Principles of Management (I) Managers and Decision Makers Mohammad Najjar, PhD Management Science

Decision Making > Decision > The Decision-Making Process Making a choice from two or more alternatives. > The Decision-Making Process Identifying a problem and decision criteria and allocating weights to the criteria. Developing, analyzing, and selecting an alternative that can resolve the problem. Implementing the selected alternative. Evaluating the decision’s effectiveness.

Decision Making Example: Sarah is a sales manager whose reps need new laptops because their old ones are outdated and inadequate for doing their job. To make it simple, assume that it is not economical to add memory to the old computers and it is the company’s policy to purchase, not lease.

Decision Making Step 1: Identifying the Problem Problem: A discrepancy (difference, inconsistency) between an existing and desired state of affairs (issues/problem). Characteristics of Problems 1- You must be aware of the problem. Be sure to identify the actual problem rather than a symptom of the problem. 2- You must be under pressure to act. A true problem puts pressure on the manager to take action; a problem without pressure to act is a problem that can be postponed. 3- You must have the authority or resources to act. When managers recognize a problem and are under pressure to take action but do not have necessary resources, they usually feel that unrealistic demands are being put upon them.

Decision Making Step 2: Identify Decision Criteria Decision criteria are factors that are important (relevant) to resolving the problem such as: Costs that will be incurred (investments required) Risks likely to be encountered (chance of failure) Outcomes that are desired (growth of the firm)

Decision Making Step 3: Assign Weight to Decision Criteria Decision criteria are not of equal importance: Assigning a weight to each item places the items in the correct priority order of their importance in the decision-making process.

Decision Making Step 3: Assign Weight to Decision Criteria Example of a decision to replace a computer: Criterion Weight Memory and Storage 10 Battery life 8 Carrying Weight 6 Warranty 4 Display Quality 3

Decision Making Step 4: Developing Alternatives Identifying viable alternatives Alternatives are listed (without evaluation) that can resolve the problem.

Decision Making Step 5: Analyzing Alternatives Appraising each alternative’s strengths and weaknesses An alternative’s appraisal is based on its ability to resolve the issues identified in steps 2 and 3. Assess Each Alternative as below:

Decision Making Step 6: Select an Alternative Choosing the best alternative through evaluating each alternative The alternative with the highest total weight is chosen. If criteria weights have been used, the decision maker simply selects the alternative that received the (highest score in Step 5 X the criteria in step 3)

Decision Making Step 7: Implementing an Alternative Putting the chosen alternative into action Conveying the decision to and gaining commitment from those who will carry out the decision In other words: the selected alternative must be implemented by effectively communicating the decision to the individuals who will be affected by it and winning their commitment to the decision

Decision Making Step 8: Evaluating the Decision’s Effectiveness The soundness of the decision is judged by its outcomes How effectively was the problem resolved by outcomes resulting from the chosen alternatives? If the problem was not resolved, what went wrong?

Managers and Decision Making Decision making is part of all four managerial functions (next slide). In fact, that is why we say that decision making is the essence of management. And that is why managers ‒ when they plan, organize, lead, and control ‒ are called decision makers.

Managers and Decision Making

Managers and Decision Making Rationality Managers make consistent, value-maximizing choices with specified constraints. Assumptions are that decision makers: Are perfectly rational, fully objective, and logical. Have carefully defined the problem and identified all viable alternatives. Have a clear and specific goal. Will select the alternative that maximizes outcomes in the organization’s interests rather than in their personal interests.

Managers and Decision Making Bounded Rationality Managers make decisions rationally, but are limited (bounded) by their ability to process information. Assumptions are that decision makers: Will not seek out or have knowledge of all alternatives. Will satisfice ‒ choose the first alternative encountered that satisfactorily solves the problem ‒ rather than maximize the outcome of their decision by considering all alternatives and choosing the best. Influence on decision making Escalation of commitment: an increased commitment to a previous decision despite evidence that it may have been wrong.

Managers and Decision Making Intuitive decision making Making decisions on the basis of experience, feelings, and accumulated judgment.

Types of Problems and Decisions Managers encounter different types of problems and use different types of decisions to resolve them > Structured Problems Involve goals that are clear Are familiar (have occurred before) Are easily and completely defined ‒ information about the problem is available and complete > Managers use Programmed Decision to solve this problem, defined as repetitive decision that can be handled by a routine approach (e.g. procedure, role, policy)

Types of Problems and Decisions Procedure A series of interrelated steps that a manager can use to respond to a structured problem. E.g. Return policy. Rule An explicit statement that limits what a manager or employee can or cannot do. E.g. Follow all steps for completing merchandise return documentation Policy A general guideline for making a decision about a structured problem. E.g. Managers must approve all refunds over $50.00, E.g. No credit purchases are refunded for cash.

