Chapter 9 Managerial Decision Making PDF

Chapter 9 Managerial Decision Making © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Learning Objectives By the end of this chapter you s...

Chapter 9 Managerial Decision Making © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Learning Objectives By the end of this chapter you should be able to: 1. Compare and contrast programmed and nonprogrammed decisions, including how they relate to the presence of certainty, uncertainty, and ambiguity. 2. Compare the ideal, rational model of decision making to the political model of decision making. 3. Summarize the six steps used in managerial decision making. 4. Describe four personal decision styles used by managers. 5. Identify the biases that frequently cause managers to make bad decisions. 6. Explain innovative techniques for decision making, including brainstorming, evidence-based management, and after-action reviews. © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2  Overview  Every organization grows, prospers, or fails as a result of decisions made by its managers.  Yet, making decision particularly in relation to complex problem is difficult.  Managers frequently make decisions amid ever-changing factors, unclear information, and conflicting point of views.  Sometimes managers make wrong decisions. Eg. Caterpillar purchased China ERA Mining Machinery Ltd. But has not worked out well after a year the ERA value declined from $700 to $580 due to accounting misconduct that was designed to overstate profit at the firm’s mine-safety equipment unit.  Good decision make a vital part of management because decisions determine how the organization solves problems, allocate resources and accomplishes its goals. 3 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  9.1 Types of Decisions and Problems Decision making is the process of Decision is a identifying choice made problems and from opportunities, available then resolving alternatives them © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4  9.1.1 Programmed and Non-programmed  Programmed Decisions  Recurring problems  Enable rules to be developed and applied in the future.  Once managers formulate decision rules, subordinates or others can make the decision—empowerment  Eg. Decision to reorder paper and other office supplies when inventories drop to a certain level.  Non-programmed Decisions  Unique situations, poorly defined, unstructured and have important consequences.  Eg. Bill Allen, Boeing’s CEO invested $16 million in 1952 to build the world’s first transatlantic commercial jetliner. Then invested $185 million which was $36 million more than Boeing’s net worth. Boeing 707 changed the history of Boeing and altered the course of the entire industry © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5 9.1.2 Facing Certainty and Uncertainty  Difference between programmed and non- programmed decisions related to the degree of uncertainty, risk, or ambiguity that managers deal with in making the decision.  In reality, some things are unknowable, thus, some decisions are fail to solve the problem or attain the desire outcome.  Managers try to obtain information about decisions alternative that will reduce decision uncertainty.  Program decisions can be made in situation involving certainty.  However, many situation managers deal with everyday involve at least some degree of uncertainty that require non-programmed decision making. © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6 9.1.2 Facing Certainty and Uncertainty cont…  Each decision situation can be organized on a scale according to the availability of information and the possibility of failure.  Certainty – Situation in which all information is fully available such as operating conditions, resource costs or constants and each cost of action and possible outcome.  Risk – decision has clear-cut goals and the good information is available but future outcomes associated with an alternative are subject to chance of loss or failure. However, enough information is available to estimate the probability of a successful outcome versus failure.  Uncertainty – managers know which goals they wish to achieve but information about alternative and future events is incomplete. Depends on the amount and value of information available. © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7 9.1.2 Facing Certainty and Uncertainty cont…  Ambiguity – the most difficult decision situation because you make decisions in difficult situations  This is because the goals and the problem are unclear, alternative are difficult to define and information about outcomes is unavailable.  Example, managers see things differently and disagree about what they want, they come from different departments so they have different priority and goal for the decision which can lead to conflicts over decisions alternatives.  A highly ambiguous situation can create a wicked decision problem. Wicked decisions involve conflict over goals and decision alternatives, rapidly changing circumstances, fuzzy information, and unclear links among decision elements, and the inability to evaluate whether a proposed solution will work.  There is often no “right” answer © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8 Conditions that Affect the Possibility of Decision Failure © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9  9.3 Decision-Making Models  The approach that managers use to make decisions usually falls into one of three types: 9.3.1 Classical model 9.3.2 Administrative model 9.3.3 Political model  The choice of models depends on the managers’ personal preference, whether the decision is programmed of non- programmed, and the degree on uncertainty associated with the decision. © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10  9.3.1 Classical Model  Classical model: based on rational economic assumptions and manager beliefs about what ideal decision making should be  Normative─ it defines how a decision maker should make a decision.  Based on rational economic assumptions drive decisions  Decision maker operates to accomplish established goals, problems are precisely formulated and defined  Decision maker strives for information and certainty, results are calculated  Criteria for evaluating alternatives are known; select alternative with maximum benefit  Decision maker is rationale and uses logic  This model is useful when applied to programmed decisions and to decisions characterized by certainty or risk because relevant information is available and probabilities can be calculated. © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11 9.2.2 Administrative Model  Is considered descriptive because it describes  How managers really make decisions in complex situation rather than dictating how they should make decisions according to theoretical ideal.  Use a rational decision making process within the limits of human and environmental factors  Bounded rationality – People have limits or boundaries on how rational they can be.  Satisficing – Decision makers choose the first solution alternative that satisfies minimal decision criteria rather than pursuing all alternative to identify the single solution that will maximize economic return © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12 9.2.2 Administrative Model Cont… Assumptions:  Goals are often vague, conflicting and lack consensus among managers.  Managers are often unaware of problems or opportunities.  Rational procedures are not always used; simplistic view or problem.  Managers’ searches for alternatives are limited because human, information and resource constraints.  Most managers settle for satisficing rather than a maximizing solution partly because they have limited information and vague criteria for what constitute a maximizing solutions.  