Chapter 7   Managers as Decision Makers

Managers make decisions and they want those decisions to be good decisions. In
this chapter, we’re going to study the steps in the decision-making process. We’ll
also look at the various things that influence a manager as he or she makes decisions.
Focus on the following learning outcomes as you read and study this chapter.

LEARNING OUTCOMES 

7.1 Describe the eight steps in the decision-making process.
7.2 Explain the four ways managers make decisions.
7.3 Classify decisions and decision-making conditions.
7.4 Describe different decision-making styles and discuss how biases affect decision making.
7.5 Identify effective decision-making techniques.

A MANAGER’S DILEMMA 

Everyone in an organization makes decisions, but decision making is particularly important in a manager’s job. Decision making is such an important part of all four managerial functions that decision making is said to be synonymous with managing. The complexity of managerial decision making ranges from routine choices to highly complicated issues. In Chapter 7, students learn about the decision-making process and study models and guidelines for making effective programmed and nonprogrammed decisions.

The opening situation in “A Manager’s Dilemma” describes the opening of Universal’s Wizarding World of Harry Potter.  At a cost of $200 million, this is a big gamble.  This innovative park, with state of the art live action robot technology, is positioned to be the new standard for theme park experiences.  Or it could be a huge failure.  Students are asked to place themselves in position of Thierry Coup, Universal’s vice president for creative development.  What decision criteria would they use?  How would they evaluate the effectiveness of Universal’s decision to build the new park? Can they foresee a situation in which they might have to retrace their steps in the decision-making process and begin again? How might your students use the decision-making process in their lives at the present time?

CHAPTER OUTLINE 

7.1 THE DECISION-MAKING PROCESS
 A decision is a choice made from two or more alternatives. The decision-making process is a set of eight steps that include identifying a problem, selecting an alternative, and evaluating the decision’s effectiveness. (See Exhibit 7-1 for an illustration of the decision-making process.)
A. Step 1:  Identifying a problem. A problem is a discrepancy between an existing and a desired state of affairs. In order to identify a problem, you as a manager should recognize and understand the three characteristics of problems:
1. You must be aware of the problem. Be sure to identify the actual problem rather than a symptom of the problem.
2. You must be under pressure to act. A true problem puts pressure on the manager to take action; a problem without pressure to act is a problem that can be postponed.
3. You must have the authority or resources to act. When managers recognize a problem and are under pressure to take action but do not have necessary resources, they usually feel that unrealistic demands are being put upon them.
B. Step 2:  Identifying decision criteria. Decision criteria are criteria that define what is relevant in a decision.
C. Step 3:  Allocating weights to the criteria. The criteria identified in   Step 2 of the decision-making process do not have equal importance, so the decision maker must assign a weight to each of the items in order to give each item accurate priority in the decision. Exhibit 7-2 lists the criteria and weights for Amanda’s purchase decision for new computers.
D. Step 4:  Developing alternatives. The decision maker must now identify viable alternatives that could resolve the problem.
E. Step 5:  Analyzing alternatives. Each of the alternatives must now be critically analyzed by evaluating it against the criteria established in steps 2 and 3. Exhibit 7-3 shows the values that Amanda assigned to each of her alternatives for a new computer. Exhibit 7-4 reflects the weighting for each alternative, as illustrated in Exhibits 7-2 and 7-3.
F. Step 7:  Selecting an alternative. This step to select the best alternative from among those identified and assessed is critical. If criteria weights have been used, the decision maker simply selects the alternative that received the highest score in Step 5.
G. Step 7: Implementing the alternative. The selected alternative must be implemented by effectively communicating the decision to the individuals who will be affected by it and winning their commitment to the decision.
H. Step 8:  Evaluating decision effectiveness. This last step in the decision-making process assesses the result of the decision to determine whether or not the problem has been resolved.

