Chapter 3


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  • While managers face problems constantly we find that they often ignore problems. They do this for several reasons, they avoid taking action. First, managers can’t be sure how much time, energy, or trouble lies ahead once they start working on a problem. Second, getting involved is risky; tackling a problem but failing to solve it successfully can hurt a manager’s track record. Third, because problems can be so perplexing, it is easier to procrastinate or to get busy with less demanding activities. The reason for this is due to the characteristics of the types of problems managers face. This slide lists the characteristics of a managerial decision.
  • Although some decisions managers face are routine and clear-cut, for most there is no automatic procedure to follow. Problems are novel and unstructured, leaving the decision maker uncertain about how to proceed. It is important for students to understand the difference between programmed and nonprogrammed decisions. Managers will primarily face nonprogrammed decisions. They have a variety of possible solutions, all of which have merits and drawbacks. The decision maker must create or impose a method for making the decision; there is no predetermined structure on which to rely.
  • Managers are expressing their preference for certainty when they are not satisfied hearing about what might have happened or may happen, and insist on hearing what did or will happen. But perfect certainty is rare. For important, nonprogrammed managerial decisions, uncertainty is the rule. Risk, like uncertainty, is a fact of life in managerial decision making. But this is not the same as taking a risk. Whereas it sometimes seems as though risk takers are admired, and that entrepreneurs and investors thrive on taking risks, the reality is that good decision makers prefer to manage risk. This means that while they accept the fact that consequential decisions entail risk, they do everything they can to anticipate the risk, minimize it, and control it.
  • Why don’t people automatically invoke such rational processes? It is easy to neglect or improperly execute these processes. The problem may be improperly defined, or goals misidentified. Not enough solutions may be generated, or they may be evaluated incompletely. A satisficing rather than maximizing choice may be made. Implementation may be poorly planned or executed, or monitoring may be inadequate or nonexistent. And decisions are influenced by subjective psychological biases, time pressures, and social realities.
  • Sometimes a manager finds it necessary to convene a group of people for the purpose of making an important decision. Some advise that in today’s complex business environment, significant problems should always be tackled by groups. Managers therefore must understand how groups operate and how to use them to improve decision making. You will learn much more about how groups work later in the book.
  • Leadership style - The leader of a decision-making body must attempt to minimize process-related problems. The leader should avoid dominating the discussion or allowing another individual to dominate. This means encouraging less vocal group members to air their opinions and suggestions and asking for dissenting viewpoints. At the same time, the leader should not allow the group to pressure people into conforming. The leader should be alert to the dangers of groupthink and satisficing. Also, she should be attuned to indications that group members are losing sight of the primary objective: to come up with the best possible solution to the problem. Constructive use of disagreement and conflict: Total and consistent agreement among group members can be destructive. It can lead to groupthink, uncreative solutions, and a waste of the knowledge and diverse viewpoints that individuals bring to the group. Therefore, a certain amount of constructive conflict should exist. Enhancement of creativity: Creativity is more than just an option; it is essential to survival. Allowing people to be creative may be one of the manager’s most important and challenging responsibilities. You are being creative if you (1) bring a new thing into being ( creation ); (2) join two previously unrelated things ( synthesis ); or (3) improve something or give it a new application ( modification ). How do you “get” creative? Recognize the almost infinite “little” opportunities to be creative. How do you “get” creativity out of other people? Give creative efforts the credit they are due, and don’t punish creative failures. Avoid extreme time pressure if possible.
  • Recognizing that a problem exists is only the beginning of this stage. The decision maker also must want to do something about it and must believe that the resources and abilities necessary for solving the problem exist.
  • Decision makers are far from objective in the way they gather, evaluate, and apply information toward making their choices. People have biases that interfere with objective rationality. The examples that follow represent only a few of the many documented subjective biases Professional gambling establishments count on people’s willingness to try to beat the odds. Their illusion of control is a major contributor to the high profits earned by most casinos.
  • In today’s rapidly changing business environment, the premium is on acting quickly and keeping pace. The most conscientiously made business decisions can become irrelevant and even disastrous if managers take too long to make them.
