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1
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Profile of a Decision
yThe Decision-Making Process
yThe Decision Maker
yThe Decision
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Decision Making and Problem Solving
y Problem solving is concerned with overcoming
obstacles in the path toward an objective.
y Problem solving may or may not require
action.
yA decision is an act requiringjudgment that is
translated into action.
3
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The Significance of Decision Making
y Decision making is the one trulydistinctive
characteristic of managers.
y Decisions made bytop managers commit the
organization toward courses of action.
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The Significance of Decision Making ..
y Decisions of top managers are
implemented bylower levels of
management.
y
Decisions involve organizational change
and the commitment of scarce resources.
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The Decision-Making Process
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Steps in the Managerial Decision MakingProcess
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Identify
Problem
The Decision-Making Process
Select
Alternative
Implement
Alternative
Evaluate
Results
1
DevelopAlternatives
AnalyzeAlternatives
Develop
DecisionCriteria
Allocate
Weights toCriteria
2 3
4 5
6
7
8
8
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The Classical Model of Decision Making
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1. Identify and define the Problem
2. Identify decision criteria
3. Allocate weights to criteria
4. Develop alternatives
5. Analyze alternatives
6. Select the best alternative
7. Implement the alternative
8. Evaluate decision effectiveness
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The iffere ce etwee what is a what it ught t e
E.g. urchase f Car r
Shortage of cash/Money
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Step 2: Decision Criteria
Factors relevant in
aking the ecision
y Price
y
Interior comforty Dura ility
y Repair recor
y Performance
y Handling
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Determining the relative priority
of eachof the criteria
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Step 3: Allocating Weights
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Problem: To purchase a new car
FOM 4.13
Criterion Weight
Price 10
Interiorcomfort 8
Durability 5
Repairrecord 5
Performance 3
Handling 1
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Generate a list of possi le vehicle
manufacturers/ rands
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Assessing the value of each
alternative ymaking a value
judgment of the feature
Step 5: Analyzing Alternatives
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Concluding Steps in Making a Decision
Step 6: Select the est
Step 7: Implementdecision
Step 8: Evaluate decision
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Categories of Decisions
y Programmed
y Non-programmed
y Decisions such as these are known as programmed
decisions-routine decisions, made by lower-level
personnel that rely on predetermined courses of
action.
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Differences between P& NP decisions can be described with respect to 3
important questions.
y First, what types of tasks are involved?
y Second, how much reliance is there on organizational
policies?
y Finally, who makes the decisions?
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Programmed
Decisions
Non-programmed
Decisions
Relationship of Problems, Decisions, and Level
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Type of
ProblemLevel
ill-Structured
Well-Structured
Top
Lower
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Certain versus Uncertain Decisions
y Understanding Risk:
yAll organizational decisions involve some degree ofrisk-ranging from complete certainty (no risk) to
com
plete un
certain
ty, "a sta in
th
ed
ark" (h
igh
risk).y Tomake the est possi le decisions inorganizations,
people seek to "manage" the risks.
y Decision making under uncertainty
yA conditionof uncertainty exists when amanager isfacedwith reaching a decisionwithnohistorical dataconcerning the varia les and/or unknowns and theirprobabilityofoccurrence.
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Programmed and Nonprogrammed Decision Differences
Certainty
y all the information the decisionmaker needs is fully available.
Risk
y decisionhas clear-cut goals.
y good information is available.
y future outcomes associatedwith each alternative are subject to chance.
Uncertainty
y managers know which goals they with to achieve.
y information about alternatives and future events is incomplete.
y managersmayhave to come up with creative approaches to alternatives.
Ambiguity
y by far themost difficult decision situation.
y goals tobe achievedor the problem tobe solved is unclear.
y alternatives are difficult todefine.
y information aboutoutcomes is unavailable.
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Top-Down versus Empowered Decisions
y Top-downdecisionmaking, puts decision-making
power in the hands ofmanagers and leaves lower- level
workers little or noopportunities tomake decisions.
y The idea of empowereddecisionmaking allows
employees tomake the decisions required todo their
jobs without first seeking supervisory approval.
