Unit 5 Managerial Decision Making PDF

Unit 5-Managerial Decision Making Learner Outcomes  Upon successful completion of this unit, learners will be able to:  explain the terms decision and decision-making  explain the eight steps in the decision-making process  examine two perspectives on how managers make dec...

Unit 5-Managerial Decision Making Learner Outcomes  Upon successful completion of this unit, learners will be able to:  explain the terms decision and decision-making  explain the eight steps in the decision-making process  examine two perspectives on how managers make decisions  distinguish between structured problems, programmed and unstructured problems, non- programmed decisions  explain the types of decision- making conditions  describe the classical and administrative models of decision making and their applications Decision Making  We make decisions every day. Some are more important than others and require more thought and effort.  In your own words define the terms:  Decision  Decision making Video on Decision Making  https://youtu.be/XtMMX4jZs2k?si=EmlunDrjJ6tVnT me  https://youtu.be/XtMMX4jZs2k? si=kVDmDo4fkXppX3z Decision Making  A decision is a choice made between available alternatives.  Decision making – a process of developing and analyzing alternatives and choosing from among them.  Problem – a discrepancy between desirable and an actual situation. Decision Making MANAGERS AT ALL LEVELS AND IN ALL AREAS OF ORGANIZATIONS MAKE DECISIONS. THAT IS, THEY MAKE CHOICES. FOR INSTANCE, TOP-LEVEL MANAGERS MAKE DECISIONS ABOUT THEIR ORGANIZATION’S GOALS, WHERE TO LOCATE MANUFACTURING FACILITIES, OR WHAT NEW MARKETS TO MOVE INTO. Decision Making MIDDLE AND LOWER-LEVEL MANAGERS MAKE DECISIONS ABOUT PRODUCTION SCHEDULES, PRODUCT QUALITY PROBLEMS, PAY RAISES, AND EMPLOYEE DISCIPLINE. MAKING DECISIONS ISN’T SOMETHING THAT JUST MANAGERS DO; ALL ORGANIZATIONAL MEMBERS MAKE DECISIONS THAT AFFECT THEIR JOBS AND THE ORGANIZATION THEY WORK FOR. Decision Making  Although decision making is typically described as choosing among alternatives, that view is too simplistic. Why? Because decision making is (and should be) a process, not just a simple act of choosing among alternatives.  Even for something as straightforward as deciding where to go for lunch, you do more than just choose burgers or pizza.  Granted, you may not spend a lot of time contemplating your lunch decision, but you still go through the process when making that decision. Steps in the Decision-Making Process 1.Identifying a problem 2.Identifying decision criteria 3.Allocating weights to the criteria 4.Developing alternatives 5.Analyzing alternatives 6.Selecting an alternative 7.Implementing the alternatives 8.Evaluating decision effectiveness The Decision Making - Process contd… Step 1: Identifying a Problem Your team is dysfunctional, your customers are leaving, or your plans are no longer relevant. Every decision starts with a problem, a discrepancy between an existing and a desired condition. Amanda is a sales manager whose reps need new laptops because their old ones are outdated and inadequate for doing their job. The Decision- Making Process cont’d  To make it simple, assume it’s not economical to add memory to the old computers and it’s the company’s policy to purchase, not lease.  Now we have a problem—a disparity between the sales reps’ current computers (existing condition) and their need to have more efficient ones (desired condition). Amanda has a decision to make. The Decision-Making Process contd …  How do managers identify problems? In the real world, most problems don’t come with neon signs flashing “problem.”  When her reps started complaining about their computers, it was pretty clear to Amanda that something needed to be done, but few problems are that obvious.  Managers also have to be cautious not to confuse problems with symptoms of the problem. Is a 5 percent drop in sales a problem? Or are declining sales merely a symptom of the real problem, such as poor-quality products, high prices, or bad The Decision -Making Process cont’d  Also, keep in mind that problem identification is subjective. What one manager considers a problem might not be considered a problem by another manager.  In addition, a manager who resolves the wrong problem perfectly is likely to perform just as poorly as the manager who doesn’t even recognize a problem and does nothing.  As you can see, effectively identifying problems is important, but not easy. The Decision Making -Process contd … Step 2: Identifying Decision Criteria  Once a manager has identified a problem, he or she must identify the decision criteria that are important or relevant to resolving the problem.  Every decision maker has criteria guiding his or her decisions even if they’re not explicitly stated.  In our example, Amanda decides after careful consideration that memory and storage capabilities, display quality, battery,life, warranty, and carrying weight are the relevant The Decision Making -Process contd …  Step 3: Allocating Weights to the Criteria  If the relevant criteria aren’t equally important, the decision maker must weight the items in order to give them the correct priority in the decision.  How? A simple way is to give the most important criterion a weight of 10 and then assign weights to the rest using that standard.  Of course, you could use any number as the highest weight. The weighted criteria for our example are shown in Exhibit 7-2. The Decision Making -Process contd …  EXHIBIT 7-2  Important Decision Criteria  Memory and storage 10  Battery life 8  Carrying weight 6  Warranty 4  Display quality 3 The Decision Making Process contd…  Step 4: Developing Alternatives  The fourth step in the decision-making process requires the decision maker to list viable alternatives that could resolve the problem. In this step, a decision maker needs to be creative and the alternatives are only listed, not evaluated just yet.  