Decision making

6-1 Copyright © 2011 Pearson Education
The Decision-Making Process
1. Define decision.
2. Describe the eight steps in the decision-making process.

Decision Making
Decision
• Making a choice from two or more alternatives.
 It is a process, not just a simple act of choosing among alternatives
The Decision-Making Process
• Identifying a problem and decision criteria and allocating weights to
the criteria.
• Developing, analyzing, and selecting an alternative that can resolve
the problem.
• Implementing the selected alternative.
• Evaluating the decision’s effectiveness.

The Situation
• Sarah 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their old ones are outdated and inadequate for doing their job.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 that it is not economical to add memory to
the old computers and it is the company’s policy to purchase, not
lease.

Exhibit 6–1
The Decision-
Making Process

Step 1: Identifying the Problem

Decision criteria are factors that are important
(relevant) to resolving the problem such as:
• Costs that will be incurred (investments required)
• Risks likely to be encountered (chance of failure)
• Outcomes that are desired (growth of the firm)
Step 2: Identifying Decision
Criteria

Decision criteria are not of equal importance:
• Assigning a weight to each item places the items in the
correct priority order of their importance in the decision-
making process.
• Every decision maker has criteria that guide his or her
decisions.
Step 3: Allocating Weights to
the Criteria

Criterion Weight
Memory and Storage 10
Battery life 8
Carrying Weight 6
Warranty 4
Display Quality 3
Exhibit 6–2 Criteria and Weights for Computer
Replacement Decision

Identifying viable alternatives
• Alternatives are listed (without evaluation) that can
resolve the problem.
• This is the step where a decision maker needs to be
creative.
Step 4: Developing Alternatives

Appraising each alternative’s strengths and
weaknesses
• An alternative’s appraisal is based on its ability to
resolve the issues identified in steps 2 and 3.
○ There are times when a decision maker might not have to
do this step. If one alternative scored highest on every
criterion, you would not need to consider the weights
because that alternative would already be the top choice.
Step 5: Analyzing Alternatives

Exhibit 6–3 Assessed Values of Laptop
Computers Using Decision Criteria

Choosing the best alternative
• The alternative with the highest total weight is chosen.
Step 6: Selecting an Alternative

Exhibit 6–4 Evaluation of Laptop Alternatives
Against Weighted Criteria

Putting the chosen alternative into action
• Conveying the decision to and gaining commitment
from those who will carry out the decision.
– you put the decision into action by communicating 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 are more likely to support it than if you just tell them what to
do.
– managers may need to do during implementation is reassess the
environment for any changes, especially with a long-term decision.
Step 7: Implementing the
Alternative

The soundness of the decision is judged by its
outcomes
• How effectively was the problem resolved by outcomes
resulting from the chosen alternatives?
• If the problem was not resolved, what went wrong?
Step 8: Evaluating the
Decision’s Effectiveness

Making Effective Decisions
Factors
Perception
Priority
Acceptability
Risk
Resources
Goals
Values
Demands
Style
Judgement

Six C’s of Decision Making
1. Construct
2. Compile
3. Collect
4. Compare
5. Consider
6. Commit

Six C’s of Decision Making
1. Construct a clear picture of precisely what must be decided.
2. Compile a list of requirements that must be met
3. Collect information on alternatives that meet the requirements
4. Compare alternatives that meet the requirements
5. Consider the “What might go wrong” factor with each alternative
6. Commit to a decision and follow through with it

Managers Making Decisions
• Decision making is part of all four managerial functions (next slide).
In fact, that is why we say that decision making is the essence of
management.
• that is why managers when they plan, organize, lead, and control‒
are called‒ decision makers.

Exhibit 6–5 Decisions in the Management Functions

• The fact that almost everything a manager does involves making
decisions does not mean that decisions are always time-consuming,
complex, or evident to an outside observer. Most decision making is
routine. Every day of the year, you make a decision.
• 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.

Making Decisions
Rationality
Rationality is the quality or state of being reasonable, based on facts
or reason
• Managers make consistent, value-maximizing choices with specified
constraints.
• Assumptions are that decision makers:
 Are perfectly rational, fully objective, and logical.
 Have carefully defined the problem and identified all viable
alternatives.
 Have a clear and specific goal.
 Will select the alternative that maximizes outcomes in the
organization’s interests rather than in their personal interests.

The Role of Intuition
Intuitive decision making
• Making decisions on the basis of experience, feelings, and
accumulated judgment.

Exhibit 6–6 What Is Intuition?
Source: Based on L. A. Burke and M. K. Miller, “Taking the Mystery Out of Intuitive Decision Making,” Academy of Management Executive, October
1999, pp. 91–99.

Types Of Decisions and
Decision-Making Conditions
1. Explain the two types of problems and decisions.
2. Contrast the three decision-making conditions.

