1. 7Chapter PowerPoint Presentation by Charlie Cook © Copyright The McGraw-Hill Companies, Inc., 2003. All rights reserved. The Manager as Decision Maker

2. © Copyright McGraw-Hill. All rights reserved.7–27–2 Learning Objectives After studying the chapter, you should be able to:After studying the chapter, you should be able to:  Differentiate between programmed and nonprogrammed decisions, and explain why nonprogrammed decision making is a complex, uncertain process.  Describe the six steps that managers should take to make the best decisions.  Explain how cognitive biases can affect decision making and lead managers to make poor decisions.  Identify the advantages and disadvantages of group decision making, and describe techniques that can improve it.

3. © Copyright McGraw-Hill. All rights reserved.7–37–3 Learning Objectives (cont’d)  Explain the role that organizational learning and creativity play in helping managers to improve their decisions.

4. © Copyright McGraw-Hill. All rights reserved.7–47–4 Chapter Outline The Nature of Managerial Decision MakingThe Nature of Managerial Decision Making  Programmed and Nonprogrammed Decision Making  The Classical Model  The Administrative Model Steps in the Decision-Making ProcessSteps in the Decision-Making Process  Recognize the Need for a Decision  Generate Alternatives  Evaluate Alternatives  Choose Among Alternatives  Implement the Chosen Alternative

5. © Copyright McGraw-Hill. All rights reserved.7–57–5 Chapter Outline (cont’d) Steps in the Decision-Making Process (cont’d)Steps in the Decision-Making Process (cont’d)  Learning from Feedback Cognitive Biases and Decision MakingCognitive Biases and Decision Making  Prior Hypothesis Bias  Representative Bias  Illusion of Control  Escalating Commitment Group Decision MakingGroup Decision Making  Perils of Groupthink  Devil’s Advocacy and Dialectical Inquiry

6. © Copyright McGraw-Hill. All rights reserved.7–67–6 Chapter Outline (cont’d) Group Decision Making (cont’d)Group Decision Making (cont’d)  Diversity Among Decision Makers Organizational Learning and CreativityOrganizational Learning and Creativity  Creating a Learning Organization  Promoting Individual Creativity  Promoting Group Creativity  Promoting Creativity at the Global Level

7. © Copyright McGraw-Hill. All rights reserved.7–77–7 The Nature of Managerial Decision Making Decision MakingDecision Making  The process by which managers respond to opportunities and threats by analyzing options, and making decisions about goals and courses of action. Decisions in response to opportunities—occurs when managers respond to ways to improve organizational performance.Decisions in response to opportunities—occurs when managers respond to ways to improve organizational performance. Decisions in response to threats—occurs when managers are impacted by adverse events to the organization.Decisions in response to threats—occurs when managers are impacted by adverse events to the organization.

8. © Copyright McGraw-Hill. All rights reserved.7–87–8 Programmed and Nonprogrammed Decisions Programmed DecisionProgrammed Decision  Routine, virtually automatic decision making that follows established rules or guidelines. Managers have made the same decision many times before.Managers have made the same decision many times before. There are rules or guidelines to follow based on experience with past decisions.There are rules or guidelines to follow based on experience with past decisions. Example: Disciplinary action to be taken concerning a tardy employee.Example: Disciplinary action to be taken concerning a tardy employee.

9. © Copyright McGraw-Hill. All rights reserved.7–97–9 Programmed and Nonprogrammed Decisions Non-Programmed DecisionsNon-Programmed Decisions  Nonroutine decision making that occurs in response to unusual, unpredictable opportunities and threats.  The are no rules to follow since the decision is new. Decisions are made based on information, and a manager’s intuition, and judgment.Decisions are made based on information, and a manager’s intuition, and judgment. Example: Deciding to invest in additional production equipment to meet forecasted demand.Example: Deciding to invest in additional production equipment to meet forecasted demand.

10. © Copyright McGraw-Hill. All rights reserved.7–10 The Classical Model Classical Model of Decision MakingClassical Model of Decision Making  A prescriptive model of decision making that assumes the decision maker can identify and evaluate all possible alternatives and their consequences and rationally choose the most appropriate course of action.  Optimum decision The most appropriate decision in light of what managers believe to be the most desirable future consequences for their organization.The most appropriate decision in light of what managers believe to be the most desirable future consequences for their organization.

11. © Copyright McGraw-Hill. All rights reserved.7–11 The Classical Model of Decision Making Figure 7.1

12. © Copyright McGraw-Hill. All rights reserved.7–12 The Administrative Model Administrative Model of Decision MakingAdministrative Model of Decision Making  An approach to decision making that explains why decision making is inherently uncertain and risky and why managers usually make satisfactory rather than optimum decisions.

