Management Chapter 6: Managers as Decision Makers (2010 PDF)

Management tenth edition Stephen P. Robbins Mary Coulter Chapter Managers 6 as...

Management tenth edition Stephen P. Robbins Mary Coulter Chapter Managers 6 as Decision Makers Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–1 Learning Outcomes Follow this Learning Outline as you read and study this chapter. 6.1 The Decision-Making Process. Define decision. Describe the eight steps in the decision-making process. 6.2 Managers Making Decisions. Discuss the assumptions of rational decision making. Describe the concepts of bounded rationality, satisficing, and escalation of commitment. Explain intuitive decision making. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–2 Learning Outcomes 6.3 Types Of Decisions and Decision-Making Conditions. Explain the two types of problems and decisions. Contrast the three decision making conditions. Explain maximax, maximin, and minimax decision choice approaches. 6.4 Decision-Making Styles Describe two decision-making styles. Discuss the twelve decision-making biases. Explain the managerial decision-making model. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–3 Learning Outcomes 6.5 Effective Decision Making In Today’s World. Explain how managers can make effective decisions in today’s world. List the six characteristics of an effective decision making process. List the five habits of highly reliable organizations. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–4 Decision Making Decision  Making a choice from two or more alternatives. The Decision-Making Process Consists of 8 steps: Step 1: Identifying a problem Step 2: Identifying decision criteria Step 3: Allocating weights to the criteria. Step 4: Developing alternatives Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–5 Decision Making The Decision-Making Process  Consists of 8 steps: Step 5: Analyzing alternatives Step 6: Selecting an alternative Step 7: Implementing the selected alternative. Step 8: Evaluating the decision’s effectiveness. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–6 Exhibit 6–1 The Decision-Making Process Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–7 Step 1: Identifying the Problem Problem  A discrepancy between an existing and desired state of affairs. Characteristics of Problems  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. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–8 Step 1: Identifying the Problem Example:  Amanda is a sales manager whose reps new laptops because their old ones are outdated and inadequate for doing their job.  To make it simple, assume that its not economical to add memory to the old computers and it’s the company’s policy to purchase, not lease.  Problem – a disparity between the sales reps’ current computers (existing condition) and their need to have more efficient ones (desired condition). Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–9 Step 2: Identifying Decision Criteria Decision criteria are factors that are important (relevant) to resolving the problem such as:  Costs that will be incurred (investments required)  Risks likely to be encountered (chance of failure)  Outcomes that are desired (growth of the firm) Step 3: Allocating Weights to the Criteria Decision criteria are not of equal importance:  Assigning a weight to each item places the items in the correct priority order of their importance in the decision-making process. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–10 Exhibit 6–2 Criteria and Weights for Computer Replacement Decision Criterion Weight Memory and Storage 10 Battery life 8 Carrying Weight 6 Warranty 4 Display Quality 3 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–11 Step 4: Developing Alternatives Identifying viable alternatives  Alternatives are listed (without evaluation) that can resolve the problem. (Exhibit 6–3) Step 5: Analyzing Alternatives Appraising each alternative’s strengths and weaknesses  An alternative’s appraisal is based on its ability to resolve the issues identified in steps 2 and 3. (Exhibit 6–4) Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–12 Exhibit 6–3 Assessed Values of Laptop Computers Using Decision Criteria Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–13 Step 6: Selecting an Alternative Choosing the best alternative  The alternative with the highest total weight is chosen. (Exhibit 6–4) Step 7: Implementing the Alternative Putting the chosen alternative into action.  Conveying the decision to and gaining commitment from those who will carry out the decision. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–14 Exhibit 6–4 Evaluation of Laptop Alternatives Against Weighted Criteria Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–15 Step 8: Evaluating the Decision’s Effectiveness The soundness of the decision is judged by its outcomes.  