978-1305502215 Chapter 6 Part 1

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CHAPTER 6

MANAGERIAL DECISION MAKING

CHAPTER OUTLINE

New Manager Self-Test: How Do You Make Decisions?

I. Types of Decisions and Problems

A. Programmed and Nonprogrammed Decisions

B. Facing Uncertainty and Ambiguity

II. Decision-Making Models

A. The Ideal, Rational Model

B. How Managers Actually Make Decisions

C. The Political Model

New Manager Self-Test: Making Important Decisions

III. Decision-Making Steps

A. Recognition of Decision Requirement

B. Diagnosis and Analysis of Causes

C. Development of Alternatives

D. Selection of the Desired Alternative

E. Implementation of the Chosen Alternative

F. Evaluation and Feedback

IV. Personal Decision Framework

V. Why Do Managers Make Bad Decisions?

VI. Innovative Decision Making

A. Start with Brainstorming

B. Use Hard Evidence

C. Engage in Rigorous Debate

D. Avoid Groupthink

E. Know When to Bail

F. Do a Postmortem

ANNOTATED LEARNING OUTCOMES

After studying this chapter, students should be able to:

1. Explain why decision making is an important component of good management.

2. Compare and contrast programmed and nonprogrammed decisions, and describe the

decision characteristics of certainty and uncertainty.

Programmed decisions involve situations that have occurred often enough to enable decision

rules to be developed and applied in the future. Once managers formulate decision rules,

3. Describe the ideal, rational model of decision making and the political model of decision

making.

The classical model of decision making is considered to be normative, which means it defines

how a decision maker should make decisions. It is based on rational economic assumptions and

4. Explain the process by which managers actually make decisions in the real world.

The administrative model describes how managers actually make decisions such as those

5. Summarize the six steps used in managerial decision making.

Whether a decision is programmed or nonprogrammed, and regardless of whether the manager

6. Describe four personal decision styles used by managers.

7. Identify the biases that frequently cause managers to make bad decisions.

Most bad decisions are errors in judgment that originate in the human mind’s limited capacity

and in the natural biases managers display during decision making. Awareness of the following

Overconfidence. Most people overestimate their ability to predict uncertain outcomes. Before

making a decision, managers have unrealistic expectations of their ability to understand the risk

and make the right choice.

8. Explain innovative techniques for decision making, including brainstorming, evidence-based

management, and after-action reviews.

One of the best known techniques for rapidly generating creative alternatives is brainstorming.

Brainstorming uses a face-to-face interactive group to spontaneously suggest a broad range of

alternatives for decision making. The keys to effective brainstorming are that people can build

Managerial Decision Making •

LECTURE OUTLINE

NEW MANAGER SELF-TEST: HOW DO YOU MAKE DECISIONS?

Most of us make decisions automatically and without realizing that people have diverse decision-

making behaviors, which they bring to management positions. New managers typically use a

different decision behavior than seasoned executives. They often start out with a more directive,

decisive, command-oriented behavior and gradually move toward more openness, diversity of

viewpoints, and interactions with others as they move up the hierarchy. This exercise helps

students determine whether they typically make decisions more like new managers or more like

senior managers.

I. TYPES OF DECISIONS AND PROBLEMS

A decision is a choice made from available alternatives. Decision making is the process of

identifying problems and opportunities and then resolving them. Decision making involves

effort both before and after the actual choice.

A. Programmed and Nonprogrammed Decisions

1. Programmed decisions involve situations that have occurred often enough to enable

decision rules to be developed and applied in the future. Once managers formulate

decision rules, subordinates and others can make decisions freeing managers for other

tasks.

2. Nonprogrammed decisions are made in response to situations that are unique,

poorly defined, largely unstructured, and likely to have important consequences for

the organization. Nonprogrammed decisions often involve strategic planning because

uncertainty is great and decisions are complex.

B. Facing Uncertainty and Ambiguity Exhibit 6.1

1. One difference between programmed and nonprogrammed decisions relates to the

degree of certainty or uncertainty that managers deal with in making the decision. In

a perfect world, managers have all the information necessary for making decisions.

In reality, some things are unknowable and some decisions will fail. Every decision

situation can be organized on a scale according to the availability of information and

the possibility of failure. The four positions on the scale are certainty, risk,

uncertainty, and ambiguity.

a. Certainty means that all the information the decision maker needs is fully

available. Few decisions are certain in the real world. Most contain risk or

uncertainty.

b. Risk means a decision has clear-cut objectives and good information available.

The future outcomes associated with each alternative are subject to failure;

however, enough information is available to allow the probability of a successful

outcome for each alternative to be estimated.

