Download Management - Griffin 7e

Managing Decision Making and Problem Solving
Learning Objectives
• After studying this chapter, you
should be able to:
– Define decision making and
discuss types of decisions and
decision-making conditions.
– Discuss rational perspectives on
decision making, including the
steps in decision making.
– Describe the behavioral nature of
decision making.
9–2
Chapter Outline
• The Nature of Decision
Making
– Decision Making Defined
– Types of Decisions
– Decision-Making Conditions
• Rational Perspectives on
Decision Making
– The Classical Model of
Decision Making
– Steps in Rational Decision
Making
• Behavioral Aspects of
Decision Making
– The Administrative Model
– Political Forces in Decision
Making
– Intuition and Escalation of
Commitment
– Risk Propensity and Decision
Making
– Ethics and Decision Making
9–3
Decision-making
Decision making
and decisionmaking process.
Are they the same
or different.
Discuss
9–4
Decision-making
Choosing
Steps
9–5
Decision Making
•
The act of
choosing one
alternative from
among a set of
alternatives.
9–6
• To reach a decision the best
alternative is usually
selected.
Best ?
a)Discuss what is meant ‘Best’?
b) Does it mean effective or
efficient?
c)Does it always mean to increase?
d)Are decisions only used to solve
problems?
9–7
• Best = Effective
• An effective decision is one
that maximize or minimize
• Managers make decisions
about both problems and
opportunities
9–8
Decision Making Process
• Arrange the Decision-Making Steps
a) Identifying alternatives
b) choosing the “best” alternative, and
c) The process of recognizing and defining the
nature of a decision situation,
d) putting it into practice
e) Evaluate the alternatives
9–9
The Nature of Decision Making Process
– The process of recognizing
and defining the nature of a
decision situation,
– Identifying alternatives
– Evaluate the alternatives
– Choosing the “best”
alternative, and
– Putting it into practice
9–10
Types of Decisions
•
In G’eant Hypermarket, whenever inventory levels of
various products such as coffee makers, electric drills,
and folding chairs drop below a predetermined level,
replacements are automatically ordered. Such a decision
is called:
i. Programmed
ii. Non-programmed decision
a) Provide an example of the other type of decision.
b) Programmed decisions are usually less critical to the
firm and are made at lower levels of the organization,
while non-programmed decisions involve top
management and important issues. Discuss why.
9–11
Types of Decisions
• Programmed Decisions
– A decision that is a fairly structured
decision or recurs
with some frequency or both.
• Example: Starting your car in the
morning.
• Non-programmed decisions
– A decision that is relatively
unstructured
and occurs much less often a
programmed
decision.
• Example: Choosing a vacation destination.
9–12
Decision-making
Conditions
Gulf Air Decision Making Conditions
Decision
Alternatives
Details
(Information)
•All Known
•Some
Known
•Not Known
•Available
(complete and
perfect)
•Partially
available
(estimates)
•Not Available
Probability of
making a Bad
decision
Level of
Ambiguity
Conditions
•Low
•Moderate
•High
•Low
•Moderate
•High
•Risk
•Certainty
•Uncertainty
Buying 5 planes
Submitting a
quotation to win a
bid to be the official
carrier to F1 travelers
GF flights Jupiter
9–14
Decision
Alternatives
Details
(Information)
Buying 5 planes
•All Known
•Some
Known
•Not Known
•Available
•Partially
available
(estimates /
probability)
•Not Available
Probability of
making a Bad
decision
Level of
Ambiguity
Conditions
•Low
•Moderate
•High
•Low
•Moderate
•High
•Risk
•Certainty
•Uncertainty
Submitting a
quotation to win a
bid to be the official
carrier to F1 travelers
GF flights Jupiter
9–15
Decision
Alternatives
Details
(Information)
Probability of
making a Bad
decision
Level of
Ambiguity
Conditions
•Low
•Moderate
•High
•Low
•Moderate
•High
•Risk
•Certainty
•Uncertainty
Buying 5 planes
Submitting a
quotation to win a
bid to be the official
carrier to F1 travelers
•All Known
•Some
Known
•Not Known
•Available
•Partially
available
(estimates /
probability)
•Not Available
GF flights Jupiter
9–16
Decision
Alternatives
Details
(Information)
Probability of
making a Bad
decision
Level of
Ambiguity
Conditions
•Low
•Moderate
•High
•Low
•Moderate
•High
•Risk
•Certainty
•Uncertainty
Buying 5 planes
Submitting a
quotation to win a
bid to be the official
carrier to F1 travelers
GF flights Jupiter
•All Known
•Some
Known
•Not Known
•Available
•Partially
available
(estimates /
probability)
•Not Available
9–17
Gulf Air Decision Making Conditions
Decision
Alternatives
Details
(Information)
Probability of
making a Bad
decision
Level of
Ambiguity
Conditions
Buying 5 planes
•All Known
•Available
(perfect and
Complete)
•Low
•Low
•Certainty
Submitting a
quotation to win a
bid to be the official
carrier to F1
travelers
•Some
Known
•Partially
available
(estimates /
probability)
•Moderate
•Moderate
•Risk
GF flights Jupiter
•Not Known •Not Available
•High
•High
•Uncertainty
9–18
Decision-Making Conditions (cont’d)
The decision
maker faces
conditions of...
