topic 1 for e-view-2

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Managerial Decision Making

Lecture 1

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Lecture Outline

1. Introduction to the course

2. Assessment

3. Topic 1 - Problem solving: Introduction and identification

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Introduction to the course

• We daily face problems and make decisions• Managerial Decision Making provides:– A detailed review of the problem solving process – An assessment of biases that may impact on the

associated decision making process

• Successful course completion will assist you to become a better decision maker in business and elsewhere.

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The course has an implicit focus on managers and organisations

Study topics 1-3 provide a logical and rational process to analyse and solve problems

Study topics 4-12 focus on decision analysis

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Teaching resources:

Your course learning is facilitated three ways:

1. Face-to-face lectures/ tutorials and/or seminars

2. Two set textbooks

3. Online resources available to the course website

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Set texts:

Wood, R., Cogin, J. & Beckmann, J. (2009). Managerial Problem Solving: Frameworks, Tools, Techniques. North Ryde: McGraw Hill, Australia. Bazerman, M. H. & Moore, D. A. (2013). Judgment in Managerial Decision Making (8th ed). Hoboken, NJ: John Wiley & Sons.

You require access to both set textbooks in this course

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Introduction to the courseCourse assessment

1. Topic quiz – 12 topics (10%)

2. Groups presentation and review (20%

3. Problem solving written assignment (30%)

4. Decision making written assignment (40%)

There is no final examLets all go to the course site now to review assessment requirements and

course objectives (see course description document)

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Assessment explanation in class1. Topic quiz – Lecture 1 (end of today)2. Groups assignment – Lecture 23. Problem solving assignment – Lecture 24. Decision making assignment – Lecture 5

Full details of each assignment is available now on the course site

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Study topics:

The course consists of 12 study topics. These may be completed on a weekly basis.

Study topics follow the sequence of chapters in the two set texts.

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Study Topics/ Textbook Chapter1 Problem solving: Introduction and identification Wood et al. ch 1 & 2

2 Problem solving: Solution generation and evaluation Wood et al. ch 3 & 4

3 Problem solving: Solution implementation Wood et al. ch 5, 6 & 7

4 Decision making: Introduction Bazerman & Moore Ch 1

5 Decision making: Overconfidence Bazerman & Moore Ch 2

6 Decision making: Biases and heuristics Bazerman & Moore Ch 3

7 Decision making: Bounded awareness Bazerman & Moore Ch 4

8 Decision making: Framing and preference reversal Bazerman & Moore Ch 5

9 Decision making: Motivations and emotions Bazerman & Moore Ch 6

10 Decision making: Escalating commitment Bazerman & Moore Ch 7

11 Decision making: Fairness and equity Bazerman & Moore Ch 8

12 Decision making: Improving decisions Bazerman & Moore Ch 12

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Introduction to the courseRecommend readings:

Most study topics have a set of recommended readings

These readings are included to enhance your understanding, identify sources of evidence for theories, and provide practical examples.

Reviewing these reading will assist you to complete quality assignments.

Some readings are technically challenging (e.g., employ quantitative methods in an empirical study). Don’t worry too much here – the main aim is to learn the key points from the study outcomes.

Other learning materials (e.g., videos, activities and so on will be provided in class).

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Class resources and procedure:

In class student will engage with a lecture and a range of activities.

Lecture notes are provided on the course site.These have been adapted from the prepared textbook slides (also available on the site)

You may do in-class activities during or following presentation of the lecture material.

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Take a few minutes to look over the course site.

What are your questions?

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Topic learning objectives:

Each study topic has set learning objectives

You should use these learning objectives to guide your learning with respect to relevance and importance of set learning content

Topic learning objectives are listed in the study guides (developed primarily for online learners) and in the weekly lecture notes

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Introduction to the courseClass expectations:

You are expected to have reviewed material covered each week before class and completed any set activities (e.g., read the textbook chapter).

At times, issues will be discussed in class where people have diverging opinions, often based an different ethical standpoints.

Regardless of your own opinion (and whether you agree or disagree with others), all class members and the class lecturer or tutor (and their opinions) should be treated respectfully.

Respect encourages open discussion and debate to enhance learning.

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Study topic 1

Problem solving:

Introduction and identification

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Topic outline Learning objectives Set readings

Topic 1:1. Problem components, phases, types, limitations, tools2. Problem Identification

I. SWATII. PESTIII. 5Ws and root cause analysisIV. Value chain analysis

3. Next week

Assessment 1 – Quiz explanation

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Problem solving: Introduction and identificationLearning objectives:

Wood et al – Chapter 1

1. Define problems with respect to the three core components.

2. Describe the four phase model of the problem solving process.

3. Distinguish problems types with respect to static versus dynamic, structured versus ill-

structured and simple versus complex.

