Dan C. Lungescu, PhD, assistant professor2015-2016

ManagementPart II: Planning

Ch. 7. Decision making

Course outline

Part I: Introduction

Part II: Planning

Part III: Organizing

Part IV: Leading

Part V: Controlling

Management

Part II outline

Part II: Planning

Ch. 5. Organizational goals and plans

Ch. 6. Strategic management

Ch. 7. Decision making

Ch. 8. Managing innovation and change

Management

Learning objectives

After studying this chapter, you should:

Explain the major types of problems facing decision makers and describe the difference between programmed and nonprogrammed decisions.

Contrast the rational and nonrational models of managers. Describe each of the steps in an effective D-M process. Explain how to overcome the barriers to accepting the problem

challenge and to searching for sufficient alternatives. Describe how to recognize common decision-making biases and

avoid the decision escalation phenomenon. Assess the advantages and disadvantages of group DM. Explain the basic ingredients and stages of creativity. Describe the major techniques for enhancing group creativity.

Chapter 7 outline

A. The nature of managerial decision making

B. Managers as decision makers

C. Steps in an effective decision-making process

D. Overcoming barriers to effective decision making

E. Group decision making

F. The creativity factor in decision making

A. The nature of managerial DM

Outline » A. The nature of managerial decision making

The process through which managers identify organizationalproblems and attempt to resolve them.

Decision making

An effective problem solving process generally includes four steps (DM: only the first three):

I. Identify the problem

II. Generate alternative solutions

III. Evaluate and choose among alternative solutions

IV. Implement and monitor the chosen solution

Problem solving

Decision making

Types of problems

Outline » A. The nature of managerial decision making » Types of problems

A serious difficulty requiring immediate action.

Crisis problem

An issue that requires resolution but does not simultaneously havethe importance and immediacy characteristics of a crisis.

Noncrisis problem

A situation that offers a strong potential for significantorganizational gain if appropriate actions are taken.

Opportunity problem

Differences in D-M situations

Outline » A. The nature of managerial decision making » Differences in D-M situations

Decisions made in routine, repetitive, well-structured situationsthrough the use of predetermined decision rules.

Programmed decisions

Decisions for which predetermined decision rules are impracticalbecause the situations are novel and/or ill-structured.

Nonprogrammed decisions

A condition in which the decision maker must choose a course ofaction without complete knowledge of the consequences that willfollow implementation.

Uncertainty

The possibility that a chosen action could lead to losses rather thanthe intended results.

Risk

B. Managers as decision makers

Outline » B. Managers as decision makers

Two major types of models regarding how managers make decisions: rational and nonrational.

A model that suggests that managers engage in completely rationaldecision processes, ultimately make optimal decisions, and possessand understand all information relevant to their decisions at thetime they make them.

Rational model

models

Models that suggest that information-gathering and information-processing limitations make it difficult for managers to makeoptimal decisions.

Nonrational models

Nonrational models

Outline » B. Managers as decision makers » Nonrational models

A model stating that managers make the smallest response possible thatwill reduce the problem to at least a tolerable level.

2. Incremental model

A model stating that managers behave in virtually a random pattern inmaking nonprogrammed decisions.

3. Garbage-can model

A concept that suggests that the ability of managers to be perfectly rationalin making decisions is limited by such factors as cognitive capacity and timeconstraints.

Bounded rationalitybased on bounded rationality

A model stating that managers seek alternatives only untilthey find one that looks satisfactory, rather than seeking theoptimal decision.

1. Satisficing model [Herbert Simon]

C. Steps in an effective D-M process

Outline » C. Steps in an effective decision-making process

Models of decision making that attempt to document howmanagers actually do make decisions.

Descriptive decision-making models

Models of decision making that attempt to prescribe how managersshould make decisions.

Normative decision-making models

I. Identify the problem

II. Generate alternative solutions

III. Evaluate and choose an alternative

I. Identifying the problem

Outline » C. Steps in an effective decision-making process » I. Identifying the problem

Involves monitoring the work situation for changing circumstancesthat may signal the emergence of a problem.

1. Scanning stage

Entails attempting to understand and verify signs that there is sometype of discrepancy between a current state and what is desired.

2. Categorization stage

Involves gathering additional information and specifying both thenature and the causes of the problem.

3. Diagnosis stage

II. Generating alternative solutions

Outline » C. Steps in an effective D-M process » II. Generating alternative solutions

A technique that encourages group members to generate as manynovel ideas as possible on a given topic without evaluating them.

