MANAGEMENT AND ORGANIZATIONS

CHAPTER 1

Question 1: A/13, Q3
Define management, also discuss in detail Mintzberg’s 10 management roles and how they are used to
explain what managers do? (Description and examples of identifiable activities)

Question 1: A/09, Q1
Describe Mintzberg’s 10 management roles and how they are used to explain what managers do?
(Description and examples of identifiable activities)

Management
Management involves coordinating and overseeing the work activities of others so that their activities
are completed efficiently and effectively. Management involves ensuring that work activities are
completed efficiently and effectively by the people responsible for doing them, or at least that’s what
managers aspire to do.

Efficiency refers to getting the most output from the least amount of inputs. Effectiveness is often
described as “doing the right things”—that is, doing those work activities that will help the organization
reach its goals.

Mintzberg’s 10 Management Roles

Mintzberg concluded that what managers do can best be described by looking at the managerial roles
they engage in at work. The term managerial roles refers to specific actions or behaviors expected of
and exhibited by a manager.

When describing what managers do from a roles perspective, we’re not looking at a specific person per
se, but at the expectations and responsibilities that are associated with being the person in that role—
the role of a manager. Roles are grouped around interpersonal relationships, the transfer of information
and decision making.

The interpersonal roles are ones that involve people (subordinates and persons outside the
organization) and other duties that are ceremonial and symbolic in nature. The three interpersonal roles
include figurehead, leader, and liaison. The informational roles involve collecting, receiving, and
disseminating information. The three informational roles include monitor, disseminator, and
spokesperson. Finally, the decisional roles entail making decisions or choices. The four decisional roles
include entrepreneur, disturbance handler, resource allocator, and negotiator.
Interpersonal Roles

• Figurehead

• Leader

• Liaison

Informational Roles

• Monitor

• Disseminator

• Spokesperson

Decisional Roles

• Entrepreneur

• Disturbance handler

• Resource allocator

• Negotiator

As managers perform these roles, Mintzberg proposed that their activities included both reflection
(thinking) and action (doing). Mintzberg’s role categories and the evidence generally supports the idea
that managers—regardless of the type of organization or level in the organization—perform similar
roles. However, the emphasis that managers give to the various roles seems to change with
organizational level. At higher levels of the organization, the roles of disseminator, figurehead,
negotiator, liaison, and spokesperson are more important; while the leader role (as Mintzberg defined
it) is more important for lower-level managers than it is for either middle or top level managers.

UNDERSTANDING MANAGEMENT'S
CONTEXT
CHAPTER 2

Question 1: A/09, Q3
What is organization culture? Describe the seven dimensions of organizational culture. Will strong or
weak cultures have the greater impact on managers? Why?
Question 2: A/13, Q2
Describe seven dimensions of organizational culture. Discuss how culture is transmitted to employee?

Organizational Culture
Organizational culture has been described as the shared values, principles, traditions and ways of doing
things that influence the way organizational members act. In most organizations, these shared values
and practices have evolved over time and determine, to a large extent, how “things are done around
here.”Our definition of culture implies three things.

 First, culture is a perception. It’s not something that can be physically touched or seen, but
employees perceive it on the basis of what they experience within the organization.
 Second, organizational culture is descriptive. It’s concerned with how members perceive the
culture and describe it, not with whether they like it.
 Finally, even though individuals may have different backgrounds or work at different
organizational levels, they tend to describe the organization’s culture in similar terms. That’s the
shared aspect of culture.

Dimensions of Organizational Culture

Research suggests seven dimensions that can be used to describe an organization’s culture. These
dimensions (shown in Exhibit above) range from low to high, meaning it’s not very typical of the culture
(low) or is very typical of the culture (high). Describing an organization using these seven dimensions
gives a composite picture of the organization’s culture.

