Decision Making PDF

Decision Making 2 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-1 Describe the eight steps in the decision-making process. Explain the four ways managers make decisions. Classify decisions and decision-making conditions. Describe different decision-making styles and disc...

Decision Making 2 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-1 Describe the eight steps in the decision-making process. Explain the four ways managers make decisions. Classify decisions and decision-making conditions. Describe different decision-making styles and discuss how biases affect decision making. Identify effective decision-making techniques. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-2 The Decision-Making Process • Decision making a choice from two or more alternatives Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-3 The Decision-Making Process ▪ Individuals at all levels and areas of organization make decisions ▪ ▪ Top level managers make decisions on organizations goal, where to locate next manufacturing plant, what new markets to move into, what products or services to offer. Middle and Lower level managers make decisions about weekly or monthly production schedules, problems that arise, pay raises and disciplining employees. – Decision making is a comprehensive process, not just a simple act of choosing among alternatives. – Decision Making Process: A set of eight steps that include identifying a problem, selecting an alternative and evaluating the decision’s effectiveness. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-4 Exhibit 6-1 Decision-Making Process Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-5 The Decision-Making Process (cont.) • Step 1: Identify a Problem – Problem - an obstacle that makes it difficult to achieve a desired goal or purpose. – A discrepancy between an existing and desired state of affairs. – Every decision starts with a problem, a discrepancy between an existing and a desired condition – Example - Amanda is a sales manager whose reps need new laptops Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-6 The Decision-Making Process (cont.) Step 1: Identifying the Problem (contd.) –Managers have to be careful not to confuse problems with symptoms of the problem. –A manager who mistakenly resolves the wrong problem is likely to perform just a s poorly as the manager who doesn’t identify the right problem and does nothing. –Characteristics of Problems (how managers identify a problem) • 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 © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-7 The Decision-Making Process (cont.) • Step 2: Identify Decision Criteria – Decision criteria are factors that are important (relevant) to resolving the problem • Costs that will be incurred (investments required) • Risks likely to be encountered (chance of failure) • Outcomes that are desired (growth of the firm) – Example - Amanda decides that memory and storage capabilities, display quality, battery life, warranty, and carrying weight are the relevant criteria in her decision. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-8 The Decision-Making Process (cont.) • Step 3: Allocate Weights to the Criteria – Decision criteria (identified in Step2) are not of equal importance – If the relevant criteria aren’t equally important, the decision maker assigns weight to each item and places the items in the correct priority in order of their importance in the decision making process. – The weighted criteria for our example are shown in Exhibit 6-2. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-9 Exhibit 6-2 Important Decision Criteria Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-10 The Decision-Making Process (cont.) • Step 4: Develop Alternatives – List viable alternatives that could resolve the problem – Alternatives are listed (without evaluation) that can resolve the problem. – Example - Amanda, identifies eight laptops as possible choices. (See Exhibit 6-3.) Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-11 Exhibit 6-3 Possible Alternatives Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-12 The Decision-Making Process (cont.) Step 5: Analyzing Alternatives – Appraising each alternative’s strengths and weaknesses • Once alternatives are identified, decision maker must critically analyze each one. • An alternative’s appraisal is based on its ability to resolve the issues related to the criteria and criteria weight. • Weights given to the alternatives is only an assessment of each alternative, it does not reflect the weighing done in step 3. • Multiply each alternative by its weight. • The sum of these scores represents and evaluation of each alternative against both the establishes criterion and weights. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-13 Exhibit 6-4 Evaluation of Alternatives Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-14 The Decision-Making Process (cont.) • Step 6: Select an Alternative • Choosing the best alternative – The alternative with the highest total weight is chosen. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-15 The Decision-Making Process (cont.) • Step 7: Implement the Alternative • Putting the chosen alternative into action − Conveying the decision to and gaining commitment from those who will carry out the alternative − participation in decision-making process inclines people to support the decision − decision may fail if it is not implemented properly Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-16 The Decision-Making Process (cont.) • Step 8: Evaluate Decision 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? Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-17 The Manager as Decision-Maker • Everyone in an organization makes decision, but decision making is particularly important in a managers job. • Decision making is part of all four managerial functions. • That is why when managers plan, organize, lead or control, they are frequently called decision makers. • All decisions taken does not need long, complex, elaborate steps / systems. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-18 The Manager as Decision-Maker Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-19 The Manager as Decision-Maker Making decisions: Rationality, Bounded Rationality, Intuition - 3 perspectives of how decisions are made Rational Decision Making Managers assumed to make rational decisions, by this we mean – Managers make decisions that are consistent, value-maximizing choices within specified constraints Assumptions of Rationality - decision maker would: be objective and logical carefully define a problem have a clear and specific goal select the alternative that maximizes the likelihood of achieving the goal make decision in the firm’s best economic interests Managerial decision making seldom meets all the tests Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-20 The Manager as Decision-Maker • Managerial decision making will be rational if these conditions are met Single, welldefined goal is to be achieved All alternatives and consequences are known Problem is clear and unambiguous Rational Decision Making Preferences are clear Preferences are constant and stable Final choice will maximize payoff No time or cost constraints exist Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-21 The Manager as Decision Maker Bounded Rationality • Despite the limits of perfect rationality managers are expected to be rational when making decisions. • A “good” decision maker is supposed to Identify problem Consider alternatives Gather information Act decisively but prudently • Managers are expected to exhibit correct decision making behavior and by doing so they show others that they are competent • Managers tend to operate under the assumptions of bounded rationality. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-22 The Manager as Decision Maker Bounded Rationality (cont’d) Managers make decisions rationally, but are limited (bounded) by their ability to process information. Because managers / decision makers can’t possibly analyze all information on all alternatives they satisfice rather than maximize satisfice - accept solutions that are “good enough”. 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. - Most decisions managers make does not fit the assumption of perfect rationality, instead they make those decisions using bounded rationality. They make decisions based on alternatives that are satisfactory. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-23 The Manager as Decision Maker Bounded Rationality (cont’d) Decision making is also strongly influenced by the organizations culture, internal politics, power consideration and a phenomenon called escalation of commitment. escalation of commitment - increased commitment to a previous decision despite evidence that it may have been wrong - refusal to admit that the initial decision may have been flawed Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-24 The Manager as Decision Maker Role of Intuition Managers regularly use intuition and it actually help improve their decision making. intuitive decision making - subconscious process of making decisions on the basis of experience and accumulated judgment - does not rely on a systematic or thorough analysis of the problem - generally complements a rational analysis Why Intuition? A manager who had experience with a particular or even similar type of problem or situation can quickly act with what appears to be limited information. One survey of managers and other organizational employees revealed that almost one-third of them emphasized “gut feeling” over cognitive problem solving and decision making. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-25 Making Decisions: The Role of Intuition • Intuitive decisionmaking – Making decisions on the basis of experience, feelings, and accumulated judgment. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-26 The Manager as Decision Maker What is Intuition? Decisions based on experience Decisions based on ethical values or culture Experiencedbased decisions Values or ethics-based decisions Intuition Subconscious mental processing Decisions based on subconscious data Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall Decisions based on feelings and emotions Affectinitiated decisions Cognitivebased decisions Decisions based on skills, knowledge, 2-27 or training The Manager as Decision Maker Types of problems and decisions: −Structured Problems & Programmed decisions −Unstructured Problems & Non-programmed decisions Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-28 Structured Problems and Programmed Decisions • Structured Problems – Involve goals that clear. – Are familiar (have occurred before). – Are easily and completely defined—information about the problem is available and complete. • Programmed Decision – A repetitive decision that can be handled by a routine approach. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-29 Structured Problems and Programmed Decisions • Types of Programmed Decisions A Procedure – A series of interrelated sequential steps that a manager can use to respond (applying a policy) to a well structured problem. A Rule – An explicit statement that limits what a manager or employee can or cannot do in carrying out the steps involved in a procedure. A Policy – A general guideline for making a decision about a structured problem. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-30 Unstructured Problems and Nonprogrammed Decisions • Unstructured Problems – Problems that are new or unusual and for which information is ambiguous or incomplete. – Problems that will require custom-made solutions. • Non-programmed Decisions – Decisions that are unique and nonrecurring. – Decisions that generate unique responses. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-31 The Manager as Decision Maker Types Of Problems, Types Of Decisions, And Level In The Organization Ill-structured Type of Problem Top Nonprogrammed Decisions Level in Organization Programmed Decisions Lower Well-structured Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-32 Exhibit 6-7 Programmed Versus Nonprogrammed Decisions Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-33 Decision-Making Styles • Recent research on how new managers make decision was done with four distinct groups of people shows that the way a person approaches decision making is likely affected by his or her thinking style. • Peoples thinking style reflects two things: (1) the source of information used (external data and facts OR internal sources such as feelings and intuition), and (2) whether that information is processed in a linear way (rational, logical, analytical) OR a nonlinear way (intuitive, creative, insightful). These four dimensions are collapsed into two styles. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-34 Decision-Making Styles • Linear Thinking Style - a person’s tendency to use external data/facts; the habit of processing information through rational, logical thinking to guide decisions and actions. • Nonlinear Thinking Style - a person’s preference for internal sources of information (feelings and intuition); a method of processing this information with internal insights, feelings, and hunches to guide decisions and actions. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-35 Decision-Making Styles • Managers need to recognize that their employees may use different decision-making styles. Some employees may take their time weighing alternatives and relying on how they feel about it while others rely on external data before logically making a decision. These differences don’t make one person’s approach better than the other. It just means that their decision making styles are different. Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 2-36