Managerial Decision Making

Chapter 03

McGraw-Hill/Irwin

Copyright 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives
LO1 Describe the kinds of decisions you will face as a manager LO2 Summarize the steps in making rational decisions LO3 Recognize the pitfalls you should avoid when making decisions LO4 Evaluate the pros and cons of using a group to make decisions
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Learning Objectives (cont.)

LO5 Identify procedures to use in leading a decision-making group LO6 Explain how to encourage creative decisions LO7 Discuss the process by which decisions are made in organizations LO8 Describe how to make decisions in a crisis

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Characteristics of Managerial Decisions

Figure 3.1

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Lack of Structure
Programmed decisions Non programmed decisions Decisions encountered
and made before, having objectively correct answers, and solvable by using simple rules, policies, or numerical computations. New, novel, complex decisions having no proven answers.

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Comparison of Types of Decisions

Table 3.1

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Uncertainty and Risk

Certainty
The state that exists when decision makers have accurate and comprehensive information.

Uncertainty
The state that exists when decision makers have insufficient information.

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Uncertainty and Risk

Risk
The state that exists when the probability of success is less than 100 percent and losses may occur.

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Conflict
Conflict
Opposing pressures from different sources, occurring on the level of psychological conflict or of conflict between individuals or groups.

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Two Levels of Conflict

Individual decision makers experience psychological conflict when several options are attractive, or when none of the options is attractive Conflict arises between people

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The Stages of Decision Making

Identifying and diagnosing the problem

Evaluating the decision

Generating alternative solutions

Implementing the decision

Evaluating alternative solutions Making the choice

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Identifying and Diagnosing the Problem

Typically, a manager realizes some discrepancy between the current state (the way things are) and a desired state (the way things ought to be).

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Identifying and Diagnosing the Problem

Such discrepancies may be detected by comparing current performance against (1) past performance, (2) the current performance of other organizations or units, or (3) future expected performance as determined by plans and forecasts.

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Generating Alternative Solutions

Ready-made solutions
Ideas that have been seen or tried before

Custom-made solutions
New, creative solutions designed specifically for the problem

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Evaluating Alternatives
Evaluating alternatives
Involves determining the value or adequacy of the alternatives that were generated Which solution will be the best?

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Evaluating Alternatives
Contingency plans
Alternative courses of action that can be implemented based on how the future unfolds.

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Making the Choice

Maximizing
A decision realizing the best possible outcome

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Question
___________ is achieving the best possible balance among several goals
A. B. C. D. Maximizing Satisficing Optimizing Minimizing

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Making the Choice

Satisficing
Choosing an option that is acceptable, although not necessarily the best or perfect

Optimizing
Achieving the best possible balance among several goals

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Implementing the Decision

1. Determine how things will look when the decision is fully operational. 2. Chronologically order the steps necessary to achieve a fully operational decision. 3. List the resources and activities required to implement each step. 4. Estimate the time needed for each step. 5. Assign responsibility for each step to specific individuals.
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Implementing the Decision

What problems could this action cause? What can we do to prevent the problems? What unintended benefits or opportunities could arise? How can we make sure they happen? How can we be ready to act when the opportunities come?

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Evaluating the Decision

Feedback that suggests the decision is working implies that the decision should be continued and applied elsewhere in the organization. Negative feedback means that either (1) implementation will require more time, resources, effort, or thought or (2) the decision was a bad one
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Question
___________ is the process in which a decision maker carefully executes all stages of decision making. A. Innovation B. Quality C. Satisficing D. Vigilance
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The Best Decision

Vigilance
A process in which a decision maker carefully executes all stages of decision making

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Barriers to Decision Making

Psychological biases

Time pressure

Social realities
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Psychological Biases
Illusion of control
Peoples belief that they can influence events, even when they have no control over what will happen

Framing effects
A decision bias influenced by the way in which a problem or decision alternative is phrased or presented.
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Psychological Biases
Discounting the future
A bias weighting short-term costs and benefits more heavily than longer-term costs and benefits.

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Pros and Cons of Using a Group to Make Decisions

Table 3.2
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Potential Problems of Using a Group

Groupthink
A phenomenon that occurs in decision making when group members avoid disagreement as they strive for consensus

Goal displacement
A condition that occurs when a decision-making group loses sight of its original goal and a new, less important goal emerges.

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Managing Group Decision Making

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Constructive Conflict
Cognitive conflict
Issue-based differences in perspectives or judgments.

Affective conflict
Emotional disagreement directed toward other people.

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Constructive Conflict
Devils advocate
A person who has the job of criticizing ideas to ensure that their downsides are fully explored.

Dialectic
A structured debate comparing two conflicting courses of action.

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Encouraging Creativity

Creation

Synthesis Modification
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Brainstorming
Brainstorming
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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Models of Organizational Decision Processes

Bounded rationality
A less-than-perfect form of rationality in which decision makers cannot be perfectly rational because decisions are complex and complete information is unavailable or cannot be fully processed

Incremental model
Model of organizational decision making in which major solutions arise through a series of smaller decisions

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Models of Organizational Decision Processes

Coalitional model
Model of organizational decision making in which groups with differing preferences use power and negotiation to influence decisions.

Garbage can model

Model of organizational decision making depicting a chaotic process and seemingly random decisions.

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Two Disasters

Table 3.3

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Decision Making in a Crisis

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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Elements of a Crisis Plan

1. 2. 3. 4. 5. Strategic actions Technical and structural actions Evaluation and diagnostic actions Communication actions Psychological and cultural actions

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Destination CEO: Allstate

What do you think would be the most challenging part of being CEO of Allstate? Do you agree with Liddys decision not to write or renew homeowners policies in hurricaneprone areas? Why or why not?

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