Chapter 3 - Foundations of Decision Making
PART II: PLANNING
CHAPTER 3 - FOUNDATIONS OF DECISION MAKING
LEARNING OUTCOMES
After reading this chapter, students should be able to:
1. Describe the decision-making process.
2. Explain the three approaches managers can use to make decisions.
3. Describe the types of decisions and decision-making conditions managers face.
4. Discuss group decision-making.
5. Discuss contemporary issues in managerial decision-making.
Opening Vignette – Flight PlanSUMMARY
Branson, Missouri is in a location not easily accessible by air service. The city, best known for its country music, aging pop-star variety shows, and family-style attractions, also has the kinds of outdoor activities that attracted eight and a half million visitors last year, “earning it the unofficial nickname ‘Vegas without the gambling.’ ” About 95 percent of those visitors come by car or bus. But now it’s show time for a new entrant—the Branson Airport.
The $155 million airport, which opened in May 2009, is an experiment that many people are watching. Steve Peet, the airport's chief executive and Jeff Bourk, executive director of the airport are taking a gamble by building a private commercial airport. Without federal assistance, the airport didn't face the usual governmental restrictions. Viewed as an incredible opportunity to attract visitors by making it easy and affordable, the location selected, is conveniently located a short distance south of Branson's popular theater district. The 7,140 foot runway can accommodate most narrow-body jets.
They can select airlines and negotiate exclusive contracts with such providers as Air Tran and Sun Country to help these airlines succeed. The airport will earn money from landing fees (based on the number of passengers, not on weight), airport fuel sales, a percentage of every sale at the airport's facility, and an $8.24 fee paid by the city of Branson for each arriving passenger. The goal is 250,000 passengers per year or 685 passengers a day, equivalent to 5-6 planeloads per day.
Teaching Notes
Discuss this case with students, asking them:
1. What type of information was needed prior to making the decision to build an airport?
2. Was Peet and Bourk's decision a sound one? Why or why not?
3. Do you think a private airport is too risky? Why or why not? (Answers will vary…)
I. THE DECISION-MAKING PROCESS
A. Introduction
1. Decision-making is typically described as “choosing among alternatives.”
2. This is simplistic because decision-making is a process.
a) See Exhibit 3-1 illustrating the decision-making process.
II. WHAT DEFINES A DECISION PROBLEM?
A. Introduction
1. The decision-making process begins with the identification of a problem (Step 1), a discrepancy between an existing and a desired state of affairs.
a) Car buying example.
2. Problem identification is subjective.
3. The manager who mistakenly solves the wrong problem perfectly is likely to perform just as poorly as the manager who fails to identify the right problem and does nothing.
a) How do managers become aware that they have a discrepancy?
b) Managers compare their current state of affairs and some standard.
1) Past performance.
2) Previously set goals.
3) Performance of some other unit within the organization or in other organizations.
4) A vehicle that runs.
B. What Is Relevant in the Decision-Making Process?
1. Once a problem is identified, the decision criteria must be identified (Step 2).
2. Car-buying example continued.
3. Every decision maker has criteria—explicitly stated or not—that guide his/her decision.
a) What is not identified is as important as what is.
4. If a decision maker does not identify a particular factor, it is treated as irrelevant.
C. How Does the Decision Maker Weight the Criteria?
1. It is necessary to allocate weights to the items listed in Step 2 in order to give them their relative priority in the decision (Step 3).
2. A simple approach, give the most important criterion a weight of ten and then assign weights to the rest against that standard.
a) Exhibit 3-2 lists the criteria and weights for vehicle replacement decision.
3. Then the decision maker lists the alternatives that could succeed in resolving the problem (Step 4).
a) No attempt is made to appraise these alternatives, only to list them.
4. Once identified, the decision maker must critically analyze each alternative (Step 5).
a) Each alternative is evaluated by appraising it against the criteria and weights established in Steps 2 and 3.
