You are on page 1of 52

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

4-1

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
Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright © 2008 Pearson Education Canada

4-2

LEARNING OUTLINE (cont’d)
Follow this Learning Outline as you read and study this chapter

• The Manager as Decision Maker (cont’d)
– 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
Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright © 2008 Pearson Education Canada

4-3

LEARNING OUTLINE (cont’d)
Follow this Learning Outline as you read and study this chapter

• Decision Making for Today’s World
– Explain how managers can make effective decisions in today’s world – List the six characteristics of an effective decisionmaking process – Describe the five habits of highly reliable organizations
4-4

Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright © 2008 Pearson Education Canada

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 decision’s effectiveness
4-5

Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright © 2008 Pearson Education Canada

.. and Nancy Langton............... Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-6 ................ ” Identify Decision Criteria • • • • • Financial qualifications Franchisor history Start-up costs Open geographical locations Franchisor support Allocate Weights to Criteria Start-up costs ......... Fundamentals of Management........................Exhibit 4.......................... Stephen P........................................7 Develop Alternatives Curves for Women Second Cup Jani-King Liberty Tax Service Curves for Women Second Cup Jani-King Liberty Tax Service 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............. Mary Coulter............6 Franchisor history .........................1 The DecisionMaking Process Identify a Problem “ I need to decide the best franchise to purchase...............7 Financial qualifications ........ Robbins...........10 Franchisor support .............8 Open geographical locations .....

information. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-7 . Fundamentals of Management. Robbins. Mary Coulter. Stephen P.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. or resources needed to solve the problem Chapter 4. and Nancy Langton.

making process Chapter 4.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. and Nancy Langton. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-8 . Fundamentals of Management. Mary Coulter. Robbins. Stephen P.

Fundamentals of Management.2 Criteria and Weights for Franchise Decision Criterion Start-up costs Franchisor support Financial qualifications Weight 10 8 6 Open geographical locations Franchisor history Chapter 4. Mary Coulter. Stephen P.Exhibit 4. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4 3 4-9 . Robbins. and Nancy Langton.

Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-10 . Stephen P. and Nancy Langton. Robbins. Mary Coulter. Fundamentals of Management.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 alternative’s strengths and weaknesses – An alternative’s appraisal is based on its ability to resolve the issues identified in steps 2 and 3 Chapter 4.

Mary Coulter. and Nancy Langton.3 Evaluation Using Decision Criteria Chapter 4. Fundamentals of Management. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-11 .Exhibit 4. Stephen P. Robbins.

Robbins.Exhibit 4. and Nancy Langton. Fundamentals of Management.4 Evaluation Against Weighted Criteria Chapter 4. Mary Coulter. Stephen P. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-12 .

Robbins. and Nancy Langton. Mary Coulter. Fundamentals of Management. Stephen P. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-13 .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 Chapter 4.

Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-14 . Fundamentals of Management.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. Stephen P. Robbins. Mary Coulter. what went wrong? Chapter 4. and Nancy Langton.

Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-15 . Mary Coulter. Robbins. Stephen P.5 Decisions in Management Functions Chapter 4. and Nancy Langton.Exhibit 4. Fundamentals of Management.

Stephen P. and Nancy Langton. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-16 .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 Chapter 4. Fundamentals of Management. Mary Coulter. Robbins.

Mary Coulter. Stephen P. Robbins. and Nancy Langton. Fundamentals of Management.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 Chapter 4. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-17 .

Fundamentals of Management. information is ambiguous or incomplete • Nonprogrammed Decisions – Decisions are unique and nonrecurring. Robbins. they require custom-made solutions Chapter 4. and Nancy Langton. Stephen P. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-18 .Problems and Decisions (cont’d) • Unstructured Problems – Problems are new or unusual. Mary Coulter.

value-maximizing choices with specified constraints – Assumptions are that decision makers: • Are perfectly rational. Fundamentals of Management. Robbins. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada . and Nancy Langton. Stephen P. 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 organization’s interests rather than in their personal interests 4-19 Chapter 4.Making Decisions • Rationality – Managers make consistent. fully objective. Mary Coulter.

Preferences are constant and stable. Final choice will have maximize payoff. Fundamentals of Management. Mary Coulter.Exhibit 4. Stephen P. Preferences are clear. Rational Decision Making Chapter 4. No time or cost constraints exist. A single.6 Assumptions of Rationality Lead to • • • • • • • The problem is clear and unambiguous. All alternatives and consequences are known. well-defined goal is to be achieved. Robbins. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-20 . and Nancy Langton.

