1. Chapter 6 DECISION MAKING: THE ESSENCE OF THE MANAGER’S JOB
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2. Learning Objectives Outline the steps in the decision-making process
You should learn to:
Outline the steps in the decision-making process
Explain why decision making is so pervasive in organizations
Describe the rational decision maker
Contrast the perfectly rational and boundedly rational approaches to decision making
Explain the role that intuition plays in the decision-making process
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3. Learning Objectives (cont.)
You should learn to:
Identify the two types of decision problems and the two types of decisions that are used to solve them
Differentiate the decision conditions of certainty, risk, and uncertainty
Describe the different decision-making styles
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4. Decision Making must be such that it exerts pressure to act
Decisions
choices from two or more alternatives
all organizational members make decisions
Decision-Making Process
a comprehensive, 8-step process
Step 1 - Identifying a Problem
problem - discrepancy between an existing and a desired state of affairs
must be such that it exerts pressure to act
manager is unlikely to characterize a situation as a problem unless s/he has resources necessary to act
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5. Some cautions about problem identification
Some cautions about problem identification include the following:
1. Make sure it’s a problem and not just a symptom .
2. Problem identification is subjective\personal judgment.
3. Before a problem can be determined, a manager must be aware of any discrepancies.
4. Discrepancies can be found by comparing current results with some standard.
5. Pressure must be exerted on the manager to correct the discrepancy.
6. Managers aren’t likely to characterize some discrepancy as a problem if they perceive that they don’t have the authority, money, information, or other resources needed to act on it.
Example. Buying a new laptop computer by a sale’s representative.
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6. The Decision-Making Process
Allocation of
Weights to
Criteria
Problem
Identification
Identification of
Decision Criteria
Development of
Alternatives
“My salespeople
need new computers”
Price
Weight
Warranty
Screen type
Reliability
Screen size
Reliability
Screen size
Warranty
Weight
Price
Screen type 3
Acer
Compaq
Gateway HP
Micromedia
NEC
Sony
Toshiba a
Analysis of
Alternatives
Selection of an
Alternative
Implementation
of an Alternative
Acer
Compaq
Gateway HP
Micromedia
NEC
Sony
Toshiba
Acer
Compaq
Gateway HP
Micromedia
NEC
Sony
Toshiba
Gateway
Evaluation
of Decision
Effectiveness
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7. Decision Making (cont.)
Decision-Making Process (cont.)
Step 2 - Identifying Decision Criteria
decision criteria - what’s relevant in making a decision. What factors are relevant in making a decision (buying a computer).
Step 3 - Allocating Weights to the Criteria
must weight the criteria to give them appropriate priority in the decision.
Not all criteria are equally important.
Step 4 - Developing Alternatives
list the viable alternatives that could resolve the problem without evaluating them
Step 5 - Analyzing Alternatives
each alternative is evaluated against the criteria. Each alternative is evaluated by appraising it against the criteria established in step 2.
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8. Assessed Values of Notebook Computer Alternatives Against Decision Criteria
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9. Evaluation of Laptop Computer Alternatives Against Criteria and Weights
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10. Decision Making (cont.)
Decision-Making Process (cont.)
Step 6 - Selecting an Alternative
choosing the best alternative from among those considered
Step 7 - Implementing the Alternative
implementation - conveying the decision to those affected by it and getting their commitment to it
participation in decision-making process inclines people to support the decision
decision may fail if it is not implemented properly
Step 8 - Evaluating Decision Effectiveness
determine whether the problem is resolved
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11. PERVASIVENESS\frequency OF DECISION MAKING.
Decision making is important to every aspect of a manager’s job.
A. Decision making is part of all four managerial functions. In performing these functions, managers are often called decision makers. (See Exhibit 6.5 on p. 155.)
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12. Decisions in the Management Functions
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13. The Manager As Decision Maker
Rational Decision Making. Should be objective and logical.
decisions are consistent, value-maximizing choices within specified constraints
managers assumed to make rational decisions
Assumptions of Rationality - decision maker would:
be objective and logical
carefully define a problem
have a clear and specific goal
select the alternative that maximizes the likelihood of achieving the goal
make decision in the firm’s best economic interests
managerial decision making seldom meets all the tests.
The answer: bounded rationality.