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Typology of Decisions
Decision-making strategies
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Computational
Judgmental
Compromise
Inspirational
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ATypology of Decisions
l Category I - routine, recurring, certainty with
regard to the outcome
l Category II - nonroutine,
nonrecurring, uncertainty with regard to the
outcome
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Decision categories
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ATypology of Decisions ..
l Category I / Computational strategy
l Category II /Judgmental strategy
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Decision combinations
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KnowledgeRegarding
the OutcomeStrong Preference Weak Preference
Preference for the Outcome
ComputationalDecision-Making
Strategy
CompromiseDecision-Making
Strategy
JudgmentalDecision-Making
Strategy
InspirationalDecision-Making
Strategy
Low LevelofKnowledge
High LevelofKnowledge
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The Locus ofChoice
y Top management makes Category II decisions.
y Operating management makes Category I
decisions.
y Middle management supervises the making of
Category I decisions and supports the making
ofCategory II decisions.
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Characteristics of Managerial Decisions (Category II)
y Long-range organizational objectives
y Best choice from among a set of alternatives
y Decision involves organizational change
y Decision requires a commitment of resources
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Perspectives on Managerial Decision Making
y The integrative perspective
y The interdisciplinary perspective
y The interlocking perspective
y The interrelational perspective
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Decision-Making Styles
Directive Conceptual
Styles of DecisionMaking
Analytic Behavioral
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Personal Decision Framework
Directive Style: usedby people who prefer simple, clear-cut solutions.
Analytical Style: usedbymanagers who like to consider complex solutions
basedon as muchdata as they can gather.
Conceptual Style: usedby people who like to consider a broad amount of
information, more sociallyoriented.
Behavioral Style: often the style adoptedbymanagers having a deep
concern for others.
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Situation: Programmed/non-
programmed Classical, administrative,
political Decision steps
Decision Choice:Best Solution toProblem
Personal Decision Style:DirectiveAnalyticalConceptualBehavioral
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Decision-Making Styles
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Selecting a Decision Making Model
y Depends on the managers personal preference.
y Whether the decision is programmedor non-
programmed.
y Extent towhich the decision is characterizedby risk,
uncertainty, or ambiguity.
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i i ki d l
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Decision-Making Models
yRational model
y
Organizational model
yPolitical model
yProcess model
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Three Decision Making Models
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Classical Model
Administrative Model
Political Model
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Classical Model-The Rational-Economic Model
y Decisionmakers have the necessary information togenerate possible alternative options and to evaluatethem
y managers have time to gather information andevaluation
y managers are therefore trying for a conditionofcertainty
y managers operate in a stable situationwhere thevariables are not changing
y goals ofmanagers are defined and agreedy decisionmakersmake rational choices by selecting
the option that will bring most benefit.
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Classical Model
Accomplishes goals that are known and agreed upon.
Strives for certaintyby gathering complete information.
Criteria for evaluating alternatives are known.
Decisionmaker is rational and uses logic.
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The Rational Model
y Founded on quantitative disciplines
y Maximized outcome
y Computational decision-making strategy
y Closed decision-making process
y Fixed objectives
y No bounded rationality
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Assumptions OfRationality
Rational
Decision
Making
Problem is
clear and
unambiguous
Single, well-
defined goalis to be achieved
All alternatives
and
consequences
are known
Preferences
are clear
Preferences
are constant
and stable
No time or cost
constraints exist
Final choice
will maximize
payoff
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The Administrative Modely Herbert Simon (1960) sought todevelop a model ofdecisionmaking based, on the actual behaviourofdecisionmakers.
y This approachhas come tobe known as the
bureaucratic or administrative model.y Simon recognized that the humanbeing has a limited
capacity for processing information, and thus thatthere are cognitive ormental limits tohuman
ration
ality.y These limits or constraints on individuals mean thatdecisionmaking is governed, according to Simon, bybounded rationality.
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Administrative Model
Howmanagers actuallymake decisions in situations characterizedbynon-programmeddecisions, uncertainty, and ambiguity.
Focusesonorganizational, rather than economic.
Two concepts are instrumental in shaping the administrativemodel.
y bounded rationality:means that people have limits or boundaries
onhow rational they canbe.
y satisficing:means that decisionmakers choose the first solution
alternative that satisfiesminimal decision criteria.
