Managing Decision Making and Problem Solving

9–29–2 Learning Objectives After studying this chapter, you should be able to: –Define decision making and discuss types of decisions and decision-making conditions. –Discuss rational perspectives on decision making, including the steps in decision making. –Describe the behavioral nature of decision making. After studying this chapter, you should be able to: –Define decision making and discuss types of decisions and decision-making conditions. –Discuss rational perspectives on decision making, including the steps in decision making. –Describe the behavioral nature of decision making.

9–39–3 Chapter Outline The Nature of Decision Making –Decision Making Defined –Types of Decisions –Decision-Making Conditions Rational Perspectives on Decision Making –The Classical Model of Decision Making –Steps in Rational Decision Making The Nature of Decision Making –Decision Making Defined –Types of Decisions –Decision-Making Conditions Rational Perspectives on Decision Making –The Classical Model of Decision Making –Steps in Rational Decision Making Behavioral Aspects of Decision Making –The Administrative Model –Political Forces in Decision Making –Intuition and Escalation of Commitment –Risk Propensity and Decision Making –Ethics and Decision Making

9–49–4 Decision-making Decision making and decision- making process. Are they the same or different. Discuss Decision making and decision- making process. Are they the same or different. Discuss

9–59–5 Decision-making Choosing Steps

9–69–6 Decision Making The act of choosing one alternative from among a set of alternatives.

9–79–7 Best ? To reach a decision the best alternative is usually selected. a)Discuss what is meant ‘Best’? b) Does it mean effective or efficient? c)Does it always mean to increase? d)Are decisions only used to solve problems? To reach a decision the best alternative is usually selected. a)Discuss what is meant ‘Best’? b) Does it mean effective or efficient? c)Does it always mean to increase? d)Are decisions only used to solve problems?

9–89–8 Best = Effective An effective decision is one that maximize or minimize Managers make decisions about both problems and opportunities Best = Effective An effective decision is one that maximize or minimize Managers make decisions about both problems and opportunities

9–99–9 Decision Making Process Arrange the Decision-Making Steps a)Identifying alternatives b)choosing the “best” alternative, and c)The process of recognizing and defining the nature of a decision situation, d)putting it into practice e)Evaluate the alternatives Arrange the Decision-Making Steps a)Identifying alternatives b)choosing the “best” alternative, and c)The process of recognizing and defining the nature of a decision situation, d)putting it into practice e)Evaluate the alternatives

9–10 The Nature of Decision Making Process –The process of recognizing and defining the nature of a decision situation, –Identifying alternatives –Evaluate the alternatives –Choosing the “best” alternative, and –Putting it into practice –The process of recognizing and defining the nature of a decision situation, –Identifying alternatives –Evaluate the alternatives –Choosing the “best” alternative, and –Putting it into practice

9–11 Types of Decisions In G’eant Hypermarket, whenever inventory levels of various products such as coffee makers, electric drills, and folding chairs drop below a predetermined level, replacements are automatically ordered. Such a decision is called: i.Programmed ii.Non-programmed decision a)Provide an example of the other type of decision. b)Programmed decisions are usually less critical to the firm and are made at lower levels of the organization, while non-programmed decisions involve top management and important issues. Discuss why. In G’eant Hypermarket, whenever inventory levels of various products such as coffee makers, electric drills, and folding chairs drop below a predetermined level, replacements are automatically ordered. Such a decision is called: i.Programmed ii.Non-programmed decision a)Provide an example of the other type of decision. b)Programmed decisions are usually less critical to the firm and are made at lower levels of the organization, while non-programmed decisions involve top management and important issues. Discuss why.

9–12 Types of Decisions Programmed Decisions –A decision that is a fairly structured decision or recurs with some frequency or both. Example: Starting your car in the morning. Non-programmed decisions –A decision that is relatively unstructured and occurs much less often a programmed decision. Example: Choosing a vacation destination. Programmed Decisions –A decision that is a fairly structured decision or recurs with some frequency or both. Example: Starting your car in the morning. Non-programmed decisions –A decision that is relatively unstructured and occurs much less often a programmed decision. Example: Choosing a vacation destination.