1) Exhibit 3-3 shows the assessed values for each vehicle; it does not reflect the weighting done in Step 3.
b) If you multiply each alternative assessment against its weight, you get Exhibit 3-4.
c) Notice that the weighting of the criteria has changed the ranking of alternatives in our example.
D. What Determines the Best Choice?
1. The critical act of choosing the best alternative from among those enumerated and assessed (Step 6).
E. What Is Decision Implementation?
1. The decision may still fail if it is not implemented properly (Step 7).
2. Decision implementation includes conveying the decision to those affected and getting their commitment to it.
3. The people who must carry out a decision are most likely to enthusiastically endorse the outcome if they participate in the decision-making process.
F. What is the Last Step in the Decision Process?
1. The last step (Step 8) appraises the result of the decision to see whether it has corrected the problem.
2. Did the alternative chosen in Step 6 and implemented in Step 7 accomplish the desired result?
G. Common Errors Committed in the Decision-Making Process
1. Making decisions is making choices.
2. Heuristics are “rules of thumb” that managers use to simplify their decision making.
3. Exhibit 3-5 identifies 12 common decision errors and biases that managers make.
4. Some common mistakes:
a) overconfidence bias - they think they know more than they do or hold unrealistically positive views of themselves and their performance.
b) immediate gratification bias - describes decision makers who tend to want immediate rewards and to avoid immediate costs.
c) anchoring effect -describes when decision makers fixate on initial information as a starting point and then, once set, fail to adequately adjust for subsequent information.
d) selective perception bias - when decision makers selectively organize and interpret events based on their biased perceptions.
e) confirmation bias - decision makers who seek out information that reaffirms their past choices and discount information that contradicts past judgments
f) framing bias - when decision makers select and highlight certain aspects of a situation while excluding others.
g) availability bias - is when decisions makers tend to remember events that are the most recent and vivid in their memory.
h) representation bias - when decision makers assess the likelihood of an event based on how closely it resembles other events or sets of events.
i) randomness bias - describes when decision makers try to create meaning out of random events.
j) sunk costs error - when decision makers forget that current choices can’t correct the past.
k) self-serving bias -decision makers who are quick to take credit for their successes and to blame failure on outside factors.
l) hindsight bias - the tendency for decision makers to falsely believe that they would have accurately predicted the outcome of an event once that outcome is actually known.
Teaching Notes
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III. APPROACHES MANAGERS CAN USE TO MAKE DECISIONS
A. Introduction
1. Decision making is the essence of management. Managers—as they plan, organize, lead, and control—are called decision makers. (Exhibit 3-6).
2. Managerial decision-making is assumed to be rational.
a) Managers make consistent, value-maximizing choices within specified constraints.
3. Decision maker who was perfectly rational would be fully objective and logical.
a) He or she would carefully define the problem and have a clear and specific goal.
b) The steps in the decision-making process would consistently lead to selecting the alternative that maximizes that goal.
c) Decisions are made in the best interests of the organization.
d) Guide users through problems by asking them a set of sequential questions about the situation and drawing conclusions based on the answers given.
Technology and the Manager’s JobMaking Better Decisions with Technology
1. Expert systems use software programs to encode the relevant experience of an expert and allow a system to act like that expert in analyzing and solving ill-structured problems.
a.) Use specialized knowledge about a particular problem area rather than general knowledge that would apply to all problems.
b.) Use qualitative reasoning rather than numerical calculations.
c.) Perform at a level of competence that is higher than that of non-expert humans.
2. Neural networks are the next step beyond expert systems.
a.) Use computer software to imitate the structure of brain cells and connections among them.
b.) People can’t easily assimilate more than two or three variables at once, but neural networks can perceive correlations among hundreds of variables.
c.) Example, most banks today use neural networks to flag potential credit card fraud and it’s more likely that the majority of credit card transactions flagged will be actual cases of fraud. Also, fraudulent activities on a credit card can be uncovered in a matter of hours with neural networks.