4. Explain three reasons why problem solving may be an imperfect process.

Wood et al – Chapter 2

5. Compare and contrast SWOT and PEST analysis with regard to the strengths and limitations of

these tools for problem identification.

6. Describe the process of 5Ws to identify and define problems.

7. Explain briefly with an example the value chain framework for implementing organisational

strategy.

Topic readings• Wood et al. Chapters 1 and 2.

Recommended/ further readings• Dawes, R. M. (1979). The robust beauty of improper linear models in decision

making. American Psychologist, 34(7), 571-582.• Lindblom, C. E. (1959). The Science of "Muddling Through". Public

Administration Review, 19(2), 79-88.• Simon, H. A. (1979). Rational Decision Making in Business Organizations. The

American Economic Review, 69(4), 493-513.

These three classic readings provide an introduction to some of the key approaches and thinking that support modern understanding of decision making practices. 19

Problem solving: Introduction and identification

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1. Problem components, phases, types, limitations, and tools

Basic Components of Problems:• Current state• Goal or desired state• Set of operations or problem-solving steps• Problem occurs if current state differs from

goal state and means of achieving the goal are not readily available

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Basic Components of Problems

Problem-solving Phases:

1. Problem identification2. Solution generation3. Solution evaluation4. Implementation

a) Planning steps: what needs to be done to implement solutions to achieve the goalb) Action steps: implement selected solution

In complex and dynamic problems cycling back through the problem-solving and implementation planning may be required

We’ll now go through each phase

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Problem-solving Phases

Problem Identification

• Purpose: Establish an understanding of the problem and a definition of the problem

• Involves clarification of current state of affairs (scope? dimension?)

• Involves diagnosis of potential causes of the problem• Involves consideration of how broadly the problem

should be defined – this influences the solution• Involves consideration of whether the problem is defined

in terms of a solution

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Solution Generation

• Purpose: Identify a range of possible solutions• It is useful to generate more than one potential

solution • To allow for comparative assessment • To predict quality of final solution chosen• To combine different potential solutions

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Solution Evaluation

• Purpose: Evaluate how well the different potential solutions move you away from the current state and toward the desired state

• Best achieved by an explicit desired state, and an evaluation of the potential solutions against this target

• Evaluations require two predictions:1. What effects or outcomes each solution may generate2. How well the outcomes for each solution will satisfy your goals

Combination of these two judgments gives you an expected value of each option

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Implementation Planning and Execution

• Purpose: Plan for and execute the steps required to implement the chosen solution

• N.B. Solution and evaluation phase are not necessarily discrete or sequential – it is good practice to take account of the implementation phase during solution evaluation, e.g. consider cost or ease of implementation

Also, implementation planning and execution may reveal the need to revisit solution generation and evaluation

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Types of Problems

Static vs. Dynamic

• Understanding the nature of the problem helps in deciding the problem-solving process and in ensuring you are solving the correct problem

• Static problems = one-off problems that go away when effectively solved. Solution analysis and steps with static problems move you from the current state to the desired stateE.g. buying a car or completing an assignment

• Dynamic problems = those that recur over and over. These need to be solved as a series of static problems, or a process for solving them on an ongoing basis needs to be createdE.g. inventory management and cash flow

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Types of Problems

Structured vs. Ill-structured

• The degree of structuring refers to how well the three components of the problem are understood

• Highly structured problems = those where the current and desired states, as well as the steps for moving between them, are clearly defined and understood

• Ill-structured problems = those with a lack of understanding at one or a combination of the three components

Lack of understanding may be due to the nature of the problem, or to the problem solver not having the knowledge to solve the problem

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Types of Problems

Simple vs. Complex

• Complexity refers to the amount of information that has to be processed in order to solve the problem

• Common sources of complexity: Dynamics: how the components of a problem change over time

independently of the problem solver’s actions Delays: lags in the effects of actions make it difficult to plan solutions Non-linear relationships between potential causes and effects Feedback loops: situations where an outcome from your actions (an

effect) becomes a cause that influences the current situation, which results in the need for further action to solve problem

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Feedback Loop

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Thinking and Memory Processes

Limitations and Biases

• Judgment heuristics = rules of thumb to simplify the definition of problems and the search for and evaluation of solutions• Availability heuristic = use of information, definitions and

solutions that are readily available (commonly, our own experience) rather than search for more options

