Chapter 4 DECISION MAKING

Chapter 4
Foundations of Decision Making
Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada
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LEARNING OUTLINE
Follow this Learning Outline as you read and study this chapter
The Decision-Making Process

Define decision and the decision-making process Describe the eight steps in the decision-making process
The Manager as Decision Maker

Discuss the assumptions of rational decision making Describe the concepts of bounded rationality, satisficing, and escalation of commitment
Explain what intuition is and how it affects decision making.

Contrast programmed and nonprogrammed decisions
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LEARNING OUTLINE (contd)

The Manager as Decision Maker (contd)

Contrast the three decision-making conditions Explain maximax, maximin, and minimax decision/ choice approaches Describe the four decision-making styles Discuss the decision-making biases and errors managers may exhibit Explain the managerial decision-making model
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LEARNING OUTLINE (contd)

Decision Making for Todays World

Explain how managers can make effective decisions in todays world List the six characteristics of an effective decisionmaking process Describe the five habits of highly reliable organizations
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Decision-Making
Decision
Making a choice from two or more alternatives
The Decision-Making Process

Identifying 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 effectiveness
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Exhibit 4.1 The DecisionMaking Process
Identify a Problem
I need to decide the best franchise to purchase.
Identify Decision Criteria
Financial qualifications Franchisor history Start-up costs Open geographical locations Franchisor support
Allocate Weights to Criteria
Start-up costs .......................................................10 Franchisor support ................................................7 Financial qualifications .........................................8 Open geographical locations ...............................6 Franchisor history ..................................................7
Develop Alternatives
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Merle Norman Petland Chem-Dry Carpet Cleaning McDonald s Merle Norman Petland Chem-Dry Carpet Cleaning McDonald s Merle Norman Petland Chem-Dry Carpet Cleaning McDonald s
Analyze Alternatives
Select an Alternative
Curves for Women Second Cup Jani-King Liberty Tax Service
Implement the Alternative
Chem-Dry Carpet Cleaning!
Evaluate Decision Effectiveness Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada
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Step 1: Identification of a Problem

Problem
A discrepancy between an existing and desired state of affairs
Characteristics of Problems
A 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
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Step 2: Identification of Decision Criteria

Decision 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: Allocation of Weights to Criteria

Decision 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
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Exhibit 4.2 Criteria and Weights for Franchise Decision

Criterion
Start-up costs Franchisor support Financial qualifications
Weight
10 8 6
Open geographical locations

Franchisor history
4
3
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Step 4: Development of Alternatives

Identifying viable alternatives
Alternatives are listed (without evaluation) that can resolve the problem
Step 5: Analysis of Alternatives

Appraising each alternatives strengths and weaknesses
An alternatives appraisal is based on its ability to resolve the issues identified in steps 2 and 3
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Exhibit 4.3 Evaluation Using Decision Criteria
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Exhibit 4.4 Evaluation Against Weighted Criteria
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Step 6: Selection of an Alternative

Choosing the best alternative
The alternative with the highest total weight is chosen
Step 7: Implementation of the Alternative

Putting the chosen alternative into action
Conveying the decision to and gaining commitment from those who will carry out the decision
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Step 8: Evaluation of Decision Effectiveness

The 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?
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Exhibit 4.5 Decisions in Management Functions
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Types of Problems and Decisions

Structured Problems
Have clear goals Are familiar Are easily and completely defined
Programmed Decision
A repetitive decision that can be handled by a routine approach
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Types of Programmed Decisions

A Procedure
A series of interrelated steps to respond to a structured problem
A Rule
An explicit statement that limits what a manager or employee can or cannot do
A Policy
A general guideline for making a decision about a structured problem
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Problems and Decisions (contd)

Unstructured Problems
Problems are new or unusual; information is ambiguous or incomplete
Nonprogrammed Decisions
Decisions are unique and nonrecurring; they require custom-made solutions
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Making Decisions
Rationality
Managers 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 goal Will select the alternative that maximizes outcomes in the organizations interests rather than in their personal interests
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Exhibit 4.6 Assumptions of Rationality

