Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-1
The
Manager as a
Decision Maker
6
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-2
Managerial Decision Making
?Decision making,the process by which
managers respond to opportunities and
threats by analyzing options,and making
decisions about goals and courses of action,
?Decisions in response to opportunities,
managers respond to ways to improve
organizational performance,
?Decisions in response to threats,occurs when
managers are impacted by adverse events to
the organization,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-3
Types of Decision Making
?Programmed Decisions,routine,almost
automatic process,
? Managers have made decision many times before,
? There are rules or guidelines to follow,
? Example,Deciding to reorder office supplies,
?Non-programmed Decisions,unusual
situations that have not been often
addressed,
? No rules to follow since the decision is new,
? These decisions are made based on information,and a
manger’s intuition,and judgment,
? Example,Should the firm invest in a new technology?
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-4
The Classical Model
?Classical model of decision making,a
prescriptive model that tells how the decision
should be made,
? Assumes managers have access to all the information
needed to reach a decision,
? Managers can then make the optimum decision by easily
ranking their own preferences among alternatives,
?Unfortunately,mangers often do not have all
(or even most) required information,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-5
The Classical Model
List alternatives
& consequences
Rank each alternative
from low to high
Select best
alternative
Assumes all information
is available to manager
Assumes manager can
process information
Assumes manager knows
the best future course of
the organization
Figure 6.1
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-6
The Administrative Model
?Administrative Model of decision making,Challenged the classical assumptions that
managers have and process all the information,
? As a result,decision making is risky,
?Bounded rationality,There is a large number
of alternatives and information is vast so 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,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-7
Why Information is Incomplete
Uncertainty
& risk
Ambiguous
Information
Time constraints &
information costs
Incomplete
Information
Figure 6.2
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-8
Incomplete Information Factors
?Incomplete information exists due to many
issues,
? Risk,managers know a given outcome can fail or
succeed and probabilities can be assigned,
? Uncertainty,probabilities cannot be given for outcomes
and the future is unknown,
?Many decision outcomes are not known such as a new
product introduction,
? Ambiguous information,information whose meaning is
not clear,
?Information can be interpreted in different ways,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-9
Incomplete Information Factors
?Time constraints and Information costs,
Managers do not have the time or money to
search for all alternatives,
? This leads the manager to again decide based on
incomplete information,
?Satisficing,Managers explore a limited
number of options and choose an acceptable
decision rather than the optimum decision,
? This is the response of managers when dealing with
incomplete information,
? Managers assume that the limited options they examine
represent all options,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-10
Decision Making Steps
Recognize need for
a decision
Frame the problem
Generate & assess alternatives
Choose among alternatives
Implement chosen alternative
Learn from feedback
Figure 6.4
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-11
Decision Making Steps
1,Recognize need for a decision,Managers must first realize that a decision must be
made,
?Sparked by an event such as environment changes,
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,
3,Evaluate alternatives,what are the advantages and disadvantages of each
alternative?
?Managers should specify criteria,then evaluate,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-12
Decision Making Steps
4,Choose among alternatives,managers rank
alternatives and decide,
?When ranking,all information needs to be considered,
5,Implement choose alternative,managers
must now carry out the alternative,
?Often a decision is made and not implemented,
6,Learn from feedback,managers should
consider what went right and wrong with
the decision and learn for the future,
?Without feedback,managers never learn from
experience and make the same mistake over,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-13
Evaluating Alternatives
Legal?
Ethical
Economical?
Practical?
Is the possible course of action,Figure 6.5
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-14
Evaluating Alternatives
?Is it legal? Managers must first be sure that
an alternative is legal both in this country and
abroad for exports,
?Is it ethical? The alternative must be ethical
and not hurt stakeholders unnecessarily,
?Is it economically feasible? Can our
organization’s performance goals sustain this
alternative?
?Is it practical? Does the management have the
capabilities and resources to do it?
