Decision Making Decision A choice from two or more alternatives. The Decision-Making Process A set of eight steps that include identifying a problem, selecting an alternative, and evaluating the decision’s effectiveness. Page 77 Slide 2

The Decision-Making Process The eight steps in the decision-making process Identifying a problem Identifying decision criteria Allocating weights to the criteria Developing alternatives Analyzing alternatives Selecting an alternative Implementing the alternative Evaluating decision effectiveness Slide 3

The Decision-Making Process Exhibit 6.1

Step 1: Identifying a Problem Finding a discrepancy (difference) between an existing (current) and a desired state of affairs (things are not going as they should). Three Characteristics (aspects) of Problems. A problem is identified when: A manager becomes aware (conscious) of it. There is pressure to act and solve the problem. The resources needed to take action are available (means, authority, information). Note: It is important not to confuse a problem with the symptoms (visible indications) of the problems. Slide 5

Step 2: Identifying Decision Criteria Managers must determine and list the relevant (important, significant) criteria (factors, items) to include in making a choice — or one criterion that will guide (direct) a decision — aimed at resolving the problem identified in step 1. Costs that will be incurred (investment required) Risks likely to be encountered (chance of failure) Outcomes that are desired (growth of the firm) Page 79 Slide 6

Step 3: Allocating Weights to the Criteria Prioritizing the criteria that were identified in step 2 by assigning (giving) a “weight” to each. Decision criteria are not of equal importance Assigning a weight to each item (criterion) places the items in the correct priority (order of importance) in the decision making process. E.g. Giving the most important criterion a weight of 10 and then assign weights to the rest against that standard: A weight of 10 would be twice as important as a weight of 5. Slide 7

Step 4: Developing Alternatives Listing viable (workable) alternatives (other possible actions) that could resolve the problem. Alternatives are only listed without evaluation. Page 80 Slide 8

Step 5: Analyzing Alternatives Appraising (evaluating, analyzing) each alternative’s strengths and weaknesses against the criteria established in steps 2 and 3. Alternatives are analyzed for their effectiveness in resolving the issue. Slide 9

Step 6: Selecting an Alternative Choosing the best alternative from among those considered. Once the criteria in the decision have been weighted, and viable alternatives analyzed, the alternative with the highest total in step 5 is chosen. Page 81 Slide 10

Step 7: Implementing the Decision Putting the chosen alternative into action. Conveying (communicating) the decision to those who will implement it and gaining (getting) their commitment (cooperation) to the decision. Slide 11

Step 8: Evaluating the Decision Effectiveness Evaluating (measuring) the outcome (result) of the decision to see if the problem has been resolved. The soundness (quality, goodness) of the decision is judged by its outcomes. How effectively was the problem solved resulting from the chosen alternatives? If the problem was not solved, what went wrong? Slide 12

Making Decisions Assumptions (accepted truths) of Rationality Rational decision making describes choices that are consistent (logical) and value-maximizing (for the best advantage) within specified constraints (defined limits). Assumptions (accepted truths) of Rationality Perfectly rational decision makers would… be fully objective (neutral, fair-minded), and logical. carefully define a problem. have a clear and specific goal. Identify all viable alternatives. select the alternative that maximizes goal achievement. maximize the organization’s interests, not their own interests. Page 82 Slide 13

Assumptions of Rationality Exhibit 6.6

Influences on Decision Making Certain assumptions of rationality in the decision-making process are not always realistic (practical) with respect to how managers actually make decisions. Bounded Rationality Managers tend to make decisions rationally, but are often limited (bounded) by their ability to process information. Satisficing Because they cannot possibly analyze all information on all alternatives, managers accept solutions that are “good enough”. They satisfice rather than maximize. Page 83 Slide 15

Influences on Decision Making Decision making may be influenced by the organization’s culture, internal politics, power considerations and by… Escalation of Commitment An increasing or continued commitment to a previous decision despite evidence that the decision may have been wrong. They don’t want to admit that their decision was wrong Rather than search for new alternatives, they increase their commitment to the original solution. E.g. Facts in the Challenger space shuttle disaster on January 28, 1986 indicate an escalation of commitment by decision makers (managers) to launch the shuttle even though the decision was questioned by others. Page 84 Slide 16

Influences on Decision Making The Role of Intuition (instinctive knowing) Intuitive decision making Making decisions on the basis of experience, feelings, and accumulated judgment. Intuition or “gut feeling” and rational analysis complement each other. An experienced manager can act with limited information using his or her judgment to make a decision. Page 84 Slide 17

What is Intuition? Exhibit 6.7 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. Exhibit 6.7

Problems and Decisions Programmed Decision A repetitive decision that can be handled by a routine approach Structured Problems Involve goals that are clear. Are familiar (have occurred before). Are easily and completely defined—information about the problem is available and complete. . Page 85 Slide 19

Types of Programmed Decisions A Policy A general guideline for making a decision about a structured problem. A Procedure A series of interrelated steps that a manager can use to respond (applying a policy) to a 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. Slide 20

Policy, Procedure, and Rule Example Accept all customer-returned merchandise. Procedure Follow all steps for completing merchandise return documentation. Rules Managers must approve all refunds over $50.00. No credit purchases are refunded for cash.

