MGMT CH 3

The Nature of Managerial Decision Making

Decision making : the process of analyzing options and making determinations about specific organizational goals and courses of action

In response to opportunities : managers search for ways to improve performance to benefit all stakeholders

In response to threats : managers search for ways to increase performance despite events inside or outside the organization that are adversely affecting organizational performance \n \n

Programmed Decision Making

Programmed decision making :routine, virtually automatic decision making that follows established rules or guidelines

All inputs and outcomes are known with certainty

Managers have made the decision many times before

Managers can develop rules and guidelines to regulate all routine and repetitive organizational activities

Example: Deciding when to reorder office supplies

Machine learning

Programmed tasks:

High degree of predictability allows these types of decisions to be learned by computers

Machine learning: artificial intelligence used by a computer system to make routine decisions without additional programming

Relies on vast amounts of data to make judgments and improve actions taken without human involvement

Programmed decisions are increasingly being digitized; freeing up managers to engage in more complex decisions

Nonprogrammed Decision Making

Nonprogrammed decisions :non-routine decision making that occurs in response to unusual, unpredictable opportunities and threats

Rules do not exist because situation is unexpected or uncertain

Decisions are made based on incomplete information

Can result in effective or ineffective decision making

Example: Should the firm invest in a new technology?

Two Models of Decision Making

Classical (rational) model :prescriptive approach, which specifies a process of decision making to maximize benefit to organization and shareholders

Based on idea that decision maker can identify and evaluate all possible alternatives and their consequences and rationally choose most suitable course of action

Assumes managers have access to all information needed to reach the optimum decision :the most appropriate decision for most desirable future consequences for organization

Managers can rank preferences among alternatives to make decision

The Classical Model

Two Models of Decision Making

Administrative Model :approach that explains why decision making is always inherently uncertain and risky process

Based on idea that managers in the real world do not have access to all the information required to make a decision

Managers usually make satisfactory rather than optimum decisions

The Administrative Model

Based on three important concepts:

Bounded Rationality :human decision-making capabilities are constrained by one’s ability to interpret, process, and act on information

Too many alternatives and to much information for managers to consider it all

Decisions are limited by people’s cognitive abilities

Bounded awareness :tendency for people to overlook important information that bears on the decision-making process

The Administrative Model

Incomplete Information :managers cannot arrive at the optimum decision because the full range of decision-making alternatives is unknowable in most situations

Incomplete information exists for three reasons:

Risk and uncertainty - probabilities of alternative outcomes cannot be determined, and future outcomes unknown

Ambiguous information - information that can be interpreted in multiple and often conflicting ways

Time constraints and cost of searching for alternative solutions to problems can be prohibitive

The Administrative Model

Satisficing :exploring a limited sample of possible alternatives.

searching for and choosing satisfactory ways to respond to problems and opportunities, rather than trying to make the best decision

Managerial decisions are often “more art than science”:

Intuition :person’s ability to make sound decisions based on past experience and immediate feelings about information at hand

Judgment :person’s ability to develop a sound option based on one’s evaluation of the importance of the information at hand

Steps in the Decision-Making Process

Seven steps that managers should follow to make a good decision:

Recognize the need for a decision

Identify the decision criteria

Generate alternatives

Assess alternatives

Choose an alternative

Implement the chosen alternative

Evaluate and learn from feedback

Step 1: Recognize the Need for a Decision

Involves two steps:

Stating the problem, and

Formulating the decision question

Tools to Help Assess the Accuracy of the Problem Statement and Decision Question

Step 2: Identify Decision Criteria

Managers must consider what variables are important

Decision Criteria

Generally, there are four categories of criteria.

legal issues

practicality and feasibility issues

ethical issues

feasibility

Step 3: Generate Alternatives

Managers must develop feasible alternative courses of action

If good alternatives are missed, the result may be poor

It is hard to develop creative alternatives, so managers need to look for new ideas

Step 4: Assess Alternatives

What are the advantages and disadvantages of each alternative?

Four categories of criteria used to evaluate each alternative:

Practicality issues :capabilities and resources

Economic feasibility issues :make economical sense and fit the organization’s performance goals

Ethical issues :course of action is ethical and will not harm any stakeholder groups

Legal issues :legal and will not violate any laws or regulations

Categories of Criteria for Evaluating Alternatives

Step 5: Choose an Alternative

Once alternatives have been evaluated, they must be ranked

All information needs to be considered

Consider using a “decision matrix” to determine the highest-ranking alternative

Step 6: Implement the Chosen Alternative

Decision must be acted upon, and many subsequent and related decisions must be made

Step 7: Evaluate and Learn from Feedback

Learning from feedback includes three steps:

Compare what actually happened to what was expected to happen

Explore why any expectations were not met

Develop guidelines that will help in future decision making

Biases in Decision Making

All decision makers are subject to bounded rationality so tend to use heuristics :rules of thumb that simplify the process of making decisions

