B. Poor decisions have cost companies billions of dollar 1. Union Carbide accident in Bhopal, India 2. Bridgestone/Firestone Tire Company

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1 Decision Making CHAPTER OUTLINE Chapter 7 I. INTRODUCTION A. Decision making is the process of choosing a particular action that deals with a problem or opportunity 1. Just one or two exceptionally good or exceptionally poor decisions can have significant effects on a manager s career or an organization s success B. Poor decisions have cost companies billions of dollar 1. Union Carbide accident in Bhopal, India 2. Bridgestone/Firestone Tire Company C. Increasingly, important decisions are being made by non-managers 1. Reality Check: How much do you know about decision making? II. TYPES OF DECISIONS A. All managers must make decisions 1. Even when the decision process is highly participative, with full involvement by subordinates, the manager is ultimately responsible for the outcome B. Herbert Simon distinguishes between two types of decisions: 1. Programmed decisions are repetitive and routine and a definite procedure has been developed for handling them 2. Non-programmed decisions are novel and unstructured; there is no established procedure for handling the problem or situation C. Ideally, the main concern of top management should be non-programmed decisions 1. First-level management should be concerned with programmed decisions 2. The nature, frequency, and degree of certainty surrounding a problem should dictate at what level of management the decision should be made D. Problems arise in organizations where top management expends much time and effort on programmed decisions 1

2 1. This often means that long-range planning is neglected and there is an overemphasis on short-run control III. A RATIONAL DECISION-MAKING PROCESS A. Decisions are the organizational mechanisms through which an attempt is made to achieve a desired state 1. Every decision is the outcome of a dynamic process that is influenced by a multitude of forces B. Establishing Specific Goals and Objectives and Measuring Results 1. If goals and objectives are adequately established, they will dictate a. What results must be achieved b. The measures that indicate whether or not they have been achieved C. Problem Identification and Definition 1. If problems did not exist, there would be no need for decisions a. Problems typically result from a determination that a discrepancy exists between a desired state and current reality b. How critical the problem is will be indicated by the gap between the level of performance specified in the goals/objectives and the level of performance attained 2. Factors that make it difficult to identify the exact problem a. Perceptual problems b. Defining problems in terms of solutions c. Identifying symptoms as problems 3. Problems are typically of three types: opportunity, crisis, or routine D. Establishing Priorities 1. Decision making and solution implementation requires resources a. Unless the resources are unlimited, priorities must be established for dealing with the problems 2. Determining problem significance involves consideration of urgency, impact, and growth tendency a. The more significant the problem, the more important it is that it be addressed E. Consideration of Causes 1. It is difficult and ill-advised to determine a solution to a problem when the cause of the problem is unknown a. Proper identification of causes helps the decision maker avoid solving the wrong problem 2. Frequently, the search for problem causes leads to a better definition of the real problem a. Problem-to cause-to problem sequence 2

3 F. Development of Alternative Solutions 1. Before a decision is made, feasible alternatives should be developed and the consequences of each should be considered 2. This search must be conducted within time and cost constraints, which limits the number of alternatives that can be developed or considered G. Evaluation of Alternative Solutions 1. Once alternatives have been developed, they must be evaluated and compared a. The decision maker should be guided by previously established goals and objectives 2. The alternative-outcome relationship is based on three possible conditions: certainty, uncertainty, and risk 3. Certainty in most decision making is not possible; there are degrees of certainty a. The degree of certainty in decision making is expressed as a degree of risk b. By gathering information or studying a situation, the degree of uncertainty facing a decision maker can be reduced 4. Two cautions for evaluating alternatives: a. Keep this phase separate from the previous step, identifying solutions b. Be wary of perfect solutions 5. The conflict that using a devil s advocate causes can force a decision maker to reexamine assumptions and information H. Solution Selection 1. A decision is not an end in itself, but only a means to an end a. The steps following the decision should include implementation and follow-up 2. Situations rarely exist in which one alternative achieves the desired objective without having some positive or negative impact on another objective a. Situations often exist where two objectives cannot be optimized simultaneously b. In other cases, attainment of an organizational objective would be at the expense of a societal objective c. The values of the decision maker will strongly influence the alternative chosen 3. Optimal solutions are often impossible a. One cannot know all possible alternatives, the consequences of each alternative, and the probability of occurrence of these consequences b. The decision maker is not at optimizer, but a satisfier 3

