《Contemporary Management》chpt 6 Manager as a Decision maker

TThe Manager as a o Decision Maker CThe McGraw-Hill Companies, Inc, 2000

Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 6-1 The Manager as a Decision Maker 6

6-2 Managerial Decision Making aDecision making: the process by which managers respond to opportunities and threats by analyzing options, and making decisions about goals and courses of action. o Decisions in response to opportunities managers respond to ways to improve organizational performance. o Decisions in response to threats: occurs when managers are impacted by adverse events to the organization " win/MeGraw-HHill CThe McGraw-Hill Companies, Inc, 2000

Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 6-2 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

6-3 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 S 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 mangers intuition, and judgment Example: Should the firm invest in a new technology? " win/MeGraw-HHill CThe McGraw-Hill Companies, Inc, 2000

Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 6-3 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?

6-4 The Classical model o 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. " win/MeGraw-HHill CThe McGraw-Hill Companies, Inc, 2000

Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 6-4 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

6-5 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 " win/MeGraw-HHill OThe McGraw-Hill Companies. Inc, 2000

Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 6-5 The Classical Model List alternatives & consequences Rank each alternative from low to high Select best alternative Assumes all information is available to manager Assumes manager can process information Assumes manager knows the best future course of the organization Figure 6.1

6-6 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 a Decisions are limited by people's cognitive abilities Incomplete information: most managers do not see all alternatives and decide based on incomplete information. " win/MeGraw-HHill CThe McGraw-Hill Companies, Inc, 2000

Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 6-6 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

6-7 Why Information is Incomplete Figure 6.2 Uncertainty Ambiguous risk Information Incomplete Information Time constraints information costs " win/MeGraw-HHill CThe McGraw-Hill Companies, Inc, 2000

Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 6-7 Why Information is Incomplete Uncertainty & risk Ambiguous Information Time constraints & information costs Incomplete Information Figure 6.2

6-8 Incomplete Information Factors iNcomplete information exists due to many ssues 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 o Information can be interpreted in different ways " win/MeGraw-HHill CThe McGraw-Hill Companies, Inc, 2000

Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 6-8 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

6-9 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 " win/MeGraw-HHill CThe McGraw-Hill Companies, Inc, 2000

Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 6-9 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

6-10 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 " win/MeGraw-HHill OThe McGraw-Hill Companies. Inc, 2000

Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc., 2000 6-10 Decision Making Steps Recognize need for a decision Frame the problem Generate & assess alternatives Choose among alternatives Implement chosen alternative Learn from feedback Figure 6.4