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Chapter

Chapter

Managerial Decision Making

Managerial Decision Making

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McGraw-Hill/IrwinMcGraw-Hill/IrwinManagement, 7/eManagement, 7/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

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Learning Objectives

After studying Chapter 3, you will know: The kinds of decisions you will face as a manager How to make rational decisions The pitfalls you should avoid when making

decisions The pros and cons of using a group to make

decisions The procedures to use in leading a decision-

making group How to encourage creative decisions The processes by which decisions are made in

organizations How to make decisions in a crisis

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Characteristics of Managerial Decisions

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Lack of Structure

Programmed Decisions Decisions

encountered and made before, having objectively correct answers, and solvable by using simple rules, policies, or numerical computations

Non-programmed Decisions New, novel, complex

decisions having no proven answers

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Comparison of Decision Types

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Uncertainty and Risk

We operate in an environment— the Internet—where there’s an enormous

amount of uncertainty. You can’t be sure what’s going to happen tomorrow, never mind next year. The danger is that the uncertainty can lead to paralysis. You

spend so much time trying to nail down all the possibilities and risks, you never get

around to taking action. And if that happens—if you become indecisive—

you’re dead.- George Conrades

Chairman and CEO Akamai Technologies

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Uncertainty and Risk

Certainty is the state that exists when decision makers have accurate and comprehensive information

Uncertainty is the state that exists when decision makers have insufficient information

Risk is the state that exists when the probability of success is less than 100%, and losses may occur

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Conflict

Conflict exists when the manager must consider opposing pressures from different sources; occurs at two levels Psychological conflict occurs when several

options are attractive, or when non of the options is attractive

Interpersonal conflict

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Stages of Decision Making

Ideal decision making process will have six stages Identify and diagnose the problem Generate alternative solutions Evaluate alternatives Make the choice Implement the decision Evaluate the decision

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Stages of Decision Making

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The Best Decision

To make the best decision managers must use vigilance Vigilance is a process in

which a decision maker carefully executes all stages of the decision making process

Research shows that when managers use a rational decision making process they tend to make better decisions

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Barriers to Effective Decision Making

Psychological Biases Time Pressures Social Realities

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Decision Making in Groups

The basic philosophy for group decision making is that ‘two heads are better than one’

Group performance is a function of two variables How effectively the group capitalizes on

potential advantages How effectively the group minimizes

potential problems

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Decision Making in Groups

Potential Advantages Larger pool of

information More perspectives and

approaches Intellectual stimulation People understand the

decision People are committed

to the decision

Potential Disadvantages One Person dominates Satisficing Group thing Goal displacement

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Managing Group Decision Making

There are three factors for effectively managing group decision making Appropriate

leadership style Constructive use of

disagreement and conflict

The enhancement of creativity

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Managing Group Decision Making

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Brainstorming

Brainstorming is a commonly used technique used to encourage creativity

It is a process in which group members generate as many ideas about a problem as they can; criticism is withheld until all ideas have been proposed

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Organizational Decision Making

Managers and groups make decisions within organizations

Three additional concepts and process a manager must consider when making a decision include Constraints on decision makers Organizational decision processes Decision making during a crisis

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Constraints on Decision Makers

Managers face various constraints that include: Capital or product markets may make an

expensive new venture impossible Legal restrictions may restrain the kinds of

international business activities in which a firm can participate

Labor unions may defeat a contract proposal

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Organizational Decision Making Models

Historically organizational decision making was viewed as a rational process

Simon challenged this view by proposing an alternative to the rational decision making process called bounded rationality

Other decision making processes include Incremental model Coalition model Garbage can model

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Decision Making During Crisis

During crisis managers must make decisions under a great deal of pressure

The organization should be prepared for crises in advance

Managers should take time to create an effective crisis management plan

During a crisis don’t pretend nothing happened rather communicate and reinforce the organization’s values

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How not to Handle a Crisis

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Questions for Crisis Planning

What kinds of crises could your company face?

Can your company detect a crisis in its early stages?

How will it manage a crisis if one occurs? How can it benefit from a crisis after it

has passed?

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Looking Ahead Chapter 4: Planning and Strategic Management

How to proceed through the basic steps in any planning process

How strategic planning integrates with tactical and operational planning

Why I is important to analyze both the external environment and the internal resources of the firm before formulation a strategy

The choices available for corporate strategy How companies can achieve competitive advantage

through business strategy How core competencies provide the foundation for

business strategy The keys to effective strategy implementation

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Identifying and diagnosing the Problem

There is normally a realization that the current state and the desired state are different This can be detected by comparing current

performance against: past performance; current performance of other organizations; and future expected performance as determined by plans and forecasts

After identifying a problem the decision maker must attempt to diagnose the true cause of the problemReturn

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Generate Alternative Solutions

Solutions will range from ready made to custom made Ready made solutions are ideas that have

been seen or tried before Custom made solutions are new, creative

solutions designed specifically for the problem

Managers will generate some of the alternative solutions based upon past experience

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Evaluate Alternatives

Each alternative is evaluated based upon the value or adequacy that it generates

Managers should consider several types of consequences that each alternative will generate

Managers should also refer to the original goals defined in the first stage of the decision making process

Contingency plans should also be developed

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Make the choice

When making the decision the following concepts should be considered Maximizing a decision will realize the best

possible outcome Satisficing means that an option was chosen

because it was acceptable although it is not necessarily the best option

Optimizing the decision means that the organization is achieving the best possible balance among several goals

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Psychological Biases Illusion of control is a belief that once can influence events

even when one has no control over what will happen Framing effects refer to how problems or decisions

alternatives are phrased or presented, and how these subjective influences can override objective facts

Discounting the future is a bias weighting short term costs and benefits more heavily than longer-term costs and benefits

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Time Pressures

Tendencies of managers Skimp on analysis Suppress conflict Make decisions without

consulting others How do you overcome

time pressures? Rely on real time

information Involve others Take a realistic view of

conflict

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Social Realities

Interpersonal factors decrease decision-making effectiveness

Important decisions are marked by conflict among interested parties

Decisions are the result of intensive social interactions, bargaining, and politicking

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Constructive use of disagreement and conflict

Cognitive conflict is issue-based differences in perspectives or judgments

Affective conflict is emotional disagreement directed toward other people

Devil’s advocate is a person who has the job of criticizing ideas to ensure that their downsides are fully explored

Dialectic is a structured debate comparing two conflicting courses of action

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Bounded Rationality

Bounded rationality states that decision makers cannot truly be objective because: They have imperfect, incomplete information The problems they face are so complex Human beings cannot process all the information

to which they are exposed There is not enough time to process all the

relevant information People within organizations have conflicting goals

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Organizational Decision Making

Incremental Model occurs when decision makers make small decisions, take little steps, move cautiously, and move in piecemeal fashion toward a bigger solution

Coalition model of organizational decision making in which groups with differing preferences use power and negotiations to influence decisions

Garbage can model of organizational decision making depicting a chaotic process and seemingly random decisions

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Crisis Management Plan

Strategic actions Technical and structural actions Evaluation and diagnostic actions Communication actions Psychological and cultural actions

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