Managerial Decision Making

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Last updated: February 14, 2019

The business executive is by profession a decision maker. Uncertainty is his opponent. Overcoming it is his mission.

John McDonald TOPIC OUTLINE * Characteristics of Managerial Decisions * The Stages of Decision Making * The Best Decision * Barriers to Effective Decision Making * Decision Making in Groups * Managing Group Decision Making * Organizational Decision Making * Techniques in Decision Making ADDITIONAL TOPICS * Planning for Decision Making Decision Levels * Some Techniques in Decision Making CHARACTERISTICS OF MANAGERIAL DECISIONS Managers face problems constantly. Some problems that require a decision a relatively simple; others seem overwhelming. Some demand immediate action, while others take months or even years to unfold. Actually managers often ignore problems. For several reasons, they avoid taking action.

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First, managers can’t be sure how much time, energy, or trouble lies ahead once they start working on a problem.Second, getting involved is risky; tackling a problem but failing to solve it successfully can hurt a manager’s track record. Third, because problems can be so perplexing, it is easier to procrastinate or to get busy with less demanding activities. It is important to understand why decision making can be so challenging, there are several characteristics of managerial decisions that contribute to their difficulty and pressure.

Most managerial decisions lack structure and entail risk, uncertainty, and conflict. . Lack of Structure * programmed decisions – decisions encountered and made in the past * have objectively correct answers * are solvable by using simple rules, policies, or numerical computations * nonprogrammed decisions – new, novel, complex decisions having no proven answers * a variety of solutions exist, all of which have merits and drawbacks * demand creative responses, intuition, and tolerance for ambiguity 2. Uncertainty and Risk certainty – have sufficient information to predict precisely the consequences of one’s actions * uncertainty – have insufficient information to know the consequences of different actions * cannot estimate the likelihood of various consequences of their actions * risk – available information permits estimation of the likelihood of various consequences * probability of an action being successful is less than 100 percent * good managers prefer to avoid or manage risk 3. Conflict opposing pressures from different sources * occurs at two levels * psychological conflict – individual decision makers: * perceive several attractive options * perceive no attractive options * conflict between individuals or groups STAGES IN DECISION MAKING Faced with these challenges, how can you make good decisions? The ideal decision-making process moves through six stages. At companies that have institutionalized the process, these stages are intended to answer the following question: What do we want to change?What’s preventing us from reaching the “desired state”? How could we make the change? What’s the best way to do it? Are we following the plan? and How well did it work out? More formally, decision makers should (1) identify and diagnose the problem, (2) generate alternative solutions, (3) evaluate alternatives, (4) make the choice, (5) implement the decision, and (6) evaluate the decision.

1. Identifying and Diagnosing the Problem * recognize that a problem exists and must be solved problem – discrepancy between current state and past performance, current performance of other organizations, or future expected performance * decision maker must want to resolve the problem and have the resources to do so 1. Generating Alternative Solutions * ready-made solutions – ideas that have been tried before * may follow the advice of others who have faced similar problem * custom-made solutions – combining new ideas into creative solutions 2. Evaluating Alternatives determining the value or adequacy of the alternatives * there are potentially more alternatives available than managers may realize * predict the consequences that will occur if the various options are put into effect * success or failure of the decision will affect the track record of the decision maker * contingency plans – alternative courses of action that can be implemented based on how the future unfolds * required to prepare for different scenarios 3. Making the Choice * maximize – a decision realizing the best possible outcome * reatest positive consequences and fewest negative consequences * greatest benefit at the lowest cost and the largest expected total return * satisfice – choose an option that is acceptable although not necessarily the best or perfect * compare the choice with the goal, not against other options * search for alternatives ends when an okay solution is found * optimizing – achieving the best possible balance among several goals 4. Implementing the Decision * those who implement the decision must: * understand the choice and why it was made be committed to its successful implementation * can’t assume that things will go smoothly during implementation * identify potential problems * identify potential opportunities 5.

Evaluating the Decision * collecting information on how well the decision is working * if decision appears inappropriate, the process cycles back to the first stage Steps in Implementation Plan 1. Determine how things will look when the decision is fully operational. 2. Order the steps necessary to achieve a fully operational decision. 3. List the resources and activities required to implement each step.

. Estimate the time needed for each step. 5. Assign responsibility for each step to specific individuals. THE BEST DECISION How can managers tell whether they have made the best decision? One approach is to wait until the results are in.

