Decision-Making: The Essence of the Manager’s Job

ninth edition
STEPHEN P. ROBBINS
© 2007 Prentice Hall, Inc.© 2007 Prentice Hall, Inc.
All rights reserved.All rights reserved.
PowerPoint Presentation by Charlie CookPowerPoint Presentation by Charlie Cook
The University of West AlabamaThe University of West Alabama
MARY COULTER
Decision-Making:Decision-Making:
The Essence of theThe Essence of the
Manager’s JobManager’s Job
ChapterChapter
66

© 2007 Prentice Hall, Inc. All rights
reserved. 6–2
L E A R N I N G O U T L I N EL E A R N I N G O U T L I N E
Follow this Learning Outline as you read and study this chapter.Follow this Learning Outline as you read and study this chapter.
The Decision-Making ProcessThe Decision-Making Process
• Define decision and decision-making process.Define decision and decision-making process.
• Describe the eight steps in the decision-making process.Describe the eight steps in the decision-making process.
The Manager as Decision MakerThe Manager as Decision Maker
• Discuss the assumptions of rational decision making.Discuss the assumptions of rational decision making.
• Describe the concepts of bounded rationality, satisficing,Describe the concepts of bounded rationality, satisficing,
and escalation of commitment.and escalation of commitment.
• Explain intuitive decision making.Explain intuitive decision making.
• Contrast programmed and nonprogrammed decisions.Contrast programmed and nonprogrammed decisions.

reserved. 6–3
L E A R N I N G O U T L I N E (cont’d)L E A R N I N G O U T L I N E (cont’d)
The Manager as Decision Maker (cont’d)The Manager as Decision Maker (cont’d)
• Contrast the three decision-making conditions.Contrast the three decision-making conditions.
• Explain maximax, maximin, and minimax decision choiceExplain maximax, maximin, and minimax decision choice
approaches.approaches.
• Describe the four decision making styles.Describe the four decision making styles.
• Discuss the twelve decision-making biases managersDiscuss the twelve decision-making biases managers
may exhibit.may exhibit.
• Describe how manager can deal with the negative effectsDescribe how manager can deal with the negative effects
of decision errors and biases.of decision errors and biases.
• Explain the managerial decision-making model.Explain the managerial decision-making model.

reserved. 6–4
L E A R N I N G O U T L I N E (cont’d)L E A R N I N G O U T L I N E (cont’d)
Decision Making for Today’s WorldDecision Making for Today’s World
• Explain how managers can make effective decisions inExplain how managers can make effective decisions in
today’s world.today’s world.
• List six characteristics of an effective decision-makingList six characteristics of an effective decision-making
process.process.
• Describe the five habits of highly reliable organizations.Describe the five habits of highly reliable organizations.

reserved. 6–5
Decision MakingDecision Making
• DecisionDecision
 Making a choice from two or more alternatives.Making a choice from two or more alternatives.
• The Decision-Making ProcessThe Decision-Making Process
 Identifying a problem and decision criteria andIdentifying a problem and decision criteria and
allocating weights to the criteria.allocating weights to the criteria.
 Developing, analyzing, and selecting an alternativeDeveloping, analyzing, and selecting an alternative
that can resolve the problem.that can resolve the problem.
 Implementing the selected alternative.Implementing the selected alternative.
 Evaluating the decision’s effectiveness.Evaluating the decision’s effectiveness.

reserved. 6–6
Exhibit 6–1Exhibit 6–1
The Decision-Making ProcessThe Decision-Making Process

reserved. 6–7
Step 1: Identifying the ProblemStep 1: Identifying the Problem
• ProblemProblem
 A discrepancy between an existing and desired stateA discrepancy between an existing and desired state
of affairs.of affairs.
• Characteristics of ProblemsCharacteristics of Problems
 A problem becomes a problem when a managerA problem becomes a problem when a manager
becomes aware of it.becomes aware of it.
 There is pressure to solve the problem.There is pressure to solve the problem.
 The manager must have the authority, information, orThe manager must have the authority, information, or
resources needed to solve the problem.resources needed to solve the problem.

