2012 Lecture 3 Chapter 7 JV Vers 1

8/2/2019 2012 Lecture 3 Chapter 7 JV Vers 1

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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?

ONB2A01

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2012 Lecture 3 Chapter 7 JV Vers 1

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