Don Hellriegel Susan E. Jackson
John W. Slocum, Jr.
MANAGING: A COMPETENCY BASED APPROACH
11th EditionChapter 8—Fundamentals of Decision
Making
Prepared by
Argie ButlerTexas A&M University
Chapter 8: PowerPoint 8.1
Learning Goals
1. Explain certainty, risk, and uncertainty and how they affect decision making
2. Describe the characteristics of routine, adaptive, and innovative decisions
3. Discuss the rational and bounded rationality models of managerial decision making
4. Explain the features of political managerial decision making
Chapter 8: PowerPoint 8.2
1. defining problems,2. gathering information,3. generating alternatives, and4. choosing a course of action
We’ve got lots of challenges ahead of us. I spend about 75% of my time solving problems of one sort or another. The other 25% is really wonderful, though. Watching people grow, develop, achieve, and do good things and seeing the company succeed is very rewarding and lots of fun.
David Hoover Chairman, CEO and President
Ball Corporation
Chapter 8: PowerPoint 8.3 (Adapted from Figure 8.1)
Objectiveprobabilities
SubjectiveprobabilitiesRisk
Certainty Uncertainty
Chapter 8: PowerPoint 8.4
The condition under which individuals are:
1. fully informed about a problem,
2. alternative solutions are known, and
3. the results of each solution are known
Both the problem and alternative solutions are totally known and well defined
Exception for most managers
Chapter 8: PowerPoint 8.5
What is Risk?
The condition under which individuals can:
Probability: the percentage of times that a specific result would occur if an individual were to make the same decision a large number of times
1. define a problem,2. specify the probability of certain events,3. identify alternative solutions, and4. state the probability of each solution leading
to a result
Chapter 8: PowerPoint 8.6
What is Risk? (cont’d)
Objective probability: the likelihood that a specific result will occur, based on hard facts and numbers
Subjective probability: the likelihood that a specific result will occur, based on personal judgment
Chapter 8: PowerPoint 8.7
What is Uncertainty?
Condition under which individuals do not have the necessary information to assign probabilities to the outcomes of alternative solutions
May not even be able to define the problem, much less identify alternative solutions and possible outcomes
Chapter 8: PowerPoint 8.8 (Adapted from Table 8.1)
Examples of Possible Crises asSources of Uncertainty and High Risk
Othercrises
Economic CrisesRecessions
Stock market crashesHostile takeovers
Physical CrisesIndustrial accidentsSupply breakdowns
Product failures
Information CrisesTheft of proprietary informationTampering with company records
Cyberattacks
Natural DisastersFires
FloodsEarthquakes
Chapter 8: PowerPoint 8.9 (Adapted from Figure 8.2)
Unusual andambiguous
Known andwell defined
Pro
ble
m T
ypes
Untried andambiguous
InnovativeDecisions
InnovativeDecisions
AdaptiveDecisions
AdaptiveDecisions
RoutineDecisions
RoutineDecisions
Conditions u
nder which
decisio
ns are
madeUncertaintyUncertainty
CertaintyCertainty
RiskRisk
Solution Types(Alternative Solutions)
Chapter 8: PowerPoint 8.10
Relatively common and well defined
Unusual and ambiguous
Firefighting
1. Solutions are incomplete
2. Problems recur and cascade
3. Urgency supersedes importance
4. Some problems become crises
Chapter 8: PowerPoint 8.11
Typically made under certainty and objective probability
Standard choices made in response to relatively well-defined and common problems and alternative solutions
Standards often used to set the framework for making routine decisions
Chapter 8: PowerPoint 8.12 (Excerpts from Table 8.2)
ReservationsPhone service will be highly efficient, including: answered before the fourth ring; no hold longer than 15 seconds; or, in case of longer holds, call-backs offered, then provided in less than three minutes
Hotel ArrivalThe doorman (or first-contact
employee) will actively greet guests, smile, make eye contact,
and speak clearly in a friendly manner
Messages and PagingPhone service will be highly efficient, including: answered before the fourth ring; no longer than 15 seconds
Hotel DepartureNo guest will wait longer
than five minutes for baggage assistance, once the bellman
is called (eight minutes in resorts)
Examples of decision rules
at Four Seasons hotels
and resorts
Chapter 8: PowerPoint 8.13
Adaptive Decisions
Choices made in response to a combination of moderately unusual problems and alternative solutions
Convergence—a business shift in which two connections with the customer that were previously viewed as competing or separate(e.g., brick-and-mortar bookstores and Internet bookstores) come to be seen as complementary
Continuous improvement—a managementphilosophy that approaches the challenge ofproduct and process enhancements as an ongoingeffort to increase the levels of quality and excellence
Chapter 8: PowerPoint 8.14
Snapshot
Richard KnightSenior VP for Global OperationsInovant LLC, a Visa Subsidiary
“Visa continuously strives against outages and defects on two broad fronts. Its physical processing operations are protected by multiple layers of redundancy and backups. The company’s IT staff continuously conducts extensive and refined software testing. We make 2,500 system changes to VisaNet per month and modify 2 million lines of code annually.”
