robbins_imch06
PART THREE
C H A P T E R S I X
Decision Making:
The Essence of the
Manager’s Job6
Lecture Outline
Introduction
The Decision-Making Process
Step 1: Identifying a Problem
Step 2: Identifying Decision Criteria
Step 3: Allocating Weights to the Criteria
Step 4: Developing Alternatives
Step 5: Analyzing Alternatives
Step 6: Selecting an Alternative
Step 7: Implementing the Alternative
Step 8: Evaluating Decision Effectiveness The Manager as Decision Maker
Making Decisions: Rationality, Bounded
Rationality, and Intuition
Assumptions of Rationality
Bounded Rationality
Role of Intuition
Types of Problems and Decisions
Structured Problems and Programmed
Decisions
Unstructured Problems and
Nonprogrammed Decisions
Integration
Decision-Making Conditions
Certainty
Risk
Uncertainty
Decision-Making Styles
Decision-Making Biases and Errors
Summing Up Managerial Decision-making Decision-making For Today’s World E veryone in an organization makes decisions, but decision-making is particularly important in a manager’s job. Decision-making is part of all four managerial functions. Managers are frequently called decision-makers when they plan, organize, lead and control. Decision-making is synonymous with managing. Decision-making can be routine or involve complex issues. In this chapter,we’ll look at the decision process and see that decision-making is essential to the manager’s job. Cecilia Mowatt is preparing for the challenges of managing the changes taking place within her organization. As her company continues its global expansion, decisions that were made concerning technology and globalization need to be monitored for effectiveness. How could she evaluate the effectiveness of the company’s decision to revamp its Web site for clients and member firms? What decision criteria might she use?
have been developed and are available for you to coordinate with Chapter 6 materials presentation.
1. INTRODUCTION.
Making good decisions is something that every manager strives to do because the overall quality of managerial decisions has a major influence on organizational success or failure. The concept of decision-making is explored in this chapter.
2. THE DECISION-MAKING PROCESS.
A decision is a choice made from two or more alternatives. The decision-
making process is a comprehensive process involving eight steps that begins with identifying a problem and decision criteria and allocating weights to those criteria; moves to developing, analyzing, and selecting an alternative that can resolve the problem; implements the alternative; and concludes with evaluating the decision’s effectiveness. (See Exhibit6.1for a depiction of the decision-making process.)
A. Step 1 is identifying a problem. A problem is defined as a discrepancy
between an existing and a desired state of affairs. Some cautions about
problem identification include the following:
1. Make sure it’s a problem and not just a symptom of a problem.
2. Problem identification is subjective.
3. Before a problem can be determined, a manager must be aware
of any discrepancies.
4. Discrepancies can be found by comparing current results with
some standard.
5. Pressure must be exerted on the manager to correct the
discrepancy.
6. Managers aren’t likely to characterize some discrepancy as a
problem if they perc eive that they don’t have the authority,
information, or other resources needed to act on it.
B. Step 2 is identifying the decision criteria. Decision criteria are criteria
that define what is relevant in making a decision.
C.Step 3 is allocating weights to the criteria. The criteria identified in Step 2 of
the decision-making process aren’t all equally important, so the decision maker must weight the items in order to give them correct priority in the decision. Exhibit6.2lists the criteria and weights for Joan’s f ranchise purchase decision.
D. Step 4 involves developing alternatives. The decision maker now needs
to identify viable alternatives for resolving the problem.
deals with setting goals and creative problem solving. E. Step 5 is analyzing alternatives. Each of the alternatives must now be
critically analyzed. Each alternative is evaluated by appraising it against
the criteria. Exhibit6.3 shows the assessed values of that Joan gave each of her eight alternatives regarding the franchise opportunities. Exhibit
6.4 reflects the weighting for each alternative (Exhibits 6.2 and 6.3).
F. Step 6 involves selecting an alternative. The act of selecting the best
alternative from among those identified and assessed is critical. If
criteria weights have been used, the decision maker simply selects the
alternative with the highest score from Step 5.
G.
Step 7 is implementing the alternative. The chosen alternative must be implemented. Implementation is conveying a decision to those affected by it and getting their commitment to it.
making processes.
H.
Step 8 involves evaluating the decision effectiveness. This last step in the decision-making process
assesses the result of the decision to see whether or not the problem has been resolved.
3.
THE MANAGER AS DECISION MAKER. Although we know about the decision-making process, we still don’t know much
about the manager as a decision maker and how decisions are actually made in
organizations. In this section, we’ll look at how decisions are made, the types of
problems and decisions managers face, the conditions under which managers
make decisions, and decision-making styles.