The seven dimensions of organizational culture are:

1. Attention to Detail - This characteristic of organizational culture dictates the degree to which
employees are expected to be accurate in their work. A culture that places a high value on
attention to detail expects their employees to perform their work with precision. A culture that
places a low value on this characteristic does not.
2. Outcome Orientation - Companies that focus on results, but not on how the results are
achieved, place a high emphasis on this value of organizational culture. A company that instructs
its sales force to do whatever it takes to get sales orders has a culture that places a high value
on the emphasis on outcome characteristic.
3. People Orientation - Companies that place a high value on this characteristic of organizational
culture place a great deal of importance on how their decisions will affect the people in their
organizations. For these companies, it is important to treat their employees with respect and
dignity.
4. Team Orientation - Companies that organize work activities around teams instead of individuals
place a high value on this characteristic of organizational culture. People who work for these
types of companies tend to have a positive relationship with their coworkers and managers.
5. Aggressiveness - This characteristic of organizational culture dictates whether group members
are expected to be assertive or easygoing when dealing with companies they compete with in
the marketplace. Companies with an aggressive culture place a high value on competitiveness
and outperforming the competition at all costs.
6. Stability - A company whose culture places a high value on stability are rule-oriented,
predictable, and bureaucratic in nature. These types of companies typically provide consistent
and predictable levels of output and operate best in non-changing market conditions.
7. Innovation and Risk taking - Companies with cultures that place a high value on innovation
encourage their employees to take risks and innovate in the performance of their jobs.
Companies with cultures that place a low value on innovation expect their employees to do their
jobs the same way that they have been trained to do them, without looking for ways to improve
their performance.

In many organizations, one cultural dimension often is emphasized more than the others and essentially
shapes the organization’s personality and the way organizational members work. For instance, at Sony
Corporation the focus is product innovation (innovation and risk taking). The company “lives and
breathes” new product development and employees’ work behaviors support that goal. In contrast,
Southwest Airlines has made its employees a central part of its culture (people orientation). The
dimensions can create significantly different cultures.
All organizations have cultures, but not all cultures equally influence employees’ behaviors and actions.
Strong cultures—those in which the key values are deeply held and widely shared—have a greater
influence on employees than do weaker cultures. The more employees accept the organization’s key
values and the greater their commitment to those values, the stronger the culture is. Most organizations
have moderate to strong cultures; that is, there is relatively high agreement on what’s important, what
defines “good” employee behavior, what it takes to get ahead, and so forth. The stronger a culture
becomes, the more it affects the way managers plan, organize, lead, and control.

Why is having a strong culture important? For one thing, in organizations with strong cultures,
employees are more loyal than are employees in organizations with weak cultures. Research also
suggests that strong cultures are associated with high organizational performance. And it’s easy to
understand why. After all, if values are clear and widely accepted, employees know what they’re
supposed to do and what’s expected of them, so they can act quickly to take care of problems. However,
the drawback is that a strong culture also might prevent employees from trying new approaches
especially when conditions are changing rapidly.

Discuss how culture is transmitted to employee?

Employees “learn” an organization’s culture in a number of ways. The most common are stories, rituals,
material symbols, and language.

 STORIES Organizational stories typically contain a narrative of significant events or people

including such things as the organization’s founders, rule breaking, reactions to past mistakes,
and so forth. To help employees learn the culture, organizational stories anchor the present in
the past, provide explanations and legitimacy for current practices, exemplify what is important
to the organization, and provide compelling pictures of an organization’s goals.
 RITUALS Corporate rituals are repetitive sequences of activities that express and reinforce the
important values and goals of the organization. Rituals plays a significant role in establishing
desired levels of motivation and behavioral expectations, which is, after all, what management
hopes an organization’s culture does.
 MATERIAL ARTIFACTS AND SYMBOLS When you walk into different businesses, do you get a
feel for what type of work environment it is—formal, casual, fun, serious, and so forth? These
reactions demonstrate the power of material symbols or artifacts in creating an organization’s
personality. The layout of an organization’s facilities, how employees dress, types of
automobiles provided to top executives and the availability of corporate aircraft are examples of
material symbols.
Others include the size of offices, the elegance of furnishings, executive perks employee fitness
centers or on-site dining facilities, and reserved parking spaces for certain employees.
Material symbols convey to employees who is important and the kinds of behavior (for example,
risk taking, conservative, authoritarian, participative, individualistic, and so forth) that are
expected and appropriate.
 LANGUAGE Many organizations and units within organizations use language as a way to identify
and unite members of a culture. By learning this language, members attest to their acceptance
 of the culture and their willingness to help preserve it. Over time, organizations often develop
unique terms to describe equipment, key personnel, suppliers, customers, processes, or
products related to its business. New employees are frequently overwhelmed with acronyms
and jargon that, after a short period of time, become a natural part of their language. Once
learned, this language acts as a common denominator that bonds members.