Decision-making Conditions

9–14 Decision Alternatives All Known Some Known Not Known Details (Information) Available (complete and perfect) Partially available (estimates) Not Available Probability of making a Bad decision Low Moderate High Level of Ambiguity Low Moderate High Conditions Risk Certainty Uncertainty Buying 5 planes Submitting a quotation to win a bid to be the official carrier to F1 travelers GF flights Jupiter Gulf Air Decision Making Conditions

9–15 Decision Alternatives Details (Information) Probability of making a Bad decision Level of Ambiguity Conditions Buying 5 planes All Known Some Known Not Known Available Partially available (estimates / probability) Not Available Low Moderate High Low Moderate High Risk Certainty Uncertainty Submitting a quotation to win a bid to be the official carrier to F1 travelers GF flights Jupiter

9–16 Decision Alternatives Details (Information) Probability of making a Bad decision Level of Ambiguity Conditions Buying 5 planes Submitting a quotation to win a bid to be the official carrier to F1 travelers All Known Some Known Not Known Available Partially available (estimates / probability) Not Available Low Moderate High Low Moderate High Risk Certainty Uncertainty GF flights Jupiter

9–17 Decision Alternatives Details (Information) Probability of making a Bad decision Level of Ambiguity Conditions Buying 5 planes Submitting a quotation to win a bid to be the official carrier to F1 travelers GF flights Jupiter All Known Some Known Not Known Available Partially available (estimates / probability) Not Available Low Moderate High Low Moderate High Risk Certainty Uncertainty

9–18 Decision Alternatives Details (Information) Probability of making a Bad decision Level of Ambiguity Conditions Buying 5 planes All Known Available (perfect and Complete) Low Certainty Submitting a quotation to win a bid to be the official carrier to F1 travelers Some Known Partially available (estimates / probability) Moderate Risk GF flights Jupiter Not Known Not Available High Uncertainty Gulf Air Decision Making Conditions

9–19 Decision-Making Conditions (cont’d) Level of ambiguity and chances of making a bad decision LowerHigherModerate CertaintyUncertaintyRisk The decision maker faces conditions of... Figure 9.1

9–20 Decision-Making Conditions Decision Making Under Certainty –A condition in which the decision maker knows with reasonable certainty what the alternatives are and what conditions are associated with each alternative. Decision Making Under Risk –A condition in which the availability of each alternative and its potential payoffs and costs are all associated with risks. Decision Making Under Uncertainty –A condition in which the decision maker does not know all the alternatives, the risks associated with each, or the consequences of each alternative. Decision Making Under Certainty –A condition in which the decision maker knows with reasonable certainty what the alternatives are and what conditions are associated with each alternative. Decision Making Under Risk –A condition in which the availability of each alternative and its potential payoffs and costs are all associated with risks. Decision Making Under Uncertainty –A condition in which the decision maker does not know all the alternatives, the risks associated with each, or the consequences of each alternative.

9–21 Decision-making conditions Stock analysts are able to make predictions about the price movement of individual stocks or the market as a whole, based on probabilities that were derived from a study of historical stock prices. What is the decision-making condition faced by stock analyst. (a) Conditions of certainty (b) Conditions of Risk (c) Conditions of Uncertainty Stock analysts are able to make predictions about the price movement of individual stocks or the market as a whole, based on probabilities that were derived from a study of historical stock prices. What is the decision-making condition faced by stock analyst. (a) Conditions of certainty (b) Conditions of Risk (c) Conditions of Uncertainty

Rational Perspectives on Decision Making

9–23 Rational Perspectives on Decision Making The Classical Model of Decision Making When faced with a decision situation, managersshould......and end up with a decision that best serves the interests of the organization. obtain complete and perfect information eliminate uncertainty evaluate everything rationally and logically Figure 9.2

9–24 What are the assumptions of the rational model of decision-making (Classical Perspective) Managers obtain a)Complete and perfect information b)Incomplete and imperfect information Decision-making condition is a)Certainty b)Risk c)Uncertainty Managers eliminate uncertainty a)Can b)Can’t Managers obtain a)Complete and perfect information b)Incomplete and imperfect information Decision-making condition is a)Certainty b)Risk c)Uncertainty Managers eliminate uncertainty a)Can b)Can’t Managers must be focused on a)Facts and logic b)Subjective judgment Decision-makers are a)rational, logical, and dispassionate when they make decisions b)irrational, illogical, and passionate when they make decisions Decision-makers take decisions that best serves the interest of the organization a)always b)sometimes c)never

9–25 Obtain complete and perfect information. Eliminate uncertainty. Evaluate everything rationally and logically… The Classical Model of Decision Making When faced with a decision situation, managers should… …and end up with a decision that best serves the interests of the organization.

