Chapter 8 Managing decision-making Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Learning objectives After studying the chapter, you should be able to: Differentiate between programmed and non-programmed decisions, and explain why non-programmed decision-making is a complex, uncertain process Describe the six steps that managers should take to make the best decisions Explain how cognitive biases can affect decision-making and lead managers to make poor decisions Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Learning objectives (cont.) Identify the advantages and disadvantages of group decision-making, and describe techniques that can improve it Explain the role that organisational learning and creativity play in helping managers to improve their decisions Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

The nature of managerial decision-making The process by which managers respond to opportunities and threats by analysing options and making decisions about goals and courses of action Decisions in response to opportunities: occurs when managers respond to ways to improve organisational performance Decisions in response to threats: occurs when managers are impacted by adverse events to the organisation Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Decision-making Programmed decision Non-programmed decisions Routine, virtually automatic decision-making that follows established rules or guidelines Managers have made the same decision many times before There are rules or guidelines to follow based on experience with past decisions Little ambiguity involved Non-programmed decisions Non-routine decision-making that occurs in response to unusual, unpredictable opportunities and threats. The are no rules to follow since the decision is new Decisions are made based on information, and a manager’s intuition and judgment Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Decision-making (cont.) Intuition Feelings, beliefs and hunches that come readily to mind, require little effort and information gathering and result in on-the-spot decisions Reasoned judgment Decisions that take time and effort to make and result from careful information gathering, generation of alternatives and evaluation of alternatives Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

The classical model of decision-making A prescriptive model of decision-making that assumes the decision-maker can identify and evaluate all possible alternatives and their consequences and rationally choose the most appropriate course of action Optimum decision The most appropriate decision in light of what managers believe to be the most desirable future consequences for their organisation Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

The classical model of decision-making (cont.) Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

The administrative model of decision-making March & Simon Approach to decision-making that explains why decision-making is inherently uncertain and risky and why managers usually make satisfactory rather than optimum decisions Bounded rationality There are a large number of alternatives and available information can be so extensive that managers cannot consider it all Decisions are limited by people’s cognitive abilities Incomplete information Most managers do not see all alternatives and decide based on incomplete information Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Why information is incomplete Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Causes of incomplete information Risk The degree of probability that the possible outcomes of a particular course of action will occur Managers know enough about a given outcome to be able to assign probabilities for the likelihood of its failure or success Uncertainty Probabilities cannot be given for outcomes and the future is unknown Many decision outcomes are not known, such as the success of a new product introduction or a merger Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Causes of incomplete information (cont.) Young Woman or Old Woman? Ambiguous information Information whose meaning is not clear, allowing it to be interpreted in multiple or conflicting ways Time constraints and information costs Do not always have time or money to search/evaluate all possible alternatives Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Causes of incomplete information (cont.) Satisficing Searching for and choosing an acceptable, or satisfactory, response to problems and opportunities, rather than trying to make the best decision Managers explore a limited number of options and choose an acceptable decision rather than the optimum decision Managers assume that the limited options they examine represent all options This is the typical response of managers when dealing with incomplete information Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Six steps in decision-making Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Decision-making steps Step 1. Recognise need for a decision Sparked by an event such as environmental change Managers must first realise that a decision must be made Step 2. Generate alternatives Managers must develop feasible alternative courses of action If good alternatives are missed, the resulting decision is poor It is hard to develop creative alternatives, so managers need to look for new ideas Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Decision-making steps (cont.) Step 3. Evaluate alternatives What are the advantages and disadvantages of each alternative? Managers should specify criteria, then evaluate When ranking, all information needs to be considered Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Decision-making steps (cont.) Step 4. Choose among alternatives Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