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14. Assumptions Of Rationality
Single, well-
defined goal
is to be achieved
Problem is
clear and
unambiguous
All alternatives
and consequences
are known
Rational
Decision
Making
Preferences
are clear
Final choice
will maximize
payoff
Preferences
are constant
and stable
No time or cost
constraints exist
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15. Bounded/limited rationality
In spite of these limits to perfect rationality, managers are expected to “appear” rational as they make decisions. But because the perfectly rational model of decision making isn’t realistic, managers tend to operate under assumptions of:
bounded rationality, which is behavior that is rational within the parameters of a simplified decision-making process that is limited (or bounded) by an individual’s ability to process information.
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16. The Manager As Decision Maker (cont.)
Bounded Rationality: within the parameters of a simplified decision-making process:
satisfice - accept solutions that are “good enough” rather than maximizing payoffs.
escalation of commitment - increased commitment to a previous decision despite evidence that it may have been wrong. strongly influenced by the organization’s culture, internal politics, power considerations.
- refusal to admit that the initial decision may have been flawed/defected
3. Intuitive
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17. The Manager As Decision Maker (cont.)
Role of Intuition
intuitive decision making - subconscious process of making decisions on the basis of experience and accumulated judgment
does not rely on a systematic or thorough analysis of the problem
generally complements a rational analysis
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18. What Is Intuition? Intuition Experienced- based decisions Values or
Decisions based
on experience
Decisions based
on ethical values
or culture
Decisions based
on feelings and
emotions
Experienced-
based decisions
Values or
ethics-based
decisions
Affect-
initiated
decisions
Intuition
Subconscious
mental
processing
Cognitive-
based
decisions
Decisions based
on subconscious
data
Decisions based
on skills,
knowledge,
or training
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19. Types of Problems and Decisions
Well-Structured Problems - straightforward, familiar, and easily defined. In handling this situation, a manager can use: ex. Student missed the final exam for management 1.
Programmed Decision - used to address structured problems.
It is a repetitive decision that can be handled by a routine approach.
minimize the need for managers to use discretion
facilitate organizational efficiency
There are three possible programmed decisions:
procedure - series of interrelated sequential steps used to respond to a structured problem. Ex. Buying computer by procurement department.
rule - explicit statement of what to do or not to do. Ex. Rules about absenteeism.
policy - guidelines or parameters for decision making rather than specifically stating what should or should not be done. Ex. Customer always comes first.
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20. Types of Problems and Decisions
Poorly-Structured Problems - new, unusual problems for which information is ambiguous or incomplete. These problems are best handled by: ex. Investing in new unproven technology.
Nonprogrammed Decisions - used to address poorly- structured problems.
produce a custom-made response
more frequent among higher-level managers
few decisions in the real world are either fully programmed or nonprogrammed
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21. Types Of Problems, Types Of Decisions, And Level In The Organization
Top
Lower
Well-structured
Ill-structured
Type of
Problem
Programmed
Decisions
Nonprogrammed
Decisions
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22. Decision-Making Conditions
Certainty is a situation in which a manager can make accurate decisions because the outcome of every alternative is known.
This isn’t characteristic of most managerial decisions. idealistic rather than realistic.
More common is the situation of risk in which the decision maker is able to estimate the likelihood of certain outcomes. Exhibit 6.9 on p. 163 shows an example of how a manager might make decisions under risk.
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23. Expected Value for Revenues from the Addition of One Ski Lift
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24. Decision-Making Conditions
Uncertainty is a situation in which the decision maker has neither certainty nor reasonable probability estimates available.
a. The choice of alternative is influenced by the limited amount of information available.
b. It’s also influenced by the psychological orientation of the decision maker.
1) An optimistic manager will follow a maximax choice (maximizing the maximum possible payoff). See Exhibit 6.10 on p. 164.
2) A pessimistic one will pursue a maximin choice (maximizing the minimum possible payoff). See Exhibit 6.10 on p. 164.
3) The manager who desires to minimize the maximum regret will opt for a minimax choice. See Exhibit 6.11 on p. 165.
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25. Payoff Matrix
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26. Regret Matrix
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27. Decision-Making Styles
Managers have different styles when it comes to making decisions and solving problems. One perspective proposes that people differ along two dimensions in the way they approach decision making. (See Exhibit 6.12 on p. 166.)
1. One dimension is an individual’s way of thinking—rational or intuitive. The other is the individual’s tolerance for ambiguity—low or high.