Lead to The problem is clear and unambiguous. A single, well-defined goal is to be achieved. All alternatives and consequences are known. Preferences are clear. Preferences are constant and stable. No time or cost constraints exist. Final choice will have maximize payoff. Rational Decision Making
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Making Decisions: The Rational Model

Rational
Describes choices that are consistent and valuemaximizing within specified constraints.
Bounded rationality (Herbert Simon)

Behavior that is rational within the parameters of a simplified model that captures the essential features of a problem.
Satisfice
Making a good enough decision: choosing the firstidentified alternative that satisfactorily and sufficiently solves the problem. 421
Copyright 2005 Prentice Hall, Inc. All rights reserved.
Making Decisions (contd)

Bounded Rationality
Managers make decisions rationally, but are limited (bounded) by their ability to process information Assumes decision makers:
Will not seek out or have knowledge of all alternatives Will satisfice Can be influenced by escalation of commitment
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Making Decisions: The Rational Model

Certainty
The implication that the outcome of every possible alternative is known.
Uncertainty
A condition under which there is not full knowledge of the problem and reasonable probabilities for alternative outcomes cannot be determined.
Risk
The probability that a particular outcome will result from a given decision.
423
Decision-Making Conditions
Certainty
Accurate decisions possible because the outcome of every alternative is known
Risk
Decision maker estimates the likelihood of outcomes that result from the choice of particular alternatives
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Exhibit 4.8 Expected Value for Adding One Ski Lift

Expected Revenues
$850,000 725,000 Expected Probability = Value of Each Alternative 0.3 0.5 = = $255,000 362,500
Event Heavy snowfall Normal snowfall
Light snowfall
350,000
0.2
70,000 $687,500
4-25
Decision-Making Conditions (contd)

Uncertainty
Limited information prevents estimation of outcome probabilities; may force managers to rely on intuition, hunches, and gut feelings
Maximax: the optimistic managers choice to maximize the maximum payoff Maximin: the pessimistic managers choice to maximize the minimum payoff Minimax: the managers choice to minimize his maximum regret
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Making Decisions (contd)

Role of Intuition
Intuitive decision making
Making decisions on the basis of experience, feelings, and accumulated judgment One-third of managers and other employees said they emphasized gut feeling over cognitive problem solving
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Exhibit 4.7 What Is Intuition?

Managers make decisions based on their past experiences Managers make decisions based on ethical values or culture Managers make decisions based on feelings or emotions
Experience-based decisions Values- or ethicsbased decisions Affect-initiated decisions
Intuition
Subconscious mental processing
Cognitive-based decisions
Managers use data from subconscious mind to help them make decisions
Source: Based on L.A. Burke and M.K. Miller. Taking the Mystery Out of Intuitive Decision Making. Academy of Management Executive. October 1999. pp. 9199.
Managers make decisions based on skills, knowledge, and training
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What Is Creative Potential?

Expertise
Understanding, abilities, knowledge, proficiencies, necessary in the field of creative endeavor.
Creative-thinking skills
The personality characteristics associated with creativity, the ability to use analogies, as well as the talent to see the familiar in a different light.
Intrinsic task motivation

The desire to work on something because its interesting, involving, exciting, satisfying, or personally challenging.
429
Decision-Making Styles
Dimensions of Decision-Making Styles
Ways of thinking
Rational, orderly, and consistent versus Intuitive, creative, and unique
Tolerance for ambiguity

Low tolerance: require consistency and order versus High tolerance: multiple thoughts simultaneously
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Exhibit 4.9 Decision-Making Styles

High Analytic Conceptual Tolerance For Ambiguity
Directive
Behavioural
Low
Source: S.P. Robbins and D.A. DeCenzo, Supervision Today. 2nd ed. (Upper Saddle River, NJ: Prentice Hall, 1998), p. 166.
Way of Thinking Rational Intuitive
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Decision-Making Styles (contd)

