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  1. 1. Managerial Decision Making Chapter 6 Part 2 Planning Challenges in the 21st Century
  2. 2. <ul><li>Describe the nature of the decision-making process and explain each of its seven steps. </li></ul><ul><li>Describe the rational–economic model of decision making. </li></ul><ul><li>Discuss the behavioral decision model and its related concepts of bounded rationality, intuition, satisficing, and escalation of commitment. </li></ul><ul><li>Describe the participative approach to decision making. </li></ul><ul><li>Discuss the advantages and disadvantages of participative decision making. </li></ul>LEARNING OBJECTIVES When you have finished studying this chapter, you should be able to:
  3. 3. <ul><li>List the various techniques used to improve participative decision making. </li></ul><ul><li>Discuss the basic classifications for managerial decisions. </li></ul><ul><li>Describe the nature of strategic decision making as well as the strategic decision-making matrix approach for strategy selection. </li></ul><ul><li>Identify the differences between the growth-share matrix and the industry attractiveness/business strength matrix approaches for evaluating business portfolios. </li></ul>LEARNING OBJECTIVES (cont’d) When you have finished studying this chapter, you should be able to:
  4. 4. Sources of Organizational and Entrepreneurial Decisions <ul><li>Decision making </li></ul><ul><ul><li>The process through which managers and leaders identify and resolve problems and capitalize on opportunities. </li></ul></ul><ul><li>Problem </li></ul><ul><ul><li>A condition that occurs when some aspect of organizational performance is less than desirable. </li></ul></ul><ul><li>Opportunity </li></ul><ul><ul><li>Any situation that has the potential to provide additional beneficial outcomes. </li></ul></ul>
  5. 5. Figure 6.1 Seven Steps in the Decision-Making Process Identifying opportunities and diagnosing problems Identifying objectives Generating alternatives Evaluating alternatives Choosing implementation strategies Monitoring and evaluating Reaching decisions
  6. 6. Step 1: Identifying Opportunities and Diagnosing Problems <ul><li>The clear identification of opportunities or the diagnosis of problems that require a decision. </li></ul><ul><li>An assessment of opportunities and problems will only be as accurate as the information on which it is based. </li></ul>
  7. 7. Step 2: Identifying Objectives <ul><li>Objectives reflect the results the organization wants to attain. Also called targets, standards or ends. </li></ul><ul><ul><li>The quantity and quality of the desired results should be specified, for these aspects will ultimately guide the decision maker in selecting the appropriate course of action. </li></ul></ul><ul><ul><li>Objectives can be measured on a variety of dimensions (monetary units, output per hour, % of defects, etc.) and whether the objectives are long-term versus short-term. </li></ul></ul>
  8. 8. Step 3: Generating Alternatives <ul><li>Once an opportunity has been identified or a problem diagnosed correctly, a manager develops various ways to solve the problem and achieve objectives. </li></ul><ul><li>The alternatives can be standard and obvious as well as innovative and unique. </li></ul>
  9. 9. Step 4: Evaluating Alternatives <ul><li>Determining the value or adequacy of the alternatives generated. </li></ul><ul><li>Predetermined decision criteria may be used in the evaluation process. </li></ul><ul><ul><li>Quality desired </li></ul></ul><ul><ul><li>Anticipated costs </li></ul></ul><ul><ul><li>Benefits </li></ul></ul><ul><ul><li>Uncertainties </li></ul></ul><ul><ul><li>Risks </li></ul></ul>
  10. 10. Step 5: Reaching Decisions <ul><li>Decision making is commonly associated with making a final choice. </li></ul><ul><li>Although choosing an alternative would seem to be a straightforward proposition, in reality the choice is rarely clear-cut. </li></ul>
  11. 11. Step 6: Choosing Implementation Strategies <ul><li>The bridge between reaching a decision and evaluating the results. </li></ul><ul><li>The keys to effective implementation are: </li></ul><ul><ul><li>Sensitivity to those who will be affected by the decision. </li></ul></ul><ul><ul><li>Proper planning and consideration of the resources necessary to carry out the decision. </li></ul></ul>