reserved. 6–8
Step 2: Identifying Decision CriteriaStep 2: Identifying Decision Criteria
• Decision criteria are factors that are importantDecision criteria are factors that are important
(relevant) to resolving the problem.(relevant) to resolving the problem.
 Costs that will be incurred (investments required)Costs that will be incurred (investments required)
 Risks likely to be encountered (chance of failure)Risks likely to be encountered (chance of failure)
 Outcomes that are desired (growth of the firm)Outcomes that are desired (growth of the firm)
Step 3: Allocating Weights to the CriteriaStep 3: Allocating Weights to the Criteria
• Decision criteria are not of equal importance:Decision criteria are not of equal importance:
 Assigning a weight to each item places the items inAssigning a weight to each item places the items in
the correct priority order of their importance in thethe correct priority order of their importance in the
decision making process.decision making process.

reserved. 6–9
Exhibit 6–2Exhibit 6–2 Criteria and Weights for Computer Replacement DecisionCriteria and Weights for Computer Replacement Decision
Criterion Weight
Memory and Storage 10
Battery life 8
Carrying Weight 6
Warranty 4
Display Quality 3

reserved. 6–10
Step 4: Developing AlternativesStep 4: Developing Alternatives
• Identifying viable alternativesIdentifying viable alternatives
 Alternatives are listed (without evaluation) that canAlternatives are listed (without evaluation) that can
resolve the problem.resolve the problem.
Step 5: Analyzing AlternativesStep 5: Analyzing Alternatives
• Appraising each alternative’s strengths andAppraising each alternative’s strengths and
weaknessesweaknesses
 An alternative’s appraisal is based on its ability toAn alternative’s appraisal is based on its ability to
resolve the issues identified in steps 2 and 3.resolve the issues identified in steps 2 and 3.

reserved. 6–11
Exhibit 6–3Exhibit 6–3 Assessed Values of Laptop ComputersAssessed Values of Laptop Computers
Using Decision CriteriaUsing Decision Criteria

reserved. 6–12
Step 6: Selecting an AlternativeStep 6: Selecting an Alternative
• Choosing the best alternativeChoosing the best alternative
 The alternative with the highest total weight isThe alternative with the highest total weight is
chosen.chosen.
Step 7: Implementing the AlternativeStep 7: Implementing the Alternative
• Putting the chosen alternative into action.Putting the chosen alternative into action.
 Conveying the decision to and gaining commitmentConveying the decision to and gaining commitment
from those who will carry out the decision.from those who will carry out the decision.

reserved. 6–13
Exhibit 6–4Exhibit 6–4 Evaluation of Laptop AlternativesEvaluation of Laptop Alternatives
Against Weighted CriteriaAgainst Weighted Criteria

reserved. 6–14
Step 8: Evaluating the Decision’sStep 8: Evaluating the Decision’s
EffectivenessEffectiveness
• The soundness of the decision is judged by itsThe soundness of the decision is judged by its
outcomes.outcomes.
 How effectively was the problem resolved byHow effectively was the problem resolved by
outcomes resulting from the chosen alternatives?outcomes resulting from the chosen alternatives?
 If the problem was not resolved, what went wrong?If the problem was not resolved, what went wrong?

reserved. 6–15
Exhibit 6–5Exhibit 6–5 Decisions in the Management FunctionsDecisions in the Management Functions

reserved. 6–16
Making DecisionsMaking Decisions
• RationalityRationality
 Managers make consistent, value-maximizing choicesManagers make consistent, value-maximizing choices
with specified constraints.with specified constraints.
 Assumptions are that decision makers:Assumptions are that decision makers:
 Are perfectly rational, fully objective, and logical.Are perfectly rational, fully objective, and logical.
 Have carefully defined the problem and identified all viableHave carefully defined the problem and identified all viable
alternatives.alternatives.
 Have a clear and specific goalHave a clear and specific goal
 Will select the alternative that maximizes outcomes in theWill select the alternative that maximizes outcomes in the
organization’s interests rather than in their personal interests.organization’s interests rather than in their personal interests.

