Download Decision

Chapter 8
Managing
decision-making
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-1
Learning objectives
After studying the chapter, you should be able to:
• Differentiate between programmed and nonprogrammed decisions, and explain why nonprogrammed decision-making is a complex,
uncertain process
• Describe the six steps that managers should take to
make the best decisions
• Explain how cognitive biases can affect decisionmaking and lead managers to make poor decisions
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-2
Learning objectives (cont.)
• Identify the advantages and disadvantages of group
decision-making, and describe techniques that can
improve it
• Explain the role that organisational learning and
creativity play in helping managers to improve their
decisions
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-3
The nature of managerial
decision-making
• Decision-making
– The process by which managers respond to opportunities
and threats by analysing options and making decisions
about goals and courses of action
 Decisions in response to opportunities: occurs when
managers respond to ways to improve organisational
performance
 Decisions in response to threats: occurs when managers are
impacted by adverse events to the organisation
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-4
Decision-making
• Programmed decision
– Routine, virtually automatic decision-making that follows
established rules or guidelines
 Managers have made the same decision many times before
 There are rules or guidelines to follow based on experience
with past decisions
 Little ambiguity involved
• Non-programmed decisions
– Non-routine decision-making that occurs in response to
unusual, unpredictable opportunities and threats.
– The are no rules to follow since the decision is new
 Decisions are made based on information, and a manager’s
intuition and judgment
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-5
Decision-making (cont.)
• Intuition
– Feelings, beliefs and hunches that come readily to mind, require
little effort and information gathering and result in on-the-spot
decisions
• Reasoned judgment
– Decisions that take time and effort to make and result from
careful information gathering, generation of alternatives and
evaluation of alternatives
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-6
The classical model of decisionmaking
• A prescriptive model of decision-making that
assumes the decision-maker can identify and
evaluate all possible alternatives and their
consequences and rationally choose the most
appropriate course of action
• Optimum decision
– The most appropriate decision in light of what managers
believe to be the most desirable future consequences for
their organisation
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-7
The classical model of decisionmaking (cont.)
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-8
The administrative model of decisionmaking
• March & Simon
– Approach to decision-making that explains why decisionmaking is inherently uncertain and risky and why managers
usually make satisfactory rather than optimum decisions
– Bounded rationality
 There are a large number of alternatives and available
information can be so extensive that managers cannot
consider it all
 Decisions are limited by people’s cognitive abilities
– Incomplete information
 Most managers do not see all alternatives and decide
based on incomplete information
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-9
Why information is incomplete
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-10
Causes of incomplete information
• Risk
– The degree of probability that the possible outcomes of a
particular course of action will occur
 Managers know enough about a given outcome to be able to
assign probabilities for the likelihood of its failure or success
• Uncertainty
– Probabilities cannot be given for outcomes and the future
is unknown
 Many decision outcomes are not known, such as the
success of a new product introduction or a merger
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-11
Causes of incomplete information
(cont.)
Young Woman or
• Ambiguous information
Old Woman?
– Information whose
meaning is not clear,
allowing it to be
interpreted in multiple or
conflicting ways
• Time constraints and
information costs
– Do not always have time or
money to search/evaluate
all possible alternatives
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-12
Causes of incomplete information
(cont.)
Satisficing
– Searching for and choosing an acceptable, or
satisfactory, response to problems and opportunities,
rather than trying to make the best decision
 Managers explore a limited number of options and choose
an acceptable decision rather than the optimum decision
 Managers assume that the limited options they examine
represent all options
 This is the typical response of managers when dealing with
incomplete information
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-13
Six steps in decision-making
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-14
Decision-making steps
Step 1. Recognise need for a decision
– Sparked by an event such as environmental change
 Managers must first realise that a decision must be
made
Step 2. Generate alternatives
– Managers must develop feasible alternative courses of
action
 If good alternatives are missed, the resulting decision
is poor
 It is hard to develop creative alternatives, so
managers need to look for new ideas
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-15
Decision-making steps (cont.)
Step 3. Evaluate alternatives
– What are the advantages and disadvantages of each
alternative?
– Managers should specify criteria, then evaluate
– When ranking, all information needs to be considered
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-16
Decision-making steps (cont.)
Step 4. Choose among alternatives
Criteria
Legality
Is the alternative legal both in this country
and abroad for exports?
Ethicalness
Is the alternative ethical and will not bring
stakeholders harm unnecessarily?
Economic feasibility Can the organisation’s performance goals
sustain this alternative?
Practicality
Does the management have the
capabilities and resources required to
implement the alternative?
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-17
General criteria for evaluating
possible courses of action
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-18
Decision-making steps (cont.)
Step 5. Implement chosen alternative
– Managers must now carry out the alternative
– Often a decision is made and not implemented
Step 6. Learn from feedback
– Managers should consider what went right and wrong
with the decision and learn for the future
– Without feedback, managers do not learn from
experience and will repeat the same mistake over
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-19
Cognitive biases and decision-making
• Heuristics
– Rules of thumb to deal with complex situations
– Decision-makers use heuristics to deal with bounded
rationality
 If the heuristic is wrong, however, then poor decisions
result from its use
 Systematic errors can result from use of an incorrect
heuristic and will appear over and over since the rule
used to make decision is flawed
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-20
Sources of cognitive bias at the
individual and group levels
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-21
Types of cognitive biases
• Prior hypothesis bias
– Allowing strong prior beliefs about a relationship between
variables to influence decisions based on these beliefs
even when evidence shows they are wrong
• Representativeness bias
– The decision-maker incorrectly generalises a decision
from a small sample or a single incident
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-22
Types of cognitive biases (cont.)