  12. 12. Figure 6. 2 Keys to Effective Implementation of Decisions
  13. 13. Step 7: Monitoring and Evaluating <ul><li>No decision-making process is complete until the impact of the decision has been evaluated. </li></ul><ul><li>Managers must observe the impact of the decision as objectively as possible and take further corrective action if it becomes necessary. </li></ul>
  14. 14. Figure 6. 3 Two Contrasting Decision Models
  15. 15. Rational-Economic Model <ul><li>A prescriptive framework of how a decision should be made that assumes managers have completely accurate information. </li></ul><ul><li>Concentrates on how decisions should be made, not on how they actually are made </li></ul>
  16. 16. Assumptions of the Rational-Economic Model <ul><li>Managers have “perfect information.” </li></ul><ul><li>Managers attempt to accomplish objectives that are known and agreed upon and have an extensive list of alternatives to choose from. </li></ul><ul><li>Managers are rational, systematic, and logical in assessing alternatives and their associated probabilities. </li></ul><ul><li>Managers work in the best interests of their organizations. </li></ul><ul><li>Ethical decisions do not arise in the decision-making process. </li></ul>
  17. 17. Drawbacks of the Rational-Economic Model <ul><li>Leaders rarely have access to perfect information. </li></ul><ul><li>Decision makers are limited in their ability to comprehend and process vast amounts of information. </li></ul><ul><li>Decision makers may lack adequate knowledge about future consequences of alternatives. </li></ul><ul><li>Personal factors can prevent a decision maker from acting in a completely rational manner. </li></ul><ul><li>Individual culture and ethical values will influence the decision process. </li></ul>
  18. 18. Ethics and Decision Making <ul><li>Ethical Dilemma </li></ul><ul><ul><li>A situation in which a person must decide whether or not to do something that, although benefiting oneself or the organization, may be considered unethical and perhaps illegal. </li></ul></ul><ul><ul><ul><li>Have you accurately assessed the problem? </li></ul></ul></ul><ul><ul><ul><li>Do you have all the necessary information? </li></ul></ul></ul><ul><ul><ul><li>Where are your loyalties? </li></ul></ul></ul><ul><ul><ul><li>Have you generated a list of possible alternatives and considered how each will affect the other parties involved? </li></ul></ul></ul><ul><ul><ul><li>Have you tested each alternative by asking whether it is legal, fair, and just to all parties involved? </li></ul></ul></ul><ul><ul><ul><li>Would your decision change if you were to disclose it to your family, your boss, or society as a whole? </li></ul></ul></ul><ul><ul><ul><li>Does your decision have any symbolic potential? </li></ul></ul></ul><ul><ul><ul><li>Could it be misunderstood? </li></ul></ul></ul>
  19. 19. Behavioral Decision Model <ul><li>Acknowledges the human limitations that make rational decisions difficult to achieve. </li></ul><ul><ul><li>A manager’s cognitive ability to process information is limited. </li></ul></ul><ul><ul><li>Managers usually attempt to behave rationally within their limited perception of a situation. </li></ul></ul><ul><ul><li>The complexity of most organizational situations forces managers to view problems within sharply restricted bounds. </li></ul></ul><ul><ul><li>The behavior of managers can be considered rational, but only in terms of their simplified view of the problem. </li></ul></ul>
  20. 20. Concepts Important to the Behavioral Decision Model <ul><li>Bounded Rationality </li></ul><ul><ul><li>Recognizes that people are limited by organizational constraints such as time, information, resources, and their own mental capabilities. </li></ul></ul><ul><li>Intuition </li></ul><ul><ul><li>An unconscious analysis based on past experience. </li></ul></ul><ul><li>Satisficing </li></ul><ul><ul><li>The search and acceptance of something that is satisfactory rather than perfect or optimal. </li></ul></ul>
  21. 21. Concepts Important to the Decision Model (cont’d) <ul><li>Escalation of Commitment </li></ul><ul><ul><li>The tendency to increase commitment to a previously selected course of action beyond the level that would be expected if the manager followed an effective decision-making process. </li></ul></ul>
