Chapter 6 DECISION MAKING: THE ESSENCE OF THE MANAGERS JOB © Prentice Hall, 20026-1

Chapter 6

DECISION MAKING:THE ESSENCE OFTHE MANAGER’S

JOB© Prentice Hall, 2002 6-6-11

Learning ObjectivesLearning Objectives• You should learn to:

1. Outline the steps in the decision-making process

2. Explain why decision making is so pervasive in organizations

3. Describe the rational decision maker4. Contrast the perfectly rational and

boundedly rational approaches to decision making

5. Explain the role that intuition plays in the decision-making process© Prentice Hall, 2002 6-6-22

Learning Objectives (cont.)Learning Objectives (cont.)• You should learn to:

1. Identify the two types of decision problems and the two types of decisions that are used to solve them

2. Differentiate the decision conditions of certainty, risk, and uncertainty

3. Describe the different decision-making styles

© Prentice Hall, 2002 6-6-33

• Decisions• choices from two or more alternatives• all organizational members make decisions• Decision-Making Processa comprehensive, 8-step processStep 1 - Identifying a Problem

problem - discrepancy between an existing and a desired state of affairs

• must be such that it exerts pressure to act• manager is unlikely to characterize a

situation as a problem unless s/he has resources necessary to act

Decision MakingDecision Making


6 - 5

Some cautions about Some cautions about problem identificationproblem identification

• Some cautions about problem identification include the following:

• 1. Make sure it’s a problem and not just a symptom .• 2. Problem identification is subjective\personal

judgment.• 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 perceive that they don’t have the authority, money, information, or other resources needed to act on it.

• Example. Buying a new laptop computer by a sale’s representative.

The Decision-Making The Decision-Making ProcessProcess

• a

ProblemIdentification

“My salespeople

need new computers”

Identification of Decision Criteria

PriceWeightWarrantyScreen typeReliabilityScreen size

Allocation ofWeights to

Criteria

Reliability 10Screen size 8Warranty 5Weight 5Price 4Screen type 3

Development of Alternatives

AcerCompaqGatewayHPMicromediaNECSonyToshiba

Implementationof an Alternative

GatewayEvaluationof Decision

Effectiveness

Analysis ofAlternatives

AcerCompaqGatewayHPMicromediaNECSonyToshiba

Selection of anAlternative

AcerCompaqGateway HPMicromediaNECSonyToshiba


• Decision-Making Process (cont.)• Step 2 - Identifying Decision Criteriadecision criteria - what’s relevant in making a decision. What

factors are relevant in making a decision (buying a computer). Step 3 - Allocating Weights to the Criteriamust weight the criteria to give them appropriate priority in the

decision. • Not all criteria are equally important.• Step 4 - Developing Alternativeslist the viable alternatives that could resolve the problem without

evaluating themStep 5 - Analyzing Alternativeseach alternative is evaluated against the criteria. Each alternative

is evaluated by appraising it against the criteria established in step 2.

Decision Making (cont.)Decision Making (cont.)


Assessed Values of Notebook Computer Assessed Values of Notebook Computer

Alternatives Against Decision CriteriaAlternatives Against Decision Criteria


Evaluation of Laptop Computer Evaluation of Laptop Computer Alternatives Against Criteria and Alternatives Against Criteria and

WeightsWeights


Decision Making (cont.)Decision Making (cont.)• Decision-Making Process (cont.)• Step 6 - Selecting an Alternativechoosing the best alternative from among those

consideredStep 7 - Implementing the Alternativeimplementation - conveying the decision to those

affected by it and getting their commitment to itparticipation in decision-making process inclines

people to support the decisiondecision may fail if it is not implemented properlyStep 8 - Evaluating Decision Effectiveness

• determine whether the problem is resolved


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PERVASIVENESS\frequency PERVASIVENESS\frequency OF DECISION MAKING. OF DECISION MAKING.

• Decision making is important to every aspect of a manager’s job.