How effectively was the problem resolved by outcomes resulting from the chosen alternatives?  If the problem was not resolved, what went wrong?  Was the problem incorrectly defined?  Were errors made when evaluating alternatives?  Was the right alternative selected but poorly implemented?  The answers might lead to redo an earlier step or might even require starting the whole process over. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–16 Exhibit 6–5 Decisions in the Management Functions Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–17 Making Decisions Rationality  Managers make consistent, value-maximizing choices with specified constraints.  Assumptions are that decision makers:  Are perfectly rational, fully objective, and logical.  Have carefully defined the problem and identified all viable alternatives.  Have a clear and specific goal  Will select the alternative that maximizes outcomes in the organization’s interests rather than in their personal interests.  For Managerial decision making: Decisions are made in the best interests of the organization. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–18  Exhibit 6–6 Assumptions of Rationality 6–19 © 2007 Prentice Hall, Inc. All rights reserved. Making Decisions (cont’d) Bounded Rationality  Managers make decisions rationally, but are limited (bounded) by their ability to process information.  Assumptions are that decision makers:  Will not seek out or have knowledge of all alternatives  Will satisfice—choose the first alternative encountered that satisfactorily solves the problem—rather than maximize the outcome of their decision by considering all alternatives and choosing the best. Accept solutions that are “good enough”.  Influence on decision making  Escalation of commitment: an increased commitment to a previous decision despite evidence that it may have been wrong. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–20 Making Decisions (cont’d) Bounded Rationality  Example:  Suppose that you’re a finance major, and upon graduation you want a job, preferably as a personal financial planner, with a minimum salary of $35,000 and within 100 miles of your hometown.  You accept a job offer as a business credit analyst – but still in the finance field – at a bank 50 miles from home at a starting salary of $34,000.  If you have done a more comprehensive job search, you would have discovered a job in personal financial planning at a trust company only 25 miles from your hometown and starting at a salary of $38,000.  Are you a perfectly rational decision maker? Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–21  Exhibit 6–7 What is Intuition? Source: Based on L. A. Burke and M. K. Miller, “Taking the Mystery Out of Intuitive Decision Making,” Academy of Management Executive, October 1999, pp. 91–99. 6–22 © 2007 Prentice Hall, Inc. All rights reserved.  Making Decisions: The Role of Intuition Intuitive decision making  Making decisions on the basis of experience, feelings, and accumulated judgment. Five Different Aspects of Intuition 1.Experience-based decisions -Based on past experiences 2.Affect-initiated decisions -Based on feelings or emotions 6–23 © 2007 Prentice Hall, Inc. All rights reserved.  Making Decisions: The Role of Intuition Five Different Aspects of Intuition 3. Cognitive-based decisions -Based on skills, knowledge and training 4.Subconscious mental processing -Use data from subconscious mind to help them make decisions 5.Values or ethics based decisions -Based on ethical values or culture 6–24 © 2007 Prentice Hall, Inc. All rights reserved. Types of Problems and Decisions Structured Problems  Refers to a straightforward, familiar and easily defined problem.  Involve goals that are clear.  Are familiar (have occurred before).  Are easily and completely defined—information about the problem is available and complete. Example:  Customer returns a purchase to a store,  When a supplier is late with an important delivery Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–25 Types of Problems and Decisions Programmed Decision  A repetitive decision that can be handled by a routine approach.  For instance,  A server spills a drink on a customer’s coat. The customer is upset, and the manager needs to do something.  Because it’s not an unusual occurrence, there’s probably some standardized routine for handling it.  The manager offers to have the coat cleaned at the restaurant’s expense.  The manager relies on one of 3 types of programmed decisions: procedure, rule or policy. