© 2003 McGraw-Hill Australia Pty Ltd. PowerPoint Slides t/a Management: A Pacific Rim Focus Enhanced Edition. Slides prepared by David Meacheam & George Sansbury. 1 CHAPTER 5 MANAGERIAL DECISION MAKING

© 2003 McGraw-Hill Australia Pty Ltd. PowerPoint Slides t/a Management: A Pacific Rim Focus Enhanced Edition. Slides prepared by David Meacheam & George Sansbury. 2 Lecture outline Nature of managerial decision making Managers as decision makers Effective decision making Barriers to effective decision making Group decision making Creativity in decision making

© 2003 McGraw-Hill Australia Pty Ltd. PowerPoint Slides t/a Management: A Pacific Rim Focus Enhanced Edition. Slides prepared by David Meacheam & George Sansbury. 3 Decision making ‘The process by which managers identify organisational problems and try to resolve them.’

© 2003 McGraw-Hill Australia Pty Ltd. PowerPoint Slides t/a Management: A Pacific Rim Focus Enhanced Edition. Slides prepared by David Meacheam & George Sansbury. 4 Nature of managerial decision making Types of problems faced: Crisis problems Serious. Requires immediate action. Non-crisis problems Requires resolution but not both immediate and important. Opportunity problems Opportunity for organisational gain IF appropriate action taken.

© 2003 McGraw-Hill Australia Pty Ltd. PowerPoint Slides t/a Management: A Pacific Rim Focus Enhanced Edition. Slides prepared by David Meacheam & George Sansbury. 5 Nature of managerial decision making Decision making situations: Programmed decisions Routine, repetitive, well-structured situations by use of pre-determined decision rules. Non-programmed decision making Pre-determined decision rules are impractical due to novel &/or ill-structured situations. The element of risk Possibility that a chosen decision could lead to losses rather than intended results.

© 2003 McGraw-Hill Australia Pty Ltd. PowerPoint Slides t/a Management: A Pacific Rim Focus Enhanced Edition. Slides prepared by David Meacheam & George Sansbury. 6 Managers as decision makers Models of managerial decision making: Rational model Model suggesting managers engage in completely rational decision processes, ultimately making optimal decisions, and possess and understand all information relevant to their decisions at the time they make them. Non-rational models Models suggesting information gathering and processing limitations make it difficult for managers to make optimal decisions.

© 2003 McGraw-Hill Australia Pty Ltd. PowerPoint Slides t/a Management: A Pacific Rim Focus Enhanced Edition. Slides prepared by David Meacheam & George Sansbury. 7 Non-rational models Satisficing model Managers seek alternatives only until they find one which looks satisfactory, rather than seeking an optimal decision. Incremental model Managers make the smallest response possible to reduce the problem to at least a tolerable level. Rubbish bin model Managers behave in virtually a random way in making non-programmed decisions.

© 2003 McGraw-Hill Australia Pty Ltd. PowerPoint Slides t/a Management: A Pacific Rim Focus Enhanced Edition. Slides prepared by David Meacheam & George Sansbury. 8 Rational decision making Rational decision making An optimal decision is possible An optimal decision is possible All relevant information is available All relevant information is available All relevant information is understandable All relevant information is understandable All alternatives are known All possible outcomes known

© 2003 McGraw-Hill Australia Pty Ltd. PowerPoint Slides t/a Management: A Pacific Rim Focus Enhanced Edition. Slides prepared by David Meacheam & George Sansbury. 9 ‘Satisficing’ decision making ‘Satisficing’ decision making Time constraints Limited ability to understand all factors Limited ability to understand all factors Inadequate base of information Inadequate base of information Limited memory of decision-makers Limited memory of decision-makers Poor perception of factors to be considered in decision process Poor perception of factors to be considered in decision process

© 2003 McGraw-Hill Australia Pty Ltd. PowerPoint Slides t/a Management: A Pacific Rim Focus Enhanced Edition. Slides prepared by David Meacheam & George Sansbury. 10 Effective decision making Steps to effective decision making: Identify the problem Scan for change, categorise as problem/non-problem, diagnose nature and cause. Generate alternative solutions Uncritically brainstorm to develop alternatives, combine & improve ideas. Evaluate & choose an alternative Feasibility, quality, cost, reversibility, ethics, acceptability. Implement and monitor Plan and implement, evaluate effect on others, monitor.

© 2003 McGraw-Hill Australia Pty Ltd. PowerPoint Slides t/a Management: A Pacific Rim Focus Enhanced Edition. Slides prepared by David Meacheam & George Sansbury. 11 Evaluation of decision effectiveness Evaluation of decision effectiveness Identification of the problem Identification of the problem Generate alternative solutions Evaluate alternatives Choose an alternative Choose an alternative Implementation and monitoring of the chosen alternative Implementation and monitoring of the chosen alternative Steps in decision-making

© 2003 McGraw-Hill Australia Pty Ltd. PowerPoint Slides t/a Management: A Pacific Rim Focus Enhanced Edition. Slides prepared by David Meacheam & George Sansbury. 12 Barriers to effective decision making Complacency Individuals either do not see signs of danger/opportunity or, avoid them. Defensive avoidance Individuals either deny the importance of a danger /opportunity or deny any responsibility for taking action. Panic Individuals become so upset they frantically seek a way to solve the problem. Deciding to decide Decision makers accept the challenge and follow an effective decision-making process.

