CHAPTER 7:

The decision-
making process
 The decision-making process
A decision is a choice that is made among a number of available
alternatives to address a problem or an opportunity.
 Step 1: Identify the need for a decision
Managers use learned scripts to recognize (or fail to recognize)
whether a situation requires a decision.
Cognitive scripts are learned guidelines or procedures that help people
interpret and respond to what is happening around them.
 Step 2: Develop alternative responses
Managers can respond in one of three ways to the need for
making a decision:
1) do nothing
2) apply an existing routine (i.e., make a programmed decision)
In programmed decisions the response to an organizational
problem or opportunity is chosen from a set of standard
alternatives.
3) develop a new routine (i.e., make a non-programmed decision)

A non-programmed decision involves developing and choosing

a new way of dealing with a problem or opportunity.
 Step 3: Choose the appropriate alternative
How a choice is made depends on two key factors:
1) the quality of knowledge available to decision-makers about the
outcomes that are likely to result with each of the alternatives, and

2) the level of agreement among decision-makers regarding an

organization’s aims and the best means to achieve those aims
 Step 3: Choose the appropriate alternative
Available knowledge (1st dimension)
a) Is it possible to identify an optimal choice?
Decisions are dilemmas if no optimal choice can be made because there
are both positive and negative aspects associated with each alternative and
the resulting trade-offs defy complete analysis.

b) Do decision makers have good knowledge about the likelihood

and pay-offs of each possible outcome?
Certainty exists when managers know exactly what outcomes are
associated with each alternative they are choosing among, the possible
payoffs associated with each possible outcome for each alternative, and
the probability that each pay-off will occur

Risk is evident when decision-makers have at least some knowledge about

the likelihood of the different possible outcomes that might occur if they
choose to implement a particular alternative, and the pay-offs associated
with each outcome
 Step 3: Choose the appropriate alternative
Available knowledge (1st dimension) (continued)
c) Is the available knowledge tacit, or explicit?
Explicit knowledge is information that can be codified or articulated
Tacit knowledge is information or other insight that people have that is
difficult to codify or articulate (e.g., intuition)
Intuition refers to making decisions based on tacit knowledge, which can
be based on experience, hunches, or “gut feel”

Comparing the three management approaches

SET management may place more emphasis on tacit knowledge than FBL and
TBL approaches, because the SET approach is:
- newer (and thus less explicit knowledge has been developed) and
- more holistic (and thus more likely to embrace knowledge that is difficult-to-
quantify)
 Step 3: Choose the appropriate alternative
Agreement on aims and means (2nd dimension)
Agreement on aims and means refers to the level of consensus among
decision-makers about the goals of an organization and the best way to
achieve those goals.
 Step 3: Choose the appropriate alternative
Classical rational (high knowledge, high agreement)

The classical rational decision-making approach involves listing all

possible options to choose from, determining the costs and benefits
associated with each, and then choosing the best option.
Examples include: decision trees, break-even analysis, inventory and
supply chain management models
 Step 3: Choose the appropriate alternative
Political (high knowledge, low agreement)
Political decision-making involves negotiations about which means and
ends to pursue, identifying costs and benefits associated with various
options, with the final choice often reflecting a compromise that partially
satisfies the competing interests of those involved.

Examples include:
- networking (ensuring that one has friends in positions of influence)
- compromise (giving in on an unimportant issue in order to gain an ally who
will support you when an issue that is important to you comes up)
- selective use of information (to further one’s interest)
- scapegoating (blaming someone for a failure)
- trading favors (e.g., a manufacturing manager supports the marketing
manager this year, expecting a favor in return next year)
 Step 3: Choose the appropriate alternative
Political (continued)
Sometimes it is helpful to sub-divide political decisions into smaller pieces
using a technique like a decision matrix, which requires that certain
subjective issues be systematically analyzed and quantified (to at least some
extent) so that managers can more effectively compare the alternatives that
they are considering.
 Step 3: Choose the appropriate alternative
Trial-and error (low knowledge, high agreement)
The trial-and-error decision-making method involves listing possible
incremental options to choose from, attempting to determine the costs and
benefits associated with each, and then choosing the option that offers the
greatest opportunity for improvement with the lowest chance of making a
mistake.

In this quadrant, managers often opt for an incremental approach that

seeks to achieve continuous improvement by doing little experiments to
test which works best.

Continuous improvement refers to making many small, incremental

improvements with regard to how things are done in an organization.
 Step 3: Choose the appropriate alternative
Random (low knowledge, low agreement)
Random decision-making involves negotiations among decision-makers
about which means and ends to pursue, and then making a choice even
though decision-makers are unable to determine the costs and benefits
associated with possible options

Administrative model (medium knowledge/agreement)

The administrative approach is characterized by satisficing, which is evident
when decision-makers do not attempt to develop an optimal solution to a
problem, but rather collect enough information and develop enough
alternatives until they feel they are able to choose one that provides an
adequate solution
 Step 4: Implement and monitor the choice
Overcome resistance to implementation (see ch. 13)
Via inviting stakeholders to participate in decision-making process

Overcome resistance to recognizing a poor decision

Escalation of commitment occurs when managers persevere with the
implementation of a poor decision despite evidence it is not working
Information distortion refers to overlooking feedback that makes a decision
look bad, and favoring feedback that makes it look good
Persistence is remaining committed to a decision despite obstacles
Administrative inertia is evident when existing structures and systems persist
simply because they are already in place
 Entrepreneurial implications
Transaction cost theory helps entrepreneurs with “make vs buy”
decisions (i.e., which goods and services to purchase from others, and
which to produce in-house)
Transaction costs are expenses that do not contribute directly to
producing an organizational output, but exist only to reduce threats
from opportunism and uncertainty.
Opportunism is evident when someone cheats or misleads
others to achieve his or her own self-interests.

Note that opportunities to start a new organization can be identified

by thinking about transaction costs from the perspective of potential
customers, namely by creating and offer goods and services that
enable customers to minimize their transaction costs.
 QUESTIONS FOR REFLECTION AND DISCUSSION
1. Identify and briefly describe each of the four steps of the decision-
making process.

2. Which of the four steps do you think is the most challenging for
managers? Why do you think so?

3. Which of the decision-making approaches in Figure 7.2 would you

find most helpful? Why?

4. How important are politics in organizations? Explain how politics

influences management decision-making. What is the best way to deal
with politics?
 QUESTIONS FOR REFLECTION AND DISCUSSION
5. What advice do you have for students in your class who are
leaning towards SET management who, like Dennis Gioia in the
opening case, aspire to become managers in order to foster a greater
sense of social responsibility in organizations?

6. Explain how you made the decision regarding which post-

secondary school to attend or which major to choose. Did your
decision-making process follow the four-step process described in the
chapter? Which steps were most important? Why?

7. Think about a good or service that many organizations are

currently making in-house, but which they might prefer to buy from a
supplier. Can you think of an entrepreneurial start-up that could offer
that good or service at a low enough cost to entice those organizations
to outsource from it?