CHAPTER 4: FOUNDATIONS OF DECISION MAKING

4.1 Decision Making Process (DMP)

A set of eight steps that includes identifying a problem, selecting a solution, and evaluating the effectiveness of the solution.

Step 1: Identification of a problem

Problem - A discrepancy between an existing and a desired state of affairs

The DMP begins with the identification of a problem (step 1).

Example: Decision to buy a vehicle. The manager spent RM6000 on auto repairs over the past few years, and now the car has a blown engine. It is not economical to repair the car and public transport is unavailable.

Step 2: Identification of decision criteria

Decision criteria - Factors that are relevant in a decision

Once a manager has identified a problem that needs attention, the decision criteria that will be important in solving the problem must be identified (step 2)

In vehicle –buying example, the product manager has to assess those factors that are relevant in her decision. These might include criteria such as price, model (two door or four door), size (compact or intermediate), manufacturer and repair records.

Step 3: Allocation of weights to criteria

The criteria are not all equally important. Therefore, it is necessary to allocate weights to the criteria listed in step 2 in order to give them their relative priority in the decision (step 3). A simple approach is merely to give the most important criterion a weight of 10 and then assign weights to the rest against that standard. The idea is to indicate their degree of importance by assigning a weight to each.

Example: Criteria and Weight in Car-Buying Decision (Scale of 1 to 10)

Step 4: Development of Alternatives

The decision maker lists the alternatives that could succeed in resolving the problem (step 4). Let’s assume that the manager has identified 12 vehicles as viable choices: Jeep Cherokee, Ford Taurus, Mercedes C230, Pontiac GTO, Mazda Tribute, Dodge Durango, Volvo S40, Isuzu Axiom, BMW 325, Audi A6, Toyota Camry and Volkswagen Passat.

Step 5: Analysis of Alternatives

Once the alternatives have been identified, the decision maker must critically analyze each one (step 5). The strengths and weaknesses of each alternative become evident as they are compared with the criteria and weights established in step 2 and 3. Each alternative is evaluated by appraising it against the criteria.

CRITERION WEIGHT

Price 10

Interior comfort 8

Durability 5

Repair record 5

Performance 3

Handling 1

Assessment of Car Alternatives

Weighting of Vehicles (Assessment Criteria X Criteria Weight)

Step 6: Selection of an alternative

Step 6 is the critical act of choosing the best alternative from among those enumerated assessed. Since we determined all the pertinent factors in the decision, weighted them appropriately, and identified the viable alternatives, we merely have to choose the alternative that generated the highest score in step 5. In the vehicle example, the decision maker would choose the Toyota Camry because it scored highest (224 points) and thus, became the best alternative.

Step 7: Implementation of the alternative

This step 7 is concerned with putting the decision into action. Decision implementation includes conveying the decision to those affected and getting their commitment to it.

Step 8: Evaluation of decision effectiveness

The last step in DMP appraises the result of the decision to see whether it has corrected the problem. Did the alternative chosen in step 6 and implemented in step 7 accomplish the desired result?

4.2 Decision Making Conditions

Managerial decision making is assumed to be rational in that managers make consistent, value-maximizing choices within specific constraints.

4.2.1 Certainty

Certainty implies that a manager can make accurate decision because the outcome of every alternative is known.

4.2.2 RiskIn real world, most managers must try to assign probabilities to outcomes that may result. We call this process dealing with risk.

4.2.3 Uncertainty

A condition in which managers do not have full knowledge of the problem they face and cannot determine even a reasonable probability of alternative outcomes.

4.3 Errors in Decision Making

We often engage in behaviors that speed up the process of decision making. In order to avoid information overload, we rely on judgmental shortcuts called heuristics. Heuristics commonly exist in two forms – availability and representative. Both types create biases in a decision maker. Another bias is the decision maker’s tendency to escalate commitment to a failing course of action.