  22. 22. Fostering Quality in the Decision-Making Process <ul><li>Vigilance </li></ul><ul><ul><li>Being concerned for and attentive to the correct decision-making procedures can make a good decision more likely. </li></ul></ul>
  23. 23. Procedures for Vigilant Decision Makers <ul><li>Survey the full range of objectives to be fulfilled and identify the values and qualities implicated by the choices. </li></ul><ul><li>Thoroughly canvass a wide range of alternative courses of action. This is the idea-gathering process , which should be separate from idea evaluation . </li></ul><ul><li>Carefully weigh whatever is known about the costs and risks of both the negative and positive consequences that could flow from each alternative. </li></ul><ul><li>Intensively search for new high-quality information relevant to further evaluation of the alternatives. </li></ul>
  24. 24. Procedures for Vigilant Decision Makers (cont’d) <ul><li>Assimilate and take into account any new advice of information to which they are exposed even when the information or advice does not support the course of action initially preferred. </li></ul><ul><li>Reexamine all the possible consequences of all known alternatives before making a final choice, including those originally regarded as unacceptable. </li></ul><ul><li>Make detailed provisions for implementing or executing the chosen course of action. </li></ul><ul><li>Give special attention to contingency plans that might be required if various known risks materialize. </li></ul>
  25. 25. Group Considerations in Decision Making <ul><li>Group decision making is becoming more common as organizations focus on improving customer service and push decision making to lower levels. </li></ul>
  26. 26. Participative Models <ul><li>Vroom and Yetton Model </li></ul><ul><ul><li>Helps managers determine when group decision making is appropriate. </li></ul></ul><ul><ul><li>Postulates that there are five decision-making styles arranged along a continuum. </li></ul></ul><ul><ul><ul><li>The decision methods become progressively more participative as one moves from the highly autocratic style (AI) to the group style (GII), where the manager allows the group to decide. </li></ul></ul></ul>
  27. 27. Vroom and Yetton Decision Styles AII CI AI CII GII Lightly autocratic Highly democratic A = Autocratic C = Consultative G = Group The manager solves the decision problem alone using information available at the time. The manager solves the decision problem alone after obtaining necessary information from subordinates. The manager solves the decision problem after obtaining ideas and suggestions from subordinates individually. The decision may or may not reflect their council. The manager solves the decision problem after obtaining ideas and suggestions from subordinates as a group. The decision may or may not reflect their council. The group analyzes the problem, identifies and evaluates alternatives, and makes a decision. The manager acts as a coordinator of the group of subordinates and accepts and implements any solution that has the support of the group
  28. 28. Table 6. 1 Vroom–Yago Decision-Making Styles Source: Adapted from V. H. Vroom, “Leadership and the Decision-Making Process,” Organizational Dynamics (Spring 2000): 82–94. Decide style Leader makes the decision alone and announces or sells it to the group. Leader uses his/her own expertise and may collect information from the group to help solve the problem. Consult individually style Leader presents the problem to group members individually, gets their ideas and suggestions individually, and then makes the decision. Consult group style Leader presents the problem to group members in a meeting, gets their suggestions, and then makes the decision. Facilitate style Leader presents the problem to the group in a meeting and acts as a facilitator by defining the problem to be solved and the constraints within which the decision must be made. Leader seeks concurrence from group members on a decision. Delegate Style Leader permits the group to make the decision within prescribed limits. Group undertakes the identification and diagnosis of the problem and the development of alternative solutions and makes the decision on the selection of alternative(s).