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–26 Types of Programmed Decisions Procedure  A series of interrelated steps that a manager can use to respond (applying a policy) to a structured problem.  For instance, Purchasing manager receives a request from a warehouse manager for 15 handheld computers for the inventory clerks.  The Purchasing manager knows how to do it by following the established purchasing procedure.  Follow all steps for completing merchandise return documentation. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–27 Types of Programmed Decisions Rule  An explicit statement that tells managers what can or cannot be do.  Rules are frequently used because they are simple to follow and ensure consistency.  For example:  Rules about lateness and absenteeism permit supervisors to make disciplinary decisions rapidly and fairly.  Managers must approve all refunds over $50.00.  No credit purchases are refunded for cash. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–28 Types of Programmed Decisions Policy  A guideline for making a decisions.  Policies typically contain an ambiguous term that leaves interpretation up to the decision makers.  Some sample policy statements:  The customer always comes first and should always be satisfied.  Employee wages shall be competitive within community standards.  Accept all customer-returned merchandise. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–29 Problems and Decisions (cont’d) Unstructured Problems  Problems that are new or unusual and for which information is ambiguous or incomplete.  Problems that will require custom-made solutions.  Example:  Whether to build a new manufacturing facility in China  Problem facing restaurant managers who must decide to modify their businesses to comply wit the new smoking ban  When problems are unstructured, managers must rely on nonprogrammed decision making in order to develop unique solutions. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–30 Problems and Decisions (cont’d) Nonprogrammed Decisions  Decisions that are unique and nonrecurring.  Decisions that generate unique responses. Lower-level managers mostly rely on programmed decisions (procedures, rules and policies) because they confront familiar and repetitive problems. As managers move up the organizational hierarchy, the problems they confront become more unstructured. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–31 Exhibit 6–7 Programmed Versus Nonprogrammed Decisions Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–32 Decision-Making Conditions Certainty  A situation in which a manager can make an accurate decision because the outcome of every alternative choice is known.  Managers are certain about the outcomes of each alternative.  Example: Depositing excess funds:  Certain as to the Interest rate being offered by banks and amount that will be earned on the funds Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–33 Decision-Making Conditions Risk A situation in which the manager is able to estimate the likelihood (probability) of outcomes that result from the choice of particular alternatives. Under risk, managers have historical data from past experiences or secondary information that lets them assign probabilities to different alternatives. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–34 Decision-Making Conditions Example: Risk Suppose you manage a Swiss Ski resort, and you’re thinking about adding another lift. Decisions will be influenced by the additional revenue that the new lift will generate, which depends on snowfall. Fairly reliable weather data on snowfall levels in your area from the past 10 years Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–35  Exhibit 6–8 Expected Value for Revenues from the Addition of One Ski Lift Expected Expected × Probability = Value of Each Event Revenues Alternative Heavy snowfall $850,000 0.3 = $255,000 Normal snowfall 725,000 0.5 = 362,500 Light snowfall 350,000 0.2 = 70,000 $687,500 6–36 © 2007 Prentice Hall, Inc. All rights reserved.  Decision-Making Conditions Uncertainty  Refers to a situation in which decision maker has neither certainty nor reasonable probability estimates available.  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”. 6–37 © 2007 Prentice Hall, Inc. All rights reserved.  Decision-Making Conditions Uncertainty  The choice of alternative is influenced by limited information of available information and by the psychological orientation of the decision maker.  Maximax: the optimistic manager’s choice to maximize the maximum payoff  Maximin: the pessimistic manager’s choice to maximize the minimum payoff  Minimax: the manager’s choice to minimize maximum regret. 6–38 © 2007 Prentice Hall, Inc. All rights reserved.  Exhibit 6–9 Payoff Matrix 6–39 © 2007 Prentice Hall, Inc. All rights reserved.  