CHAPTER 6 DECISION MAKING: THE ESSENCE OF THE MANAGER'S JOB 1. INTRODUCTION. All managers make numerous decisions. The overall quality of these decisions strongly affect the organization's success or failure. The concept of decision making is explored in this chapter. 2. THE DECISION-MAKING PROCESS. Decision making is a process that involves more than the simple act of choosing among alternatives. The decision-making process is defined as a set of eight steps that include identifying a problem, selecting an alternative, and evaluating the decision's effectiveness. A. Step 1: Identifying a problem. A problem is defined as a discrepancy between an existing and a desired state of affairs. Some cautions about problem identification include the following. 1. Make sure it's a problem and not just a symptom of a problem. 2. Problem identification is subjective. 3. Before a problem can be determined, a manager must be aware of any discrepancies. 4. Discrepancies can be found by comparing current results with some standard. 5. Pressure must be exerted on the manager to correct the discrepancy. 6. Managers aren't likely to characterize some discrepancy as a problem if they perceive that they don't have the authority, money, information, or other resources needed to act on it. B. Step 2: Identifying decision criteria. The decision criteria include any criteria that define what is relevant in a decision. C. Step 3: Allocating weights to the criteria. The criteria identified in step 2 of the decision-making process must be weighted in order to give them correct priority in the decision. D. Step 4: Developing alternatives. The decision maker now needs to identify viable alternatives for resolving the problem. E. Step 5: Analyzing alternatives. Each of the alternatives must now be critically analyzed. Each alternative is evaluated by appraising it against the criteria. F. Step 6: Selecting an alternative. The act of selecting the best alternative from among those identified and assessed is critical. G. Step 7: Implementing the alternative. The chosen alternative must be implemented. Implementation is defined as conveying a decision to those affected and getting their commitment to it. H. Step 8: Evaluating decision effectiveness. The last step in the decision-making process assesses the result of the decision to see whether or not the problem has been corrected. 3. THE PERVASIVENESS OF DECISION MAKING. Decision making is important to every aspect of a manager's job. A. Decision making is part of all four managerial functions. In performing these functions, managers are often called decision makers. B. Much of a manager's decision making is routine. Even though certain problems may seem easy or may have been faced before, it still involves a decision. 4. THE RATIONAL DECISION MAKER. Rational decision making describes choices that are consistent and value-maximizing within specific constraints. A. Assumptions of rationality. There are seven assumptions about rationality. 1. The problem is clear and unambiguous. 2. A single, well-defined goal is to be achieved. 3. All alternatives and consequences are known. 4. Preferences are clear. 5. Preferences are constant and stable. 6. No time or cost constraints exist. 7. Final choice will maximize economic payoff. B. Limits to rationality. Unfortunately, most decisions that managers face don't meet all the tests of rationality. Studies into the decision-making process have uncovered some important insights. 1. There are limits to an individual's information processing capacity. 2. Decision makers tend to intermix solutions with problems. 3. Perceptual biases can distort problem identification. 4. Many decision makers select information more for its accessibility than for its quality. 5. Decision makers tend to commit themselves prematurely to a specific alternative thereby biasing the process towards that alternative. 6. An escalation of commitment can be fostered if there is evidence that a previous solution is not working. An escalation of commitment is an increased commitment to a previous decision despite evidence that it may have been wrong. 7. Prior decision precedents constrain current choices. 8. Organizations are made up of divergent interests that make it difficult to create a common effort toward a single goal. 9. Organizations place time and cost constraints on decision makers which then limit the amount of search a manager can make. 10. A strong conservative bias exists in most organizational cultures which reinforces the status quo and discourages risk taking and innovation. C. Bounded rationality is defined as behavior that is rational within the parameters of a simplified model that captures the essential features of a problem. The result of bounded rationality is satisficing, which is defined as acceptance of solutions that are "good enough." 5. PROBLEMS AND DECISIONS: A CONTINGENCY APPROACH. Since the type of problem a manager faces in a decision-making situation can influence how the problem is addressed, a categorization scheme for problems and types of decisions is presented next. A. Types of problems. Well-structured problems are straightforward, familiar, and easily defined problems. Ill-structured problems are new problems in which information is ambiguous or incomplete. B. Types of decisions. There are two types of decisions that managers might face. 1. Programmed decisions are repetitive decisions that can be handled by a routine approach. In dealing with this type of decision, managers may utilize procedures, rules, or policies. a. A procedure is a series of interrelated sequential steps that can be used to respond to a structured problem. b. A rule is an explicit statement that tells managers what they ought or ought not to do. c. A policy is a guide that establishes parameters for making decisions. 2. Nonprogrammed decisions are unique decisions that require a custom-made solution. C. Integration. Lower-level managers typically confront familiar and repetitive problems and rely on programmed decisions. As managers move up the levels of the organization, the problems tend to become more ill-structured. However, few managerial decisions in the real world are either fully programmed or nonprogrammed. 6. DECISION-MAKING STYLES. Managers have different sytles when it comes to making a decision and solving problems. We want to look at two different views. A. One view proposes that there are three different ways managers approach problems in the workplace. 1. A problem avoider ignores information that points to a problem. These individuals don't want to confront problems. 2. Problem solvers try to solve problems when they come up. They can be characterized as being reactive only dealing with problems when they occur. 3. A problem seeker actively seeks out problems to solve or new opportunities to pursue. They take a proactive approach to anticipating problems before they occur. 