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The Administrative Model
yAttainable objectives
y Bounded rationality
y
Short-term horizon
y Qualitative orientation
yJudgmental decision-making strategy
y Open decision-making process
y Satisficing outcome
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The Political Model
yAcceptable outcomes
y Compromise decision-making strategy
y No bounded rationality
yAmbiguous or nonexistent objectives
y
Incremental or marginal choices
y Short-term horizon
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The Process Model
y Dynamic objectives
y Objectives-oriented outcomes
y Long-term horizon
yAccommodates innovation
y Bounded rationality
yJudgmental decision-making strategy
y Open decision-making process
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Image Theoryy
Image theorydeals primarily withdecisions about adopting a certaincourseof action (e.g., should the companydevelop a new productline?) or changing a current courseof action (e.g., should the companydrop a present product line?).
y According to the theory, peoplemake decisions on the basis of a simpletwo-step process. The first step is the compatibility test, a comparisonof the degree towhich a particular courseof action is consistent with
various images-particularly individual principles, current goals, andplans for the future.
y 'If any lack of compatibility exists with respect to these considerations,a rejectiondecision ismade.
y If the compatibility test is passed, then theprofitability test is carriedout.
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Garbage can modely
Relevant to turbulent situations.y decisions occur when four streams meet:
y choice opportunities these are scheduledor unscheduledmeetings where it is expected that decisions will be made
y
participants people whohave the opportunity toinfluencedecisions theyhave different knowledge andexperiences whichmay contribute to solutions of problems
y problems possibly a result of a performance gap theserequire attention
y Solutions these are separate from the problems that theymay eventually solve answers looking for questions.
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Garbage can model
y The choiceopportunities act as a garbage can for theother three constituents: participants, problems andsolutions.
y
A particular combinationof these three constituentsmight produce a decision that will deal with theproblem.
y The resultsmay involve radical and creative decisions.
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Comparisons of:
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Classical Model Administrative Model
Political Model
Clear-cut problem and goals.
Conditionof certainty.
Full information about
alternatives and their
outcomes.
Rational choiceby
individual formaximizing
outcomes.
Vague problem and goals.
Conditionof uncertainty.
Limited information about
alternatives and their
outcomes.
Satisfying choice for resolving
problemusing intuition.
Pluralistic; conflicting goals.
Conditionof
uncertainty/ambiguity.
Inconsistent viewpoints;
ambiguous information.
Bargaining anddiscussion among
coalitionmembers.
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Conditions that Affect the Possibility of Decision Failure
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OrganizationalProblem
ProblemSolution
Low HighPossibility ofFailure
Certainty Risk Uncertainty Ambiguity
Programmed
Decisions
Nonprogrammed
Decisions
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Behavioral Model of Decision Making
yClassical model is prescriptive: It tells managers
what they shoulddo
y Behavioralmodel is descriptive: It tells us how
managers actuallymake decisions
y Managers attempt tobe rational, but
y assumptions of complete rationality are relaxed (i.e., we
know managers dont have complete and accurate
information) bounded rationality
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Behavioral Model of Decision Making
y How domanagers actuallymake decisions?
y They satisfice rather thanoptimize
y They use their intuition
y
They act politically (e.g., coalitions)
y They take risks
y They escalate their commitment
y Theyhave their owndecisionmaking styles
y They use heuristics
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Behavioral Model of Decision Making
y
How domanagers actuallymake decisions?y They satisfice rather thanoptimize
y They use their intuition
y They act politically (e.g., coalitions)
y They take risks
y They escalate their commitment
y Theyhave their owndecisionmaking styles
y They use heuristics
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Common Biases and Errors
y Overconfidence Biasy Believing toomuch inour own ability tomake gooddecisions
yAnchoring Bias
y Using early, first received information as the basis formaking subsequent judgments
y Confirmation Bias
y Using only the facts that support our decision
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Common Biases and Errors
y Availability Bias
y Using information that is most readily at hand
y Recent
y Vivid
y Representative Bias
y Mixing apples withoranges
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Common Biases and Errors
y Escalation ofCommitment
y In spite ofnew negative information, commitmentactually increases
y RandomnessError
y Creating meaning out of random events
y Hindsight Bias
y Looking back, once the outcome has occurred, andbelieving that you accurately predicted the outcome ofan event
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Common Biases in Decision Makingy Heuristics are rules of thumb
y The availabilityheuristic: use information that is easilyrecalled
y The representativeness heuristic: categorize andstereotype basedon limited information (e.g., you cantell a book by its cover)
y The anchoring and adjustment heuristic: place too
muchweight on initial information
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Common Biases in Decision Making
y
Escalationof Commitmenty The tendencyofdecisionmakers to invest additional
time, money, or effort intowhat are essentiallybad
decisions or unproductive courses of action that are
alreadydraining organizational resources.