  • A good crisis management plan will incorporate the following: 1. Strategic actions such as integrating CM into strategic planning and official policies. 2. Technical and structural actions such as creating a CM team and dedicating a budget to CM. 3. Evaluation and diagnostic actions such as conducting audits of threats and liabilities, and establishing tracking systems for early warning signals. 4. Communication actions such as providing training for dealing with the media, local communities, and police and government officials. 5. Psychological and cultural actions such as showing a strong top management commitment to CM and providing training and psychological support services regarding the human and emotional impacts of crises.
  • Chapter 3

    1. 2. Managerial Decision Making 3 McGraw-Hill/Irwin Management, 7/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.
    2. 3. Learning Objectives <ul><li>After studying Chapter 3, you will know: </li></ul><ul><li>The kinds of decisions you will face as a manager </li></ul><ul><li>How to make rational decisions </li></ul><ul><li>The pitfalls you should avoid when making decisions </li></ul><ul><li>The pros and cons of using a group to make decisions </li></ul><ul><li>The procedures to use in leading a decision-making group </li></ul><ul><li>How to encourage creative decisions </li></ul><ul><li>The processes by which decisions are made in organizations </li></ul><ul><li>How to make decisions in a crisis </li></ul>
    3. 4. Characteristics of Managerial Decisions
    4. 5. Lack of Structure <ul><li>Programmed Decisions </li></ul><ul><ul><li>Decisions encountered and made before, having objectively correct answers, and solvable by using simple rules, policies, or numerical computations </li></ul></ul><ul><li>Non-programmed Decisions </li></ul><ul><ul><li>New, novel, complex decisions having no proven answers </li></ul></ul>
    5. 6. Comparison of Decision Types
    6. 7. Uncertainty and Risk <ul><li>We operate in an environment— the Internet—where there’s an enormous amount of uncertainty. You can’t be sure what’s going to happen tomorrow, never mind next year. The danger is that the uncertainty can lead to paralysis. You spend so much time trying to nail down all the possibilities and risks, you never get around to taking action. And if that happens—if you become indecisive—you’re dead. </li></ul><ul><li>George Conrades </li></ul><ul><li>Chairman and CEO Akamai Technologies </li></ul>
    7. 8. Uncertainty and Risk <ul><li>Certainty is the state that exists when decision makers have accurate and comprehensive information </li></ul><ul><li>Uncertainty is the state that exists when decision makers have insufficient information </li></ul><ul><li>Risk is the state that exists when the probability of success is less than 100%, and losses may occur </li></ul>
    8. 9. Conflict <ul><li>Conflict exists when the manager must consider opposing pressures from different sources; occurs at two levels </li></ul><ul><ul><li>Psychological conflict occurs when several options are attractive, or when non of the options is attractive </li></ul></ul><ul><ul><li>Interpersonal conflict </li></ul></ul>
    9. 10. Stages of Decision Making <ul><li>Ideal decision making process will have six stages </li></ul><ul><ul><li>Identify and diagnose the problem </li></ul></ul><ul><ul><li>Generate alternative solutions </li></ul></ul><ul><ul><li>Evaluate alternatives </li></ul></ul><ul><ul><li>Make the choice </li></ul></ul><ul><ul><li>Implement the decision </li></ul></ul><ul><ul><li>Evaluate the decision </li></ul></ul>
    10. 11. Stages of Decision Making
    11. 12. The Best Decision <ul><li>To make the best decision managers must use vigilance </li></ul><ul><ul><li>Vigilance is a process in which a decision maker carefully executes all stages of the decision making process </li></ul></ul><ul><li>Research shows that when managers use a rational decision making process they tend to make better decisions </li></ul>
    12. 13. Barriers to Effective Decision Making <ul><li>Psychological Biases </li></ul><ul><li>Time Pressures </li></ul><ul><li>Social Realities </li></ul>
    13. 14. Decision Making in Groups <ul><li>The basic philosophy for group decision making is that ‘two heads are better than one’ </li></ul><ul><li>Group performance is a function of two variables </li></ul><ul><ul><li>How effectively the group capitalizes on potential advantages </li></ul></ul><ul><ul><li>How effectively the group minimizes potential problems </li></ul></ul>