9–26 What are the ideal steps that would be taken to reach and implement a decision.

9–27 Rational Model Of d-m 1.Recognizing and defining the decision situation 2.Identifying alternatives 3.Evaluate alternatives –Feasibility –Satisfactory –Affordable consequences 4.Select the an alternative (s) 5.Implement the decision 6.Follow up and evaluate the results 1.Recognizing and defining the decision situation 2.Identifying alternatives 3.Evaluate alternatives –Feasibility –Satisfactory –Affordable consequences 4.Select the an alternative (s) 5.Implement the decision 6.Follow up and evaluate the results

9–28 which of the following statements is true According to the Rational Model Of decision-making 1.The first step is to recognize that a decision is necessary. To do this, the situation must be defined clearly and fully. 2.All alternative courses of action must be listed for evaluation. 3.The proper sequence for evaluating a decision alternative is, satisfactoriness, feasibility and probable consequences. 4.The alternative that is selected is the one with the highest feasibility, satisfaction and affordable consequences. 5.Selecting an alternative is the crux (decisive factor) of decision-making 6.In implementing the chosen alternatively, some unexpected consequences might occur. According to the Rational Model Of decision-making 1.The first step is to recognize that a decision is necessary. To do this, the situation must be defined clearly and fully. 2.All alternative courses of action must be listed for evaluation. 3.The proper sequence for evaluating a decision alternative is, satisfactoriness, feasibility and probable consequences. 4.The alternative that is selected is the one with the highest feasibility, satisfaction and affordable consequences. 5.Selecting an alternative is the crux (decisive factor) of decision-making 6.In implementing the chosen alternatively, some unexpected consequences might occur.

9–29 K-mart Steps of Classical Decision-making Model K-Mart is a company that sells shoes and has two divisions, specialty store and a discount. The former, specializes in high quality shoes while the later is in lower quality shoes. The company needed to take a decision regarding the future of the company. The company was loosing and was facing a possibility of bankruptcy. What would be the first step to reach a decision? Recognizing that a decision is necessary. To do this, the problem must be defined clearly and fully. Define the problem and specify the indicators that you used to recognize the need to take a decision? Kmart recently defined its decision situation as a need to decided what to do with the future of the company? How to recover from bankruptcy and to regain lost sales and profits. If K-mart decided to continue then it needs an injection of fund of about 10 million to recover. K-Mart is a company that sells shoes and has two divisions, specialty store and a discount. The former, specializes in high quality shoes while the later is in lower quality shoes. The company needed to take a decision regarding the future of the company. The company was loosing and was facing a possibility of bankruptcy. What would be the first step to reach a decision? Recognizing that a decision is necessary. To do this, the problem must be defined clearly and fully. Define the problem and specify the indicators that you used to recognize the need to take a decision? Kmart recently defined its decision situation as a need to decided what to do with the future of the company? How to recover from bankruptcy and to regain lost sales and profits. If K-mart decided to continue then it needs an injection of fund of about 10 million to recover.