B. What Is Bounded Rationality?
1. Management theory is built on the premise that individuals act rationally.
2. The essence of managerial jobs revolves around the rational decision-making process. However, few people actually behave rationally.
From the Past to the Present1. Herbert Simon found that within certain constraints, managers do act rationally.
2. Because it is impossible for human beings to process and understand all the information necessary, they construct simplified models that extract the essential features from problems.
a.) Bounded rationality, decision makers behave rationally within the limits of the simplified or bounded model.
b.) The result is a satisficing decision; the solutions are “good enough.”
3. How do managers’ actions within these boundaries differ from actions within the rational model?
a) Once a problem is identified, the search for criteria and alternatives begins.
1) This list of criteria is generally limited and made up of the more conspicuous choices.
b) Simon found that decision makers focus on easy-to-find choices—those that are highly visible.
c) This means developing alternatives that vary only slightly from past decisions about similar problems.
d) Once this limited set of alternatives is identified, decision makers begin reviewing them.
1) The review will not be exhaustive.
e) They review alternatives only until an alternative that is sufficient is found.
1) The first alternative to meet the “good enough” criterion ends the search.
(a) Accept offer as cash flow manager with mid-sized firm 60 miles from home at starting salary of $44,500.
(b) Further searching would have revealed an opening for a cash flow manager with a Fortune 1000 firm 25 miles from home at a starting salary of $48,000.
(c) You stopped searching when the first job was found because it was “good enough.”
f) What are the implications of bounded rationality on the manager’s job? In situations in which the assumptions of perfect rationality do not apply (including many of the most important and far-reaching decisions that a manager makes), the details of the decision-making process are strongly influenced by the decision maker’s self-interest, the organization’s culture, internal politics, and power considerations.
g) Decision-making is also likely influenced by the organization’s culture, internal politics, power considerations, and by a phenomenon called escalation of commitment, which is an increased commitment to a previous decision despite evidence that it may have been wrong.
C. Role of Intuitive Decision Making
1) It’s making decisions on the basis of experience, feelings, and accumulated judgment.
2) It’s been described as “unconscious reasoning.”
3) Exhibit 3-7 shows 5 different aspects of intuition.
4) One survey found that almost half of the executives surveyed “used intuition more often than formal analysis to run their companies.
Teaching Notes
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IV. TYPES OF DECISIONS AND DECISION-MAKING
A. Introduction
1. Types of problems faced by managers often determine how a problem is treated.
B. How Do Problems Differ?
1. Some problems are straightforward. The goal of the decision maker is clear, the problem familiar, and information about the problem easily defined and complete.
a) examples of well-structured problems include a supplier’s tardiness with an important delivery, a customer’s wanting to return an Internet purchase, etc.
2. Many situations, however, are ill-structured problems. They are new or unusual. Information about such problems is ambiguous or incomplete.
a) examples of ill-structured problems include the decision to enter a new market segment, to hire an architect to design a new office park, etc.
C. How Does a Manager Make Programmed Decisions?
1. Programmed, or routine, decision making is the most efficient way to handle well-structured problems.
2. When problems are ill structured, managers must rely on nonprogrammed decision making.
a) Automotive mechanic example.
3. Decisions are programmed to the extent that they are repetitive and routine and to the extent that a specific approach has been worked out for handling them.
a) Programmed decision making is relatively simple and tends to rely heavily on previous solutions.
b) The develop-the-alternatives stage is given little attention because programmed decision making becomes decision making by precedent.
4. Procedure is a series of interrelated sequential steps that a manager can use when responding to a well-structured problem.
a) The only real difficulty is in identifying the problem.
b) Once the problem is clear, so is the procedure.
c) Example of purchasing manager and request for 250 copies of Norton Antivirus Software
5. A rule is an explicit statement that tells a manager what he or she ought or ought not to do.
a) Rules are frequently used with a well-structured problem because they are simple to follow and ensure consistency.
6. A policy provides guidelines to channel a manager’s thinking in a specific direction.