4. Managers can and do use each approach. B. The other approach suggests that individuals differ along two dimensions in the way they approach decision making. One dimension is an individual's way of thinking (rational or intuitive) and the other is an individual's tolerance for ambiguity (low or high). These two dimensions can be combined into four different decision-making styles. 1. The directive style is characterized by a low tolerance for ambiguity and a rational way of thinking. 2. The analytic style is characterized by a high tolerance for ambiguity and a rational way of thinking. 3. The conceptual style is characterized by a high tolerance for ambiguity and an intuitive way of thinking. 4. The behavioral style is characterized by a low tolerance for ambiguity and an intuitive way of thinking. 5. Although these four styles are distinct, most managers have characteristics of more than one style. It's probably more realistic to think of a manager's dominant style and his or her alternate styles. 7. ANALYZING DECISION ALTERNATIVES. There are three different decision conditions that managers might face: certainty, risk, and uncertainty. A. Certainty is a situation in which a manager can make accurate decisions because the outcome of every alternative is known. B. Risk describes those conditions in which the decision maker has to estimate the likelihood of certain outcomes. C. Uncertainty is a situation in which a decision maker has neither certainty nor reasonable probability estimates available. 8. GROUP DECISION MAKING. Many decisions in organizations are made in groups. A. Advantages and disadvantages. Individual and group decisions each have their own set of strengths and drawbacks. 1. The advantages that group decisions have over individuals include the following: a. Provide more complete information. b. Generate more alternatives. c. Increase acceptance of a situation. d. Increase legitimacy. 2. The drawbacks include the following: a. Time consuming. b. Minority domination. c. Pressures to conform which can lead to groupthink. d. Ambiguous responsibility. B. Effectiveness and efficiency. Are groups more effective than individuals? It depends on the criteria used for defining effectiveness. 1. Group decisions tend to be more accurate. 2. Individual decisions are quicker in terms of speed. 3. Group decisions tend to have more acceptance. 4. The effectiveness of group decisions tends to be influenced by the size of the group. Groups should not be too large. 5. Groups also are not as efficient as individual decision makers. C. Techniques for improving group decision making. There are four ways to make group decisions more creative. 1. Brainstorming is an idea-generating process that encourages alternatives while withholding criticism. 2. Nominal group technique is a decision-making technique in which group members are physically present but operate independently. 3. Delphi technique is a group decision-making technique in which members never meet face to face. 4. Electronic meetings are decision-making groups that interact by way of linked computers. ANSWERS TO REVIEW QUESTIONS 1. What, if any, are the differences between problem solving and decision making? Many decisions are made in order to solve problems, but decisions don't always have to revolve around problem solution. 2. With more and more managers using computers, will they be able to make "more rational" decisions? Why or why not? Computers will allow managers to more easily gather information and analyze it, but it's doubtful that utilizing computers will allow managers to be more rational. If we look at the assumptions of rationality (problem clarity, goal orientation, known options, clear preferences, etc.), it's obvious that even by adding computers to the decision-making process, managers' decision making still won't be rational. 3. What is a satisficing decision? A satisficing decision is one that is "good enough." It meets the decision maker's criteria of being both satisfactory and sufficient. Rather than optimizing, it meets the minimum threshold test. 4. What's the difference between a rule and a policy? A rule is an explicit statement that tells a manager what he or she ought or ought not to do. A policy provides guidelines to channel a manager's thinking in a specific direction. Thus, the policy establishes parameters for the decision maker instead of specifically stating what should or should not be done. 5. Why would an organization's senior executives favor developing a wide range of programmed decisions for middle- and lower-level managers? Problems at the middle and lower levels tend to be more structured. Thus, routine problems should be handled by a repetitive decision. Also, programmed decisions minimize the need for managers to exercise discretion. Discretion costs money, so the more nonprogrammed decisions a manager must make, the higher salary he or she will command because greater judgment is needed. There are strong economic incentives for top management to create standard operational procedures, rules, and policies to guide other middle- and lower-level managers. 6. Is the order in which alternatives are considered more critical under assumptions of perfect rationality or bounded rationality? Why? The order of alternatives is more critical in the realistic model (bounded rationality) because, unlike the rational model where all alternatives are evaluated and the optimal one chosen, once a satisfactory alternative is identified under the bounded rationality model, it is accepted. 7. What is groupthink? What are its implications for decision making? Groupthink represents conformity to outside pressures and the withholding of deviant, minority, or unpopular views, thus causing members to suffer deterioration of mental efficiency, reality testing, and moral judgments. Its major implication for decision making is that it can create poorly thought-out decisions. 8. What role should creativity play in decision making? Why? Creativity obviously plays a part in the development of potential alternatives. The decision maker wants to be as creative as possible in coming up with possible alternatives. But, creativity could also play a role in identifying problems. Managers might have to use their creativity in recognizing discrepancies. 9. Would you call yourself a systematic or intuitive thinker? What are the decision-making implications of this label? Student responses to this question will vary. The chapter's self-assessment exercise can be used perhaps to help them decide which they are. The decision-making implications of this label are that it describes the way we think or process information which in turn influences how we tend to make decisions. 10. Can managers be trained to be better decision makers? If so, how? If not, why not? Managers can be trained to be better decision makers. They can be provided with suggestions for identifying problems, developing their creativity, analyzing alternatives, and making choices.