• Representative heuristic = tendency to assume that the causes or solutions to problems have a similar form to the appearance of the problem

• Confirmatory bias = tendency to seek and accept information that confirms what we already believe and be resistant to information that challenges our beliefs

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Types of Thinking• Divergent thinking includes mental operations leading to

alternative definitions of the problem, alternative diagnoses, new hypotheses, new options, new criteria, etc

• Convergent thinking includes mental operations that reduce or minimise the amount of information to be consciously processed, e.g. by narrowing the definition of the problem and the elimination of options and criteria

• Strategic thinking refers to mental operations by which the problem solver moves into the conceptual space of a problem. Addresses three issues:1. What are the expectations of external stakeholders?2. Consider the future in which the solution will be implemented3. What are the current strengths and weaknesses of the problem-solving unit?

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Values, Emotions and Conflict in Problem Solving

• Emotional reactions are a reflection of values and therefore are integral to the specification of goals and desired statesValues = beliefs about what is right and wrong, and important

and unimportant, e.g. what we believe is important is reflected in our goal/desired state

• Emotions can also influence the speed of information processing and attentiveness during problem solving

• Emotions can also lead to conflicts that interfere with effective problem solving

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Class activity 1 & 2

Group or individual task

We’ll do now (or this may be done later on in the tutorial)

After this activity, we’ll look at tools used for problem solving

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Problem solving tools A range of tools are available to assist problem solving

We look at some of the basic tools in this course used in business and management

Various tools may be useful in one or more of the problem solving phases

We apply these tools in the next few topic 2 and 3

Sophisticated and complex tools (e.g., decision support systems) are available also – choice of tool depends upon the problem to be solved (including characteristics and context).

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Problem solving tools

Tools benefits and efficacy:

Information can be ‘chunked’ to record, limit or

synthesise

Relationships may be specified

Integrate convergent and divergent thinking

Facilitates systematic problem assessment

Focusses problem solvers on position and context rather

than people and personalities

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2. Problem identification Phase one of the problem solving process

Issues may be defined as a range of discrete problems

Problem definition is the most important and often the most difficult phase in problem solving

The definition must be communicated clearly and agreed upon by the problem solvers

Solutions are often not feasible, accepted or implemented due to an ill-defined problem

We will not review some tools used to define problems. Before this, read the Lickity Split Ice-Creeam, case from Wood et al. (2009, p. 26).

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SWOT Analysis

Definition

• A tool to identify the Strengths, Weaknesses, Opportunities and Threats associated with the organisational context for a particular problem

• Strengths and weaknesses are internal value-creating (or -destroying) factors (e.g. skills and resources) that can be measured using internal assessments or external benchmarking

• Opportunities and threats are external value-creating (or -destroying) factors a company cannot control, but which emerge from the environment

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SWOT Analysis

When to Use

• Problem identification (exploration of organisational context)

• Solution generation (identification of alternative problem solutions)

• Solution evaluation (appraisal and prioritisation of solutions)

• To define an organisation’s strategy• To develop plans for work or personal life• Individual’s career planning

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SWOT Analysis

Simple Rules

• Be realistic• Be specific• Distinguish between where your organisation is

today, and where it could be in the future• Always analyse strengths and weaknesses in the

context of your competition• Keep it short and simple• Keep in mind: A SWOT is subjective

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SWOT Analysis

Guiding Questions

Strengths • Every organisation has strengths

• What are your advantages?• What do you do well?• What can you offer that your competition cannot?

• Don’t be modest, be realistic

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SWOT Analysis

Guiding Questions

Weaknesses • Every organisation has weaknesses

• What could be improved?• What is done poorly?• What should be avoided?• Do you have any current problems?

This should be considered from an internal and an external basis Do others perceive weaknesses that you don’t see? Do your competitors do any better?

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SWOT Analysis

Guiding Questions

Opportunities • All organisations have some opportunities from which they

can gain.

• What chances are available?• What are the interesting trends?

• Useful opportunities can come from: Changes in technology and markets on both a broad and a narrow scale Changes in government policy related to your field Changes in social patterns

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SWOT Analysis

Guiding Questions

Threats • No organisation is immune

• What obstacles do you face?• What is your competition doing?• Are the required specifications for your job, products or

services changing?• Is changing technology threatening your position?

