Chapter 6/ Topic 5

Decision Making: The Essence of a Managers Job

Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

LEARNING OUTLINE
Follow this Learning Outline as you read and study this chapter. G The decision-making process

Define decision and decision-making process. Describe the eight steps in the decision-making process.

G The manager as decision maker

Discuss the assumptions of rational decision making. Describe the concepts of bounded rationality, satisficing, and escalation of commitment. Explain what intuition is and how it affects decision making. Contrast programmed and nonprogrammed decisions.

Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

L E A R N I N G O U T L I N E (contd)
Follow this Learning Outline as you read and study this chapter. G The manager as decision maker (contd)

Contrast the three decision-making conditions. Explain maximax, maximin, and minimax decision choice approaches. Describe the four decision making styles. Discuss the twelve decision-making biases managers may exhibit. Describe how manager can deal with the negative effects of decision errors and biases. Explain the managerial decision-making model.

Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

L E A R N I N G O U T L I N E (contd)
Follow this Learning Outline as you read and study this chapter. G Decision making for todays world

Explain how managers can make effective decisions in todays world. List six characteristics of an effective decision-making process. Describe the five habits of highly reliable organisations

Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

Decision making
G

Decision: definition
H

Making a choice from two or more alternatives. Identifying a problem and decision criteria and allocating weights to the criteria. Developing, analysing, and selecting an alternative that can resolve the problem. Implementing the selected alternative. Evaluating the decisions effectiveness. Read Beaconsfield Mine Accident vignette Text Book pp.214-215
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The decision-making process

H

H H

Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

The decision-making process

1. 2.

3. 4. 5. 6. 7. 8.
Management 4e 2006 Education Australia Robbins, Bergman, Stagg, Coulter:Copyright 2003 PearsonPearson Education Australia Figure 6.1

Step 1: Identifying the problem Problem

H

A discrepancy between an existing and desired state of affairs.

Characteristics of Problems
H

H H

A problem becomes a problem when a manager becomes aware of it. There is pressure to solve the problem. The manager must have the authority, information, or resources needed to solve the problem.

Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

Step 1: Identifying the problem (cont.)

G

Involves 3 Stages H Scanning: Monitoring changing circumstances H Categorisation: Understand desirable or undesirable situation H Diagnosis: Gathering additional information specifying nature of the problem. Without appropriate diagnosis process is difficult to follow.
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Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

Step 2: Identifying decision criteria

G Decision

criteria are factors that are important (relevant) to resolving the problem.
H

Costs that will be incurred (investments required) Risks likely to be encountered (chance of failure) Outcomes that are desired (growth of the firm)

Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

Step 3: Allocating weights to the criteria

G

Decision criteria are not of equal importance:

H

Assigning a weight to each item places the items in the correct priority order of their importance in the decision making process.

Criterion
Start-up costs Franchisor support

Weight
10 8 6
Typically might be Key Success Factors? Major Constraints? Sources of Risk? Desirable Outcomes?

Financial qualifications

Open geographical locations 4 Franchisor history

Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

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Step 4: Developing alternatives

G

Identifying viable alternatives

H

Alternatives are listed (without evaluation) that can resolve the problem.

Step 5: analysing alternatives

G

Appraising each alternatives strengths and weaknesses (Costs, Risks, Benefits)

H

An alternatives appraisal is based on its ability to resolve the issues identified in steps 2 and 3.
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Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

Evaluation Criteria
G G G

G G

Feasibility Can it be accomplished Quality Extent of solving problem Acceptability Will decision makers support alternative Costs - Resource levels required and whether alternative will have undesirable effects Reversibility Can the alternative be reversed Ethics Alignment with organisations social responsibilities and managers ethics
Take a recent problem that you have confronted and evaluate The above criteria?
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Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

Step 6: Selecting an alternative

G Choosing
H

the best alternative

The alternative with the highest total weight is chosen. (Unless there are extenuating circumstances or changes in criteria weighting)

Step 7: Implementing the Decision

G

Putting the chosen alternative into action.

Conveying the decision to and gaining commitment from those who will carry out the decision. H What can a manager do to improve the likelihood of success in implementation?
H
Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

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Step 8: Evaluating the decisions effectiveness

G The
H

soundness of the decision is judged by its outcomes.

How effectively was the problem resolved by outcomes resulting from the chosen alternatives? H If the problem was not resolved, what went wrong? Why is this step important? Isnt it too late for this problem?

Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

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Influences on decision making

G Escalation
H

of Commitment

Increasing or continuing a commitment to previous decision despite mounting evidence that the decision may have been wrong.

G The
H

Role of Intuition
Making decisions on the basis of experience, feelings, and accumulated judgement.