Certainty
Risk
Uncertainty
Level of ambiguity and chances of making a bad decision
Lower
Moderate
Higher
Figure 9.1
9–19
Decision-Making Conditions
• Decision Making Under Certainty
– A condition in which the decision maker knows with
reasonable certainty what the alternatives are and what
conditions are associated with each alternative.
• Decision Making Under Risk
– A condition in which the availability of each alternative and
its potential payoffs and costs are all associated with risks.
• Decision Making Under Uncertainty
– A condition in which the decision maker does not know all
the alternatives, the risks associated with each, or the
consequences of each alternative.
9–20
Decision-making conditions
• Stock analysts are able to make predictions about
the price movement of individual stocks or the
market as a whole, based on probabilities that were
derived from a study of historical stock prices.
What is the decision-making condition faced by
stock analyst.
(a) Conditions of certainty
(b) Conditions of Risk
(c) Conditions of Uncertainty
9–21
Rational Perspectives on
Decision Making
Rational Perspectives on
Decision Making
• The Classical Model of Decision Making
• obtain complete
When faced with a
and perfect information
decision situation,
• eliminate uncertainty
managers should. . .
• evaluate everything
rationally and logically
. . . and end up with
a decision that best
serves the interests
of the organization.
Figure 9.2
9–23
What are the assumptions of the rational model of
decision-making (Classical Perspective)
Managers obtain
a) Complete and perfect
information
b) Incomplete and imperfect
information
Decision-making condition is
a) Certainty
b) Risk
c) Uncertainty
Managers must be focused on
a) Facts and logic
b) Subjective judgment
Decision-makers are
a) rational, logical, and dispassionate
when they make decisions
b) irrational, illogical, and passionate
when they make decisions
Decision-makers ---------------Managers ------------ eliminate
take decisions that best serves
uncertainty
the interest of the organization
a) Can
b) Can’t
a) always
b) sometimes
c) never
9–24
The Classical Model of Decision Making
…and end up with a
decision that best
serves the interests
of the organization.
Obtain complete and
perfect information.
Eliminate uncertainty.
Evaluate everything
rationally and logically…
When faced with a
decision situation,
managers
should…
9–25
•What are the ideal
steps that would be
taken to reach and
implement a decision.
9–26
Rational Model Of d-m
1. Recognizing and defining the decision situation
2. Identifying alternatives
3. Evaluate alternatives
–
–
–
Feasibility
Satisfactory
Affordable consequences
4. Select the an alternative (s)
5. Implement the decision
6. Follow up and evaluate the results
9–27
which of the following statements is true
According to the Rational Model Of decision-making
1. The first step is to recognize that a decision is necessary.
To do this, the situation must be defined clearly and fully.
2. All alternative courses of action must be listed for
evaluation.
3. The proper sequence for evaluating a decision alternative
is, satisfactoriness, feasibility and probable consequences.
4. The alternative that is selected is the one with the highest
feasibility, satisfaction and affordable consequences.