    14. 15. Decision Making in Groups <ul><li>Potential Advantages </li></ul><ul><ul><li>Larger pool of information </li></ul></ul><ul><ul><li>More perspectives and approaches </li></ul></ul><ul><ul><li>Intellectual stimulation </li></ul></ul><ul><ul><li>People understand the decision </li></ul></ul><ul><ul><li>People are committed to the decision </li></ul></ul><ul><li>Potential Disadvantages </li></ul><ul><ul><li>One Person dominates </li></ul></ul><ul><ul><li>Satisficing </li></ul></ul><ul><ul><li>Group thing </li></ul></ul><ul><ul><li>Goal displacement </li></ul></ul>
    15. 16. Managing Group Decision Making <ul><li>There are three factors for effectively managing group decision making </li></ul><ul><ul><li>Appropriate leadership style </li></ul></ul><ul><ul><li>Constructive use of disagreement and conflict </li></ul></ul><ul><ul><li>The enhancement of creativity </li></ul></ul>
    16. 17. Managing Group Decision Making
    17. 18. Brainstorming <ul><li>Brainstorming is a commonly used technique used to encourage creativity </li></ul><ul><li>It 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 </li></ul>
    18. 19. Organizational Decision Making <ul><li>Managers and groups make decisions within organizations </li></ul><ul><li>Three additional concepts and process a manager must consider when making a decision include </li></ul><ul><ul><li>Constraints on decision makers </li></ul></ul><ul><ul><li>Organizational decision processes </li></ul></ul><ul><ul><li>Decision making during a crisis </li></ul></ul>
    19. 20. Constraints on Decision Makers <ul><li>Managers face various constraints that include: </li></ul><ul><ul><li>Capital or product markets may make an expensive new venture impossible </li></ul></ul><ul><ul><li>Legal restrictions may restrain the kinds of international business activities in which a firm can participate </li></ul></ul><ul><ul><li>Labor unions may defeat a contract proposal </li></ul></ul>
    20. 21. Organizational Decision Making Models <ul><li>Historically organizational decision making was viewed as a rational process </li></ul><ul><li>Simon challenged this view by proposing an alternative to the rational decision making process called bounded rationality </li></ul><ul><li>Other decision making processes include </li></ul><ul><ul><li>Incremental model </li></ul></ul><ul><ul><li>Coalition model </li></ul></ul><ul><ul><li>Garbage can model </li></ul></ul>
    21. 22. Decision Making During Crisis <ul><li>During crisis managers must make decisions under a great deal of pressure </li></ul><ul><li>The organization should be prepared for crises in advance </li></ul><ul><li>Managers should take time to create an effective crisis management plan </li></ul><ul><li>During a crisis don’t pretend nothing happened rather communicate and reinforce the organization’s values </li></ul>
    22. 23. A Crisis – You Decide
    23. 24. How not to Handle a Crisis
    24. 25. Questions for Crisis Planning <ul><li>What kinds of crises could your company face? </li></ul><ul><li>Can your company detect a crisis in its early stages? </li></ul><ul><li>How will it manage a crisis if one occurs? </li></ul><ul><li>How can it benefit from a crisis after it has passed? </li></ul>
    25. 26. Looking Ahead <ul><li>Chapter 4: Planning and Strategic Management </li></ul><ul><ul><li>How to proceed through the basic steps in any planning process </li></ul></ul><ul><ul><li>How strategic planning integrates with tactical and operational planning </li></ul></ul><ul><ul><li>Why I is important to analyze both the external environment and the internal resources of the firm before formulation a strategy </li></ul></ul><ul><ul><li>The choices available for corporate strategy </li></ul></ul><ul><ul><li>How companies can achieve competitive advantage through business strategy </li></ul></ul><ul><ul><li>How core competencies provide the foundation for business strategy </li></ul></ul><ul><ul><li>The keys to effective strategy implementation </li></ul></ul>
    26. 27. Identifying and diagnosing the Problem <ul><li>There is normally a realization that the current state and the desired state are different </li></ul><ul><ul><li>This can be detected by comparing current performance against: past performance; current performance of other organizations; and future expected performance as determined by plans and forecasts </li></ul></ul><ul><li>After identifying a problem the decision maker must attempt to diagnose the true cause of the problem </li></ul>Return