MANAGERS AS DECISION MAKERS

CHAPTER 7

Question 1: A/13, Q6
Describe four decision making styles. Also discuss 12 decision making errors and biases that managers
may exhibit.

Decision-Making Styles
Personality and individual differences affect our decisions. Two of these variables are particularly
relevant to organizational decisions: the individual’s decision-making style and level of moral
development. The decision-styles model below identifies four approaches to decision making. The
model illustrates that people differ along two dimensions: in their thinking styles (some are logical and
rational, others intuitive and creative); in their tolerance for ambiguity. People using the directive style
dislike ambiguity and prefer rationality. Those using the analytic style confront ambiguity by demanding
more alternatives.

Dimensions of Decision-Making Styles

Ways of thinking

Rational, orderly, and consistent

versus

Intuitive, creative, and unique

Tolerance for ambiguity

Low tolerance: require consistency and order

versus

High tolerance: multiple thoughts simultaneously

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

Behavioral - Avoid conflict by working well with others and being receptive to suggestions

The Four 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.

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.

Decision-Making Biases and Errors

Heuristics - using “rules of thumb” to simplify decision making.

Overconfidence Bias - holding unrealistically positive views of oneself and one’s performance.

Immediate Gratification Bias - choosing alternatives that offer immediate rewards and avoid
immediate costs.

Anchoring Effect - fixating on initial information and ignoring subsequent information.

Selective Perception Bias - selecting, organizing and interpreting events based on the decision
maker’s biased perceptions.

Confirmation Bias - seeking out information that reaffirms past choices while discounting
contradictory information.

Framing Bias - selecting and highlighting certain aspects of a situation while ignoring other aspects.

Availability Bias - losing decision-making objectivity by focusing on the most recent events.

Representation Bias - drawing analogies and seeing identical situations when none exist.

Randomness Bias - creating unfounded meaning out of random events.

Sunk Costs Errors - forgetting that current actions cannot influence past events and relate only to
future consequences.

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 (after-the-fact).

Question 2: A/09, Q4
Describe well structured problems and programmed decision. Differentiate between procedures,
policies and rules. Describe poorly structured problems and non programmed decisions.

Depending on the nature of the problem, a manager can use one of two different types of decisions.

 Structured problems and programmed decisions

 Unstructured problems and nonprogrammed decisions

Structured Problems and Programmed Decisions

Structured problems are straightforward, familiar, and easily defined problems. 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. For
example, the manager offers to have the coat cleaned at the restaurant’s expense. This is what we call a
programmed decision, a repetitive decision that can be handled by a routine approach. Because the
problem is structured, the manager doesn’t have to go to the trouble and expense of going through an
involved decision process.

The “develop-the-alternatives” stage of the decision-making process either doesn’t exist or is given little
attention. Why? Because once the structured problem is defined, the solution is usually self-evident or
at least reduced to a few alternatives that are familiar and have proved successful in the past. The
spilled drink on the customer’s coat doesn’t require the restaurant manager to identify and weight
decision criteria or to develop a long list of possible solutions. Instead, the manager relies on one of
three types of programmed decisions: procedure, rule, or policy.