A. Managers can make decisions on the basis of rationality, bounded
rationality, or intuition.
1. Assumptions of Rationality.
Managerial decision-making is assumed to be rational; that is,
choices that are consistent and value maximizing within
specified constraints. The assumptions of rationality are
summarized in Exhibit6.6.
a. These assumptions are problem clarity (the problem is
clear and unambiguous); goal orientation (a single, well-
defined goal is to be achieved); known options (all
alternatives and consequences are known); clear
preferences; constant preferences (preferences are
constant and stable); no time or cost constraints; and
maximum payoff.
b. The assumption of rationality is that decisions are made
in the best economic interests of the organization, not in
the manager’s interests.
c. The assumptions of rationality can be met if:the
manager is faced with a simple problem in which goals
are clear and alternatives limited, in which time
pressures are minimal and the cost of finding and
evaluating alternatives is low, for which the
organizational culture supports innovation and risk
taking, and in which outcomes are concrete and
measurable.
2. In spite of these limits to perfect rationality, managers are
expected to “appear” rational as they make decisions. But
because the perfectly rational model of decision-making isn’t
realistic, managers tend to operate under assumptions of
bounded rationality,which is behavior that is rational within
the parameters of a simplified decision-making process that is
limited (or bounded) by an individual’s ability to process
information.
a. Under bounded rationality, managers make satisficing
decisions —in which managers accept solutions that are
“good enough,” rather than maximizing payoffs.
b. Managers’ decision-making may also be strongly
influenced by the organization’s culture, internal
politics, power considerations, and by a phenomenon
called escalation of commitment—an increased
commitment to a previous decision despite evidence that
it may have been wrong.
Q & A 6.5 Do most high school seniors maximize or satisfice in making their choice of what college to attend?
3. Role of Intuition.
Managers also regularly use their intuition. Intuitive decision-
making is a subconscious process of making decisions on the
basis of experience and accumulated judgment. Exhibit 6.7
describes the five different aspects of intuition.
a. Making decisions on the basis of gut feeling doesn’t
happen independently of rational analysis. The two
complement each other.
b. Although intuitive decision-making will not replace the
rational decision-making process, it does play an
important role in managerial decision-making.
B. Types of Problems and Decisions.
Managers will be faced with different types of problems and will use
different types of decisions.
1. Structured problems are straightforward, familiar, and easily
defined. In handling this situation, a manager can use a
programmed decision,which is a repetitive decision that can
be handled by a routine approach. There are three possible
programmed decisions.
a. A procedure is a series of interrelated sequential steps
that can be used to respond to a structured problem.
b. A rule is an explicit statement that tells managers what
they ought or ought not do.
c. A policy is a guide that establishes parameters for
making decisions rather than specifically stating what
should or should not be done
2. Unstructured problems are new or unusual problems in which
information is ambiguous or incomplete. These problems are
best handled by a nonprogrammed decision that is a unique
decision that requires a custom-made solution.
3. Exhibit 6.8describes the relationship among problems,
decisions, and organizational level.
a. At the higher levels of the organization, managers are
dealing with poorly structured problems and using
nonprogrammed decisions.
b. At lower levels, managers are dealing with well-
structured problems by using programmed decisions.
C. Decision-Making Conditions.
1.Certainty is a situation in which a manager can make accurate
decisions because the outcome of every alternative is known.
This isn’t characteristic of most managerial decisions.
2. More common is the situation of risk in which the decision
maker is able to estimate the likelihood of certain outcomes.
Exhibit6.9shows an example of how a manager might make
decisions using “expected value” considering the conditions of
risk.
3. Uncertainty is a situation in which the decision maker has
neither certainty nor reasonable probability estimates available.
a. The choice of alternative is influenced by the limited
amount of information available to the decision maker.
b. It’s also influenced by the psychological orientation of
the decision maker.
1) An optimistic manager will follow a maximax
choice (maximizing the maximum possible
payoff). See Exhibit6.10
2) A pessimistic one will pursue a maximin choice
(maximizing the minimum possible payoff). See
Exhibit6.10.
3) The manager who desires to minimize the
maximum regret will opt for a minimax choice.
See Exhibit6.11.
D. Decision-Making Styles
Managers have different styles when it comes to making decisions and
solving problems. One perspective proposes that people differ along two
dimensions in the way they approach decision-making.
1. One dimension is an individual’s way of thinking—rational or
intuitive. The other is the individual’s tolerance for ambiguity—
low or high.