Intuition – Quick apprehension of decision situation experience but without conscious thought  Quasirational-combining intuition and analytical thought © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13 USE OF InfoTech IN DECISION MAKING  Using computer technology for managerial decision making is becoming more and more common. What are some of its possible advantages and disadvantages? Advantages include increased accuracy, timeliness, and reliability of information to improve managerial decision making. Disadvantages include inputting the wrong data that produces incorrect information that will be used in substantial managerial decisions, being susceptible to confirmation bias, and being overly confident in accuracy of data. © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14  9.3.3 Political Model  This model is useful for making non programmed decisions when conditions are uncertain, information is limited and there are managers conflicts about what goals to pursue or what course of action to take.  This is because decisions usually involve managers with diverse interests.  Thus they have to talk to one another to share information and reach an agreement known as coalition building  Informal alliance among managers who support a specific goal  Without a coalition, powerful groups can derail (disrupt) the decision-making process 15  © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Political model resembles the real environment  9.3.3 Political Model Cont… Four assumptions of the political model:  Organizations are made up of groups with diverse interests, goals, and values  Information is ambiguous and incomplete  Managers lack of time, resources, or mental capacity to process all information regarding a problem, hence need each other to exchange viewpoints to gather information and reduce ambiguity.  Decisions are the result of bargaining and discussion among coalition members thru push and gull debates. © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16 Characteristics of Classical, Administrative, and Political Decision-Making Models © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17  9.4 Decision Making Steps Six Steps in the Managerial Decision-Making Process © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18 9.4 Decision-Making Steps 1. Recognition of Decision Requirement – Identify problem or opportunity. Problem occurs when organizational accomplishment is less that established goals. Some aspect of performance is unsatisfactory. Opportunity exist when managers see potential accomplishment that exceeds specified current goals. They see possibility of enhancing performance beyond current levels. 2. Diagnosis and Analysis – Analyze underlying causal factors associated with the decision situation 5 Whys - a question-asking method used to explore the root cause underlying a particular problem. 3. Develop Alternatives – Define feasible alternatives by responding to the situation and19 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9.4 Decision-Making Steps Cont… 4. Selection of Desired Alternative – Alternative with most desirable or promising outcome. Choosing alternative also depends on the managers personality factors and willingness to accept risk and uncertainty. Risk propensity is the willingness to undertake risk with the opportunity of gaining an increased payoff. 5. Implementation of Chosen Alternative – Use of managerial, administrative, and persuasive abilities to ensure the chosen alternative is carried out. 6.Evaluation and Feedback – Gather information to determine how well the decision was implemented and whether it achieved its 20 goals. © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Decision Alternatives with Different Levels of Risk © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21  9.5 Personal Decision Framework  Decision Style: distinctions among people with respect to how they evaluate problems, generate alternatives, and make choices.  Directive style – People who prefer simple, clear-cut solutions to problems. Managers who uses this style often make decisions quickly because they do not like to deal with a lot of information and may consider one or two alternatives  Analytic style – Managers prefer complex solutions based on a lot of data. Managers carefully consider alternative and often base their decision on objective, rational data from management control systems an other sources.  Conceptual style – Managers like a broad amount of information however they are more socially oriented than those with an analytical style and like to talk to other about the problems an possible alternative for solving it.  Behavioral style – Managers with a deep concern for others as individuals. They like to talk to people one on one, understand their feelings about the problem and consider the22 © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.  Personal Decision Framework © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23 9.6 Why Do Managers Make Bad Decisions? 1. Being influenced by initial impressions — eg. Looking at previous years sales when estimating sales for the coming years. Giving too much weight to the past can lead to poor forecast and misguided decisions.  Anchoring bias: occurs when we allow initial impressions, statistics, and estimates to act as anchors to our subsequent thoughts and judgements 2. Justifying past decisions — eg. Manager continues to pour money into a failing project (sunk cost effect)  Loss aversion: stronger response to a potential loss than to an expected gain 3. Seeing what you want to see — look into information that supports their existing instinct or point of view and avoid information contradicts it.  Confirmation bias: occurs when a manager puts too much value on evidence that is consistent with a favored belief or viewpoint and discounts evidence that contradicts it © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24 9.6 Why Do Managers Make Bad Decisions? 4. Perpetuating the status quo — make decision based on what has worked in the past and fail to explore new options, dig for addition information or investigate new technologies. 5. Being influenced by emotions — eg. Make decision when you were angry, upset, or over ecstatic (overjoyed). 6. Overconfidence — overestimate their ability to predict uncertain outcomes. © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25  9.7 Innovative Decision Making Mechanisms to help reduce bias-related decision errors:  Start with brainstorming  uses a face-to-face interactive group to spontaneously suggest as many ideas as possible for solving a problem.  Electronic brainstorming: brings people together in an interactive group over a computer network  Use hard evidence  Evidence-based decision making: a commitment to make more informed and intelligent decisions based on the best available facts and evidence.  Engage in rigorous debate  Ensure group diversity  Devil’s advocate: person assigned the role of challenging the assumptions and assertions made by the group © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26  9.7 Innovative Decision Making Cont…  Avoid groupthink  Groupthink: tendency of people in groups to suppress contrary opinions  Know when to bail  Escalating commitment: continuing to invest time and money in a solution even when there is strong evidence that it is not appropriate  Do a premortem and postmortem  Postmortem, or after-action review: disciplined procedure whereby managers invest time in reviewing the results of decisions on a regular basis and learn from them  Premortem: purposefully imagining a decision has been implemented and has failed miserably, and then identifying reasons for the failure so that problematic issues can be addressed in advance © 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27