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Chapter3--ManagerialDecisionMaking.pptx

Chapter 3

Managerial Decision Making

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Learning Objectives

3-1 Describe the kinds of decisions you will face as a manager.

3-2 Summarize the steps in making “rational” decisions.

3-3 Recognize the pitfalls you should avoid when making decisions.

3-4 Evaluate the pros and cons of using a group to make decisions.

3-5 Identify procedures to use in leading a decision-making group.

3-6 Explain how to encourage creative decisions.

3-7 Discuss the processes by which decisions are made in organizations.

3-8 Describe how to make decisions in a crisis.

This is the last of three chapters in Part One of the text. The previous chapters discussed managing and performance, and the internal and external environments.

Exhibit 3.1 Characteristics of Managerial Decisions

It is important to understand why decision making can be so challenging. Exhibit 3.1 illustrates several characteristics of managerial decisions that contribute to their difficulty and pressure.

Lack of Structure

Programmed decisions:

Decisions encountered and made before, having objectively correct answers, and solvable by using simple rules, policies, or numerical computations.

Nonprogrammed decisions:

New, novel, complex decisions having no proven answers.

If you face a programmed decision, a clear procedure or structure exists for arriving at the right decision. With a nonprogrammed decision, the decision maker must create and use a method for making the decision; there is no predetermined structure on which to rely.

Exhibit 3.2 Comparing Programmed versus Nonprogrammed Decisions

Examples	Programmed Decisions	Nonprogrammed Decisions
Company	Policies to follow when posting an open position on job boards	Changing from proprietary server to cloud storage
University	Income formulas to determine amount of student financial aid	Create a design for a new engineering building
Health care	Procedure for discharging patients	Purchase of advance imaging equipment
Government	Merit system for promoting federal employees	Response to an unexpected state budget shortfall

This is an abbreviated version of Exhibit 3.2.

Uncertainty

Certainty:

The state that exists when decision makers have accurate and comprehensive information.

Uncertainty:

The state that exists when decision makers have insufficient information.

People usually prefer certainty even if their “certainty” is mistaken or misleading. Businesspeople do not like uncertainty; it can prevent them from taking action.

Risk

Risk:

The state that exists when the probability of success is less than 100 percent and losses may occur.

While some risk takers are admired and entrepreneurs and investors thrive on taking risks, the reality is that good decision makers prefer to manage risk.

Conflict

Conflict:

Opposing pressures from different sources, occurring on the level of psychological conflict or of conflict between individuals or groups.

Levels of Conflict:

Individual decision makers.

Conflict between people.

Important decisions are even more difficult because of the conflicts managers face. Conflict, which exists when a manager must consider opposing pressures from different sources, occurs at two levels.

First, individual decision makers experience psychological conflict when several options are attractive or when none of the options is attractive.

Second, conflict arises between people.

Take Charge of Your Career Strategically Manage Your Job Search

Strategic planning can be applied to the decision involved in managing your career plan.

Focus on YOUR values, interests, and career goals.

Create a plan to organize around your vision.

Use tools to assist in information organization and planning.

Recall networking is vitally important.

Finally, stay positive.

Exhibit 3.3 The Phases of Decision Making

Access the text alternative for slide images.

Faced with these challenges, how can you make good decisions? The ideal decision-making process includes six phases.

Identifying and Diagnosing the Problem

First Phase:

Recognize there is a gap between the current and desired state.

Is there an opportunity that can be exploited?

Diagnose the reason for the performance gap.

The first phase in the decision-making process is to recognize that a problem exists and must be solved. The problem may be an opportunity that needs to be exploited: a gap between what the organization is doing now and what it should do to create a more positive future. Recognizing that a problem or opportunity exists is only the beginning of this phase. The decision maker must dig in deeper and attempt to diagnose the problem.

Exhibit 3.4 lists some useful questions (listed below) to ask and answer in this phase.

How can you best describe the difference between what is actually happening and what should be happening?