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-15
Cognitive Biases
?Suggests decision makers use heuristics to
deal with bounded rationality,
? A heuristic is a rule of thumb to deal with complex
situations,
? If the heuristic is wrong,however,then poor decisions
result from its use,
?Systematic errors can result from use of an
incorrect heuristic,
? These errors will appear over and over since the rule
used to make decision is flawed,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-16
Types of Cognitive Biases
Prior Hypothesis
Representativeness
Illusion of Control
Escalating Commitment
Cognitive
Biases
Figure 6.6
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-17
Types of Cognitive Biases
Prior hypothesis bias,manager allows strong prior
beliefs about a relationship between variables and makes
decisions based on these beliefs even when evidence
shows they are wrong,
Representativeness,decision maker incorrectly
generalizes a decision from a small sample or one
incident,
Illusion of control,manager over-estimates their ability
to control events,
Escalating commitment,manager has already
committed considerable resource to project and then
commits more even after feedback indicates problems,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-18
Group Decision Making
Many decisions are made in a group setting,
? Groups tend to reduce cognitive biases and can call on
combined skills,and abilities,
There are some disadvantages with groups,
Group think,biased decision making resulting
from group members striving for agreement,
? Usually occurs when group members rally around a
central manger’s idea (CEO),and become blindly
committed without considering alternatives,
? The group tends to convince each member that the idea
must go forward,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-19
Improved Group Decision Making
?Devil’s Advocacy,one member of the group
acts as the devil’s advocate and critiques the
way the group identified alternatives,
? Points out problems with the alternative selection,
?Dialectical inquiry,two different groups are
assigned to the problem and each group
evaluates the other group’s alternatives,
? Top managers then hear each group present their
alternatives and each group can critique the other,
?Promote diversity,by increasing the diversity
in a group,a wider set of alternatives may be
considered,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-20
Devil’s Advocacy v,Dialectic Inquiry
Devil’s Advocacy
Presentation of
alternative
Critique of
alternative
Reassess
alternative
accept,modify,reject
Dialectic Inquiry
Alter,1
Debate the two
alternatives
Reassess
alternatives
accept 1 or 2,combine
Alter,2
Figure 6.7
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-21
Organizational Learning & Creativity
?Organizational Learning,Managers seek to
improve member’s ability to understand the
organization and environment so as to raise
effectiveness,
? The learning organization,managers try to improve the
people’s ability to behave creatively to maximize
organizational learning,
?Creativity,is 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 organization,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-22
Senge’s Learning Organization Principles
Figure 6.8
Develop Personal
Mastery
Build Shared
Vision
Build complex,
challenging
mental models
Promote Team
Learning
Encourage
Systems
Thinking
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-23
Creating a Learning Organization
Senge suggests top managers follow several
steps to build in learning,
? 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,
? Build a Shared Vision,a people share a common mental
model of the firm to evaluate opportunities,
? Systems Thinking,know that actions in one area of the
firm impacts all others,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-24
Individual Creativity
?Organizations can build an environment
supportive of creativity,
? Many of these issues are the same as for the learning
organization,
? Managers must provide employees with the ability to
take risks,
? If people take risks,they will occasionally fail,
?Thus,to build creativity,periodic failures
must be rewarded,
? This idea is hard to accept for some managers,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-25
Building 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,
?Be creative and radical in stating alternatives,
?When all are listed,then the pros and cons of each are
discussed and a short list created,
?Production blocking is a potential problem
with brainstorming,
?Members cannot absorb all information being presented
during the session and can forget their own alternatives,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-26
Building Group Creativity
?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,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-27
Building Group Creativity
?Delphi Technique,provides for a written
format without having all managers meet
face-to-face,
?Problem is distributed in written form to managers who
then generate written alternatives,
?Responses are received and summarized by top
managers,
?These results are sent back to participants for feedback,
and ranking,
?The process continues until consensus is reached,
? Delphi allows distant managers to participate,
6-1
The
Manager as a
Decision Maker
6
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-2
Managerial Decision Making
?Decision making,the process by which
managers respond to opportunities and
threats by analyzing options,and making
decisions about goals and courses of action,
?Decisions in response to opportunities,
managers respond to ways to improve
organizational performance,
?Decisions in response to threats,occurs when
managers are impacted by adverse events to
the organization,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-3
Types of Decision Making
?Programmed Decisions,routine,almost
automatic process,
? Managers have made decision many times before,
? There are rules or guidelines to follow,
? Example,Deciding to reorder office supplies,
?Non-programmed Decisions,unusual
situations that have not been often
addressed,
? No rules to follow since the decision is new,
? These decisions are made based on information,and a
manger’s intuition,and judgment,
? Example,Should the firm invest in a new technology?