Chapter 8: PowerPoint 8.15
Choices based on the discovery, identification, and diagnosis of unusual and ambiguous problems and/or the development of unique or creative alternative solutions
Three forms of innovation for economic progress:
1. Institutional innovation: includes the legal and institutional framework for business, such as deregulation
2. Technological innovation: creates the possibility of new products, services, and production methods
3. Management innovation: major changes in the way organizations are structured and how managers perform their functions
Chapter 8: PowerPoint 8.16
Jack StackCEOSpringfield ReManufacturing Corporation
“You have to innovate and optimize at the same time. After all, you’re under pressure to optimize 24 hours a day, but no one is pushing you to innovate. In order
for us to be able to compete over a long period of time, we give everyone in our organization all of the information needed so they can make decisions
that will drive innovation throughoutour company.”
Snapshot
Chapter 8: PowerPoint 8.17
Prescribes a set of phases that individuals or teams should follow to increase the likelihood that their decisions will be logical and optimal
Rational decision: results in the maximum achievement of a goal in a situation
Usually focuses on means—how best to achieve one or more goals
Chapter 8: PowerPoint 8.18 (Adapted from Figure 8.3)
Environmental influences
1Define and
diagnose theproblem
1Define and
diagnose theproblem
2Set
goals
2Set
goals
3Search foralternativesolutions
3Search foralternativesolutions
7Follow-up
and controlthe results
7Follow-up
and controlthe results
6Implementthe solution
selected
6Implementthe solution
selected
5Choose among
alternativesolutions
5Choose among
alternativesolutions
4Compare and
evaluatealternative solutions
4Compare and
evaluatealternative solutions
Environmental influences
Chapter 8: PowerPoint 8.19
Rational Model: Define andDiagnose the Problem
Noticing skill: identifying and monitoring numerous external and internal environmental factors and deciding which ones are contributing to the problem(s)
Interpreting skill: assessing the factors noticed and determining which are causes, not merely symptoms, of the real problem(s)
Incorporating skill: relating those interpretations to the current or desired goals
Need to ask probing questions
Chapter 8: PowerPoint 8.20
Goals: results to be attained and indicate the direction toward which decisions and actions should be aimed
General goals: provide broad direction for decision making in qualitative terms
Operational goals: state what is to be achievedin quantitative terms, for whom, and within what time period
Hierarchy of goals: represents the formallinking of goals between organizationallevels
Chapter 8: PowerPoint 8.21
Rational Model: Search forAlternative Solutions
Gary TookerFormer CEO & Chairman of Board of DirectorsMotorola
…I think many people in a rush to make a decision do not have enough of the alternatives out in the open. So, they have two of the alternatives and say, “Okay, I’m going this way” but they didn’t think through it enough when
there were possibly three or four alternatives. One of the hidden ones might have been the best, and so the issue is making sure that either all or enough of the alternatives
are out in the open to allow you to make the best decision.
Chapter 8: PowerPoint 8.22 (Adapted from Figure 8.5)
Contends that the capacity of the human mind for formulating and solving complex problems is small compared with what is needed for objectively rational behavior
Decision Biases
Inadequate Problem Description
Limited Search for Alternatives
Limited Information
Satisficing
Chapter 8: PowerPoint 8.23
Selective perception bias
Concrete information bias
Gambler’sfallacy bias
Law of small numbers bias
Bounded Rationality Model: Decision Biases
Availabilitybias
Chapter 8: PowerPoint 8.24
Jeffrey McKeeverChairman and CEO
MicroAge
…When someone comes to you, you often have a bias about what they are talking about. If you have been in business for 20 to 30 years, chances are you’ve been there and done that. Their idea is generally not so new or innovative as they think. You have a strong prejudice about outcomes. That is a dangerous thing. One of the things you have to do very cognitively to be
a good leader is not let your biases or your filters totally cloud the message someone’s
trying to deliver.
Chapter 8: PowerPoint 8.25
Inadequate problem definition
New problems often are viewed as being like old problems
Too much focus on symptoms as problems Laziness
Limited search for alternatives
Options considered until one that seems adequate
Limited information
Ignorance: the lack of relevant information or the incorrect interpretation of the information that is available
Chapter 8: PowerPoint 8.26
Herbert SimonRecipient of Nobel Prize in Economics
Satisficing is intended to be used in contrast to the classical economist’s idea that in making decisions in business or
anywhere in real life, you somehow pick, or somebody gives you, a set of alternatives from which you select the best one—
maximize. The satisficing idea is that first of all, you don’t have the alternatives, you’ve got to go out and scratch for them—and that you have mighty shaky ways of evaluating them when you do find them. So you look for alternatives
until you get one from which, in terms of your experience and in terms of what you have reason to expect, you will get a
reasonable result.
Chapter 8: PowerPoint 8.27
Bounded Rationality Model
Level of Satisficing Can be Raised By:
1. Personal determination
2. Setting higher individual or organization standards (goals)
3. Use of management science and computer-based decision-making and problem-solving techniques
4. Following the seven steps in the rational model
Chapter 8: PowerPoint 8.28 (Adapted from Figure 8.6)
Divergence in problem definition
Divergence in goals
Divergence in solutions
Political decisionmaking
Multiple stakeholders with power such as:
InvestorsCustomers Employees
Unions
Suppliers
Competitors
Legislative BodiesRegulatory Agencies
Chapter 8: PowerPoint 8.29
Recognize up front the amount of time and attention to organizational politics, the informal systems and
processes that influence so much about how things actually get done in an organization…Politics, by the way, is not a bad thing. Any enterprise has its own
political system, if we can call it that. But, I think what makes the difference is the curiosity and the inquiry by
you to learn how the political system works.
Eliza HermannVice president for Human Resources StrategyBP PLC
Snapshot