A procedure is a series of sequential steps a manager uses to respond to a structured problem. The only
difficulty is identifying the problem. Once it’s clear, so is the procedure. For instance, a purchasing
manager receives a request from a warehouse manager for PDA handhelds for the inventory clerks. The
purchasing manager knows how to make this decision by following the established purchasing
procedure.

A rule is an explicit statement that tells a manager what can or cannot be done. Rules are frequently
used because they’re simple to follow and ensure consistency. For example, rules about lateness and
absenteeism permit supervisors to make disciplinary decisions rapidly and fairly.

The third type of programmed decisions is a policy, which is a guideline for making a decision. In
contrast to a rule, a policy establishes general parameters for the decision maker rather than specifically
stating what should or should not be done. Policies typically contain an ambiguous term that leaves
interpretation up to the decision maker. Here are some sample policy statements:

 The customer always comes first and should always be satisfied.

 We promote from within, whenever possible.
 Employee wages shall be competitive within community standards.

Notice that the terms satisfied, whenever possible, and competitive require interpretation. For instance,
the policy of paying competitive wages doesn’t tell a company’s human resources manager the exact
amount he or she should pay, but it does guide them in making the decision.

Unstructured (or poorly structured) Problems and Nonprogrammed

Decisions
Not all the problems managers face can be solved using programmed decisions. Many organizational
situations involve unstructured problems, which are problems that are new or unusual and for which
information is ambiguous or incomplete. Like the problem facing restaurant managers in New York City
who must decide how to modify their businesses to comply with the new law. When problems are
unstructured, managers must rely on nonprogrammed decision making in order to develop unique
solutions.

Nonprogrammed decisions are unique and nonrecurring and involve custom-made solutions. 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.

Question 1: A/14, Q5
Elaborate various steps of decision making process.

Managers at all levels and in all areas of organizations make decisions. That is, they make choices. For
instance, top-level managers make decisions about their organization’s goals, where to locate
manufacturing facilities, or what new markets to move into. Middle and lower-level managers make
decisions about production schedules, product quality problems, pay raises, and employee discipline.
Making decisions isn’t something that just managers do; all organizational members make decisions that
affect their jobs and the organization they work for. But our focus in this chapter is on how managers
make decisions.

Although decision making is typically described as choosing among alternatives, that view is too
simplistic. Why? Because decision making is a process, not just a simple act of choosing among
alternatives. This process is as relevant to personal decisions as it is to corporate decisions. Let’s use an
example—a manager deciding what laptop computers to purchase—to illustrate the steps in the
process.

Step 1: Identifying a Problem

Your team is dysfunctional, your customers are leaving, or your plans are no longer relevant. Every
decision starts with a problem, a discrepancy between an existing and a desired condition. Amanda is a
sales manager whose reps need new laptops because their old ones are outdated and inadequate for
doing their job. To make it simple, assume it’s not economical to add memory to the old computers and
it’s the company’s policy to purchase, not lease. Now we have a problem—a disparity between the sales
reps’ current computers (existing condition) and their need to have more efficient ones (desired
condition). Amanda has a decision to make.

How do managers identify problems? In the real world, most problems don’t come with neon signs
flashing “problem.” When her reps started complaining about their computers, it was pretty clear to
Amanda that something needed to be done, but few problems are that obvious. Managers also have to
be cautious not to confuse problems with symptoms of the problem. Is a 5 percent drop in sales a
problem? Or are declining sales merely a symptom of the real problem, such as poor-quality products,
high prices, or bad advertising? Also, keep in mind that problem identification is subjective. What one
manager considers a problem might not be considered a problem by another manager. In addition, a
manager who resolves the wrong problem perfectly is likely to perform just as poorly as the manager
who doesn’t even recognize a problem and does nothing. As you can see, effectively identifying
problems is important, but not easy.