• A. Decision making is part of all four managerial functions. In performing these functions, managers are often called decision makers. (See Exhibit 6.5 on p. 155.)

Decisions in the Decisions in the Management FunctionsManagement Functions


The Manager As Decision The Manager As Decision MakerMaker

• Rational Decision Making. Should be objective and logical.

• decisions are consistent, value-maximizing choices within specified constraints

• managers assumed to make rational decisions• Assumptions of Rationality - decision maker would:1. be objective and logical2. carefully define a problem3. have a clear and specific goal4. select the alternative that maximizes the likelihood of

achieving the goal5. make decision in the firm’s best economic interests• managerial decision making seldom meets all the tests.• The answer: bounded rationality.


Assumptions Of RationalityAssumptions Of Rationality

RationalDecisionMaking

Problem isclear and

unambiguous

Single, well-defined goal

is to be achievedAll alternativesand

consequencesare known

Preferencesare clear

Preferencesare constantand stable

No time or costconstraints exist

Final choicewill maximize

payoff


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Bounded/limited Bounded/limited rationalityrationality

• 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.

The Manager As Decision The Manager As Decision Maker (cont.)Maker (cont.)

• Bounded Rationality: within the parameters of a simplified decision-making process:

1. satisfice - accept solutions that are “good enough” rather than maximizing payoffs.

2. escalation of commitment - increased commitment to a previous decision despite evidence that it may have been wrong. strongly influenced by the organization’s culture, internal politics, power considerations.

- refusal to admit that the initial decision may have been flawed/defected

3. Intuitive


The Manager As Decision The Manager As Decision Maker (cont.)Maker (cont.)

• Role of Intuition– intuitive decision making -

subconscious process of making decisions on the basis of experience and accumulated judgment•does not rely on a systematic or

thorough analysis of the problem•generally complements a rational

analysis


What Is Intuition?What Is Intuition?Decisions basedon experience

Decisions basedon feelings and

emotions

Decisions basedon ethical values

or culture

Decisions basedon subconscious

data

Decisions basedon skills,

knowledge,or training

Intuition

Affect-initiateddecisions

Experienced-based decisions

Values orethics-based

decisions

Subconsciousmental

processing

Cognitive-based

decisions


Types of Problems and DecisionsTypes of Problems and Decisions• Well-Structured Problems - straightforward, familiar, and easily

defined. In handling this situation, a manager can use: ex. Student missed the final exam for management 1.– Programmed Decision - used to address structured problems. – It is a repetitive decision that can be handled by a routine approach. – minimize the need for managers to use discretion– facilitate organizational efficiency

There are three possible programmed decisions: – procedure - series of interrelated sequential steps used to respond to

a structured problem. Ex. Buying computer by procurement department.

– rule - explicit statement of what to do or not to do. Ex. Rules about absenteeism.

– policy - guidelines or parameters for decision making rather than specifically stating what should or should not be done. Ex. Customer always comes first.


Types of Problems and Types of Problems and DecisionsDecisions

– Poorly-Structured Problems - new, unusual problems for which information is ambiguous or incomplete. These problems are best handled by: ex. Investing in new unproven technology.

Nonprogrammed Decisions - used to address poorly- structured problems.

– produce a custom-made response– more frequent among higher-level managers– few decisions in the real world are either fully

programmed or nonprogrammed


Types Of Problems, Types Of Decisions, And Types Of Problems, Types Of Decisions, And Level In The OrganizationLevel In The Organization

ProgrammedDecisions

NonprogrammedDecisions Level in

Organization

Top

LowerWell-structured

Ill-structured

Type ofProblem


Decision-Making ConditionsDecision-Making Conditions– 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. idealistic rather than realistic.

– More common is the situation of risk in which the decision maker is able to estimate the likelihood of certain outcomes. Exhibit 6.9 on p. 163 shows an example of how a manager might make decisions under risk.


