Principles of Management

1. Principles of Management Week 4 – Decision Making

2. Rational Decision Making 8-step Process • 1. Identification of problem • 2. Identification of Decision Criteria • 3. Allocation of weights to criteria • 4. Development of alternatives • 5. Analysis of alternatives • 6. Decide on an alternative • 7. Implementation of decision • 8. Evaluation of decision

3. The Decision-Making Process Allocation of Weights to Criteria Problem Identification Identification of Decision Criteria Development of Alternatives Acer Compaq Gateway HP Micromedia NEC Sony Toshiba “My salespeople need new computers” Price Weight Warranty Screen type Reliability Screen size Reliability 10 Screen size 8 Warranty 5 Weight 5 Price 4 Screen type 3 Analysis of Alternatives Selection of an Alternative Implementation of an Alternative R S W W P S Acer 4 3 4 3 2 6 Compaq 3 4 5 2 6 7 Gateway 9 6 7 7 8 2 HP 3 5 6 7 6 5 Micromedia 2 2 3 4 5 4 NEC 3 4 5 6 7 2 Sony 7 5 6 4 2 8 Toshiba 3 4 5 6 7 3 Acer 125 Compaq 142 Gateway 246 HP 174 Micromedia 103 NEC 151 Sony 192 Toshiba 154 Gateway Evaluation of Decision Effectiveness

4. Decisions in the Management Functions

5. About Rational Decision Making • Is it always possible to make rational decisions?

6. Single, well- defined goal is to be achieved Problem is clear and unambiguous All alternatives and consequences are known Rational Decision Making Preferences are clear Final choice will maximize payoff Preferences are constant and stable No time or cost constraints exist

7. Bounded Rationality behave rationally within the parameters of a simplified decision-making process that is limited by an individual’s ability to process information satisfice - accept solutions that are “good enough”

8. Intuitive decision making Based on “gut feeling” subconscious process of making decisions on the basis of experience, values, and emotions does not rely on a systematic or thorough analysis of the problem generally complements a rational analysis

9. Types of Problems & Decisions Well-Structured Problems - straightforward, familiar, and easily defined Programmed Decisions - used to address structured problems minimize the need for managers to use discretion facilitate organizational efficiency

10. Types of Problems and Decisions Poorly-Structured Problems - new, unusual problems for which information is ambiguous or incomplete Nonprogrammed Decisions - used to address poorly- structured problems produce a custom-made response more frequent among higher-level managers Procedure, Rule, & Policy

11. Types of Problems & Level In the Organization Ill-structured Top Type of Problem Level in Organization Lower Well-structured Programmed Decisions Nonprogrammed Decisions

12. Things to consider . . . Certainty– how certain is a particular outcome? Risk– how much risk can you take? expected value - the conditional return from each possible outcome Uncertainty –Limited information prevents estimation of outcome probabilities for alternatives.

13. Expected Value for Revenues from the Addition of One Ski Lift

14. What to do? maximax choice – optimistic maximizing the maximum possible payoff taking the best of all possible cases maximinchoice – pessimistic maximizing the minimum possible payoff taking the best of the worst cases minimax- minimize the maximum “regret” (difference between what you get and the best case)

15. Payoff Matrix

16. Regret Matrix

17. Decision-Making Styles • Dimensions of Decision-Making Styles • Value orientations • Task and technical concerns • People and social concerns • Tolerance for ambiguity • Low tolerance: require consistency and order • High tolerance: multiple thoughts simultaneously

18. Analytical • Prefer complex • problems • Carefully analyze • alternatives • Enjoy solving • problems • Willing to use • innovative • methods Decision-Making Styles • Directive • Prefer simple, • clear solutions • Make decisions • rapidly • Do not consider • many alternatives • Rely on existing • rules • Conceptual • Socially oriented • Humanistic and • artistic approach • Solve problems • creatively • Enjoy new ideas • Behavioral • Concern for their • organization • Interest in helping • others • Open to • suggestions • Rely on meetings

19. Decision Making Styles High Analytical Conceptual Directive Behavioral Tolerance for Ambiguity Low Tasks and TechnicalConcerns People and SocialConcerns Value Orientation

20. Common Errors in Decision Making • Over-confidence • Hindsight • Self-serving • Sunk costs • Randomness • Representation • Availability • Framing • Confirmation • Selective perception • Anchoring • Immediate gratification

21. Advantages and Disadvantages of Group-Aided Decision Making Advantages Disadvantages 1. Greater pool of knowledge 1. Social pressure 2. Different perspectives 2. Minority domination 3. Greater comprehension 3. Logrolling 4. Increased acceptance 4. Goal displacement 5. Training ground 5. “Groupthink”

22. Decision-Making Approach • Rationality • Bounded Rationality • Intuition • Types of Problems and Decisions • Well-structured • - programmed • Poorly structured • - nonprogrammed • Decision • Choose best • alternative • - maximizing • - satisficing • Implementing • Evaluating • Decision-Making Conditions • Certainty • Risk • Uncertainty • Decision Maker Style • Directive • Analytic • Conceptual • Behavioral Decision-Making Process