    27. 28. Generate Alternative Solutions <ul><li>Solutions will range from ready made to custom made </li></ul><ul><ul><li>Ready made solutions are ideas that have been seen or tried before </li></ul></ul><ul><ul><li>Custom made solutions are new, creative solutions designed specifically for the problem </li></ul></ul><ul><li>Managers will generate some of the alternative solutions based upon past experience </li></ul>Return
    28. 29. Evaluate Alternatives <ul><li>Each alternative is evaluated based upon the value or adequacy that it generates </li></ul><ul><li>Managers should consider several types of consequences that each alternative will generate </li></ul><ul><li>Managers should also refer to the original goals defined in the first stage of the decision making process </li></ul><ul><li>Contingency plans should also be developed </li></ul>Return
    29. 30. Make the choice <ul><li>When making the decision the following concepts should be considered </li></ul><ul><ul><li>Maximizing a decision will realize the best possible outcome </li></ul></ul><ul><ul><li>Satisficing means that an option was chosen because it was acceptable although it is not necessarily the best option </li></ul></ul><ul><ul><li>Optimizing the decision means that the organization is achieving the best possible balance among several goals </li></ul></ul>Return
    30. 31. Psychological Biases <ul><li>Illusion of control is a belief that once can influence events even when one has no control over what will happen </li></ul><ul><li>Framing effects refer to how problems or decisions alternatives are phrased or presented, and how these subjective influences can override objective facts </li></ul><ul><li>Discounting the future is a bias weighting short term costs and benefits more heavily than longer-term costs and benefits </li></ul>Return
    31. 32. Time Pressures <ul><li>Tendencies of managers </li></ul><ul><ul><li>Skimp on analysis </li></ul></ul><ul><ul><li>Suppress conflict </li></ul></ul><ul><ul><li>Make decisions without consulting others </li></ul></ul><ul><li>How do you overcome time pressures? </li></ul><ul><ul><li>Rely on real time information </li></ul></ul><ul><ul><li>Involve others </li></ul></ul><ul><ul><li>Take a realistic view of conflict </li></ul></ul>Return
    32. 33. Social Realities <ul><li>Interpersonal factors decrease decision-making effectiveness </li></ul><ul><li>Important decisions are marked by conflict among interested parties </li></ul><ul><li>Decisions are the result of intensive social interactions, bargaining, and politicking </li></ul>Return
    33. 34. Constructive use of disagreement and conflict <ul><li>Cognitive conflict is issue-based differences in perspectives or judgments </li></ul><ul><li>Affective conflict is emotional disagreement directed toward other people </li></ul><ul><li>Devil’s advocate is a person who has the job of criticizing ideas to ensure that their downsides are fully explored </li></ul><ul><li>Dialectic is a structured debate comparing two conflicting courses of action </li></ul>Return
    34. 35. Bounded Rationality <ul><li>Bounded rationality states that decision makers cannot truly be objective because: </li></ul><ul><ul><li>They have imperfect, incomplete information </li></ul></ul><ul><ul><li>The problems they face are so complex </li></ul></ul><ul><ul><li>Human beings cannot process all the information to which they are exposed </li></ul></ul><ul><ul><li>There is not enough time to process all the relevant information </li></ul></ul><ul><ul><li>People within organizations have conflicting goals </li></ul></ul>Return
    35. 36. Organizational Decision Making <ul><li>Incremental Model occurs when decision makers make small decisions, take little steps, move cautiously, and move in piecemeal fashion toward a bigger solution </li></ul><ul><li>Coalition model of organizational decision making in which groups with differing preferences use power and negotiations to influence decisions </li></ul><ul><li>Garbage can model of organizational decision making depicting a chaotic process and seemingly random decisions </li></ul>Return
    36. 37. Crisis Management Plan <ul><li>Strategic actions </li></ul><ul><li>Technical and structural actions </li></ul><ul><li>Evaluation and diagnostic actions </li></ul><ul><li>Communication actions </li></ul><ul><li>Psychological and cultural actions </li></ul>Return