13. © Copyright McGraw-Hill. All rights reserved.7–13 The Administrative Model (cont’d) Administrative Model of Decision Making (cont’d)Administrative Model of Decision Making (cont’d)  Bounded rationality There is a large number of alternatives and available information can be so extensive that managers cannot consider it all.There is a large number of alternatives and available information can be so extensive that managers cannot consider it all. Decisions are limited by people’s cognitive abilities.Decisions are limited by people’s cognitive abilities.  Incomplete information most managers do not see all alternatives and decide based on incomplete information.most managers do not see all alternatives and decide based on incomplete information.

14. © Copyright McGraw-Hill. All rights reserved.7–14 Why Information Is Incomplete Figure 7.2

15. © Copyright McGraw-Hill. All rights reserved.7–15 Causes of Incomplete Information RiskRisk  The degree of probability that the possible outcomes of a particular course of action will occur. Managers know enough about a given outcome to be able to assign probabilities for the likelihood of its failure or successManagers know enough about a given outcome to be able to assign probabilities for the likelihood of its failure or success UncertaintyUncertainty  Probabilities cannot be given for outcomes and the future is unknown. Many decision outcomes are not known such as the success of a new product introduction.Many decision outcomes are not known such as the success of a new product introduction.

16. © Copyright McGraw-Hill. All rights reserved.7–16 Causes of Incomplete Information (cont’d) Ambiguous InformationAmbiguous Information  Information whose meaning is not clear allowing it to be interpreted in multiple or conflicting ways. Figure 7.3 Young Woman or Old Woman

17. © Copyright McGraw-Hill. All rights reserved.7–17 Causes of Incomplete Information (cont’d) SatisficingSatisficing  Searching for and choosing an acceptable, or satisfactory response to problems and opportunities, rather than trying to make the best decision. Managers explore a limited number of options and choose an acceptable decision rather than the optimum decision.Managers explore a limited number of options and choose an acceptable decision rather than the optimum decision. Managers assume that the limited options they examine represent all options.Managers assume that the limited options they examine represent all options. This is the typical response of managers when dealing with incomplete information.This is the typical response of managers when dealing with incomplete information.

18. © Copyright McGraw-Hill. All rights reserved.7–18 Six Steps in Decision Making Figure 7.4

19. © Copyright McGraw-Hill. All rights reserved.7–19 Decision Making Steps Step 1. Recognize Need for a Decision  Sparked by an event such as environment changes. Managers must first realize that a decision must be made.Managers must first realize that a decision must be made. Step 2. Generate Alternatives  Managers must develop feasible alternative courses of action. If good alternatives are missed, the resulting decision is poor.If good alternatives are missed, the resulting decision is poor. It is hard to develop creative alternatives, so managers need to look for new ideas.It is hard to develop creative alternatives, so managers need to look for new ideas.

20. © Copyright McGraw-Hill. All rights reserved.7–20 Decision Making Steps Step 4. Evaluate Alternatives  What are the advantages and disadvantages of each alternative?  Managers should specify criteria, then evaluate.  When ranking, all information needs to be considered.

21. © Copyright McGraw-Hill. All rights reserved.7–21 General Criteria for Evaluating Possible Courses of Action Figure 7.5

22. © Copyright McGraw-Hill. All rights reserved.7–22 Evaluating Alternatives

23. © Copyright McGraw-Hill. All rights reserved.7–23 Decision Making Steps Step 5. Implement Chosen Alternative  Managers must now carry out the alternative.  Often a decision is made and not implemented. Step 6. Learn From Feedback  Managers should consider what went right and wrong with the decision and learn for the future.  Without feedback, managers do not learn from experience and will repeat the same mistake over.

24. © Copyright McGraw-Hill. All rights reserved.7–24 Cognitive Biases and Decision Making HeuristicsHeuristics  Rules of thumb to deal with complex situations.  Decision makers use heuristics to deal with bounded rationality. If the heuristic is wrong, however, then poor decisions result from its use.If the heuristic is wrong, however, then poor decisions result from its use. Systematic errors can result from use of an incorrect heuristic and will appear over and over since the rule used to make decision is flawed.Systematic errors can result from use of an incorrect heuristic and will appear over and over since the rule used to make decision is flawed.

25. © Copyright McGraw-Hill. All rights reserved.7–25 Sources of Cognitive Bias at the Individual and Group Levels Figure 7.6 Source:

26. © Copyright McGraw-Hill. All rights reserved.7–26 Types of Cognitive Biases Prior Hypothesis BiasPrior Hypothesis Bias  Allowing strong prior beliefs about a relationship between variables to influence decisions based on these beliefs even when evidence shows they are wrong. RepresentativenessRepresentativeness  The decision maker incorrectly generalizes a decision from a small sample or a single incident.

27. © Copyright McGraw-Hill. All rights reserved.7–27 Types of Cognitive Biases Illusion of ControlIllusion of Control  The tendency to overestimates one’s own ability to control activities and events. Escalating CommitmentEscalating Commitment  Committing considerable resources to project and then committing more even if evidence shows the project is failing.