2. These two dimensions lead to a two by two matrix with four
different decision-making styles. (See Exhibit6.12).
a. The directive style is one that’s characterized by low
tolerance for ambiguity and a rational way of thinking.
b. The analytic style is one characterized by a high
tolerance for ambiguity and a rational way of thinking.
c. The conceptual style is characterized by an intuitive
way of thinking and a high tolerance for ambiguity.
d. The behavioral style is one characterized by a low
tolerance for ambiguity and an intuitive way of thinking.
3. Most managers realistically probably have a dominant style and
alternate styles, with some relying almost exclusively on their
dominant style and others being more flexible depending on the
situation.
E. Decision-Making Biases and Errors.
Managers use different styles and “rules of thumb” (heuristics) to simply their decision-making.
1. Overconfidence bias occurs when decision makers tend to think
that they know more than they do or hold unrealistically positive
views of themselves and their performance.
2. Immediate gratification bias describes decision makers who tend
to want immediate rewards and avoid immediate costs.
3. Anchoring effect describes when decision makers fixate on
initial information as a starting point and then fail to adequately
adjust for subsequent information.
4. Selective perception bias occurs when decision makers
selectively organize and interpret events based on their biased
perceptions.
5. Confirmation bias occurs when decision makers seek out
information that reaffirms their past choices and discounts
information that is contradictory.
6. Framing bias occurs when decision makers select and highlight
certain aspect of a situation while excluding others.
7. Availability bias occurs when decision makers remember events
that are the most recent.
8. Representation bias occurs when decision makers assess the
likelihood of an event based on how closely it resembles other
events.
9. Randomness bias describes when decision makers try to create
meaning out of random events.
10. Sunk costs error is when decision makers forget that current
choices can’t correct the past.
11. Self-serving bias is where decision makers are quick to take
credit for their successes and blame failure on outside factors.
12. Hindsight bias is the tendency for decision makers to falsely
believe that they would have accurately predicted the outcome
once the outcome is known.
F. Summing Up Managerial Decision-making
1. Exhibit 6.14provides an overview of managerial decision-
making. Managers want to make good decisions.
2. Regardless of the decision, it has been shaped by a number of
factors.
4. DECISION-MAKING FOR TODAY’S WORLD.
Today’s business world revolves around making decisions, often risky ones with incomplete or inadequate information and under intense time pressure. What do managers need to do to make effective decisions under today’s conditions?
1.Know when it’s time to call it q uits.
2.Practice the five why’s.
3.Be an effective decision maker.
4.Build highly reliable organizations (HRO’s).
a.Not tricked by their own success.
b.Defer to the experts on the front lines.
c.Let unexpected circumstances provide the solution.
d.Embrace complexity.
e.Anticipate but also anticipate their limits.
1. Why is decision-making often described as the essence of the manager’s job?
As shown in Exhibit 6.5, decisions are made in all four functions of management. Almost anything a manager does in terms of planning, organizing, leading, and controlling involves decision-making. The pervasiveness of decision-making in management explains why managers are often called decision makers.
2. How might an organization’s culture influence the way in which managers make
decisions?
An organization’s culture might influence how managers make decisions by emphasizing how much risk taking is permitted and by the importance placed on effectiveness of the decisions made. For example, if the organizational culture rewards decisions that reinforce the status quo, chances are good that those types of decisions will be made.
3. All of us bring biases to the decisions we make. What types of biases might a
manager have? What would be the drawbacks of having biases? Could there be any advantages to having biases? Explain. What are the implications for managerial decision-making?
Students should be encouraged to identify biases that they may have encountered or even possibly identify biases that they themselves feel they have. But, some examples might be: halo/horn effect, cultural biases, age biases, etc. The drawback of biases is their limiting effect on behavior. However, if a manager is aware of potential biases, he/she can use this to an advantage. A manager who is aware can detect biases in others and respond from a perspective of understanding; that is, I understand what the halo bias is and I see you incorporating this bias in your decision-making, therefore, I can understand why you made the choice you did. These biases can “cloud” a decision maker’s identification or evaluation of alternatives, which would ultimately affect the final decision.
4. Would you call yourself a systematic or intuitive thinker? What are the decision-
making implications of these labels? What are the implications for choosing an employer?
Student responses to this will vary. A systematic thinker would be one who is more logical and rational in searching for and processing information. An
intuitive thinker would rely more on instincts and past experiences in searching for and processing information. The decision-making implication of this label is that it describes the way we think or process information that, in turn, influences how we tend to make decisions. The implications for choosing an employer are that organizations need both systematic and intuitive thinkers. Each of these styles would provide a different perspective on situations.
5. “As managers use computer and software tools more often, they’ll be able to
make more rational decisions.” Do you agree or disagree with that statement?
