personnel are typically made in groups by forming committees, task forces, review panels and work teams why ? – These groups represent the people who will be most affected by the decisions being made. – Because of their expertise.

40. 3-40 Group Decision Making Advantages – Group decisions provide more complete information – Diversity of experiences and perspectives are higher – Groups generate more alternatives – Group decisions increase acceptance of a solution Disadvantages – Group decisions are time consuming – May be subject to minority domination – Subject to pressure to conform – Responsibility is ambiguous – Subject to Groupthink ( when group exerts extensive pressure on an individual to withhold his different views in order to appear in agreement ) which undermines critical thinking Copyright ©2011 Pearson Education

41. 3-41 When Are Groups Most Effective? Groups are more effective for decisions requiring – Accuracy – Creativity – Acceptance – Speed( individual Ideal Group Size – 5-15 – 5-7 most effective Copyright ©2011 Pearson Education

42. 3-42 Improving Group Decision Making Brainstorming : – People sit around a table, the group leader state the problem in a clear manner that understood by all participants. – Members then freewheel as many alternatives as they can in a given time. – No criticism is allowed – All alternatives are recorded for later discussion a analysis – Brainstorming is merely a process for generating ideas.

43. 3-43 Improving Group Decision Making Nominal group technique : – Group members must be present, as if they are in a traditional committee meeting. – Participant are required to operate independently. – They secretly write down a list of potential solutions. – The chief advantage of this technique is that it permits the group to meet formally but does not restrict independent thinking

44. 3-44 Improving Group Decision Making Electronic meeting : – Numerous people sit together and they are linked to the computer. – Issues are presented to the participants – Participant start typing their response onto their computer. – Individuals start comments as well and all is been displayed on a projection screen in the room. Advantages: – Honesty – Speed – Anonymity – Cutting down chitchat. – Many participant can declare their point of view without interrupting others – Connecting people all over the world and cutting down the cost – Enhance feedback among the members

45. 3-45 Improving Group Decision Making Disadvantages : – Slow tippers may not have the chance to speak up their mind. – Lack of oral communications.

46. 3-46 Developing your Creativity in decision makin, How? The three component model of creativity 1. expertise ( person’s ability and knowledge) 2.Creative thinking skills ( personal characteristics) 3.Intrinsic task motivation ( the design to work on something because its interesting, involving, exciting, challenging and satisfying Copyright ©2011 Pearson Education

47. 3-47 Developing your Creativity in decision makin, How? 1. think of yourself as creative 2. pay attention to your intuition 3. move away from your comfort zone 4. engage in activities that put you outside your comfort zone 5.seek a change of scenery 6.find several right answers 7.challeng your self to defend your solution. 8. believe in finding a workable solution 9. brainstorm with others 10.turn creative idea into action. Copyright ©2011 Pearson Education