1. Copyright ©2008 by Cengage Learning. All rights reserved Management, Organizational Policies & Practices Lecture 8 Dr. Amna Yousaf PhD (HRM) University of Twente, the Netherlands

2. Copyright ©2008 by Cengage Learning. All rights reserved Recap Lecture 7 Organizational Stakeholders Social Responsibility Costs and benefits of planning Top level, medium level and bottom level plans Special purpose plans for planning for change, contingencies and product development processes.

3. Copyright ©2008 by Cengage Learning. All rights reserved Decision Making Lecture 8

4. Copyright ©2008 by Cengage Learning. All rights reserved 4 What Is Rational Decision Making? After reading these sections, you should be able to: explain the steps and limits to rational decision making. Explain the different mistakes managers make Explain how decision making can be improved explain how group decisions and group decision- making techniques can improve decision- making.

5. Copyright ©2008 by Cengage Learning. All rights reserved 5 What Is Rational Decision Making? Decision Making The process of choosing a solution from available alternatives. Rational Decision Making A systematic process of defining problems, evaluating alternatives, and choosing optimal solutions.

6. Copyright ©2008 by Cengage Learning. All rights reserved 6 Steps to Rational Decision Making Define the problem Identify decision criteria Weight the criteria Generate alternative courses of action Evaluate each alternative Compute the optimal decision 1 1 2 2 3 3 4 4 5 5 6 6

7. Copyright ©2008 by Cengage Learning. All rights reserved 7 Steps to Rational Decision Making Define the problem 1 1 A problem exists when there is a gap between a desired state and an existing state To make decisions about problems, managers must… –be aware of the gap. –be motivated to reduce the gap. –have the knowledge, skills, abilities, and resources to fix the problem.

8. Copyright ©2008 by Cengage Learning. All rights reserved Defining the Problem Cisco Systems, Inc. makes the switches and routers that create the infrastructure for the Internet. But Cisco wants to make a broader impact on Internet communication, especially in the business world. The company will stretch its resources to develop instant messaging and Web conferencing as well as online video. 8 Beyond the Book Source: “The 50 Women to Watch 2008,” The Wall Street Journal, 10 November 2008, R6.

9. Copyright ©2008 by Cengage Learning. All rights reserved Problem Identification Kemp Mill Music had to close 30 of 36 stores. Case of an expensive dog food company –Could not identify –Business people compaint of unreasonable working conditions – working 60 hours a week – response of congress 9

10. Copyright ©2008 by Cengage Learning. All rights reserved 10 Steps to Rational Decision Making Identify decision criteria 2 2 Standards used to guide judgments and decisions The more criteria a potential solution meets, the better that solution should be –Purchasing computer for office: Reliability, on- site service, warranty, compatibility with existing software, technical details such as computer chip, several gigabites of memory and hard drive, CD-ROM to play DVD’s and good price!

11. Copyright ©2008 by Cengage Learning. All rights reserved 11 Steps to Rational Decision Making Weight the criteria 3 3 17 inch monitor and a CD-ROM drive may not be that important for office but a Pentium 400 computer chip, 128 megabytes of memory, network/internet connections, at least 10 gegabytes hard drive are must haves

12. Copyright ©2008 by Cengage Learning. All rights reserved Steps to Rational Decision Making Absolute comparisons –each criterion is compared to a standard or ranked on its own merits Relative comparisons –each criterion is compared directly to every other criterion 12

13. Copyright ©2008 by Cengage Learning. All rights reserved 13 Steps to Rational Decision Making Absolute Weighting of Decision Criteria

14. Copyright ©2008 by Cengage Learning. All rights reserved 14 Steps to Rational Decision Making Relative Weighting of Decision Criteria

15. Copyright ©2008 by Cengage Learning. All rights reserved 15 Steps to Rational Decision Making Generate alternative courses of action 4 4 The idea is to generate as many alternatives as possible A manufacturing company located in Los Angeles wants to relocate based on criteria of government regulations, cheap real estate rentals, quality labor, availability of raw materials – generate a few options

16. Copyright ©2008 by Cengage Learning. All rights reserved 16 Evaluate each alternative 5 5 Steps to Rational Decision Making This step can take much longer and be more expensive than other steps in the process To evaluate each option for manufacturing firm, it may have to deploy a research firm to collect all necessary information

17. Copyright ©2008 by Cengage Learning. All rights reserved 17 Compute the optimal decision 6 6 Steps to Rational Decision Making Multiply the rating for each criterion by the weight for that criterion Sum the scores for each alternative course of action

