Decision Making Refined

DECISION MAKING

AJAY SOLKHE Faculty University School of Management KUK

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DECISION MAKING 

Decision 

Making a choice from two or more alternatives.

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HOW ARE DECISIONS MADE IN ORGANIZATIONS?  Decision environments include:  CERTAIN ENVIRONMENTS. RISK ENVIRONMENTS. UNCERTAIN ENVIRONMENTS.

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 Certain environments. environments  Exist when information is sufficient to predict

the results of each alternative in advance of implementation.  Certainty is the ideal problem solving and

decision making environment.

 Risk environments. environments  Exist when decision makers lack complete certainty regarding the outcomes of various courses of action, but they can assign probabilities of occurrence.  Probabilities can be assigned through objective statistical procedures or personal intuition. 6–4

 Uncertain environments.  Exist when managers have so little information that they cannot even assign probabilities to various alternatives and possible outcomes.  Uncertainty forces decision makers to rely on individual and group creativity to succeed in problem solving.  Also characterized by rapidly changing:  External conditions.  Information technology requirements.  Personnel influencing problem and

definitions.

 These

rapid changes organized anarchy.

are

also

choice

called

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THE DECISION-MAKING PROCESS 

IDENTIFYING A PROBLEM and DECISION CRITERIA and ALLOCATING WEIGHTS to the criteria.



DEVELOPING, ANALYZING, alternative that can resolve



IMPLEMENTING the selected alternative.



EVALUATING the decision’s effectiveness.

and SELECTING an the problem.

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

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 problem.



The manager must have the authority, information, or resources needed to solve the problem.

pressure

to

solve

the

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STEP 2: IDENTIFYING 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: Allocating Weights to the 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. 6–10

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Criterion

Weight

Start-up costs

10

Franchisor support

8

Financial qualifications

6

Open geographical locations

4

Franchisor history

3

Exhibit 6.2 6–11

STEP 4: DEVELOPING ALTERNATIVES 

Identifying viable alternatives 

Alternatives are listed (without evaluation) that can resolve the problem.

STEP 5: ANALYZING ALTERNATIVES • Appraising each alternative’s strengths and weaknesses  An alternative’s appraisal is based on its ability to resolve the issues identified in steps 2 and 3.

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STEP 6: SELECTING AN ALTERNATIVE 

Choosing the best alternative 

The alternative with the highest total weight is chosen.

STEP 7: IMPLEMENTING THE DECISION • Putting the chosen alternative into action.  Conveying the decision to and gaining commitment from those who will carry out the decision.

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Start-Up Franchise Financial Open Franchisor Costs Support Qualifications Locations History Franchise Curves For Women

10

3

10

8

5

Quiznos Sandwiches

8

7

7

8

7

Jani-King

8

5

7

10

10

Jackson-Hewitt Tax Service

8

7

7

8

7

GNC Vitamins and Nutritional Supplements

7

8

7

8

7

Radio Shack

8

3

6

10

8

Chem-Dry Carpet Cleaning

10

7

8

6

7

McDonald’s

4

10

4

8

10

Exhibit 6.3 6–14

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Start-Up Franchise Financial Open Franchisor Costs Support Qualifications Locations History Total Franchise Curves For Women

100

24

60

32

15

231

Quiznos Sandwiches

80

56

42

32

21

231

Jani-King

80

40

42

40

30

232

Jackson-Hewitt Tax Service 80

56

42

32

21

231

GNC Vitamins and Nutritional Supplements

70

64

42

32

21

229

Radio Shack

80

24

36

40

24

204

Chem-Dry Carpet

100

56

48

24

21

249

McDonald’s

40

80

24

32

30

206

Exhibit 6.4 6–15

STEP 8: EVALUATING THE DECISION’S 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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MAKING DECISIONS



Rationality



Managers make consistent, valuemaximizing choices with specified constraints.



Assumptions makers:

are

that

decision



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 organization’s interests rather than in 6–17 their personal interests.

ASSUMPTIONS OF RATIONALITY

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

Managers make decisions rationally, but are limited (bounded) by their ability to process information.



Assumptions are that decision makers: 

Will not seek alternatives

out

or

have

knowledge

of

all



Will satisfice—choose the first alternative satisfice encountered that satisfactorily solves the problem— rather than maximize the outcome of their decision by considering all alternatives and choosing the best. 6–19

THE CONCEPT OF BOUNDED RATIONALITY Managerial objectives Competitive information

Imperfect information Time and cost constraints Cognitive limitations

Permeable boundaries

Rational decision maker

Environmental information Satisficing (satisfying the minimum requirements to achieve a goal)

decisions

Managerial experience

Technical knowledge Managerial objectives

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

INFLUENCES ON DECISION MAKING Escalation of Commitment  Increasing

or continuing a commitment to previous decision despite mounting evidence that the decision may have been wrong.

 The

Role of Intuition

 Intuitive 

decision making

Making decisions on the basis of experience, feelings, and accumulated judgement.

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PROBLEMS AND DECISIONS 

Structured Problems 

Involve goals that clear.

 Are

familiar (have occurred before).

 Are

easily and completely defined— information about the problem is available and complete.

 Programmed

Decision

A

repetitive decision that can be handled by a routine approach. 6–23

TYPES OF PROGRAMMED DECISIONS

A 



Policy

A general guideline for making a decision about a structured problem.

