Management: Decision Making

Management
Stephen P. Robbins Mary Coulter
Chapter
Decision Making
6
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–1
Decision Making
• The Decision-Making Process
 Consists of 8 steps:
Step 5: Analyzing alternatives
Step 6: Selecting an alternative
Step 7: Implementing the selected alternative.
Step 8: Evaluating the decision’s effectiveness.

Step 1: Identifying the 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.

Step 1: Identifying the Problem
• Example:
 Amanda is a sales manager whose reps new laptops
because their old ones are outdated and inadequate
for doing their job.
 To make it simple, assume that its not economical to
add memory to the old computers and it’s the
company’s policy to purchase, not lease.
 Problem – a disparity between the sales reps’ current
computers (existing condition) and their need to have
more efficient ones (desired condition).

Step 2: Identifying Decision Criteria
• Decision criteria are factors that are important
(relevant) to resolving the problem such as:
 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: Allocating Weights to the 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.

Exhibit 6–2 Criteria and Weights for Computer Replacement
Decision
Criterion Weight
Memory and Storage 10
Battery life 8
Carrying Weight 6
Warranty 4
Display Quality 3

Step 4: Developing Alternatives
• Identifying viable alternatives
 Alternatives are listed (without evaluation) that can
resolve the problem. (Exhibit 6–3)
Step 5: Analyzing 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. (Exhibit
6–4)

Exhibit 6–3 Assessed Values of Laptop
Computers Using Decision Criteria

Step 6: Selecting an Alternative
• Choosing the best alternative
 The alternative with the highest total weight is
chosen. (Exhibit 6–4)
Step 7: Implementing the

Alternative
• Putting the chosen alternative into action.
 Conveying the decision to and gaining commitment
from those who will carry out the decision.

Exhibit 6–4 Evaluation of Laptop Alternatives
Against Weighted Criteria

Step 8: Evaluating the Decision’s
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?
 Was the problem incorrectly defined?
 Were errors made when evaluating alternatives?
 Was the right alternative selected but poorly implemented?
 The answers might lead to redo an earlier step or might

even require starting the whole process over.
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
organization’s interests rather than in their personal interests.
 For Managerial decision making: Decisions are made in the
best interests of the organization.

Exhibit 6–6 Assumptions of Rationality
6–13
© 2007 Prentice Hall, Inc. All rights reserved.
Making Decisions (cont’d)
• Bounded Rationality
 Managers make decisions rationally, but are limited
(bounded) by their ability to process information.
 Assumptions are that decision makers:
 Will not seek out or have knowledge of all alternatives
 Will satisfice—choose the first alternative encountered that
satisfactorily solves the problem—rather than maximize the
outcome of their decision by considering all alternatives and
choosing the best. Accept solutions that are “good enough”.
 Influence on decision making
 Escalation of commitment: an increased commitment to a
previous decision despite evidence that it may have been
wrong.
Making Decisions (cont’d)
• Bounded Rationality
 Example:
 Suppose that you’re a finance major, and upon graduation
you want a job, preferably as a personal financial planner,
with a minimum salary of $35,000 and within 100 miles of
your hometown.
 You accept a job offer as a business credit analyst – but still
in the finance field – at a bank 50 miles from home at a
starting salary of $34,000.
 If you have done a more comprehensive job search, you
would have discovered a job in personal financial planning at
a trust company only 25 miles from your hometown and
starting at a salary of $38,000.
 Are you a perfectly rational decision maker?

Exhibit 6–7 What is Intuition?
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. 91–99. 6–16
Making Decisions: The Role of
Intuition
Intuitive decision making
Making decisions on the basis of experience,
feelings, and accumulated judgment.
Five Different Aspects of Intuition
1.Experience-based decisions
-Based on past experiences
2.Affect-initiated decisions
-Based on feelings or emotions
6–17
Making Decisions: The Role of
Intuition
Five Different Aspects of Intuition
3. Cognitive-based decisions
-Based on skills, knowledge and training
4.Subconscious mental processing

-Use data from subconscious mind to help them
make decisions
5.Values or ethics based decisions