What is/are the cause(s) of the deviation?

What short- and long-term goals need to be met?

Which goals are absolutely critical to the success of the decision?

Generating Alternative Solutions

Second Phase:

Ready-made solutions:

Ideas that have been seen or tried before.

Custom-made solutions:

New, creative solutions designed specifically for the problem.

The second phase of decision making links problem diagnosis to the development of alternative courses of action aimed at solving the problem. Managers generate at least some alternative solutions based on past experiences.

Solutions range from ready-made to custom-made. Decision makers who search for ready-made solutions use ideas they have tried before or follow the advice of others who have faced similar problems. Custom-made solutions, by contrast, must be designed for specific problems. This technique often combines ideas into new, creative solutions.

Evaluating Alternatives

Third Phase

Evaluating alternatives:

Which solution will be the best?

What consequences will occur?

How will you measure success?

Contingency plans

Alternative courses of action that can be implemented based on how the future unfolds.

The third phase of decision making involves determining the value or adequacy of the alternatives that were generated. Which solution will be the best?

Exhibit 3.5 lists some useful questions (listed below) to ask and answer in this phase

Which goals does each alternative meet and fail to meet?

Which alternatives are most acceptable to you and to other important stakeholders?

If several alternatives might solve the problem, which can be implemented at the lowest cost or greatest profit?

If no alternative achieves all your goals, can two or more of the best ones be combined?

Is our information about alternatives complete and current? If not, can we get more and better information?

Of course, results cannot be forecast with perfect accuracy. But sometimes decision makers can build in safeguards by considering the potential consequences of several scenarios. Then they generate contingency plans-alternative courses of action that can be implemented depending on how the future unfolds.

Making the Choice

Maximizing:

A decision realizing the best possible outcome.

Satisficing:

Choosing an option that is acceptable, although not necessarily the best or perfect.

Optimizing:

Achieving the best possible balance among several goals.

As you make your decision, important concepts include maximizing, satisficing, and optimizing.

The maximizing decision realizes the greatest positive consequences and the fewest negative consequences.

When you satisfice, you compare your choice against your goal, not against other options.

When optimizing, instead of buying the cheapest piece of equipment that works, you buy the one with the best combination of attributes.

Implementing the Decision

Adequate planning requires several steps:

Determine how things will look when the decision is fully operational.

Chronologically order, perhaps with a flow diagram, the steps necessary to achieve a fully operational decision.

List the resources and activities required to implement each step.

Estimate the time needed for each step.

Assign responsibility for each step to specific individuals.

Exhibit 3.6 lists several useful questions that should be asked in the implementation stage of decision making.

What problems could this action cause?

What can we do to prevent the problems?

What unintended benefits or opportunities could arise?

How can we make sure they happen?

How can we be ready to act when the opportunities come?

Evaluating the Decision

Positive feedback:

Suggests the decision is working.

Implies that the decision should be continued and applied elsewhere.

Negative feedback:

Implementation will require more time, resources, effort, or thought.

Solution wasn’t good enough.

Evaluating the decision begins with collecting information on how well the decision is working.

If the decision appears inadequate, it’s time to adjust. The process cycles back to the first phase: (re)defining the problem. The decision-making process begins anew, preferably with more information, new suggestions, and an approach that attempts to eliminate the mistakes made the first time around.

The Best Decision

Two types of decision-making processes:

Reflexive: done quickly and without careful thought.

Reflective: analytic, slow and deliberate.

Vigilance:

A process in which a decision maker carefully executes all stages of decision making.

People use two types of decision-making processes, what Nobel laureate Daniel Kahneman calls System 1 and System 2 information processing.

Vigilance occurs when the decision makers carefully and conscientiously execute the phases of the decision-making process. Even if managers reflect on their decision-making activities and conclude that they executed each step conscientiously, they still will not know whether the decision will work; after all, nothing guarantees a good outcome.

Barriers to Effective Decision Making 1

Psychological Biases:

Motivated reasoning: seeing what one wants to see, and making decisions based more on desire than evidence.