Problems and Decisions (cont’d) Non-programmed Decisions Decisions that are unique and nonrecurring (are not repeated). Decisions that generate unique responses. Unstructured Problems Problems that are new or unusual and for which information is ambiguous or incomplete. Problems that will require custom-made solutions. Page 86 Slide 22

Types of Problems, Types of Decisions, and Level in the Organization Exhibit 6.8

Decision-Making Conditions Certainty When a manager can make an accurate decision because the outcome of every alternative is known. Risk When a manager can only estimate the different outcomes resulting from each alternative. Page 87 Slide 24

Decision-Making Conditions Uncertainty Limited or no information prevents estimation of outcomes resulting from alternatives and may force managers to use intuition, hunches, and “gut feelings”. Maxi-max: the optimistic manager’s choice to maximize the maximum payoff Maxi-min: the pessimistic manager’s choice to maximize the minimum payoff Mini-max: the manager’s choice to minimize his maximum regret. Page 88 Slide 25

Payoff Matrix Exhibit 6.10

Regret Matrix Exhibit 6.11

Making Decisions Decision-Making Styles Directive: Use minimal information and consider few alternatives. Analytic: Make careful decisions in unique situations. Conceptual: Maintain a broad outlook (wide perception) and consider many alternatives in making long-term decisions. Behavioral: Avoid conflict by working well with others and being receptive (accept) to suggestions. Decision-Making Biases (wrong attitudes) and Errors Using “rules of thumb” (fixed, easy guidelines) to simplify decision making. Holding unrealistically (too high) positive views of one’s self and one’s performance. Choosing alternatives that offer immediate rewards to avoid immediate costs. Slide 28

The Managerial Decision-Making Model Summing up Managerial Decision Making The decision making process is shaped (formed) in various degrees by four factors that play a role in how managers choose the “best” alternative, implement it, and determine whether or not it takes care of the problem: The decision-making approach being followed. The decision-making conditions. The type of problem being dealt with. The manager’s own style of decision making. Page 91 Slide 29

Overview of Managerial Decision Making Exhibit 6.14

Decision Making for Today’s World Guidelines for making effective decisions: Know when it is time to call it quits. Recognize when a decision is not working and it is time to move on. Practice the five “whys”. Learning to ask “why” not just once, but five times forces decision makers to examine more deeply the causes of the problem and possible solutions. Be an effective decision maker. >>> Page 92 Slide 31

Decision Making for Today’s World Characteristics of an Effective Decision-Making Process 1 - It focuses on what is important. 2 - It is logical and consistent. 3 - It acknowledges both subjective and objective thinking and blends (mixes) analytical with intuitive (instinctive) thinking. 4 - It requires only as much information and analysis as is necessary to resolve a particular dilemma. 5 - It encourages and guides the gathering of relevant information and informed opinion. 6 - It is straightforward (free from ambiguity), reliable, easy to use, and flexible. Slide 32

Decision Making for Today’s World Habits of highly reliable organizations (HROs) Are not tricked (led to mistakes) by their success. Defer to (let decide) the experts on the front line. Let unexpected circumstances provide the solution. Embrace (include, welcome) complexity. Anticipate, but also anticipate their limits. Slide 33

C H A P T E R R E V I E W 1/3 The Decision-Making Process (slides 2 & 5 to 12) Define decision and decision-making process. Describe the eight steps in the decision-making process.

C H A P T E R R E V I E W 2/3 The Manager as Decision Maker (slides 13, 15 to 20, 22, 24, 25, 29) Discuss the assumptions of rational decision making. Describe the concepts of bounded rationality, satisficing, and escalation of commitment. Explain what intuition is and how it affects decision making. Contrast programmed and non-programmed decisions. Contrast the three decision-making conditions. Explain maxi-max, maxi-min, and mini-max decision choice approaches. Explain the managerial decision-making model.

C H A P T E R R E V I E W 3/3 Decision Making for Today’s World (slides 29, 30, 31,33) Explain how managers can make effective decisions in today’s world. List six characteristics of an effective decision-making process. Describe the five habits of highly reliable organizations.