Managers as Decision Makers

1. Managers as Decision Makers

2. Describe the eight steps in the decision-making process. • Explain the four ways managers make decisions. • Classify decisions and decision-making conditions. • Describe different decision-making styles and discuss how biases affect decision making. • Identify effective decision-making techniques.

3. The Decision-Making Process • Decision- making a choice from two or more alternatives

4. The Decision-Making Process managers at all levels and in all areas of organizations make decisions. For instance: top level managers make decisions about their organization’s goals, where to locate manufacturing facilities, or what new markets to move into. Middle and lower level managers make decisions about production schedules, product quality problem, pay raises, and employee discipline. Making decisions isn’t something that just managers do, but our focus is on how managers make decisions Exhibit 6-1 page 137 shows the eight steps in the decision making process.

5. Exhibit 6-1Decision-Making Process

6. The Decision-Making Process (cont.) • Step 1: Identify a Problem • Problem : an obstacle that makes it difficult to achieve a desired goal or purpose. Example - Amanda is a sales manager whose reps need new laptops because their old ones are outdated and inadequate for doing their job. it’s not economical to add memory to the old computers and it’s the company’s policy to purchase, not lease. - Amanda has a problem: problem—a disparity between the sales reps’ current computers (existing condition) and their need to have more efficient ones (desired condition). Amanda has a decision to make. - Every decision starts with a problem.

7. The Decision-Making Process (cont.) How the managers identify problems? managers have to be cautions not to confuse problems with symptoms of a problem. In the example: the symptoms as poor quality products, high prices or bad advertising. Managers should keep in their mind that problem identification is subjective. What one manager considers a problem might not be considered a problem by another manager.

8. The Decision-Making Process (cont.) • Step 2: Identify Decision Criteria • Decision criteria are factors that are important (relevant) to resolving the problem, • Every decision maker has criteria guiding his or her decisions even if they’re not explicitly stated. • In our Example - Amanda decides that memory and storage capabilities, display quality, battery life, warranty, and carrying weight are the relevant criteria in her decision.

9. The Decision-Making Process (cont.) • Step 3: Allocate Weights to the Criteria • The decision maker must weight the items in order to give them the correct priority in the decision. • A simple way is to give the most important criterion a weight of 10 and then assign weights to the rest using that standard The weighted criteria for our example are shown in Exhibit 6-2. page 138

10. Exhibit 6-2Important Decision Criteria

11. The Decision-Making Process (cont.) • Step 4: Develop Alternatives • The decision maker requires to list viable alternatives that could resolved the problem. The alternative are only listed, not evaluated. In our Example - Amanda, identifies eight laptops as possible choices. (See Exhibit 6-3.) page 139

12. Exhibit 6-3Possible Alternatives

13. The Decision-Making Process (cont.) • Step 5: Analyze Alternatives • Appraising each alternative’s strengths and weaknesses • Decision maker must evaluate each alternative, by using the criteria established in step (2). • See exhibit 6-3 and exhibit 6-4 page 139 • When you multiply each alternative by the assigned weight, you get the weighted alternatives as shown in exhibit 6-4 . The total score for each alternative, then, is the sum of its weighted criteria.

14. The Decision-Making Process (cont.) • Step 6: Select an Alternative • Choosing the best alternative • The alternative with the highest total weight is chosen. • In our example (Exhibit 6-4), Amanda would choose the Toshiba Qosmio because it scored higher than all other alternatives (249 total).

15. Exhibit 6-4Evaluation of Alternatives

16. The Decision-Making Process (cont.) • Step 7: Implement the Alternative • Putting the chosen alternative into action - Conveying the decision to and gaining commitment from those who will carry out the alternative. We know that if the people who must implement a decision participate in the process, they’re more likely to support it than if you just tell them what to do. Another thing managers may need to do during implementation is reassess the environment for any changes, especially if it’s a long-term decision. Are the criteria, alternatives, and choice still the best ones, or has the environment changed in such a way that we need to reevaluate?

17. The Decision-Making Process (cont.) • Step 8: Evaluate Decision Effectiveness • Evaluating the outcome or result of the decision to see if the problem was resolved. • If the evaluation shows that the problem still exist, then the manager needs to assess • - what went wrong, • - was the problem incorrectly defined, • - where errors made when evaluating alternatives, • - was the right alternative selected but poorly implemented? • The answers might lead you to redo an earlier step or might even require starting the whole process over.

18. Managers Making Decisions: Decisions making in all four managerial functions. Exhibit 6-5 page 141 showing that. Most decision making is routine, every day of the year you make a decision about your activities.