Types of Decision Makers
Directive
Use minimal information and consider few alternatives
Analytic
Make careful decisions in unique situations
Conceptual
Maintain a broad outlook and consider many alternatives in making long-term decisions
Behavioural
Avoid conflict by working well with others and being receptive to suggestions
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Decision Making: Styles

Directive style
Characterizes the low tolerance for ambiguity and a rational way of thinking of individuals who are logical and efficient and typically make fast decisions that focus on the short term.
Analytic style
Characterizes the high tolerance for ambiguity combined with a rational way of thinking of individuals who prefer to have complete information before making a decision.
433
Decision Making: Styles (contd)

Conceptual style
Individuals who tend to be very broad in outlook, to look at many alternatives, and to focus on the long run and often look for creative solutions.
Behavioral style
Individuals who think intuitively but have a low tolerance for uncertainty; they work well with others, are open to suggestions, and are concerned about the individuals who work for them.
434
Group Decision Making (contd)

Groupthink
The extensive pressure of others in a strongly cohesive or threatened group that causes individual members to change their opinions to conform to that of the group
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Group Decision Making

Advantages
Generates more complete information and knowledge Generates more diverse alternatives Increases acceptance of a solution Increases legitimacy of decision
Disadvantages
Time consuming Minority domination Pressures to conform Ambiguous responsibility
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Exhibit 4.10 Group Vs. Individual Decision Making

Criteria of Effectiveness Groups Individuals
Accuracy
Speed Creativity
Degree of acceptance
Efficiency
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When Are Groups Most Effective?

Creativity
Groups tend to be more creative than individuals.
Acceptance of the final solution

Groups help increase the acceptance of decisions.
Effectiveness of group decision making

Groups of five to seven members are optimal for decision process speed and quality.
438
Improving Group Decision Making

Brainstorming
An idea-generating process that encourages alternatives while withholding criticism.
Nominal group technique

A decision-making technique in which group members are physically present but operate independently.
Electronic meeting
A type of nominal group technique in which participants are linked by computer.
439
Exhibit 4.11 Common Decision-Making Errors and Biases

Overconfidence Hindsight Immediate Gratification
Self-serving
Anchoring Effect
Sunk Costs
Decision-Making Errors and Biases
Selective Perception
Randomness
Confirmation
Representation
Framing
Availability
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Common Decision-making Errors

Heuristics: Using judgmental shortcuts
Availability heuristic
The tendency to base judgments on information that is readily available.
Representative heuristic
The tendency to base judgments of probability on things (objects or events) that are familiar
Escalation of commitment
An increased commitment to a previous decision despite negative information about the decisions present outcomes. 441
Decision-Making Biases and Errors

Heuristics Using rules of thumb to simplify decision making Overconfidence Bias Holding unrealistically positive views of ones self and ones performance Selective Perception Bias Selecting, organizing, and interpreting events based on the decision makers biased perceptions
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Confirmation Bias Seeking out information that reaffirms past choices and discounting contradictory information Sunk Costs Error Forgetting that current actions cannot influence past events and relate only to future consequences Escalation of commitment error Increased commitment to a wrong decision
Decision-Making Biases and Errors (contd)
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Decision-Making Biases and Errors (contd)

Self-serving Bias Taking quick credit for successes and blaming outside factors for failures Hindsight Bias Mistakenly believing that an event could have been predicted once the actual outcome is known (afterthe-fact)
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Ethics and Decision Making

Ethics Defined
The rules and principles that define right and wrong conduct
Four Views of Ethics

Utilitarian view Rights view Theory of justice view Integrative social contracts theory
4-45
Ethics and Decision Making (contd)

