You are on page 1of 52

Chapter 4

Foundations of Decision Making

Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-1

LEARNING OUTLINE
Follow this Learning Outline as you read and study this chapter

The Decision-Making Process


Define decision and the decision-making process Describe the eight steps in the decision-making process

The Manager as Decision Maker


Discuss the assumptions of rational decision making Describe the concepts of bounded rationality, satisficing, and escalation of commitment

Explain what intuition is and how it affects decision making.


Contrast programmed and nonprogrammed decisions
Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-2

LEARNING OUTLINE (contd)


Follow this Learning Outline as you read and study this chapter

The Manager as Decision Maker (contd)


Contrast the three decision-making conditions Explain maximax, maximin, and minimax decision/ choice approaches Describe the four decision-making styles Discuss the decision-making biases and errors managers may exhibit Explain the managerial decision-making model
Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-3

LEARNING OUTLINE (contd)


Follow this Learning Outline as you read and study this chapter

Decision Making for Todays World


Explain how managers can make effective decisions in todays world List the six characteristics of an effective decisionmaking process Describe the five habits of highly reliable organizations
4-4

Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

Decision-Making
Decision
Making a choice from two or more alternatives

The Decision-Making Process


Identifying a problem and decision criteria and allocating weights to the criteria Developing, analyzing, and selecting an alternative that can resolve the problem Implementing the selected alternative Evaluating the decisions effectiveness
4-5

Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

Exhibit 4.1 The DecisionMaking Process

Identify a Problem

I need to decide the best franchise to purchase.

Identify Decision Criteria

Financial qualifications Franchisor history Start-up costs Open geographical locations Franchisor support

Allocate Weights to Criteria

Start-up costs .......................................................10 Franchisor support ................................................7 Financial qualifications .........................................8 Open geographical locations ...............................6 Franchisor history ..................................................7

Develop Alternatives

Curves for Women Second Cup Jani-King Liberty Tax Service Curves for Women Second Cup Jani-King Liberty Tax Service

Merle Norman Petland Chem-Dry Carpet Cleaning McDonald s Merle Norman Petland Chem-Dry Carpet Cleaning McDonald s Merle Norman Petland Chem-Dry Carpet Cleaning McDonald s

Analyze Alternatives

Select an Alternative

Curves for Women Second Cup Jani-King Liberty Tax Service

Implement the Alternative

Chem-Dry Carpet Cleaning!

Evaluate Decision Effectiveness Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-6

Step 1: Identification of a Problem


Problem
A discrepancy between an existing and desired state of affairs

Characteristics of Problems
A problem becomes a problem when a manager becomes aware of it
There is pressure to solve the problem The manager must have the authority, information, or resources needed to solve the problem

Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-7

Step 2: Identification of Decision Criteria


Decision criteria are factors that are important (relevant) to resolving the problem:
Costs that will be incurred (investments required) Risks likely to be encountered (chance of failure) Outcomes that are desired (growth of the firm)

Step 3: Allocation of Weights to Criteria


Decision criteria are not of equal importance:
Assigning a weight to each item places the items in the correct priority order of their importance in the decision- making process
Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-8

Exhibit 4.2 Criteria and Weights for Franchise Decision


Criterion
Start-up costs Franchisor support Financial qualifications

Weight
10 8 6

Open geographical locations


Franchisor history
Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4
3
4-9

Step 4: Development of Alternatives


Identifying viable alternatives
Alternatives are listed (without evaluation) that can resolve the problem

Step 5: Analysis of Alternatives


Appraising each alternatives strengths and weaknesses
An alternatives appraisal is based on its ability to resolve the issues identified in steps 2 and 3
Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-10

Exhibit 4.3 Evaluation Using Decision Criteria

Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-11

Exhibit 4.4 Evaluation Against Weighted Criteria

Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-12

Step 6: Selection of an Alternative


Choosing the best alternative
The alternative with the highest total weight is chosen

Step 7: Implementation of the Alternative


Putting the chosen alternative into action
Conveying the decision to and gaining commitment from those who will carry out the decision
Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-13

Step 8: Evaluation of 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?

Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-14

Exhibit 4.5 Decisions in Management Functions

Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-15

Types of Problems and Decisions


Structured Problems
Have clear goals Are familiar Are easily and completely defined

Programmed Decision
A repetitive decision that can be handled by a routine approach

Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-16

Types of Programmed Decisions


A Procedure
A series of interrelated steps to respond to a structured problem

A Rule
An explicit statement that limits what a manager or employee can or cannot do

A Policy
A general guideline for making a decision about a structured problem
Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-17

Problems and Decisions (contd)


Unstructured Problems
Problems are new or unusual; information is ambiguous or incomplete

Nonprogrammed Decisions
Decisions are unique and nonrecurring; they require custom-made solutions

Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-18

Making Decisions
Rationality
Managers make consistent, value-maximizing choices with specified constraints Assumptions are that decision makers:
Are perfectly rational, fully objective, and logical Have carefully defined the problem and identified all viable alternatives Have a clear and specific goal Will select the alternative that maximizes outcomes in the organizations interests rather than in their personal interests
4-19

Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

Exhibit 4.6 Assumptions of Rationality


Lead to The problem is clear and unambiguous. A single, well-defined goal is to be achieved. All alternatives and consequences are known. Preferences are clear. Preferences are constant and stable. No time or cost constraints exist. Final choice will have maximize payoff. Rational Decision Making

Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-20

Making Decisions: The Rational Model


Rational
Describes choices that are consistent and valuemaximizing within specified constraints.

Bounded rationality (Herbert Simon)


Behavior that is rational within the parameters of a simplified model that captures the essential features of a problem.

Satisfice
Making a good enough decision: choosing the firstidentified alternative that satisfactorily and sufficiently solves the problem. 421
Copyright 2005 Prentice Hall, Inc. All rights reserved.

Making Decisions (contd)


Bounded Rationality
Managers make decisions rationally, but are limited (bounded) by their ability to process information Assumes decision makers:
Will not seek out or have knowledge of all alternatives Will satisfice Can be influenced by escalation of commitment
Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-22

Making Decisions: The Rational Model


Certainty
The implication that the outcome of every possible alternative is known.

Uncertainty
A condition under which there is not full knowledge of the problem and reasonable probabilities for alternative outcomes cannot be determined.

Risk
The probability that a particular outcome will result from a given decision.
423
Copyright 2005 Prentice Hall, Inc. All rights reserved.

Decision-Making Conditions
Certainty
Accurate decisions possible because the outcome of every alternative is known

Risk
Decision maker estimates the likelihood of outcomes that result from the choice of particular alternatives
Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-24

Exhibit 4.8 Expected Value for Adding One Ski Lift


Expected Revenues
$850,000 725,000 Expected Probability = Value of Each Alternative 0.3 0.5 = = $255,000 362,500

Event Heavy snowfall Normal snowfall

Light snowfall

350,000

0.2

70,000 $687,500

Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-25

Decision-Making Conditions (contd)


Uncertainty
Limited information prevents estimation of outcome probabilities; may force managers to rely on intuition, hunches, and gut feelings
Maximax: the optimistic managers choice to maximize the maximum payoff Maximin: the pessimistic managers choice to maximize the minimum payoff Minimax: the managers choice to minimize his maximum regret
Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-26

Making Decisions (contd)


Role of Intuition
Intuitive decision making
Making decisions on the basis of experience, feelings, and accumulated judgment One-third of managers and other employees said they emphasized gut feeling over cognitive problem solving

Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-27

Exhibit 4.7 What Is Intuition?


Managers make decisions based on their past experiences Managers make decisions based on ethical values or culture Managers make decisions based on feelings or emotions

Experience-based decisions Values- or ethicsbased decisions Affect-initiated decisions

Intuition

Subconscious mental processing

Cognitive-based decisions

Managers use data from subconscious mind to help them make decisions
Source: Based on L.A. Burke and M.K. Miller. Taking the Mystery Out of Intuitive Decision Making. Academy of Management Executive. October 1999. pp. 9199.
Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

Managers make decisions based on skills, knowledge, and training

4-28

What Is Creative Potential?


Expertise
Understanding, abilities, knowledge, proficiencies, necessary in the field of creative endeavor.

Creative-thinking skills
The personality characteristics associated with creativity, the ability to use analogies, as well as the talent to see the familiar in a different light.

Intrinsic task motivation


The desire to work on something because its interesting, involving, exciting, satisfying, or personally challenging.
429
Copyright 2005 Prentice Hall, Inc. All rights reserved.

Decision-Making Styles
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
Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-30

Exhibit 4.9 Decision-Making Styles


High Analytic Conceptual Tolerance For Ambiguity

Directive

Behavioural

Low
Source: S.P. Robbins and D.A. DeCenzo, Supervision Today. 2nd ed. (Upper Saddle River, NJ: Prentice Hall, 1998), p. 166.

Way of Thinking Rational Intuitive

Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-31

Decision-Making Styles (contd)


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

Behavioural
Avoid conflict by working well with others and being receptive to suggestions
Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-32

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.
433
Copyright 2005 Prentice Hall, Inc. All rights reserved.

