Chapter 3

Managing Decision
Making
 Decision
• A choice from two or more alternatives.
 Decision-making process

• A set of eight steps that includes identifying a

problem, selecting an alternative, and evaluating the
decision’s effectiveness.
 The Decision-Making Process
1. Identify a problem
2. Identify decision criteria
3. Allocate weights to criteria
4. Develop alternatives
5. Analyze alternatives
6. Select an alternative
7. Implement the alternative
8. Evaluate decision effectiveness
Exhibit 3.1 The Decision-Making Process
 Identify a problem

• The decision-making process begins with the existence of a problem,

or more specifically, a problem means ‘a discrepancy between an
existing and a desired state of affairs.’
• Take Amanda, a sales manager who is on the road a lot and spent
nearly $6000 on auto repairs over the past few years. Now her car
has a blown engine and cost estimates indicate it’s not economical to
repair.
• Furthermore, convenient public transportation is unavailable. So, we
have a problem—a discrepancy between the manager’s need to have
a car that works and the fact that her current one doesn’t.
 Identify a problem (continued)
• In our example, a blown engine is a clear signal to the manager
that she needs a
new car,
• How do managers become aware they have a problem?
• They have to make a comparison between current reality and
some standard, which can be
• (1) past performance, (2) previously set goals, or (3) the
performance of some other unit within the organization or in
other organizations.
 Identify decision criteria

• Decision criteria simply means ‘Criteria that define

what is relevant in making a decision’.
• Once a manager has identified a problem that needs
attention, the decision criteria that will be important in
solving the problem must be identified.
 Identify decision criteria
(continued)
• In our vehicle-buying example, the sales manager
assesses the factors that are relevant in her decision,
which might include criteria such as price, model (two-
door or four-door), size (compact or intermediate),
manufacturer (French, Japanese, South Korean,
German, North American), optional equipment
(navigation system, side-impact protection, leather
interior), and repair records.
• These criteria reflect what she thinks is relevant in her
 Allocate weights to criteria

• If all the decision criteria are equally important, weighting the

criteria is not necessary.
• If the criteria identified in Step 2 are not equally important, the
decision maker must weigh the items in-order to give them the
correct priority in the decision. How do you weight criteria?
• A simple approach is to give the most important criterion a
weight of 10 and then assign weights to the rest against that
standard.
 Criteria and weights for Car-
Buying Decision
CRITERION WEIGHT
Price 10
Interior comfort 8
Durability 5
Repair record 5
(record of all the maintenance and repair
work that has been performed on the car.)

Performance 3
Handling 1
(Dealer handling fees)
 Develop alternatives

• The fourth step requires the decision maker to list viable

alternatives that could successfully resolve the problem. No
attempt is made in this step to evaluate these alternatives,
only to list them.
• Let’s assume that our sales manager, Amanda, identifies 12
cars as viable choices: Jeep Compass, Ford Focus, Hyundai
Elantra, Ford Fiesta SES, Volkswagen Golf, Toyota Prius,
Mazda 3 MT, Kia Soul, BMW i3, Nissan Cube, Toyota Camry,
and Honda Fit Sport MT.
 Analyze alternatives

• Once the alternatives have been identified, the decision

maker critically analyzes each one. How? By evaluating
it against the criteria. The strengths and weaknesses of
each alternative become evident as they’re com-pared
with the criteria and weights established in steps 2 and
3.
 Select an alternative
• Now it’s time to choose the best alternative from
among those assessed. Because we determined all the
pertinent factors in the decision, weighted them
appropriately, and identified and assessed the viable
alternatives, this step is fairly simple.
 Implement the alternative

• This is concerned with putting the decision into action.

This step involves conveying the decision to those
affected by it and getting their commitment to it.
 Evaluate decision effectiveness

• In the last step in the decision-making process, managers

appraise the outcome of the decision to see whether the problem
was resolved. Did the alternative chosen in step 6 and
implemented in step 7 accomplish the desired result? For our
sales manager, that means does she have a car that reliably
works?
• Evaluating the results of a decision is part of the managerial
control process.
 Factors Affecting Decision
Making

‘Decision making is the essence of

management’
 Factors Affecting Decision
Making
Exhibit 3.5 Decisions in the Management
Planning
Functions Leading

• What are the organization’s long- • How do I handle employees who

term objectives? appear to be low in motivation?

• What strategies will best achieve • What is the most effective

those objectives? leadership style in a given
situation?
• What should the organization’s • How will a specific change affect
short-term objectives be? worker productivity?

• How difficult should individual • How to solve conflicts among

goals be? employees?
 Factors Affecting Decision Making
Exhibit 3.5 Decisions in the Management
Functions
Organizing Controlling

• How many employees should I have • What activities in the organization

report directly to me? need to be controlled?