reserved. 6–17
Exhibit 6–6Exhibit 6–6 Assumptions of RationalityAssumptions of Rationality

reserved. 6–18
Making Decisions (cont’d)Making Decisions (cont’d)
• Bounded RationalityBounded Rationality
 Managers make decisions rationally, but are limitedManagers make decisions rationally, but are limited
(bounded) by their ability to process information.(bounded) by their ability to process information.
 Assumptions are that decision makers:Assumptions are that decision makers:
 Will not seek out or have knowledge of all alternativesWill not seek out or have knowledge of all alternatives
 WillWill satisficesatisfice—choose the first alternative encountered that—choose the first alternative encountered that
satisfactorily solves the problem—satisfactorily solves the problem—rather than maximize therather than maximize the
outcome of their decision by considering all alternatives andoutcome of their decision by considering all alternatives and
choosing the best.choosing the best.
 Influence on decision makingInfluence on decision making
 Escalation of commitment: an increased commitment to aEscalation of commitment: an increased commitment to a
previous decision despite evidence that it may have beenprevious decision despite evidence that it may have been
wrong.wrong.

reserved. 6–19
The Role of IntuitionThe Role of Intuition
• Intuitive decision makingIntuitive decision making
 Making decisions on the basis of experience, feelings,Making decisions on the basis of experience, feelings,
and accumulated judgment.and accumulated judgment.

reserved. 6–20
Exhibit 6–7Exhibit 6–7 What is Intuition?What is Intuition?
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. 91–99.

reserved. 6–21
Types of Problems and DecisionsTypes of Problems and Decisions
• Structured ProblemsStructured Problems
 Involve goals that clear.Involve goals that clear.
 Are familiar (have occurred before).Are familiar (have occurred before).
 Are easily and completely definedAre easily and completely defined—infor—information aboutmation about
the problem is available and complete.the problem is available and complete.
• Programmed DecisionProgrammed Decision
 A repetitive decision that can be handled by a routineA repetitive decision that can be handled by a routine
approach.approach.

reserved. 6–22
Types of Programmed DecisionsTypes of Programmed Decisions
• PolicyPolicy
 A general guideline for making a decision about aA general guideline for making a decision about a
structured problem.structured problem.
• ProcedureProcedure
 A series of interrelated steps that a manager can useA series of interrelated steps that a manager can use
to respond (applying a policy) to a structured problem.to respond (applying a policy) to a structured problem.
• RuleRule
 An explicit statement that limits what a manager orAn explicit statement that limits what a manager or
employee can or cannot do.employee can or cannot do.

reserved. 6–23
Policy, Procedure, and Rule ExamplesPolicy, Procedure, and Rule Examples
• PolicyPolicy
 Accept all customer-returned merchandise.Accept all customer-returned merchandise.
• ProcedureProcedure
 Follow all steps for completing merchandise returnFollow all steps for completing merchandise return
documentation.documentation.
• RulesRules
 Managers must approve all refunds over $50.00.Managers must approve all refunds over $50.00.
 No credit purchases are refunded for cash.No credit purchases are refunded for cash.

reserved. 6–24
Problems and Decisions (cont’d)Problems and Decisions (cont’d)
• Unstructured ProblemsUnstructured Problems
 Problems that are new or unusual and for whichProblems that are new or unusual and for which
information is ambiguous or incomplete.information is ambiguous or incomplete.
 Problems that will require custom-made solutions.Problems that will require custom-made solutions.
• Nonprogrammed DecisionsNonprogrammed Decisions
 Decisions that are unique and nonrecurring.Decisions that are unique and nonrecurring.
 Decisions that generate unique responses.Decisions that generate unique responses.

reserved. 6–25
Exhibit 6–8Exhibit 6–8 Programmed versus Nonprogrammed DecisionsProgrammed versus Nonprogrammed Decisions

reserved. 6–26
Decision-Making ConditionsDecision-Making Conditions
• CertaintyCertainty
 A situation in which a manager can make an accurateA situation in which a manager can make an accurate
decision because the outcome of every alternativedecision because the outcome of every alternative
choice is known.choice is known.
• RiskRisk
 A situation in which the manager is able to estimateA situation in which the manager is able to estimate
the likelihood (probability) of outcomes that resultthe likelihood (probability) of outcomes that result
from the choice of particular alternatives.from the choice of particular alternatives.