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SWOT Analysis QuestionsWhat to Look For

Potential Resource Strengths

• Powerful strategy

• Strong financial condition

• Strong brand name, image, reputation

• Widely recognized market leader

• Proprietary technology

• Cost advantages

• Staff motivations, skills

• Shared values, commitment of staff

• Good customer service

• Better product quality

• Alliances

Potential Resource Weaknesses

• No clear strategic direction

• Outdated practices, facilities

• Weak balance sheet, excessive debt

• Higher overall costs than rivals

• Missing some key skills, competencies

• Low morale, weak commitment of staff

• Internal operating problems.

• Falling behind in R&D

• Too narrow product line

• Weak marketing skills

Potential Resource Opportunities

• Serving additional customer groups

• Expanding to new geographic areas

• Expanding product line

• Transferring skills to new products

• Vertical integration

• Openings to take MS from rivals

• Alliances

• Expansion of products, services

• Openings to exploit new technologies

• Openings to extend brand name, image

Potential Resource Threats

• Entry of potent new competitors

• Loss of sales to substitutes

• Slowing market growth

• Adverse shifts regulatory rules, etc

• Costly new regulations

• Vulnerability to business cycle

• Growing leverage of customers or suppliers

• Shift in buyer needs for product

• Demographic change

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SWOT Analysis

Limitations

• Provides a description of the organisation’s position• Raises awareness• Can encourage to explore widely• Can help to inform debates• Does not identify problems• Does not provide answers

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SWOT Example 1

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SWOT Example 2

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SWOT Example 3

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SWOT Example

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Activity

Wood et al. (2009, p. 31)

Activity 2.2 then 2.1 box – complete in small groups – one for each of SWOT - if time present to class

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PEST Analysis

Definition• A tool to identify the Political, Economic, Social and

Technological factors of a particular problem• The emphasis is on the importance of the environment

when generating solutions to problems• Organisation’s environment

Internal: staff, internal customers, office technology, wages, etc.

Micro: external customers, agents, distributors, suppliers, competitors

Macro: political, economic, socio-cultural, technological forces

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PEST Analysis

When to Use

• To assist solving more complex problems for large businesses

• Revision of a strategy, marketing proposition, etc.• Problem identification (the position, potential and

direction for a business)• Solution generation (triggers proactive thinking

about consequences of proposed problem solutions)

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PEST Analysis

Simple Rules

• Be realistic• Be specific• Distinguish between where your organisation is today,

and where it could be in the future• Always analyse strengths and weaknesses in the context

of your competition• Keep it short and simple• Keep in mind: A PEST is subjective

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PEST Analysis

Guiding Questions

Political - Influence upon the regulation of businesses• How stable is the political environment?• Will government policy influence laws that regulate or tax

your business?• What is the government’s position on marketing ethics?• What is the government’s position on the economy?• Does the government have a view on culture and religion?• Is the government involved?

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PEST Analysis

Guiding Questions

Economic - Consider short- and long-term state of trading economy

• Interest rates?• Inflation?• Employment level per capita?• Long-term prospects for the economy Gross Domestic

Product (GDP) per capita?

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PEST Analysis

Guiding QuestionsSocio-cultural - Varies from country to country• What is the dominant religion?• What are attitudes to foreign products and services?• Does language impact upon the diffusion of products onto markets?• How much time do consumers have for leisure?• What are the roles of men and women within society?• How long is the population living? Are the older generations wealthy?• What are the differences between age groups?• Does the population have a strong/weak opinion on green issues?

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PEST Analysis

Guiding Questions

Technology - Major driver of globalisation

• Does technology allow for products and services to be made more cheaply and to a better standard of quality?

• Do the technologies offer consumers and businesses more innovative products and services?

• How is distribution changed by new technologies?• Does technology offer companies a new way to

communicate with consumers?

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PEST AnalysisExample

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Activity

Wood et al. (2009, p. 39)

Activity 2.3 box – complete in small groups – one for each of SWOT - if time present to class

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5Ws and Root Cause Analysis

Definition

• The 5Ws provide a questioning structure for clarifying some element of a problem through repeated questioning (what, when, who, where, and why?)

• Root cause analysis is an extension of the 5Ws (repeatedly asking why, in order to get to the root cause of a problem)

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When to Use

• Problem identification• To be used to clarify and redefine problems• To provide cues for determining the goals• To find out what additional data and analyses is needed

• Solution generation• Can be used in combination with a fishbone diagram• To explore all potential or actual causes for a problem

Most useful when problems involve human factors or interactions

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Simple Rules

All problems can be defined in terms of five simple attributes:1. the What?2. the When?3. the Who?4. the Where?5. the Why?