  29. 29. Situational Contingencies Affecting Decision Making Participation <ul><li>Decision significance </li></ul><ul><li>Importance of commitment </li></ul><ul><li>Leader expertise </li></ul><ul><li>Likelihood of commitment </li></ul><ul><li>Team support </li></ul><ul><li>Team expertise </li></ul><ul><li>Team competence </li></ul>
  30. 30. Figure 6. 4 Vroom and Jago Decision Model Instructions: The matrix operates like a funnel. You start at the left with a specific decision problem in mind. The column headings denote situational factors which may or may not be present in that problem. You progress by selecting High and Low (H or L) for each relevant situational factor. Proceed down from the funnel, judging only those situational factors for which a judgment is called for, until you reach the recommended process.
  31. 31. Participative Models (cont’d) <ul><li>Vroom and Jago Model </li></ul><ul><ul><li>The nature of the decision itself determines the appropriate degree of participation — diagnostic questions help managers select the appropriate level. </li></ul></ul><ul><li>A participative decision style is desirable when: </li></ul><ul><ul><li>Subordinates have useful information and share the organization’s goals. </li></ul></ul><ul><ul><li>Subordinates commitment to the decision is essential. </li></ul></ul><ul><ul><li>Timeliness is not crucial. </li></ul></ul><ul><ul><li>Conflict is unlikely. </li></ul></ul>
  32. 32. Participative Decision Making: Group Size <ul><li>In general, as group size increases: </li></ul><ul><ul><li>The leader becomes more psychologically distant from the other members. </li></ul></ul><ul><ul><li>The demands on the leaders time and attention are greater </li></ul></ul><ul><ul><li>The group’s tolerance of direction from the leader is greater, and the team’s decision making becomes more centralized. </li></ul></ul><ul><ul><li>The atmosphere is less friendly, less personal and, in general, less satisfying. </li></ul></ul><ul><ul><li>Rules and procedures become more formalized. </li></ul></ul>
  33. 33. Table 6. 2 Advantages and Disadvantages of Group Decision Making <ul><li>Advantages </li></ul><ul><li>Experience and expertise of several individuals available </li></ul><ul><li>More information, data, and facts accumulated </li></ul><ul><li>Problems viewed from several perspectives </li></ul><ul><li>Higher member satisfaction </li></ul><ul><li>Greater acceptance and commitment to decisions </li></ul><ul><li>Disadvantages </li></ul><ul><li>Greater time requirement </li></ul><ul><li>Minority domination </li></ul><ul><li>Compromise </li></ul><ul><li>Concern for individual rather than group goals </li></ul><ul><li>Social pressure to conform </li></ul><ul><li>Groupthink </li></ul>
  34. 34. What is Groupthink? <ul><li>An agreement-at-any-cost mentality that results in ineffective group decision making. </li></ul><ul><li>Characteristics of Groupthink </li></ul><ul><ul><li>Illusions of invulnerability </li></ul></ul><ul><ul><li>Collective rationalization </li></ul></ul><ul><ul><li>Belief in the morality of group decisions </li></ul></ul><ul><ul><li>Self-censorship </li></ul></ul><ul><ul><li>Illusion of unanimity in decision making </li></ul></ul><ul><ul><li>Pressure on members who express arguments </li></ul></ul>
  35. 35. Table 6. 3 Characteristics of Groupthink and the Types of Defective Decisions That May Result <ul><li>Characteristics of Groupthink </li></ul><ul><li>Illusion of invulnerability </li></ul><ul><li>Collective rationalization </li></ul><ul><li>Belief in the morality of group decisions </li></ul><ul><li>Self-censorship </li></ul><ul><li>Illusion of unanimity in decision making </li></ul><ul><li>Pressure on member who express arguments </li></ul><ul><li>Types of Defective Decisions </li></ul><ul><li>Incomplete survey of alternatives </li></ul><ul><li>Incomplete survey of goals </li></ul><ul><li>Failure to examine risks of preferred decisions </li></ul><ul><li>Poor information search </li></ul><ul><li>Failure to reappraise alternatives </li></ul><ul><li>Failure to develop contingency plans </li></ul>