-Based on ethical values or culture
6–18
Types of Problems and Decisions
• Structured Problems
 Refers to a straightforward, familiar and easily defined
problem.
 Involve goals that are clear.
 Are familiar (have occurred before).
 Are easily and completely defined—information
about the problem is available and complete.
Example:
 Customer returns a purchase to a store,
 When a supplier is late with an important delivery
Types of Problems and Decisions
• Programmed Decision
 A repetitive decision that can be handled by a routine
approach.
 For instance,
 A server spills a drink on a customer’s coat. The customer is
upset, and the manager needs to do something.
 Because it’s not an unusual occurrence, there’s probably
some standardized routine for handling it.
 The manager offers to have the coat cleaned at the
restaurant’s expense.
 The manager relies on one of 3 types of programmed
decisions: procedure, rule or policy.
Types of Programmed Decisions
• Procedure
 A series of interrelated steps that a manager can
use to respond (applying a policy) to a structured
problem.
 For instance, Purchasing manager receives a
request from a warehouse manager for 15 handheld
computers for the inventory clerks.
 The Purchasing manager knows how to do it by
following the established purchasing procedure.
 Follow all steps for completing merchandise return
documentation.
• Rule
 An explicit statement that tells managers what can or
cannot be do.
 Rules are frequently used because they are simple to
follow and ensure consistency.
 For example:
 Rules about lateness and absenteeism permit supervisors
to make disciplinary decisions rapidly and fairly.
 Managers must approve all refunds over $50.00.
 No credit purchases are refunded for cash.

• Policy
 A guideline for making a decisions.
 Policies typically contain an ambiguous term that
leaves interpretation up to the decision makers.
 Some sample policy statements:
 The customer always comes first and should
always be satisfied.
 Employee wages shall be competitive within
community standards.
 Accept all customer-returned merchandise.

Problems and Decisions (cont’d)
• Unstructured Problems
 Problems that are new or unusual and for which
information is ambiguous or incomplete.
 Problems that will require custom-made solutions.
 Example:
 Whether to build a new manufacturing facility in China
 Problem facing restaurant managers who must decide to
modify their businesses to comply wit the new smoking ban
 When problems are unstructured, managers must rely

on nonprogrammed decision making in order to
develop unique solutions.
Problems and Decisions (cont’d)
• Nonprogrammed Decisions
 Decisions that are unique and nonrecurring.
 Decisions that generate unique responses.
• Lower-level managers mostly rely on programmed

decisions (procedures, rules and policies) because
they confront familiar and repetitive problems.
• As managers move up the organizational hierarchy,
the problems they confront become more
unstructured.
Exhibit 6–7 Programmed Versus Nonprogrammed Decisions

Decision-Making Conditions
• Certainty
 A situation in which a manager can make an accurate
decision because the outcome of every alternative
choice is known.
 Managers are certain about the outcomes of each
alternative.
 Example: Depositing excess funds:
 Certain as to the Interest rate being offered by
banks and amount that will be earned on the funds

• Risk
A situation in which the manager is able to
estimate the likelihood (probability) of
outcomes that result from the choice of
particular alternatives.
Under risk, managers have historical data
from past experiences or secondary
information that lets them assign probabilities
to different alternatives.

• Example: Risk
• Suppose you manage a Swiss Ski resort, and you’re
thinking about adding another lift.
• Decisions will be influenced by the additional revenue
that the new lift will generate, which depends on
snowfall.
• Fairly reliable weather data on snowfall levels in your
area from the past 10 years

Exhibit 6–8 Expected Value for Revenues from
the Addition of One Ski Lift
Expected
Expected × Probability = Value of Each
Event Revenues Alternative
Heavy snowfall $850,000 0.3 = $255,000
Normal snowfall 725,000 0.5 = 362,500
Light snowfall 350,000 0.2 = 70,000
$687,500
6–30
• Uncertainty
 Refers to a situation in which decision maker has
neither certainty nor reasonable probability estimates
available.
 Limited information prevents estimation of outcome
probabilities for alternatives associated with the
problem and may force managers to rely on intuition,
hunches, and “gut feelings”.
6–31
• Uncertainty
 The choice of alternative is influenced by limited
information of available information and by the
psychological orientation of the decision maker.
 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
maximum regret.
6–32
Exhibit 6–9 Payoff Matrix
6–33
Exhibit 6–10 Regret Matrix
6–34
Decision-Making Styles
• The way a person approaches decision making is
likely affected by his or her Thinking Style.
 Thinking style reflects two things:
1. The source of information a person tend to use (external data
and facts or internal sources, such as feelings and intuition).
2. How the person process that information (linear – rational,
logical, analytical; or nonlinear – intuitive, creative , insightful).
• These four dimensions are collapsed into two