9–30 Kmart Criteria for Evaluation of Alternatives Kmart saw its primary options as Option (1) Borrow 10m from a bank Option (2) selling off its discount operations and concentrating on specialty retailing, Option (3) selling off its specialty store businesses to raise cash, or Option (4) shutting down the company (selling the company) Kmart have asked you, as a management consultant, to evaluate the alternatives on three criteria: –Feasibility –Satisfactory –Affordable consequences In selecting an alternative, use the facts below only. Banks and financial institutions were unwilling to lend the 10m due to the weak financial position. There is one interested buyer who is willing to pay the market value of 8m. The shareholders are not interested in selling it as the projection of the future demand is increasing. There are already interesting buyers for the specialty store. The value of this division is around 12m. Projection of future demand of quality shoes indicates a sharp decline as customers are increasingly interested in discount shoes. Therefore, Shareholders are willing to sell this division. The market value of the company as a total is 18m. There is only one interested buyer who is willing to pay 14m for the whole company. The stockholders are not willing to sell at this price as it reduces their personal wealth. Kmart saw its primary options as Option (1) Borrow 10m from a bank Option (2) selling off its discount operations and concentrating on specialty retailing, Option (3) selling off its specialty store businesses to raise cash, or Option (4) shutting down the company (selling the company) Kmart have asked you, as a management consultant, to evaluate the alternatives on three criteria: –Feasibility –Satisfactory –Affordable consequences In selecting an alternative, use the facts below only. Banks and financial institutions were unwilling to lend the 10m due to the weak financial position. There is one interested buyer who is willing to pay the market value of 8m. The shareholders are not interested in selling it as the projection of the future demand is increasing. There are already interesting buyers for the specialty store. The value of this division is around 12m. Projection of future demand of quality shoes indicates a sharp decline as customers are increasingly interested in discount shoes. Therefore, Shareholders are willing to sell this division. The market value of the company as a total is 18m. There is only one interested buyer who is willing to pay 14m for the whole company. The stockholders are not willing to sell at this price as it reduces their personal wealth.

9–31 3. EVALUATE ALTERNATIVES Feasible Satisfactory Affordable consequenc es

9–32 Evaluation CriteriaMeaningOption (1) Borrow Option (2) Sell Discount Option (3) Sell Specialty Options (4) Sell company Feasibility Whether the alternative is within the realm of probability and practicality for the organization Satisfactory to the extent to which the alternative meets the conditions of the situation Affordable consequences The effects of the decisions on the the total organization

9–33 Evaluation CriteriaMeaningOption (1) Borrow Option (2) Sell Discount Option (3) Sell Specialty Options (4) Sell company FeasibilityWhether the alternative is within the realm of probability and practicality for the organization No bank in willing to lend the company 10 m due to the weak financial position of the company There is one interested buyer who is willing to pay the market value of 8m. Yes, as there are interested buyers for this segment. Yes, there is only one interested buyer who is willing to pay 12m for the whole company Satisfactoryto the extent to which the alternative meets the conditions of the situation No, Selling at 8m will not meet the company requirement of 10m Yes, Sell at 12m will meet the company requirement of 10 m Yes, selling at 14m will meet the company requirement of 10m. Affordable consequences The effects of the decisions on the the total organization Yes, Shareholders are willing to sell. As a consequence, the company will consist of one division only that is the discount stores and the growth of demand for this segment is increasing. No, The stockholders are not willing to sell at this price as it reduces their personal wealth.

9–34 Evaluating Alternatives in the Decision-Making Process Is the alternative feasible? Eliminate from consideration Is the alternative satisfactory? Are the alternative’s consequences affordable? Retain for further consideration Yes Eliminate from consideration Eliminate from consideration No

9–35 Steps in the Rational Decision-Making Process

9–36 Steps in the Rational Decision-Making Process (cont’d)

9–37 What are the assumptions the rational model of decision-making Managers can obtain a)Complete and perfect information b)Incomplete and imperfect information Decision-making condition is a)Certainty b)Risk c)Uncertainty Managers eliminate uncertainty a)Can b)Can’t Managers must be focused on a)Facts and logic b)Subjective judgment Decision-makers are a)rational, logical, and dispassionate when they make decisions b)irrational, illogical, and passionate when they make decisions Decision-makers take decisions that decision that best serves the interest of the organization a)Always b)Sometimes c)never Managers can obtain a)Complete and perfect information b)Incomplete and imperfect information Decision-making condition is a)Certainty b)Risk c)Uncertainty Managers eliminate uncertainty a)Can b)Can’t Managers must be focused on a)Facts and logic b)Subjective judgment Decision-makers are a)rational, logical, and dispassionate when they make decisions b)irrational, illogical, and passionate when they make decisions Decision-makers take decisions that decision that best serves the interest of the organization a)Always b)Sometimes c)never

Behavioral perspective of d-m

9–39...and end up with a decision that may or may not serve the interests of the organization. Use incomplete and imperfect Information. Are constrained by bounded rationality. Tend to satisfice… When faced with a decision situation managers actually… Behavioral Aspects of Decision Making The Administrative Model of Decision Making

