Dec Making

7/29/2019 Dec Making

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Principles of ManagementFundamentals of Decision Making

Professor Bowon Kim

KAIST Graduate School of Management


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Learning Objectives

After reading this chapter, you should be able to:

Define decision making

Explain the conditions of certainty, risk, and uncertainty under

which decisions are made

Describe a framework for understanding routine, adaptive, and

innovative decisions

Explain how goals affect decision making

Describe the rational, bounded rationality, and political models of

decision making


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Define Decision Making

What is Decision Making?

The Decision Making Process

define the problem

identify and assess alternatives

choose a course of action


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Steps in the Decision Making Process

Define the

problem

Gather

information

Identify

and assessalternatives

Choose a

course of

action


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Define Decision Making

What is Decision Making?

Systematic Decisions are Based On the nature of the problem possible available the degree of involved

managers rely on all six managerial competencies to make

decisions


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Conditions of Certainty, Risk, and Uncertainty

Decision Making Conditions

Reflect Uncontrollable Environmental Forces made under conditions of certainty, risk, and

uncertainty


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Conditions Under Which Decisions Are Made

Certainty Uncertainty

Objective probabilities Subjective probabilities

Risk


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Certainty

Full Information the condition under which individuals are fully

informed about a problem, alternatives are obvious, andthe likely results of each choice are clear

is the exception for top and middle managers, but more

common at the supervisory management level


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Risk

Determining

the condition under which individuals can define a

problem, specify the probability of certain events,identify alternative solutions, and state the probability

of each alternative leading to a desired outcome

probability is the percentage of times a specific

outcome would occur if the decision were made

numerous times

type, amount, and reliability of information influence

the level of risk


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Risk

Probability

the likelihood that a specific outcome will occur, based

on facts and numbers often based on archival data,historical company and industry events and trends

Probability

the likelihood that a specific outcome will occur, based

on personal judgments and beliefs based on intuition,previous experience, expertise, and personality


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Uncertainty

the condition under which individuals do not have the

information needed to assign probabilities to outcomesof alternative solutions

individual may not even be able to identify the problem common in areas such as R&D, market research, and

strategic planning


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Framework for Decision Making

Known and

well defined

Unusual

and

ambiguous

Innovative decisions

Adaptivedecisions

Routine

decisions

Risk

Uncertainty

Certainty

Untried and

ambiguous


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Framework for Understanding Routine, Adaptive, and Innovative

Decisions

Types of Problems

Relatively Common

Unusual/Ambiguous


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Decisions

Types of Solutions

Relatively Common and Well Defined

Untried and Ambiguous


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Decisions

Routine Decisions

made in response to well-defined and common

problems and alternative solutions

often available in established rules, standard operating

procedures, or computer software employees may be tempted to make routine decisions in

situations that actually call for adaptive or innovativedecision making


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Decisions

Adaptive Decisions

Response to

combinations of moderately unusual and fairly

uncommon problems and alternative solutions

Involve

modifying and improving upon and practices

a process known as continuous improvement

continuous improvement is a steady stream of small incrementalimprovements made in functional areas of the organization


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Benefits of Continuous Improvement

1) Enhanced customer value through new

and improved products and services

2) Reduction in errors, defects, and waste

3) Increased responsiveness changes in customer

expectations

4) Increased productivity and effectiveness

in the use of resources


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Decisions

Innovative Decisions Based on

discovery, identification, and diagnosis of unusual andambiguous problems and/or development of unique orcreative alternative solutions

information Involve

a series of small, interrelated decisions made overmonths or years

Dont usually happen in a logical, orderly sequence

a sharp break from


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How Goals Affect Decision Making

Linked With Organizational Goals

a search for better ways to achieve established goals an effort to discover new goals, revise current goals, or

drop outdated goals


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The Nature of Goals Goals are Results

organizational aims

Goals Specify Desired Outcomes

quantitative qualitative

are relatively stable

require constant monitoring and modification


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Why People Set Goals

Organizational Purposes to focus individual and organizational decisions and

efforts

to facilitate the planning process to to facilitate performance evaluation and control


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General and Operational Goals