Used to deal with complex situations

Can lead to distortions in information and alternatives that impede decision making

Systematic errors :errors that people make over and over again and that result in poor decision making

Examples of Cognitive Bias and Errors in Decision Making

Confirmation Bias

Decision Making Styles

Managers have their own style of making decisions

Varies according to way of thinking and tolerance for ambiguity and uncertainty

Four decision-making styles identified:

Based on degree to which managers process information rationally or intuitively and on tolerance for ambiguity:

Directive :rational with low tolerance for ambiguity

Analytic :rational but can handle some ambiguity

Conceptual :use high degree of intuition and high tolerance for ambiguity

Behavioural :high degree of intuition and low tolerance for ambiguity

Ethics and Decision Making

Ethical decision making

Making Ethical Decisions

How do managers and companies decide what is ethical?

Society, using political and legal process, can lobby for and pass laws that specify what people can and cannot do

Laws specify sanctions or punishments that will follow if laws are broken

Ethics are not fixed principles:

Alter and change as time passes, and as they do so, laws change to reflect the changing ethical beliefs of a society

Ethical choices are important for an organization to prosper

Must effectively satisfy the competing needs of stakeholders

Codes of Ethics

Formal standards and rules, based on beliefs about right or wrong, that managers use to make appropriate decisions in best interests of stakeholders

Organization’s code of ethics derives from three main sources:

Societal ethics :governing how everyone deals with each other on issues such as fairness, justice, poverty, and the rights of the individual

Professional ethics :governing how members of the profession make decisions when the way they should behave is not clear-cut

Individual ethics :personal standards for interacting with others, of the organization’s top managers

Sources of an Organization’s Code of Ethics

Societal Ethics

Standards that govern how members of society deal with each other in matters involving fairness, justice, poverty, rights of the individual, etc.

Emanate from society’s laws, customs, practices and from unwritten attitudes, values and norms

Influence how people interact with each other

Varies among societies

Ethical standards accepted in Canada are not accepted in all other countries

Professional Ethics

Standards that govern how members of a profession, managers or workers, make decisions when they way in which they behave is not clear-cut

Professional groups can impose punishments for violations of ethical standards

Within an organization, professional rules and norms govern how employees make decisions and act in certain situations

Rules and norms become part of organization’s Code of Ethics

Individual Ethics

Personal values and attitudes that govern how individuals interact with other people

Influenced by one’s family, peers, upbringing, personality and experiences

Experiences (school, religion, etc.) contribute to development of personal standards and values

Manager’s Role in Ethical Decision Making

Managers can emphasize ethical behaviour by:

Ensuring ethical values and norms are central to organizational culture

Helping develop ethical values and standards in other employees

Implementing ethical control systems (codes of ethics, regular training programs, etc.)

Modeling ethical behaviour

Ethics ombudsperson :ethics officer who monitors an organization’s practices to ensure they are ethical

Social Responsibility and Decision Making

Social responsibility :manager’s duty or obligation to make decisions that promote the well-being of stakeholders and society as a whole

Organization’s commitment to social responsibility ranges from low to high:

Obstructionist :managers choose not to behave in a socially responsible way

Defensive :minimal commitment to ethical behavior

Accommodative :acknowledgement of the need to support social responsibility

Proactive :actively embrace acting socially responsible

Examples of Socially Responsible Behaviour

Approaches to Social Responsibility

Why Be Socially Responsible?

Employees and society benefit directly because organizations bear some of the costs of helping employees

If all organizations were socially responsible, the quality of life would be higher.

It is the right thing to do; companies that act responsibly benefit from increasing business and rising profits

The recognition that Earth cannot support unsustainable practices that focus on short-term profit making.

How to Be Socially Responsible?

How do managers decide which social issues to respond to?

Impact investing :investments that seek to solve social or environmental problems and generate financial returns to the investor

Social audit :allows managers to consider both the organizational and social effects of particular decisions

Decision Making for Sustainability

Sustainability :making decisions that meet needs of current generation without sacrificing future generations’ ability to do so

Sustainability strategy contains four elements:

Protects the environment

Promotes social responsibility

Respects cultural differences

Provides an economic benefit

Decision Making in Learning Organizations

Organizational learning :process through which managers seek to improve employee’s desire and ability to understand and manage the organization and its task environment

Learning organization :managers try to maximize ability of individuals and groups to think and behave creatively

Maximizes organizational learning

Creativity :ability of decision maker to discover original ideas that lead to feasible courses of action

Principles for Creating a Learning Organization

Promote Individual Creativity

Individuals more likely to be creative when they are given opportunity to:

Generate new ideas

Experiment and take risks

Make mistakes and learn from them

Intrapreneur :manager, employee, scientist, etc. who works inside organization and notices opportunities to develop new or improved products and better ways to make them

Innovation :implementation of creative ideas and process of creating new goods and services or improving processes