19. Exhibit 6-5Decisions Managers May Make

20. Exhibit 6-5Decisions Managers May Make (cont.)

21. Managers Making Decisions: continued: How managers make decisions? three perspective on how managers make decisions: rational, bounded, and intuition a) Rational Decision-Making - a type of decision making in whichchoices that are logical and consistent while maximizing value. After all, managers have all sorts of tools and techniques to help them be rational decision makers. Managers aren’t always rational. What does it mean to be a “rational” decision maker: assumptions of rationality:

22. Making Decisions: Rationality • Assumptions of Rationality • The decision maker would be fully objective and logical • The problem faced would be clear and unambiguous • The decision maker would have a clear and specific goal and know all possible alternatives and consequences and consistently select the alternative that maximizes achieving that goal • and decisions are made in the best interests of the organization.

23. Making Decisions: Bounded Rationality b) Bounded Rationality - decision making that’s rational, but limited (bounded) by an individual’s ability to process information. Because they can’t possibly analyze all information on all alternatives there for: - managers satisfice, rather than maximize. :That is, they accept solutions that are “good enough.” They’re being rational within the limits (bounds) of their ability to process information. Also Managers decision making influence by the organization’s culture, internal politics, power considerations, and a phenomenon called - Escalation of commitment: an increased commitment to a previous decision despite evidence that it may have been a poor (wrong) decision.

24. Making Decisions: The Role of Intuition c) Intuitive decision- making • Making decisions on the basis of experience, feelings, and accumulated judgment. • Researchers studying managers’ use of intuitive decision making have identified five different aspects of intuition which are described in exhibit 6-6 page 142.

25. Exhibit 6-6What Is Intuition?

26. Managers Making Decisions: continued: • Intuitive decision making can complement both rational and boundedly rational decision making, how? • - managers who has had experience with a similar type of problem or situation often can act quickly with what appears to be limited information and can achieved higher decision making performance, because of that past experience. • - Managers should ignore emotions when make decisions may not be the best advice.

27. Types of Decisions: Structured Problems and Programmed Decisions : Structured Problems - straightforward, familiar, and easily defined problems.. Example might include: - when a customer returns a purchase to a store. - When a supplier is late with an important delivery. because they’re straightforward, familiar, and easily defined, Because it’s not an unusual occurrence, there’s probably some standardized routine for handling it becomes: : Programmed decision – a repetitive decision that can be handled by a routine approach, Because the problem is structured, the manager doesn’t have to go the trouble and expense of going through an involved decision making process.

28. Structured Problems and Programmed Decisions (cont.) The manager relies on one of three types of programmed decisions: procedure, rule, or policy. • Procedure - a series of sequential steps used to respond to a well-structured problem. Ex: when a purchasing manager receives a request from a warehouse manager to purchase some thing to complete the work • . Rule - an explicit statement that tells managers what can or cannot be done. Rules are frequently used because they are simple to follow and ensure consistency. • Ex: rules about lateness and absenteeism permit supervisors to make disciplinary decisions rapidly and fairly.

29. Structured Problems and Programmed Decisions (cont.) Policy - a guideline for making decisions Its establishes general parameters for the decision maker rather than specifically stating what should or should not be done. Policies contain an ambiguous term that leaves interpretation up to the decision maker, here some sample policy statements: the customer always comes first and should always be satisfied. We promote from within whenever possible. Employee wages shall be competitive within community standards. The terms satisfied, whenever, and competitive require interpretation.

30. Types of Decisions: Unstructured Problems and Nonprogrammed Decisions Not all problems managers face can be solved using programmed decisions, some involve: • :Unstructured Problems: a problem that is new or unusual and for which information is ambiguous or incomplete. • When the problem are unstructured, managers should rely on nonprogrammed decisions in order to develop unique solutions • :Nonprogrammed decisions: a unique and nonrecurring decision that requires and involve a custom made solutions. Exhibit 6-7 page 145 describe the differences between programmed and nonprogrammed decisions.

31. Exhibit 6-7Programmed VersusNonprogrammed Decisions

32. Decision-Making Conditions When making decisions, managers may face three different conditions: certainty, risk, and uncertainty. • Certainty - a situation in which a manager can make accurate decisions because all outcomes are known. For example, when Wyoming’s state treasurer decides where to deposit excess state funds, he knows exactly the interest rate offered by each bank and the amount that will be earned on the funds. He is certain about the outcomes of each alternative

33. Decision-Making Conditions Risk - a situation in which the decision maker is able to estimate the likelihood of certain outcomes managers have historical data from past personal experiences or secondary information that lets them assign probabilities to different alternatives. Uncertainty - a situation in which a decision maker has neither certainty nor reasonable probability estimates available. the choice of alternative is influenced by the limited amount of available informationand by thepsychological orientation of the decision maker.