General criteria for evaluating possible courses of action Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Decision-making steps (cont.) Step 5. Implement chosen alternative Managers must now carry out the alternative Often a decision is made and not implemented Step 6. Learn from feedback Managers should consider what went right and wrong with the decision and learn for the future Without feedback, managers do not learn from experience and will repeat the same mistake over Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Cognitive biases and decision-making Heuristics Rules of thumb to deal with complex situations Decision-makers use heuristics to deal with bounded rationality If the heuristic is wrong, however, then poor decisions result from its use Systematic errors can result from use of an incorrect heuristic and will appear over and over since the rule used to make decision is flawed Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Sources of cognitive bias at the individual and group levels Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Types of cognitive biases Prior hypothesis bias Allowing strong prior beliefs about a relationship between variables to influence decisions based on these beliefs even when evidence shows they are wrong Representativeness bias The decision-maker incorrectly generalises a decision from a small sample or a single incident Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Types of cognitive biases (cont.) Illusion of control The tendency to overestimate one’s own ability to control activities and events Escalating commitment Committing considerable resources to project and then committing more even if evidence shows the project is failing Critical to be aware of one’s biases Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Group decision-making Superior to individual decision-making in several ways Choices less likely to fall victim to bias Able to draw on combined skills, competencies and accumulated knowledge of group members Improved ability to generate feasible alternatives More likely to be supported in implementation Allows managers to process more information Managers affected by decisions agree to cooperate Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Group decision-making (cont.) Disadvantages Groups often take longer than individuals Like individual decisions can be undermined by biases such as Groupthink Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Group decision-making (cont.) Groupthink perils Biased decision-making resulting from group members striving for agreement Usually occurs when group members rally around a central manager’s idea and become blindly committed to the idea without assessing information or considering alternatives The group’s influence tends to convince each member that the idea must go forward Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Improved group decision-making Devil’s advocacy A group member who advances or defends unpopular or opposing alternatives for the sake of argument One member of the group who acts as the devil’s advocate by critiquing the way the group identified alternatives and pointing out problems with the alternative selection Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Improved group decision-making (cont.) Dialectical inquiry Two different groups are assigned to the problem and each group evaluates the other group’s choice of alternatives Top managers then hear each group present their alternatives and each group can critique the other Promote group diversity Increasing the diversity in a group (e.g. gender, ethnicity, organisational functions) may result in consideration of a wider set of alternatives Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Devil’s advocacy and dialectical inquiry Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Organisational learning and creativity Managers seek to improve employees’ desire and ability to understand and manage the organisation and its task environment so as to continuously raise effectiveness The learning organisation Managers try to maximise the people’s ability to behave creatively to maximise organisational learning Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Senge’s principles for creating a learning organisation Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Creating a learning organisation Personal mastery Managers empower employees and allow them to create and explore Mental models Challenge employees to find new, better methods to perform a task Team learning Is more important than individual learning since most decisions are made in groups Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Creating a learning organisation (cont.) Build a shared vision People share a common mental model of the firm to frame problems and evaluate opportunities Systems thinking Knowing and understanding how actions in one area of the firm will impact other areas of the firm Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Organisational learning and creativity The ability of the decision-maker to discover novel ideas leading to a feasible course of action A creative management staff and employees are the key to the learning organisation Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Promoting individual creativity Organisations can build an environment supportive of creativity Managers must provide employees with the confidence and ability to take risks If people take risks, they will occasionally fail To build creativity, periodic failures must be rewarded This idea is hard to accept for some managers Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Promoting group creativity Brainstorming Managers meet face-to-face to generate and debate many alternatives Group members are not allowed to evaluate alternatives until all alternatives are listed When all are listed, then the pros and cons of each are discussed and a short list created Production blocking during brainstorming—caution! Members cannot absorb all information being presented during the session and can forget even their own alternatives Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Promoting group creativity (cont.) Nominal group technique Provides a more structured way to generate alternatives in writing Avoids the production blocking problem Similar to brainstorming except that each member is given time to first write down all alternatives he or she would suggest Alternatives are then read aloud without discussion until all have been listed Then discussion occurs and alternatives are ranked Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Promoting group creativity (cont.) Delphi technique Provides a written format without having all managers meet face-to-face Delphi allows distant managers to participate Problem is distributed in written form to managers who then generate written alternatives Responses are received and summarised by top managers These results are sent back to participants for feedback and ranking The process continues until consensus is reached Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Promoting creativity at the global level Delphi technique Particularly useful if time/distance an issue Global businesses may have language/communication problems Global businesses will vary decision-making processes from country to country; some more participative, some centralised Need for development to promote awareness of different styles so that global businesses can get staff to work together to identify opportunities, threats and brainstorm ideas and approaches Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Summary Programmed decisions for routine situations, non-programmed for novel situations Classical versus administrative model of decision-making Classical has complete information, follows rational process Administrative has incomplete information, bounded rationally and ‘satisficing’ decisions are made Six steps to decision-making: Recognising need Alternatives generation Alternatives assessment Choosing from alternatives Implementing alternative Learning from feedback Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas

Summary (cont.) Decision-making can be impacted by cognitive biases such as prior hypothesis, representativeness, illusion of control and escalating commitment Group decision-making has advantages and disadvantages including groupthink and group cognitive bias Decision-making quality can be improved by devil’s advocate, dialectic inquiry and increasing group diversity Organisational learning is a process used to improve employees’ desire and ability to understand and manage the organisation’s task environment and thus improve effectiveness Managers need to promote organisation learning and creativity at individual and group levels for quality decision-making Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Contemporary Management by Waddell, Devine, Jones & George By John Dugas