© 2003 McGraw-Hill Australia Pty Ltd. PowerPoint Slides t/a Management: A Pacific Rim Focus Enhanced Edition. Slides prepared by David Meacheam & George Sansbury. 13 Barriers to effective decision- making Complacency Defensive avoidance Panic

© 2003 McGraw-Hill Australia Pty Ltd. PowerPoint Slides t/a Management: A Pacific Rim Focus Enhanced Edition. Slides prepared by David Meacheam & George Sansbury. 14 Decision making bias Framing Tendency to make different decisions depending on how a problem is presented. Prospect theory Decision makers find the prospect of an actual loss more painful than giving up the possibility of a gain. Representativeness Tendency to be overly influenced by stereotypes in making judgements about the likelihood of occurrences.

© 2003 McGraw-Hill Australia Pty Ltd. PowerPoint Slides t/a Management: A Pacific Rim Focus Enhanced Edition. Slides prepared by David Meacheam & George Sansbury. 15 Decision making bias Availability Tendency to judge the likelihood of an occurrence on the basis of the extent to which other like instances can easily be recalled. Anchoring & adjustment Tendency to be influenced by an initial figure, even when the information is largely irrelevant. Overconfidence Tendency to be more certain of judgements regarding the likelihood of a future event than one’s actual predictive accuracy warrants.

© 2003 McGraw-Hill Australia Pty Ltd. PowerPoint Slides t/a Management: A Pacific Rim Focus Enhanced Edition. Slides prepared by David Meacheam & George Sansbury. 16 Decision escalation ‘Escalating commitment and accelerating losses’ Non-rational escalation: increased commitment of resources beyond rational limits Sunk costs: not recoverable, and should not influence decision-making

© 2003 McGraw-Hill Australia Pty Ltd. PowerPoint Slides t/a Management: A Pacific Rim Focus Enhanced Edition. Slides prepared by David Meacheam & George Sansbury. 17 Group decision making Advantages: More information available Wide range of ideas/approaches Improved acceptance of decision Develops group members’ skills Disadvantages: More time consuming Disagreement/time problems Open to individual dominance Groupthink may arise

© 2003 McGraw-Hill Australia Pty Ltd. PowerPoint Slides t/a Management: A Pacific Rim Focus Enhanced Edition. Slides prepared by David Meacheam & George Sansbury. 18 Group decision making Advantages More information available More alternative solutions More alternative solutions Increases solution understanding & acceptance Increases solution understanding & acceptance Builds member knowledge & skill base Builds member knowledge & skill base Disadvantages Time consuming Delays & ill feeling possible Domination by individuals Risk of groupthink

© 2003 McGraw-Hill Australia Pty Ltd. PowerPoint Slides t/a Management: A Pacific Rim Focus Enhanced Edition. Slides prepared by David Meacheam & George Sansbury. 19 Enhancing group decision making Heterogenous membership Communication/social skills Devil’s advocates Dialectical inquiry Groupware

© 2003 McGraw-Hill Australia Pty Ltd. PowerPoint Slides t/a Management: A Pacific Rim Focus Enhanced Edition. Slides prepared by David Meacheam & George Sansbury. 20 Techniques to improve group decisions Member diversity Better group decision making Better group decision making Expert members Devil’s advocates Groupware use Dialectic inquiry

© 2003 McGraw-Hill Australia Pty Ltd. PowerPoint Slides t/a Management: A Pacific Rim Focus Enhanced Edition. Slides prepared by David Meacheam & George Sansbury. 21 Creativity in decision making ‘Creativity is the cognitive process of developing an idea, concept, commodity or discovery viewed as novel by its creator or target audience.’

© 2003 McGraw-Hill Australia Pty Ltd. PowerPoint Slides t/a Management: A Pacific Rim Focus Enhanced Edition. Slides prepared by David Meacheam & George Sansbury. 22 Creativity in decision making Creativity requires both: Divergent thinking Attempting to move logically to a problem solution. Divergent thinking Generating new ways of viewing a problem and seeking novel alternatives.

© 2003 McGraw-Hill Australia Pty Ltd. PowerPoint Slides t/a Management: A Pacific Rim Focus Enhanced Edition. Slides prepared by David Meacheam & George Sansbury. 23 Creativity in decision making Three basic ingredients necessary for creativity: Domain-relevant skills Expertise in a field relevant to the problem. Creativity-relevant skills Skills in generating novel ideas, approaches, modes of thinking about problems. Task motivation Interest in the task for its own sake, a desire to resolve the problem.

© 2003 McGraw-Hill Australia Pty Ltd. PowerPoint Slides t/a Management: A Pacific Rim Focus Enhanced Edition. Slides prepared by David Meacheam & George Sansbury. 24 Enhancing group creativity Brainstorming Nominal group technique Delphi technique Scenario analysis

© 2003 McGraw-Hill Australia Pty Ltd. PowerPoint Slides t/a Management: A Pacific Rim Focus Enhanced Edition. Slides prepared by David Meacheam & George Sansbury. 25 TECHNIQUES TO ENHANCE GROUP CREATIVITY Brainstorming Better group creativity Better group creativity Nominal group technique Nominal group technique Delphi technique Delphi technique Scenario analysis

© 2003 McGraw-Hill Australia Pty Ltd. PowerPoint Slides t/a Management: A Pacific Rim Focus Enhanced Edition. Slides prepared by David Meacheam & George Sansbury. 26 Lecture summary Nature of managerial decision making Problem types, problem situations. Managers as decision makers Rational and non-rational models. Effective decision making Ideal decision making process.

© 2003 McGraw-Hill Australia Pty Ltd. PowerPoint Slides t/a Management: A Pacific Rim Focus Enhanced Edition. Slides prepared by David Meacheam & George Sansbury. 27 Lecture summary Barriers to effective decision making Complacency, defensive avoidance, panic Decision making bias, decision escalation. Group decision making Advantages-disadvantages, enhancing group performance. Creativity in decision making Divergent and non-divergent thinking, necessary skills, enhancing group creativity.