Confirmation bias: accepting incoming information that fits what one already believes and rejecting what doesn’t confirm what one thinks.

Illusion of control: belief that one can influence events even when one has no control over what will happen.

Framing effects: how problems or decision alternatives are phrased or presented and how these subjective influences can override objective facts.

Discounting the future: a bias weighing short-term costs and benefits more heavily than longer-term costs and benefits.

These biases affect personal decisions, team decision, decisions in business and other sectors, and even foreign policy.

Think of how many people have strong and entrenched attitudes, and how often you have (not) seen people persuade others to change their minds about something they care about.

Barriers to Effective Decision Making 2

Time Pressures:

The most conscientiously-made business decisions can become irrelevant and even disastrous if managers take too long to make them.

Social Realities:

Many decisions are the result of intensive social interactions, bargaining, and politicking.

SPOTLIGHT ON . . . Predictive Analytics: Helping Businesses Make Decisions

Large volumes of potentially relevant data may complicate the decision-making process.

Predictive analytics:

Uses A I.

Managers can make decisions about today and tomorrow.

1. What do you think of universities using predictive analytics to help recruit, retain, and teach students.

2. In what industries have you seen creative uses of predictive analytics being most useful? What pros and cons do you see?

Student responses will vary.

Exhibit 3.7 Pros and Cons of Using Groups to Make Decisions

Potential Advantages	Potential Disadvantages
Larger pool of information	One person dominates
More perspectives and approaches	Satisficing
Intellectual stimulation	Groupthink
People understand the decision	Goal displacement
People are committed to the decision	Social loafing

Sometimes managers convene groups of people in order to make important decisions. Some advise that in today’s complex business environment, significant problems should always be tackled by groups.

If enough time is available, groups usually make higher-quality decisions than most individuals acting alone. However, groups often are inferior to the best individual. How well the group performs depends on how effectively it capitalizes on the potential advantages and minimizes the potential problems of using a group.

Decision Making in Groups

Groupthink:

Occurs when people choose not to disagree or raise objections because they don’t want to break up a positive team spirit.

Goal displacement:

A condition that occurs when a decision-making group loses sight of its original goal and a new, less important goal emerges.

Pressure to avoid disagreement can lead to groupthink. This occurs in when people choose not to disagree or raise objections. This can stifle creativity and vigilant decision making. Goal displacement often occurs in groups. The goal of group members should be to come up with the best possible solution to the problem. But when goal displacement occurs, new goals emerge to replace the original ones. It is common for two or more group members to have different opinions and present their conflicting cases. Attempts at rational persuasion become heated disagreement. Winning the argument becomes the new goal. Saving face and defeating the other person’s idea become more important than solving the problem.

Exhibit 3.8 Managing Group Decision Making

Access the text alternative for slide images.

s Exhibit 3.8 illustrates, effectively managing group decision making has three requirements: (1) an appropriate leadership style, (2) the constructive use of disagreement and conflict, and (3) the enhancement of creativity.

Leadership Style

Leader must:

Attempt to minimize process-related problems.

Avoid dominating discussions or allowing others to.

Encourage less vocal group members to speak up.

Not allow group to pressure people into conforming.

These suggestions have two implications. First, don’t lose sight of the problem and goals. Second, make a decision!

Slow-moving organizations whose members can’t come to an agreement will be standing still while their competitors move ahead.

Constructive Disagreement

Cognitive conflict:

Issue-based differences in perspectives or judgments.

Affective conflict:

Emotional disagreement directed toward other people.

Devil’s advocate:

A person who has the job of criticizing ideas to ensure that their downsides are fully explored.

Dialectic:

A structured debate comparing two conflicting courses of action.

Affective conflict is more destructive because it can lead to anger, bitterness, goal displacement, and lower-quality decisions. Cognitive conflict, in contrast, can air legitimate differences of opinion and develop better ideas and problem solutions. Conflict, then, should be task-related rather than personal. But even task-related conflict is good only when managed properly.