Step 2: Identifying Decision Criteria

Once a manager has identified a problem, he or she must identify the decision criteria that are
important or relevant to resolving the problem. Every decision maker has criteria guiding his or her
decisions even if they’re not explicitly stated. In our example, Amanda decides after careful
consideration that memory and storage capabilities, display quality, battery life, warranty, and carrying
weight are the relevant criteria in her decision.

Step 3: Allocating Weights to the Criteria

If the relevant criteria aren’t equally important, the decision maker must weight the items in order to
give them the correct priority in the decision. How? A simple way is to give the most important criterion
a weight of 10 and then assign weights to the rest using that standard. Of course, you could use any
number as the highest weight. The weighted criteria for our example are shown below:

Memory and storage 10

Battery life 8

Carrying weight 6

Warranty 4

Display quality 3

Step 4: Developing Alternatives

The fourth step in the decision-making process requires the decision maker to list viable alternatives
that could resolve the problem. In this step, a decision maker needs to be creative. And the alternatives
are only listed, not evaluated just yet. Our sales manager, Amanda, identifies eight laptops as possible
choices.

Possible Alternatives
Step 5: Analyzing Alternatives

Once alternatives have been identified, a decision maker must evaluate each one. How? By using the
criteria established in Step 2. Exhibit 7-3 shows the assessed values that Amanda gave each alternative
after doing some research on them. Keep in mind that these data represent an assessment of the eight
alternatives using the decision criteria, but not the weighting. When you multiply each alternative by the
assigned weight, you get the weighted alternatives as shown in Exhibit 7-4. The total score for each
alternative, then, is the sum of its weighted criteria.

Evaluation of Alternatives

Sometimes a decision maker might be able to skip this step. If one alternative scores highest on every
criterion, you wouldn’t need to consider the weights because that alternative would already be the top
choice. Or if the weights were all equal, you could evaluate an alternative merely by summing up the
assessed values for each one. For example, the score for the HP ProBook would be 36 and the score for
the Sony NW would be 35.

Step 6: Selecting an Alternative

The sixth step in the decision-making process is choosing the best alternative or the one that generated
the highest total in Step 5. In our example (Exhibit 7-4), Amanda would choose the Dell Inspiron because
it scored higher than all other alternatives (249 total).

Step 7: Implementing the Alternative

In step 7 in the decision-making process, you put the decision into action by conveying it to those
affected and getting their commitment to it. We know that if the people who must implement a
decision participate in the process, they’re more likely to support it than if you just tell them what to do.
Another thing managers may need to do during implementation is reassess the environment for any
changes, especially if it’s a long-term decision. Are the criteria, alternatives, and choice still the best
ones, or has the environment changed in such a way that we need to reevaluate?

Step 8: Evaluating Decision Effectiveness

The last step in the decision-making process involves evaluating the outcome or result of the decision to
see whether the problem was resolved. If the evaluation shows that the problem still exists, then the
manager needs to assess 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 you to redo an earlier step or might even require starting the whole process over.

Question 2: A/14b
Elaborate the eight steps in the decision making process.

Question 3: A/13, Q3
Describe the eight steps in the decision making process.

Question 4: A/12, Q3
Explain eight steps of decision making process.

Question 6: A/11, Q4
Define decision making process. Describe the eight steps in decision making process.

Question 5: A/12b, Q4
Briefly explain various types of decision and decision making conditions.

Types of Decisions and Decision-Making Conditions

Restaurant managers in New York City make routine decisions weekly about purchasing food supplies
and scheduling employee work shifts. It’s something they’ve done numerous times. But now they’re
facing a different kind of decision—one they’ve never encountered— how to adapt to the new law
requiring that nutritional information be posted.

Types of Decisions

Such situations aren’t all that unusual. Managers in all kinds of organizations face different types of
problems and decisions as they do their jobs. Depending on the nature of the problem, a manager can
use one of two different types of decisions.