Brainstorming

4 principles involved:

1. Don’t criticize ideas while generating possible solutions.

2. Freewheel (offer seemingly wild and outrageous ideas).

3. Offer as many ideas as possible.

4. Combine and improve on ideas that have been offered.

III. Choosing an alternative

Outline » C. Steps in an effective D-M process » III. Evaluating and choosing an alternative

Each alternative should be evaluated systematically according to six general criteria:

The extent to which it can be accomplished within relatedorganizational constraints.

1. Feasibility

The extent to which it effectively solves the problem underconsideration.

2. Quality

The degree to which the decision makers and others who will beaffected by the implementation of the alternative are willing tosupport it.

3. Acceptability

Choosing an alternative (2)

Outline » C. Steps in an effective D-M process » III. Evaluating and choosing an alternative (2)

Refers both to the resource levels required and the extent to whichthe alternative is likely to have undesirable side effects.

4. Costs

The extent to which it can be reversed, if at all.

5. Reversibility

The extent to which it is compatible with the social responsibilitiesof the organization.

6. Ethics

D. Overcoming barriers to effective DM

Outline » D. Overcoming barriers to effective decision making

Managers often do not follow the four-step process just outlined » they face several barriers to effective decision making.

The main means for overcoming the four key decision-making barriers:

I. Accepting the problem challenge in the first place

II. Searching for sufficient alternatives

III. Recognizing common decision-making biases

IV. Avoiding the decision escalation phenomenon

I. Accepting the problem challenge

Outline » D. Overcoming barriers to effective DM » I. Accepting the problem challenge

4 basic reaction patterns may characterize the behavior of individuals when faced with a legitimate problem in the form of a difficulty or an opportunity (the first 3 are barriers):

A condition in which individuals either do not see the signs of danger oropportunity or ignore them.

1. Complacency

A condition in which individuals either deny the importance of a danger oran opportunity or deny any responsibility for taking action.

2. Defensive avoidance

A reaction in which individuals become so upset that they frantically seek away to solve a problem.

3. Panic

A response in which decision makers accept the challenge of deciding whatto do about a problem and follow an effective decision-making process.

4. Deciding to decide

Guidelines for deciding to decide

Outline » D. Overcoming barriers to DM » I. Accepting the problem » Deciding to decide

Is the source in a position to know the truth? If so, is the source likely to be honest? Is there any evidence, and how good is it?

Appraise credibility of information

How likely is a real danger or opportunity? If a threat, how severe might the losses be? If an opportunity, how great might the gains be?

Ascertain importance of threat or opportunity

Is the threat or opportunity likely to occur soon? Will it develop gradually, or is sudden change likely? If some action is urgent, can part be done now and the rest

later?

Determine the need for urgency

III. Recognizing common D-M biases

Outline » D. Overcoming barriers to effective DM » III. Recognizing common D-M biases

The tendency to make different decisions depending on how aproblem is presented.

Framing

A theory positing that decision makers find the prospect of an actualloss more painful than giving up the possibility of a gain.

Prospect theory

The tendency to be overly influenced by stereotypes in makingjudgments about the likelihood of occurrences.

Representativeness

Recognizing common D-M biases (2)

Outline » D. Overcoming barriers to effective DM » III. Recognizing common D-M biases (2)

The tendency to judge the likelihood of an occurrence on the basisof the extent to which other like instances or occurrences can easilybe recalled.

Availability

The tendency to be influenced by an initial figure, even when theinformation is largely irrelevant.

Anchoring and adjustment

The tendency to be more certain of judgments regarding thelikelihood of a future event than one’s actual predictive accuracywarrants.

Overconfidence

Decision-making biases: examples

Outline » D. Overcoming barriers to DM » III. Recognizing common D-M biases » Examples

I was told that my very old uncle just died in his bed. OK, I will always sleep on the floor.Framing

Should I watch the game? I like my team winning, but I hate it losing. OK, I won’t watch it. [1 day after:] How

stupid I was! It didn’t see Braga-CFR 0-2!Prospect

I read that 1 woman out of 10 is cheating. And this is my tenth girlfriend. OK, we will break.

Representa-tiveness

CFR lost the last 2 games. So I’m sure today it will lose again. [1 day after:] God, I didn’t see CFR

beating Barcelona in the Champions League finale!Availability

‘Mom, how many days should I prepare for my management exam?’ ‘Well, I think 2, this is my

lucky number’. ‘OK, then.’ [After the exam:] Beep!

Anchoring andadjustment

People talk about plains falling down. OK, I will go by car. [After the car crash:] I should have read the

statistics. The planes are not flown by drunk pilots…Overconfidence

IV. Avoiding the decision escalation

Outline » D. Overcoming barriers to effective DM » IV. Avoiding the decision escalation

Situations that signal the strong possibility of escalatingcommitment and accelerating losses.