9–40 Behavioral and Political Aspects of d-m Which of the following statements is true. Decision makers are limited with their values, skills and knowledge. In reality decision makers have the tendency to search for all alternatives. In reality decision makers tend to search for alternative until one is found that meets some minimum standard of sufficiency. It is impossible for an informal alliance of groups to effect the decision that will be selected. Sometimes, decision makers select an alternative based on their inner belief about something without proper evaluation. It is impossible for a decision maker to stay with a decision when it appears to be wrong. In reality a decision maker effected by his/her willingness to gamble when making a decision. Individual ethics (personal beliefs about right and wrong behavior) combine with the organization’s ethics affects the decision-maker. Which of the following statements is true. Decision makers are limited with their values, skills and knowledge. In reality decision makers have the tendency to search for all alternatives. In reality decision makers tend to search for alternative until one is found that meets some minimum standard of sufficiency. It is impossible for an informal alliance of groups to effect the decision that will be selected. Sometimes, decision makers select an alternative based on their inner belief about something without proper evaluation. It is impossible for a decision maker to stay with a decision when it appears to be wrong. In reality a decision maker effected by his/her willingness to gamble when making a decision. Individual ethics (personal beliefs about right and wrong behavior) combine with the organization’s ethics affects the decision-maker.

9–41 Behavioral Aspects of Decision Making (cont’d) Bounded Rationality –The concept that decision makers are limited by their values and unconscious reflexes, skills, and habits. Satisficing –The tendency to search for alternatives only until one is found that meets some minimum standard of sufficiency to resolve the problem. Coalition –A political force in decision making which consists of an informal alliance of individuals or groups formed to achieve a goal. Bounded Rationality –The concept that decision makers are limited by their values and unconscious reflexes, skills, and habits. Satisficing –The tendency to search for alternatives only until one is found that meets some minimum standard of sufficiency to resolve the problem. Coalition –A political force in decision making which consists of an informal alliance of individuals or groups formed to achieve a goal.

9–42 Behavioral Aspects of Decision Making (cont’d) Intuition –An innate belief about something without conscious consideration. Escalation of Commitment –A decision maker is staying with a decision even when it appears to be wrong. Risk Propensity –The extent to which a decision maker is willing to gamble when making a decision. Intuition –An innate belief about something without conscious consideration. Escalation of Commitment –A decision maker is staying with a decision even when it appears to be wrong. Risk Propensity –The extent to which a decision maker is willing to gamble when making a decision.

9–43 Behavioral Aspects of Decision Making (cont’d) Ethics and Decision Making –Individual ethics (personal beliefs about right and wrong behavior) combine with the organization’s ethics to create managerial ethics. –Components of managerial ethics: Relationships of the firm to employees Employees to the firm The firm to other economic agents Ethics and Decision Making –Individual ethics (personal beliefs about right and wrong behavior) combine with the organization’s ethics to create managerial ethics. –Components of managerial ethics: Relationships of the firm to employees Employees to the firm The firm to other economic agents

9–44 Behavioral Aspects of Decision Making The Administrative Model of Decision Making Figure 9.4 When faced with a decision situation managers actually…...and end up with a decision that may or may not serve the interests of the organization. use incomplete and imperfect information are constrained by bounded rationality tend to satisfice

9–45 What are the assumptions of the administrative model (Behavioral perspective of decision-making) In reality, managers obtain a)Complete and perfect information b)Incomplete and imperfect information In reality, decision-making condition is NOT a)Certainty b)Risk c)Uncertainty In reality, managers completely eliminate uncertainty a)Can b)Can’t In reality, managers obtain a)Complete and perfect information b)Incomplete and imperfect information In reality, decision-making condition is NOT a)Certainty b)Risk c)Uncertainty In reality, managers completely eliminate uncertainty a)Can b)Can’t In reality, managers focus on a)Facts and logic only b)Facts and logic along with subjective judgment and other behavioral aspects In reality, decision-makers are a)rational, logical, and dispassionate when they make decisions b)Not fully rational, logical, when they make decisions In reality, decision-makers take decisions that best serves the interest of the organization a)Always b)Sometimes c)never

9–46...and end up with a decision that may or may not serve the interests of the organization. The Administrative Model of Decision Making Use incomplete and imperfect Information. Are constrained by bounded rationality. Tend to satisfice… When faced with a decision situation managers actually…