Expected Value for Revenues from Expected Value for Revenues from the Addition of One Ski Liftthe Addition of One Ski Lift


Decision-Making ConditionsDecision-Making Conditions– 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.– 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 Exhibit 6.10 on p. 164.

– 2) A pessimistic one will pursue a maximin choice (maximizing the minimum possible payoff). See Exhibit 6.10 on p. 164.

– 3) The manager who desires to minimize the maximum regret will opt for a minimax choice. See Exhibit 6.11 on p. 165.


Payoff MatrixPayoff Matrix


Regret MatrixRegret Matrix


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Decision-Making StylesDecision-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. (See Exhibit 6.12 on p. 166.)

• 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.

• 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.

The Manager As A Decision The Manager As A Decision Maker (cont.)Maker (cont.)

• Decision-Making Styles– two dimensions define the approach to decision making

• way of thinking - differs from rational to intuitive• tolerance for ambiguity - differs from a need for

consistency and order to the ability to process many thoughts simultaneously

– define four decision-making styles• Directive - fast, efficient, and logical• Analytic - careful and able to adapt or cope with

new situations• Conceptual - able to find creative solutions• Behavioral - seek acceptance of decisions


Decision-Making StylesDecision-Making Styles

Analytic

Directive Behavioral

Rational IntuitiveWay of Thinking

Conceptual

High

Low

Tol

eran

ce f

or A

mbi

guity


Managing Workforce Managing Workforce DiversityDiversity

• Diversity in Decision Making– Advantages - diverse employees:

• provide fresh perspectives• offer differing interpretations of problem definition• increase the likelihood of creative and unique

solutions– Disadvantages - diverse employees:

• require more time to reach a decision• may have problems of communication• may create a more complex, confusing, and

ambiguous decision-making process• may have difficulty in reaching agreement


Overview Of Managerial Decision MakingOverview Of Managerial Decision Making

Decision-MakingProcess

Types of Problems and Decisions• Well-structured

- programmed• Poorly structured

- nonprogrammed

Decision-Making Conditions• Certainty

• Risk• Uncertainty

Decision Maker Style• Directive• Analytic

• Conceptual• Behavioral

Decision-Making Approach• Rationality

• Bounded Rationality• Intuition

Decision• Choose best alternative - maximizing - satisficing• Implementing• Evaluating


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Discussion Discussion • In the first step of the decision-

making process, how do managers know when there is a problem?

• Before something can be characterized as a problem (a discrepancy between an existing and a desired state of affairs), managers have to be aware of the discrepancy, they have to be under pressure to take action, and they must have the resources necessary to take action.

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Discussion Discussion • Why is the allocation of weights

to criteria important in making decisions?

• because all criteria are not equally important, so the decision maker must weight the items in order to give them the correct priority

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Discussion Discussion • How do managers develop, analyze, select, and

implement alternatives and then assess whether the decision was effective?

• Developing alternatives requires decision makers to list the viable alternatives that could resolve the problem.

• In analyzing alternatives, the decision maker assesses the strengths and weaknesses of each alternative as it compares with the established criteria and weights.

• Selecting an alternative is simply a matter of identifying the one with the highest weighted score.

• In the implementation phase, the decision is conveyed to those affected and their commitment to it is obtained.

• To assess whether the decision was effective, managers should ask whether it accomplished the desired result.

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Discussion Discussion • Describe decision making from the rationality and

bounded rationality viewpoints.• Managerial decision making is assumed to be

rational; that is, managers are assumed to make consistent, value-maximizing choices within specified constraints. In bounded rationality, managers construct simplified models that extract the essential features from problems without capturing all their complexity. Then, given information processing limitations and constraints imposed by the organization, managers attempt to behave rationally within the parameters of the simple model. The result is a satisficing decision rather than a maximizing one.

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Discussion Discussion • 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.

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Discussion Discussion • 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.

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Discussion Discussion • “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.

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Chapter 6 DECISION MAKING: THE ESSENCE OF THE MANAGERS JOB © Prentice Hall, 20026-1