1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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

34. 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

35. 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

36. 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

37. 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

38. 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

39. 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

40. 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

41. 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