General Goals

provide broad direction for decision making in

qualitative terms

state in quantitative terms

what is to be achieved for whom within what time period


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Role of Stakeholders Demands

are expressed desires of stakeholders regarding organizational

decisions and goals

limit the types of goals set, decisions made, and actions taken two of the most important are laws and ethics

are the set of goals and alternatives organizations and individualshave to choose from

the range of choices depends partially on the magnitude of

stakeholder power


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Stakeholders, Alternatives, and Goals

Power of

Stakeholders

Choice among

organizational

alternatives

and goals

Constraints

Demands

create influence


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Rational, Bounded Rationality, and Political Models

Rational Model

Seven Step Process

increases the likelihood of logical and sound decision

making

permits the maximum achievement of goals within the

limitations of the situation


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2. Set goals 3. Search for

alternative

solutions

Rational Decision-Making Model

1. Define the

issue

4. Compare and

evaluate

alternative

solutions

5. Choose among

alternative

solutions

6. Implement the

solution

selected

7. Follow up and

control

External and internal

environment forces


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Rational Model Step 1: Define and Diagnose the Problem

using three basic skills

identifying and monitoring numerous external and internalenvironmental forces and deciding which ones are contributing to theproblem

assessing the environmental forces and determining which are causes

and which are symptoms

relating interpretations to current or desired goals Step 2: Set Goals Step 3: Search for

may involve seeking additional information, thinking creatively,

consulting experts, undertaking research, and similar actions


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Rational Model Step 4: Alternative Solutions

anticipate expected results and determine the relativecost of each alternative

Step 5: Choose Among Alternative Solutions Step 6: the Solution Selected

a well chosen solution must also be accepted andsupported in order to be well implemented

Step 7: and Control

when implementation doesnt produce desired resultscorrective action is needed


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Bounded Rationality Model Developed by Herbert Simon

management scholar, in the 1950's Simon won the 1978 Nobel Prize in economics for his research

into the decision making process Refers to

an individual's tendencies to select less than the best goal or

alternative solution

to engage in for alternative solutions to have and control over external and internal environmental

forces influencing the outcomes of decisions


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Bounded Rationality Model

Satisficing

accepting an acceptable (rather than optimal) goal or

alternative solution may be easier to identify and achieve, less controversial, or

otherwise safer

factors that result in a satisficing decision

a limited

information


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Factors Influencing a Satisficing Decision

Satisficing decision

Limited

search

Informationprocessing

bias

Inadequate

information


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Bounded Rationality Model

individuals stop searching for alternatives as soon as

they find an acceptable one

Inadequate or Misinterpreted Information


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Bounded Rationality Model Information Processing Biases

individuals are often affected by information processing biases when theyengage in bounded rationality decision making

availability bias people who easily recall specific instances of an event (due to personal familiarity

with that event) may overestimate how frequently (in general) the event occurs

what people expect to find is often what they do find people seek information consistent with their own views and downplay

conflicting information concrete information bias

vivid, direct experience usually prevails over abstract information

people may view a few incidents as representative of a larger population

seeing an unexpected number of similar events in a row can lead people to

believe that a dissimilar event is more likely to occur next


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Political Model Power of

describes the decision making process in terms of the particular

interests and goals of powerful external and internal stakeholders powerful refers to the ability to control or influence decisions and

goals


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Factors Affecting Political Decision-Making Processes

Stakeholders

Choice of goals

Alternative solutions

Political

decision

making


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Political Model Problem Definition

external and internal stake holders try to define problems to their ownadvantage

stakeholders may use scapegoating to cast blame on another party for

problems, hoping to preserve a position of power or a positive image

reflect the agendas of the organization's most powerful stakeholders coalitions(alliances)

formed when no one person or group has sufficient power to select orimplement its preferred goal

Search for Alternative Solutions constrained or expanded

depending upon whether more or less information is conducive to stakeholdersagendas

bringing in a new stakeholder representative to increase the number ofalternative solutions


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Did You Make an Ethical Decision? (examples)

Highly Highly

Ethical Ethical Gray Area Unethical Unethical

Taking a box

of paper clips

home

Using a copy

machine for

personal use

Using e-mail

for personal

messages

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