Intuitive decision making

Describe one example from your own experience however domestic or humble (personal or business) that exemplifies the entrenching of a position despite mounting evidence that the decision may have been wrong.
Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

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Decisions in the management function

G

Decision making is synonymous with managing. Decision making is part of all four management functions: o Planning o Organising o Leading o Controlling. Some decisions are routine, others complex. G a decision nevertheless with managers struggling with choices everyday
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3 views on how managers make decisions

Consistent, Value maximising, Within Specified Constraints

Rationality Bounded rationality

Operate under assumptions Simplifying the model capturing Essential problem features

Intuition
Unconscious Processes Experience Judgement
Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

How do managers choose an approach?

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The rational decision maker:

System 2 Thinking
G G

G G

Managerial decision making is assumed to be rational. Rational describes choices that are consistent and value-maximising within specified constraints. A perfectly rational decision maker is assumed fully objective and logical The result would follow a decision making process maximising the probability of goal achievement

Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

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Assumptions of rationality

What is wrong with this model?

Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

Figure 6.3

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Bounded rationality
Bounded rationality is behaviour that is rational within the parameters of a simplified decision-making process which is limited (or bounded) by an individuals ability to process information. Satisficing is acceptance of solutions that are good enough. Incremental model suggests managers make the smallest response to reduce problems to acceptable levels. Rubbish Bin Model holds that chance, serendipity, those involved and favoured approaches in the absence of planning. Managers attempt to behave rationally within parameters of the simplified model
Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

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Escalation of commitment

An increased commitment to a previous decision despite evidence it may have been wrong. Can you think of an example that turned out well and alternatively disastrously?

Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

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What is intuition? System 1 Thinking

Do you think managers Make decisions based upon intuition alone?

Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

Figure 6.4

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Intuitive Decision Making

Intuitive decision making is an unconscious process of making decisions on the basis of experience and accumulated judgment. Making decisions on the basis of intuition or gut feeling alone is unlikely. Usually it is a combination of intuition and rational analysis; the two complementing each other. Interestingly, one survey of managers and other organisational members found that almost one-third of them emphasised gut feeling over cognitive problem solving and decision making.
How do you think you use intuition?
Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

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Types of problems, types of decisions, and levels in the organisation

What are the characteristics of information?

Approximate Rational conditions Or use Intuition

Familiar, easily defined Assumes what? How do they contribute?

Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

Figure 6.5

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Types of Problems
Crisis is a serious difficulty requiring immediate attention G Non-crisis problem is an issue requiring resolution but without the importance of immediacy of a crisis G Opportunity is a situation offering significant organisational gain if appropriate action is taken, typically following new ideas and directions. G The relationships above are essentially between??
G

Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

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Problems and decisions

G Structured problems H Involve goals that are clear. H Are familiar (have occurred before). H Are easily and completely definedinformation about the problem is available and complete. G Programmed decision
H

A repetitive decision that can be handled by a routine approach.

Typically what relationships do you see between the structure of a problem and the type of problem faced in terms of a managers response?
Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

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More Ethical Scenarios

G G G

Scenario 2: Ethic in an International context Scenario 3: Protecting Proprietary Knowledge Scenario 4: Company training versus personal motives Scenario 5: Unsubstantiated payments. What should Roberta do? DVD: Managers Hot Seat Whistleblowing: Code Red or Red Ink

Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

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Decision-making styles
Nike CEO: Perez? Nike Founder: Knight?

What style are you?

Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

Figure 6.6

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Decision-making styles (contd)

Types of Decision Makers G Directive
Use minimal information and consider few alternatives.
G

Analytic
Make careful decisions in unique situations.

Conceptual
Maintain a broad outlook and consider many alternatives in making long-term decisions.

Behavioural
Avoid conflict by working well with others and being receptive to suggestions.

Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

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Types of programmed decisions

G A Policy
H

A general guideline for making a decision about a structured problem.

G A Procedure
H

A series of interrelated steps that a manager can use to respond (applying a policy) to a structured problem.

G A Rule
H

An explicit statement that limits what a manager or employee can or cannot do in carrying out the steps involved in a procedure.

Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

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Policy, procedure, and rule examples

G Policy
H

Accept all customer-returned merchandise.

G Procedure
H

Follow all steps for completing merchandise return documentation.

G Rules
H H

Managers must approve all refunds over $50.00. No credit purchases are refunded for cash.

Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

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Decision-making conditions

Decision-making conditions Decision-making conditions

Situation where Situation where outcomes are known outcomes are known

Certainty Certainty

Condition in which Condition in which decision maker is decision maker is able to estimate able to estimate likelihood of likelihood of outcomes outcomes

Risk Risk

Situation without Situation without certainty or ability certainty or ability to estimate to estimate probable outcomes probable outcomes

Uncertainty Uncertainty

Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

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Decision-making conditions
G Uncertainty
H

Limited information prevents estimation of outcome probabilities for alternatives associated with the problem and may force managers to rely on intuition, hunches, and gut feelings.
Maximax: the optimistic managers choice to maximise the maximum payoff Maximin: the pessimistic managers choice to maximise the minimum payoff Minimax: the managers choice to minimize his maximum regret. How do you typically deal with uncertainty?
Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

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Another Perspective?

