Management

Thirteenth Edition

Chapter 2
Making Decisions

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Learning Objectives
2.1 Describe the eight steps in the decision-making process.
• Develop your skill at being creative.
2.2 Explain the four ways managers make decisions.
2.3 Classify decisions and decision-making conditions.
2.4 Describe different decision-making styles and discuss
how biases affect decision-making.
• Know how to recognize when you’re using decision-making
errors and biases and what to do about it.
2.5 Identify effective decision-making techniques.

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Be a Better Decision Maker
A key to success in management and in your career
is knowing how to be an effective decision-maker.

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The Decision-Making Process (1 of 9)
• Decision – Making a choice
from two or more alternatives.

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Exhibit 2-1 Decision-Making Process

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The Decision-Making Process (2 of 9)
• Step 1: Identify a Problem
– Problem – An obstacle that makes it difficult to
achieve a desired goal or purpose.
– Every decision starts with a problem, a discrepancy
between an existing and a desired condition.
– Example – Amanda is a sales manager whose reps
need new laptops.

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The Decision-Making Process (3 of 9)
• Step 2: Identify Decision Criteria
– Decision criteria are factors that are important
(relevant) to resolving the problem.
– Example – Amanda decides that memory and storage
capabilities, display quality, battery life, warranty, and
carrying weight are the relevant criteria in her decision.

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The Decision-Making Process (4 of 9)
• Step 3: Allocate 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.
– The weighted criteria for our example is shown in
Exhibit 2-2.

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Exhibit 2-2 Important Decision
Criteria
Memory and storage 10
Battery life 8
Carrying weight 6
Warranty 4
Display quality 3

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The Decision-Making Process (5 of 9)
• Step 4: Develop Alternatives
– List viable alternatives that could resolve the problem
– Example – Amanda, identifies eight laptops as
possible choices. (See Exhibit 2-3)

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Exhibit 2-3 Possible Alternatives

blank Memory Battery Carrying Display

and Storage Life Weight Warranty Quality
HP ProBook 10 3 10 8 5
Sony VAIO 8 7 7 8 7
Lenovo IdeaPad 8 5 7 10 10
Apple Macbook 8 7 7 8 7
Toshiba Satellite 7 8 7 8 7
Sony NW 8 3 6 10 8
Dell Inspiron 10 7 8 6 7
HP Pavilion 4 10 4 8 10

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The Decision-Making Process (6 of 9)
• Step 5: Analyze Alternatives
– Appraising each alternative’s strengths and weaknesses.
– An alternative’s appraisal is based on its ability to resolve
the issues related to the criteria and criteria weight.

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The Decision-Making Process (7 of 9)
• Step 6: Select an Alternative
• Choosing the best alternative
– The alternative with the highest total weight is chosen.

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Exhibit 2-4 Evaluation of Alternatives

blank Memory Battery Carrying Display

and Storage Life Weight Warranty Quality Total
HP ProBook 100 24 60 32 15 231
Sony VAIO 80 56 42 32 21 231
Lenovo IdeaPad 80 40 42 40 30 232
Apple Macbook 80 56 42 32 21 231
Toshiba Satellite 70 64 42 32 21 229
Sony NW 80 24 36 40 24 204
Dell Inspiron 100 56 48 24 21 249
HP Pavilion 40 80 24 32 30 206

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The Decision-Making Process (8 of 9)
• Step 7: Implement the Alternative
– Putting the chosen alternative into action
– Conveying the decision to and gaining commitment
from those who will carry out the alternative

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The Decision-Making Process (9 of 9)
• Step 8: Evaluate Decision Effectiveness
– The soundness of the decision is judged by its
outcomes.
– How effectively was the problem resolved by
outcomes resulting from the chosen alternatives?
– If the problem was not resolved, what went wrong?

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Review Learning Objective 2.1
• Describe the eight steps in the decision-making
process.
1. Identify problem
2. Identify decision criteria
3. Weight the criteria
4. Develop alternatives
5. Analyze alternatives
6. Select alternative
7. Implement alternative
8. Evaluate decision effectiveness

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Exhibit 2-5 Decisions Managers May
Make (1 of 2)
Planning
• What are the organization’s long-term objectives?
• What strategies will best achieve those objectives?
• What should the organization’s short-term objectives be?
• How difficult should individual goals be?
Organizing
• How many employees should I have report directly to me?
• How much centralization should there be in an organization?
• How should jobs be designed?
• When should the organization implement a different structure?
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Exhibit 2-5 Decisions Managers May
Make (2 of 2)
Leading
• How do I handle employees that appear to be unmotivated?
• What is the most effective leadership style in a given situation?
• How will a specific change affect worker productivity?
• When is the right time to stimulate conflict?
Controlling
• What activities in the organization need to be controlled?
• How should those activities be controlled?
• When is a performance deviation significant?
• What type of management information system should the
organization have?
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Making Decisions: Rationality
• Rational Decision-Making – Describes choices that
are logical and consistent while maximizing value.
• Assumptions of Rationality
– The decision maker would be fully objective and logical
– The problem faced would be clear and unambiguous
– The decision maker would have a clear and specific goal
and know all possible alternatives and consequences
and consistently select the alternative that maximizes
achieving that goal

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Making Decisions: Bounded
Rationality
• Bounded Rationality – Decision-making that’s rational,
but limited (bounded) by an individual’s ability to process
information.
• Satisfice – Accepting solutions that are “good enough.”
• Escalation of Commitment – An increased
commitment to a previous decision despite evidence it
may have been wrong.

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Making Decisions: The Role of
Intuition
• Intuitive Decision-Making
– Making decisions on the
basis of experience,
feelings, and
accumulated judgment.