But what if the decision has been made but not yet implemented. * nothing can guarantee a “best” decision * must be confident that the procedures used are likely to produce the best decision given the circumstances * vigilance – decision maker carefully and conscientiously executes all stages of decision makingEven if the managers reflect on these decision making activities and conclude that they were executed conscientiously, they still no know whether the decision will work; after all, nothing guarantees a good outcome. But they will know that they did their best to make the best possible decision. BARRIERS TO EFFECTIVE DECISION MAKING Vigilance and full execution of six-stage decision-making process are the exception rather than the rule in managerial decision making. But research shows that when managers use such rational processes, better decision results.Managers who make sure they engage in these processes are more effective. Why don’t people automatically invoke such rational processes? It is easy to neglect or improperly execute these processes.

The problem may be improperly defined, or goals misidentified. Not enough solutions may be generated, or they may be evaluated incompletely. A satisficing rather than maximizing choice may be made. Implementation may be poorly planned or executed, or monitoring may be inadequate or nonexistent.

And decisions are influenced by subjective psychological biases, time pressures, and social realities. . Psychological Biases * biases that interfere with objective rationality * illusion of control – a belief that one can influence events even when one has no control over what will happen * framing effects – how problems or decision alternatives are phrased or perceived * subjective influences can override objective facts * discount the future – weigh short-term costs and benefits more heavily than longer-term costs and benefits * the avoidance of short-term costs or the seeking of short-term rewards may result in negative long-term consequences . Time Pressures * today’s economy places a premium on acting quickly and keeping pace * in order to make timely and high-quality decisions one must: * focus on real-time information * involve people more effectively and efficiently * rely on trusted experts * take a realistic view of conflict 2. Social Realities * many decisions result from intensive social interactions, bargaining, and politicking DECISION MAKING IN GROUPS Sometimes a manager finds it necessary to convene a group of people for the purpose of making an important decision.Some advise that in today’s complex business environment, significant problems should always be tackled by teams. Managers therefore must understand how groups and teams operate and how to use them to improve decision making.

The basic philosophy behind using a group to make decisions is captured by the adage “two heads are better than one”. Potentially, if enough time is available, groups usually make higher-quality decisions than most individuals acting alone.However, groups often are inferior to the best individual. How well the group performs depends on how effectively it capitalizes on potential advantages and minimizes the potential problems of using a group. * Potential Advantages 1. Larger pool of information 2. More perspectives and approaches 3.

Intellectual stimulation 4. People understand the decision 5. People are committed to the decision * Potential Disadvantages 1. One person dominates 2.

Satisficing 3.Groupthink – team spirit discourages disagreement 4. Goal displacement – new goals replace original goals MANAGING GROUP DECISION MAKING 1.

Leadership Style * leader should attempt to minimize process-related problems * leader should: * avoid dominating the discussion * encourage less vocal members to express themselves * mitigate pressures for conformity * stay alert to groupthink and satisficing * prevent group from losing sight of the primary objective 1. Constructive Conflict a certain amount of constructive conflict should exist * cognitive conflict – issue-based differences in perspectives or judgments * most constructive type of conflict * can air legitimate differences of opinion and develop better ideas * affective conflict – emotional disagreement directed toward other people that is likely to be destructive * devil’s advocate – has the job of criticizing others * dialectic – structured debate comparing two conflicting courses of action 2.Encouraging Creativity * creativity involves: * creation – bringing a new thing into being * synthesis – joining two previously unrelated things * modification – improving something or giving it new application * to become creative one must: * recognize creative potential in little opportunities * obtain sufficient resources * escape from work once in awhile and read widely * brainstorming – group generates ideas about a problem * criticism is withheld until all ideas have been proposedORGANIZATIONAL DECISION MAKING Individuals and groups make decisions constantly, throughout the organizations.

