Managerial Decision Making

Chapter 3

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
3-2
Learning Objectives

 Describe the kinds of decisions you will face as a

manager

 Summarize the steps in making “rational” decisions

 Recognize the pitfalls you should avoid when making

decisions

 Evaluate the pros and cons of using a group to make

decisions

3-3
Learning Objectives

 Identify procedures to use in leading a decision-

making group

 Explain how to encourage creative decisions

 Discuss the process by which decisions are made in

organizations

 Describe how to make decisions in a crisis

3-4
“The business executive is by profession
a decision maker. Uncertainty is his
opponent. Overcoming it is his mission.”

-John McDonald

3-5
Managerial Decision Making

3-6
Characteristics of
Managerial Decisions
Managers face problems and opportunities constantly; some simple and
some overwhelming. In fact, some managers actually
avoid making decisions.
Lack of structure Programmed decisions versus nonprogrammed
decisions

Uncertainty and ri Certainty versus uncertainty versus risk

sk

Conflict Psychological conflict versus conflict between people

3-7
Stages of Decision Making

Identifying/ Generating
Evaluating
Diagnosing Alternative
Alternatives
Problem Solutions

Making Implementing Evaluating

the the the
Choice Decision Decision

3-8
The Best Decision

 Nothing can guarantee a “best” decision, but

managers should be confident they followed
proper decision-making procedures

 Vigilance occurs when the decision maker

carefully executes all stages of decision
making

3-9
Barriers to Effective
Decision Making
 Why don’t managers use rational decision
processes?
 Improperly defined or misidentified goal
 Too few solution alternatives generated
 Poorly planned execution
 Inadequate or nonexistent monitoring

3-10
Barriers to Effective
Decision Making
Psychological biases Biases that interfere with objective rationality
including the
illusion of control, framing effects, and discounting
the future

Time pressures The pressure to act quickly; managers employ a

variety of tactics to manage time pressures

Social realities Interpersonal factors that decrease decision-

making effectiveness

3-11
Decision Making in Groups

 “Two heads are better than one”

 Groupsusually make higher quality decisions

than most individuals acting alone

 However, group decisions are often inferior to

the best individual decisions

3-12
Decision Making in Groups

3-13
Decision Making in Groups

Potential Advantages Potential Disadvantages

More information One member may dominate the

discussion
Greater number of perspectives Satisficing is more likely

Opportunity for intellectual Pressure to avoid disagreement can

stimulation lead to groupthink
Participants likely to understand why Goal displacement is more likely
decision was made
Higher level of commitment to
decision

3-14
Managing Group Decision Making

 Leadership style
 Minimize process-related problems
 Avoid dominating the discussion
 Encourage less-vocal group members to air
opinions and suggestions
 Be alert to groupthink, satisficing, and goal
displacement

3-15
Managing Group
Decision Making
Constructive conflict helps avoid groupthink and uncreative solutions while
bringing out diverse viewpoints

Cognitive conflict Issue-based differences in perspectives or

judgments

Affective conflict Emotional disagreement directed toward other

people

Devil’s advocate A person who has the job of criticizing ideas to

ensure that their downsides are fully explored

Dialectic A structured debate comparing two conflicting

courses of action

3-16
Managing Group
Decision Making
 Encouraging creativity
 Give creative efforts the credit they deserve
 Don’t punish creative failures
 Avoid extreme time pressures
 Stimulate and challenge people intellectually
 Listen to employees’ ideas
 Put together groups with different styles of thinking
 Get your people in touch with customers
 Protect your people from managers who demand
immediate payoffs
 Be creative yourself

3-17
Managing Group
Decision Making
 Brainstorming
A process in which group members generate as
many ideas about a problem as they can
 Criticism is withheld until all ideas have been
proposed