4 I. Implementation 1. A decision must be effectively implemented before it can achieve the objective for which it was made 2. A good decision can be hurt by poor implementation 3. The test of the soundness of a decision is the behavior of the people involved relative to the decision a. Decisions can be undermined by dissatisfied subordinates b. Subordinates cannot be manipulated in the same manner as other resources J. Follow-Up 1. Effective management involves the periodic measurement of actual results with planned results a. If deviations exist, changes must be made b. If the original objective must be revised, the entire decision-making process must be reactivated 2. At times, the outcome of a decision is unexpected or is perceived differently by different people IV. ALTERNATIVES TO RATIONAL DECISION MAKING A. The decision making process can be impacted by such things as time pressures, incomplete information, and limited human resources B. Administrative Decision Making 1. Per March and Simon, decision makers operate with incomplete information a. They are also impacted by their cognitive abilities and social and sociological factors b. This causes a bounded rationality approach to decision making 2. Assumptions of the bounded rationality approach a. Decision makers rarely have all the information they need or want b. Decision makers are not aware of all possible alternatives and cannot predict consequences c. Early alternatives and solutions are quickly adopted because of constraints and limitations d. Decision making is constrained by organizational goals e. Conflicting goals can force a compromise solution 3. Decisions made under these circumstances are good enough C. Intuitive Decision Making 1. An intuitive decision maker uses experience, self-confidence, and selfmotivation to process information, data, and the environment to address a problem or opportunity 2. Contributors to intuitive decision making 4

5 a. High levels of uncertainty about a problem, the goals, and the decision criteria b. No history or past experience to draw upon c. Intense time pressures d. An excessive number of alternatives 3. In chaotic, rapidly changing, and pressure-packed situations, there is likely to be a lot of intuitive decision making taking place 4. Even when combining systematic and intuitive approaches, decisions can turn out to be flawed and costly to the organization V. BEHAVIORAL INFLUENCES ON DECISION MAKING A. Values 1. The guidelines a person uses when confronted with a situation in which a choice must be made 2. Often acquired early in life and are a basic part of a person s thoughts 3. Decision-making elements affected by values: a. Establishment of objectives b. Development of alternatives c. Choosing an alternative d. Implementing a decision e. Evaluation and control 4. To a large degree, a decision maker s willingness to make ethical or unethical decisions will be influenced by his or her values 5. Most cited reasons for making unethical choices: a. Pressure to perform exceptionally well b. Keeping up with the Joneses c. A culture of being secretive and nonrevealing d. Failure to take responsibility for problems e. Focusing on cost before safety 6. Values are difficult to change 7. Decision makers should ask: a. What is legal? b. What is right? c. What is fair? d. Can this decision meet the sunshine test? e. If it is published in the newspaper, would readers consider the decision ethical? B. Propensity for Risk 1. Decision makers vary greatly in their propensity for taking risks a. Many people are bolder, more innovative, and advocate greater risktaking when in groups 2. Risk propensity is also affected by whether potential outcomes are characterized in terms of losses or gains (framing) 5

6 a. When the choice is perceived as being between losses, there is greater propensity to take risks than when it is perceived as being between gains C. Potential for Dissonance 1. Post-decision anxiety is related to what Festinger calls cognitive dissonance 2. There is often a lack of consistency or harmony among an individual s various cognitions after a decision has been made 3. Anxiety will be greater when any of the following conditions exist: a. The decision is psychologically or financially important b. There are a number of foregone alternatives c. The foregone alternatives have many favorable features 4. Post-decision dissonance is especially prevalent at higher levels in the organizations a. Admitting mistakes can reduce dissonance 5. People are like to try to reduce dissonance by: a. Seeking information that supports the wisdom of their decision b. Selectively perceiving (distorting) information in a way that supports their decision c. Adopting a less favorable view of foregone alternatives d. Minimizing the negative aspects of the decision and exaggerating the importance of the positive aspects 6. What kind of risk taker you are and your potential for anxiety following a decision are strongly influenced by your personality, perceptions, and value system D. Escalation of Commitment 1. Gamblers who place larger and larger wagers in order to recoup earlier loses are displaying a decision-making behavior (escalation of commitment) 2. Likely candidates for escalation of decision making: a. Are unclear of their goals b. Have a fear of failure c. Are feeling pressure d. Work in a culture of low trust 3. Escalation of commitment refers to an increasing commitment to a previous decision when a rational decision maker would withdraw a. Typically stems from a need to turn a losing or poor decision into a winning or good decision b. Can result from being too ego-involved in a decision process 4. As organizations transcend national boundaries, cultural differences and influences become increasingly significant VI. GROUP DECISION MAKING A. Decisions about non-programmed problems that are novel and have uncertain outcomes are usually made by groups 6

