Management Ch. 3 PDF

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Chapter 3: Decision Making 3.1 Describe the steps in the decision-making process. 3.2 Define the factors that affect how decisions are made. 3.3 Discuss contemporary issues in managerial decision making. 3.4 Describe how ethics and social responsibility relate to decision making. The Decision-Making Process (1 of 2) A good decision should be judged by the process used, not the results achieved. In some cases, a good decision results in an undesirable outcome. As a decision maker, you can control the process. But in the real world, factors outside your control can adversely affect the outcome. Using the right process may not always result in a desirable outcome, but it increases the probability! The decision-making process is a set of eight steps: 1. Identify a problem 2. Identify decision criteria 3. Allocate weights to criteria 4. Develop alternatives 5. Analyze alternatives 6. Select an alternative 7. Implement the alternative 8. Evaluate decision effectiveness The Decision-Making Process (2 of 2) Decision making is the essence of management Exhibit 3.1 The Decision-Making Process

Step 1: Identify a problem or, more specifically, a discrepancy between an existing and a desired state of affairs. Make a comparison between current reality and some standard, which can be (1) past performance, (2) previously set goals, or (3) the performance of some other unit within the organization or in other organizations. Step 2: Identify decision criteria. Managers must determine what is relevant in making a decision. These criteria are generally determined by one’s objectives. Every decision maker has criteria—whether explicitly stated or not—that guide his or her decision making. Note that in this step in the decisionmaking process, what’s not identified can be as important as what is because it’s still guiding the decision.

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Chapter 3: Decision Making Step 3: Allocate weights to criteria. If the criteria identified in Step 2 are not equally important, the decision maker must weight the items in order to give them the correct priority in the decision. A simple approach is to give the most important criterion a weight of 10 and then assign weights to the rest against that standard. Thus, a criterion with a weight of 10 would be twice as important as one given a 5. Of course, you could use 100 or 1000 or any number you select as the highest weight. The idea is to prioritize the criteria you identified in Step 2 by assigning a weight to each. Step 4: Develop alternatives. List viable alternatives that could resolve the problem. No attempt is made to evaluate the alternatives, only to list them. Step 5: Analyze alternatives. A decision maker must analyze each alternative by appraising each against the criteria established in steps 2 and 3. From this comparison, the strengths and weaknesses of each alternative become evident. Step 6: Select an alternative choose the best alternative from among those considered. Once all the pertinent criteria in the decision have been weighted and viable alternatives analyzed, simply choose the alternative that generated the highest total in Step 5. Step 7: Implement the alternative. Put the decision into action. This step involves conveying the decision to those affected by it and getting their commitment to it. Successful implementation requires participation. Step 8: Evaluate decision effectiveness: Has the problem been resolved satisfactorily? Factors Affecting Decision Making Everyone in an organization makes decisions, but decision making is particularly important in a manager’s job. Decision making is part of all four managerial functions. That’s why managers—when they plan, organize, lead, and control—are frequently called decision makers. Exhibit 3.5 Decisions in the Management Functions Planning Leading

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What are the organization’s long-term objectives?

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How do I handle employees who appear to be low in motivation?

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What strategies will best achieve those objectives?

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What is the most effective leadership style in a given situation?

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What should the organization’s shortterm objectives be?

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How will a specific change affect worker productivity?

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How difficult should individual goals be?

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When is the right time to stimulate conflict?

Chapter 3: Decision Making •

How many employees should I have report directly to me?

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What activities in the organization need to be controlled?

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How much centralization should there be in the organization?

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How should those activities be controlled?

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How should jobs be designed?

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When is a performance deviation significant?

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When should the organization implement a different structure?

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What type of management information system should the organization have?

What Are the Three Approaches Managers Use to Make Decisions? 1. The Rational Model assumes that decision makers are making decisions that are consistent and value-maximizing within specified constraints. HOWEVER, most decision managers do not fit the assumption of perfect rationality. 2. Bounded rationality means that managers make rational decisions but are limited—or ‘bounded’— by their ability to process information. • Furthermore, no one can possibly analyze all information on all alternatives, so decision makers satisfice—that is, they accept solutions that are “good enough,” rather than spend time and resources trying to maximize. Most managerial decisions are not perfectly rational because they are influenced by: 1. the organization’s culture 2. internal politics 3. political considerations, and 4. a phenomenon called escalation of commitment: an increased commitment to a previous decision despite evidence that it may have been wrong Managers sometimes “escalate commitment” (continue to invest time and other resources) to bad decisions. This is obviously not a rational approach, but happens for two main reasons: 1) They hate to admit that their initial decision may have been flawed 2) They do not want to search for new alternatives. Managers may make bounded decisions which are not perfectly rational, because they are affected by such things as their willingness to obtain all the information needed, their propensity to take short-cuts (heuristics) or their own sense of ethics, their willpower and/or self-interest.à Exhibit 3.6 Bounded Decision Making Bounded Awareness 3

People overlook important information during the decision-making process.

