Chapter 3 Decision Making Power Point Presentation by

Decisions • Decision defined Ø A choice among competing alternatives and the implementation of the chosen alternative; all decisions have a time horizon or scope. • Strategic decisions Ø Have a long-term perspective; they are related to an organization’s overall strategy. • Tactical decisions Ø Have a shorter time scope; entail choices that must be made in the near term. Ø Must be consistent with the organization’s strategy. Copyright © 2005 South-Western. All rights reserved. 2

Conditions Affecting Decisions • Certainty Ø The decision maker has complete information of the probabilities of the outcomes of each alternative. • Uncertainty Ø The decision maker has absolutely no knowledge of the probabilities of the outcomes of each alternative. • Risk Ø The decision maker has some probabilistic estimate of the outcomes of each alternative. Copyright © 2005 South-Western. All rights reserved. 3

The Decision Making Process • Decision making process defined Ø A series of related steps or stages (a choice among alternative courses of action) leading to an action, an outcome, and assessment. • Managerial decision making Ø From managerial perspective, a decision is an action that someone takes and is subsequently accountable for. Ø Managerial decision-making process v Is often fragmented and rapid, responding to interruptions and unexpected events. v Involves reason and emotion, risk and uncertainty, and imagination and knowledge. Copyright © 2005 South-Western. All rights reserved. 4

Types of Managerial Decisions • Programmed decision Ø If a particular situation occurs often, a solution is designed in the form of a routine procedure. • Non-programmed decision Ø Decisions are unstructured, novel, or unique one-time situations that require a choice among existing alternatives. Ø There is no established procedure for handling the problem. Copyright © 2005 South-Western. All rights reserved. 5

Types of Managerial Decisions (cont’d) • Proactive decision Ø A decision made in anticipation of an external change or other conditions. Ø Rational, proactive approach can prevent problems from developing. • Reactive decision Ø An after-the-fact decision made in response to external changes. Ø Suggests a lack of planning and strategy. Copyright © 2005 South-Western. All rights reserved. 6

Types of Managerial Decisions (cont’d) • Intuitive decisions Ø Involve the use of estimates, guesses, or hunches to decide among alternative courses of action. • Systematic decisions Ø Result from a logical, organized analytic process. Ø Systematic decision-making requires v. A clear set of objectives. v A relevant information base. v Rational and creative generation, implementation, and assessment of alternatives. Copyright © 2005 South-Western. All rights reserved. 7

Types of Managerial Decisions (cont’d) • Mintzberg’s strategic decision categories Ø Entrepreneurial decisions—inventive decisions that strategic managers make about the nature of the product and the future of the organization. Ø Adaptive decisions—reactive responses to environmental conditions. Ø Planning decisions—proactive as well as reactive decisions that develop specific reactions to reduce uncertainties related to growth, uniqueness, and efficiency. Copyright © 2005 South-Western. All rights reserved. 8

Decision Models • Rational decision model Ø A prescriptive model v Advises the decision maker how decisions should be made. v Bases a decision on a logical, factual analysis that leads the decision maker to an optimal decision. Ø Rational decision model assumes: v People attempt to make logical decisions. v The alternative chosen offers the greatest benefits. v There is little uncertainty and risk in the decision. v Decision makers rely on rules and procedures to reach a decision. Copyright © 2005 South-Western. All rights reserved. 9

Decision Models (cont’d) • Rational decision model (cont’d) Ø Most appropriate for: v Programmed decisions. v Situations where all the alternatives are known. v Unambiguous decisions. v Situations where information is readily available. v Individual decision making. Copyright © 2005 South-Western. All rights reserved. 10

Decision Models (cont’d) • Administrative decision model Ø A descriptive model v Makes more realistic assumptions about the decision context and human nature. v Describes how people actually make decisions, not how they should make them. Ø Administrative decision model assumes: v Limited information processing ability. v Non-programmed decisions. v Preferences of individuals or group. v Alternatives are unclear. v Greater participation through group decision making. Copyright © 2005 South-Western. All rights reserved. 11

Decision Models (cont’d) • Administrative decision model (cont’d) Ø Satisficing v To seek a satisfactory decision, one that’s good enough but not perfect. v The first alternative that proves to be a satisfactory alternative (solution) is the one chosen. Copyright © 2005 South-Western. All rights reserved. 12

Decision Models (cont’d) Movie Decision Model Matrix Exhibit 3. 1 Copyright © 2005 South-Western.