reserved. 6–27
Exhibit 6–9Exhibit 6–9 Expected Value for Revenues fromExpected Value for Revenues from
the Addition of One Ski Liftthe Addition of One Ski Lift
Expected
Expected × Probability = Value of Each
Event Revenues Alternative
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

reserved. 6–28
Decision-Making ConditionsDecision-Making Conditions
• UncertaintyUncertainty
 Limited information prevents estimation of outcomeLimited information prevents estimation of outcome
probabilities for alternatives associated with theprobabilities for alternatives associated with the
problem and may force managers to rely on intuition,problem and may force managers to rely on intuition,
hunches, and “gut feelings”.hunches, and “gut feelings”.
 Maximax:Maximax: the optimistic manager’s choice to maximize thethe optimistic manager’s choice to maximize the
maximum payoffmaximum payoff
 Maximin:Maximin: the pessimistic manager’s choice to maximize thethe pessimistic manager’s choice to maximize the
minimum payoffminimum payoff
 Minimax:Minimax: the manager’s choice to minimize maximum regret.the manager’s choice to minimize maximum regret.

reserved. 6–29
Exhibit 6–10Exhibit 6–10 Payoff MatrixPayoff Matrix

reserved. 6–30
Exhibit 6–11Exhibit 6–11 Regret MatrixRegret Matrix

reserved. 6–31
Decision-Making StylesDecision-Making Styles
• Dimensions of Decision-Making StylesDimensions of Decision-Making Styles
 Ways of thinkingWays of thinking
 Rational, orderly, and consistentRational, orderly, and consistent
 Intuitive, creative, and uniqueIntuitive, creative, and unique
 Tolerance for ambiguityTolerance for ambiguity
 Low tolerance: require consistency and orderLow tolerance: require consistency and order
 High tolerance: multiple thoughts simultaneouslyHigh tolerance: multiple thoughts simultaneously

reserved. 6–32
Decision-Making Styles (cont’d)Decision-Making Styles (cont’d)
• Types of Decision MakersTypes of Decision Makers
 DirectiveDirective
 Use minimal information and consider few alternatives.Use minimal information and consider few alternatives.
 AnalyticAnalytic
 Make careful decisions in unique situations.Make careful decisions in unique situations.
 ConceptualConceptual
 Maintain a broad outlook and consider many alternatives inMaintain a broad outlook and consider many alternatives in
making decisions.making decisions.
 BehavioralBehavioral
 Avoid conflict by working well with others and being receptiveAvoid conflict by working well with others and being receptive
to suggestions.to suggestions.

reserved. 6–33
Exhibit 6–12Exhibit 6–12 Decision-Making MatrixDecision-Making Matrix

reserved. 6–34
Exhibit 6–13Exhibit 6–13 Common Decision-Making Errors and BiasesCommon Decision-Making Errors and Biases

reserved. 6–35
Decision-Making Biases and ErrorsDecision-Making Biases and Errors
• HeuristicsHeuristics
 Using “rules of thumb” to simplify decision making.Using “rules of thumb” to simplify decision making.
• Overconfidence BiasOverconfidence Bias
 Holding unrealistically positive views of one’s self andHolding unrealistically positive views of one’s self and
one’s performance.one’s performance.
• Immediate Gratification BiasImmediate Gratification Bias
 Choosing alternatives that offer immediate rewardsChoosing alternatives that offer immediate rewards
and that to avoid immediate costs.and that to avoid immediate costs.

reserved. 6–36
(cont’d)(cont’d)
• Anchoring EffectAnchoring Effect
 Fixating on initial information and ignoring subsequentFixating on initial information and ignoring subsequent
information.information.
• Selective Perception BiasSelective Perception Bias
 Selecting organizing and interpreting events based onSelecting organizing and interpreting events based on
the decision maker’s biased perceptions.the decision maker’s biased perceptions.
• Confirmation BiasConfirmation Bias
 Seeking out information that reaffirms past choicesSeeking out information that reaffirms past choices
and discounting contradictory information.and discounting contradictory information.