A Procedure A

series of interrelated steps that a manager can use to respond (applying a policy) to a structured problem.

A

Rule

 An

explicit statement that limits what a manager or employee can or cannot do in carrying out the steps involved in a procedure. 6–24



Policy 

Accept all customer-returned merchandise (Commodities offered for sale).

 Procedure  Follow

all steps for completing merchandise return documentation.

 Rules  Managers

$50.00.

 No

must approve all refunds over

credit purchases are refunded for cash. 6–25

PROBLEMS AND DECISIONS (CONT’D)  Unstructured

Problems

 Problems

that are new or unusual and for which information is ambiguous or incomplete.

 Problems

that

will

require

custom-made

solutions.  Nonprogrammed

Decisions

 Decisions

that are unique and nonrecurring.

 Decisions

that generate unique responses.

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TYPES OF PROBLEMS, TYPES OF DECISIONS, AND LEVEL IN THE ORGANIZATION

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DECISION-MAKING CONDITIONS 

Certainty 

A ideal situation in which a manager can make an accurate decision because the outcome of every alternative choice is known.

 Risk A

situation in which the manager is able to estimate the likelihood (probability) of outcomes that result from the choice of particular alternatives.

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

Uncertainty 

Limited or information prevents estimation of outcome probabilities for alternatives associated with the problem and may force managers to rely on intuition, hunches, and “gut feelings”. 

Maximax: the optimistic manager’s choice to maximize the maximum payoff (income and profit)



Maximin: the pessimistic manager’s choice to maximize the minimum payoff (income and profit)



Minimax: the manager’s maximum regret (loss).

choice

to

minimize

his

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Expected Probability = Value of Each Alternative

Event

Expected × Revenues

Heavy snowfall

$850,000

0.3

=

$255,000

Normal snowfall

725,000

0.5

=

362,500

Light snowfall

350,000

0.2

=

70,000 $687,500

Exhibit 6.9 6–30

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Exhibit 6.10 6–31

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

Exhibit 6.11 6–32

DECISION-MAKING STYLES 

Dimensions of Decision-Making Styles 

Ways of thinking 

Rational, orderly, and consistent

 Intuitive,

creative, and unique

 Tolerance  Low

for ambiguity

tolerance: require consistency and order

 High

tolerance: multiple thoughts simultaneously 6–33



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. 6–34

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

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

Heuristics 

Using “rules of thumb” to simplify decision making.

 Overconfidence

Bias

 Holding

unrealistically positive views of one’s self and one’s performance.

 Immediate

Gratification Bias

 Choosing

alternatives that offer immediate rewards and that to avoid immediate costs. 6–37



Anchoring Effect 

Fixating on initial information subsequent information.

 Selective 

Selecting organizing and interpreting events based on the decision maker’s biased perceptions.

Bias

Seeking out information that reaffirms past choices and discounting contradictory information.

 Framing 

ignoring

Perception

 Confirmation 

and

Bias

Selecting and highlighting certain aspects of a situation while ignoring other aspects.

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

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.

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

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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

Guidelines for making effective decisions: Know when it’s time to call it quits.  Practice the five “whys”.  Be an effective decision maker. 

 Habits

of highly reliable organizations (HROs)

 Are

not tricked (deceived )by their success.  Defer to the experts on the front line.  Let unexpected circumstances provide the solution.  Embrace complexity.  Anticipate, but also anticipate their limits.

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

It focuses on what is important.



It is logical and consistent.



It acknowledges both subjective and objective thinking and blends analytical with intuitive thinking.



It requires only as much information and analysis as is necessary to resolve a particular dilemma.



It encourages and guides the gathering of relevant information and informed opinion.



It is straightforward, reliable, easy to use, and flexible. 6–43

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 Managers face complex choice processes.  Decision making information may not be available.  Bounded rationality and cognitive limitations affect the

way people define problems, identify alternatives, and choose preferred solutions.  Most decision making in organizations goes beyond stepby-step rational choice.  Most decision making in organizations falls somewhere between the highly rational and the highly chaotic.  Decisions must be made under risk and uncertainty. Decisions must be made to solve nonroutine problems.  Decisions must must be made under time pressures and information limitations.  Decisions should be ethical.

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■

- Individual decision making

■

- Group decision making

■

- Organizational decision making

■

- Meta-organizational decision making

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THE SCOPE OF DECISION MAKING Decisional Inputs (Objectives, information, resources, energy)

Metaorganization Organization Group

Interactional Levels

Individual

Decisional Outputs

Permeable Boundaries

(Actions transactions, outcomes)

External Environment 6–46

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DECISION-MAKING STRATEGIES Knowledge Regarding the Outcome

Strong Preference

High Level of Knowledge

Computational Decision-Making Strategy

Compromise Decision-Making Strategy

Low Level of Knowledge

Judgmental Decision-Making Strategy

Inspirational Decision-Making Strategy

Preference for the Outcome Weak Preference

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■

Type A: most likely success

■

Type B: unlikely success

■

Type C: unlikely success

■

Type D: least likely success

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STRATEGIC DECISION MATRIX Copyright © 2005 Prentice Hall, Inc. All rights reserved.

Attitude toward the decision-making process Attitude toward the decision

Attainable objectives/ Open DM process

Unattainable objectives/ Closed DM process

Judgmental DM strategy/ Satisficing outcome

Type A

Type B

Computational DM strategy/ Maximizing outcome

Type C

Type D

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