A devil’s advocate has the job of criticizing ideas. The group leader can formally assign people to play this role. An alternative to devil’s advocacy is the dialectic. The philosophy of the dialectic stems from Plato and Aristotle, who advocated synthesizing the conflicting views of a thesis and an antithesis.

Encouraging Creativity

How do you become more creative?

Read widely and try new experiences.

Exchange ideas and give feedback.

How do you encourage creativity in others?

Give creative efforts credit.

Don’t punish creative failures.

Avoid extreme time pressure.

Stimulate and challenge people intellectually.

Exhibit 3.9 Creative Actions

Access the text alternative for slide images.

Exhibit 3.9 describes three ways to be creative along with some ideas of college student entrepreneurs who turned their creativity into businesses.

Creation: Bring a new thing into being

Synthesis: Join two previously unrelated things

Modification: Improve something or give it a new application

Brainstorming

Brainstorming is a process in which group members generate as many ideas about a problem as they can; criticism is withheld until all ideas have been proposed.

A common technique used to elicit creative ideas is brainstorming. In brainstorming, group members generate as many ideas about a problem as they can. Ideas are posted publicly so everyone can see them and use them as building blocks. The group is encouraged to say anything that comes to mind, with one exception: no criticism of other people or their ideas is allowed.

In the proper brainstorming environment—free of criticism—people are less inhibited and more likely to voice their ideas, even wild ones. Only after the group generates a good list of alternatives. Only then does the group turn to the evaluation stage. At that point, many ideas can be considered, modified, or combined into a creative, custom-made solution to the problem.

Exhibit 3.10 Improving Brainstorming Effectiveness

EXHIBIT 3.10 Improving Brainstorming Effectiveness

Choose participants based on their expertise and knowledge of the challenge.

Use well-thought-out questions as a platform to spark new ideas.

Break up large groups into subgroups of 3 to 5 people.

Ask subgroups to think deeply to generate 2 to 3 solutions for each key question explored.

Do not have the full group evaluate the winning ideas, but rather ask subgroups to identify their top 2 or 3 ideas. Describe next steps (for example, top management team will evaluate ideas).

Act quickly on key ideas and provide feedback to all participants.

Organizational Decision Processes 1

Bounded rationality:

A less-than-perfect form of rationality in which decision makers cannot be perfectly rational because decisions are complex and complete information is unavailable or cannot be fully processed.

Incremental model:

Model of organizational decision making in which major solutions arise through a series of smaller decisions.

Herbert Simon challenged the rational model and proposed an important alternative. Due to bounded rationality, decision makers cannot be truly rational because (1) they have imperfect, incomplete information about alternatives and consequences; (2) the problems they face are so complex; (3) human beings simply cannot process all the information to which they are exposed; (4) there is not enough time to process all relevant information fully; and (5) people, including managers within the same firm, have conflicting goals.

When these conditions hold—and they do for most consequential managerial decisions—perfect rationality will give way to more biased, subjective, messier decision processes. For example, the incremental model of decision making occurs when decision makers make small decisions, take baby steps, move cautiously toward a bigger solution.

Organizational Decision Processes 2

Coalition model:

Model of decision making in which groups with differing preferences use power and negotiation to influence decisions.

Garbage can model:

Model of organizational decision making depicting a chaotic process and seemingly random decisions.

The coalitional model of decision making arises when people disagree on goals or compete with one another for resources. The decision process becomes political as groups of individuals band together and try collectively to influence the decision. Two or more coalitions form, each representing a different preference, and each tries to use power and negotiations to sway the decision.

The garbage can model of decision making occurs when people aren’t sure of their goals, or disagree about the goals, and likewise are unsure of or in disagreement about what to do. This situation occurs because some problems are so complex that they are not well understood and because decision makers move in and out of the decision process because they have so many other things to attend to as well. This model implies that some decisions are chaotic and almost random. You can see that this is a dramatic departure from rationality in decision making.