• How much centralization should • How should those activities be

there be in the organization? controlled?

• How should jobs be designed? • When is a performance deviation

significant?
• When should the organization • What type of management
implement a different structure? information system should the
organization have?
What Are the different Approaches Managers Use to Make Decisions?

Rational model
Bounded rationality
Bounded awareness
Bounded ethicality
Bounded willpower
Bounded self-interest
Intuitive decision making
 Rational model

• Rational model of decision making is a model where individuals

use facts and information, analysis, and a step-by-step procedure
to come to a decision. The rational model of decision making is a
more advanced type of decision-making model.
• Making decisions that are consistent and value-maximizing within
specified constraints.
• This approach assumes that decision makers must act rationally.
How? Use rational decision making—that is, make logical and
consistent choices to maximize value.
 Rational model: Example
• An example of rational decision making in business
include: Cost-benefit analysis: Evaluating the costs
and benefits of different options before making a
decision, such as investing in new technology or
expanding into a new market.
 Bounded rationality

• Bounded rationality means managers make rational

decisions but are limited (bounded) by their ability to
process information.
• No one can possibly analyze all information on all
alternatives, so they satisfice—that is, they accept
solutions that are “good enough,” rather than spend
time and resources trying to maximize.
 Bounded rationality (continued)
• In bounded rationality, limitations on a person’s ability
to interpret, process, and act on information.
• In organizational context, a CEO cannot make fully
rational decisions in a situation because their
cognition was overwhelmed by a lot of information in
that tense situation.
 Bounded awareness

• The “bounded awareness” phenomenon causes people to ignore

critical information when making decisions.
• People overlook (fail to notice) important information during the
decision-making process.
• For instance, bounded awareness can occur at various points in
the decision-making process. First, executives may fail to see or
seek out key information needed to make a sound decision.
Second, they may fail to use the information that they do see
because they aren't aware of its relevance.
 Bounded ethicality

• Bounded ethicality is the idea that our ability to make ethical

choices is often limited or restricted because of internal and
external pressures. Most people are usually ethical, but not
completely so.
• For example, although most of us want to act ethically, we also
wish to please authority figures. Therefore, if our boss asks us
to do something unethical, we may do it without even realizing
our mistake because we are focusing on pleasing the boss
rather than on the ethical dimensions of the issue facing us.
 Bounded willpower

• Bounded willpower captures the idea that even given

an understanding of the optimal choice, people will
often still preferentially choose whatever brings the
most short-term benefit over incremental progress
toward a long-term goal.
• For instance, a person does not save enough for
retirement early in their career.
 Bounded self-interest

• Bounded self-interest is the idea that people are often

willing to choose a less-optimal outcome for
themselves if it means they can support others.
• Giving to charity is an example of bounded self-
interest, as is volunteering.
 Intuitive decision making

• Making decisions on the basis of experience, feelings,

and accumulated judgment.
• For example, managers often use their intuition when
hiring decisions, relying on their gut feeling to assess
the fit between a candidate and the organization. This
could include factors such as the candidate's body
language, interpersonal skills, and enthusiasm for the
role.
 Types of Problems and Decisions
• Types of Problems
Structured problems , and
Unstructured problems
 Structured problems
• Structured problems are straightforward, familiar, and easily
defined. They are resolved using programmed decisions.
• Programmed decisions are repetitive decisions that can be
handled by a routine approach
Procedures
Rules
Policies
 Unstructured problems
• Unstructured problems are new and unusual. Information
is often ambiguous or incomplete. They are resolved using
nonprogrammed decisions.
• Nonprogrammed decisions are unique and nonrecurring.
• They require custom-made solutions.
Types of Problems and Decisions
 Heuristics
• Heuristics is defined as a problem-solving or decision-making technique
that uses minimum relevant information, past results, and experiences to
produce a workable and practical solution for a problem in a reasonable
period.
• Managers may use heuristics, or “rules of thumb,” to simplify their
decision making.
used to help make sense of complex, uncertain, and ambiguous
information
not always reliable and may lead to errors or biases in processing and
evaluating information
 Heuristics
• A common example of the familiarity heuristic is
choosing between different brands of food items at
the grocery store. With a wide variety of breakfast
cereals, many people often simplify the decision by
going with the brand and type of cereal with which
they've had the best previous experience.
 Decision-Making Biases and
Errors
Overconfidence bias
Sunk-costs error
Selective perception bias
Escalation-of-commitment error
Self-serving bias
Hindsight bias
 Overconfidence bias

• Decision makers tend to think they know more than they do or

hold unrealistically positive views of themselves and their
performance.
• For example, a sales manager brags (say something in a
boastful manner / show off) that his presentation was so good
that there is no doubt the sale will be his. Later he learns that
he lost the sale because the client found him obnoxious.
(extremely unpleasant)
 Sunk-costs error