  36. 36. Types of Defective Groupthink Decisions <ul><li>Incomplete survey of alternatives </li></ul><ul><li>Incomplete survey of goals </li></ul><ul><li>Failure to examine risks of preferred decisions </li></ul><ul><li>Poor information search </li></ul><ul><li>Failure to reappraise alternatives </li></ul><ul><li>Failure to develop contingency plans </li></ul>
  37. 37. Techniques for Quality in Group Decision Making <ul><li>Brainstorming </li></ul><ul><li>Nominal Group Technique </li></ul><ul><li>Delphi Technique </li></ul><ul><li>Devil’s Advocacy Approach </li></ul><ul><li>Dialectical Inquiry </li></ul>
  38. 38. Brainstorming <ul><li>Brainstorming </li></ul><ul><ul><li>A technique to enhance creativity by encouraging group members to generate as many novel ideas as possible on a given topic without evaluating them. </li></ul></ul><ul><li>Rules of Brainstorming </li></ul><ul><ul><li>Freewheeling is encouraged. </li></ul></ul><ul><ul><li>Ideas are not criticized as they are being generated. </li></ul></ul><ul><ul><li>Quality is encouraged. </li></ul></ul><ul><ul><li>The wilder the ideas, the better. </li></ul></ul><ul><ul><li>Piggyback on previously stated ideas. </li></ul></ul><ul><ul><li>Ideas are evaluated after alternatives are generated. </li></ul></ul>
  39. 39. Other Decision-Making Techniques <ul><li>Nominal Group Technique (NGT) </li></ul><ul><ul><li>A structured process designed to stimulate creative group decision making where agreement is lacking or the members have incomplete knowledge concerning the nature of the problem. </li></ul></ul><ul><li>Delphi Technique </li></ul><ul><ul><li>Uses experts to make predictions and forecasts about future events without meeting face-to-face. </li></ul></ul>
  40. 40. Other Decision-Making Techniques (cont’d) <ul><li>Devil’s Advocacy </li></ul><ul><ul><li>An individual or subgroup appointed to critique a proposed course of action and identify problems to consider before the decision is final. </li></ul></ul><ul><li>Dialectical Inquiry </li></ul><ul><ul><li>Approaches a decision from two opposite points and structures a debate between conflicting views. </li></ul></ul>
  41. 41. Classifying Decision Situations <ul><li>Programmed decision </li></ul><ul><ul><li>A decision made in response to a situation that is routine or recurring. </li></ul></ul><ul><ul><li>Example: starting your automobile </li></ul></ul><ul><li>Nonprogrammed decision </li></ul><ul><ul><li>A decision made in response to a situation that is unique, unstructured, or poorly defined. </li></ul></ul><ul><ul><li>Example: deciding to get a tattoo </li></ul></ul>
  42. 42. Responses to Decision Situations Responses require creativity. Responses are routine. Alternatives are not familiar to decision makers. Alternatives are familiar to decision makers. Nonprogrammed Decisions Programmed Decisions
  43. 43. Strategic Decision-Making Tools <ul><li>Strategic Decision Making </li></ul><ul><ul><li>Selection of a strategy that will define the long-term direction of the firm — occurs at the highest levels of the organization. </li></ul></ul><ul><li>Two important areas for strategic decision making are: </li></ul><ul><ul><li>Strategy selection </li></ul></ul><ul><ul><li>Evaluation of portfolios </li></ul></ul>
  44. 44. Strategy Selection <ul><li>The Strategic Decision-Making Matrix </li></ul><ul><ul><li>A two-dimensional grid used to select the best strategic alternative in light of multiple organizational objectives. </li></ul></ul><ul><ul><li>Management usually assigns the weights based on its subjective assessment of the importance of each objective. </li></ul></ul>