To understand decision making in organizations, a manager must consider a number of additional concepts and processes including (1) the constraints decision makers face, (2) organizational decision processes, (3) negotiations and politics, (4) decision making during a crisis, and (5) emergent strategies. 1. Constraints on Decision Makers organizations cannot do whatever they wish * face various constraints on their actions 2. Models of Organizational Decision Processes * bounded rationality – decision makers cannot be truly rational because: * they have imperfect, incomplete information about alternatives * the problems they face are so complex * human beings cannot process all the information to which they are exposed * time is limited people in the organization have conflicting goals * incremental model – major decisions arise through a series of smaller decisions * piecemeal approach to larger solutions * coalitional model – groups with differing preferences use power and negotiation to influence decisions * used when people disagree about goals or compete for resources * garbage can model – a chaotic process leading to seemingly random decisions * occurs when people are unsure of their goals and what should be done 3.Negotiations and Politics * negotiations necessary to galvanize the preferences of competing groups and individuals * organizational politics – people try to influence decisions to promote their own interests * use power to pursue hidden agendas * create common goals – helps to make decision making a collaborative rather than a competitive process 4.

Decision Making in a Crisis * stress and time constraints make decisions less effective * should be prepared for crises in advance 5. Emergent Strategies the strategy that evolves from all the activities engaged in by people throughout the organization * result from dynamic processes in which people engage in discovery, implement decisions, and reconsider the initial decision after discovering new things by chance * emergent strategies may start at any organizational level * emergent strategies are generally the result of constructive processes PLANNING FOR DECISION MAKING While decision making without planning is fairly common, it is often not pretty.The terms used to describe it – crisis management, putting out fires, seat-of-the-pants governing – all reveal the inelegance and awkwardness of this way of life. Planning allows decisions to be made in a much more comfortable and intelligent way. Planning even makes decisions easier by providing guidelines and goals for the decision. We might even say that planning is a type of decision simplification technique. Decision makers will find four major benefits to planning: 1.

Planning allows the establishment of independent goals. The vision which will shape the decisions is set apart from surrounding events.Decisions are not made only as reactions to external stimuli. “Management by fire fighting” is replaced by a conscious and directed series of choices. Managers now steer the organization, individuals now steer their lives, rather than being steered by external forces.

Sometimes the difference between planning and not planning is described as “proactive” (taking control of the situation) versus “reactive” (responding to stimuli). 2. Planning provides a standard of measurement. A plan provides something to measure against, so that you can discover whether or not you are achieving or heading toward your goals.

As the proverb says, “If you don’t know where you’re going, it doesn’t matter which way you go”. 3. Planning converts values to action. When you are faced with a decision, you can consult your plan and determine which decision will help advance your plan best. Decisions made under the guidance of planning can work together in a coherent way to advance company or individual goals. Planning is useful in emergency situations, too. When a crisis arises, a little thought about the overall plan will help determine which decision to make that will not only help resolve the crisis but will also help advance the overall plan.Without a plan, crises are dealt with haphazardly and decisions are made which may ultimately be in conflict with each other.

4. Planning allows limited resources to be committed in an orderly way. Budgets, time, effort, manpower – all are limited. Their best use can be made when a plan governs their use. A simple example would be planning to buy a house or a car. Rather than having to decide between buying the item right now with all cash or never having it, you can plan to buy it over several years by making payments.

Or, you might combine this plan with the plan to buy a smaller house and add rooms later as they could be afforded. By planning you can thus accomplish things that might otherwise look impossible. DECISION LEVELS We all recognize that some decisions are more important than others, whether in their immediate impact or long term significance. As a means of understanding the significance of a decision so that we can know how much time and resources to spend on it, three levels of decision have been identified: 1. Strategic. Strategic decisions are the highest level.

Here a decision concerns general direction, long term goals, philosophies and values. These decisions are the least structured and most imaginative; they are the most risky and of the most uncertain outcome, partly because they reach so far into the future and partly because they are of such importance. For example: Decisions about what to do with your life, what to learn, or what methods to use to gain knowledge (travel, work, and school) would be strategic. Whether to produce a low priced product and gain market share or produce a high priced product for a niche market would be a strategic decision. . Tactical. Tactical decisions support strategic decisions. They tend to be medium range, medium significance, with moderate consequences.

For example: If your strategic decision were to become a forest ranger, a tactical decision would include where to go to school and what books to read. Or if your company decided to produce a low priced product, a tactical decision might be to build a new factory to produce them at a low manufacturing cost. 3. Operational. These are every day decisions, used to support tactical decisions.

They are often made with little thought and are structured. Their impact is immediate, short term, short range, and usually low cost. The consequences of a bad operational decision will be minimal, although a series of bad or sloppy operational decisions can cause harm. Operational decisions can be preprogrammed, pre-made, or set out clearly in policy manuals.