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Four key decision paradoxesy Inclusion versus efficiency
y Leaders often agonise over whether theyneed to
involve everybody tomake a decision;
y Inclusive decisionmaking canbe costly in terms of
time resources, but invites diversityof views increasing
the qualityof the decision.
y Conversely, whendecisions are largelyoperational,
leaders tend to prefer inclusionover efficiency.
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Empowerment versus control
y Leadersmust choose the extent ofdelegationof
responsibility for decisionmaking from problem
framing todecision announcement.
y Some leaders prefer todelegate, allowing appropriately
experienced staff to act autonomously.
y Other leaders will seek tobe involved in all decisions
at every stage.
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Instinct versus method
y Experienced leaders believe they know what todo incertain circumstances and can relyon instinct to arriveat a decision.
y The implication is that such leaders will prefer to use
experience and speedily impose solutions for emergingproblems.
y Others will bemore cautious, preferring to employ amethodical approach to every situation, considering
alternatives, risks andopportunities before a decisionis taken.
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Head versus Heart
y The dilemma here is that of problem solving through
creativity anddivergent thinking on the one hand, or
on emotion and compassionon the other.
y Leadersmust choose the degree towhich their own
andothers emotional preferences andneeds influence
or overridemore rational considerations.
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TYPES OF DECISION- Processes of decision making
Sporadic decision processes
y Sporadicdecision processes are those that are informal, andwill suffer from
delays throughbeing impededby all sorts of things fromwaiting for
information toovercoming resistanceor opposition.
y The decisionwill take a long time tomake (betweenone to three years) and
will eventuallybemade at the highest level.
y Political activitymay well come to the fore in these decisions.
y An examplemaybe a decision to purchase a stake in a supplier, where there is
un
certain
ty abo
ut th
e futureo
f th
em
arket.y This kindofdecisiondoes not happenon a routine basis and tends to entail
weighty and controversial considerations calledvortex matters.
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Constricted decision processes
yConstricted decision processes are narrowly channeled.
y There is a need formore sources of information, but
the information required is usually technical and is
readily available.
y the decision can usuallybemade at the local level or at
least at a lower level than the top of the hierarchy.
y This kindofdecisiondeals withfamiliar matters.
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Ways to Improve Group Decision-Making
y Brainstorming
y Nominal group technique
y The Stepladder Technique: Systematically Incorporating NewMembers
y Computer-Based Approaches
i. Electronic meeting systems
ii. Computer-assisted communication
iii. Group Decision Support Systems
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Steps of Delphi Techniques
yA problem is identified.
y Groupmembers are asked tooffer solution to the problemby providing anonymous response to carefullydesignedquestionnaire.
y Responses of all group members are compiled and sent out
to all members.y Individual group members are asked to generate a new
y individual solution to the problem after theyhave studiedthe individual responses of all other group members
com
piled
in
step 3.y Step 3 and 4 are repeated until a consensus problem
solution is reached.
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Steps of Nominal Group Techniques
y
Each groupmember writesdown individual ideason the problembeing discussed.
y Eachmember presents individual ideas orally. The ideas are usually
writtenon a board for all othermembers to see and refer to.
y After all members present their ideasorally, the entire groupdiscusses
these idea simultaneously.
y Whendiscussion is completed a secret ballot is taken to allow
members to support their favorite ideas without fear. The idea receivingthemost votes is adopted and implemented.
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Conclusion
What we know about decisions making generally
y In situations ofhigh stress /time pressure
y Inability to absorb complex & new information
y Tendency to engage in stereotypic thinking
y Tendency tonot to consider a rangeof alternatives
y Tendency to accept the acceptable alternative
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What does it result in ?
y Business as usual
y Limitedoptions
y Shallow analysis
y Best predictor of future behaviour is past behaviour
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What does it result in ?...
y People are not rational actors when facedwith
economicdecisions
y Relying on purely financial informationmayhave
limited success