Decision Making in a Crisis

What kinds of crises could your company face?

Can your company detect a crisis in its early stages?

How will it manage a crisis if one occurs?

What team inside the company would lead the response effort?

What can it learn from a crisis to improve its response next time?

Superstorm Sandy hit the East Coast with fierce devastation. Managers had to make critical decisions to keep people safe.

ORLANDO BARRIA/EPA-EFE/Shutterstock

Crisis management includes identifying causes of serious disruption, preventing or preparing for potential damage, and bringing a damaged organization (or team, person, or society) back to normal functioning.

Information technology is a crucial arena highly vulnerable to crises. Businesses, homes, government agencies, hospitals, and other organizations continually send critical information through public and private networks. Any technical failure – sometimes accidental, sometimes maliciously intentional – could be magnified by the speed and reach of information technology.

Exhibit 3.11 Elements in an Effective Crisis Plan

Strategic actions such as integrating crisis management (CM) into strategic planning and official policies

Evaluation and diagnostic actions such as conducting audits of threats and establishing tracking systems for early warning signals

Technical and structural actions such as creating a CM team and dedicating a budget to CM

Communication actions such as providing training for dealing with the media, local communities, and police and government officials

Psychological and cultural actions such as providing training and psychological support services regarding the human and emotional impacts of crises

SOURCES: Meyers, G. with Holusha, J., When It Hits the Fan: Managing the Nine Crises of Business. Boston: Houghton Mifflin, 19 86; Bacharach, S. and Bamberger, P., “9/11 and New York City Firefighters’ Post Hoc Unit Support and Control Climates: A Context Theory of the Consequences of Involvement in Traumatic Work-Related Events,” Academy of Management Journal 50 (2007), pp. 849–68.

Management in Action: Making Decisions During the Covid-19 Pandemic?

One airline expanded its operations.

Southwest expanded in the major hubs of Houston and Chicago.

Some retailers reduced the number of products.

Coach cut the number of handbag styles in half.

Bed, Bath and Beyond and Kohl’s reduced the number of houseware products.

Some organizations had to rethink their business models.

Bow and Arrow switched from in store sales to shipping cans of its beer.

In Review

Describe the kinds of decisions you will face as a manager.

Summarize the steps in making “rational” decisions.

Recognize the pitfalls you should avoid when making decisions.

Evaluate the pros and cons of using a group to make decisions.

Identify procedures to use in leading a decision-making group.

Explain how to encourage creative decisions.

Discuss the processes by which decisions are made in organizations.

Describe how to make decisions in a crisis.

This slide may be used to summarize the chapter and to solicit questions.

The next chapter starts part two of the text, “Planning and Strategic Management.”

End of Main Content

Because learning changes everything.®

www.mheducation.com

Accessibility Content: Text Alternatives for Images

Exhibit 3.3 The Phases of Decision Making – Text Alternative

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Phase one: identify and diagnose the problem.

Phase two: generate alternative solutions.

Phase three: evaluate alternatives.

Phase four: make the choice.

Phase five: implement the decision.

Phase six: evaluate the decision.

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Exhibit 3.8 Managing Group Decision Making – Text Alternative

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Leadership, creativity, and constructive conflict all feed into effective group decision making.

Leadership: avoid domination, encourage input, avoid groupthink and satisficing, remember the goals.

Creativity: brainstorm, avoid criticizing, exhaust ideas, combine ideas.

Constructive conflict: discuss legitimate differences, stay on task, be impersonal, play devil’s advocate.

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Exhibit 3.9 Creative Actions – Text Alternative

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Creation: How? Bring a new thing into being. Example: Develop a new energy drink from a family recipe.

Synthesis: How? Join two previously unrelated things. Example: Personalize multimedia online assignments to teach Mandarin to college students.

Modification: How? Improve something or give it a new application. Example: Refurbish cell phones and sell them on eBay.

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