Structured Problems and Programmed Decisions. Some problems are straightforward. The decision
maker’s goal is clear, the problem is familiar, and information about the problem is easily defined and
complete. Examples might include when a customer returns a purchase to a store, when a supplier is
late with an important delivery, a news team’s response to a fast-breaking event, or a college’s handling
of a student wanting to drop a class. Such situations are called structured problems because they’re
straightforward, familiar, and easily defined. 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. For example, the manager offers to have the
coat cleaned at the restaurant’s expense. This is what we call a programmed decision, a repetitive
decision that can be handled by a routine approach. Because the problem is structured, the manager
doesn’t have to go to the trouble and expense of going through an involved decision process. The
“develop-the-alternatives” stage of the decision-making process either doesn’t exist or is given little
attention. Why? Because once the structured problem is defined, the solution is usually self-evident or
at least reduced to a few alternatives that are familiar and have proved successful in the past. The
spilled drink on the customer’s coat doesn’t require the restaurant manager to identify and weight
decision criteria or to develop a long list of possible solutions. Instead, the manager relies on one of
three types of programmed decisions: procedure, rule, or policy.

A procedure is a series of sequential steps a manager uses to respond to a structured problem. The only
difficulty is identifying the problem. Once it’s clear, so is the procedure. For instance, a purchasing
manager receives a request from a warehouse manager for 15 PDA handhelds for the inventory clerks.
The purchasing manager knows how to make this decision by following the established purchasing
procedure.

A rule is an explicit statement that tells a manager what can or cannot be done. Rules are frequently
used because they’re simple to follow and ensure consistency. For example, rules about lateness and
absenteeism permit supervisors to make disciplinary decisions rapidly and fairly.

The third type of programmed decisions is a policy, which is a guideline for making a decision. In
contrast to a rule, a policy establishes general parameters for the decision maker rather than specifically
stating what should or should not be done. Policies typically contain an ambiguous term that leaves
interpretation up to the decision maker. Here are some sample policy statements:

 The customer always comes first and should always be satisfied.

 We promote from within, whenever possible.
 Employee wages shall be competitive within community standards.

Notice that the terms satisfied, whenever possible, and competitive require interpretation. For instance,
the policy of paying competitive wages doesn’t tell a company’s human resources manager the exact
amount he or she should pay, but it does guide them in making the decision.

Unstructured Problems and Nonprogrammed Decisions. Not all the problems managers face can be
solved using programmed decisions. Many organizational situations involve unstructured problems,
which are problems that are new or unusual and for which information is ambiguous or incomplete.
Whether to build a new manufacturing facility in China is an example of an unstructured problem. So,
too, is the problem facing restaurant managers in New York City who must decide how to modify their
businesses to comply with the new law. When problems are unstructured, managers must rely on
nonprogrammed decision making in order to develop unique solutions. Nonprogrammed decisions are
unique and nonrecurring and involve custom-made solutions.

The differences between programmed and nonprogrammed decisions

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. Why? Because lower-level managers handle the
routine decisions and let upper-level managers deal with the unusual or difficult decisions. Also, upper-
level managers delegate routine decisions to their subordinates so they can deal with more difficult
issues.20 Thus, few managerial decisions in the real world are either fully programmed or
nonprogrammed. Most fall somewhere in between.

Decision-Making Conditions

When making decisions, managers may face three different conditions: certainty, risk, and uncertainty.
Let’s look at the characteristics of each.

Certainty. The ideal situation for making decisions is one of certainty, which is a situation where a
manager can make accurate decisions because the outcome of every alternative is known. For example,
when North Dakota’s state treasurer decides where to deposit excess state funds, he knows exactly the
interest rate being offered by each bank and the amount that will be earned on the funds. He is certain
about the outcomes of each alternative. As you might expect, most managerial decisions aren’t like this.