4–21 Copyright © 2005 Prentice Hall. All rights reserved. Inc. • Bounded rationality (Herbert Simon) – Behavior that is rational within the parameters of a simplified model that captures the essential features of a problem. .Making Decisions: The Rational Model • Rational – Describes choices that are consistent and valuemaximizing within specified constraints. • Satisfice – Making a “good enough” decision: choosing the firstidentified alternative that satisfactorily and sufficiently solves the problem.

Making Decisions (cont’d) • 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 Chapter 4. Mary Coulter. Fundamentals of Management. and Nancy Langton. Stephen P. Robbins. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-22 .

Making Decisions: The Rational Model • Certainty – The implication that the outcome of every possible alternative is known. 4–23 Copyright © 2005 Prentice Hall. • Risk – The probability that a particular outcome will result from a given decision. Inc. . • Uncertainty – A condition under which there is not full knowledge of the problem and reasonable probabilities for alternative outcomes cannot be determined. All rights reserved.

Mary Coulter. Stephen P. Fundamentals of Management. and Nancy Langton. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-24 . Robbins.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 Chapter 4.

500 Chapter 4.2 = 70.3 0. Robbins. Mary Coulter.000 362. Stephen P.Exhibit 4.5 = = $255.000 Expected Probability = Value of Each Alternative 0. Fundamentals of Management.000 725. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-25 .000 0.500 Event Heavy snowfall Normal snowfall Light snowfall 350. and Nancy Langton.000 $687.8 Expected Value for Adding One Ski Lift Expected × Revenues $850.

hunches. Stephen P. and “gut feelings” • Maximax: the optimistic manager’s choice to maximize the maximum payoff • Maximin: the pessimistic manager’s choice to maximize the minimum payoff • Minimax: the manager’s choice to minimize his maximum regret Chapter 4. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-26 . Robbins. Fundamentals of Management.Decision-Making Conditions (cont’d) • Uncertainty – Limited information prevents estimation of outcome probabilities. Mary Coulter. may force managers to rely on intuition. and Nancy Langton.

and accumulated judgment • One-third of managers and other employees said they emphasized “gut feeling” over cognitive problem solving Chapter 4. feelings. Robbins. Mary Coulter. Fundamentals of Management. Stephen P. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-27 .Making Decisions (cont’d) • Role of Intuition – Intuitive decision making • Making decisions on the basis of experience. and Nancy Langton.

Stephen P. Chapter 4. Robbins. and Nancy Langton. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada Managers make decisions based on skills.K.Exhibit 4. Miller. October 1999.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. Fundamentals of Management. Burke and M.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. 91–99.” Academy of Management Executive.A. knowledge. “Taking the Mystery Out of Intuitive Decision Making. and training 4-28 . Mary Coulter. pp.

the ability to use analogies.What Is Creative Potential? • Expertise – Understanding. knowledge. necessary in the field of creative endeavor. as well as the talent to see the familiar in a different light. abilities. • Creative-thinking skills – The personality characteristics associated with creativity. or personally challenging. proficiencies. involving. • Intrinsic task motivation – The desire to work on something because it’s interesting. . satisfying. All rights reserved. 4–29 Copyright © 2005 Prentice Hall. Inc. exciting.

Robbins. and Nancy Langton. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-30 . and unique – Tolerance for ambiguity • Low tolerance: require consistency and order versus • High tolerance: multiple thoughts simultaneously Chapter 4. orderly.Decision-Making Styles • Dimensions of Decision-Making Styles – Ways of thinking • Rational. and consistent versus • Intuitive. Mary Coulter. creative. Fundamentals of Management. Stephen P.

Robbins. Way of Thinking Rational Intuitive Chapter 4. p. 2nd ed.A.P. (Upper Saddle River. Fundamentals of Management. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-31 . 166. Supervision Today. Stephen P. and Nancy Langton. Mary Coulter.Exhibit 4. Robbins and D.9 Decision-Making Styles High Analytic Conceptual Tolerance For Ambiguity Directive Behavioural Low Source: S. DeCenzo. 1998). NJ: Prentice Hall.

Decision-Making Styles (cont’d) • 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 Chapter 4. Stephen P. and Nancy Langton. Mary Coulter. Fundamentals of Management. Robbins. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-32 .