The music industry failed to see the threat of Napster and file sharing.

Chapter 3: Decision Making

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Bounded Ethicality

Personal ethical preferences may not be in sync with our actual behaviour.

A hiring manager views himself or herself as egalitarian but has different eye contact and body language with one group of people versus another.

Bounded Rationality

We employ shortcuts (heuristics) to help make sense of things.

Limited time to perform or a lack of understanding of financial ratios might lead to decisions made with improper financial support.

Bounded Willpower

We give too much focus to the present and not enough to the future.

A person does not save enough for retirement early in their career.

Bounded SelfInterest

We attach priority to the outcomes of others rather than simply try to maximize our own payoffs.

Employ principles of fairness rather than trying to crush your competitors.

Intuitive decision making - unconscious reasoning/subconscious process - managers make decisions on the basis of experience, feelings, and accumulated judgment. Some studies have linked intuition and creativity. Exhibit 3.7 What Is Intuition?

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Chapter 3: Decision Making Types of Problems and Decisions Depending on the nature of the problem, a manager can use different types of decisions. Some problems are straightforward. The goal of the decision maker is clear, the problem is familiar, and information about the problem is easily defined and complete. Structured problems are straightforward, familiar, and easily defined. When situations are structured, there is probably some standardized routine for handling problems that may arise. Programmed decision is a standardized method for handling the problem. Decisions are programmed to the extent that (1) they are repetitive and routine and (2) a specific approach has been worked out for handling them. Managers make programmed decisions by falling back on procedures, rules, and policies. • A procedure is a series of interrelated sequential steps that a decision maker can use to respond to a structured problem. The only real difficulty is in identifying the problem. Once it is clear, so is the procedure. • A rule is an explicit statement that tells a decision maker what he or she can or cannot do. Rules are frequently used because they are simple to follow and ensure consistency. • A policy is a guideline for making a decision. In contrast to a rule, a policy establishes general parameters for the decision maker, rather than specifically stating what should or should not be done. Unstructured problems are new and unusual. Information is often ambiguous or incomplete. They are resolved using nonprogrammed decisions. EX: the decision to enter a new market segment, to hire an architect to design a new office park, or to merge two organizations. So, too, is the decision to invest in a new, unproven technology. Nonprogrammed decisions are unique and nonrecurring. When a manager confronts an unstructured problem, there is no cut-and-dried solution. The problem requires a custom-made, nonprogrammed decision. Few managerial decisions in the real world are either fully programmed or nonprogrammed. These are extremes, and most decisions fall somewhere in between. Few programmed decisions are designed to eliminate individual judgment completely. At the other extreme, even a unique situation requiring a nonprogrammed decision can be helped by programmed routines. The problems confronting managers usually become more unstructured as they move up the organizational hierarchy: • lower-level managers handle the routine decisions and let upper-level managers make the unusual or difficult decisions. • higher-level managers delegate routine decisions to their subordinates so that they, the higherlevel managers, can deal with more difficult issues.

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Chapter 3: Decision Making Decision-Making Conditions When managers make decisions, they face three conditions: certainty, risk, and uncertainty.  

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Certainty is the ideal condition for making decisions, in which a decision maker can make accurate decisions because the outcome of every alternative is known. Risk is a far more common condition, in which a decision maker is able to estimate the likelihood of certain outcomes. The ability to assign probabilities to outcomes may be the result of personal experiences or secondary information. With risk, managers have historical data that let them assign probabilities to different alternatives. Uncertainty occurs where you are not certain about the outcomes and cannot even make reasonable probability estimates.

Under these conditions, the choice of alternative is influenced by the limited amount of information available to the decision maker and by the psychological orientation of the decision maker: An optimistic manager will follow a maximax choice (maximizing the maximum possible payoff) in order to get the largest possible gain. A pessimistic one will pursue a maximin choice (maximizing the minimum possible payoff) to make the best of a situation if the worst possible outcome occurs. The manager who desires to minimize the maximum regret will opt for a minimax choice to avoid having big regrets after the decisions play out. Group Decision-Making Many organizational decisions are made by groups and there are certain advantages to group decision making: • More complete information and knowledge. A group brings a diversity of experience and perspectives to the decision-making process. • More diverse alternatives. Because groups have a greater amount and diversity of information, they can identify more diverse alternatives. • Increased acceptance of a solution. Group members are reluctant to fight or undermine a decision they have helped develop. • Increased legitimacy. Decisions made by groups may be perceived as more legitimate than decisions made unilaterally by one person. There are also disadvantages to group decision making: • Increased time to reach a solution. Groups almost always take more time to reach a solution than it would take an individual. • Opportunity for minority domination. A dominant and vocal minority frequently can have an excessive influence on the final decision. • Ambiguous responsibility. Group members share responsibility, but the responsibility of any single member is diluted. • Pressures to conform. There can be pressures to conform in groups. This pressure undermines critical thinking in the group and eventually harms the quality of the final decision.