Managerial Decision Making •

c. Uncertainty means managers know which goals they wish to achieve, but

information about alternatives and future outcomes is incomplete. Factors that

may affect a decision, such as price, production costs, volume, or future interest

rates, are difficult to analyze and predict. Managers may have to come up with

creative approaches to alternatives and use personal judgment to determine which

alternative is best. Many decisions made under uncertainty do not produce the

desired results, but managers face uncertainty every day.

d. Ambiguity means that the goals to be achieved or the problem to be solved is

unclear, alternatives are difficult to define, and information about outcomes is

unavailable. Highly ambiguous circumstances can create a wicked decision

problem, with conflicts over goals and decision alternatives, rapidly changing

circumstances, fuzzy information, and unclear linkages among decision elements.

Managers have a difficult time coming to grips with the issues and must conjure

up reasonable scenarios in the absence of clear information. Ambiguity is by far

the most difficult decision situation.

Discussion Question #3: Explain the difference between risk and ambiguity. How might

decision making differ for a risky versus an ambiguous situation?

NOTES________________________________________________________________________

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II. DECISION-MAKING MODELS Exhibit 6.2

Decisions are usually made using the classical, the administrative, or the political decision

making model. The choice of model used depends on the manager’s personal preference,

whether the decision is programmed or nonprogrammed, and the degree of uncertainty

associated with the decision.

A. The Ideal, Rational Model

1. The classical model of decision making is based on assumptions that managers

should make logical decisions that will be in the organization’s best economic

interests. The four assumptions include:

a. The decision maker operates to accomplish goals that are known and agreed upon.

b. The decision maker strives for conditions of certainty, gathering complete

information.

c. Criteria for evaluating alternatives are known.

d. The decision maker is rational and uses logic to assign values, order preferences,

evaluate alternatives, and make the decision to maximize goals.

2. The classical model is normative, defining how a decision maker should make

decisions, and providing guidelines for reaching an ideal outcome for the

organization. The value of the classical model has been to help decision makers be

more rational.

3. The classical model represents an “ideal” model of decision making that is often

unattainable by real people in real organizations. It works best when applied to

programmed decisions and to decisions characterized by uncertainty or risk because

relevant information is available and probabilities can be calculated.

Discussion Question #8: List some possible advantages and disadvantages to using computer

technology for managerial decision making.

NOTES________________________________________________________________________

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B. How Managers Actually Make Decisions

1. Bounded Rationality and Satisficing

a. The administrative model is considered to be descriptive, meaning that it

describes how managers actually make decisions rather than how they should

make them. Herbert A. Simon proposed two concepts instrumental in shaping the

administrative model: bounded rationality and satisficing.

b. Bounded rationality means people have limits, or boundaries, on the amount of

information they can process in making a decision. Because managers do not

have the time or cognitive ability to process complete information about complex

decisions, they must satisfice.

c. Satisficing means that decision makers choose the first solution alternative that

satisfies minimal decision criteria. Rather than pursue all alternatives, managers

will opt for the first solution that appears to solve the problem. The decision

maker cannot justify the time and expense of obtaining complete information.

d. According to the administrative model:

• Decision goals often are vague, conflicting, and lack consensus among

managers.

• Rational procedures are not always used, and when they are, they are confined

to a simplistic view of the problem that does not capture the complexity of

real events.

• Managers’ searches for alternatives are limited because of human,

information, and resource constraints.

Managerial Decision Making •

• Most managers settle for a satisficing rather than a maximizing solution.

2. Intuition

a. Intuition is another aspect of administrative decision making. Intuition

represents a quick apprehension of a decision situation based on past experience

but without conscious thought. Intuitive decision making is not arbitrary or

irrational because it is based on years of practice and hands-on experience.

b. Intuition begins with recognition; when people build a depth of experience and

knowledge in a particular area, the right decision often comes quickly and

effortlessly. Research on the validity of intuition in decision making is

inconclusive, suggesting that managers should take a cautious approach to it,

applying intuition only under the right circumstances and in the right way.

Discussion Question #9: Can intuition and evidence-based decision making coexist as valid

approaches within an organization? How might managers combine their intuition with a

rational, data-driven, evidence-based approach?

NOTES________________________________________________________________________

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C. The Political Model

1. This model is for nonprogrammed decisions when conditions are uncertain,

information is limited, and there is disagreement about the goals to pursue or the

action to take. Managers often engage in coalition building for making complex

organizational decisions. A coalition is an informal alliance among managers who

support a specific goal. Coalition building is the process of forming alliances among

managers. The inability of managers to build coalitions often makes it difficult or

impossible for them to get their decisions implemented. The political model closely

resembles the real environment in which most managers and decision makers operate.

The political model begins with four basic assumptions.

a. Organizations are made up of groups with diverse interests, goals, and values.

b. Information is ambiguous and incomplete.

c. Managers do not have time, resources, or mental capacity to identify all

dimensions of the problem and process all relevant information.

d. Managers engage in the push and pull of debate to decide goals and discuss

alternatives.

2. Recent research has found rational, classical procedures to be associated with high

performance for organizations in stable environments. Administrative and political

Managerial Decision Making •

decision-making procedures and intuition have been associated with high

performance in unstable environments when decisions must be made rapidly.