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-4
The Classical Model
?Classical model of decision making,a
prescriptive model that tells how the decision
should be made,
? Assumes managers have access to all the information
needed to reach a decision,
? Managers can then make the optimum decision by easily
ranking their own preferences among alternatives,
?Unfortunately,mangers often do not have all
(or even most) required information,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-5
The Classical Model
List alternatives
& consequences
Rank each alternative
from low to high
Select best
alternative
Assumes all information
is available to manager
Assumes manager can
process information
Assumes manager knows
the best future course of
the organization
Figure 6.1
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-6
The Administrative Model
?Administrative Model of decision making,Challenged the classical assumptions that
managers have and process all the information,
? As a result,decision making is risky,
?Bounded rationality,There is a large number
of alternatives and information is vast so 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,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-7
Why Information is Incomplete
Uncertainty
& risk
Ambiguous
Information
Time constraints &
information costs
Incomplete
Information
Figure 6.2
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-8
Incomplete Information Factors
?Incomplete information exists due to many
issues,
? Risk,managers know a given outcome can fail or
succeed and probabilities can be assigned,
? Uncertainty,probabilities cannot be given for outcomes
and the future is unknown,
?Many decision outcomes are not known such as a new
product introduction,
? Ambiguous information,information whose meaning is
not clear,
?Information can be interpreted in different ways,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-9
Incomplete Information Factors
?Time constraints and Information costs,
Managers do not have the time or money to
search for all alternatives,
? This leads the manager to again decide based on
incomplete information,
?Satisficing,Managers explore a limited
number of options and choose an acceptable
decision rather than the optimum decision,
? This is the response of managers when dealing with
incomplete information,
? Managers assume that the limited options they examine
represent all options,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-10
Decision Making Steps
Recognize need for
a decision
Frame the problem
Generate & assess alternatives
Choose among alternatives
Implement chosen alternative
Learn from feedback
Figure 6.4
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-11
Decision Making Steps
1,Recognize need for a decision,Managers must first realize that a decision must be
made,
?Sparked by an event such as environment changes,
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,
3,Evaluate alternatives,what are the advantages and disadvantages of each
alternative?
?Managers should specify criteria,then evaluate,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-12
Decision Making Steps
4,Choose among alternatives,managers rank
alternatives and decide,
?When ranking,all information needs to be considered,
5,Implement choose alternative,managers
must now carry out the alternative,
?Often a decision is made and not implemented,
6,Learn from feedback,managers should
consider what went right and wrong with
the decision and learn for the future,
?Without feedback,managers never learn from
experience and make the same mistake over,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-13
Evaluating Alternatives
Legal?
Ethical
Economical?
Practical?
Is the possible course of action,Figure 6.5
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-14
Evaluating Alternatives
?Is it legal? Managers must first be sure that
an alternative is legal both in this country and
abroad for exports,
?Is it ethical? The alternative must be ethical
and not hurt stakeholders unnecessarily,
?Is it economically feasible? Can our
organization’s performance goals sustain this
alternative?
?Is it practical? Does the management have the
capabilities and resources to do it?