Risk. A far more common situation is one of risk, conditions in which the decision maker is able to
estimate the likelihood of certain outcomes. Under risk, managers have historical data from past
personal experiences or secondary information that lets them assign probabilities to different
alternatives. Let’s do an example.
Suppose that you manage a Colorado ski resort and you’re thinking about adding another lift. Obviously,
your decision will be influenced by the additional revenue that the new lift would generate, which
depends on snowfall. You have fairly reliable weather data from the last 10 years on snowfall levels in
your area—three years of heavy snowfall, five years of normal snowfall, and two years of light snow.
And you have good information on the amount of revenues generated during each level of snow. You
can use this information to help you make your decision by calculating expected value—the expected
return from each possible outcome—by multiplying expected revenues by snowfall probabilities. The
result is the average revenue you can expect over time if the given probabilities hold. As Exhibit 7-8
shows, the expected revenue from adding a new ski lift is $687,500. Of course, whether that’s enough to
justify a decision to build depends on the costs involved in generating that revenue.

Uncertainty. What happens if you face a decision where you’re not certain about the outcomes and
can’t even make reasonable probability estimates? We call this condition uncertainty. Managers do face
decision-making situations of uncertainty. Under these conditions, the choice of alternative is influenced
by the limited amount of available information and by the psychological orientation of the decision
maker. An optimistic manager will follow a maximax choice (maximizing the maximum possible payoff);
a pessimist will follow a maximin choice (maximizing the minimum possible payoff); and a manager who
desires to minimize his maximum “regret” will opt for a minimax choice. Let’s look at these different
choice approaches using an example.

A marketing manager at Visa has determined four possible strategies (S1, S2, S3, and S4) for promoting
the Visa card throughout the West Coast region of the United States. The marketing manager also
knows that major competitor MasterCard has three competitive actions (CA1, CA2, CA3) it’s using to
promote its card in the same region. For this example, we’ll assume that the Visa manager had no
previous knowledge that would allow her to determine probabilities of success of any of the four
strategies. She formulates the matrix shown in Exhibit 7-9 to show the various Visa strategies and the
resulting profit depending on the competitive action used by MasterCard.
In this example, if our Visa manager is an optimist, she’ll choose strategy 4 (S4) because that could
produce the largest possible gain: $28 million. Note that this choice maximizes the maximum possible
gain (maximax choice).

If our manager is a pessimist, she’ll assume that only the worst can occur. The worst outcome for each
strategy is as follows: S1 = $11 million; S2 = $9 million; S3 = $15 million; S4 = $14 million. These are the
most pessimistic outcomes from each strategy. Following the maximin choice, she would maximize the
minimum payoff; in other words, she’d select S3 ($15 million is the largest of the minimum payoffs).

In the third approach, managers recognize that once a decision is made, it will not necessarily result in
the most profitable payoff. There may be a “regret” of profits given up—regret referring to the amount
of money that could have been made had a different strategy been used. Managers calculate regret by
subtracting all possible payoffs in each category from the maximum possible payoff for each given
event, in this case for each competitive action. For our Visa manager, the highest payoff, given that
MasterCard engages in CA1, CA2, or CA3, is $24 million, $21 million, or $28 million, respectively (the
highest number in each column). Subtracting the payoffs in Exhibit 7-9 from those figures produces the
results shown in Exhibit 7-10.

The maximum regrets are S1 = $17 million, S2 = $15 million, S3 = $13 million, and S4 = $7 million. The
minimax choice minimizes the maximum regret, so our Visa manager would choose S4. By making this
choice, she’ll never have a regret of profits given up of more than $7 million. This result contrasts, for
example, with a regret of $15 million had she chosen S2 and MasterCard had taken CA1.

Although managers try to quantify a decision when possible by using payoff and regret matrices,
uncertainty often forces them to rely more on intuition, creativity, hunches, and “gut feel.”

Question 7: A/11b, Q4
Describe two decision making styles. Discuss the various decision-making biases.