3-18
Organizational
Decision Making
 Constraints on decision makers

 Models of organization decision making

 Bounded rationality
 Incremental model
 Coalitional model
 Garbage can model

 Decision making in a crisis

3-19
Why Do Managers Sometimes Avoid
Making Decisions?
 Managers can’t be sure how much time,
energy, or trouble lies ahead

 Getting involved is risky; tackling a problem

but failing to solve it can hurt a manager’s
track record

 Itis easier to procrastinate or get busy with

less demanding activities
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original slide 3-20
Lack of Structure

 Programmed decisions
 Decisions encountered and made before, having
objectively correct answers, and solvable by using
simple rules, policies, or numerical computations

 Nonprogrammed decisions
 New,
novel, complex decisions having no proven
answers

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original slide 3-21
Uncertainty and Risk
 Certainty
 Decision makers have accurate and comprehensive
information

 Uncertainty
 Decision makers have insufficient information

 Risk
 The probability of success is less than 100% and
losses may occur

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original slide 3-22
Conflict

 Conflict
 Opposing pressures from different sources,
occurring on the level of psychological conflict or of
conflict between individuals or groups
Decision makers experience psychological
conflict when several options are attractive, or
when none of the options is attractive
Conflict arises between people

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original slide 3-23
Identifying and Diagnosing the Problem

 Recognize a problem exists by comparing the

current state (the way things are) to the
desired state (the way things ought to be
 Past performance
 Current performance
 Future expected performance

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original slide 3-24
Generating Alternative Solutions

 Ready-made solutions
 Ideas that have been seen or tried before

 Custom-made solutions
 New,creative solutions designed specifically or the
problem

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original slide 3-25
Evaluating Alternatives

 Choosing the best solution

 Is information complete and current? If not, can we get more
and better information?
 Does the alternative meet our primary objective?
 What problems could we have if we implement the
alternative?

 Contingency plans are alternative courses of action

that can be implemented based on how the future
unfolds.

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original slide 3-26
Making the Choice

 Maximizing
 Making the best possible decision

 Satisficing
 Choosing an option that is acceptable, although not
necessarily the best or perfect

 Optimizing
 Achieving the best possible balance among several
goals

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original slide 3-27
Implementing the Decision

 Those implementing the decision must

understand and be committed to its successful
implementation

 Decisionmakers should assume

implementation will not go smoothly
 Identify potential problems
 Identify potential opportunities

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original slide 3-28
Evaluating the Decision

 Collecting information on how well the decision

is working

 Decisioninformation is useful whether

feedback is positive or negative. Negative
feedback means that either:
 Implementation will require more time, resources,
effort, or thought
 The decision was a bad one in which case
managers process back to the first stage and
redefine the problem

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original slide 3-29
Psychological Biases

 Illusion of control
 People’s belief that they can influence events, even when
they have no control over what will happen

 Framing effects
 A psychological bias influenced by the way a problem or
decision alternative is phrased or presented

 Discounting the future

 A bias weighting short-term costs and benefits more heavily
than longer-term costs and benefits

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original slide 3-30
Tactics to Manage
Time Pressures
 Focus on real-time information

 Involve people more effectively and efficiently

in the decision-making process

 Take a realistic view of conflict

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original slide 3-31
Groupthink

A phenomenon that occurs in decision making

when group members avoid disagreement as
they strive for consensus

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original slide 3-32
Goal Displacement

A condition that occurs when a decision-

making group loses sight of its original goal
and a new, less important goal emerges

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original slide 3-33
Bounded Rationality

A less-than-perfect form of rationality in which

decision makers cannot be perfectly rational
because decisions are complex and complete
information is unavailable

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original slide 3-34
Incremental Model

 Modelof organizational decision making in

which major solutions arise through a series of
smaller decisions

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original slide 3-35
Coalitional Model

 Modelof organizational decision making in

which groups with differing preferences use
power and negotiations to influence decisions

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original slide 3-36
Garbage Can Model

A model of organizational decision making

depicting a chaotic process and seemingly
random decisions

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original slide 3-37