Discussion Question #4: Analyze three decisions you made over the past six months. Which of

these were programmed and which were nonprogrammed? Which model—the classical,

administrative, or political—best describes the approach you took to making each decision?

NOTES________________________________________________________________________

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NEW MANAGER SELF-TEST: MAKING IMPORTANT DECISIONS

This exercise helps students learn how they make important personal decisions. They think about

a time when they made an important career decision or made a large purchase or investment.

They decide to what extent each of the terms describes how they reached the final decision.

III. DECISION-MAKING STEPS Exhibit 6.3

Whether a decision is programmed or nonprogrammed, and regardless of whether the manager

follows the classical, political, or administrative model of decision making, six steps typically are

associated with effective decision-making processes. These six steps are:

A. Recognition of Decision Requirement

1. Managers confront a decision requirement in the form of either a problem or an

opportunity. A problem occurs when organizational accomplishment is less than

established goals. Some aspect of performance is unsatisfactory. An opportunity

exists when managers see potential accomplishments that exceed current goals.

2. Awareness of a problem or opportunity is the first step in the decision-making

sequence and requires surveillance of the internal and external environment for issues

that merit executive attention. Recognizing decision requirements is difficult because

it often means integrating information in novel ways.

B. Diagnosis and Analysis of Causes

1. Diagnosis is the step in which managers analyze the underlying causal factors

associated with the decision situation. Managers make a big mistake if they jump

right into generating alternatives without first exploring the cause of the problem

more deeply. Studies recommend that managers ask a series of questions to specify

underlying causes, including:

a. What is the state of disequilibrium affecting us?

b. When did it occur?

Managerial Decision Making •

c. Where did it occur?

d. How did it occur?

e. To whom did it occur?

f. What is the urgency of the problem?

g. What is the interconnectedness of events?

h. What result came from which activity?

C. Development of Alternatives

1. Once the problem or opportunity has been recognized and analyzed, decision makers

begin to consider taking action. The next step is to develop possible alternative

solutions that will respond to the needs of the situation and correct the underlying

causes.

2. For a programmed decision, feasible alternatives are often available within the

organization’s rules and procedures. Nonprogrammed decisions require developing

new courses of action that will meet the needs of the company.

D. Selection of the Desired Alternative Exhibit 6.4

1. The 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. The manager tries

to select the choice with the least amount of risk and uncertainty. Making choices

also depends on managers’ personality factors and willingness to accept risk and

uncertainty. Risk propensity is the willingness to undertake risk with the

opportunity of gaining an increased payoff.

E. Implementation of Chosen Alternative

1. The implementation stage involves the use of managerial, administrative, and

persuasive abilities to ensure that the chosen alternative is carried out. The success of

the chosen alternative depends on whether or not it is translated into action.

Sometimes an alternative never becomes reality because managers lack resources or

energy needed to make things happen. Communication, motivation, and leadership

skills must be used to see that the decision is carried out.

F. Evaluation and Feedback

1. In the evaluation step, decision makers gather information or feedback to determine

how well the decision was implemented and whether it achieved its goals. Feedback

is important because decision making is a continuous, never-ending process.

Managerial Decision Making •

Feedback provides decision makers with information that can start a new decision

cycle.

2. By learning from decision mistakes, managers can turn problems into opportunities.

NOTES________________________________________________________________________

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IV. PERSONAL DECISION FRAMEWORK Exhibit 6.5

Not all managers make decisions in the same way. These differences can be explained by the

concept of personal decision styles. Personal decision style refers to differences between people

with respect to how they perceive problems and make decisions. Research has identified four

major decision styles.

• The directive style is used by people who prefer simple, clear-cut solutions to problems.

• With an analytical style, managers like to consider complex solutions based on as much data

as they can gather.

• People who tend toward a conceptual style also like to consider a broad amount of

information.

• The behavioral style is characterized by having a deep concern for others as individuals.

Most managers have a dominant decision style. The most effective managers are able to shift

among styles as needed to meet the situation.

Discussion Question #10: What do you think is your dominant decision style? Is your style

compatible with group techniques such as brainstorming and engaging in rigorous debate?

Discuss.

NOTES________________________________________________________________________

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V. WHY DO MANAGERS MAKE BAD DECISIONS?

Even the best manager will make mistakes, but managers can increase their percentage of good

decisions by understanding some of the factors that cause people to make bad ones. Most bad

decisions are errors in judgment that originate in the human mind’s limited capacity and in the

natural biases managers display during decision making. Awareness of the following six biases

can help managers make more enlightened choices:

• Being influenced by initial impressions. The mind often gives disproportionate weight to the

first information it receives when considering decisions. These initial impressions act as an

anchor to subsequent thoughts and judgments. Past events and trends also act as anchors.

Giving too much weight to the past can lead to poor forecasts and misguided decisions.