Principles of Management

Lecture # 04Asghar Ali NarejoContact: 0300-3141046E-mail: asghar_204u@yahoo.com

Principles of ManagementDecision MakingDecisionMaking a choice from two or more alternatives.The Decision-Making ProcessIdentifying a problem and decision criteria and allocating weights to the criteria.Developing, analyzing, and selecting an alternative that can resolve the problem.Implementing the selected alternative.Evaluating the decisions effectiveness10/1/20112Problem A situation in which the existing circumstances differ significantly from the preferred situation. Types of Problems:Crises ProblemA situation that urgently require an immediate decision.No crises ProblemsA situation that require decision but less urgently than a crises problem.Opportunity ProblemsA Situation that can be dealt with in a way that has a positive effect on the organization and its performance.

10/1/20113Types of Problems and DecisionsStructured ProblemsInvolve goals that clear.Are familiar (have occurred before).Are easily and completely defined means information about the problem is available and complete.Programmed DecisionsA repetitive decision that can be handled by a routine approach. (Preprogrammed Decision Rules)10/1/20114Types of Programmed DecisionsPolicyA general guideline for making a decision about a structured problem.ProcedureA series of interrelated steps that a manager can use to respond (applying a policy) to a structured problem.RuleAn explicit statement that limits what a manager or employee can or cannot do.10/1/201155Problems and DecisionsUnstructured ProblemsProblems that are new or unusual and for which information is uncertain or incomplete.Problems that will require custom made solutions.Nonprogrammer DecisionsDecisions that are unique and nonrecurring.Decisions that generate unique responses.10/1/201166Exhibit 1.1Programmed versus Nonprogrammer Decisions

10/1/201177Decision-Making ConditionsCertaintyA situation in which a manager can make an accurate decision because the outcome of every alternative choice is known.RiskA situation in which the manager is able to estimate the likelihood (probability) of outcomes that result from the choice of particular alternatives.10/1/201188Decision-Making ConditionsUncertaintyLimited information prevents estimation of outcome probabilities for alternatives associated with the problem and may force managers to rely on intuition, hunches, and gut feelings.Maximax: the optimistic (confident) managers choice to maximize the maximum payoffMaximin: the pessimistic ( negative) managers choice to maximize the minimum payoffMinimax: the managers choice to minimize maximum regret.10/1/201199The decision making process-ExampleIdentification of a problem

Identification of Decision Criteria

Allocation of weights to criteria

Development of alternatives

Analyzing of alternatives

Selection of alternatives

Implementation of alternatives

Evaluation of decision alternatives

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10/1/201111Step 1: Identifying the ProblemProblemA discrepancy between an existing and desired state of affairs.Characteristics of ProblemsA problem becomes a problem when a manager becomes aware of it.There is pressure to solve the problem.The manager must have the authority, information, or resources needed to solve the problem.10/1/20111212Step 2: Identifying Decision CriteriaDecision criteria are factors that are important (relevant) to resolving the problem.Costs that will be incurred (investments required)Risks likely to be encountered (chance of failure)Outcomes that are desired (growth of the firm)Step 3: Allocating Weights to the CriteriaDecision criteria are not of equal importance:Assigning a weight to each item places the items in the correct priority order of their importance in the decision making process.10/1/20111313Step 4: Developing AlternativesIdentifying viable alternativesAlternatives are listed (without evaluation) that can resolve the problem.Step 5: Analyzing AlternativesAppraising each alternatives strengths and weaknessesAn alternatives appraisal is based on its ability to resolve the issues identified in steps 2 and 3.10/1/20111414Step 6: Selecting an AlternativeChoosing the best alternativeThe alternative with the highest total weight is chosen.Step 7: Implementing the AlternativePutting the chosen alternative into action.Conveying the decision to and gaining commitment from those who will carry out the decision.10/1/20111515Step 8: Evaluating the Decisions EffectivenessThe soundness of the decision is judged by its outcomes.How effectively was the problem resolved by outcomes resulting from the chosen alternatives?If the problem was not resolved, what went wrong?