7.2 MANAGERS MAKING DECISIONS
 At this point in the study of Chapter 7, students will learn about the manager as a decision maker and how decisions are actually made in organizations. Exhibit 7-5 shows how decision making fits into the four functions of management. 
In this section, students examine how decisions are made, the types of problems and decisions faced by real-life managers, the conditions under which managers make decisions, and decision-making styles.
A. Making Decisions: Rationality. Managerial decision making is assumed to be rational—that is, making choices that are consistent and value-maximizing within specified constraints. If a manager could be perfectly rational, he or she would be completely logical and objective.
1. Rational decision making assumes that the manager is making decisions in the best interests of the organization, not in his or her own interests.
2. The assumptions of rationality can be met if the manager is faced with a simple problem in which (1) goals are clear and alternatives limited, (2) time pressures are minimal and the cost of finding and evaluating alternatives is low, (3) the organizational culture supports innovation and risk taking, and (4) outcomes are concrete and measurable.
B. Making Decisions: Bounded Rationality. In spite of these limits to perfect rationality, managers are expected to be rational as they make decisions. Because the perfectly rational model of decision making isn’t realistic, managers tend to operate under assumptions of bounded rationality, which is decision-making behavior that is rational, but limited (bounded) by an individual’s ability to process information.
1. Under bounded rationality, managers make satisficing decisions, in which they accept solutions that are “good enough.”
2. Managers’ decision making may be strongly influenced by the organization’s culture, internal politics, power considerations, and by a phenomenon called escalation of commitment—an increased commitment to a previous decision despite evidence that it may have been wrong.
C. Making Decisions: The Role of Intuition. Managers also regularly use their intuition. Intuitive decision making is a subconscious process of making decisions on the basis of experience and accumulated judgment. Exhibit 7-6 describes the five different aspects of intuition.
1. Making decisions on the basis of gut feeling doesn’t necessarily happen independently of rational analysis; the two complement each other.
2. Although intuitive decision making will not replace the rational decision-making process, it does play an important role in managerial decision making.
D. Making Decisions: The Role of Evidence-Based Management. The premise behind evidence-based management (EBMgt) is that any decision making process is likely to be enhanced through the use of relevant and reliable evidence.  EBMgt promotes the use of the best available evidence to improve management practice. 
1. The four essential elements of EBMgt are the decision maker’s expertise and judgment; external evidence that’s been evaluated by the decision maker; opinions, preferences, and values of those who have a stake in the decision; and relevant organizational (internal) factors such as context, circumstances, and organizational members.
2. The strength or influence of each of these elements on a decision will vary with each decision.
3. The key for managers is to recognize and understand the mindful, conscious choice as to which element(s) are most important and should be emphasized in making a decision.

7.3 TYPES OF DECISIONS AND DECISION-MAKING CONDITIONS
A. Types of Decisions. Managers encounter different types of problems and use different types of decisions to resolve them.
1. Structured problems are straightforward, familiar, and easily defined. In dealing with structured problems, a manager may use a programmed decision, which is a repetitive decision that can be handled by a routine approach. Managers rely on three types of programmed decisions:
a. A procedure is a series of interrelated sequential steps that can be used to respond to a structured problem.
b. A rule is an explicit statement that tells managers what they can or cannot do.
c. A policy is a guideline for making decisions.
2. Unstructured problems are problems that are new or unusual and for which information is ambiguous or incomplete. These problems are best handled by a nonprogrammed decision that is a unique decision that requires a custom-made solution.
3. Exhibit 7-7describes differences between programmed versus nonprogrammed decisions.
a. At higher levels in the organizational hierarchy, managers deal more often with difficult, unstructured problems and make nonprogrammed decisions in attempting to resolve these problems and challenges.
b. Lower-level managers handle routine decisions themselves, using programmed decisions. They let upper-level managers handle unusual or difficult decisions.

B. Decision-Making Conditions
1. Certainty is a situation in which a manager can make accurate decisions because all outcomes are known. Few managerial decisions are made under the condition of certainty.
2. More common is the situation of risk, in which the decision maker is able to estimate the likelihood of certain outcomes. Exhibit 7-8 shows an example of how a manager might make decisions using “expected value,” considering the conditions of risk.
3. Uncertainty is a situation in which the decision maker is not certain and cannot even make reasonable probability estimates concerning outcomes of alternatives.
a. The choice of alternative is influenced by the limited amount of information available to the decision maker.
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. .
2) A pessimistic manager will pursue a maximin choice, maximizing the minimum possible payoff. (See Exhibit 7-9)
3) The manager who desires to minimize the maximum “regret” will opt for a minimax choice. (See Exhibit 7-10)

LEADERS WHO MAKE A DIFFERENCE 

Mikhail D. Prokhorov knows about risky decisions.  As one of the growing number of Russian entrepreneurs, Mikhail became a billionaire taking advantage of the growing (and risky), metal and real estate markets in Russia. After his success in his own country, Mikhail is now trying his hand at becoming an NBA league owner. As the new majority owner of the New Jersey Nets, he says “I am real excited to take the worst team of the league and turn it into the best.”