For example: If your tactical decision is to read some books on forestry, your operational decision would involve where to shop for the books. You might have a personal policy of shopping for books at a certain store or two.Thus, the operational decision is highly structured: “Whenever books are needed, look at Joe’s Books. ” An important comment should be made here. Issues should be examined and decisions should be made at all of these levels.

If you discover that nearly all of your thinking and decision making is taking place at the operational level, then you are probably not doing enough strategic thinking and planning. As a result you will lead a reactive life, responding only to the forces around you and never getting control of your life, your direction or your goals. SOME TECHNIQUES IN DECISION MAKINGThis is a list of easy, practical techniques that can be applied to simple or complex decisions. They share the assumption that circumspect analysis is the key to making good decisions. Many decisions are made with too little information and too little thought, in a non-deliberate way. Think about it for a moment: how many people do you know who commonly spend even five minutes structuring and analyzing a decision? Note how these techniques provide a visible, structured, orderly set of factors involved in a decision, so that the decision maker can consider them in a thoughtful and coherent way.The first three techniques are especially for whether-type decisions, those involving yes/no, either/or, or two-possibility decisions. 1.

T-Chart. A T-Chart is an orderly, graphic representation of alternative features or points involved in a decision. In one form, it can be a list of positive and negative attributes surrounding a particular choice. Drawing up such a chart insures that both the positive and negative aspects of each direction or decision will be taken into account.

For example, what are the pros and cons of deciding to buy a sport utility vehicle?PRO| CON| better visibility| higher insurance| safer structure| poorer gas mileage| can take off road| more expensive maintenance| In another form, two possible choices are listed, with the good points or arguments or effects listed for each. Suppose your company is trying to decide whether to create its own advertising or hire an agency. Use Outside Agency| Write Ads In-House| professional work| faster product| expertise of ideas| better knowledge of product| media connections| use same ad in flyers|To fill out this latter form, more than two choices can be included, and a list of negatives for each choice can be added as well.

2. PMI. Edward de Bono refines the T-Chart idea into a three part structure, which he calls PMI for plus, minus, and interesting. Here you first list all the plus or good points of the idea, then all the minus or bad points, and finally all the interesting points–consequences, areas of curiosity or uncertainty, or attributes that you simply don’t care to view as either good or bad at this point (consequences that some people might view as good and others might view as bad, for example).

The “interesting” category also allows exploration of the idea or choice outside the context of judgment–you don’t have to evaluate the attribute into a positive or negative category. As simple as this technique seems to be, and as often as others will tell you, “Well, of course, everyone does that all the time,” this is a very powerful but much neglected technique. Most people believe they list the pluses and minuses of a decision before making it, but in actual practice, many people make a decision or form an opinion before they consider the evidence in an orderly way.Only after they make a decision do they hunt around for reasons to support it. Considering the evidence on both (or all) sides before you commit yourself emotionally and psychologically to a position will have a major impact on the quality of your decision making. For example, suppose you are on a jury and must decide the guilt or innocence of the accused (or to hold for the plaintiff or defendant in a civil trial, if you prefer).What happens on most juries is that after the members meet in the room and choose a foreman, a preliminary vote is taken. “Let’s find out where we all stand now,” the foreman might say.

Unfortunately, beginning a decision making session this way creates more problems than it solves. Before the jurors have had time to think over the issues or to discuss them to clarify the facts, they are asked to give their opinions. Giving an opinion is, in our society, accompanied by an ego investment, because we do not like to be wrong.As a result, each juror becomes emotionally committed to his first opinion and will very often proceed to look for arguments and facts that support this opinion (and hence defend his ego), rather than listen thoughtfully to the facts and decide the case on its merits. If, on the other hand, the foreman said, “Instead of a preliminary vote on the case, let’s work together to draw up a list, first of all the evidence that would argue for the defendant’s guilt, then all the evidence that would argue for his innocence.

And as we make the lists, we can also write down facts that are interesting but that don’t necessarily argue either for guilt or innocence. ” Now all the jurors will work together, have the opportunity to ask questions and resolve doubts, consider evidence they might not otherwise have remembered, and can change their minds back and forth as many times as they want, all without a threat to their egos or their need to be correct. Notice that the PMI technique turns the jurors into collaborators, working together, instead of competitive debaters arguing for victory (rather than truth).As another example, suppose that you are on the board of a missionary and relief organization and your group has decided to improve the roads in a small South American village. You as chairman must present the alternatives, which are that you have enough gravel either to pave half the roads completely or to fix the worst spots and holes in all the roads.

