The Manager as a Decision Maker

Lecture 6
Business Management & Ethics
 Managerial Decision Making
• Decision making: the process by which
managers respond to opportunities and threats
by analyzing options, and making decisions
about goals and courses of action.
• Decisions in response to opportunities:
managers respond to ways to improve
organizational performance.
• Decisions in response to threats: occurs when
managers are impacted by adverse events to
the organization.
 Types of Decision Making
• Programmed Decisions: routine, almost
automatic process.
– Managers have made decision many times before.
– There are rules or guidelines to follow.
– Example: Deciding to reorder office supplies.
• Non-programmed Decisions: unusual situations
that have not been often addressed.
– No rules to follow since the decision is new.
– These decisions are made based on information, and
a manger’s intuition, and judgment.
– Example: Should the firm invest in a new technology?
 The Classical Model

• Classical model of decision making: a

prescriptive model that tells how the decision
should be made.
– Assumes managers have access to all the
information needed to reach a decision.
– Managers can then make the optimum decision by
easily ranking their own preferences among
alternatives.
• Unfortunately, mangers often do not have all
(or even most) required information.
 The Classical Model
Figure 6.1

List alternatives Assumes all information

& consequences is available to manager

Rank each alternative Assumes manager can

from low to high process information

Assumes manager knows

Select best the best future course of
alternative the organization
 The Administrative Model
• Administrative Model of decision making:
Challenged the classical assumptions that
managers have and process all the information.
– As a result, decision making is risky.
 Bounded rationality: There is a large number of
alternatives and information is vast so that
managers cannot consider it all.
– Decisions are limited by people’s cognitive abilities.
 Incomplete information: most managers do not
see all alternatives and decide based on
incomplete information.
 Why Information is Incomplete
Figure 6.2

Uncertainty Ambiguous
& risk Information

Incomplete
Information

Time constraints &

information costs
 Incomplete Information Factors
• Incomplete information exists due to many
issues:
– Risk: managers know a given outcome can fail or
succeed and probabilities can be assigned.
– Uncertainty: probabilities cannot be given for
outcomes and the future is unknown.
• Many decision outcomes are not known such as a new
product introduction.
– Ambiguous information: information whose
meaning is not clear.
• Information can be interpreted in different ways.
 Incomplete Information Factors
• Time constraints and Information costs:
Managers do not have the time or money to
search for all alternatives.
– This leads the manager to again decide based on
incomplete information.
• Satisficing: Managers explore a limited number
of options and choose an acceptable decision
rather than the optimum decision.
– This is the response of managers when dealing with
incomplete information.
– Managers assume that the limited options they
examine represent all options.
 Decision Making Steps
Figure 6.4
Recognize need for
a decision

Frame the problem

Generate & assess

alternatives
Choose among
alternatives

Implement chosen
alternative

Learn from feedback

 Decision Making Steps
1. Recognize need for a decision: Managers must
first realize that a decision must be made.
• Sparked by an event such as environment changes.
2. Generate alternatives: managers must develop
feasible alternative courses of action.
• If good alternatives are missed, the resulting decision is
poor.
• It is hard to develop creative alternatives, so managers
need to look for new ideas.
3. Evaluate alternatives: what are the advantages
and disadvantages of each alternative?
• Managers should specify criteria, then evaluate.
 Decision Making Steps
4. Choose among alternatives: managers rank
alternatives and decide.
• When ranking, all information needs to be considered.
5. Implement choose alternative: managers
must now carry out the alternative.
• Often a decision is made and not implemented.
6. Learn from feedback: managers should
consider what went right and wrong with the
decision and learn for the future.
• Without feedback, managers never learn from
experience and make the same mistake over.
 Evaluating Alternatives
Figure 6.5
Is the possible course of action:

Legal?
Ethical
Economical?