7.4 DECISION-MAKING STYLES
 Managers have different styles in making decisions and solving problems. One perspective proposes that people differ along two dimensions in the way they approach decision making.
A.  Linear-Nonlinear Thinking Profile. 
1. Research shows that an individual’s thinking style reflects two dimensions: (1) the source of information you tend to use and (2) how you process that information (linear—rational, logical, analytical; or nonlinear—intuitive, creative, insightful).
2. These four dimensions are collapsed into two styles.  The linear thinking style is characterized by a person’s preference for using external data and facts and processing this information through rational, logical thinking to guide decisions and actions. The nonlinear thinking style is characterized by a preference for internal sources of information and processing this information with internal insights, feelings, and hunches to guide decisions and actions.
B. Decision-Making Biases and Errors
 Managers use different styles and “rules of thumb” (heuristics) to simplify their decision making.  See Exhibit 7-11 for the common decision making biases.
1. Overconfidence bias occurs when decision makers tend to think that they know more than they do or hold unrealistically positive views of themselves and their performance.
2. Immediate gratification bias describes decision makers who tend to want immediate rewards and avoid immediate costs.
3. The anchoring effect describes when decision makers fixate on initial information as a starting point and then, once set, fail to adequately adjust for subsequent information.
4. Selective perception bias occurs when decision makers selectively organize and interpret events based on their biased perceptions.
5. Confirmation bias occurs when decision makers seek out information that reaffirms their past choices and discount information that contradicts their past judgments.
7. Framing bias occurs when decision makers select and highlight certain aspects of a situation while excluding others.
7. Availability bias is seen when decision makers tend to remember events that are the most recent and vivid in their memory.
8. Decision makers who show representation bias assess the likelihood of an event based on how closely it resembles other events or sets of events.
9. Randomness bias describes the effect when decision makers try to create meaning out of random events.
10. The sunk costs error is when a decision maker forgets that current choices cannot correct the past. Instead of ignoring sunk costs, the decision maker cannot forget them. In assessing choices, the individual fixates on past expenditures rather than on future consequences.
11. Self-serving bias is exhibited by decision makers who are quick to take credit for their successes and blame failure on outside factors.
12. Hindsight bias is the tendency for decision makers to falsely believe, once the outcome is known, that they would have accurately predicted the outcome.

C. Overview Managerial Decision Making
1. Exhibit 7-12 provides an overview of managerial decision making. Managers want to make good decisions because doing so is in their best interests.
2. Regardless of the decision, it has been shaped by a number of factors, which have been discussed in Chapter Seven.

7.5 EFFECTIVE DECISION MAKING FOR TODAY’S WORLD
Today’s business world revolves around making decisions, which are often risky ones made with incomplete or inadequate information and under intense time pressure. How can managers make effective decisions under these conditions?
A. Understand cultural differences.
B. Know when it is time to call it quits.
C. Use an effective decision-making process.
D. Build highly reliable organizations (HROs) that practice five habits:
1. Do not be tricked by your own success.
2. Defer to the experts on the front lines.
3. Let unexpected circumstances provide the solution.
4. Embrace complexity.
5. Anticipate, but also recognize the limits to your ability to anticipate.

LET’S GET REAL
Tiffany Eulinger
Area Manager
Buckle
Kansas City, MO

Tiffany believes that the way to assess Universal’s decision to invest in the new Harry Potter attraction is guest satisfaction and attendance.  While the first year attendance may be the result of increased publicity and hype, long-term success is based on sales growth and costs.  As an area manager, Tiffany sees many new stores have good openings. But it is consistent growth and improvement on last year’s sales that truly proves store success.