All rights reserved. . Inc. 4–33 Copyright © 2005 Prentice Hall.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.

to look at many alternatives.Decision Making: Styles (cont’d) • Conceptual style – Individuals who tend to be very broad in outlook. are open to suggestions. 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. and are concerned about the individuals who work for them. All rights reserved. they work well with others. Inc. 4–34 Copyright © 2005 Prentice Hall.

Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-35 . and Nancy Langton. Fundamentals of Management. Mary Coulter.Group Decision Making (cont’d) • 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 Chapter 4. Stephen P. Robbins.

Robbins. Stephen P. and Nancy Langton.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 Chapter 4. Fundamentals of Management. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-36 . Mary Coulter.

Individual Decision Making Criteria of Effectiveness Groups Individuals   Accuracy Speed Creativity  Degree of acceptance Efficiency   4-37 Chapter 4. Mary Coulter.10 Group Vs. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada .Exhibit 4. Robbins. and Nancy Langton. Fundamentals of Management. Stephen P.

When Are Groups Most Effective? • Creativity – Groups tend to be more creative than individuals. • Effectiveness of group decision making – Groups of five to seven members are optimal for decision process speed and quality. 4–38 Copyright © 2005 Prentice Hall. All rights reserved. Inc. • Acceptance of the final solution – Groups help increase the acceptance of decisions. .

Improving Group Decision Making • Brainstorming – An idea-generating process that encourages alternatives while withholding criticism. 4–39 Copyright © 2005 Prentice Hall. Inc. All rights reserved. . • Electronic meeting – A type of nominal group technique in which participants are linked by computer. • Nominal group technique – A decision-making technique in which group members are physically present but operate independently.

Mary Coulter.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 Chapter 4. Robbins. Fundamentals of Management. Stephen P. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-40 . and Nancy Langton.Exhibit 4.

All rights reserved. Inc. – 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 decision’s present outcomes. 4–41 Copyright © 2005 Prentice Hall. .Common Decision-making Errors • Heuristics: Using judgmental shortcuts – Availability heuristic • The tendency to base judgments on information that is readily available.

and Nancy Langton. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada . Robbins. organizing. Stephen P. and interpreting events based on the decision maker’s biased perceptions 4-42 Chapter 4.Decision-Making Biases and Errors • Heuristics – Using “rules of thumb” to simplify decision making • Overconfidence Bias – Holding unrealistically positive views of one’s self and one’s performance • Selective Perception Bias – Selecting. Mary Coulter. Fundamentals of Management.

Stephen P. and Nancy Langton.• 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 (cont’d) Chapter 4. Robbins. Mary Coulter. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-43 . Fundamentals of Management.

Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-44 . and Nancy Langton. Mary Coulter. Stephen P.Decision-Making Biases and Errors (cont’d) • 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) Chapter 4. Fundamentals of Management. Robbins.

Mary Coulter. Robbins. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada . and Nancy Langton.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 Chapter 4. Stephen P. Fundamentals of Management.

Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-46 .Ethics and Decision Making (cont’d) • 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. and due process Chapter 4. life and safety. free speech. and Nancy Langton. Mary Coulter. Fundamentals of Management. Stephen P. Robbins.

and Nancy Langton.Ethics and Decision Making (cont’d) • 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 Chapter 4. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-47 . Robbins. Stephen P. Mary Coulter. Fundamentals of Management.

Fifth Canadian Edition Copyright © 2008 Pearson Education Canada • Provide support for individuals facing ethical dilemmas. Mary Coulter. • Conduct independent social audits. Stephen P. • Provide ethics training. Chapter 4. • Lead by example. and Nancy Langton. Robbins. Fundamentals of Management. 4-48 . • Delineate job goals and performance appraisal mechanisms.How Managers Can Improve Ethical Behaviour in an Organization • Hire individuals with high ethical standards. • Establish codes of ethics and decision rules.

Code of Ethics • A formal statement of an organization’s primary values and the ethical rules it expects its employees to follow – Be a dependable organizational citizen – Don’t do anything unlawful or improper that will harm the organization – Be good to customers Chapter 4. Stephen P. Fundamentals of Management. and Nancy Langton. Robbins. Mary Coulter. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-49 .

Robbins. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-50 . Fundamentals of Management. and Nancy Langton. Stephen P. Mary Coulter.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 Chapter 4.

12 Examining Ethics Chapter 4.Exhibit 4. Mary Coulter. Robbins. Fundamentals of Management. Fifth Canadian Edition Copyright © 2008 Pearson Education Canada 4-51 . and Nancy Langton. Stephen P.

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 .