Decision Models (cont’d) • Political decision model Ø Political decisions are: v Non-programmed decisions ruled by political concerns rather than a logical analysis of the situation. v Not the best decision, but the alternative (decision) that will be accepted by the groups involved in the decision. v More political the more diverse are the participants in the decision-making process. Copyright © 2005 South-Western. All rights reserved. 14

Political Decision Model (cont’d) • Political decision model (cont’d) Ø Characteristics of political decisions: v Are non-programmed. v Contain ambiguous information. v Entail low consensus on goals among stakeholders. v Involve groups that can influence the decision process. Copyright © 2005 South-Western. All rights reserved. 15

Decision Models (cont’d) Decision-Making Models Rational Administrative Political Decision Type Programmed Non-programmed Decision Outcome Optimal Satisficed Negotiated Degree of Objectivity High Moderate to low Exhibit 3. 2 Copyright © 2005 South-Western. All rights reserved. 16

The Decision-Making Process • Step 1: Identify and define the problem Ø Problem: realization that a discrepancy exists between a desired state and current reality. Ø Problem identification factors: v Perceptual inaccuracies. v Defining problems in terms of solutions. v Identifying symptoms as problems. Copyright © 2005 South-Western. All rights reserved. 17

The Decision-Making Process (cont’d) • Step 2: Establish decision criteria Ø Determine significance of each problem according to: v Urgency: amount of time available to solve a problem. v Impact: seriousness of a problem’s effect. v Growth tendency: future consequences of a problem. • Step 3: Weight criteria Ø Weighting: process of ranking importance of decision criteria. Copyright © 2005 South-Western. All rights reserved. 18

The Decision-Making Process (cont’d) • Step 4: Develop alternatives Ø Examine organization’s internal and external environment for solutions to problem. • Step 5: Evaluate alternatives Ø Select alternatives that will produce most favorable outcomes and least unfavorable outcomes. • Step 6: Decide on a solution Ø Select a particular solution to achieve a predetermined objective. Copyright © 2005 South-Western. All rights reserved. 19

The Decision-Making Process (cont’d) • Step 7: Implement the decision Ø Implementation may be more important than the actual choice of alternative. • Step 8: Feedback and evaluation Ø System of control and evaluation necessary to make sure actual results are consistent with original objectives. Copyright © 2005 South-Western. All rights reserved. 20

The Decision-Making Process (cont’d) Steps in a Typical Decision. Making Process Exhibit 3. 3

Factors That Influence Decision Making Exhibit 3. 4 Copyright © 2005 South-Western. All rights

Factors That Influence Decisions (cont’d) • Individual values Ø Values influence decision-making process in following ways: v Establishing goals and objectives. v Developing alternatives. v Selecting a solution. v Implementing. v Following up. Copyright © 2005 South-Western. All rights reserved. 23

Factors That Influence Decisions (cont’d) • Personality Ø Personality variables v Introversion-extroversion, conscientiousness, altruism, ability to deal with new situations, and neuroticism. Ø Situational variables v Variables related to the decision context or the external (physical and social) situation. Ø Interaction variables v The combined, unique effect of personality and the situation. Copyright © 2005 South-Western. All rights reserved. 24

Factors That Influence Decisions (cont’d) • Risk tolerance Ø A low-risk tolerance decision maker will establish different objectives, evaluate alternatives differently, and select different alternatives from a decision maker who has high risk tolerance. Ø Framing: decision maker’s perception of decision’s possible outcomes in relation to gains or losses. Ø Individuals more likely to take risks when a choice is perceived as being between losses than when it is perceived as being between gains. Copyright © 2005 South-Western. All rights reserved. 25