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Chapter 3: Decision Making Groupthink is a form of conformity in which deviant, minority, or unpopular views are withheld in order to give the appearance of agreement. It applies to a situation in which a group’s ability to appraise alternatives objectively and arrive at a quality decision is jeopardized. Because of pressures for conformity, groups often deter individuals from critically appraising unusual, minority, or unpopular views. Consequently, an individual’s mental efficiency, reality testing, and moral judgment deteriorate. The tragedy of Groupthink What does it do: It hinders decision making, possibly jeopardizing the quality of the decision by – undermines critical thinking – reduces a group’s ability to be objective – harms the quality of the final decision The following are examples of situations in which groupthink is evident: – Group members rationalize any resistance to assumptions they have made. – Members apply direct pressure on those who momentarily express doubts about any of the group’s shared views, or who question the validity of arguments favoured by the majority. – Those members who have doubts or hold differing points of view seek to avoid going against what appears to be group consensus. – There is an illusion of unanimity. If someone does not speak, it is assumed that he or she is in full agreement. What Can Be Done to Minimize Groupthink? – Encourage cohesiveness. – Foster open discussion. – Have an impartial leader who seeks input from all members Several research studies have found that groupthink symptoms were associated with poorer-quality decision outcomes. Groupthink can be minimized if the group is cohesive, fosters open discussion, and has an impartial leader who seeks input from all members. Individual vs. Group Decision Making Whether a group or an individual will be more effective in making a particular decision will depend on the criteria used to assess effectiveness: • Group decisions are preferable when accuracy, creativity, and a degree of acceptance are required. • Individual decision making offers greater speed and efficiency. The effectiveness of group decision making is also influenced by the size of the group. Although a larger group provides greater opportunity for diverse representation, it also requires more coordination and more time for members to contribute their ideas.

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Chapter 3: Decision Making Determining whether a group or an individual will be more effective in making a particular decision depends on the criteria you use to assess effectiveness. • Group decisions are preferable when accuracy, creativity, and degree of acceptance are required. • Individual decision making offers greater speed and efficiency. Evidence indicates that groups of five, and to a lesser extent, seven, are the most effective. Exhibit 3.8 Employee Involvement in Decision Making

Employee involvement, present in every organization to some extent, leads to higher commitment from the employees for the decisions. Employee involvement also increases skill variety and feelings of autonomy, which results in higher job enrichment and motivation. The four situational factors that have an impact on the effectiveness of employee involvement outcomes are: • Decision structure. Programmed decisions require less employee involvement. • Source of decision knowledge. Employees may have more relevant and timely information than managers, increasing the need for involvement. • Decision commitment. If participants might be against a decision without their input, then involvement is more necessary. • Risk of conflict. If there are conflicting employee and organizational goals, involvement is useful in minimizing conflict. Decision-Making Biases and Errors Managers may use heuristics, or “rules of thumb,” to simplify their decision making. – used to help make sense of complex, uncertain, and ambiguous information 8

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not always reliable and may lead to errors or biases in processing and evaluating information

7 factors that affect how decisions are made: 1. Overconfidence bias occurs when decision makers think that they know more than they do or hold unrealistically positive views of themselves and their performance. 2. A sunk-costs error occurs when decision makers forget that current choices can’t correct the past. They incorrectly fixate on past expenditures of time, money, or effort in assessing choices, rather than on future consequences. 3. Selective perception bias occurs when decision makers selectively organize and interpret events based on their own biased perceptions. 4. Confirmation bias occurs when decision makers seek out information that confirms their past choices, but discount information that is contradictory. 5. An escalation-of-commitment error occurs when there is increased commitment to a previous decision, despite evidence that suggests it may have been wrong. 6. Self-serving bias is the tendency for decision makers to take credit for their successes and blame failure on outside factors. 7. Hindsight bias is the tendency for decision makers to falsely believe that they would have accurately predicted an outcome once that outcome is known. The main strategy is to be aware of them and then try not to exhibit them. Beyond that, managers should also pay attention to “how” they make decisions: They should try to identify the heuristics they typically use and critically evaluate how appropriate those are. Finally, managers might want to ask people around them to help identify weaknesses in their decision-making style and try to improve. Contemporary Issues in Managerial Decision Making Today’s business world revolves around making decisions, often risky ones, usually with incomplete or inadequate information, and under intense time pressure. More is at stake than ever before since bad decisions can cost millions. Important issues that managers face in today’s fast-moving and global world include: – national culture – creativity and design thinking – big data How Does National Culture Affect Managers’ Decision Making? National Culture Decision variables are influenced by the country’s cultural environment. • The way decisions are made (group vs. individual, participative vs. autocratic). • The degree of risk a decision maker is willing to take. Creativity is the ability to produce novel and useful ideas. Creativity is important because it allows the decision maker to appraise and understand the problem more fully, including “seeing” problems others can’t see, and identifying all viable alternatives. Most people have creative potential that they can use when confronted with a deci...