Our sales manager, Amanda, identifies eight laptops as possible choices. (See Exhibit 7-3.) …The Decision Making -Process contd …  The Decision Making -Process contd … Step 5: Analyzing Alternatives  Once alternatives have been identified, a decision maker must evaluate each one. How?  By using the criteria established in Step 2. Exhibit 7- 3 shows the assessed values that Amanda gave each alternative after doing some research on them. Keep in mind that these data represent an assessment of the eight alternatives using the decision criteria, but not the weighting.  When you multiply each alternative by the assigned weight, you get the weighted alternatives as shown The Decision Making Process contd… The Decision Making -Process contd …  Sometimes a decision maker might be able to skip this step. If one alternative scores highest on every criterion, you wouldn’t need to consider the weights because that alternative would already be the top choice. Or if the weights were all equal, you could evaluate an alternative merely by summing up the assessed values for each one. (Look again at Exhibit 7-3.)  For example, the score for the HP ProBook would be 36 and the score for the Sony NW would be 35. The Decision Making -Process contd … The Decision Making -Process contd … Step 6: Selecting an Alternative  The sixth step in the decision-making process is choosing the best alternative or the one that generated the highest total in Step 5. In our example (Exhibit 7-4), Amanda would choose the Dell Inspiron because it scored higher than all other alternatives ( 249 total). The Decision Making -Process contd … Step 7: Implementing the Alternative  In step 7 in the decision-making process, you put the decision into action by conveying it to those affected and getting their commitment to it. We know that if the people who must implement a decision participate in the process, they’re more likely to support it than if you just tell them what to do.  Another thing managers may need to do during implementation is reassess the environment for any changes, especially if it’s a long-term decision. Are the criteria, alternatives, and choice still the best ones, or has the environment changed in such a way that we need to reevaluate? The Decision Making -Process contd … Step 8: Evaluating Decision Effectiveness  The last step in the decision-making process involves evaluating the outcome or result of the decision to see whether the problem was resolved.  If the evaluation shows that the problem still exists, then the manager needs to assess 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 you to redo an earlier step or might even require starting the whole process over. Decision Making Perspectives  There are two perspectives on decision making  1. Rationality  2. Bounded Rationality  Video on bounded rationality  https://youtu.be/zz0smJqANes?si=hQ_OqJXTC9sCQ XXR Making Decisions: Rationality  When Hewlett-Packard (HP) acquired Compaq, the company did no research on how customers viewed Compaq products until “months after then-CEO Carly Fiorina publicly announced the deal and privately warned her top management team that she didn’t want to hear any dissent pertaining to the acquisition.”  By the time they discovered that customers perceived Compaq products as inferior—just the opposite of what customers felt about HP products—it was too late. HP’s performance suffered and Fiorina lost her job. Making Decisions: Rationality  We assume that managers will use rational decision making; that is, they’ll make logical and consistent choices to maximize value. After all, managers have all sorts of tools and techniques to help them be rational decision makers. But as the HP example illustrates, managers aren’t always rational. What does it mean to be a “rational” decision maker?  ASSUMPTIONS OF RATIONALITY  A rational decision maker would be fully objective and logical. The problem faced would be clear and unambiguous, and the decision maker would have a clear and specific goal and know all possible alternatives and consequences.  Finally, making decisions rationally would consistently lead to selecting the alternative that maximizes the likelihood of achieving that goal. These assumptions apply to any decision— personal or managerial. However, for managerial decision making, we need to add one additional assumption—decisions are made in the best  Making Decisions: Bounded Rationality Despite the unrealistic assumptions, managers are expected to be rational when making decisions. They understand that “good” decision makers are supposed to do certain things and exhibit good decision-making behaviors as they identify problems, consider alternatives, gather information, and act decisively but prudently. When they do so, they show others that they’re competent and that their decisions are the result of intelligent deliberation. However, a more realistic approach to describing how managers make decisions is the concept of bounded rationality, which says that Making Decisions: Satisfice  Because they can’t possibly analyze all information on all alternatives, managers satisfice, rather than maximize. That is, they accept solutions that are “good enough or satisfactory.”  They’rebeing rational within the limits (bounds) of their ability to process information. Types of Decisions Types of Decisions  Managers in all kinds of organizations face different types of problems and decisions as they do their jobs.  Depending on the nature of the problem, a manager can use one of two different types of decisions.  