If you stand up and say, “Well that’s it; what do you think? ” you’ll get the usual off-the-cuff first impression opinions, backed up later by whatever arguments those who have committed to them can dredge up.But suppose you say, “Let’s make two PMI lists, first one of all the good and bad points for paving half the roads completely, and then one for the good and bad of fixing the worst problems on all the roads. Then we will have all the ideas and reasons before us when we make a decision. ” This way, you will be pooling your ideas and working together without the threat of being wrong or the need to defend your first opinion. Yes, this simple technique of deliberate pro and con identification is extremely powerful and extremely neglected.

Get into the habit of using it and you’ll see your decision making quality improve remarkably. . Buriden’s Ass. This method of decision making is used when two or more equally attractive alternatives are faced. (From an old fable of an ass placed between two equally nice bales of hay.

The ass couldn’t decide which bale to turn to because they were both so attractive, and so it starved to death from indecision. ) The method is simply to list all the negative points or drawbacks about each decision. That is, when two or more alternatives seem very desirable, we become blinded to any drawbacks. The Buriden’s Ass method simply focuses on the drawbacks. For example, suppose you are a young lady bout to become engaged.

Mr. Right asks you, “Darling, would you rather have a $4,000 diamond engagement ring or $4,000 worth of furniture for our new Swiss chalet? ” You find these to be both very attractive alternatives, so you decide to use the Buriden’s Ass method to decide between them. What are the drawbacks of the ring? It might get stolen or lost; it isn’t useful like furniture; people might think you married Mr. Right for his money (or that he had to buy your consent with a big rock); it might make your friends feel bad because they have little rings; you might worry about damaging it.

And so on. Now, what are the drawbacks of the furniture? It will wear out eventually and be gone, while the ring should last a lifetime; you might worry about staining or damaging the furniture; furniture isn’t “romantic” like diamonds; and so on. The last two techniques are especially useful for which-type of decisions: those involving several alternatives and several criteria. 4. Measured Criteria. With this technique, you list the criteria you want your decision to meet and assign points to each criterion based on its relative importance in the decision.

Then, each alternative is given a certain number of points according to how fully it meets the criterion. For points you can use a scale of 1 to 10, 1 to 100, or any other range that makes sense to you. In the example, travelling by train is rated at 25 out of 30 points for the “comfort” criterion, while the plane is ranked a little less comfortable, at 21 out of 30. Once all the alternatives have been assigned their due points for each criterion, all the points for each alternative are added up and the alternative with the highest total points is the one chosen.

In the example below, that would be the plane. Possible Points| Train| Plane| Car| Comfort| 30| 25| 21| 18| Speed| 15| 7| 15| 3| Safety| 20| 13| 17| 9| Food| 10| 6| 2| 10| Total| 75| 51| 55| 40| Example: 5. Decision Matrix or Weighted Decision Table. This is a slightly more sophisticated version of the measured criteria technique. Here a table is set up with each criterion given a weight depending on its importance in the decision and with each alternative given a ranking for that criterion. For example, suppose you want to decide on which class to take next semester, and you have the following alternatives: * Behavior Disorders * Personal Finance * Screenwriting Beginning Acting You set up a decision matrix with the alternatives across the top and with the criteria you want a class to meet listed down the side. Each criterion is also given a weight to show its relative importance. In this example below, note that “personal interest” is weighted with a 9, a very high weight, while “good hour” is weighted with a 3, a low weight.

Taking a class at a good hour is important to you (because you named it as one of the criteria), but personal interest is three times as important. Now each alternative is ranked according to how well it meets the named criterion in each case.In our example below, we have decided to use higher numbers to represent better or more important, so the “most personally interesting” class according to the ranking below, is Personal Finance. After ranking all the alternatives, the total points are added up, and the one with the largest total is the alternative chosen. Instead of ranking the alternatives from one to the total number of alternatives as we did above (1-4 because of 4 alternatives), you can use relative ranking numbers, where, say 10 would be the best possible and 1 would be very poor. There are two advantages to this latter method.One is that very low and very high rankings can be moved apart–a ranking of 1 out of 10 is much lower than 1 out of 6.

The second advantage is that two alternatives can be given the same ranking in points. Thus, the absolute scale, whether 1 to 10 or 1 to 100, gives more flexibility than the 1-out-of-number-of-alternatives scale, above.

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