4.3.1 Availability heuristic

Availability heuristic is the tendency to base judgments on information that is readily available. Events that invoke strong emotions, are vivid to the imagination, or have recently occurred create a strong impression on us.

For example, many people have a fear of flying. Although travelling in aircraft is statistically safer than driving a vehicle, aircraft accidents get much more attention. This causes individuals to overstate the risk of flying and understate the risk of driving.

4.3.2 Representative heuristic

Representative heuristic is the tendency for people to base judgments of probability on things with which they are familiar. Representative heuristics cause individuals to match the likelihood of an occurrence with something that they are familiar with.

For example, decision makers may predict the future success of a new product by relating it to a previous product’s success.

Managers may also be affected by representative heuristics when they no longer hire graduates from a particular college program because the last three persons hired from that program were poor performers.

4.3.3 Escalation of Commitment

Escalation of commitment is an increased commitment to a previous decision despite negative information. That is, the escalation of commitment represents the tendency to stay the course, despite negative data that suggest one should do otherwise.

4.4 Types of Problems (How do problems differ?)

4.4.1 Well-structured problem

Well-structured problems are straight forward, familiar, easily defined problems. The goal of the decision maker is clear, the problem is familiar, and information about the problem easily defined and complete.

Examples: A customer’s wanting to return an internet purchase and a university’s handling of a student who is applying for financial aid.

4.4.2 Ill-structured problem

Ill-structured problems are new problems in which information is ambiguous or incomplete. The problems are new or unusual.

Examples: Decision to enter a new market segment, or to merge two organizations.

4.5 Types of Decisions

4.5.1 Programmed decision

Programmed decision is a repetitive decision that can be handled by a routine approach. Because the problem is well-structured, the manager does not have to go to the trouble and expense of working up an involved decision process. Programmed decision making is relatively simple and tends to rely heavily on previous solutions. Managers can look into these three systematic procedure, rule or policy.

4.5.1.1 ProcedureA series of interrelated sequential steps that can be used to respond to a well-structured problem.

4.5.1.2 RulesAn explicit statement that tells managers what they ought or ought not to do.

Example: No smoking in this area

4.5.1.3 PolicyA general guide that establishes parameters for making decisionsExample: “we promote from within, whenever possible”.

4.5.2 Non-programmed decisionDecisions that must be custom-made to solve unique and nonrecurring problems.

Examples: Deciding whether to acquire another organization, deciding which global markets offer the most potential or deciding whether to sell off an unprofitable division.

Such decisions are unique and nonrecurring. When a manager confronts an ill-structured problem, no cut-and-dried solution is available. A custom-made non-programmed response is required.

4.6 Decision-Making Styles

The basic premise for this decision-making model is the realization that individuals differ along two dimensions. The first is the way they think. Some decision makers are logical and rational. Being such, they process information in a sequential manner.In contrast, some individuals think creatively and use their intuition. These decision makers have a tendency to see matters from a big-picture perspective.

The second dimension focuses on individuals’ tolerance for ambiguity. Some individuals have a high need for consistency and order in making decisions so that ambiguity is minimized. Others, however, are able to tolerate high levels of uncertainty and can process many thoughts at the same time.

• 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.

• 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.

4.7 Group Decision Making Many decisions in organizations, especially important decisions that have far-reaching effects on organizational activities and personnel, are typically made in groups. In many cases, these groups represent the people who will be most affected by the decisions being made. Because of their expertise, these people are often best qualified to make decisions that affect them.

4.7.1 Advantages of group decision making

Make more accurate decisions Provides more complete information Offers a greater diversity of experiences and perspectives Generates more alternatives Increases acceptance of a solution Increases the legitimacy of a decision.

4.7.2 Disadvantages of group decision making

Is more time-consuming and less efficient Minority domination can influence decision process Increased pressures to conform to the group’s mindset (groupthink) Ambiguous responsibility for the outcomes of decisions