Making Decisions

 

THE decision-making process

Managers at all levels and in all areas of organizations make decisions. That is, they make choices. For instance, top-level managers make decisions about their organization’s goals, where to locate manufacturing facilities, or what new markets to move into. Middle- and lower-level managers make decisions about production schedules, product quality problems, pay raises, and employee discipline. Our focus in this chapter is on how managers make decisions, but making decisions isn’t something that just managers do. All organizational members make decisions that aŽect their jobs and the organization they work for

Step 1: Identify a Problem 

Your team is dysfunctional, your customers are leaving, or your plans are no longer relevant. Every decision starts with a problem, a discrepancy between an existing and a desired condition. Let’s work through an example. Amanda is a sales manager whose reps need new laptops because their old ones are outdated and inadequate for doing their job. To make it simple, assume it’s not economical to add memory to the old computers and it’s the company’s policy to purchase, not lease. Now we have a problem—a disparity between the sales reps’ current computers (existing condition) and their need to have more efcient ones (desired condition).

Step 2: Identify Decision Criteria

Once a manager has identi„ed a problem, he or she must identify the decision criteria important or relevant to resolving the problem. Every decision maker has criteria guiding his or her decisions even if they’re not explicitly stated. In our example, Amanda decides after careful consideration that memory and storage capabilities, display quality, battery life, warranty, and carrying weight are the relevant criteria in her decision. Sometimes, decision criteria change. For instance, considering the demographics, interests, and preferences of consumers were essential criteria in making advertising decisions.

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. How? A simple way is to give the most important criterion a weight of 10 and then assign weights to the rest using that standard. Of course, you could use any number as the highest weight.

Step 4: Develop Alternatives 

The fourth step in the decision-making process requires the decision maker to list viable alternatives that could resolve the problem. In this step, a decision maker needs to be creative, and the alternatives are only listed—not evaluated just yet.

Step 5: Analyze Alternatives 

Once alternatives have been identifed, a decision maker must evaluate each one. How? By using the criteria established in Step 2. Sometimes a decision maker might be able to skip this step. If one alternative scores highest on every criterion, you wouldn’t need to consider the weights because that alternative would already be the top choice. Or if the weights were all equal, you could evaluate an alternative merely by summing up the assessed values for each one.

Step 6: Select an Alternative 

The sixth step in the decision-making process is choosing the best alternative or the one that generated the highest total in Step 5.

Step 7: Implement the Alternative

In Step 7 in the decision-making process, you put the decision into action by conveying it to those affected and getting their commitment to it. We know that if the people who must implement a decision participate in the process, they’re more likely to support it than if you just tell them what to do. Another thing managers may need to do during implementation is reassess the environment for any changes, especially if it’s a long-term decision.

The standard approach was to limit the amount of information shared to reduce its liability. However, the changing environment has led management of many hospitals to consider and implement an alternative course of action. There is greater pressure from accrediting groups, patient safety advocates, and lawmakers to be more transparent about medical errors and to analyze them carefully to prevent them from happening again.

Step 8: Evaluate Decision Effectiveness

The last step in the decision-making process involves evaluating the outcome or result of the decision to see whether the problem was resolved. If the evaluation shows that the problem still exists, then the manager needs to assess what went wrong.

APPROACHES to decision making

Although everyone in an organization makes decisions, decision making is particularly important to managers. As Exhibit 2-5 shows, it’s part of all four managerial functions. That’s why managers—when they plan, organize, lead, and control—are called decision makers.

The fact that almost everything a manager does involves making decisions doesn’t mean that decisions are always time-consuming, complex, or evident to an outside observer. Most decision making is routine. For instance, every day of the year you make a decision about what to eat for dinner. It’s no big deal. You’ve made the decision thousands of times before. It’s a pretty simple decision and can usually be handled quickly. It’s the type of decision you almost forget is a decision. And managers also make dozens of these routine decisions every day; for example, which employee will work what shift next week, what information should be included in a report, or how to resolve a customer’s complaint. Keep in mind that even though a decision seems easy or has been faced by a manager a number of times before, it still is a decision. Let’s look at four perspectives on how managers make decisions.

Rationality 

We assume that managers will use rational decision making; that is, they’ll make logical and consistent choices to maximize value.14 After all, managers have all sorts of tools and techniques to help them be rational decision makers.

Bounded Rationality

Despite the unrealistic assumptions, managers are expected to be rational when making decisions.15 They understand that “good” decision makers are supposed to do certain things and exhibit good decision-making behaviors as they identify problems, consider alternatives, gather information, and act decisively but prudently. When they do so, they show others that they’re competent and that their decisions are the result of intelligent deliberation. However, a more realistic approach to describing how managers make decisions is the concept of bounded rationality, which says that managers make decisions rationally, but are limited (bounded) by their ability to process information.16 Because they can’t possibly analyze all information on all alternatives, managers satisfice, rather than maximize. That is, they accept solutions that are “good enough.” They’re being rational within the limits (bounds) of their ability to process information. Let’s look at an example

Intuition 

When managers at stapler-maker Swingline saw the company’s market share declining, they used a logical scienti„c approach to address the issue. For three years, they exhaustively researched stapler users before deciding what new products to develop. However, at Accentra, Inc., founder Todd Moses used a more intuitive decision approach to come up with his line of unique PaperPro staplers.

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. 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. When decision makers face uncertainty, their psychological orientation will determine whether they follow a maximax choice (maximizing the maximum possible payoff); a maximin choice (maximizing the minimum possible payoff); or a minimax choice (minimizing the maximum regret—amount of money that could have been made if a different decision had been made).

How biases affect decision making.

The 12 common decision-making errors and biases include overconfidence, immediate gratification, anchoring, selective perception, con„rmation, framing, availability, representation, randomness, sunk costs, self-serving bias, and hindsight. The managerial decision-making model helps explain how the decision-making process is used to choose the best alternative(s), either through maximizing or satis„cing and then implementing and evaluating the alternative. It also helps explain what factors aŽect the decision-making process, including the decision-making approach (rationality, bounded rationality, intuition), the types of problems and decisions (well structured and programmed or unstructured and nonprogrammed), and the decisionmaking conditions (certainty, risk, uncertainty).

 Effective decision-making techniques

Managers can make efective decisions by understanding cultural diferences in decision making, creating standards for good decision making, knowing when it’s time to call it quits, using an efective decision-making process, and developing their ability to think clearly. An efective 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; (5) encourages and guides gathering relevant information and informed opinions; and (6) is straightforward, reliable, easy to use, and fexible. Design thinking is “approaching management problems as designers approach design problems.” It can be useful when identifying problems and when identifying and evaluating alternatives. Using big data, decision makers have power tools to help them make decisions. However, no matter how comprehensive or well analyzed the big data, it needs to be tempered by good judgment.