• Not all attributes are relevant for all problems• The What?-attribute is always relevant and should be addressed first• The Why?-attribute should be addressed last• Avoid thinking about solutions before all the attributes are known

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Guiding Questions

• What: What is the problem here? What do we need to know? What would the ideal situation look like?

What criteria will we use to measure our success at solving this problem?

• Where: This refers to the physical or structural locations of problems Where does the problem usually arise? Where might we expect

problems to arise?

• When: Timing issues include: When does the problem occur? When do we have to be done? When

will the solution be used?

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Guiding Questions

• Who: This refers to who is affected by a problem or who is the source of a problemWho is involved in the problem? Who will determine

whether or not we have succeeded?

• Why: This is used for determining either values/goals or, more commonly, the cause of a problemWhy do we need to solve this problem? Why is that

happening? Why do people react in that way?

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Limitations

• This tool relies on inferences, hence assumptions / conclusions can be incorrect

use of data (“hard evidence”)

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5Ws Analysis Example

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Value Chain Analysis

Definition

• Tool for analysing the activities in which a firm can pursue a competitive advantage strategy (e.g. low cost versus differentiation)

• Can help to make the implementation of competitive strategies more systematic

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Two Categories of ActivitiesPrimary activities are those involved in the creation, sale and transfer of products or service (including after-sales)

Inbound logistics – concerned with receiving, storing, distributing inputs

Operations – comprise the transformation of the inputs into the final product form

Outbound logistics – involve the collecting, storing, and distributing the product to the buyers

Marketing and sales – how buyers can be convinced to purchase the product

Service – involves how to maintain the value of the product after it is purchased

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Two Categories of Activities

• Support activities are not directly involved in production, but should increase a firm’s effectiveness or efficiency Procurement—concerned with the tasks of purchasing inputs such as

raw materials, equipment, and labour Technology development—these activities are intended to improve

the product and the processes and can occur in many parts of the firm Human resource management—recruiting, hiring, training,

development, performance, management and compensation Firm infrastructure—the activities that are not specific to any primary

area; including general management, planning, finance, and accounting

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When to Use

• Problem identification (identification of obstacles to

implementing a competitive strategy)

• In combination with a SWOT analysis of the value chain,

it can facilitate effective outsourcing decisions

• Evaluation of strategic alliance choices

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Simple Rules• In a company with more than one product area, it is appropriate to

conduct the value chain analysis at the product group level, and not at the corporate strategy level

• Be sure to include the subcontracted or outsourced portions of work as activities

• Do not just look at each activity independently; the value chain is a system of activities that are interdependent because they are related by their linkages

• If you have strong relationships with one or more of your customers, it may be worth presenting your conclusions to them and getting their feedback

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Three Simple Steps

• Step 1: Activity analysis Identify the activities you take to deliver your product or service to the

customerStart with primary activities, continue with support activities

• Step 2: Value analysisAdd to all activities listed customer value factorsAdd to needs to be improved in order to further differentiate you from

competitors• Step 3: Planning and implementation

Evaluate ideas for increasing value to your customers with regard to costs and benefits

Be aware of linkages between activities

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Value Chain AnalysisFramework

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Example 2

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Limitations

• Time consuming• Typically used for industrial organisations that

buy material and transform these into physical products

• Hence, adaptations are needed to apply this tool to service-based industries

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Assessment 1 - Quiz

Online automated quiz – available from the course site

Due date: 31 May 2015 (11:55 p.m.)

Details of task:Self-paced series of quizzes completed online for topics 1 to 12 (60 questions in total)

Important: All questions for each of 12 topic quizzes must be answered correctly – Multiple attempts are allowed.

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Assessment 1 - Quiz

Note that once all correct answers has been submitted for a topic then further attempts will not override this completed status. Weighting/Value: Contributes 10% towards assessment - all questions must be answered correctly (otherwise zero marks) Your progress on the quiz is available on the course site. If you are in any doubt that you have completed this assessment then check completion with the course lecturer.

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For next week:

Become familiar with assessment and deadlines

Complete activities 2.4, 2.5 & 2.6 (Wood et al., from p. 45) or activity 2.7 (Wood et al., from p. 53)

Pre-read Wood Chapters 3 & 4

Complete Quiz topic 1

topic 1 for e-view-2

Documents

associated decision

decision analysis4introduction

emotionsbazerman moore

equitybazerman moore

heuristicsbazerman moore

introductionbazerman

decisionsbazerman moore

better decision maker