Types of Problems and Decisions Managers encounter different types of problems and use different types of decisions to resolve them > Unstructured Problems Problems that are new or unusual and for which information is ambiguous or incomplete. Problems that will require custom-made solutions. > Managers use Nonprogrammed Decisions Decisions that are unique and nonrecurring. Decisions that generate unique responses.

Types of Problems and Decisions

Decision Making Conditions > Certainty A situation in which a manager can make an accurate decision because the outcome of every alternative choice is known. However, only few managerial decisions are made under the condition of certainty > Risk A situation in which the manager is able to estimate the likelihood (probability) of outcomes that result from the choice of particular alternatives.

Decision Making Conditions An example of how a manager might make decisions using “expected value,” considering the conditions of risk

Decision Making Conditions When telling a lie, have you calculated the risk of your behaviour. Have you told someone a “White lie”? Is it ethical and have you calculated the consequences?

Decision Making Conditions > Uncertainty Limited information prevents estimation of outcome probabilities for alternatives associated with the problem and may force managers to rely on intuition, hunches, and “gut feelings”. Maximax: the optimistic manager’s choice to maximize the maximum payoff Maximin: the pessimistic manager’s choice to maximize the minimum payoff Minimax: the manager’s choice to minimize maximum regret

Decision Making Conditions Example of a Payoff Matrix

Decision Making Conditions Example of a Regret Matrix

Decision Making Styles >> Linear thinking style A person’s preference for using external data and facts and processing this information through rational, logical thinking. >> Nonlinear thinking style A person’s preference for internal sources of information and processing this information with internal insights, feelings and hunches. Note: Decision style to solve a problem reflects two dimensions: (1) the source of information you tend to use and (2) how you process that information (linear—rational, logical, analytical; or nonlinear—intuitive, creative, insightful).

Decision Making and Diversity Diverse employees can provide fresh perspectives on issues. Offer differing interpretations on how a problem can be defined. Be more open to trying new ideas, be more creative in generating alternatives, and be more flexible in resolving issues. Drawbacks: Lack of common perspective, which requires more time required to discuss issues; communication challenges (particularly if language barriers are present) and additional complexity, confusion, and ambiguity as a result of diverse opinions.

Decision Making and Biases/Errors

Decision Making and Bias Heuristics Using “rules of thumb” to simplify decision making. Overconfidence Bias Holding unrealistically positive views of oneself and one’s performance. Immediate Gratification Bias Choosing alternatives that offer immediate rewards and avoid immediate costs.

Decision Making and Bias Anchoring Effect Fixating on initial information and ignoring subsequent information. Selective Perception Bias Selecting, organizing and interpreting events based on the decision maker’s biased perceptions. Confirmation Bias Seeking out information that reaffirms past choices and discounting contradictory information.

Decision Making and Bias Framing Bias Selecting and highlighting certain aspects of a situation while ignoring other aspects. Availability Bias Losing decision-making objectivity by focusing on the most recent events. Representation Bias Drawing analogies and seeing identical situations when none exist. Randomness Bias Creating meaning out of random events.

Decision Making and Bias Sunk Costs Errors Forgetting that current actions cannot influence past events and relate only to future consequences. Self-Serving Bias Taking quick credit for successes and blaming outside factors for failures. Hindsight Bias Mistakenly believing that an event could have been predicted once the actual outcome is known (after-the- fact).

Decision Making Process: An Overview

Decision Making in the Arab World The traditional Arab decision-making process has been impacted by several factors. >> A system of networking and collective decision making where the leader/manager consults with other group members to arrive at a decision that has the backing of the community. >> The concept of Shura is important. It is not restricted to the political arena; it has its manifestations in different social institutions, including the family and business organizations. >>The consultative style seems to be widespread in Arab organizations.

Decision Making for Today’s World Guidelines for making effective decisions: 1. Understand cultural differences. In some cases, there is no best way to make decisions. The best way may depend on the values, attitudes, and beliefs that prevail in a specific culture. 2. Know when it’s time to stop. Good decision makers are not afraid to change their minds. They do not become attached to one course of thinking.

Decision Making for Today’s World 3. Use an effective decision-making process. This process has six characteristics: It focuses on what is important. It is logical and consistent. It acknowledges both subjective and objective thinking and blends analytical with intuitive thinking. It requires only as much information and analysis as is necessary to resolve a particular dilemma. It encourages and guides the gathering of relevant information and informed opinion. It is straightforward, reliable, easy to use, and flexible.

Decision Making for Today’s World Build an organization that can spot the unexpected and quickly adapt to the changed environment. Karl Weick calls such organizations highly reliable organizations (HROs) and says they share five habits: Are not tricked by their success. Defer to the experts on the front line. Let unexpected circumstances provide the solution. Embrace complexity. Anticipate (expect), but also recognize their limits.