9–47 Behavioral and Political Aspects of d-m Discuss the following statements. D0 you agree or disagree and why? Correct the statements that you disagree with. 1.In reality, decision makers are limited by their values, skills and knowledge. 2.In reality, decision makers have the tendency to search for all alternatives. 3.In reality, decision makers tend to search for alternatives until one is found that meets some minimum standard of sufficiency. 4.It is impossible for an informal alliance of groups to effect the decision that will be selected. 5.In reality, sometimes, decision makers select an alternative based on their inner belief about something without proper evaluation. 6.It is impossible for a decision maker to stay with a decision when it appears to be wrong. 7.In reality a decision maker is effected by his/her willingness to gamble when making a decision. 8.Individual ethics (personal beliefs about right and wrong behavior) combined with the organization’s ethics affect the decision-maker. Discuss the following statements. D0 you agree or disagree and why? Correct the statements that you disagree with. 1.In reality, decision makers are limited by their values, skills and knowledge. 2.In reality, decision makers have the tendency to search for all alternatives. 3.In reality, decision makers tend to search for alternatives until one is found that meets some minimum standard of sufficiency. 4.It is impossible for an informal alliance of groups to effect the decision that will be selected. 5.In reality, sometimes, decision makers select an alternative based on their inner belief about something without proper evaluation. 6.It is impossible for a decision maker to stay with a decision when it appears to be wrong. 7.In reality a decision maker is effected by his/her willingness to gamble when making a decision. 8.Individual ethics (personal beliefs about right and wrong behavior) combined with the organization’s ethics affect the decision-maker.

9–48 Behavioral and Political Aspects of d-m Match the behaviors that you agree with with one of the following terms. Escalation of Commitment Intuition Satisficing Bounded Rationality Risk Propensity Ethics and Decision Making Coalition Match the behaviors that you agree with with one of the following terms. Escalation of Commitment Intuition Satisficing Bounded Rationality Risk Propensity Ethics and Decision Making Coalition

9–49 Behavioral Aspects of Decision Making (cont’d) Bounded Rationality –The concept that decision makers are limited by their values and unconscious reflexes, skills, and habits. Satisficing –The tendency to search for alternatives only until one is found that meets some minimum standard of sufficiency to resolve the problem. Coalition –A political force in decision making which consists of an informal alliance of individuals or groups formed to achieve a goal. Bounded Rationality –The concept that decision makers are limited by their values and unconscious reflexes, skills, and habits. Satisficing –The tendency to search for alternatives only until one is found that meets some minimum standard of sufficiency to resolve the problem. Coalition –A political force in decision making which consists of an informal alliance of individuals or groups formed to achieve a goal.

9–50 Behavioral Aspects of Decision Making (cont’d) Intuition –An innate belief about something without conscious consideration. Escalation of Commitment –A decision maker is staying with a decision even when it appears to be wrong. Risk Propensity –The extent to which a decision maker is willing to gamble when making a decision. Intuition –An innate belief about something without conscious consideration. Escalation of Commitment –A decision maker is staying with a decision even when it appears to be wrong. Risk Propensity –The extent to which a decision maker is willing to gamble when making a decision.

9–51 Behavioral Aspects of Decision Making (cont’d) Ethics and Decision Making –Individual ethics (personal beliefs about right and wrong behavior) combine with the organization’s ethics to create managerial ethics. –Components of managerial ethics: Relationships of the firm to employees Employees to the firm The firm to other economic agents Ethics and Decision Making –Individual ethics (personal beliefs about right and wrong behavior) combine with the organization’s ethics to create managerial ethics. –Components of managerial ethics: Relationships of the firm to employees Employees to the firm The firm to other economic agents

9–52 Concepts Covered …. The Nature of Decision Making –Decision Making Defined –Types of Decisions –Decision-Making Conditions Certainty Risk Uncertainty Rational Perspectives on Decision Making –The Classical Model of Decision Making –Steps in Rational Decision Making The Nature of Decision Making –Decision Making Defined –Types of Decisions –Decision-Making Conditions Certainty Risk Uncertainty Rational Perspectives on Decision Making –The Classical Model of Decision Making –Steps in Rational Decision Making Behavioral Aspects of Decision Making –The Administrative Model –Political Forces in Decision Making Bounded Rationality Satisfice –Intuition and Escalation of Commitment –Risk Propensity and Decision Making –Ethics and Decision Making