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Chapter 7
Fundamentals of
decision-making
p. 157
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Learning outcomes
1. Define decision-making and explain the role of decision-making for managers and employees
2. Explain the conditions of certainty, risk, and uncertaintyunder which decisions are made
3. Describe the characteristics of routine, adaptive, andinnovative decisions
4. Explain how goals affect decision-making
5. Compare and contrast the rational, bounded rationality,and political models of decision-making
6. Use your creative abilities in identifying solutions toproblems by preparing a brief report relating to creativityin problem solving.
(Consult http://www.tiac.net/users/seeker/brainlinks.html)
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Framework and outcomes:
1. Define decision-making2. Decision-making conditions - describe3. Decision-making aspects and types
explain4. Goals, objectives and decision-making -
link5. Decision-making models and process -
identify & discuss (rational, boundedrational, political)
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Introduction
1. Decision-making is the process by whichmanagers respond to opportunities andthreats by analysing options, and makingdecisions about goals and courses of action
2. Decisions in response to opportunities:Managers respond to ways to improveorganisational performance
3. Decisions in response to threats: Occurswhen managers are impacted by adverseevents in the organisation.
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In order for decision-making to take place,one of the following questions must beanswered affirmatively: Is there a gap between the present situation and
some desired objective? Is the decision-maker aware of the significance of
the gap? Is the decision-maker motivated to act on the
gap?
Does the decision-maker have resources to act? Refer to Figure 7.1: Fundamental Components of
the Decision-Making Process on page 159 of thetextbook.
Introduction
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Conditions under which decisions are made p. 160
Certainty Risk Uncertainty
Objective Selective
probabilities probabilities
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CERTAINTY
1. Is the condition under which individualsare fully informed about a problem,alternative solutions are obvious, and the
likely results of each solution are clear.2. The condition of certainty at least allows
anticipation (if not control) of events andtheir outcomes.
3. This condition means that both theproblem and alternative solutions areknown and well defined.
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RISK
1. Risk is the condition under which individualscan define problems, specify the probability ofcertain events, identify alternative solutions, and
state the probability of each solution leading tothe desired results
2. Probability is the percentage of times that aspecific outcome would occur if an individualwere to make a particular decision a largenumber of times
3. Objective probability is the likelihood that aspecific outcome would occur, based on hardfacts and numbers
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CERTAINTY & RISK
1. Subjective Probability is the likelihood thata specific outcome will occur, based onpersonal judgment and beliefs
2. Uncertainty
Uncertainty is the condition under which
an individual does not have thenecessary information to assignprobabilities to the outcomes ofalternative solutions.
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Types of decision-making p. 162
Programmed decisions (routine, almostautomatic process): Managers have made decision many times before There are rules or guidelines to follow
Example: Deciding to reorder office supplies
Non-programmed decisions (unusualsituations that have not been often
addressed): No rules to follow since the decision is new These decisions are made based on information
and a mangers intuition and judgement Example: Should the firm invest in new
technology?
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Adaptive decisions
1. Made in response to a combination ofmoderately unusual problems.
2. Continuous improvement
3. Improving upon past routine decisionsand practices
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Innovative decisions p. 165
Are decisions based on the discoveryof unusual problems.
The development of unique or creativealternative solutions.
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Goals and decision-making p.166
1. Decision-making in organisations under theconditions of risk and uncertainty iscoupled directly with goals in one of twoways:
The decision-making process is triggered by asearch for better ways to achieve establishedgoals
The decision-making process is triggered byan effort to discover new goals, revise current
goals, or drop outdated goals2. Goals are crucial in giving employees,
managers, and organisations a sense oforder, direction, and meaning
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Nature of Goals and decision-making
1. Goals are results to attained, and thus indicatethe direction in which decisions and actionsshould be aimed
2. Clear goals specify the quality or quantity of
desired results3. Goals are also called objectives, ends, purpose,
standards, deadlines, targets, and quotas
4. They specify results and outcomes thatsomeone believes to be desirable and worthachieving
5. Goals can cover the long term (years) or shortterm (minutes, hours, days, or months)
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Why people set Goals
1. Goals serve to focus individual andorganisational decisions and efforts
2. Goals aid the planning process
3. Goals motivate people and stimulatebetter performance
4. Goals assist in performanceevaluation and control
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General and operation goals
1. General goals provide boarddirection for decision-making inqualitative terms
2. Operation goals state what is to beachieved in quantitative terms, forwhom, and within what time period.
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Role of stakeholders p. 167
1. Goals are not set in a vacuum, variousstakeholders (e.g. customers, shareholders,suppliers, and government agencies) havean impact on an organisation and itsemployees
2. This impact is felt in the goal-setting andrevision process
3. Stakeholders play a crucial role in shapingthe demands, constraints, and choices ofalternatives that managers and employeesface when setting goals
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Role of stakeholders (cont.)