  45. 45. Table 6. 4 Strategic Decision-Making Matrix Objectives Increased Increased Total Increased Share Output Weighted Profit Market Production Score Alternative 0.5 0.3 0.2 Strategies/ Weight Product 2 2 3 0.5(2) 1 0.3(2) 1 0.2(3) 5 2.2 development Horizontal 4 2 2 0.5(4) 1 0.3(2) 1 0.2(2) 5 3.0 integration Joint venture 5 3 3 0.5(5) 1 0.3(3) 1 0.2(3) 5 4.0
  46. 46. Evaluation of Portfolios <ul><li>Business Portfolio Matrix </li></ul><ul><ul><li>A two-dimensional grid that compares the strategic positions of each of the organization’s businesses. </li></ul></ul><ul><ul><li>Most frequently used matrices: </li></ul></ul><ul><ul><ul><li>Growth-share matrix. </li></ul></ul></ul><ul><ul><ul><li>Industry attractiveness/business strength matrix. </li></ul></ul></ul>
  47. 47. Boston Consulting Group (BCG) Matrix <ul><li>Business portfolio matrix that uses market growth rate and relative market share as the indicators of the firm’s strategic position. </li></ul><ul><ul><li>Market growth rate </li></ul></ul><ul><ul><ul><li>A measure of the annual growth percentage of the market in which the business operates. </li></ul></ul></ul><ul><ul><li>Relative market share </li></ul></ul><ul><ul><ul><li>The firm’s market share divided by the market share of its largest competitor. </li></ul></ul></ul>
  48. 48. Figure 6. 5 The BCG Growth-Share Matrix
  49. 49. BCG Matrix: Stars and Cash Cows <ul><li>Stars </li></ul><ul><ul><li>Businesses that fall into the high market growth/high market share cell of the BCG matrix. </li></ul></ul><ul><ul><li>Offer attractive profit and growth opportunities. </li></ul></ul><ul><li>Cash Cows </li></ul><ul><ul><li>Businesses that fall into the low market growth/high market share cell of a BCG matrix. </li></ul></ul><ul><ul><li>Generate substantial cash surpluses. </li></ul></ul><ul><ul><li>Generally yesterday’s stars that have matured. </li></ul></ul>
  50. 50. BCG Matrix: Dogs and Question Marks <ul><li>Dogs </li></ul><ul><ul><li>Businesses that fall into the low market growth/low market share cell of a BCG matrix. </li></ul></ul><ul><ul><li>Typically generate low profits, and in some cases may even lose money. </li></ul></ul><ul><li>Question Marks </li></ul><ul><ul><li>Businesses that fall into the high market growth/low market share cell of a BCG matrix. </li></ul></ul><ul><ul><li>Businesses that look attractive from an industry standpoint, however, their low market share makes their profit potential uncertain. </li></ul></ul>
  51. 51. Table 6. 6 Illustration of Industry Attractiveness and Business Strength Computations Source: Adapted from Strategic Management: Text and Cases on Business Policy by Hesmer, © 1984. Reprinted by permission of Prentice Hall, Upper Saddle River NJ.
  52. 52. The Industry Attractiveness/Business Strength Matrix (GE Matrix) <ul><li>Business portfolio matrix that uses several factors to assess industry attractiveness and business strength. </li></ul><ul><li>Uses multiple factors in determining both industry attractiveness and business strength for each firm in the portfolio. </li></ul>
  53. 53. Figure 6. 6 The GE Industry Attractiveness/Business Strength Matrix
  54. 54. Implications for Leaders <ul><li>Be able to recognize quickly problems and opportunities that call for a decision. </li></ul><ul><li>Be able to recognize the different time frames and scopes of strategic decisions versus operational decisions. </li></ul><ul><li>Be equipped with all the tools and techniques that can aid in making strategic decisions. </li></ul><ul><li>Be familiar with the framework for operational decision making as well as the structural components for displaying operational decisions. </li></ul>
  55. 55. Implications for Leaders <ul><li>Be able to recognize the different decision-making environments in which their operational decisions will be made. </li></ul><ul><li>Have an awareness and understanding of the various quantitative tools that can aid in making operational decisions. </li></ul>