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Exhibit 2-6 What Is Intuition?

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Making Decisions: The Role of
Evidence-Based Management
• Evidence-Based Management (EBMgt) – The
systematic use of the best available evidence to
improve management practice.

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Structured Problems and
Programmed Decisions (1 of 2)
• Structured Problems – Straightforward, familiar,
and easily defined problems.
• Programmed Decision – A repetitive decision that
can be handled by a routine approach.

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Structured Problems and
Programmed Decisions (2 of 2)
• Procedure – A series of sequential steps used to
respond to a well-structured problem.
• Rule – An explicit statement that tells managers
what can or cannot be done.
• Policy – A guideline for making decisions.

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Unstructured Problems and
Nonprogrammed Decisions
• Unstructured Problems – Problems that are new
or unusual and for which information is ambiguous
or incomplete.
• Nonprogrammed Decisions – Unique and
nonrecurring and involve custom made solutions.

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Exhibit 2-7 Programmed Versus
Nonprogrammed Decisions
Characteristic Programmed Decisions Nonprogrammed Decisions
Type of problem Structured Unstructured
Managerial level Lower levels Upper levels
Frequency Repetitive, routine New, unusual
Information Readily available Ambiguous or incomplete
Goals Clear, specific Vague
Time frame for solution Short Relatively long
Solution relies on . . . Procedures, rules, policies Judgment and creativity

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Decision-Making Conditions
• Certainty – A situation in which a manager can make
accurate decisions because all outcomes are known.
• Risk – A situation in which the decision maker is able
to estimate the likelihood of certain outcomes.
• Uncertainty – A situation in which a decision maker
has neither certainty nor reasonable probability
estimates available.

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Managing Risk
• Managers can use historical data from past
experiences or secondary information that lets them
assign probabilities to different alternatives.
• Managers use this information to help make decisions
by calculating the expected value – the expected
return from each possible outcome – by multiplying
expected revenues by (the probability).
• This exercise will give the manager an idea of the
average revenue that they can expect over time if
everything relative to the probability remains constant.

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Exhibit 2-8 Expected Value

Expected Expected Value of

Event Revenues × Probability = Each Alternative
Heavy snowfall $850,000 blank 0.3 blank $255,000
Normal snowfall 725,000 blank 0.5 blank 362,500
Light snowfall 350,000 blank 0.2 blank 70,000
blank blank blank blank blank $687,500

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Exhibit 2-9 Payoff Matrix

Visa Marketing MasterCard’s MasterCard’s MasterCard’s

Strategy (in Competitive Action Competitive Action Competitive Action
millions of dollars) CA1 CA2 CA3
S1 13 14 11
S2 9 15 18
S3 24 21 15
S4 18 14 28

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Exhibit 2-10 Regret Matrix

Visa Marketing MasterCard’s MasterCard’s MasterCard’s

Strategy (in Competitive Action Competitive Action Competitive Action
millions of dollars) CA1 CA2 CA3
S1 11 7 17
S2 15 6 10
S3 0 0 13
S4 6 7 0

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Decision-Making Styles
• Linear Thinking Style – A person’s tendency to use
external data/facts; the habit of processing information
through rational, logical thinking.
• Nonlinear Thinking Style – A person’s preference for
internal sources of information; a method of processing
this information with internal insights, feelings, and
hunches.

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Decision-Making Biases and
Errors (1 of 4)
• 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.

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Decision-Making Biases and
Errors (2 of 4)
• 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.

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Decision-Making Biases and
Errors (3 of 4)
• 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.

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Decision-Making Biases and
Errors (4 of 4)
• 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).

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Exhibit 2-11 Common Decision-
Making Biases

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Exhibit 2-12 Overview of Managerial
Decision-Making

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Guidelines for Making Effective
Decisions
• Understand cultural differences
• Create standards for good decision-making
• Know when it’s time to call it quits
• Use an effective decision-making process
• Build an organization that can spot the unexpected
and quickly adapt to the changed environment

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Design Thinking and Decision Making
• Design Thinking – approaching management
problems as designers approach design problems.

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Review Learning Objective 2.2 (1 of 2)
• Explain the four ways managers make decisions.
– Assumptions of rationality
 The problem is clear and unambiguous
 A single, well-defined goal is to be achieved
 All alternatives and consequences are known
 The final choice will maximize the payoff

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Review Learning Objective 2.2 (2 of 2)
• Satisficing – When decision makers accept solutions
that are good enough.
• 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.
• Evidence-based management, a manager makes
decisions based on the best available evidence.

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Review Learning Objective 2.3 (1 of 2)
• Classify decisions and 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.

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Review Learning Objective 2.3 (2 of 2)
• Classify decisions and decision-making conditions.
– 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.

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Review Learning Objective 2.4
• Describe different decision-making styles and
discuss how biases affect decision-making.
– Linear thinking style – Characterized by a person’s
preference for using external data and processing this
information through rational, logical thinking.
– Nonlinear thinking style – Characterized by a preference
for internal sources of information and processing this
information with internal insights, feelings, and hunches.

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Review Learning Objective 2.5 (1 of 2)
• Identify effective decision-making techniques.
– An effective decision-making process
1. Focuses on what’s important
2. Is logical and consistent
3. Acknowledges both subjective and objective thinking and
blends both analytical and intuitive approaches
4. Requires only “enough” information as is necessary to
resolve a problem

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Review Learning Objective 2.5 (2 of 2)
5. Encourages and guides gathering relevant information and
informed opinions
6. Is straightforward, reliable, easy to use, and flexible
• Design Thinking – “approaching management
problems as designers approach design problems.”

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Copyright

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