Why?
Although computer and software tools will allow managers to more easily gather information and analyze it, it’s doubtful that utilizing computers will allow managers to be more rational. If we look at the assumptions of rationality (problem clarity, goal orientation, known options, clear preferences, and so forth as shown in Exhibit 6.6), it’s obvious that even by adding computers to the decision-making process, managers’ decision-making still won’t be perfectly rational.
6. How can managers blend the guidelines for making effective decisions in today’s
world with the rationality and bounded rationality models of decision-making, or can thy? Explain.
There is a balance that is required. Under today’s business conditions such as intense time pressure and higher degrees of risk and uncertainty, managers must practice sound decision-making judgments. Knowing when it’s time to quit and asking the five “whys” for example, are not inconsistent with rationality and bounded rationality.
7. Why do good managers sometimes make bad decisions? How can managers
improve their decision-making skills?
Time pressures, incomplete information, higher levels of uncer tainty in today’s business environment may lead to ineffective decision-making. Managers can improve their decision-making skills by focusing on six characteristics of effective decision-making. This includes: focusing on what’s important, logic and consistency, blending subjective and objective thinking with analysis, requiring that information that is necessary to resolve a particular dilemma, gathering relevant and informed opinion, and remaining flexible.
Small groups of students are to discuss previous decision-making experiences. They are to decide whether or not they felt they made good/bad decisions and what happened during the decision-making process that contributed to it being a good/bad decision. The group is also to develop a list of practical suggestions for making good decisions.
To prepare students to do this, a class discussion could revolve around a decision-making situation. Ask the class if anyone is considering making a large
purchase, such as a car, stereo, computer, or house. Then the class can help this individual make the decision by following the eight steps of the decision-making process to ultimately make a “good decision.” The variety of decision criteria for a car purchase, for instance, and the weight of each criterion can be quite entertaining. Although one student may think that heated car seats is a must, others totally disregard this criterion. However, this class activity may get students more comfortable about evaluating decisions and the decision-making process.
One other suggestion might be to identify a decision for the groups to evaluate or develop the list of practical suggestions for making this decision a good one, such as car purchase, stereo purchase, university/graduate school choice, etc. Students sometimes have a hard time getting started on activities, because they simply cannot “remember” or think of a decision-making experience example to work with.
Framing a Good Decision
1. How do you think good decision-making has contributed to the success of this
business?
The decisions that have been made are carefully considered, and tied to the fundamental philosophy of the company. It is a privately held company so that the immediate stakeholders are more limited that would be the case in a publicly held firm. It is clear the company gathers customer information and participates in programs that are socially responsible.
2. A decision to move into a new market as Chris did is a major decision. How
could he have used the decision-making process to help make this decision?
It is clear that Chris used the eight-step decision-making process in reaching the decision to enter this new market. The problem is two-fold: the reduction in the supply of choice woods and the fact that 65 percent of the guitar market is in the under $800 price range. It is clear also that Chris applied decision criteria that are consistent with the company’s philosophy. Once the decision alternativ e was selected and implemented, it was followed through and monitored through customer feedback.
3. What criteria do you think would be most important to Chris as he makes
decisions about the company’s future?
The criteria would be the on-going viability of the firm, socially responsible corporate behavior, maintaining a high quality product, and staying true to the company’s philosophy of origin.
4. Would you characterize the conditions surrounding C.F. Martin Guitar
Company as conditions of certainly, risk, or uncertainty? Explain your choice.
It appears that there are elements of all three. The conditions of certainty are clear in terms of the diminishing supply of natural wood products; the element of risk pertains to whether or not a lower-priced Martin guitar would be accepted by consumers and uncertainty deals with the ability of the firm to identify other wood products to build guitars of quality into the future.
5. What could Chris learn from the concept of highly reliable organizations to help
him be a better decision maker?
It appears that CF Martin does already have some of the characteristics
associated with HRO’s. It is clear that Chris is “not tricked by the company’s
historical success—as they enter a new market and substitute wood products for
their traditional products. We do not know whether he defers to experts on the
front lines, but we do know that the skilled people building these guitars exercise both care and patience. The unexpected circumstances (such as the depletion of
rosewood) did generate a solution in terms of using cosmetically flawed natural
woods that customers did not reject. C.F. Martin clearly embraces complexity
given the balance of social responsibility, depletion of natural materials, price
levels of their guitars, and new markets.
Here’s a “what if” situation to raise with your students.
You may ask students to research the Enron debacle and Arthur Andersen’s complicity in the decisions to engage in questionable accounting practices. Why were these decisions made? Can the rational decision-making process be applied here?