Exhibit 6–10 Regret Matrix 6–40 © 2007 Prentice Hall, Inc. All rights reserved.  Decision-Making Styles The way a person approaches decision making is likely affected by his or her Thinking Style.  Thinking style reflects two things: 1. The source of information a person tend to use (external data and facts or internal sources, such as feelings and intuition). 2. How the person process that information (linear – rational, logical, analytical; or nonlinear – intuitive, creative , insightful). These four dimensions are collapsed into two styles: linear thinking style and nonlinear thinking style. 6–41 © 2007 Prentice Hall, Inc. All rights reserved.  Decision-Making Styles Linear Thinking Style  A decision style characterized by a person’s preference for using external data and facts and processing this information through rational, logical thinking. Nonlinear Thinking Style  A decision style characterized by a person’s preference for internal sources of information and processing this information through with internal insights, feelings and hunches. 6–42 © 2007 Prentice Hall, Inc. All rights reserved.  Decision-Making Biases and Errors Heuristics  Using “rules of thumb” to simplify decision making.  Heuristics can be useful because they help make sense of complex, uncertain, and ambiguous information.  Even though managers may use rules of thumbs, that doesn’t mean those rules are reliable. 6–43 © 2007 Prentice Hall, Inc. All rights reserved.  Exhibit 6–11 Common Decision-Making Errors and Biases 6–44 © 2007 Prentice Hall, Inc. All rights reserved.  Decision-Making Biases and Errors Overconfidence Bias  When a decision makers tend to think they know more than they do or hold unrealistically positive views of themselves and their performance. Immediate Gratification Bias  Choosing alternatives that offer immediate rewards and that to avoid immediate costs. 6–45 © 2007 Prentice Hall, Inc. All rights reserved.  Decision-Making Biases and Errors (cont’d) Anchoring Effect  Fixating on initial information as a starting point and ignoring subsequent information. Selective Perception Bias  Selecting organizing and interpreting events based on the decision maker’s biased perceptions.  This influences the information they pay attention to, the problem they identify, and the alternatives they develop. 6–46 © 2007 Prentice Hall, Inc. All rights reserved.  Decision-Making Biases and Errors (cont’d) Confirmation Bias  Seeking out information that reaffirms past choices and discounting contradictory information.  These people tend to accept at face value information that confirms their preconceived views and are critical and skeptical of information that challenges thee views 6–47 © 2007 Prentice Hall, Inc. All rights reserved.  Decision-Making Biases and Errors (cont’d) Framing Bias  Selecting and highlighting certain aspects of a situation while ignoring other aspects.  Omitting other aspects, distort what they see and create incorrect reference points. Availability Bias  Losing decision-making objectivity by focusing on the most recent events.  Distort the ability to recall events in an objective manner and results in distorted judgments and probability estimates. 6–48 © 2007 Prentice Hall, Inc. All rights reserved.  Decision-Making Biases and Errors (cont’d) Representation Bias  When decision makers assess the likelihood of an event based on how closely it resembles other events, or sets of events.  Drawing analogies and seeing identical situations when none exist. Randomness Bias  Creating unfounded meaning out of random events.  Most decision makers have difficulty dealing with chance, even though random events happen to everyone, and there’s nothing that can be done to predict them. 6–49 © 2007 Prentice Hall, Inc. All rights reserved.  Decision-Making Biases and Errors (cont’d) Sunk Costs Errors  Forgetting that current actions cannot influence past events and relate only to future consequences.  Incorrectly fixate on past expenditures of time, money, or effort in assessing choices rather than on future consequences. Self-Serving Bias  Taking quick credit for successes and blaming outside factors for failures. 6–50 © 2007 Prentice Hall, Inc. All rights reserved.  Decision-Making Biases and Errors (cont’d) Hindsight Bias Mistakenly believing that an event could have been predicted once the actual outcome is known (after-the-fact). 6–51 © 2007 Prentice Hall, Inc. All rights reserved.  Exhibit 6–14 Overview of Managerial Decision Making 6–52 © 2007 Prentice Hall, Inc. All rights reserved.  Effective Decision Making for Today’s World Guidelines for making effective decisions:  Understand cultural differences.  Values, beliefs, attitudes and behavioral patterns of the people involved.  