Answers to Review and Discussion Questions 

1. Why is decision making often described as the essence of the manager’s job?
Decisions are made throughout the performance of 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.

2. Describe the eight steps in the decision-making process.
The decision-making process consists of eight steps: (1) identify problem; (2) identify decision criteria; (3) weight the criteria; (4) develop alternatives; (5) analyze alternatives; (6) select alternative; (7) implement alternative; and (8) evaluate decision effectiveness.

3. Compare and contrast the four ways managers make decisions.
The assumptions of rationality are as follows: the problem is clear and unambiguous; a single, well-defined goal is to be achieved; all alternatives and consequences are known; and the final choice will maximize the payoff. Bounded rationality says that managers make rational decisions but are bounded (limited) by their ability to process information. Satisficing happens when decision makers accept solutions that are good enough. With escalation of commitment, managers increase commitment to a decision even when they have evidence it may have been a wrong decision. Intuitive decision making means making decisions on the basis of experience, feelings, and accumulated judgment. Using evidence based management, a manager makes decisions based on the best available evidence.

4. 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 indicating how much risk taking is permitted and how much importance is placed on the effectiveness of the decisions made. For example, if an organizational culture rewards decisions that reinforce the status quo, these types of decisions will likely be made.

5. Explain the two types of problems and decisions. Contrast the three decision-making conditions.
Programmed decisions are repetitive decisions that can be handled by a routine approach and are used when the problem being resolved is straightforward, familiar, and easily defined (structured). Nonprogrammed decisions are unique decisions that require a custom- made solution and are used when the problems are new or unusual (unstructured) and for which information is ambiguous or incomplete. Certainty is a situation in which a manager can make accurate decisions because all outcomes are known. Risk is a situation in which a manager can estimate the likelihood of certain outcomes. Uncertainty is a situation in which a manager is not certain about the outcomes and can’t even make reasonable probability estimates.

6. All of us bring biases to the decisions we make. What types of biases might a manager have? What would be the drawbacks of having biases? Could there    be any advantages to having biases? Explain. What are the implications for managerial decision making?
 Students should be encouraged to identify biases that they have encountered or feel that they themselves might have. Examples could include the halo/horn effect, cultural biases, and age biases. The drawback of biases is their limiting effect on behavior. However, when managers are aware of potential biases, they can use their awareness to an advantage. They can better recognize biases held by others and respond more effectively as a result of their knowledge. Managers should be aware that biases can “cloud” a decision maker’s identification or evaluation of alternatives, which ultimately affect the final decision.

7. Would you call yourself a systematic or intuitive thinker? What are the decision-making implications of these labels? What are the implications for choosing an employer?
Student responses to these questions will vary. A systematic thinker is one who is more logical and rational in searching for and processing information. An intuitive thinker relies more on instincts and past experiences in searching for and processing information. The decision-making implication of this label is that it describes the way we think or process information and in turn, influences how we tend to make decisions. Organizations need both systematic and intuitive thinkers. Each of these styles provides a different perspective.

8.  “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 allow managers to gather information and analyze it more efficiently, utilizing computers does not necessarily allow managers to be more rational. Looking at the assumptions of rationality (see Exhibit 7.7), it is apparent that adding computers to the decision-making process does not guarantee perfectly rational decision making by managers.

9. How can managers blend the guidelines for making effective decisions in today’s world with the rationality and bounded rationality models of decision making, or can they?  Explain.
A balance is required. Under today’s business conditions (such as intense time pressure and higher degrees of risk and uncertainty), managers must practice sound decision-making approaches. Knowing when it’s time to quit, for example, is not inconsistent with rationality and bounded rationality.

10. Is there a difference between wrong decisions and bad decisions? Why do    good managers sometimes make wrong decisions? Bad decisions? How can managers improve their decision-making skills?
Time pressures, incomplete information, and higher levels of uncertainty in today’s business environment may lead to ineffective decision making.  Managers can improve their decision-making skills by focusing on six characteristics of effective decision-making, including focusing on important criteria, logic and consistency; blending subjective and objective thinking with analysis; requiring the information necessary to resolve a particular dilemma; gathering relevant and informed opinions; and remaining flexible.