10/1/20111616Exhibit 1.2Decisions in the Management Functions

10/1/20111717Making DecisionsRationalityManagers make consistent, value-maximizing choices with specified constraints.Assumptions are that decision makers:Are perfectly rational, fully objective, and logical.Have carefully defined the problem and identified all viable alternatives.Have a clear and specific goalWill select the alternative that maximizes outcomes in the organizations interests rather than in their personal interests.10/1/20111818Exhibit 1.3 Assumptions of Rationality

10/1/20111919Making Decisions (contd)Bounded RationalityManagers make decisions rationally, but are limited (bounded) by their ability to process information.Assumptions are that decision makers:Will not seek out or have knowledge of all alternativesWill satisfiedchoose the first alternative encountered that satisfactorily solves the problemrather than maximize the outcome of their decision by considering all alternatives and choosing the best.Influence on decision makingEscalation of commitment: an increased commitment to a previous decision despite evidence that it may have been wrong. 10/1/20112020The Role of Intuition ( Perception)Intuitive decision makingMaking decisions on the basis of experience, feelings, and accumulated judgment.

10/1/20112121Exhibit 1.4 What is Intuition?

10/1/20112222Decision-Making StylesDimensions of Decision-Making StylesWays of thinkingRational, orderly, and consistentIntuitive, creative, and uniqueTolerance for ambiguityLow tolerance: require consistency and orderHigh tolerance: multiple thoughts simultaneously10/1/20112323Decision Making StylesTypes of Decision MakersDirectiveUse minimal information and consider few alternatives.AnalyticMake careful decisions in unique situations.ConceptualMaintain a broad outlook and consider many alternatives in making decisions.BehavioralAvoid conflict by working well with others and being receptive to suggestions.10/1/20112424Exhibit 1.5Decision-Making Matrix

10/1/20112525Exhibit 1.6Common Decision-Making Errors and Biases

10/1/20112626Decision-Making Biases and ErrorsHeuristicsUsing rules of thumb to simplify decision making.Overconfidence BiasHolding unrealistically positive views of ones self and ones performance.Immediate Gratification BiasChoosing alternatives that offer immediate rewards and that to avoid immediate costs.10/1/20112727Decision-Making Biases and Errors Anchoring EffectFixating on initial information and ignoring subsequent information.Selective Perception BiasSelecting organizing and interpreting events based on the decision makers biased perceptions.Confirmation BiasSeeking out information that reaffirms past choices and discounting contradictory information.10/1/20112828Decision-Making Biases and ErrorsFraming BiasSelecting and highlighting certain aspects of a situation while ignoring other aspects.Availability BiasLosing decision-making objectivity by focusing on the most recent events.Representation BiasDrawing analogies and seeing identical situations when none exist.Randomness BiasCreating unfounded meaning out of random events.10/1/20112929Decision-Making Biases and Errors Sunk Costs ErrorsForgetting that current actions cannot influence past events and relate only to future consequences.Self-Serving BiasTaking quick credit for successes and blaming outside factors for failures.Hindsight BiasMistakenly believing that an event could have been predicted once the actual outcome is known (after-the-fact).10/1/20113030Exhibit 1.7Overview of Managerial Decision Making

10/1/20113131Decision Making for Todays WorldGuidelines for making effective decisions:Understand cultural differences.Know when its time to call it quits.Use an effective decision-making process.Habits of Highly Reliable Organizations (HROs)Are not tricked by their success.Defer to the experts on the front line.Let unexpected circumstances provide the solution.Embrace complexity.Anticipate, but also anticipate their limits.10/1/20113232Characteristics of:An Effective Decision Making ProcessIt focuses on what is important.It is logical and consistent.It acknowledges both subjective and objective thinking and blends analytical with intuitive thinking.It requires only as much information and analysis as is necessary to resolve a particular dilemma.It encourages and guides the gathering of relevant information and informed opinion.It is straightforward, reliable, easy to use, and flexible.10/1/20113333Keeping SmileAsghar Ali NarejoContact: 0300-3141046E-mail: asghar_204u@yahoo.com

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