Escalation situations

The tendency to increase commitment to a previously selectedcourse of action beyond the level that would be expected if themanager followed an effective decision-making process.

Escalation phenomenon (nonrational escalation)

Costs that, once incurred, are not recoverable and should not enterinto considerations of future courses of action.

Sunk costs

E. Group decision making

Outline » E. Group decision making

Disadvantages

It is usually more time-consuming.

Disagreements may delay decisions and cause hard feelings.

The discussion may be dominated by one or a few group members.

Groupthink may cause members to overemphasize achieving agreement.

Advantages

More information and knowledge is focused on the issue.

An increased number of alternatives can be developed.

Greater understandingand acceptance of the final decision are likely.

Members developknowledge and skills for future use.

Groupthink

Outline » E. Group decision making » Groupthink

The tendency in cohesive groups to seek agreement about an issueat the expense of realistically appraising the situation.

Groupthink

Group members are so concerned about preserving the cohesion ofthe group that they are reluctant to: Bring up issues that may cause disagreements. Provide information that may prove unsettling to the discussion.

Consequences

Enhancing group D-M process

Outline » E. Group decision making » Enhancing group D-M process

1. Involving the group in decisions.

2. Considering carefully the composition of the group.

3. Setting up mechanisms that help avoid groupthink.

4. Using techniques that enhance creativity.

Individuals who are assigned the role of making sure that thenegative aspects of any attractive decision alternatives areconsidered.

Devil’s advocates

A procedure in which a decision situation is approached from twoopposite points of view.

Dialectical inquiry

F. The creativity factor in DM

Outline » F. The creativity factor in decision making

The cognitive process of developing an idea, concept, commodity, ordiscovery that is viewed as novel by its creator or a target audience.

Creativity

Creativity is not a quality of a person;it is a quality of ideas, of behaviors, or products.

Creativity requires two types of thinking:

The effort to solve problems by beginning with a problem andattempting to move logically to a solution.

Convergent thinking

The effort to solve problems by generating new ways of viewing aproblem and seeking novel alternatives.

Divergent thinking

Basic ingredients of creativity

Outline » F. The creativity factor in decision making » Basic ingredients of creativity

Skills associated with expertise in the relevant field. They includerelated technical skills or artistic ability, talent in the area, andfactual knowledge.

Domain-relevant skills

A cognitive style, or method, of thinking that is oriented toexploring new directions, knowledge of approaches that can beused for generating novel ideas, and a work style that is conduciveto developing creative ideas.

Creativity-relevant skills

The individual must be genuinely interested in the task for its ownsake, rather than because of some external reward possibility, suchas money. Primary concern with external rewards tends to inhibitthe creative process.

Task motivation

The creative work style

Outline » F. The creativity factor in decision making » The creative work style

Ability to concentrate effort and attention for long periods.

Ability to abandon unproductive avenues.

Persistence.

A high energy level.

Stages of creativity

Outline » F. The creativity factor in decision making » Stages of creativity

Gathering initial information, defining the problem or task requiringcreativity, generating alternatives, and seeking and carefully analyzingfurther data relating to the problem.

Preparation

Involves mainly subconscious mental activity and divergent thinking toexplore unusual alternatives.

Incubation

A new level of insight is achieved, often through a sudden breakthrough in“eureka” fashion.

Illumination

Testing the ideas to determine the validity of the insight. Convergent, logicalthinking is needed to evaluate the solution. If the solution does not provefeasible, it may be necessary to cycle back through all or some of theprevious steps.

Verification

Techniques for enhancing group creativity

Outline » F. The creativity factor in DM » Techniques for enhancing group creativity

1. Brainstorming

2. The nominal group

3. Delphi

The major techniques:

The nominal group technique

Outline » F. The creativity factor in DM » Enhancing group creativity » The nominal group

A technique that integrates both individual work and groupinteraction within certain ground rules (steps):

Nominal group technique

The individual members independently prepare lists of their ideason a problem.

1. Creating individual ideas

Each group member presents his/her ideas in a round-robin session(one idea at a time from each group member in turn) withoutdiscussion. The ideas are recorded so that everyone can see them. Ifa presented idea triggers a new idea for someone else, thatmember adds the new idea to his/her list for presentation on afuture round-robin turn.

2. Presenting the ideas

The nominal group technique (2)

Outline » F. The creativity factor in DM » Enhancing group creativity » The nominal group (2)

When all the individual ideas are recorded on the group list, themembers discuss the ideas for clarification and evaluation purposes.

3. Discussing the ideas

The members silently and independently vote on the ideas, using arank ordering or rating procedure. The final outcome is determinedby pooling the individual votes.

4. Choosing one idea

Dan C. Lungescu, PhD, assistant professor2015-2016