7 1. The increased complexity requires specialized knowledge not usually possessed by one person 2. This is couple with the reality that the decision must be accepted throughout the organization B. Individual Versus Group Decision Making 1. Groups usually take more time to reach a decision than do individuals a. This brings about interaction and better decision making 2. Open discussion can be negatively influenced by: a. Pressure to conform b. A dominant personality type in the group c. Status incongruity d. Perceived expertise e. Framing 3. Non-programmed decisions appear to be better suited to group decision making when it comes to: a. Establishing goals and objectives b. Identifying causes and developing alternative solutions c. Evaluating alternative solutions d. Solution selection e. Implementation and follow-up C. Creativity in Group Decision Making 1. Creativity is a process by which an individual, group, or team produces novel and useful ideas (lateral thinking) 2. Common characteristics of creative decision makers a. Perseverance b. Risk-taking propensity c. Openness d. Tolerance of ambiguity 3. Groups and teams have more creative potential than do individuals, if an atmosphere fostering group creativity is created a. Similar to brainstorming, discussion must be free-flowing and spontaneous b. All members must participate c. Evaluation of ideas must wait until after the generation of all ideas D. Techniques for Stimulating Creativity 1. While the necessity and benefits of group decision making are recognized, numerous problems are associated with it a. Increasing the creative capability of a group is especially necessary when group membership is diverse E. Brainstorming 7

8 VII. 1. The generation of ideas in a group through noncritical discussion, that includes a strict set of rules a. No idea is too ridiculous b. Ideas belong to the group, not the person stating it c. No idea can be criticized 2. Issues that can decrease the effectiveness of brainstorming: a. Social loafing b. Conformity c. Idea production blocking d. Downward norm setting 3. These problems can be minimized by: a. Setting specific goals for the team to achieve b. Providing meaningful performance incentives c. Having a skilled facilitator manage the process F. The Delphi Technique 1. The solicitation and comparison of anonymous judgments on the topic of interest a. Uses sequential questionnaires that are interspersed with summarized information and feedback from earlier responses 2. Retains the advantage of having several judges while removing the biasing effects that might occur in face-to-face interaction 3. Studies have shown no significant change occurs after the second round of estimation G. The Nominal Group Technique (NGT) 1. A method of decision making that occurs in a highly structured meeting 2. The group decision is based on mathematical assessment of votes 3. Basic differences between Delphi and NGT a. Delphi participants are anonymous; NGT participants become acquainted b. Delphi participants never meet face-to-face; NGT participants meet around a table c. Delphi participants communicate via written questionnaires and feedback from the monitoring staff; in NGT, communication is direct between participants SUMMARY OF KEY POINTS Decisions may be classified as programmed or nonprogrammed, depending on the type of problem. Decisions are programmed to the extent that they are repetitive and routine and a definite procedure has been developed for handling the problem. Decisions are nonprogrammed when they are novel and unstructured and there is no established procedure for handling the problem. 8

9 Because not all problems are of the same importance, it is necessary to prioritize them. How significant a problem is depends on at least three problem attributes; urgency, impact, and growth tendency. Urgency related to time and how critical time pressures are in dealing with a problem. Impact describes the seriousness of the problem s effects. Growth tendency addresses the likelihood of future changes in problem urgency or impact. The relationship between alternatives and outcomes is based on three possible conditions. Certainty exists when the decision maker has complete knowledge of the probability of the outcome of each alternative. Uncertainty exists when absolutely no such knowledge is available. Risk is an intermediate condition, wherein some probable estimate of outcomes can be made. The decision-making process entails following a number of steps. Sequentially, these are (1) establishing specific goals and objectives and measuring results, (2) problem identification and definition, (3) establishing priorities, (4) consideration of causes, (5) development of alternative solutions, (6) evaluation of alternative solutions, (7) solution selection, (8) implementation, and (9) follow-up. The decision-making process is influenced by behavioral factors. Different decision makers may behave differently at any step in the decision-making process. Behavioral factors include values, propensity for risk, potential for dissonance, and escalation of commitment. Research suggests that decisions made by groups are superior to those made by individuals. However, there are aspects of group decision making that tend to have negative effects. These include pressure to conform and the disproportionate influence exerted by a dominant group member. One of the advantages of group decision making is that it can facilitate the identification of creative and innovative solutions to problems. Three specific techniques for stimulating creativity in groups are brainstorming, the nominal group technique, and the Delphi technique. 9