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-15
Cognitive Biases
?Suggests decision makers use heuristics to
deal with bounded rationality,
? A heuristic is a rule of thumb to deal with complex
situations,
? If the heuristic is wrong,however,then poor decisions
result from its use,
?Systematic errors can result from use of an
incorrect heuristic,
? These errors will appear over and over since the rule
used to make decision is flawed,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-16
Types of Cognitive Biases
Prior Hypothesis
Representativeness
Illusion of Control
Escalating Commitment
Cognitive
Biases
Figure 6.6
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-17
Types of Cognitive Biases
Prior hypothesis bias,manager allows strong prior
beliefs about a relationship between variables and makes
decisions based on these beliefs even when evidence
shows they are wrong,
Representativeness,decision maker incorrectly
generalizes a decision from a small sample or one
incident,
Illusion of control,manager over-estimates their ability
to control events,
Escalating commitment,manager has already
committed considerable resource to project and then
commits more even after feedback indicates problems,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-18
Group Decision Making
Many decisions are made in a group setting,
? Groups tend to reduce cognitive biases and can call on
combined skills,and abilities,
There are some disadvantages with groups,
Group think,biased decision making resulting
from group members striving for agreement,
? Usually occurs when group members rally around a
central manger’s idea (CEO),and become blindly
committed without considering alternatives,
? The group tends to convince each member that the idea
must go forward,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-19
Improved Group Decision Making
?Devil’s Advocacy,one member of the group
acts as the devil’s advocate and critiques the
way the group identified alternatives,
? Points out problems with the alternative selection,
?Dialectical inquiry,two different groups are
assigned to the problem and each group
evaluates the other group’s alternatives,
? Top managers then hear each group present their
alternatives and each group can critique the other,
?Promote diversity,by increasing the diversity
in a group,a wider set of alternatives may be
considered,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-20
Devil’s Advocacy v,Dialectic Inquiry
Devil’s Advocacy
Presentation of
alternative
Critique of
alternative
Reassess
alternative
accept,modify,reject
Dialectic Inquiry
Alter,1
Debate the two
alternatives
Reassess
alternatives
accept 1 or 2,combine
Alter,2
Figure 6.7
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-21
Organizational Learning & Creativity
?Organizational Learning,Managers seek to
improve member’s ability to understand the
organization and environment so as to raise
effectiveness,
? The learning organization,managers try to improve the
people’s ability to behave creatively to maximize
organizational learning,
?Creativity,is 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 organization,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-22
Senge’s Learning Organization Principles
Figure 6.8
Develop Personal
Mastery
Build Shared
Vision
Build complex,
challenging
mental models
Promote Team
Learning
Encourage
Systems
Thinking
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-23
Creating a Learning Organization
Senge suggests top managers follow several
steps to build in learning,
? 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,
? Build a Shared Vision,a people share a common mental
model of the firm to evaluate opportunities,
? Systems Thinking,know that actions in one area of the
firm impacts all others,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-24
Individual Creativity
?Organizations can build an environment
supportive of creativity,
? Many of these issues are the same as for the learning
organization,
? Managers must provide employees with the ability to
take risks,
? If people take risks,they will occasionally fail,
?Thus,to build creativity,periodic failures
must be rewarded,
? This idea is hard to accept for some managers,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-25
Building 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,
?Be creative and radical in stating alternatives,
?When all are listed,then the pros and cons of each are
discussed and a short list created,
?Production blocking is a potential problem
with brainstorming,
?Members cannot absorb all information being presented
during the session and can forget their own alternatives,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-26
Building Group Creativity
?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,
Irwin/McGraw-Hill ?The McGraw-Hill Companies,Inc.,2000
6-27
Building Group Creativity
?Delphi Technique,provides for a written
format without having all managers meet
face-to-face,
?Problem is distributed in written form to managers who
then generate written alternatives,
?Responses are received and summarized by top
managers,
?These results are sent back to participants for feedback,
and ranking,
?The process continues until consensus is reached,
? Delphi allows distant managers to participate,
