University of Bahrain College of Business Administration Management & Marketing Department Chapter Five: Decision Making, Learning, Creativity and Entrepreneurship Dr.Mahmood AsadMGT230: Chapter51

The Nature of Managerial Decision Making Every time managers act to plan, organize, direct, or control organizational activities, they make a stream of decisions. One of the main tasks facing a manager is to manage the organizational environment. MGT230: Chapter52Dr.Mahmood Asad

The Nature of Managerial Decision Making Decision Making is the process by which managers respond to opportunities and threats by analyzing options, and making determinations about specific organizational goals and courses of action. MGT230: Chapter53Dr.Mahmood Asad

The Nature of Managerial Decision Making Decision making in response to opportunities: – Occurs when managers search for ways to improve organizational performance to benefit stakeholders. MGT230: Chapter54Dr.Mahmood Asad

The Nature of Managerial Decision Making Decision making in response to threats: – Occurs when events inside or outside the organization are adversely affecting organizational performance and managers are searching for ways to increase performance. MGT230: Chapter55Dr.Mahmood Asad

Programmed and Nonprogrammed Decision Making PROGRAMMED DECISION MAKING Programmed Decision is routine, virtually automatic decision making that follows established rules or guidelines. MGT230: Chapter56Dr.Mahmood Asad

Programmed and Nonprogrammed Decision Making NONPROGRAMMED DECISION MAKING Nonprogrammed Decision is nonroutine decision making that occurs in response to unusual, unpredictable opportunities and threats. MGT230: Chapter57Dr.Mahmood Asad

Programmed and Nonprogrammed Decision Making 1.Intuition is feelings, beliefs, and hunches that come readily to mind, require little effort and information gathering and result in on-the-spot decisions. 2.Reasoned judgment is decisions that take time and effort to make and result from careful information gathering, generation of alternatives, and evaluation of alternatives. MGT230: Chapter58Dr.Mahmood Asad

Programmed and Nonprogrammed Decision Making – “Exercising” one’s judgment is a more rational process than “going with” one’s intuition. – Both intuition and judgment often are flawed and can result in poor decision making. – Error is much greater in nonprogammed decision making than in progammed decision making. MGT230: Chapter59Dr.Mahmood Asad

(1) The Classical Model Classical Decision Making Model is 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. MGT230: Chapter510Dr.Mahmood Asad

(1) The Classical Model – Optimum decision is The most appropriate decision in light of what managers believe to be the most desirable future consequences for their organization. MGT230: Chapter511Dr.Mahmood Asad

MGT230: Chapter512 Figure 5.1: The Classical Model of Decision Making Dr.Mahmood Asad

(2) The Administrative Model Administrative model is 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. ▫ The administrative model is based on three important concepts: 1.Bounded rationality 2.Incomplete information 3.Satisficing MGT230: Chapter513Dr.Mahmood Asad

(2) The Administrative Model 1.BOUNDED RATIONALITY Bounded rationality is cognitive limitations that constrain one’s ability to interpret, process, and act on information. MGT230: Chapter514Dr.Mahmood Asad

(2) The Administrative Model 2.INCOMPLETE INFORMATION Information is incomplete because the full range of decision- making alternatives is unknowable in most situations and the consequences associated with known alternatives are uncertain. Information is incomplete because of risk and uncertainty, ambiguity, and time constraints. MGT230: Chapter515Dr.Mahmood Asad

MGT230: Chapter516 Figure 5.2: Why Information is Incomplete Dr.Mahmood Asad

(2) The Administrative Model RISK AND UNCERTAINTY Risk is the degree of probability that the possible outcomes of a particular course of action will occur. MGT230: Chapter517Dr.Mahmood Asad

(2) The Administrative Model Uncertainty is probabilities cannot be given for outcomes and the future is unknown. MGT230: Chapter518Dr.Mahmood Asad

(2) The Administrative Model AMBIGUOUS INFORMATION Ambiguous information is Information that can be interpreted in multiple and often conflicting ways. Look at Figure 5.3. Do you see a young woman or an old woman? MGT230: Chapter519Dr.Mahmood Asad

MGT230: Chapter520 Figure 5.3: Ambiguous Information: Young Woman or Old Woman? Dr.Mahmood Asad

(2) The Administrative Model TIME CONSTRAINTS AND INFORMATION COSTS Managers have neither the time nor money to search for all possible alternatives and evaluate potential consequences of those alternatives. MGT230: Chapter521Dr.Mahmood Asad

(2) The Administrative Model 3. SATISFICING Satisficing is searching for and choosing an acceptable, or satisfactory response to problems and opportunities, rather than trying to make the best decision. MGT230: Chapter522Dr.Mahmood Asad

Steps in the Decision-Making Process MGT230: Chapter523Dr.Mahmood Asad

(1) Recognize the Need for a Decision Some stimuli usually spark the realization that there is a need to make a decision. Managers can be proactive or reactive in recognizing the need to make a decision, but managers must recognize this need and respond in a timely and appropriate way. MGT230: Chapter524Dr.Mahmood Asad

(2) Generate Alternatives Manager must generate a set of feasible alternative courses of action to take in response to the opportunity or threat. MGT230: Chapter525Dr.Mahmood Asad

(3) Assess Alternatives Evaluate the advantages and disadvantages of each alternative. Successful managers use four criteria to evaluate the pros and cons of alternative courses of action: MGT230: Chapter526Dr.Mahmood Asad

MGT230: Chapter527 Figure 5.5: General Criteria for Evaluating Possible Courses of Action Dr.Mahmood Asad

(3) Assess Alternatives 1.Legality: not violate any domestic and international laws or government regulations. 2.Ethicalness: will not harm any stakeholder group. 3.Economic feasibility: alternatives can be accomplished given the organization’s performance goals. 4.Practicality: managers have the capabilities and resources required to implement the alternative and not threaten the attainment of other organizational goals. MGT230: Chapter528Dr.Mahmood Asad

(4) Choose among Alternatives Rank the various alternatives and make a decision. When ranking alternatives, managers must be sure all the information available is brought to bear on the problem or issue at hand. MGT230: Chapter529Dr.Mahmood Asad

(5) Implement the Chosen Alternative When alternative implemented, many subsequent and related decisions must be made. Although the need to make subsequent decisions to implement the chosen course of action may seem obvious, many managers make a decision and then fail to act on it. This is the same as not making a decision at all. MGT230: Chapter530Dr.Mahmood Asad

(6) Learn from Feedback Effective managers always conduct a retrospective analysis to see what they can learn from past successes or failures. Managers must establish a formal procedure with which they can learn from the results of past decisions. The procedure include the following steps: MGT230: Chapter531Dr.Mahmood Asad

(6) Learn from Feedback 1.Compare what actually happened to what was expected to happen as a result of the decision. 2.Explore why any expectations for the decision were not met. 3.Derive guidelines that will help in future decision making. MGT230: Chapter532Dr.Mahmood Asad