5. Selecting an alternative is the crux (decisive factor) of
decision-making
6. In implementing the chosen alternatively, some unexpected
consequences might occur.
9–28
K-mart Steps of Classical Decision-making Model
• K-Mart is a company that sells shoes and has two divisions, specialty
store and a discount. The former, specializes in high quality shoes while
the later is in lower quality shoes. The company needed to take a decision
regarding the future of the company. The company was loosing and was
facing a possibility of bankruptcy.
• What would be the first step to reach a decision?
• Recognizing that a decision is necessary. To do this, the problem must be
defined clearly and fully.
• Define the problem and specify the indicators that you used to recognize
the need to take a decision?
• Kmart recently defined its decision situation as a need to decided what
to do with the future of the company? How to recover from bankruptcy
and to regain lost sales and profits.
• If K-mart decided to continue then it needs an injection of fund of about
10 million to recover.
9–29
Kmart Criteria for Evaluation of Alternatives
Kmart saw its primary options as
• Option (1) Borrow 10m from a bank
• Option (2) selling off its discount operations and concentrating on specialty
retailing,
• Option (3) selling off its specialty store businesses to raise cash, or
• Option (4) shutting down the company (selling the company)
Kmart have asked you, as a management consultant, to evaluate the alternatives on three
criteria:
–
–
–
Feasibility
Satisfactory
Affordable consequences
In selecting an alternative, use the facts below only.
• Banks and financial institutions were unwilling to lend the 10m due to the weak financial
position.
• There is one interested buyer who is willing to pay the market value of 8m. The shareholders
are not interested in selling it as the projection of the future demand is increasing.
• There are already interesting buyers for the specialty store. The value of this division is
around 12m. Projection of future demand of quality shoes indicates a sharp decline as
customers are increasingly interested in discount shoes. Therefore, Shareholders are willing
to sell this division.
• The market value of the company as a total is 18m. There is only one interested buyer who is
willing to pay 14m for the whole company. The stockholders are not willing to sell at this
price as it reduces their personal wealth.
9–30
3. EVALUATE ALTERNATIVES
Feasible
Affordable
consequences
Satisfactory
9–31
Evaluation Criteria
Meaning
Feasibility
Whether the
alternative is
within the
realm of
probability
and
practicality
for the
organization
Satisfactory
to the extent
to which the
alternative
meets the
conditions of
the situation
Affordable
consequences
The effects of
the decisions
on the the
total
organization
Option (1)
Borrow
Option (2)
Sell Discount
Option (3)
Sell Specialty
Options (4)
Sell company
9–32
Evaluation Criteria
Meaning
Option (1)
Borrow
Option (2)
Sell Discount
Option (3)
Sell Specialty
Options (4)
Sell company
Feasibility
Whether the
alternative is
within the realm
of probability and
practicality for
the organization
No bank in willing
to lend the
company 10 m due
to the weak
financial position
of the company
There is one
interested buyer
who is willing
to pay the
market value of
8m.
Yes, as there are
interested
buyers for this
segment.
Yes, there is only
one interested
buyer who is
willing to pay
12m for the whole
company
Satisfactory
to the extent to
which the
alternative meets
the conditions of
the situation
No, Selling at
8m will not
meet the
company
requirement of
10m
Yes, Sell at
12m will meet
the company
requirement of
10 m
Yes, selling at
14m will meet the
company
requirement of
10m.
Affordable
consequences
The effects of the
decisions on the
the total
organization
Yes,
Shareholders
are willing to
sell. As a
consequence,
the company
will consist of
one division
only that is the
discount stores
and the growth
of demand for
this segment is
increasing.
No, The
stockholders are
not willing to sell
at this price as it
reduces their
personal wealth.
9–33
Evaluating Alternatives in the
Decision-Making Process
Is the alternative
feasible?
Yes
Is the alternative
satisfactory?
Yes
Are the alternative’s
consequences
affordable?
No
No
No
Eliminate from
consideration
Eliminate from
consideration
Eliminate from
consideration
Yes
Retain for further
consideration
9–34
Steps in the Rational
Decision-Making Process
Step
Detail
Example
1. Recognizing and
defining the decision
situation
Some stimulus indicates that a
decision must be made. The
stimulus may be positive or
negative.