reserved. 6–37
• Framing BiasFraming Bias
 Selecting and highlighting certain aspects of aSelecting and highlighting certain aspects of a
situation while ignoring other aspects.situation while ignoring other aspects.
• Availability BiasAvailability Bias
 Losing decision-making objectivity by focusing on theLosing decision-making objectivity by focusing on the
most recent events.most recent events.
• Representation BiasRepresentation Bias
 Drawing analogies and seeing identical situationsDrawing analogies and seeing identical situations
when none exist.when none exist.
• Randomness BiasRandomness Bias
 Creating unfounded meaning out of random events.Creating unfounded meaning out of random events.

reserved. 6–38
• Sunk Costs ErrorsSunk Costs Errors
 Forgetting that current actions cannot influence pastForgetting that current actions cannot influence past
events and relate only to future consequences.events and relate only to future consequences.
• Self-Serving BiasSelf-Serving Bias
 Taking quick credit for successes and blamingTaking quick credit for successes and blaming
outside factors for failures.outside factors for failures.
• Hindsight BiasHindsight Bias
 Mistakenly believing that an event could have beenMistakenly believing that an event could have been
predicted once the actual outcome is known (after-predicted once the actual outcome is known (after-
the-fact).the-fact).

reserved. 6–39
Exhibit 6–14Exhibit 6–14 Overview of Managerial Decision MakingOverview of Managerial Decision Making

reserved. 6–40
Decision Making for Today’s WorldDecision Making for Today’s World
• Guidelines for making effective decisions:Guidelines for making effective decisions:
 Understand cultural differences.Understand cultural differences.
 Know when it’s time to call it quits.Know when it’s time to call it quits.
 Use an effective decision-making process.Use an effective decision-making process.
• Habits of highly reliable organizations (HROs)Habits of highly reliable organizations (HROs)
 Are not tricked by their success.Are not tricked by their success.
 Defer to the experts on the front line.Defer to the experts on the front line.
 Let unexpected circumstances provide the solution.Let unexpected circumstances provide the solution.
 Embrace complexity.Embrace complexity.
 Anticipate, but also anticipate their limits.Anticipate, but also anticipate their limits.

reserved. 6–41
Characteristics of an Effective Decision-Characteristics of an Effective Decision-
Making ProcessMaking Process
• It focuses on what is important.It focuses on what is important.
• It is logical and consistent.It is logical and consistent.
• It acknowledges both subjective and objective thinkingIt acknowledges both subjective and objective thinking
and blends analytical with intuitive thinking.and blends analytical with intuitive thinking.
• It requires only as much information and analysis as isIt requires only as much information and analysis as is
necessary to resolve a particular dilemma.necessary to resolve a particular dilemma.
• It encourages and guides the gathering of relevantIt encourages and guides the gathering of relevant
information and informed opinion.information and informed opinion.
• It is straightforward, reliable, easy to use, and flexible.It is straightforward, reliable, easy to use, and flexible.

reserved. 6–42
Terms to KnowTerms to Know
• decisiondecision
• decision-making processdecision-making process
• problemproblem
• decision criteriadecision criteria
• rational decision makingrational decision making
• bounded rationalitybounded rationality
• satisficingsatisficing
• escalation of commitmentescalation of commitment
• intuitive decision makingintuitive decision making
• structured problemsstructured problems
• programmed decisionprogrammed decision
• procedureprocedure
• rulerule
• policypolicy
• unstructured problemsunstructured problems
• nonprogrammed decisionsnonprogrammed decisions
• certaintycertainty
• riskrisk
• uncertaintyuncertainty
• directive styledirective style
• analytic styleanalytic style
• conceptual styleconceptual style
• behavioral stylebehavioral style
• heuristicsheuristics
• business performancebusiness performance
management (BPM) softwaremanagement (BPM) software

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Decision-Making: The Essence of the Manager’s Job