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Chapter

3
Managerial Decision Making

McGraw-Hill/Irwin Management, 7/e

Copyright 2007 The McGraw-Hill Companies, Inc. All rights reserved.

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Learning Objectives
After studying Chapter 3, you will know: The kinds of decisions you will face as a manager How to make rational decisions The pitfalls you should avoid when making decisions The pros and cons of using a group to make decisions The procedures to use in leading a decision-making group How to encourage creative decisions The processes by which decisions are made in organizations How to make decisions in a crisis

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Characteristics of Managerial Decisions

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Lack of Structure
Programmed Decisions Non-programmed

Decisions

encountered and made before, having objectively correct answers, and solvable by using simple rules, policies, or numerical computations

Decisions New, novel, complex decisions having no proven answers

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Comparison of Decision Types

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Uncertainty and Risk

We operate in an environment the Internet where theres an enormous amount of uncertainty. You cant be sure whats going to happen tomorrow, never mind next year. The danger is that the uncertainty can lead to paralysis. You spend so much time trying to nail down all the possibilities and risks, you never get around to taking action. And if that happensif you become indecisive youre dead.
- George Conrades
Chairman and CEO Akamai Technologies

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Uncertainty and Risk

Certainty is the state that exists when

decision makers have accurate and comprehensive information Uncertainty is the state that exists when decision makers have insufficient information Risk is the state that exists when the probability of success is less than 100%, and losses may occur

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Conflict
Conflict exists when the manager must

consider opposing pressures from different sources; occurs at two levels Psychological conflict occurs when several options are attractive, or when non of the options is attractive Interpersonal conflict

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Stages of Decision Making

Ideal decision making process will have six

stages Identify and diagnose the problem Generate alternative solutions Evaluate alternatives Make the choice Implement the decision Evaluate the decision

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Stages of Decision Making

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The Best Decision

To make the best decision

managers must use vigilance

Vigilance is a process in

which a decision maker carefully executes all stages of the decision making process

Research shows that when

managers use a rational decision making process they tend to make better decisions

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Barriers to Effective Decision Making

Psychological Biases Time Pressures Social Realities

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Decision Making in Groups

The basic philosophy for group decision

making is that two heads are better than one Group performance is a function of two variables How effectively the group capitalizes on potential advantages How effectively the group minimizes potential problems

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Decision Making in Groups

Potential Advantages
Larger pool of

Potential Disadvantages
One Person dominates Satisficing

information More perspectives and approaches Intellectual stimulation People understand the decision People are committed to the decision

Group thing
Goal displacement

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Managing Group Decision Making

There are three

factors for effectively managing group decision making Appropriate leadership style Constructive use of disagreement and conflict The enhancement of creativity

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Managing Group Decision Making

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Brainstorming
Brainstorming is a

commonly used technique used to encourage creativity It is a process in which group members generate as many ideas about a problem as they can; criticism is withheld until all ideas have been proposed

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Organizational Decision Making

Managers and groups make decisions within

organizations Three additional concepts and process a manager must consider when making a decision include Constraints on decision makers Organizational decision processes Decision making during a crisis

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Constraints on Decision Makers

Managers face various constraints that

include: Capital or product markets may make an expensive new venture impossible Legal restrictions may restrain the kinds of international business activities in which a firm can participate Labor unions may defeat a contract proposal

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Organizational Decision Making Models

Historically organizational decision making

was viewed as a rational process Simon challenged this view by proposing an alternative to the rational decision making process called bounded rationality Other decision making processes include Incremental model Coalition model Garbage can model

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Decision Making During Crisis

During crisis managers must make decisions

under a great deal of pressure The organization should be prepared for crises in advance Managers should take time to create an effective crisis management plan During a crisis dont pretend nothing happened rather communicate and reinforce the organizations values

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How not to Handle a Crisis

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Questions for Crisis Planning

What kinds of crises could your company

face? Can your company detect a crisis in its early stages? How will it manage a crisis if one occurs? How can it benefit from a crisis after it has passed?

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Looking Ahead
Chapter 4: Planning and Strategic Management How to proceed through the basic steps in any planning

process How strategic planning integrates with tactical and operational planning Why I is important to analyze both the external environment and the internal resources of the firm before formulation a strategy The choices available for corporate strategy How companies can achieve competitive advantage through business strategy How core competencies provide the foundation for business strategy The keys to effective strategy implementation

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Identifying and diagnosing the Problem

There is normally a realization that the

current state and the desired state are different This can be detected by comparing current performance against: past performance; current performance of other organizations; and future expected performance as determined by plans and forecasts After identifying a problem the decision maker must attempt to diagnose the true cause of the problem Return

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Generate Alternative Solutions

Solutions will range from ready made to

custom made Ready made solutions are ideas that have been seen or tried before Custom made solutions are new, creative solutions designed specifically for the problem Managers will generate some of the alternative solutions based upon past experience
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Evaluate Alternatives
Each alternative is evaluated based upon the

value or adequacy that it generates Managers should consider several types of consequences that each alternative will generate Managers should also refer to the original goals defined in the first stage of the decision making process Contingency plans should also be developed
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Make the choice

When making the decision the following

concepts should be considered Maximizing a decision will realize the best possible outcome Satisficing means that an option was chosen because it was acceptable although it is not necessarily the best option Optimizing the decision means that the organization is achieving the best possible balance among several goals
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Psychological Biases
Illusion of control is a belief that once can influence events

even when one has no control over what will happen Framing effects refer to how problems or decisions alternatives are phrased or presented, and how these subjective influences can override objective facts Discounting the future is a bias weighting short term costs and benefits more heavily than longer-term costs and benefits

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Time Pressures
Tendencies of managers
Skimp on analysis
Suppress conflict Make decisions without

consulting others
How do you overcome

time pressures?
Rely on real time

information Involve others Take a realistic view of conflict

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Social Realities
Interpersonal factors decrease decision-

making effectiveness Important decisions are marked by conflict among interested parties Decisions are the result of intensive social interactions, bargaining, and politicking

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Constructive use of disagreement and conflict

Cognitive conflict is issue-

based differences in perspectives or judgments Affective conflict is emotional disagreement directed toward other people Devils advocate is a person who has the job of criticizing ideas to ensure that their downsides are fully explored Dialectic is a structured debate comparing two conflicting courses of action

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Bounded Rationality
Bounded rationality states that decision

makers cannot truly be objective because:

They have imperfect, incomplete information The problems they face are so complex Human beings cannot process all the information

to which they are exposed There is not enough time to process all the relevant information People within organizations have conflicting goals

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Organizational Decision Making

Incremental Model occurs when decision

makers make small decisions, take little steps, move cautiously, and move in piecemeal fashion toward a bigger solution Coalition model of organizational decision making in which groups with differing preferences use power and negotiations to influence decisions Garbage can model of organizational decision making depicting a chaotic process and seemingly random decisions
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Crisis Management Plan

Strategic actions

Technical and structural actions

Evaluation and diagnostic actions Communication actions Psychological and cultural actions

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