Types of Problems and Decisions
• Managers face different types of problems and decisions as they do
their jobs.
• Depending on the nature of the problem, a manager can make one
of two different types of decisions:
– Structured Problems
– Unstructured Problems

Types of Problems and Decisions
Structured Problems
Some problems are straightforward.
•Involve goals that are clear
•Are familiar (have occurred before)
•Are easily and completely defined information about the problem is‒
available and complete
Programmed Decision
•A repetitive decision that can be handled by a routine approach.

• With this type of decision the “develop-the-alternatives” stage of
the decision-making process either does not exist or is given little
attention.
• once the structured problem is defined, the solution is usually self-
evident or at least reduced to a few alternatives that are familiar
and have proved successful in the past.
• Manager relies on one of three types of programmed decisions:
Procedure.
Rule
policy.

Problems and Decisions
Unstructured Problems
• Problems that are new or unusual and for which information is
ambiguous or incomplete.
• Problems that will require new and unique solutions.
Nonprogrammed Decisions
• Decisions that are unique and nonrecurring.
• Decisions that generate unique responses.

Exhibit 6–7 Programmed Versus Nonprogrammed
Decisions

• Few managerial decisions in the real world are either fully
programmed or nonprogrammed. Most fall somewhere
in between.

managers may face three different conditions in
making decisions, :
• certainty,
• Risk
• uncertainty.

Certainty
• A situation in which a manager can make an accurate decision
because the outcome of every alternative choice is known.
Risk
• A situation in which the manager is able to estimate the likelihood
(probability) of outcomes that result from the choice of particular
alternatives.
– managers have historical data from past personal experiences or
secondary information that lets them assign probabilities to
different alternatives

Decision Making Conditions
Uncertainty
• Limited information prevents estimation of outcome probabilities for
alternatives associated with the problem and may force managers to
rely on intuition.

Decision-Making Styles
1. Describe two decision-making styles.
2. Discuss the twelve decision-making biases.
3. Explain the managerial decision-making model.
4. Describe decision-making practices in the Arab context.

Decision-Making Styles
Linear thinking style
• A person’s preference for using external data and facts and
processing this information through rational, logical thinking.
Nonlinear thinking style
• A person’s preference for internal sources of information and
processing this information with internal insights, feelings and
hunch

• Managers need to recognize that their employees may use different
decisionmaking styles.
• Some employees may take their time weighing alternatives and
relying on how they feel about it, while others may rely on external
data before logically making a decision.
• This does not make one person’s approach better than the other. It
just means that their decision-making styles are different.

Exhibit 6–11 Common Decision-Making Errors
and Biases

Decision-Making Biases and Errors
Heuristics
• Using “rules of thumb” to simplify decision making.
Overconfidence Bias
• Holding unrealistically positive views of oneself and one’s
performance.
Immediate Gratification Bias
• Choosing alternatives that offer immediate rewards and avoid
immediate costs.

Decision-Making Biases and Errors (cont’d)
Anchoring Effect
• Fixating on initial information and ignoring subsequent information.
Selective Perception Bias
• Selecting, organizing and interpreting events based on the decision
maker’s biased perceptions.
Confirmation Bias
• Seeking out information that reaffirms past choices and discounting
contradictory information.

Framing Bias
• Selecting and highlighting certain aspects of a situation while
ignoring other aspects.
Availability Bias
• Losing decision-making objectivity by focusing on the most recent
events.
Representation Bias
• Drawing analogies and seeing identical situations when none exist.
Randomness Bias
• Creating unfounded meaning out of random events.

Sunk Costs Errors
• Forgetting that current actions cannot influence past events and
relate only to future consequences.
Self-Serving Bias
• Taking quick credit for successes and blaming outside factors for
failures.
Hindsight Bias
A psychological phenomenon in which past events seem to be more
prominent than they appeared . Hindsight bias can lead an individual
to believe that an event was more predictable than it actually was,
and can result in an oversimplification in cause and effect..

• Managers avoid the negative effects of these decision errors and
biases by being aware of them and then not using them.
• Managers should also pay attention to how they make decisions and
try to identify the heuristics they typically use and critically evaluate
how appropriate those are.
• Managers might want to ask those around them to help identify
weaknesses in their decision-making style and try to improve on

Decision Making for Today’s World
Guidelines for making effective decisions:
1. Understand cultural differences.
 In some cases, there is no best way to make decisions. The best
way may depend on the values, attitudes, and beliefs that prevail
in a specific culture.
2. Know when it’s time to stop.
 Good decision makers are not afraid to change their minds.
They do not become attached to one course of thinking.

Decision Making for Today’s World (cont’d)
3.Use an effective decision-making process. This process has six
characteristics:
 It focuses on what is important.
 It is logical and consistent.
 It acknowledges both subjective and objective thinking and
blends analytical with intuitive thinking.
 It requires only as much information and analysis as is
necessary to resolve a particular dilemma.
 It encourages and guides the gathering of relevant
information and informed opinion.
 It is straightforward, reliable, easy to use, and flexible.

Decision making

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