Know when it’s time to call it quits.  When it’s evident that a decision isn’t working, don’t be afraid to pull the plug.  Use an effective decision-making process.  Build an organization that can spot the unexpected and quickly adapt to the changed environment.  Such organization is called highly reliable organizations (HROs) 6–53 © 2007 Prentice Hall, Inc. All rights reserved.  Effective Decision Making for Today’s World HRO Five habits:  Are not tricked by their success.  Preoccupied with their failures and alert to the smallest deviations and react quickly to anything that doesn’t fit to their expectations.  Defer to the experts on the front line.  Frontline workers-those who interact day in and day out with customers, products, suppliers, and so forth – have firsthand knowledge of what can and cannot be done, what will and will not work.  Get their inputs.  Let them make decisions. 6–54 © 2007 Prentice Hall, Inc. All rights reserved.  Effective Decision Making for Today’s World HRO Five habits:  Let unexpected circumstances provide the solution.  How decision maker respond to unexpected circumstances.  Embrace complexity.  Ask “why” and keep on asking why as they probe more deeply into the causes of the problem and possible solutions.  Anticipate, but also anticipate their limits.  Do try to anticipate as much as possible, but recognize that they can’t anticipate everything.  Think by acting. By actually doing things, you’ll find out what works and what doesn’t. 6–55 © 2007 Prentice Hall, Inc. All rights reserved.  Characteristics of an Effective Decision-Making Process It focuses on what is important. It is logical and consistent. It acknowledges both subjective and objective thinking and blends analytical with intuitive thinking. It requires only as much information and analysis as is necessary to resolve a particular dilemma. It encourages and guides the gathering of relevant information and informed opinion. It is straightforward, reliable, easy to use, and flexible. 6–56 © 2007 Prentice Hall, Inc. All rights reserved.  Terms to Know decision policy Decision-making process unstructured problems problem nonprogrammed decisions decision criteria certainty rational decision making risk bounded rationality uncertainty satisficing directive style escalation of commitment analytic style intuitive decision making conceptual style structured problems behavioral style programmed decision heuristics procedure business performance rule management (BPM) software Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–57  THANK YOU VERY MUCH HAVE A NICE DAY AND GOD BLESS Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–58  All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–59  Decision-Making Styles Dimensions of Decision-Making Styles  Ways of thinking  Rational, orderly, and consistent  Intuitive, creative, and unique  Tolerance for ambiguity  Low tolerance: require consistency and order  High tolerance: multiple thoughts simultaneously 6–60 © 2007 Prentice Hall, Inc. All rights reserved.  Decision-Making Styles Dimensions of Decision-Making Styles  Ways of thinking  Rational, orderly, and consistent  Intuitive, creative, and unique  Tolerance for ambiguity  Low tolerance: require consistency and order  High tolerance: multiple thoughts simultaneously 6–61 © 2007 Prentice Hall, Inc. All rights reserved.  Decision-Making Styles (cont’d) Types of Decision Makers  Directive  A decision-making style characterized by low tolerance for ambiguity and a rational way of thinking.  They’re efficient and logical.  Directive types make fast decisions and focus on the short run.  Use minimal information and consider few alternatives.  Analytic  A decision-making style characterized by high tolerance for ambiguity and a rational way of thinking  Want more information before making a decision and consider more alternatives.  Make careful decisions in unique situations. 6–62 © 2007 Prentice Hall, Inc. All rights reserved.  Decision-Making Styles (cont’d) Types of Decision Makers  Conceptual  A decision-making style characterized by high tolerance for ambiguity and an intuitive way of thinking.  Maintain a broad outlook and consider many alternatives in making decisions.  Focus on the long run and are very good at finding creative solutions to problems  Behavioral  A decision-making style characterized by low tolerance for ambiguity and a rational way of thinking.  Avoid conflict by working well with others and being receptive to suggestions.  Acceptance by others is important to this decision-making style 6–63 © 2007 Prentice Hall, Inc. All rights reserved.  Exhibit 6–12 Decision-Making Matrix 6–64 © 2007 Prentice Hall, Inc. All rights reserved.