A plant manager sees that
employee turnover has increased by 5 percent.
2. Identifying alternatives
Both obvious and creative
alternatives are desired. In
general, the more important
the decision, the more alternatives should be considered.
The plant manager can increase wages, increase benefits, or change hiring standards.
3. Evaluating alternatives
Each alternative is evaluated
to determine its feasibility, its
satisfactoriness, and its
consequences.
Increasing benefits may not be
feasible. Increasing wages and
changing hiring standards may
satisfy all conditions.
9–35
Steps in the Rational
Decision-Making Process (cont’d)
Step
Detail
Example
4. Selecting the best
alternative
Consider all situational factors,
and choose the alternative that
best fits the manager’s
situation.
Changing hiring standards will take
an extended period of time to cut
turnover, so increase wages.
5. Implementing the
chosen alternative
The chosen alternative is
implemented into the
organizational system.
The plant manager may need
permission from corporate
headquarters. The human resource
department establishes a new wage
structure.
6. Following up and
evaluating the
results
At some time in the future, the
manager should ascertain the
extent to which the alternative
chosen in step 4 and
implemented in step 5 has
worked.
The plant manager notes that, six
months later, turnover has dropped
to its previous level.
9–36
What are the assumptions the rational model of
decision-making
Managers can obtain
a)
b)
Complete and perfect information
Incomplete and imperfect information
Decision-making condition is
a)
b)
c)
Certainty
Risk
Uncertainty
Managers ------------ eliminate uncertainty
a)
b)
Can
Can’t
Managers must be focused on
a)
b)
Facts and logic
Subjective judgment
Decision-makers are
a)
b)
rational, logical, and dispassionate when they make decisions
irrational, illogical, and passionate when they make decisions
Decision-makers ------------------ take decisions that decision that best serves the interest of the
organization
a)
b)
c)
Always
Sometimes
never
9–37
Behavioral
perspective
of d-m
Behavioral Aspects of Decision Making
• The Administrative
Model of Decision
Making
...and end up with a
decision that may or
may not serve the
interests of the
organization.
Use incomplete and
imperfect Information.
Are constrained by
bounded rationality.
Tend to satisfice…
When faced with a
decision situation
managers
actually…
9–39
Behavioral and Political Aspects of d-m
Which of the following statements is true.
• Decision makers are limited with their values, skills and
knowledge.
• In reality decision makers have the tendency to search for all
alternatives.
• In reality decision makers tend to search for alternative until
one is found that meets some minimum standard of
sufficiency.
• It is impossible for an informal alliance of groups to effect the
decision that will be selected.
• Sometimes, decision makers select an alternative based on their
inner belief about something without proper evaluation.
• It is impossible for a decision maker to stay with a decision
when it appears to be wrong.
• In reality a decision maker effected by his/her willingness to
gamble when making a decision.
• Individual ethics (personal beliefs about right and wrong
behavior) combine with the organization’s ethics affects the
decision-maker.
9–40
Behavioral Aspects of
Decision Making (cont’d)
• Bounded Rationality
– The concept that decision makers are limited by their values
and unconscious reflexes, skills, and habits.
• Satisficing
– The tendency to search for alternatives only until one is
found that meets some minimum standard of sufficiency to
resolve the problem.
• Coalition
– A political force in decision making which consists of an
informal alliance of individuals or groups formed to achieve a
goal.
9–41
Behavioral Aspects of
Decision Making (cont’d)
• Intuition
– An innate belief about something without conscious
consideration.
• Escalation of Commitment
– A decision maker is staying with a decision even when it
appears to be wrong.
• Risk Propensity
– The extent to which a decision maker
is willing to gamble when making
a decision.
9–42
Behavioral Aspects of
Decision Making (cont’d)
• Ethics and Decision Making
– Individual ethics (personal beliefs about right and wrong
behavior) combine with the organization’s ethics to create
managerial ethics.