18. Copyright ©2008 by Cengage Learning. All rights reserved 18 Limits to Rational Decision Making Bounded Rationality A decision-making process restricted in the real world by:  limited resources  incomplete and imperfect information  managers’ limited decision-making capabilities  Gathering whole of information may lead to information overload that may require much longer to process  PC Magazine use of 24 specific decion criteria and evaluation of approx. 50 PC’s to describe “perfect PC”

19. Copyright ©2008 by Cengage Learning. All rights reserved Limits to Rational Decision Making Memory problems – difficult retrieving important information. –Selecting the computer – managers must track compatibility of existing computers. Information retrieval can be time consuming and costly Managers are not experts – to search perfect PC 24 times 50 analyses may not be easy to conduct and interpret 19

20. Copyright ©2008 by Cengage Learning. All rights reserved 20 Limits to Rational Decision Making Maximize Satisfice

21. Copyright ©2008 by Cengage Learning. All rights reserved Maximize or Satisfice Maximizing is choosing the best alternative Satisficing is choosing a “good enough” alternative. 21

22. Copyright ©2008 by Cengage Learning. All rights reserved Common Decision-Making Mistakes Intuition based decisions –Albert Einstein discoverer of law of relativity said “ I did not arrive at the fundamental laws through my rational mind” –Robert Pittman CEO of Time Warner said “Research just answers some questions; at the end of the day it’s a gut decision”. Can be prone to mistakes – case of radiologists 22

23. Copyright ©2008 by Cengage Learning. All rights reserved Common Decision-Making Mistakes Availability bias – tendency to give preference to recent information and vivid images –Case of local channel advertising security related items Representative bias – judge the likelihood of an event’s occurrence based on its similarity to previous events. –Hiring of ABC university graduate 23

24. Copyright ©2008 by Cengage Learning. All rights reserved Common Decision-Making Mistakes Anchoring and adjustment bias- to use an initial value or experience as a basis of comparison throughout the decision process –Salary figure in a job interview –First travel in business class will make economy class miserable every time 24

25. Copyright ©2008 by Cengage Learning. All rights reserved Risk and Decision Making Condition of risk when the possibility of making a wrong decision prevails –Risky conditions make rational decisions a challenge 25

26. Copyright ©2008 by Cengage Learning. All rights reserved Using Rules and Tests to Improve Decisions Decision Rule – set of criteria that alternative solutions must meet to be acceptable to the decision maker –Fast food restaurant or clothing store rules Dictionary Rule – rank criteria in order of importance and then test each alternative against those criteria in rank order so that alternative meeting first criteria checked on second and so on 26

27. Copyright ©2008 by Cengage Learning. All rights reserved Using Rules and Tests to Improve Decisions Minimum Threshold Rule – alternative required to meet all minimum established criteria –Ottawa rule for x-ray of ankle injuries 27

28. Copyright ©2008 by Cengage Learning. All rights reserved Using Rules and Tests to Improve Decisions Multivariable Testing- systematic approach of small scale experiments to evaluate potential solutions –Amusement park conducted tests to increase park attendance 28

29. Copyright ©2008 by Cengage Learning. All rights reserved 29 Using Groups to Improve Decision Making Delphi Technique Electronic Brainstorming Structured Conflict Nominal Group Technique

30. Copyright ©2008 by Cengage Learning. All rights reserved 30 Group Decision Making 1.View problems from multiple perspectives 2.Find and access more information 3.Generate more alternative solutions 4.More committed to making chosen solutions work 1.View problems from multiple perspectives 2.Find and access more information 3.Generate more alternative solutions 4.More committed to making chosen solutions work Advantages

31. Copyright ©2008 by Cengage Learning. All rights reserved 31 Group Decision Making 1.Susceptible to groupthink and to considering a limited number of solutions 2.Takes considerable time 3.One or two people can dominate group discussion 4.Members don’t feel personally accountable for decisions and actions 1.Susceptible to groupthink and to considering a limited number of solutions 2.Takes considerable time 3.One or two people can dominate group discussion 4.Members don’t feel personally accountable for decisions and actions Disadvantages