• Illusion of control
– The tendency to overestimate one’s own ability to control
activities and events
• Escalating commitment
– Committing considerable resources to project and then
committing more even if evidence shows the project is
failing
• Critical to be aware of one’s biases
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-23
Group decision-making
• Superior to individual decision-making in several ways
• Choices less likely to fall victim to bias
• Able to draw on combined skills, competencies and
accumulated knowledge of group members
• Improved ability to generate feasible alternatives
• More likely to be supported in implementation
• Allows managers to process more information
• Managers affected by decisions agree to cooperate
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-24
Group decision-making (cont.)
• Disadvantages
– Groups often take longer than individuals
– Like individual decisions can be undermined by biases
such as Groupthink
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-25
Group decision-making (cont.)
• Groupthink perils
– Biased decision-making resulting from group members
striving for agreement
 Usually occurs when group members rally around a
central manager’s idea and become blindly committed
to the idea without assessing information or
considering alternatives
 The group’s influence tends to convince each member
that the idea must go forward
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-26
Improved group decision-making
• Devil’s advocacy
– A group member who advances or defends unpopular or
opposing alternatives for the sake of argument
– One member of the group who acts as the devil’s
advocate by critiquing the way the group identified
alternatives and pointing out problems with the alternative
selection
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-27
Improved group decision-making
(cont.)
• Dialectical inquiry
– Two different groups are assigned to the problem and
each group evaluates the other group’s choice of
alternatives
– Top managers then hear each group present their
alternatives and each group can critique the other
• Promote group diversity
– Increasing the diversity in a group (e.g. gender, ethnicity,
organisational functions) may result in consideration of a
wider set of alternatives
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-28
Devil’s advocacy and dialectical
inquiry
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-29
Organisational learning and creativity
• Organisational learning
– Managers seek to improve employees’ desire and ability
to understand and manage the organisation and its task
environment so as to continuously raise effectiveness
• The learning organisation
– Managers try to maximise the people’s ability to behave
creatively to maximise organisational learning
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-30
Senge’s principles for creating a
learning organisation
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-31
Creating a learning organisation
• Personal mastery
– Managers empower employees and allow them to create
and explore
• Mental models
– Challenge employees to find new, better methods to
perform a task
• Team learning
– Is more important than individual learning since most
decisions are made in groups
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-32
Creating a learning organisation
(cont.)
• Build a shared vision
– People share a common mental model of the firm to
frame problems and evaluate opportunities
• Systems thinking
– Knowing and understanding how actions in one area of
the firm will impact other areas of the firm
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-33
Organisational learning and
creativity
• Creativity
– The ability of the decision-maker to discover novel
ideas leading to a feasible course of action
– A creative management
staff and employees are
the key to the learning
organisation
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-34
Promoting individual creativity
• Organisations can build an environment supportive
of creativity
– Managers must provide employees with the confidence
and ability to take risks
 If people take risks, they will occasionally fail
– To build creativity, periodic failures must be rewarded
 This idea is hard to accept for some managers
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-35
Promoting group creativity
• Brainstorming
– Managers meet face-to-face to generate and debate
many alternatives
 Group members are not allowed to evaluate
alternatives until all alternatives are listed
 When all are listed, then the pros and cons of each
are discussed and a short list created
– Production blocking during brainstorming—caution!
 Members cannot absorb all information being
presented during the session and can forget even
their own alternatives
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-36
Promoting group creativity (cont.)
• Nominal group technique
– Provides a more structured way to generate alternatives
in writing
 Avoids the production blocking problem
 Similar to brainstorming except that each member is
given time to first write down all alternatives he or she
would suggest
 Alternatives are then read aloud without discussion
until all have been listed
 Then discussion occurs and alternatives are ranked
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-37
Promoting group creativity (cont.)
• Delphi technique
– Provides a written format without having all managers meet
face-to-face
– Delphi allows distant managers to participate
 Problem is distributed in written form to managers who
then generate written alternatives
 Responses are received and summarised by top
managers
 These results are sent back to participants for feedback
and ranking
 The process continues until consensus is reached
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-38
Promoting creativity at the global level
• Delphi technique
– Particularly useful if time/distance an issue
– Global businesses may have language/communication
problems
– Global businesses will vary decision-making processes
from country to country; some more participative, some
centralised
– Need for development to promote awareness of different
styles so that global businesses can get staff to work
together to identify opportunities, threats and brainstorm
ideas and approaches
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-39
Summary
• Programmed decisions for routine situations, nonprogrammed for novel situations
• Classical versus administrative model of decision-making
• Classical has complete information, follows rational process
• Administrative has incomplete information, bounded
rationally and ‘satisficing’ decisions are made
• Six steps to decision-making:
–
–
–
–
–
–
Recognising need
Alternatives generation
Alternatives assessment
Choosing from alternatives
Implementing alternative
Learning from feedback
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-40
Summary (cont.)
• Decision-making can be impacted by cognitive biases such
as prior hypothesis, representativeness, illusion of control
and escalating commitment
• Group decision-making has advantages and disadvantages
including groupthink and group cognitive bias
• Decision-making quality can be improved by devil’s advocate,
dialectic inquiry and increasing group diversity
• Organisational learning is a process used to improve
employees’ desire and ability to understand and manage the
organisation’s task environment and thus improve
effectiveness
• Managers need to promote organisation learning and
creativity at individual and group levels for quality decisionmaking
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Contemporary Management by Waddell, Devine, Jones & George
By John Dugas
8-41