2. These two dimensions lead to a two by two matrix with four different decision-making styles.
a. The directive style is one that’s characterized by low tolerance for ambiguity and a rational way of thinking.
b. The analytic style is one characterized by a high tolerance for ambiguity and a rational way of thinking.
c. The conceptual style is characterized by an intuitive way of thinking and a high tolerance for ambiguity.
d. The behavioral style is one characterized by a low tolerance for ambiguity and an intuitive way of thinking.
3. Most managers realistically probably have a dominant style and alternate styles, with some relying almost exclusively on their dominant style and others being more flexible depending on the situation.
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28. The Manager As A Decision Maker (cont.)
Decision-Making Styles
two dimensions define the approach to decision making
way of thinking - differs from rational to intuitive
tolerance for ambiguity - differs from a need for consistency and order to the ability to process many thoughts simultaneously
define four decision-making styles
Directive - fast, efficient, and logical
Analytic - careful and able to adapt or cope with new situations
Conceptual - able to find creative solutions
Behavioral - seek acceptance of decisions
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29. Decision-Making Styles
High
Low
Tolerance for Ambiguity
Analytic
Conceptual
Directive
Behavioral
Rational
Intuitive
Way of Thinking
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30. Managing Workforce Diversity
Diversity in Decision Making
Advantages - diverse employees:
provide fresh perspectives
offer differing interpretations of problem definition
increase the likelihood of creative and unique solutions
Disadvantages - diverse employees:
require more time to reach a decision
may have problems of communication
may create a more complex, confusing, and ambiguous decision-making process
may have difficulty in reaching agreement
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31. Overview Of Managerial Decision Making
Decision-Making Approach
Rationality
Bounded Rationality
Intuition
Types of Problems and Decisions
Well-structured
- programmed
Poorly structured
- nonprogrammed
Decision
Choose best
alternative
- maximizing
- satisficing
Implementing
Evaluating
Decision-Making
Process
Decision-Making Conditions
Certainty
Risk
Uncertainty
Decision Maker Style
Directive
Analytic
Conceptual
Behavioral
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32. Discussion
In the first step of the decision-making process, how do managers know when there is a problem?
Before something can be characterized as a problem (a discrepancy between an existing and a desired state of affairs), managers have to be aware of the discrepancy, they have to be under pressure to take action, and they must have the resources necessary to take action.
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33. Discussion
Why is the allocation of weights to criteria important in making decisions?
because all criteria are not equally important, so the decision maker must weight the items in order to give them the correct priority
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34. Discussion
How do managers develop, analyze, select, and implement alternatives and then assess whether the decision was effective?
Developing alternatives requires decision makers to list the viable alternatives that could resolve the problem.
In analyzing alternatives, the decision maker assesses the strengths and weaknesses of each alternative as it compares with the established criteria and weights.
Selecting an alternative is simply a matter of identifying the one with the highest weighted score.
In the implementation phase, the decision is conveyed to those affected and their commitment to it is obtained.
To assess whether the decision was effective, managers should ask whether it accomplished the desired result.
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35. Discussion
Describe decision making from the rationality and bounded rationality viewpoints.
Managerial decision making is assumed to be rational; that is, managers are assumed to make consistent, value-maximizing choices within specified constraints. In bounded rationality, managers construct simplified models that extract the essential features from problems without capturing all their complexity. Then, given information processing limitations and constraints imposed by the organization, managers attempt to behave rationally within the parameters of the simple model. The result is a satisficing decision rather than a maximizing one.
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36. Discussion
Why is decision making often described as the essence of the manager’s job?
As shown in Exhibit 6.5, decisions are made in all four functions of management. Almost anything a manager does in terms of planning, organizing, leading, and controlling involves decision making. The pervasiveness of decision making in management explains why managers are often called decision makers.
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37. Discussion
How might an organization’s culture influence the way in which managers make decisions?
An organization’s culture might influence how managers make decisions by emphasizing how much risk taking is permitted and by the importance placed on effectiveness of the decisions made. For example, if the organizational culture rewards decisions that reinforce the status quo, chances are good that those types of decisions will be made.
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38. Discussion
“As managers use computer and software tools more often, they’ll be able to make more rational decisions.” Do you agree or disagree with that statement? Why?
Although computer and software tools will allow managers to more easily gather information and analyze it, it’s doubtful that utilizing computers will allow managers to be more rational. If we look at the assumptions of rationality (problem clarity, goal orientation, known options, clear preferences, and so forth as shown in Exhibit 6.6), it’s obvious that even by adding computers to the decision-making process, managers’ decision making still won’t be perfectly rational.
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