– Components of managerial ethics:
• Relationships of the firm to employees
• Employees to the firm
• The firm to other economic agents
9–43
Behavioral Aspects of Decision Making
• The Administrative Model of Decision Making
• use incomplete and
When faced with a
decision situation
managers actually…
imperfect information
• are constrained by
bounded rationality
• tend to satisfice
. . . and end up with a
decision that may or may
not serve the interests
of the organization.
Figure 9.4
9–44
What are the assumptions of the administrative
model (Behavioral perspective of decision-making)
In reality, managers obtain
a) Complete and perfect
information
b) Incomplete and imperfect
information
In reality, decision-making
condition is NOT
a) Certainty
b) Risk
c) Uncertainty
In reality, managers focus on
a) Facts and logic only
b) Facts and logic along with subjective
judgment and other behavioral aspects
In reality, decision-makers are
a) rational, logical, and dispassionate
when they make decisions
b) Not fully rational, logical, when they
make decisions
In reality, decision-makers
---------------- take
decisions that best serves
In reality, managers ----------the interest of the
completely eliminate
organization
uncertainty
a) Can
b) Can’t
a) Always
b) Sometimes
c) never
9–45
The Administrative Model of Decision
Making
...and end up with a
decision that may or
may not serve the
interests of the
organization.
Use incomplete and
imperfect Information.
Are constrained by
bounded rationality.
Tend to satisfice…
When faced with a
decision situation
managers
actually…
9–46
Behavioral and Political Aspects of d-m
Discuss the following statements. D0 you agree or disagree and why?
Correct the statements that you disagree with .
1.
2.
3.
4.
5.
6.
7.
8.
In reality, decision makers are limited by their values, skills and
knowledge.
In reality, decision makers have the tendency to search for all
alternatives.
In reality, decision makers tend to search for alternatives until one is
found that meets some minimum standard of sufficiency.
It is impossible for an informal alliance of groups to effect the decision
that will be selected.
In reality, sometimes, decision makers select an alternative based on
their inner belief about something without proper evaluation.
It is impossible for a decision maker to stay with a decision when it
appears to be wrong.
In reality a decision maker is effected by his/her willingness to
gamble when making a decision.
Individual ethics (personal beliefs about right and wrong behavior)
combined with the organization’s ethics affect the decision-maker.
9–47
Behavioral and Political Aspects of d-m
Match the behaviors that you agree with with one of
the following terms.
•
•
•
•
•
•
•
Escalation of Commitment
Intuition
Satisficing
Bounded Rationality
Risk Propensity
Ethics and Decision Making
Coalition
9–48
Behavioral Aspects of
Decision Making (cont’d)
• Bounded Rationality
– The concept that decision makers are limited by their values
and unconscious reflexes, skills, and habits.
• Satisficing
– The tendency to search for alternatives only until one is
found that meets some minimum standard of sufficiency to
resolve the problem.
• Coalition
– A political force in decision making which consists of an
informal alliance of individuals or groups formed to achieve a
goal.
9–49
Behavioral Aspects of
Decision Making (cont’d)
• Intuition
– An innate belief about something without conscious
consideration.
• Escalation of Commitment
– A decision maker is staying with a decision even when it
appears to be wrong.
• Risk Propensity
– The extent to which a decision maker
is willing to gamble when making
a decision.
9–50
Behavioral Aspects of
Decision Making (cont’d)
• Ethics and Decision Making
– Individual ethics (personal beliefs about right and wrong
behavior) combine with the organization’s ethics to create
managerial ethics.
– Components of managerial ethics:
• Relationships of the firm to employees
• Employees to the firm
• The firm to other economic agents
9–51
Concepts Covered ….
• The Nature of Decision
Making
– Decision Making Defined
– Types of Decisions
– Decision-Making Conditions
• Certainty
• Risk
• Uncertainty
• Rational Perspectives on
Decision Making
– The Classical Model of
Decision Making
– Steps in Rational Decision
Making
• Behavioral Aspects of
Decision Making
– The Administrative Model
– Political Forces in Decision
Making
• Bounded Rationality
• Satisfice
– Intuition and Escalation of
Commitment
– Risk Propensity and Decision
Making
– Ethics and Decision Making
9–52