C9 Managerial Decision Making

• Decision


  A choice made from available alternatives
• Decision making


  The process of identifying problems and opportunities and then resolving them
• Programmed decisions


  Involve situations that have occurred often enough to enable decision rules to be developed and applied in the future
• Nonprogrammed decisions


  Are made in response to situations that are unique, are poorly defined and largely unstructured, and have important consequences for the organization
• Certainty


  Situation in which all information the decision maker needs is fully available
• Risk


  Decision has clear-cut goals and good information is available, but future outcomes associated with each alternative are subject to chance of loss or failure
• Uncertainty


  Goals are known, but information about alternatives and future events is incomplete
• Decision-Making Models


  • Classical model
  • Administrative model
  • Political model
• Classical model


  • Decision-making model based on rational economic assumptions and manager beliefs about what ideal decision making should be
  • Normative: how a decision maker should make a decision
  • Does not describe how managers actually make decisions hence, often unattainable
  • But, the model helps decision makers be more rational and not rely entirely on personal preference in making decisions
• Assumptions of Classical model


  • Operates to accomplish known goals; problems are defined
  • Strives for certainty and gathers information; alternatives and results are calculated
  • Criteria for evaluation of alternatives are known; selects alternative that maximizes economic return
  • Decision maker is rational and uses logic; decision maximizes attainment of organizational goals
• Administrative model


  • Descriptive: how managers actually make decisions in complex situations
  • Bounded rationality: people have limits or boundaries on how rational they can be
  • Satisficing: decision makers choose the first solution that satisfies minimal decision criteria (good enough)
• Assumptions of Administrative model


  • Goals are often vague; managers are unaware of problems
  • Rational procedures are not always used; simplistic view of problems
  • Managers' searches for alternatives are limited
  • Most managers settle for satisficing
• Intuition- Administrative Model


  Quick apprehension of decision situation based on experience but without conscious thought
• Quasirationality


  Combining intuitive and analytical thought
• Political model


  • Nonprogrammed decisions when conditions are uncertain, information is limited, and there is manager conflict about goals to pursue or action to take
  • Resembles the real environment
  • Coalition: informal alliance among managers who support specific goal
  • Without a coalition, powerful groups can derail the decision-making process
• Assumptions of Political model


  • Organizations are made up of groups with diverse interests, goals, and values
  • Information is ambiguous and incomplete
  • Managers do not have the time, resources, or mental capacity to identify all dimensions and process all information regarding a problem
  • Decisions are the result of bargaining and discussion among coalition members
• Decision-Making Steps


  1. Recognition of decision requirement: identify problem or opportunity

  2. Diagnosis and analysis: analyze underlying causal factors

  3. Develop alternatives: develop possible alternative solutions that will respond to the needs of the situation and correct the underlying causes

  4. Selection of desired alternative: best alternative is one in which the solution best fits the firm's overall goals and values and achieves the desired results using the fewest resources

  5. Implementation of chosen alternative: the use of managerial, administrative, and persuasive abilities to ensure that the chosen alternative is carried out

  6. Evaluation and feedback: gather information to determine how well the decision was implemented and whether it achieved its goals
• S1: Problem & Opportunity

  Organizational accomplishment is less than established goals

  Managers see potential accomplishments that exceed current goals
• S2: 5 Whys

  A question-asking method used to explore the root cause underlying a particular problem
• S4: Risk propensity/tendency

  Willingness to undertake risk with the opportunity of gaining an increased payoff
• Personal Decision Frameworks


  • Directive style
  • Analytical style
  • Conceptual style
  • Behavioral style
• Directive style


  • People who prefer simple, clear-cut solutions to problems – may consider only one or two alternatives
  • Efficient and rational and prefer to rely on existing rules and procedures
• Analytical style


  • Managers prefer complex solutions based on a lot of data
  • Search for the best possible decisions based on info. available
• Conceptual style


  • Managers like a broad amount of information – talk to others about the problem and its possible alternatives
  • Rely on info. from both people and systems and like to solve problems creatively
• Behavioral style


  • Managers have a deep concern for others – consider the effect of decision on other people
  • Make decisions that help others develop and achieve their goals
• Brainstorming


  Uses a face-to-face interactive group to spontaneously suggest as many ideas as possible for solving a problem
• Electronic brainstorming


  Brings people together in an interactive group over a computer network
• Evidence-based decision making


  A commitment to make more informed and intelligent decisions based on the best available facts and evidence
• Point–counterpoint (Dialectical Inquiry)


  A technique which breaks a decision-making group into two subgroups and assigns them different, often competing, responsibilities
• Groupthink


  Tendency of people in groups to suppress contrary opinions
• Escalating commitment


  Continuing to invest time and money in a solution even when there is strong evidence that it is not appropriate
• After-action review


  Disciplined procedure whereby managers invest time in reviewing the results of decisions on a regular basis and learn from them
• Why make Bad Decision?


  Anchoring Bias:

  Occurs when we allow initial impressions, statistics, and estimates to act as anchors to our subsequent thoughts and judgements

  Sunk Cost Effect:

  When a manager continues to pour money into a failing project, hoping to turn things around

  Confirmation Bias:

  Occurs when a manager puts too much value on evidence that is consistent with a favored belief or viewpoint

  Being influenced by emotions

  Being overconfident