32. Copyright ©2008 by Cengage Learning. All rights reserved 32 Groupthink  the group is insulated from others with different perspectives.  the group leader expresses a strong preference for a particular decision.  there is no established procedure for defining problems and exploring alternatives.  group members have similar backgrounds.  the group is insulated from others with different perspectives.  the group leader expresses a strong preference for a particular decision.  there is no established procedure for defining problems and exploring alternatives.  group members have similar backgrounds. Groupthink is likely to occur when…

33. Copyright ©2008 by Cengage Learning. All rights reserved 33 Structured Conflict C-Type Conflict Cognitive conflict Disagreement that focuses on problem- and issue-related differences of opinion A-Type Conflict Affective conflict Disagreement that focuses on individuals or personal issues Affective conflict Disagreement that focuses on individuals or personal issues

34. Copyright ©2008 by Cengage Learning. All rights reserved 34 Devil’s Advocacy Steps to Establish a Devil’s Advocacy Program 1.Generate a potential solution 2.Assign a devil’s advocate to criticize and question 3.Present the critique of the solution to key decision makers 4.Gather additional information 5.Decide whether to use, change, or not use the originally proposed solution 1.Generate a potential solution 2.Assign a devil’s advocate to criticize and question 3.Present the critique of the solution to key decision makers 4.Gather additional information 5.Decide whether to use, change, or not use the originally proposed solution

35. Copyright ©2008 by Cengage Learning. All rights reserved 35 Dialectical Inquiry Steps to Establish a Dialectical Inquiry Process 1.Generate a potential solution 2.Identify the assumptions underlying the potential solution 3.Generate a conflicting counterproposal based on opposite assumptions 4.Have advocates of each position present their arguments and engage in a debate in front of decision makers 5.Decide whether to use, change, or not use the originally proposed solution 1.Generate a potential solution 2.Identify the assumptions underlying the potential solution 3.Generate a conflicting counterproposal based on opposite assumptions 4.Have advocates of each position present their arguments and engage in a debate in front of decision makers 5.Decide whether to use, change, or not use the originally proposed solution Beyond the Book

36. Copyright ©2008 by Cengage Learning. All rights reserved 36 Nominal Group Technique Steps to Establish Nominal Group Technique 1.During a quiet time, group members write down as many problems and solutions as possible. 2.Each member shares one idea at a time. 3.Ideas are posted on flipcharts until all ideas are shared. 4.Group discusses advantages/disadvantages. 5.Ideas are ranked during a second quiet time. 6.Members read rankings aloud, and the idea with the highest average rank is selected. 1.During a quiet time, group members write down as many problems and solutions as possible. 2.Each member shares one idea at a time. 3.Ideas are posted on flipcharts until all ideas are shared. 4.Group discusses advantages/disadvantages. 5.Ideas are ranked during a second quiet time. 6.Members read rankings aloud, and the idea with the highest average rank is selected.

37. Copyright ©2008 by Cengage Learning. All rights reserved 37 Delphi Technique Steps to Establish Delphi Technique 1.Assemble a panel of experts. 2.Create a questionnaire of open-ended questions. 3.Summarize the responses and feed back to the panel until the members reach agreement. 4.Create a brief report and send to the panel members for agreement/disagreement. 5.Continue the feedback process until panel reaches agreement. 1.Assemble a panel of experts. 2.Create a questionnaire of open-ended questions. 3.Summarize the responses and feed back to the panel until the members reach agreement. 4.Create a brief report and send to the panel members for agreement/disagreement. 5.Continue the feedback process until panel reaches agreement.

38. Copyright ©2008 by Cengage Learning. All rights reserved 38 Brainstorming Four Rules of Brainstorming 1.The more ideas, the better. 2.All ideas are acceptable, no matter how wild or crazy. 3.Other group members’ ideas should be used to come up with even more ideas. 4.Criticism or evaluation of ideas is not allowed. 1.The more ideas, the better. 2.All ideas are acceptable, no matter how wild or crazy. 3.Other group members’ ideas should be used to come up with even more ideas. 4.Criticism or evaluation of ideas is not allowed.

39. Copyright ©2008 by Cengage Learning. All rights reserved 39 Electronic Brainstorming Advantages of Electronic Brainstorming Overcomes production blocking technology allows everyone to record their ideas as they are created no ideas lost while waiting your turn to speak Overcomes evaluation apprehension anonymity creates free expression

40. Copyright ©2008 by Cengage Learning. All rights reserved 40 Electronic Brainstorming Disadvantages of Electronic Brainstorming Greater expense No automatic acceptance of ideas because of one’s position Some find it difficult to express themselves in writing Lack of typing skills can frustrate participants