Demands are the desires expressed bypowerful stakeholders that an organisation makecertain decisions and achieve particular goals
Constraints limit the type of goals set, thedecisions made, and the actions taken. Twoimportant constraints are law and ethics
Choices are goals and alternatives thatorganisations and individuals are free to, but donot have to, select
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Balanced score care p. 168
1. One of the techniques that can be used bymanagers to ensure that organisational goals areachieved while considering the interests ofstakeholders is the balanced scorecard
2. Balanced scorecard keeps track of the key elementsof a companys strategy implementation byconsidering both internal and external stakeholdersperspectives
3. The balanced scorecard looks at an organisations
strategic approach from four perspectives:financial, customer, internal process, and thelearning and growth perspective
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Financial perspective
1. The financial perspective measures indicatewhether an organisation's strategy,implementation, and execution are
contributing to that organisationsimprovements in the market value.
2. The customer perspective of the balancescorecard requires that managers translate
their general mission statement intospecific measures that reflect the factorsthat affect customers the most.
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Role of stakeholders (cont.)
1. The internal process perspective stipulatesthat customer-based measures aretranslated into measures of what the
organisation must do internally to meet it'scustomer expectations
2. The learning and growth perspectiverequires that organisations make continual
improvements to their existing productsand processes; and have the ability tointroduce entirely new products withexpanded capabilities.
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The classical model (rational) p.169
1. The classical model of decision-making is a prescriptive model thattells how the decision should be made Assumes managers have access to all the
information needed to reach a decision Managers can then make the optimum
decision by easily ranking their ownpreferences among alternatives
2. Unfortunately, mangers often do nothave all (or even most) requiredinformation
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The classical model (rational) (cont.)
List alternatives& consequences
Rank each alternativefrom low to high
Select bestalternative
Assumes all informationis available to manager
Assumes manager canprocess information
Assumes manager knows
the best future course ofthe organisation
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The classical model (rational) (cont.)
Phase 2:Set goals
Phase 3:Search for
alternative
solutions
Phase 1: Defineand diagnose
the problem
Phase 4:Compare and
evaluate
alternative
solutions
Phase 5:
Choose among
alternative
solutions
Phase 6:
Implement the
solution
selected
Phase 7:
Follow up
and
control
External and internalenvironmental factors
and stakeholders
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The administrative model (bounded rationality)
Administrative model of decision-making: Challenges the classicalassumption that managers have, and
process, all the information As a result, decision-making is risky
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Bounded rationality p. 173
Bounded rationality: Since the number ofalternatives is large and the amount ofinformation vast, managers cannot be
expected to consider everything Decisions are limited by peoples cognitive
abilities
Incomplete information: Most managers do
not see all alternatives and therefore makedecisions based on incomplete information.
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Bounded rationality model
Developed by Herbert Simon Management scholar in the 1950s Simon won the 1978 Nobel Prize in economics for
his research into the decision-making process
Refers to An individuals tendencies to select less than the
best goal or best alternative solution
Satisficing
Factors that result in a satisficing decision A limited search Inadequate information
Information processing bias.
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Factors influencing a satisficing decision
Information processing biases
Limitedsearch
Limitedinformation
Satisficingdecision
Perceivedproblem Triggers Leads to
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Why information is incomplete
Uncertainty& risk
Ambiguousinformation
Time constraints &information costs
Incompleteinformation
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Political model p. 174
Power (of stakeholders) to influence The definition of the problem The choice of goals Consideration of alternative solutions
Selection of alternative to be implemented Actions and success of the organisation
Problem definition External and internal stakeholders try to define
problems to their own advantage Stakeholders may use scapegoatingto cast blame
on another party for problems, hoping to preservea position of power or a positive image
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Political model (stakeholder) (cont.)
Choice of goals Reflect the agendas of the organisations most
powerful stakeholders Coalitions (alliances)
Formed when no one person or group has sufficientpower to select or implement the preferred goal
Search for alternative solutions Constrained or expanded
Depending upon whether more or less information is
conducive to stakeholders agendas Co-optation
Bringing in a new stakeholder representative to increasethe number of alternative solutions.
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ANYQUESTIONS?
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