Another perspective on decision making proposes that people differ in the way they approach decision making. The first is an individuals way of thinking (rational and logical or creative and intuitive) and secondly, the individuals tolerance for ambiguity.
Activity 5.5: Study Guide Page 60
Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

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Different decision making styles Managers have different styles when it comes to making decisions and solving problems.

Some people are problem avoiders others are problem solvers and a third group are problem seekers. Managers can and do use all three approaches. What is your preferred style?
Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

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Common decision-making errors and biases

Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

Figure 6.7

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Decision-making biases and errors

G Heuristics
H

Using rules of thumb to simplify decision making.

H Biases H Biases H Biases

emanating from availability heuristics emanating from representative heuristics beyond availability & representative heuristics

H
H

Overconfidence Bias

Holding unrealistically positive views of ones self and ones performance.

G Immediate Gratification Bias

H

Choosing alternatives that offer immediate rewards and that avoid immediate costs.

Status-Quo Trap
H

Strong bias toward maintaining the existing situation.

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Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

Decision-making biases and errors

G Anchoring Effect
H

Fixating on initial information and ignoring subsequent information.

G Selective Perception
H

Selecting organising and interpreting events based on the decision makers biased perceptions.

G Confirmation Bias
H

Seeking out information that reaffirms past choices and discounting contradictory information.

Prudence Trap
H

Adjusting high-stakes decisions to be on the safe side.

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Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

Decision-making biases and errors

G Framing Bias
H

Selecting and highlighting certain aspects of a situation while ignoring other aspects.

G Availability Bias
H

Losing decision-making objectivity by focusing on the most recent events.

G Representation Bias
H

Drawing analogies and seeing identical situations when none exist.

G Randomness Bias
H

Creating unfounded meaning out of random events.

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Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

Decision-making biases and errors

G Sunk Costs Errors
H

Forgetting that current actions cannot influence past events and relate only to future consequences.

G Self-Serving Bias
H

Taking quick credit for successes and blaming outside factors for failures.

G Hindsight Bias
H

Mistakenly believing that an event could have been predicted once the actual outcome is known (after-thefact).

Recallability Trap
H

Basing our prediction of future events on our memory of past events.

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Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

Group decision making Group decision making

Advantages Advantages
More complete More complete information information Generates more Generates more alternatives alternatives Increases solution Increases solution acceptance acceptance Increases legitimacy Increases legitimacy

Disadvantages Disadvantages
Time consuming Time consuming Minority domination Minority domination Pressures to conform Pressures to conform Ambiguous Ambiguous responsibility responsibility

Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

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Group Decision Making

G

Groupthink
H

A phenomenon whereby group members feel extensive pressure to conform to the opinions of others.

Techniques to overcome Groupthink

Brainstorming Nominal group technique Electronic meetings

Team Based Exercise: Page 238 Text Book Ethical Dilemma: Bank Practices p.238 Activity 5.6 (page 60) reflect on the way decisions are made either individually or in groups in the organisations of countries where you work. How might cultural considerations affect decision-making processes? Give examples?
Robbins, Bergman, Stagg, Coulter: Management 4e 2006 Pearson Education Australia

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Overview of managerial decision making

Management 4e 2006 Education Australia Robbins, Bergman, Stagg, Coulter:Copyright 2003 PearsonPearson Education Australia

Figure 6.8

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Improving Decision Making

G

G G

Strategy 1: Acquiring Experience and Expertise Experience without expertise can be quite dangerous Strategy 2: De-biasing Judgment Unfreeze, Change, Refreeze Strategy 3: Analogical Reasoning Able to take away an abstract form of the learning message Strategy 4: Taking and Outsiders View Strategy 5: Using Linear Models and Other Statistical Techniques Strategy 6: Understanding Biases in Others
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What might an optimal decision making process look like? (Hammond, Keeney, Raiffa;1999)
1. 2. 3. 4. 5. 6. 7. 8.

Work on the right problem Specify your objectives Create imaginative alternatives Understand the consequences Grapple with your tradeoffs Clarify your uncertainties Think hard about your risk tolerance Consider linked decisions

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CASE STUDY: Jimmy Possum Furniture (pp. 239-240)

G G G

Answer the case questions 1-6 Types of problems and decisions? Explain How might Rational, Bounded and Intuition decision making have been used in the initial concept? Explain. How would you characterise the conditions surrounding the decisions Jimmy Possum needed to make? Explain. Is escalation of commitment evident? Why or Why not?

Managers Hot Seat Case 2: Lets make a Fourth Quarter Deal

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