Decision-Making Styles
William D. Perez’s tenure as Nike’s CEO lasted a short and turbulent 13 months. Analysts attributed his
abrupt dismissal to a difference in decision-making approaches between him and Nike co-founder Phil
Knight. Perez tended to rely more on data and facts when making decisions, whereas Knight highly
valued, and had always used, his judgment and feelings to make decisions.23 As this example clearly
shows, managers have different styles when it comes to making decisions.

Linear–Nonlinear Thinking Style Profile

Suppose that you’re a new manager. How will you make decisions? Recent research done with four
distinct groups of people says that the way a person approaches decision making is likely affected by his
or her thinking style.24Your thinking style reflects two things: (1) the source of information you tend to
use (external data and facts OR internal sources such as feelings and intuition), and (2) whether you
process that information in a linear way (rational, logical, analytical) OR a nonlinear way (intuitive,
creative, insightful). These four dimensions are collapsed into two styles. The first, 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 second, nonlinear
thinking style, is characterized by a preference for internal sources of information (feelings and
intuition) and processing this information with internal insights, feelings, and hunches to guide decisions
and actions. Look back at the earlier Nike example and you’ll see both styles described.

Managers need to recognize that their employees may use different decision-making styles. Some
employees may take their time weighing alternatives and relying on how they feel about it while others
rely on external data before logically making a decision. These differences don’t make one person’s
approach better than the other. It just means that their decision making styles are different.

Decision-Making Biases and Errors

When managers make decisions, they not only use their own particular style, they may use “rules of
thumb,” or heuristics, to simplify their decision making. Rules of thumb can be useful because they help
make sense of complex, uncertain, and ambiguous information. 25 Even though managers may use rules
of thumb, that doesn’t mean those rules are reliable. Why? Because they may lead to errors and biases
in processing and evaluating information. Exhibit 7-11 identifies twelve common decision errors and
biases that managers make. Let’s look at each.26

When decision makers tend to think they know more than they do or hold unrealistically positive views
of themselves and their performance, they’re exhibiting the overconfidence bias. The immediate
gratification bias describes decision makers who tend to want immediate rewards and to avoid
immediate costs. For these individuals, decision choices that provide quick payoffs are more appealing
than those with payoffs in the future. The anchoring effect describes how decision makers fixate on
initial information as a starting point and then, once set, fail to adequately adjust for subsequent
information. First impressions, ideas, prices, and estimates carry unwarranted weight relative to
information received later. When decision makers selectively organize and interpret events based on
their biased perceptions, they’re using the selective perception bias. This influences the information
they pay attention to, the problems they identify, and the alternatives they develop. Decision makers
who seek out information that reaffirms their past choices and discount information that contradicts
past judgments exhibit the confirmation bias. These people tend to accept at face value information that
confirms their preconceived views and are critical and skeptical of information that challenges these
views. The framing bias is when decision makers select and highlight certain aspects of a situation while
excluding others.

By drawing attention to specific aspects of a situation and highlighting them, while at the same time
downplaying or omitting other aspects, they distort what they see and create incorrect reference points.
The availability bias happens when decisions makers tend to remember events that are the most recent
and vivid in their memory. The result? It distorts their ability to recall events in an objective manner and
results in distorted judgments and probability estimates. When decision makers assess the likelihood of
an event based on how closely it resembles other events or sets of events, that’s the representation
bias. Managers exhibiting this bias draw analogies and see identical situations where they don’t exist.
The randomness bias describes the actions of decision makers who try to create meaning out of random
events. They do this because 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. The sunk
costs error occurs when decision makers forget that current choices can’t correct the past. They
incorrectly fixate on past expenditures of time, money, or effort in assessing choices rather than on
future consequences. Instead of ignoring sunk costs, they can’t forget them. Decision makers who are
quick to take credit for their successes and to blame failure on outside factors are exhibiting the self-
serving bias. Finally, the hindsight bias is the tendency for decision makers to falsely believe that they
would have accurately predicted the outcome of an event once that outcome is actually known.

Question 8: A/18, Q3
Explain the two types of problems and decisions. Contrast the three decision-making conditions.