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Chapter Managerial Decision Making 3 3McGraw-Hill/Irwin Management, 7/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

3-3 Learning Objectives After studying Chapter 3, you will know:  The kinds of decisions you will face as a manager  How to make rational decisions  The pitfalls you should avoid when making decisions  The pros and cons of using a group to make decisions  The procedures to use in leading a decision-making group  How to encourage creative decisions  The processes by which decisions are made in organizations  How to make decisions in a crisis

3-4 Characteristics of Managerial Decisions

3-5 Lack of Structure  Programmed Decisions  Decisions encountered and made before, having objectively correct answers, and solvable by using simple rules, policies, or numerical computations  Non-programmed Decisions  New, novel, complex decisions having no proven answers

3-6 Comparison of Decision Types

3-7 Uncertainty and Risk We operate in an environment— the Internet— where there’s an enormous amount of uncertainty. You can’t be sure what’s going to happen tomorrow, never mind next year. The danger is that the uncertainty can lead to paralysis. You spend so much time trying to nail down all the possibilities and risks, you never get around to taking action. And if that happens—if you become indecisive— you’re dead. - George Conrades Chairman and CEO Akamai Technologies

3-8 Uncertainty and Risk  Certainty is the state that exists when decision makers have accurate and comprehensive information  Uncertainty is the state that exists when decision makers have insufficient information  Risk is the state that exists when the probability of success is less than 100%, and losses may occur

3-9 Conflict  Conflict exists when the manager must consider opposing pressures from different sources; occurs at two levels  Psychological conflict occurs when several options are attractive, or when non of the options is attractive  Interpersonal conflict

3-10 Stages of Decision Making  Ideal decision making process will have six stages  Identify and diagnose the problem Identify and diagnose the problem  Generate alternative solutions Generate alternative solutions  Evaluate alternatives Evaluate alternatives  Make the choice Make the choice  Implement the decision  Evaluate the decision

3-11 Stages of Decision Making

3-12 The Best Decision  To make the best decision managers must use vigilance  Vigilance is a process in which a decision maker carefully executes all stages of the decision making process  Research shows that when managers use a rational decision making process they tend to make better decisions

3-13 Barriers to Effective Decision Making  Psychological Biases Psychological Biases  Time Pressures Time Pressures  Social Realities Social Realities

3-14 Decision Making in Groups  The basic philosophy for group decision making is that ‘two heads are better than one’  Group performance is a function of two variables  How effectively the group capitalizes on potential advantages  How effectively the group minimizes potential problems

3-15 Decision Making in Groups  Potential Advantages  Larger pool of information  More perspectives and approaches  Intellectual stimulation  People understand the decision  People are committed to the decision  Potential Disadvantages  One Person dominates  Satisficing  Group thing  Goal displacement

3-16 Managing Group Decision Making  There are three factors for effectively managing group decision making  Appropriate leadership style  Constructive use of disagreement and conflict Constructive use of disagreement and conflict  The enhancement of creativity

3-17 Managing Group Decision Making

3-18 Brainstorming  Brainstorming is a commonly used technique used to encourage creativity  It is a process in which group members generate as many ideas about a problem as they can; criticism is withheld until all ideas have been proposed

3-19 Organizational Decision Making  Managers and groups make decisions within organizations  Three additional concepts and process a manager must consider when making a decision include  Constraints on decision makers  Organizational decision processes  Decision making during a crisis

3-20 Constraints on Decision Makers  Managers face various constraints that include:  Capital or product markets may make an expensive new venture impossible  Legal restrictions may restrain the kinds of international business activities in which a firm can participate  Labor unions may defeat a contract proposal

3-21 Organizational Decision Making Models  Historically organizational decision making was viewed as a rational process  Simon challenged this view by proposing an alternative to the rational decision making process called bounded rationalitybounded rationality  Other decision making processes include Other  Incremental model  Coalition model  Garbage can model

3-22 Decision Making During Crisis  During crisis managers must make decisions under a great deal of pressure  The organization should be prepared for crises in advance  Managers should take time to create an effective crisis management plancrisis management plan  During a crisis don’t pretend nothing happened rather communicate and reinforce the organization’s values

3-23 How not to Handle a Crisis

3-24 Questions for Crisis Planning  What kinds of crises could your company face?  Can your company detect a crisis in its early stages?  How will it manage a crisis if one occurs?  How can it benefit from a crisis after it has passed?

3-25 Looking Ahead  Chapter 4: Planning and Strategic Management  How to proceed through the basic steps in any planning process  How strategic planning integrates with tactical and operational planning  Why I is important to analyze both the external environment and the internal resources of the firm before formulation a strategy  The choices available for corporate strategy  How companies can achieve competitive advantage through business strategy  How core competencies provide the foundation for business strategy  The keys to effective strategy implementation

3-26 Identifying and diagnosing the Problem  There is normally a realization that the current state and the desired state are different  This can be detected by comparing current performance against: past performance; current performance of other organizations; and future expected performance as determined by plans and forecasts  After identifying a problem the decision maker must attempt to diagnose the true cause of the problem Return

3-27 Generate Alternative Solutions  Solutions will range from ready made to custom made  Ready made solutions are ideas that have been seen or tried before  Custom made solutions are new, creative solutions designed specifically for the problem  Managers will generate some of the alternative solutions based upon past experience Return

3-28 Evaluate Alternatives  Each alternative is evaluated based upon the value or adequacy that it generates  Managers should consider several types of consequences that each alternative will generate  Managers should also refer to the original goals defined in the first stage of the decision making process  Contingency plans should also be developed Return

3-29 Make the choice  When making the decision the following concepts should be considered  Maximizing a decision will realize the best possible outcome  Satisficing means that an option was chosen because it was acceptable although it is not necessarily the best option  Optimizing the decision means that the organization is achieving the best possible balance among several goals Return

3-30 Psychological Biases  Illusion of control is a belief that once can influence events even when one has no control over what will happen  Framing effects refer to how problems or decisions alternatives are phrased or presented, and how these subjective influences can override objective facts  Discounting the future is a bias weighting short term costs and benefits more heavily than longer-term costs and benefits Return

3-31 Time Pressures  Tendencies of managers  Skimp on analysis  Suppress conflict  Make decisions without consulting others  How do you overcome time pressures?  Rely on real time information  Involve others  Take a realistic view of conflict Return

3-32 Social Realities  Interpersonal factors decrease decision- making effectiveness  Important decisions are marked by conflict among interested parties  Decisions are the result of intensive social interactions, bargaining, and politicking Return

3-33 Constructive use of disagreement and conflict  Cognitive conflict is issue- based differences in perspectives or judgments  Affective conflict is emotional disagreement directed toward other people  Devil’s advocate is a person who has the job of criticizing ideas to ensure that their downsides are fully explored  Dialectic is a structured debate comparing two conflicting courses of action Return

3-34 Bounded Rationality  Bounded rationality states that decision makers cannot truly be objective because:  They have imperfect, incomplete information  The problems they face are so complex  Human beings cannot process all the information to which they are exposed  There is not enough time to process all the relevant information  People within organizations have conflicting goals Return

3-35 Organizational Decision Making  Incremental Model occurs when decision makers make small decisions, take little steps, move cautiously, and move in piecemeal fashion toward a bigger solution  Coalition model of organizational decision making in which groups with differing preferences use power and negotiations to influence decisions  Garbage can model of organizational decision making depicting a chaotic process and seemingly random decisions Return

3-36 Crisis Management Plan  Strategic actions  Technical and structural actions  Evaluation and diagnostic actions  Communication actions  Psychological and cultural actions Return