CHAPTER MANAGERIAL DECISION MAKING © 2003 McGraw-Hill Australia Pty Ltd PowerPoint Lecture outline • Nature of managerial decision making • Managers as decision makers • Effective decision making • Barriers to effective decision making • Group decision making • Creativity in decision making © 2003 McGraw-Hill Australia Pty Ltd PowerPoint Decision making Decision making ‘The process by which managers identify organisational problems and try to resolve them.’ © 2003 McGraw-Hill Australia Pty Ltd PowerPoint Nature of managerial decision making Types of problems faced: • Crisis problems Serious Requires immediate action • Non-crisis problems Requires resolution but not both immediate and important • Opportunity problems Opportunity for organisational gain IF appropriate action taken © 2003 McGraw-Hill Australia Pty Ltd PowerPoint Nature of managerial decision making Decision making situations: • Programmed decisions Routine, repetitive, well-structured situations by use of pre-determined decision rules • Non-programmed decision making Pre-determined decision rules are impractical due to novel &/or ill-structured situations • The element of risk Possibility that a chosen decision could lead to losses rather than intended results © 2003 McGraw-Hill Australia Pty Ltd PowerPoint Managers as decision makers Models of managerial decision making: • Rational model Model suggesting managers engage in completely rational decision processes, ultimately making optimal decisions, and possess and understand all information relevant to their decisions at the time they make them • Non-rational models Models suggesting information gathering and processing limitations make it difficult for managers to make optimal decisions © 2003 McGraw-Hill Australia Pty Ltd PowerPoint Non-rational models • Satisficing model Managers seek alternatives only until they find one which looks satisfactory, rather than seeking an optimal decision • Incremental model Managers make the smallest response possible to reduce the problem to at least a tolerable level • Rubbish bin model Managers behave in virtually a random way in making non-programmed decisions © 2003 McGraw-Hill Australia Pty Ltd PowerPoint An Anoptimal optimaldecision decision isispossible possible All Allrelevant relevantinformation information isisavailable available All Allrelevant relevantinformation informationisis understandable understandable All Allalternatives alternativesare areknown known Rational Rational decision decision making making All Allpossible possibleoutcomes outcomesknown known © 2003 McGraw-Hill Australia Pty Ltd PowerPoint Time Timeconstraints constraints Limited Limitedability abilityto to understand understandall allfactors factors Inadequate Inadequatebase base of ofinformation information Limited Limitedmemory memoryof of decision-makers decision-makers ‘Satisficing’ ‘Satisficing’ decision decision making making Poor Poorperception perceptionof offactors factors to tobe beconsidered considered in indecision decisionprocess process © 2003 McGraw-Hill Australia Pty Ltd PowerPoint Effective decision making Steps to effective decision making: • Identify the problem Scan for change, categorise as problem/non-problem, diagnose nature and cause • Generate alternative solutions Uncritically brainstorm to develop alternatives, combine & improve ideas • Evaluate & choose an alternative Feasibility, quality, cost, reversibility, ethics, acceptability • Implement and monitor Plan and implement, evaluate effect on others, monitor © 2003 McGraw-Hill Australia Pty Ltd PowerPoint 10 Barriers to effective decisionmaking Complacency Defensive avoidance Panic © 2003 McGraw-Hill Australia Pty Ltd PowerPoint 13 Decision making bias • Framing Tendency to make different decisions depending on how a problem is presented • Prospect theory Decision makers find the prospect of an actual loss more painful than giving up the possibility of a gain • Representativeness Tendency to be overly influenced by stereotypes in making judgements about the likelihood of occurrences © 2003 McGraw-Hill Australia Pty Ltd PowerPoint 14 Decision making bias • Availability Tendency to judge the likelihood of an occurrence on the basis of the extent to which other like instances can easily be recalled • Anchoring & adjustment Tendency to be influenced by an initial figure, even when the information is largely irrelevant • Overconfidence Tendency to be more certain of judgements regarding the likelihood of a future event than one’s actual predictive accuracy warrants © 2003 McGraw-Hill Australia Pty Ltd PowerPoint 15 Decision escalation ‘Escalating commitment and accelerating losses’ Non-rational escalation: increased commitment of resources beyond rational limits Sunk costs: not recoverable, and should not influence decision-making © 2003 McGraw-Hill Australia Pty Ltd PowerPoint 16 Group decision making Advantages: • More information available • Wide range of ideas/approaches • Improved acceptance of decision • Develops group members’ skills Disadvantages: • More time consuming • Disagreement/time problems • Open to individual dominance • Groupthink may arise © 2003 McGraw-Hill Australia Pty Ltd PowerPoint 17 Group decision making Advantages Advantages Disadvantages Disadvantages More Moreinformation informationavailable available Time Timeconsuming consuming More More alternative alternativesolutions solutions Delays Delays&&illillfeeling feelingpossible possible Increases Increasessolution solution understanding understanding&&acceptance acceptance Domination Dominationby byindividuals individuals Builds Buildsmember member knowledge knowledge&&skill skillbase base Risk Riskof ofgroupthink groupthink © 2003 McGraw-Hill Australia Pty Ltd PowerPoint 18 Enhancing group decision making • • • • • Heterogenous membership Communication/social skills Devil’s advocates Dialectical inquiry Groupware © 2003 McGraw-Hill Australia Pty Ltd PowerPoint 19 Techniques Techniques to to improve improve group group decisions decisions Member Member diversity diversity Expert Expert members members Devil’s Devil’s advocates advocates Dialectic Dialectic inquiry inquiry Better Better group group decision decision making making Groupware Groupware use use © 2003 McGraw-Hill Australia Pty Ltd PowerPoint 20 Creativity in decision making ‘Creativity is the cognitive process of developing an idea, concept, commodity or discovery viewed as novel by its creator or target audience.’ © 2003 McGraw-Hill Australia Pty Ltd PowerPoint 21 Creativity in decision making Creativity requires both: • Divergent thinking Attempting to move logically to a problem solution • Divergent thinking Generating new ways of viewing a problem and seeking novel alternatives © 2003 McGraw-Hill Australia Pty Ltd PowerPoint 22 Creativity in decision making Three basic ingredients necessary for creativity: • Domain-relevant skills Expertise in a field relevant to the problem • Creativity-relevant skills Skills in generating novel ideas, approaches, modes of thinking about problems • Task motivation Interest in the task for its own sake, a desire to resolve the problem © 2003 McGraw-Hill Australia Pty Ltd PowerPoint 23 Enhancing group creativity • • • • Brainstorming Nominal group technique Delphi technique Scenario analysis © 2003 McGraw-Hill Australia Pty Ltd PowerPoint 24 TECHNIQUES TECHNIQUESTO TOENHANCE ENHANCEGROUP GROUPCREATIVITY CREATIVITY Brainstorming Brainstorming Nominal Nominal group group technique technique Delphi Delphi technique technique Better Better group group creativity creativity Scenario Scenario analysis analysis © 2003 McGraw-Hill Australia Pty Ltd PowerPoint 25 Lecture summary • Nature of managerial decision making Problem types, problem situations • Managers as decision makers Rational and non-rational models • Effective decision making Ideal decision making process © 2003 McGraw-Hill Australia Pty Ltd PowerPoint 26 Lecture summary • Barriers to effective decision making Complacency, defensive avoidance, panic Decision making bias, decision escalation • Group decision making Advantages-disadvantages, enhancing group performance • Creativity in decision making Divergent and non-divergent thinking, necessary skills, enhancing group creativity © 2003 McGraw-Hill Australia Pty Ltd PowerPoint 27 [...]... group creativity creativity Scenario Scenario analysis analysis © 2003 McGraw-Hill Australia Pty Ltd PowerPoint 25 Lecture summary • Nature of managerial decision making Problem types, problem situations • Managers as decision makers Rational and non-rational models • Effective decision making Ideal decision making process © 2003 McGraw-Hill Australia Pty Ltd PowerPoint 26 Lecture summary • Barriers... individual dominance • Groupthink may arise © 2003 McGraw-Hill Australia Pty Ltd PowerPoint 17 Group decision making Advantages Advantages Disadvantages Disadvantages More Moreinformation informationavailable available Time Timeconsuming consuming More More alternative alternativesolutions solutions Delays Delays&&illillfeeling feelingpossible possible Increases Increasessolution solution understanding...Identification Identification of ofthe theproblem problem Steps Steps in in decision- making decision- making Generate Generatealternative alternativesolutions solutions Evaluate Evaluatealternatives alternatives Evaluation Evaluation of of decision decision effectiveness effectiveness Choose Choose an analternative alternative Implementation Implementationand andmonitoring monitoring... 26 Lecture summary • Barriers to effective decision making Complacency, defensive avoidance, panic Decision making bias, decision escalation • Group decision making Advantages-disadvantages, enhancing group performance • Creativity in decision making Divergent and non-divergent thinking, necessary skills, enhancing group creativity © 2003 McGraw-Hill Australia Pty Ltd PowerPoint 27 ... Non-rational escalation: increased commitment of resources beyond rational limits Sunk costs: not recoverable, and should not influence decision- making © 2003 McGraw-Hill Australia Pty Ltd PowerPoint 16 Group decision making Advantages: • More information available • Wide range of ideas/approaches • Improved acceptance of decision • Develops group members’ skills Disadvantages: • More time consuming • Disagreement/time... decide Decision makers accept the challenge and follow an effective decision- making process © 2003 McGraw-Hill Australia Pty Ltd PowerPoint 12 Barriers to effective decisionmaking Complacency Defensive avoidance Panic © 2003 McGraw-Hill Australia Pty Ltd PowerPoint 13 Decision making bias • Framing Tendency to make different decisions depending on how a problem is presented • Prospect theory Decision makers... recalled • Anchoring & adjustment Tendency to be influenced by an initial figure, even when the information is largely irrelevant • Overconfidence Tendency to be more certain of judgements regarding the likelihood of a future event than one’s actual predictive accuracy warrants © 2003 McGraw-Hill Australia Pty Ltd PowerPoint 15 Decision escalation ‘Escalating commitment and accelerating losses’ Non-rational... chosenalternative alternative © 2003 McGraw-Hill Australia Pty Ltd PowerPoint 11 Barriers to effective decision making • Complacency Individuals either do not see signs of danger/opportunity or, avoid them • Defensive avoidance Individuals either deny the importance of a danger /opportunity or deny any responsibility for taking action • Panic Individuals become so upset they frantically seek a way to... understanding&&acceptance acceptance Domination Dominationby byindividuals individuals Builds Buildsmember member knowledge knowledge&&skill skillbase base Risk Riskof ofgroupthink groupthink © 2003 McGraw-Hill Australia Pty Ltd PowerPoint 18 Enhancing group decision making • • • • • Heterogenous membership Communication/social skills Devil’s advocates Dialectical inquiry Groupware © 2003 McGraw-Hill Australia... seeking novel alternatives © 2003 McGraw-Hill Australia Pty Ltd PowerPoint 22 Creativity in decision making Three basic ingredients necessary for creativity: • Domain-relevant skills Expertise in a field relevant to the problem • Creativity-relevant skills Skills in generating novel ideas, approaches, modes of thinking about problems • Task motivation Interest in the task for its own sake, a desire to resolve