• Sunk-costs error is our tendency to continue with

something we've invested money, effort, or time into—
even if the current costs outweigh the benefits.
• For instance, continuing to study something that does
not interest us simply because we already paid a high
amount in tuition fees; but also in simple, everyday life
decisions (such as watching a movie till the end even if
it's boring).
 Selective perception bias

• Decision makers selectively organize and interpret

events based on their biased perceptions.
• Selective perception is the unconscious process by
which people screen, select, and notice objects in their
environment. During this process, information tends to
be selectively perceived in ways that align with
existing attitudes, beliefs, and goals.
 Selective perception bias:
Example
• If the manager focuses his attention on the poor quality
of the financial report (simply because it is of special
interest to him), ignoring the high quality of the other
two, he is exhibiting selective perception.
• A purchase manager continues to give business to the
same supplier, even though the supplier has been late on
several deliveries. Here, the purchase manager thinks
the supplier is a nice person, and the supplier keeps
promising to deliver on time.
 Escalation-of-commitment error

• An increased commitment to a previous decision despite evidence

that the decision might have been wrong.
• It is the tendency to remain committed to our past behaviors,
particularly those exhibited publicly, even if they do not have
desirable outcomes.
• Escalation of commitment is a human behavior pattern in which
an individual or group facing increasingly negative outcomes from
a decision, action, or investment nevertheless continue the
behavior instead of altering course.
 Escalation-of-commitment error:
Example
• For instance, staying in a job that you hate, making
bad financial decisions, and sticking to unproductive
business strategies are all examples
 Self-serving bias

• A self-serving bias is the common habit of a person taking credit

for positive events or outcomes, but blaming outside factors for
negative events.
• For example, a manager might takes credit for a successful
project solely, disregarding the contributions of their team
members.
• A student gets a good grade on a test and tells herself that she
studied hard, and not because of the Professor’s lecture session,
and she blames the poor quality of the lecture, or the study
materials, if she fails the course
 Hindsight bias.
• Hindsight bias is a psychological phenomenon that allows
people to convince themselves after an event that they
accurately predicted it before it happened.
• Once an outcome is actually known, decision makers falsely
believe that they would have accurately predicted that
outcome.
• For example, after a client cancelled a contract that had been
drawn up, Cindy tells her manager she knew ahead of time that
was going to happen, even though she’d had no such thoughts
before the contract was cancelled.
 Design Thinking
• Approaching management problems as designers
approach design problems.
• Design thinking is an extension of innovation that
allows you to design solutions for end users with a
single problem statement in mind.
Design Thinking Process
 Stage 1: Empathize—Research Your Users' Needs

• Here, you should gain an empathetic understanding of

the problem you’re trying to solve, typically through
user research.
• Empathy is crucial to a human-centered design process
such as design thinking because it allows you to set
aside your own assumptions about the world and gain
real insight into users and their needs.
 Stage 2: Define—State Your Users' Needs and Problems

• It’s time to accumulate the information gathered

during the Empathize stage.
• You then analyze your observations and synthesize
them to define the core problems you and your team
have identified. These definitions are called problem
statements.
 Stage 3: Ideate—Challenge Assumptions and Create Ideas

• Now, you’re ready to generate ideas. The solid background of

knowledge from the first two phases means you can start to
“think outside the box”, look for alternative ways to view the
problem and identify innovative solutions to the problem
statement you’ve created.
• Brainstorming is particularly useful here..
Stage 4: Prototype—Start to Create Solutions

• A prototype is an early sample, model, or release of a

product built to test a concept or process.
• This is an experimental phase. The aim is to identify
the best possible solution for each problem found.
 Stage 5: Test—Try Your Solutions Out

• Evaluators rigorously test the prototypes. Although

this is the final phase, design thinking is iterative:
Teams often use the results to redefine one or more
further problems.
• So, you can return to previous stages to make
further iterations, alterations and refinements – to
find or rule out alternative solutions.
 Potential role for design-thinking
in early-stage companies
• Creates competitive advantage
• Deliver superior value
• Develop New Products That Meet Customer Needs
and Drive Revenue.
• Gain a Deep Understanding of Customers.
• Save Time, Money, and Effort.
 Corporate social responsibility
(C S R)
• Corporate social responsibility (C S R) is a business’s
intention, beyond its legal and economic obligations, to
do the right things and act in ways that are good for
society.
 Conclusion!
• Design Thinking is a strategy for creative problem solving by
prioritizing customers' requirements above everything else.
• Design thinking gives you an opportunity to take a look at
problems from a completely different perspective.
• In conclusion, Organizational decision-making is a critical part
of leadership and management. It involves thinking through a
process to arrive at a consensus. The goal is to make efficient,
accurate decisions that optimize the business.