Decision Making: Styles (contd)


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.
434
Copyright 2005 Prentice Hall, Inc. All rights reserved.

Group Decision Making (contd)


Groupthink
The extensive pressure of others in a strongly cohesive or threatened group that causes individual members to change their opinions to conform to that of the group

Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-35

Group Decision Making


Advantages
Generates more complete information and knowledge Generates more diverse alternatives Increases acceptance of a solution Increases legitimacy of decision

Disadvantages
Time consuming Minority domination Pressures to conform Ambiguous responsibility

Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-36

Exhibit 4.10 Group Vs. Individual Decision Making


Criteria of Effectiveness Groups Individuals

Accuracy
Speed Creativity

Degree of acceptance
Efficiency

4-37

Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

When Are Groups Most Effective?


Creativity
Groups tend to be more creative than individuals.

Acceptance of the final solution


Groups help increase the acceptance of decisions.

Effectiveness of group decision making


Groups of five to seven members are optimal for decision process speed and quality.

438
Copyright 2005 Prentice Hall, Inc. All rights reserved.

Improving Group Decision Making


Brainstorming
An idea-generating process that encourages alternatives while withholding criticism.

Nominal group technique


A decision-making technique in which group members are physically present but operate independently.

Electronic meeting
A type of nominal group technique in which participants are linked by computer.
439
Copyright 2005 Prentice Hall, Inc. All rights reserved.

Exhibit 4.11 Common Decision-Making Errors and Biases


Overconfidence Hindsight Immediate Gratification

Self-serving

Anchoring Effect

Sunk Costs

Decision-Making Errors and Biases

Selective Perception

Randomness

Confirmation

Representation

Framing

Availability
Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-40

Common Decision-making Errors


Heuristics: Using judgmental shortcuts
Availability heuristic
The tendency to base judgments on information that is readily available.

Representative heuristic
The tendency to base judgments of probability on things (objects or events) that are familiar

Escalation of commitment
An increased commitment to a previous decision despite negative information about the decisions present outcomes. 441
Copyright 2005 Prentice Hall, Inc. All rights reserved.

Decision-Making Biases and Errors


Heuristics Using rules of thumb to simplify decision making Overconfidence Bias Holding unrealistically positive views of ones self and ones performance Selective Perception Bias Selecting, organizing, and interpreting events based on the decision makers biased perceptions
4-42

Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

Confirmation Bias Seeking out information that reaffirms past choices and discounting contradictory information Sunk Costs Error Forgetting that current actions cannot influence past events and relate only to future consequences Escalation of commitment error Increased commitment to a wrong decision

Decision-Making Biases and Errors (contd)

Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-43

Decision-Making Biases and Errors (contd)


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 (afterthe-fact)

Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-44

Ethics and Decision Making


Ethics Defined
The rules and principles that define right and wrong conduct

Four Views of Ethics


Utilitarian view Rights view Theory of justice view Integrative social contracts theory
4-45

Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

Ethics and Decision Making (contd)


Utilitarian View
Greatest good is provided for the greatest number
Encourages efficiency and productivity and is consistent with the goal of profit maximization

Rights View
Respecting and protecting individual liberties and privileges
Seeks to protect individual rights of conscience, free speech, life and safety, and due process
Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-46

Ethics and Decision Making (contd)


The Theory of Justice Organizational rules are enforced fairly and impartially and follow all legal rules and regulations
Protects the interests of underrepresented stakeholders and the rights of employees

Integrative Social Contracts Theory Ethical decisions should be based on existing ethical norms in industries and communities
Based on integration of the general social contract and the specific contract between community members
Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-47

How Managers Can Improve Ethical Behaviour in an Organization


Hire individuals with high ethical standards. Establish codes of ethics and decision rules. Lead by example. Delineate job goals and performance appraisal mechanisms. Provide ethics training. Conduct independent social audits.
Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

Provide support for individuals facing ethical dilemmas. 4-48

Code of Ethics
A formal statement of an organizations primary values and the ethical rules it expects its employees to follow
Be a dependable organizational citizen Dont do anything unlawful or improper that will harm the organization Be good to customers

Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-49

Effective Use of a Code of Ethics


Develop a code of ethics to guide decision making Communicate the code regularly Have all levels of management show commitment to the code Publicly reprimand and consistently discipline those who break the code
Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-50

Exhibit 4.12 Examining Ethics

Chapter 4, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada

4-51

Decision-Making and National Culture


Differs from one country to another

Need to recognize what is acceptable


Managers can expect high payoff if they can accommodate the diversity