1. Programmed Decisions  2. Nonprogrammed Decisions STRUCTURED PROBLEMS AND PROGRAMMED DECISIONS Some problems are straightforward. The decision maker’s goal is clear, the problem is familiar, and information about the problem is easily defined and complete.  Examples might include when a customer returns a purchase to a store, when a supplier is late with an important delivery, a news team’s response to a fast-breaking event, or a college’s handling of a student wanting to drop a class. Such situations are called structured problems because they’re straightforward, familiar, and easily defined. Types of Decisions  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.  For example, the manager offers to have the coat cleaned at the restaurant’s expense. This is what we call a programmed decision, a repetitive decision that can be handled by a routine approach. STRUCTURED PROBLEMS AND PROGRAMMED DECISIONS  Because the problem is structured, the manager doesn’t have to go to the trouble and expense of going through an involved decision process. The “develop-the-alternatives” stage of the decision- making process either doesn’t exist or is given little attention. Why?  Because once the structured problem is defined, the solution is usually self-evident or at least reduced to a few alternatives that are familiar and have proved successful in the past.  The spilled drink on the customer’s coat doesn’t require the restaurant manager to identify and SSTRUCTURED PROBLEMS AND PROGRAMMED DDECISIONS A procedure is a series of sequential steps a manager uses to respond to a structured problem. The only difficulty is identifying the problem. Once it’s clear, so is the procedure. For instance, a purchasing manager receives a request from a warehouse manager for 15 PDA handhelds for the inventory clerks. The purchasing manager knows how to make this decision by following the established STRUCTURED PROBLEMS AND PROGRAMMED DECISIONS A rule is an explicit statement that tells a manager what can or cannot be done. Rules are frequently used because they’re simple to follow and ensure consistency. For example, rules about lateness and absenteeism permit supervisors to make disciplinary decisions rapidly and fairly. STRUCTURED PROBLEMS AND PROGRAMMED DECISIONS  The third type of programmed decisions is a policy, which is a guideline for making a decision. In contrast to a rule, a policy establishes general parameters for the decision maker rather than specifically stating what should or should not be done. Policies typically contain an ambiguous term that leaves interpretation up to the decision maker. Here are some sample policy statements:  The customer always comes first and should always be satisfied.  We promote from within, whenever possible.  Employee wages shall be competitive within community standards. STRUCTURED PROBLEMS AND PROGRAMMED DECISIONS  Notice that the terms satisfied, whenever possible, and competitive require interpretation. For instance, the policy of paying competitive wages doesn’t tell a company’s human resources manager the exact amount he or she should pay, but it does guide them in making the decision. UNSTRUCTURED PROBLEMS AND NONPROGRAMMED DECISIONS  Not all the problems managers face can be solved using programmed decisions.  Many organizational situations involve unstructured problems, which are problems that are new or unusual and for which information is ambiguous or incomplete. Whether to build a new manufacturing facility in China is an example of an unstructured problem.  When problems are unstructured, managers must rely on nonprogrammed decision making in order to develop unique  UNSTRUCTURED PROBLEMS AND NONPROGRAMMED DECISIONS  Nonprogrammed decisions are unique and nonrecurring and involve custom-made solutions. (or a decision which is new)  As managers move up the organizational hierarchy, the problems they confront become more unstructured. Why? Because lower-level managers handle the routine decisions and let upper-level managers deal with the unusual or difficult decisions. Also, upper-level managers delegate routine decisions to their subordinates so they can deal with more difficult issues.  Thus, few managerial decisions in the real world are either fully programmed or nonprogrammed. Most fall Decision-Making Conditions When making decisions, managers may face three different conditions: certainty, risk, and uncertainty. CERTAINTY  The ideal situation for making decisions is one of certainty, which is a situation where a manager can make accurate decisions because the outcome of every alternative is known. For example, when government department decides where to deposit excess state funds, he knows exactly the interest rate being offered by each bank and the amount that will be earned on the funds. He is certain about the outcomes of each alternative.  Decision-Making Conditions RISK  A far more common situation is one of risk, conditions in which the decision maker is able to estimate the likelihood of certain outcomes. Under risk, managers have historical data from past personal experiences or secondary information that lets them assign probabilities to different alternatives. Decision-Making Conditions  Suppose that you manage a Colorado ski resort and you’re thinking about adding another lift. Obviously, your decision will be influenced by the additional revenue that the new lift would generate, which depends on snowfall. You have fairly reliable weather data from the last 10 years on snowfall levels in your area—three years of heavy snowfall, five years of normal snowfall, and two years of light snow. And you have good information on the amount of revenues generated during each level of snow. Decision-Making Conditions  You can use this information to help you make your decision by calculating expected value—the expected return from each possible outcome—by multiplying expected revenues by snowfall probabilities. The result is the average revenue you can expect over time if the given probabilities hold. As Exhibit 7-8 shows, the expected revenue from adding a new ski lift is $687,500. Of course, whether that’s enough to justify a decision to build depends on the costs involved in generating that revenue Decision-Making Conditions UNCERTAINTY  What happens if you face a decision where you’re not certain about the outcomes and can’t even make reasonable probability estimates? We call this condition uncertainty.  