styles: linear thinking style and nonlinear thinking
style.
6–35
• Linear Thinking Style
 A decision style characterized by a person’s
preference for using external data and facts and
processing this information through rational, logical
thinking.
• Nonlinear Thinking Style

 A decision style characterized by a person’s
preference for internal sources of information and
processing this information through with internal
insights, feelings and hunches.
6–36
Decision-Making Biases and Errors
• Heuristics
 Using “rules of thumb” to simplify decision
making.
 Heuristics can be useful because they help make
sense of complex, uncertain, and ambiguous
information.
 Even though managers may use rules of thumbs,
that doesn’t mean those rules are reliable.
6–37
Exhibit 6–11 Common Decision-Making Errors and Biases
6–38
• Overconfidence Bias
 When a decision makers tend to think they know
more than they do or hold unrealistically positive
views of themselves and their performance.
• Immediate Gratification Bias

 Choosing alternatives that offer immediate rewards
and that to avoid immediate costs.
6–39
(cont’d)
• Anchoring Effect
 Fixating on initial information as a starting point and
ignoring subsequent information.
• Selective Perception Bias
 Selecting organizing and interpreting events based on
the decision maker’s biased perceptions.
 This influences the information they pay attention to,
the problem they identify, and the alternatives they
develop.
6–40
(cont’d)
• Confirmation Bias
 Seeking out information that reaffirms past choices
and discounting contradictory information.
 These people tend to accept at face value information
that confirms their preconceived views and are critical
and skeptical of information that challenges thee
views
6–41
(cont’d)
• Framing Bias
 Selecting and highlighting certain aspects of a
situation while ignoring other aspects.
 Omitting other aspects, distort what they see and
create incorrect reference points.
• Availability Bias
 Losing decision-making objectivity by focusing on the
most recent events.
 Distort the ability to recall events in an objective
manner and results in distorted judgments and
probability estimates.
6–42
(cont’d)
• Representation Bias
 When decision makers assess the likelihood of an
event based on how closely it resembles other events,
or sets of events.
 Drawing analogies and seeing identical situations
when none exist.
• Randomness Bias
 Creating unfounded meaning out of random events.
 Most decision makers have difficulty dealing with
chance, even though random events happen to
everyone, and there’s nothing that can be done to
predict them.
6–43
(cont’d)
• Sunk Costs Errors
 Forgetting that current actions cannot influence past
events and relate only to future consequences.
 Incorrectly fixate on past expenditures of time, money,
or effort in assessing choices rather than on future
consequences.
• Self-Serving Bias
 Taking quick credit for successes and blaming outside
factors for failures.
6–44
(cont’d)
• Hindsight Bias
Mistakenly believing that an event could have
been predicted once the actual outcome is
known (after-the-fact).
6–45
Exhibit 6–14 Overview of Managerial Decision Making
6–46
Effective Decision Making for
Today’s World
• Guidelines for making effective decisions:
 Understand cultural differences.
 Values, beliefs, attitudes and behavioral patterns of the
people involved.
 Know when it’s time to call it quits.
 When it’s evident that a decision isn’t working, don’t be afraid
to pull the plug.
 Use an effective decision-making process.
 Build an organization that can spot the unexpected
and quickly adapt to the changed environment.
 Such organization is called highly reliable
organizations (HROs)
6–47
Today’s World
• HRO Five habits:
 Are not tricked by their success.
 Preoccupied with their failures and alert to the smallest
deviations and react quickly to anything that doesn’t fit
to their expectations.
 Defer to the experts on the front line.
 Frontline workers-those who interact day in and day out
with customers, products, suppliers, and so forth – have
firsthand knowledge of what can and cannot be done,
what will and will not work.
 Get their inputs.
 Let them make decisions.
6–48
Today’s World
• HRO Five habits:
 Let unexpected circumstances provide the solution.
 How decision maker respond to unexpected
circumstances.
 Embrace complexity.
 Ask “why” and keep on asking why as they probe more
deeply into the causes of the problem and possible
solutions.
 Anticipate, but also anticipate their limits.
 Do try to anticipate as much as possible, but recognize
that they can’t anticipate everything.
 Think by acting. By actually doing things, you’ll find out
what works and what doesn’t.
6–49
Characteristics of an Effective
Decision-Making Process
• It focuses on what is important.
• It is logical and consistent.
• It acknowledges both subjective and objective thinking
and blends analytical with intuitive thinking.
• It requires only as much information and analysis as is
necessary to resolve a particular dilemma.
• It encourages and guides the gathering of relevant
information and informed opinion.
• It is straightforward, reliable, easy to use, and flexible.
6–50
Terms to Know
• decision • policy
• Decision-making process • unstructured problems
• problem • nonprogrammed decisions
• decision criteria • certainty
• rational decision making • risk
• bounded rationality • uncertainty
• satisficing • directive style
• escalation of commitment • analytic style
• intuitive decision making • conceptual style
• structured problems • behavioral style
• programmed decision • heuristics
• procedure • business performance
• rule management (BPM) software

