1. 7-1 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin The Nature of Managerial Decision Making Decision Making  The process by which managers respond to opportunities and threats by analyzing options, and making decisions about goals and courses of action. Decisions in response to opportunities—occurs when managers respond to ways to improve organizational performance. Decisions in response to threats—occurs when managers are impacted by adverse events to the organization.

2. 7-2 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Decision Making Programmed Decision  Routine, virtually automatic decision making that follows established rules or guidelines. Managers have made the same decision many times before There are rules or guidelines to follow based on experience with past decisions Little ambiguity involved

3. 7-3 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Decision Making Non-Programmed Decisions  Nonroutine decision making that occurs in response to unusual, unpredictable opportunities and threats.  The are no rules to follow since the decision is new. Decisions are made based on information, and a manager’s intuition, and judgment.

4. 7-4 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Decision Making Intuition – feelings, beliefs, and hunches that come readily to mind, require little effort and information gathering and result in on-the-spot decisions Reasoned judgment – decisions that take time and effort to make and result from careful information gathering, generation of alternatives, and evaluation of alternatives

5. 7-5 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin The Classical Model of Decision Making Figure 7.1

6. 7-6 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin The Administrative Model Administrative Model of Decision Making  Bounded rationality There is a large number of alternatives and available information can be so extensive that managers cannot consider it all. Decisions are limited by people’s cognitive abilities.  Incomplete information most managers do not see all alternatives and decide based on incomplete information.

7. 7-7 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin The Administrative Model Administrative Model of Decision Making  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.

8. 7-8 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Why Information Is Incomplete Figure 7.2

9. 7-9 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Six Steps in Decision Making Figure 7.4

10. 7-10 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Figure 7.5 General Criteria for Evaluating Possible Courses of Action

11. 7-11 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Cognitive Biases and Decision Making Heuristics  Rules of thumb to deal with complex situations.  Decision makers use heuristics to deal with bounded rationality. If the heuristic is wrong, however, then poor decisions result from its use. Systematic errors can result from use of an incorrect heuristic and will appear over and over since the rule used to make decision is flawed.

12. 7-12 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Sources of Cognitive Bias at the Individual and Group Levels Figure 7.6

13. 7-13 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Group Decision Making Superior to individual making Choices less likely to fall victim to bias Able to draw on combined skills of group members Improve ability to generate feasible alternatives

14. 7-14 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Group Decision Making Allows managers to process more information Managers affected by decisions agree to cooperate

15. 7-15 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Group Decision Making Groupthink  Biased decision making resulting from group members striving for agreement. Usually occurs when group members rally around a central manager’s idea, and become blindly commit to the idea without considering alternatives. The group’s influence tends to convince each member that the idea must go forward.

16. 7-16 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Improved Group Decision Making Devil’s Advocacy  A group member who defends unpopular or opposing alternatives for the sake of argument  One member of the group who acts as the devil’s advocate by critiquing the way the group identified alternatives and pointing out problems with the alternative selection.

17. 7-17 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Improved Group Decision Making Dialectical Inquiry  Two different groups are assigned to the problem and each group evaluates the other group’s choice of alternatives.  Top managers then hear each group present their alternatives and each group can critique the other. Promote Diversity  Increasing the diversity in a group may result in consideration of a wider set of alternatives.

18. 7-18 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Organizational Learning and Creativity Organizational Learning  Managers seek to improve a employee’s desire and ability to understand and manage the organization and its task environment so as to raise effectiveness. The Learning Organization  Managers try to maximize the people’s ability to behave creatively to maximize organizational learning.

19. 7-19 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Senge’s Principles for Creating a Learning Organization Figure 7.8

20. 7-20 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Organizational Learning and Creativity Creativity  The ability of the decision maker to discover novel ideas leading to a feasible course of action. A creative management staff and employees are the key to the learning organization.

21. 7-21 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Promoting Individual Creativity Organizations can build an environment supportive of creativity.  Managers must provide employees with the ability to take risks. If people take risks, they will occasionally fail.  To build creativity, periodic failures must be rewarded. This idea is hard to accept for some managers.

22. 7-22 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Building Group Creativity Brainstorming  Managers meet face-to-face to generate and debate many alternatives. Group members are not allowed to evaluate alternatives until all alternatives are listed. When all are listed, then the pros and cons of each are discussed and a short list created.  Production blocking Members cannot absorb all information being presented during the session and can forget even their own alternatives.

23. 7-23 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Building Group Creativity Nominal Group Technique  Provides a more structured way to generate alternatives in writing. Avoids the production blocking problem. Similar to brainstorming except that each member is given time to first write down all alternatives he or she would suggest. Alternatives are then read aloud without discussion until all have been listed. Then discussion occurs and alternatives are ranked.

24. 7-24 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Building Group Creativity Delphi Technique  Provides a written format without having all managers meet face-to-face.  Delphi allows distant managers to participate. Problem is distributed in written form to managers who then generate written alternatives. Responses are received and summarized by top managers. These results are sent back to participants for feedback, and ranking. The process continues until consensus is reached.