ETHICS DILEMMA 

This dilemma involves the development of a video game called “Six Days in Fallujah.”  The makers of the game, Atomic Games, describes the game as a “documentary-style reconstruction that will be so true to the original battle, gamers will almost feel what it was like to fight in Fallujah in November 2004.”  The families of servicemen who died in this conflict see this as demeaning to their fallen relatives and trivializing the battle.  Students are asked if there are any serious ethical issues in Atomic’s decision to make this game and if the company should proceed with the game’s release.”  Something that students may take from this case is the importance of proper planning before implementing decisions.  In the end, bad press led to the game not being released.  Atomic had already sunk cost into game development, but could have avoided this loss by taking into account possible backlash from relatives before development.

SKILLS EXERCISE:  DEVELOPING YOUR  CREATIVITY SKILLS 

Creativity is an important skill for all managers – not just those in marketing and R&D. In this exercise, students work on developing their creativity skills using eight steps suggested by the authors.  To practice their new creativity skills, students can engage in a brainstorming exercise where they see how many words can be made from the letters in the word ‘brainstorm.’  To illustrate the usefulness of brainstorming this could be done as an entire class with someone assigned to write down the created words.  There are 95 possible words that can be generated.

WORKING TOGETHER:  TEAM EXERCISE 

In this team-based activity, small groups of students are to discuss previous decision-making experiences. They should discuss whether they feel they made good/bad decisions and what happened during the decision-making process that contributed to the quality of the decision. The group should develop a list of practical suggestions for making good decisions.

In preparation for this exercise, you might initiate a class discussion centered on a particular decision-making situation. Ask the class if anyone is considering making a large purchase, such as a car, stereo, computer, or house. Students can help this individual make the decision by offering suggestions following the eight steps of the decision-making process for making a “good decision.” Compiling a variety of decision criteria for a car purchase, for instance, and weighting each criterion can create interest and provide insight for students. Although one student may think that having heated car seats is a must, others may totally disregard this criterion. This class activity should help students to become more comfortable and skillful in using the decision-making process.

Your Turn to be a Manager 

• For one week, pay close attention to the decisions you make and how you make them. Write a description of five of those decisions, using the steps in the decision-making process as your guide. Also, describe whether you relied on external or internal sources of information to help you make each decision and whether you think you were more linear or nonlinear in how you processed that information.

• When you feel you haven’t made a good decision, assess how you could have made a better decision.

• Find two examples each of procedures, rules, and policies. Bring your examples to class and be prepared to share them.

• Write a procedure, a rule, and a policy for your instructor to use in your class. Be sure that each one is clear and understandable. And be sure to explain how it fits the characteristics of being a procedure, a rule, or a policy.

• Find three examples of managerial decisions described in any of the popular business periodicals (Wall Street Journal, BusinessWeek, Fortune, etc.). Write a paper describing each decision and any related information, such as what led to the decision, what happened as a result of the decision, etc. What did you learn about decision making from these examples?

• Interview two managers and ask them for suggestions on what it takes to be a good decision maker. Write down their suggestions and be prepared to present them in class.

• Steve’s and Mary’s suggested readings: Noel M. Tichy and Warren G. Bennis, Judgment: How Winning Leaders Make Great Calls (Portfolio, 2007); Gerd Gigerenzer, Gut Feelings: The Intelligence of the Unconscious (Viking, 2007); Stephen P. Robbins, Decide & Conquer: Make Winning Decisions and Take Control of Your Life (Financial Times Press, 2004); and John S. Hammond, Ralph L. Keeney, and Howard Raiffa, Smart Choices: A Practical Guide to Making  Better Decisions (Harvard Business School Press, 1999).

• Do a Web search on the phrase “101 dumbest moments in business.” Get the most current version of this end-of-year list. Choose three of the examples and describe what happened. What’s your reaction to each example? How could the managers have made better decisions?

• In your own words, write down three things you learned in this chapter about being a good manager.

• Self-knowledge can be a powerful learning tool. Go to mymanagementlab and complete these self-assessment exercises: How Well Do I Handle Ambiguity? How Well Do I Respond to Turbulent Change? and What’s My Decision-Making Style? Using the results of your assessments, identify personal strengths and weaknesses. What will you do to reinforce your strengths and improve your weaknesses?