34. Decision-Making Conditions Under uncertainty: The manager may be: optimistic manager: he will follow a maximax choice (maximizing the maximum possible payoff). Or a pessimist manager: he will follow a maximin choice (maximum the minimums possible payoff). A manager may follow a minimax choice, when he desires to minimize his maximum (regret). Exhibit 6-9 page 146 and 6-10 page 147 demonstrate that.

35. Exhibit 6-9Payoff Matrix

36. Exhibit 6-10Regret Matrix

37. Decision-Making Styles • Some managers tend to rely more on data and facts when making decisions, while other used his judgment and feeling to make decisions. Linear-nonlinear thinking style profile: The decision making affected by a person thinking style reflect two things: • - the source of information you tend to use (external data and facts or internal sources) such as feeling and intuition. • - How you process that information (linear-rational, logical, analytical, or nonlinear- intuitive, creative, insightful). • These dimensions are collapsed into two style:

38. Decision-Making Styles: continued: a) the linear thinking style: is a decision style characterized by a person’s preference for using external data and facts and processing this information through rational, logical thinking to guide decisions and actions. b) The nonlinear thinking style: is a decision style characterized by a person’s preference for using internal resources of information (feeling and intuition) and processing this information with internal insights, feeling, and hunches to guide decisions and actions.

39. Decision-Making Biases and Errors Managers may use rules of thumb (heuristics) to simplify their decision making. Heuristics can be useful because they help managers to make sense of complex, uncertain, and ambiguous information. The rules of thumb may lead to errors and biases in processing and evaluation information. Exhibit 6-11 page 149 identifies 12 common decision errors and biases that managers make.

40. Exhibit 6-11Common Decision-Making Biases

41. Decision-Making Biases and Errors - Overconfidence Bias - when decision maker tend to think they know more than they do. unrealistically positive views of oneself and one’s performance. - Immediate Gratification Bias - describe decision maker who tend to want immediate rewards and to avoid immediate costs holding. choosing alternatives that offer immediate rewards and avoid immediate costs.

42. Decision-Making Biases and Errors (cont.) - Anchoring Effect - describe the situation when decision makers fixating on initial information and ignoring subsequent information. • Selective Perception Bias - when decision makers selecting, organizing and interpreting events based on the decision maker’s biased perceptions. • Confirmation Bias - decision makers tend to at face value information that confirms their preconceived views and are critical and skeptical of information. seeking out information that reaffirms past choices while discounting contradictory

43. Decision-Making Biases and Errors (cont.) • Framing Bias - decision makers selecting and highlighting certain aspects of a situation while ignoring other aspects. • Availability Bias - causes decision makers to tend to remember events that are the most recent and vivid in their memory (losing decision-making objectivity by focusing on the most recent events). • Representation Bias - when decision makers assess the likelihood of an events based on how closely it resembles other events or sets of events. (drawing analogies and seeing identical situations when none exist). • Randomness Bias - occurs when decision makers creating unfounded meaning out of random events.

44. Decision-Making Biases and Errors (cont.) • Sunk Costs Errors - decision makers forget that current choices can’t correct the past. (forgetting that current actions cannot influence past events and relate only to future consequences). • Self-Serving Bias - occurs when decision makers taking quick credit for successes and blaming outside factors for failures. • Hindsight Bias - when decision makers tend to falsely believe after that outcome is actually known. (mistakenly believing that an event could have been predicted once the actual outcome is known (after-the-fact).

45. Overview of Managerial Decision Making Exhibit 6-12 page 151 provides an overview of managerial decision making. The decision making process affected by five factors: decision making approach types of problems and decisions decision making conditions decision making style. decision making errors and biases

46. Exhibit 6-12Overview of Managerial Decision Making

47. Guidelines for Making Effective Decisions: • Understand cultural differences • Create standards for good decision making • Know when it’s time to call it quits • Use an effective decision making process • Build an organization that can spot the unexpected and quickly adapt to the changed environment

48. Guidelines for Making Effective Decisions: continued: Highly reliable organizations: share 5 habits: they are not tricked by their success, alert to the smallest deviations and react quickly to anything that doesn’t fit with their expectations defer to the expert on the front line workers (interact day to day with customers). Let unexpected circumstances provide the solution: reaction of the foreman illustrates how effective decision makers respond to unexpected circumstances. Embrace complexity: Anticipate but also recognize their limits.

49. Review Learning Outcome 6.1 • Describe the eight steps in the decision-making process. • Identify problem • Identify decision criteria • Weight the criteria • Develop alternatives • Analyze alternatives • Select alternative • Implement alternative • Evaluate decision effectiveness

50. Review Learning Outcome 6.2 • Explain the four ways managers make decisions. • Assumptions of rationality • The problem is clear and unambiguous • A single, well-defined goal is to be achieved • All alternatives and consequences are known • The final choice will maximize the payoff