THANK YOU VERY MUCH
HAVE A NICE DAY
AND
GOD BLESS

All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by
any means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.

• Dimensions of Decision-Making Styles
 Ways of thinking
 Rational, orderly, and consistent
 Intuitive, creative, and unique
 Tolerance for ambiguity

 Low tolerance: require consistency and order
 High tolerance: multiple thoughts simultaneously
6–54
• Dimensions of Decision-Making Styles
 Ways of thinking
 Rational, orderly, and consistent
 Intuitive, creative, and unique
 Tolerance for ambiguity

 Low tolerance: require consistency and order
 High tolerance: multiple thoughts simultaneously
6–55
Decision-Making Styles (cont’d)
• Types of Decision Makers
 Directive
 A decision-making style characterized by low tolerance for
ambiguity and a rational way of thinking.
 They’re efficient and logical.
 Directive types make fast decisions and focus on the short
run.
 Use minimal information and consider few alternatives.
 Analytic
 A decision-making style characterized by high tolerance for
ambiguity and a rational way of thinking
 Want more information before making a decision and consider
more alternatives.
 Make careful decisions in unique situations.
6–56
Decision-Making Styles (cont’d)
• Types of Decision Makers
 Conceptual
 A decision-making style characterized by high tolerance for
ambiguity and an intuitive way of thinking.
 Maintain a broad outlook and consider many alternatives in
making decisions.
 Focus on the long run and are very good at finding creative
solutions to problems
 Behavioral
 A decision-making style characterized by low tolerance for
ambiguity and a rational way of thinking.
 Avoid conflict by working well with others and being receptive
to suggestions.
 Acceptance by others is important to this decision-making
style
6–57
Exhibit 6–12 Decision-Making Matrix
6–58

Management: Decision Making

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Management: Decision Making

Uploaded by

Copyright:

Available Formats

Management

Stephen P. Robbins Mary Coulter

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–2

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–3

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–4

Step 3: Allocating Weights to the Criteria

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–5

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–6

Step 5: Analyzing Alternatives

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–7

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–8

Step 7: Implementing the

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–9

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–10

 The answers might lead to redo an earlier step or might

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–12

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–15

4.Subconscious mental processing

5.Values or ethics based decisions

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–22

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–23

 When problems are unstructured, managers must rely

• Lower-level managers mostly rely on programmed

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–26

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–27

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–28

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–29

• These four dimensions are collapsed into two

• Nonlinear Thinking Style

• Immediate Gratification Bias

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–51

HAVE A NICE DAY

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–52

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 6–53

 Tolerance for ambiguity

 Tolerance for ambiguity

You might also like