28. © Copyright McGraw-Hill. All rights reserved.7–28 Group Decision Making Most decisions are made in group settings.Most decisions are made in group settings.  Groups tend to reduce cognitive biases and can call on their greater combined skills and abilities. GroupthinkGroupthink  Biased decision making resulting from group members striving for agreement. Usually occurs when group members rally around a central manager’s idea, and become blindly commit to the idea without considering alternatives.Usually occurs when group members rally around a central manager’s idea, and become blindly commit to the idea without considering alternatives. The group’s influence tends to convince each member that the idea must go forward.The group’s influence tends to convince each member that the idea must go forward.

29. © Copyright McGraw-Hill. All rights reserved.7–29 Improved Group Decision Making Devil’s AdvocacyDevil’s Advocacy  A group member who defends unpopular or opposing alternatives for the sake of argument  One member of the group who acts as the devil’s advocate by critiquing the way the group identified alternatives and pointing out problems with the alternative selection.

30. © Copyright McGraw-Hill. All rights reserved.7–30 Improved Group Decision Making Dialectical InquiryDialectical Inquiry  Two different groups are assigned to the problem and each group evaluates the other group’s choice of alternatives.  Top managers then hear each group present their alternatives and each group can critique the other. Promote DiversityPromote Diversity  Increasing the diversity in a group may result in consideration of a wider set of alternatives.

31. © Copyright McGraw-Hill. All rights reserved.7–31 Devil’s Advocacy and Dialectical Inquiry Figure 7.7 Source:

32. © Copyright McGraw-Hill. All rights reserved.7–32 Organizational Learning and Creativity Organizational LearningOrganizational Learning  Managers seek to improve a employee’s desire and ability to understand and manage the organization and its task environment so as to raise effectiveness. The Learning OrganizationThe Learning Organization  Managers try to maximize the people’s ability to behave creatively to maximize organizational learning.

33. © Copyright McGraw-Hill. All rights reserved.7–33 Senge’s Principles for Creating a Learning? Figure 7.8 Source:

34. © Copyright McGraw-Hill. All rights reserved.7–34 Organizational Learning and Creativity CreativityCreativity  The ability of the decision maker to discover novel ideas leading to a feasible course of action. A creative management staff and employees are the key to the learning organization.A creative management staff and employees are the key to the learning organization.

35. © Copyright McGraw-Hill. All rights reserved.7–35 Creating a Learning Organization Personal MasteryPersonal Mastery  Managers empower employees and allow them to create and explore. Mental ModelsMental Models  Challenge employees to find new, better methods to perform a task. Team LearningTeam Learning  Is more important than individual learning since most decisions are made in groups.

36. © Copyright McGraw-Hill. All rights reserved.7–36 Creating a Learning Organization (cont’d) Build a Shared VisionBuild a Shared Vision  People share a common mental model of the firm to evaluate opportunities. Systems ThinkingSystems Thinking  Knowing and understanding how actions in one area of the firm will impact other areas of the firm.

37. © Copyright McGraw-Hill. All rights reserved.7–37 Promoting Individual Creativity Organizations can build an environment supportive of creativity.Organizations can build an environment supportive of creativity.  Managers must provide employees with the ability to take risks. If people take risks, they will occasionally fail.If people take risks, they will occasionally fail.  To build creativity, periodic failures must be rewarded. This idea is hard to accept for some managers.This idea is hard to accept for some managers.

38. © Copyright McGraw-Hill. All rights reserved.7–38 Building Group Creativity BrainstormingBrainstorming  Managers meet face-to-face to generate and debate many alternatives. Group members are not allowed to evaluate alternatives until all alternatives are listed.Group members are not allowed to evaluate alternatives until all alternatives are listed. When all are listed, then the pros and cons of each are discussed and a short list created.When all are listed, then the pros and cons of each are discussed and a short list created.  Production blocking Members cannot absorb all information being presented during the session and can forget even their own alternatives.Members cannot absorb all information being presented during the session and can forget even their own alternatives.

39. © Copyright McGraw-Hill. All rights reserved.7–39 Building Group Creativity Nominal Group TechniqueNominal Group Technique  Provides a more structured way to generate alternatives in writing. Avoids the production blocking problem.Avoids the production blocking problem. Similar to brainstorming except that each member is given time to first write down all alternatives he or she would suggest.Similar to brainstorming except that each member is given time to first write down all alternatives he or she would suggest. Alternatives are then read aloud without discussion until all have been listed.Alternatives are then read aloud without discussion until all have been listed. Then discussion occurs and alternatives are ranked.Then discussion occurs and alternatives are ranked.

40. © Copyright McGraw-Hill. All rights reserved.7–40 Building Group Creativity Delphi TechniqueDelphi Technique  Provides a written format without having all managers meet face-to-face.  Delphi allows distant managers to participate. Problem is distributed in written form to managers who then generate written alternatives.Problem is distributed in written form to managers who then generate written alternatives. Responses are received and summarized by top managers.Responses are received and summarized by top managers. These results are sent back to participants for feedback, and ranking.These results are sent back to participants for feedback, and ranking. The process continues until consensus is reached.The process continues until consensus is reached.