Chapter 2 Decision Making PDF

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Chapter Two: Decision Making

DESCRIBE THE 8 STEPS IN THE DECISION-MAKING PROCESS 1. Identify the problem 2. Identify decision criteria 3. Allocate weights to the criteria 4. Develop alternatives 5. Analyze alternatives 6. Select an alternative 7. Implement alternative 8. Evaluate decision effectiveness

Decisions Managers Make PLANNING What are the organisations long term goals? What strategies will best achieve those goals? What should the organisations short term goals be? How difficult should individual goals be?

ORGANISING How many employees should I have reporting directly to me? How much centralization should there be in an organisation? How should jobs be designed? When should the organisation implement a different structure?

LEADING How do I handle employees who appear to be unmotivated? What is the most effective leadership style in a given situation? Principles of Business 1

Chapter Two: Decision Making How will a specific change affect worker productivity? When is the right time to stimulate conflict?

CONTROLLING What activities in the organisation need to be controlled? How should those activities be controlled? When is a performance deviation significant? What time of management information system should the organisation have?

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Chapter Two: Decision Making

EXPLAIN THE 4 WAYS OF MAKING DECISIONS Rationality When managers make logical and consistent choices to maximize value. A rational decision maker is fully objective and logical. The problem faced needs to be clear and unambiguous, and the decision maker will have a clear goal in mind. They will consider all the alternatives and follow the 8 steps in decision making. They will be aware of all possible outcomes, including consequences and then chose the decision that maximizes the likelihood of reaching their goal. It isn’t common that a manager can make a completely rational decision, especially if the decision is complex. There are not many times that the conditions will be 100 percent predictable, which means a manager can never be completely sure of all the outcomes.

Bounded Rationality When managers make a rational decision, but they are limited by the information available and their understanding of the information. When managers can’t analyze all information on all alternatives they satisfice, which means they select the alternative that is good enough. They are being rational within the limits of their ability to process information. Most decisions don’t fit perfectly into all the assumptions for a rational decision. Other influences for decision making are the organisations culture, internal politics, power considerations and escalation of commitment. Escalation of commitment is an increased commitment into a previous decision, despite there being evidence that it may have been wrong or that it is no longer working. The National Children’s Hospital is an example of escalation of commitment. The location chosen is filled with traffic and is not easy to access, but this is being ignored as there has already been such an investment. Principles of Business 1

Chapter Two: Decision Making

Intuition When managers make decisions based on their gut feeling, past experiences and their personal accumulated judgement.

Evidence Based Management The systematic use of best available evidence to improve management practices. Managers look at: 1. Decision makers expertise and judgement 2. External Evidence 3. Opinions, preferences and values of those of have a stake in the decision 4. Internal evidence, such as context, circumstances and organizational members

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Chapter Two: Decision Making

CLASSIFY DECISIONS AND DECISION-MAKING CONDITIONS DESCRIBE HOW BIASES AFFECT DECISION-MAKING Types of Decisions A structured problem is one that is clear, straightforward, familiar and easily resolved. They are usually problems that arise more than once. These require a programmed decision which is a repetitive decision that can be used multiple times. An unstructured problem is one that is new and unusual. These require an non-programmed decision which is a new decision that is formed usually for a once off use. Characteristics Type of Problem Managerial Level Frequency Information Goals Time Frame Solution relies on..

Programmed Structured Lower-Level Repetitive, routine Readily Available Clear and Specific Short-Term Procedures, Rules, Policies

Non-Programmed Unstructured Higher-Level New, Unusual Ambiguous or Incomplete Vague Long-Term Judgement and Creativity

Decision Making Conditions CERTAINTITY When a manager is faced with a clear problem and can make accurate decisions because all information is readily available. They can accurately predict the outcomes. RISK When a manager can estimate the likelihood of the outcomes but can’t be certain. Managers can use historical data to assign probabilities to certain outcomes, but nothing can be set in stone.

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Chapter Two: Decision Making UNCERTAINTITY When a manager makes a decision with very little or no information and cannot estimate the outcomes.

Decision Making Bias Overconfidence Bias: When a person has an overly optimistic and positive view of themselves and their performance Immediate Gratification: When a person makes a decision based on getting a reward or result right away. Anchoring Effect: When a person focuses on initial information and ignores all subsequent information. Selective Perception: When a person selectively organizes and interprets information based on their own perceptions Confirmation Bias: When a person seeks out information to confirm their own initial ideas and ignores information that contradicts or discounts their idea. Framing Bias: When a person highlights certain aspects of a situation and ignores others. Availability Bias: When a person only remembers and looks at the most recent events they remember and don’t research into anything else. Representation Bias: When a person tries to predict an event based on how closely it represents a previous, slightly similar event. Randomness Bias: When a person makes a decision based off of random events Sunk Cost Error: When a person forgets that current choices can’t affect the past and keep investing in what is now a bad decision Self-Serving Bias: When a person is quick to take credit when a decision goes well, but passes blame when the decision doesn’t succeed. Hindsight Bias: When a person thinks they could have accurately predicted the event once the event has happened.

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Chapter Two: Decision Making

IDENTIFY EFFECTIVE DECISIONMAKING TECHNIQUES UNDERSTAND CULTURAL DIFFERENCES Attitudes, beliefs and behaviors all affect what decision may be a good one. These are all variable based on the country and culture you are in, as well as the culture and norms of the organisation. L’oreal encourage open debate around decision making whereas in China decisions are made from the very top as there is a very high respect for the chain of command. CREATE STANDARDS FOR GOOD DECISION MAKING Good decisions are forward-looking, relevant to the organisations goals and use all information available and are looked at objectively. Decision makers should avoid a conflict of interest, and if there is a conflict, the decision should be passed to someone else. KNOW WHEN IT’S TIME TO CALL IT QUITS Don’t become subject to sunk-cost error, if a decision is no longer working then change it. Don’t wait for it to become irreparable. USE AN EFFECTIVE DECISION-MAKING PROCESS Every decision should have 6 characteristics: 1. Focuses on what’s important 2. Logical and Consistent 3. Acknowledges both subjective and objective thinking and blends analysis and intuitive thinking 4. Requires only enough information and analysis as is necessary to resolve the problem 5. Encourages and guides the gathering of relevant information and informed opinion 6. Straightforward, reliable, easy to use and flexible

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Chapter Two: Decision Making DEVELOP ABILITY TO THINK CLEARLY Making good decisions doesn’t come naturally. You have to work at it, study and learn the processes and most importantly review your previous decisions to see where you could have improved.

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