Utilitarian View
Greatest good is provided for the greatest number
Encourages efficiency and productivity and is consistent with the goal of profit maximization
Rights View
Respecting and protecting individual liberties and privileges
Seeks to protect individual rights of conscience, free speech, life and safety, and due process
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Ethics and Decision Making (contd)

The Theory of Justice Organizational rules are enforced fairly and impartially and follow all legal rules and regulations
Protects the interests of underrepresented stakeholders and the rights of employees
Integrative Social Contracts Theory Ethical decisions should be based on existing ethical norms in industries and communities
Based on integration of the general social contract and the specific contract between community members
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How Managers Can Improve Ethical Behaviour in an Organization

Hire individuals with high ethical standards. Establish codes of ethics and decision rules. Lead by example. Delineate job goals and performance appraisal mechanisms. Provide ethics training. Conduct independent social audits.
Provide support for individuals facing ethical dilemmas. 4-48
Code of Ethics
A formal statement of an organizations primary values and the ethical rules it expects its employees to follow
Be a dependable organizational citizen Dont do anything unlawful or improper that will harm the organization Be good to customers
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Effective Use of a Code of Ethics

Develop a code of ethics to guide decision making Communicate the code regularly Have all levels of management show commitment to the code Publicly reprimand and consistently discipline those who break the code
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Exhibit 4.12 Examining Ethics
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Decision-Making and National Culture

Differs from one country to another
Need to recognize what is acceptable

Managers can expect high payoff if they can accommodate the diversity

Chapter 4 DECISION MAKING

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Chapter 4

Foundations of Decision Making

The Decision-Making Process

The Manager as Decision Maker

Explain what intuition is and how it affects decision making.

LEARNING OUTLINE (contd)

The Manager as Decision Maker (contd)

LEARNING OUTLINE (contd)

Decision Making for Todays World

The Decision-Making Process

Exhibit 4.1 The DecisionMaking Process

I need to decide the best franchise to purchase.

Identify Decision Criteria

Allocate Weights to Criteria

Curves for Women Second Cup Jani-King Liberty Tax Service

Implement the Alternative

Chem-Dry Carpet Cleaning!

Step 1: Identification of a Problem

Step 2: Identification of Decision Criteria

Step 3: Allocation of Weights to Criteria

Exhibit 4.2 Criteria and Weights for Franchise Decision

Open geographical locations

Step 4: Development of Alternatives

Step 5: Analysis of Alternatives

Exhibit 4.3 Evaluation Using Decision Criteria

Exhibit 4.4 Evaluation Against Weighted Criteria

Step 6: Selection of an Alternative

Step 7: Implementation of the Alternative

Step 8: Evaluation of Decision Effectiveness

Exhibit 4.5 Decisions in Management Functions

Types of Problems and Decisions

Types of Programmed Decisions

Problems and Decisions (contd)

Exhibit 4.6 Assumptions of Rationality

Making Decisions: The Rational Model

Bounded rationality (Herbert Simon)

Making Decisions (contd)

Making Decisions: The Rational Model

Exhibit 4.8 Expected Value for Adding One Ski Lift

Event Heavy snowfall Normal snowfall

Decision-Making Conditions (contd)

Making Decisions (contd)

Exhibit 4.7 What Is Intuition?

Experience-based decisions Values- or ethicsbased decisions Affect-initiated decisions

Subconscious mental processing

Managers make decisions based on skills, knowledge, and training

What Is Creative Potential?

Intrinsic task motivation

Tolerance for ambiguity

Exhibit 4.9 Decision-Making Styles

Way of Thinking Rational Intuitive

Decision-Making Styles (contd)

Decision Making: Styles

Decision Making: Styles (contd)

Group Decision Making (contd)

Group Decision Making

Exhibit 4.10 Group Vs. Individual Decision Making

When Are Groups Most Effective?

Acceptance of the final solution

Effectiveness of group decision making

Improving Group Decision Making

Nominal group technique

Exhibit 4.11 Common Decision-Making Errors and Biases

Decision-Making Errors and Biases