Managers do face decision-making situations of uncertainty. Under these conditions, the choice of alternative is influenced by the limited amount of available information and by the  Decision-Making Conditions  UNCERTAINTY  An optimistic manager will follow a maximax choice (maximizing the maximum possible payoff); a pessimist will follow a maximin choice (maximizing the minimum possible payoff); and a manager who desires to minimize his maximum “regret” will opt for a minimax choice.  Although managers try to quantify a decision when possible by using payoff and regret matrices, uncertainty often forces them to rely more on intuition, creativity, hunches, and “gut feeling CLASSICAL MODEL A decision -making model based on the assumption that managers should make logical decisions that will be in the organization’s best economic interests.  ASSUMPTIONS OF THE CLASSICAL MODEL  1.The decision maker operates to accomplish known and agreed upon goals. Problems are precisely formulated and defined.  2. The decision maker strives for conditions of certainty, gather complete information. All alternatives and the potential results of each are calculated. ASSUMPTIONS  3.Criteria for evaluating alternatives are known. The decision maker selects alternative that will maximise the economic return to the organization.  4. the decision maker is rational and uses logic to assign values, order preferences, evaluate alternatives, and make the decision that will maximise the attainment of organizational goals. CLASSICAL MODEL  In many respects, the classical model represents an “ideal” model of decision making that is often unattainable by real people in real organisations. It is most valuable when applied to programmed decisions and to decisions characterized by certainty or risk because relevant information is available and probabilities can be calculated. Example 1  A new analytical software programs automate many programmed decisions, such as freezing the account of a customer who failed to make payments. GE Energy Rentals uses a system that captures financial and organizational information about customers to help managers evaluate risks and make credit decisions. The system enabled the division to reduce costs, increase processing time, and improve cash flow. Example 2  In the retail industry, software programs analyse current and historical sales data to help companies such as Home Depot and Gap decide when, where, and how much to mark down prices. Administrative Model  A decision –making model that describes how managers make decisions characterized by nonprogrammed decisions, uncertainty and ambiguity.  Many management decisions are not sufficiently programmable to lend themselves to any degree of quantification. Managers are unable to make economically rational decisions even if they want to. Administrative Model  This model is based on the work of Hebert A. Simon. He proposed two concepts that were instrumental in shaping the administrative model:  1. bounded rationality  2. satisficing Bounded rationality & Satisficing  People have limits, or boundaries , on how rational they can be. The organization is complex, and manager have the time and ability to process only limited amount of information with which to make decisions. Because managers lack the time or cognitive ability to process complete information about complex decisions they must satisfice. Bounded Rationality & Satisficing  Satisficing means that decision makers choose the first solution alternative that satisfies minimal decision criteria. Rather than pursuing all alternatives to identify the single solution that will maximise economic returns managers will opt for the first solution that appears to solve the problem even if better solutions are presumed to exist. Example  A junior executive was on a business trip and spills coffee on her blouse before an important meeting. She would likely run to a clothing store and buy the first satisfactory replacement she finds. Having neither the time nor the opportunity to explore all the blouses in the town, she satisfices by choosing a blouse that will solve the immediate problem. Administrative Model Assumptions  This model focuses on organizational factors that influence individual decisions. It is more realistic than the classical model for complex, nonprogrammed decisions. According to the administrative model:  1. decision goals are often vague, conflicting, and lack consensus among managers. Managers often are unaware of problems or opportunities that exist in the organization. Assumptions of the Administrative Model  2. Rational; procedures are not always used, and when they are, they are confined to a simplistic view of the problem that misses the complexity of real organisational events.  3. Managers’ searches for alternatives are limited because of human, information, and resource constraints. Administrative Model Assumptions  4. Most managers settle for satisficing rather than a maximizing solution. This is partly because they have limited information and because they have vague criteria for what constitutes a maximizing solution.