ANSWERS TO CASE APPLICATION QUESTIONS 

The Curtain Falls
1. Would you characterize television programming decisions as structured or unstructured? Explain. What type of decision-making condition would you consider this to be? Explain.
According to the case, this decision was “a radical experiment.”  Because this was something that had never been done before, it can be seen as an unstructured decision.   Also, while it was known that this format would save money, they did not know if it would be accepted by viewers, making the condition one of uncertainty.

2. What criteria did NBC use in evaluating its initial decision to move Leno and O’Brien? Was that criteria appropriate? Why or why not?
It appears that NBC’s main criterion was cost of production.  Primetime 60-minute dramas are traditionally five times more expensive to produce than comedy-variety shows.  From this format’s failure in the prime time slot, it is obvious that other criteria should have been taken into consideration.  For example, samples of viewers could have been surveyed to see if they would watch the format in primetime.  It is also possible that there are different viewers that watch television at those times.

3. Evaluate Jeff Gaspin’s statement, “I don’t think it’s wrong to take chances. . . . Sometimes they work. Sometimes they don’t.” What does it say about his decision-making style?
Mr. Gaspin appears to have a non-linear thinking style.  Due to the lack of existing information, Mr. Gaspin decided to take a chance and use his own feelings and intuition to guide his actions.  Someone with a linear style would have requested more information and probably tested the concept more thoroughly before committing the network to a final decision.

4. Describe how NBC executives could have used each of the following to make better decisions: (a) rationality, (b) bounded rationality, (c) intuition, and (d) evidence-based management.
In the case of rationality, the network executives would have followed a series of logical steps to help them reach the decision about prime-time format.  This would have included a thorough evaluation of the decision criteria, criteria weights, possible alternatives, and evaluation of those alternative’s outcomes.  In a decision involving bounded rationality, the decision would have been made based on a limited set of criteria and alternatives.  In the case of intuition, a number of factors would have been considered including past experience, manager feelings, manager’s skills, subconscious mental process, and managerial values.  Finally, the case of evidence-based management, the network executives would have relied on available information on the success of similar formats.

Underwater Chaos

1. What’s your reaction to this story? What does it illustrate about decision making?
With the vast sums of money invested into large projects like the Eurotunnel (approximately £9.5bn), it amazes observers that important information (i.e. the affect of the cold weather) would not be considered beforehand.  However, this situation is fairly common in projects that use groundbreaking technologies in extreme environments.   These types of projects occur under conditions of uncertainty and great risk.  It is common for these projects to experience unexpected ‘hiccups.’ The best case scenario in these types of projects is to plan as to avoid life threatening catastrophes and to have contingencies plans in case of emergencies.

2. How could the decision-making process have helped in both the response to the crisis situation and in preventing it from happening?
Better planning is always suggested after the fact.  Consideration of the effects of extreme weather could have been made part of the testing of the train and track equipment before it was put into use. While the situation was developing, emergency plans should have been in place to deal with a possible breakdown and better communication equipment made available.  Eurostar should have been clued into possible problems when other forms of transportation broke down during the extreme weather.  It is important to note that Eurostar did take the necessary actions after the incident to correct communication problems and retrofit train equipment.

3. Could procedures, policies, and rules play any role in future crisis situations like this one? If so, how? If not, why not?
Students may not be aware that most companies have plans for dealing with emergencies. Airlines are a good example of firms that practice risk management.   These firms develop contingency plans for minor and worse case scenarios.  Employees are trained in how to handle emergencies and backup/emergency equipment is distributed throughout the organization.  However, unexpected emergencies are by their very nature difficult to plan for.   It is almost impossible to plan for every emergency.  For example, after the first space shuttle disaster, NASA grounded the entire program and put together a small army of engineers and scientists to mitigate risk to the crew.  Unfortunately, the shuttle program by nature is risky and again suffered the loss of another ship and crew.

4. What could other organizations learn from this incident?
As the adage goes, ‘accidents happen.’  Learning from mistakes and the actions that a company takes during an event like this is what’s important.  Ask students if they have experienced a similar situation. Students may be able to relate to being stuck in a plane on a runway or in a hotel when services were down. How did the company respond?