Practical?
 Evaluating Alternatives
• Is it legal? Managers must first be sure that an
alternative is legal both in this country and
abroad for exports.
• Is it ethical? The alternative must be ethical and
not hurt stakeholders unnecessarily.
• Is it economically feasible? Can our
organization’s performance goals sustain this
alternative?
• Is it practical? Does the management have the
capabilities and resources to do it?
 Cognitive Biases
•Suggests decision makers use heuristics to
deal with bounded rationality.
– A heuristic is a rule of thumb to deal with
complex situations.
– If the heuristic is wrong, however, then poor
decisions result from its use.
•Systematic errors can result from use of an
incorrect heuristic.
– These errors will appear over and over since the
rule used to make decision is flawed.
 Types of Cognitive Biases
Figure 6.6

Prior Hypothesis

Representativeness Cognitive
Biases
Illusion of Control

Escalating Commitment
 Types of Cognitive Biases
Prior hypothesis bias: manager allows strong prior
beliefs about a relationship between variables and
makes decisions based on these beliefs even when
evidence shows they are wrong.
Representativeness: decision maker incorrectly
generalizes a decision from a small sample or one
incident.
Illusion of control: manager over-estimates their ability
to control events.
Escalating commitment: manager has already
committed considerable resource to project and then
commits more even after feedback indicates problems.
 Group Decision Making
Many decisions are made in a group setting.
– Groups tend to reduce cognitive biases and can call
on combined skills, and abilities.
There are some disadvantages with groups:
Group think: biased decision making resulting
from group members striving for agreement.
– Usually occurs when group members rally around a
central manger’s idea (CEO), and become blindly
committed without considering alternatives.
– The group tends to convince each member that the
idea must go forward.
 Improved Group Decision Making
• Devil’s Advocacy: one member of the group acts
as the devil’s advocate and critiques the way
the group identified alternatives.
– Points out problems with the alternative selection.
• Dialectical inquiry: two different groups are
assigned to the problem and each group
evaluates the other group’s alternatives.
– Top managers then hear each group present their
alternatives and each group can critique the other.
• Promote diversity: by increasing the diversity in
a group, a wider set of alternatives may be
considered.
 Devil’s Advocacy v. Dialectic Inquiry
Figure 6.7

Devil’s Advocacy Dialectic Inquiry

Presentation of
alternative Alter. 1 Alter. 2

Critique of Debate the two

alternative alternatives

Reassess Reassess
alternative alternatives
accept, modify, reject accept 1 or 2, combine
Organizational Learning & Creativity
• Organizational Learning: Managers seek to
improve member’s ability to understand the
organization and environment so as to raise
effectiveness.
– The learning organization: managers try to improve
the people’s ability to behave creatively to
maximize organizational learning .
• Creativity: is the ability of the decision maker to
discover novel ideas leading to a feasible course
of action.
– A creative management staff and employees are
the key to the learning organization.
 Senge’s Learning Organization Principles
Figure 6.8

Develop Personal Build complex,

Mastery challenging
mental models
Encourage
Systems
Thinking
Build Shared Promote Team
Vision Learning
 Creating a Learning Organization
Senge suggests top managers follow several
steps to build in learning:
– Personal Mastery: managers empower employees
and allow them to create and explore.
– Mental Models: challenge employees to find new,
better methods to perform a task.
– Team Learning: is more important than individual
learning since most decisions are made in groups.
– Build a Shared Vision: a people share a common
mental model of the firm to evaluate opportunities.
– Systems Thinking: know that actions in one area of
the firm impacts all others.
 Individual Creativity
• Organizations can build an environment
supportive of creativity.
– Many of these issues are the same as for the
learning organization.
– Managers must provide employees with the ability
to take risks.
– If people take risks, they will occasionally fail.
• Thus, to build creativity, periodic failures must
be rewarded.
– This idea is hard to accept for some managers.
 Building Group Creativity
• Brainstorming: managers meet face-to-face to
generate and debate many alternatives.
• Group members are not allowed to evaluate alternatives
until all alternatives are listed.
• Be creative and radical in stating alternatives.
• When all are listed, then the pros and cons of each are
discussed and a short list created.
• Production blocking is a potential problem with
brainstorming.
• Members cannot absorb all information being presented
during the session and can forget their own alternatives.
 Building Group Creativity
• Nominal Group Technique: Provides a more
structured way to generate alternatives in
writing.
• Avoids the production blocking problem.
• Similar to brainstorming except that each member is
given time to first write down all alternatives he or she
would suggest.
• Alternatives are then read aloud without discussion until
all have been listed.
• Then discussion occurs and alternatives are ranked.
 Building Group Creativity
• Delphi Technique: provides for a written format
without having all managers meet face-to-face.
• Problem is distributed in written form to managers who
then generate written alternatives.
• Responses are received and summarized by top
managers.
• These results are sent back to participants for feedback,
and ranking.
• The process continues until consensus is reached.
– Delphi allows distant managers to participate.
END.