Factors That Influence Decisions (cont’d) • Cognitive dissonance theory Ø A conflict exists among an individual’s various cognitions (attitudes, beliefs, and intentions) about the consequences of a particular decision after the decision has been made. Ø Anxiety increases when: v The decision is important psychologically or financially. v There a number of foregone alternatives. v The foregone alternatives have many favorable features. Copyright © 2005 South-Western. All rights reserved. 26

Factors That Influence Decisions (cont’d) • Reducing cognitive dissonance Ø Seek information that supports the wisdom of the decision. Ø Selectively perceive (distort) information in a way that supports the decision. Ø Adopt a less favorable view of the foregone alternatives. Ø Minimize importance of the negative aspects of the decision and exaggerate importance of the positive aspects. Copyright © 2005 South-Western. All rights reserved. 27

Factors That Influence Decisions (cont’d) • Decision-making styles Ø Analytical—seeks a rational decision and has a high tolerance for ambiguity. Ø Directive—seeks a rational decision and has a low tolerance for ambiguity. Ø Behavioral—seeks an intuitive decision and has a low tolerance for ambiguity. Ø Conceptual—seeks an intuitive decision and has a high tolerance for ambiguity. Copyright © 2005 South-Western. All rights reserved. 28

Factors That Influence Decisions (cont’d) Source: Based on A. J. Rowe, J. D. Boulgarides, and M. R. Mc. Grath, Managerial Decision Making, Modules in Management Series (Chicago: SRA, 1984); A. J. Rowe and J. D. Boulgarides, Managerial Decision Making ( Englewood Cliffs, N. J. : Prentice Hall, 1994); G. M. Marakas, Decision Support Systems in the Twenty-First Century, 2 nd ed. (Upper Saddle River, N. J. : Prentice Hall, 2002). Copyright © 2005 South-Western. All rights reserved. Exhibit 3. 5 29

Group Decision Making • Disadvantages of group decision making Ø Groupthink—the tendency of the group to be swayed collectively can negate the benefits of group decision making. Ø Empowerment—allowing more people in the organization access to the decision-making process may make for lower-quality decision. Ø Corporate governance—may dictate who can be part of the decision-making process. Ø Politics—may lead to decisions favoring the dominant political coalition in the organization. Copyright © 2005 South-Western. All rights reserved. 30

Group Decision Making (cont’d) • Advantages of group decision making Ø Establishing goals and objectives v Groups are superior because of their greater collective knowledge. Ø Developing alternatives v Groups can ensure a broad search in the various functional areas of the organization. Ø Evaluating alternatives v The collective judgment of the group benefits from its wider range of viewpoints. Copyright © 2005 South-Western. All rights reserved. 31

Group Decision Making (cont’d) • Advantages of group decision making (cont’d) Ø Making a decision v Group interaction and consensus results in the acceptance of more risk. Ø Decision implementation v Responsibility for effective implementation rests with individual manager, not with group that made decision. Copyright © 2005 South-Western. All rights reserved. 32

Group Decision Making (cont’d) • Creativity in group decision making Ø Brainstorming v Groups are expected to produce imaginative solutions to organizational problems. – No idea is too ridiculous. – Each idea presented belongs to the group. – No idea can be criticized. Ø Delphi technique v Involves achieving non-interactive consensus on a topic through sequential questionnaires that are summarized and used as feedback of opinions from earlier responses. Copyright © 2005 South-Western. All rights reserved. 33

Group Decision Making (cont’d) • Creativity in group decision making (cont’d) Ø The Nominal Group Technique (NGT) v. A process that brings about consensus through a prescriptive method of group interaction: – Individuals initially do not speak to one another. – Each person writes ideas on a pad of paper. – A structured sharing (listing) of ideas takes place. – Each idea is discussed before a vote is taken. – Ideas are prioritized by ranking or voting. – The group decision is the mathematically pooled outcome of the individual votes. Copyright © 2005 South-Western. All rights reserved. 34