Chapter 7 The Decision-Making Process John R. Schermerhorn, Jr. Daniel G. Bachrach Introduction to Management 13th edition 7 Chapter 7 The Decision-Making Process

Planning Ahead — KEY TAKEAWAYS Discuss the role of information in the management process. Identify how managers approach problems and decisions. Describe the six steps in the decision-making process? Describe the potential pitfalls and sources of creativity in managerial decision making. Copyright ©2015 John Wiley & Sons, Inc.

Chapter 7 Outline Information, Technology, and Management Information and information systems Data Mining and Analytics Business Intelligence and Executive Dashboards Problem Solving and Managerial Decisions Managers as Problem Solvers Problem-Solving Approaches and Styles Structured and Unstructured Problems Crisis Problems Problem-Solving Environments Copyright ©2015 John Wiley & Sons, Inc.

Chapter 7 Outline The Decision-Making Process Step 1 – Identify and Define the Problem Step 2 – Generate and Evaluate Alternative Courses of Action Step 3 – Decide on a Preferred Course of Action Step 4 – Implement the Decision Step 5 – Evaluate Results At All Steps – Check Ethical Reasoning Issues in Managerial Decision Making Decision errors and traps Creativity in decision making Copyright ©2015 John Wiley & Sons, Inc.

The Decision-Making Process Decision - making a choice from two or more alternatives Managers at all levels and in all areas of organizations make decisions. That is, they make choices. Although decision making is typically described as choosing among alternatives, this view is too simplistic. Why? Because decision making is (and should be) a process, not just a simple act of choosing among alternatives.

What are the top ten skills that employers want? 1. Ability to work in a team structure 2. Ability to make decisions and solve problems 3. Ability to communicate verbally with people inside and outside an organization 4. Ability to plan, organize and prioritize work 5. Ability to obtain and process information 6. Ability to analyze quantitative data 7. Technical knowledge related to the job 8. Proficiency with computer software programs 9. Ability to create and/or edit written reports 10. Ability to sell and influence others Copyright ©2015 John Wiley & Sons, Inc.

The Top 5 Business Decisions Of All Time #5 Greatest Decision—General Electric. Jack Welch’s decision to fully fund a first-in-class training center at Crotonville, led to the development of hundreds of great leaders who practiced the “GE Way”. Copyright ©2015 John Wiley & Sons, Inc.

The Top 5 Business Decisions Of All Time #4 Greatest Decision—Samsung. Their decision to launch a sabbatical program that sends top talent all around the world continues to be the secret behind Samsung’s success as a global brand. Copyright ©2015 John Wiley & Sons, Inc.

The Top 5 Business Decisions Of All Time #3 Greatest Decision—Wal-Mart. Sam Walton’s decision to hold Saturday morning, all-employee meetings led to a culture of rapid information and decision making, which in turn created one of the biggest companies in the world. Copyright ©2015 John Wiley & Sons, Inc.

The Top 5 Business Decisions Of All Time #2 Greatest Decision—Apple. The board’s decision to bring back Steve Jobs, after firing him a decade earlier, led to amazing product innovation and to the creation of one of the most valuable companies in the world. Copyright ©2015 John Wiley & Sons, Inc.

The Top 5 Business Decisions Of All Time #1 Greatest Decision—Ford. Henry Ford’s decision to double the wages of his workers enabled him to attract the talent he needed, and helped insure a class of worker who could afford the very products they were building. Copyright ©2015 John Wiley & Sons, Inc.

Exhibit 6-1 Decision-Making Process

The Decision-Making Process (cont.) Step 1: Identify a Problem Problem - an obstacle that makes it difficult to achieve a desired goal or purpose. Every decision starts with a problem, a discrepancy between an existing and a desired condition Example - Amanda is a sales manager whose reps need new laptops Every decision starts with a problem, a discrepancy between an existing and a desired condition. For our example, Amanda 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 it’s not economical to add memory to the old computers and it’s the company’s policy to purchase, not lease. Now we have a problem—a disparity between the sales reps’ current computers (existing condition) and their need to have more efficient ones (desired condition). Amanda has a decision to make.

The Decision-Making Process (cont.) Step 2: Identify Decision Criteria Decision criteria are factors that are important (relevant) to resolving the problem Example - Amanda decides that memory and storage capabilities, display quality, battery life, warranty, and carrying weight are the relevant criteria in her decision. Once a manager has identified a problem, he or she must identify the decision criteria important or relevant to resolving the problem. Every decision maker has criteria guiding his or her decisions even if they’re not explicitly stated. In our example, Amanda decides after careful consideration that memory and storage capabilities, display quality, battery life, warranty, and carrying weight are the relevant criteria in her decision.

The Decision-Making Process (cont.) Step 3: Allocate Weights to the Criteria If the relevant criteria aren’t equally important, the decision maker must weight the items in order to give them the correct priority in the decision. The weighted criteria for our example are shown in Exhibit 6-2. If the relevant criteria aren’t equally important, the decision maker must weight the items in order to give them the correct priority in the decision. How? A simple way is to give the most important criterion a weight of 10 and then assign weights to the rest using that standard. Of course, you could use any number as the highest weight. The weighted criteria for our example are shown in Exhibit 6-2.

Exhibit 6-2 Important Decision Criteria

The Decision-Making Process (cont.) Step 4: Develop Alternatives List viable alternatives that could resolve the problem Example - Amanda, identifies eight laptops as possible choices. (See Exhibit 6-3.) The fourth step in the decision-making process requires the decision maker to list viable alternatives that could resolve the problem. In this step, a decision maker needs to be creative, and the alternatives are only listed—not evaluated—just yet. Our sales manager, Amanda, identifies eight laptops as possible choices. (See Exhibit 6-3.)

Exhibit 6-3 Possible Alternatives

The Decision-Making Process (cont.) Step 5: Analyze Alternatives Appraising each alternative’s strengths and weaknesses An alternative’s appraisal is based on its ability to resolve the issues related to the criteria and criteria weight. Once alternatives have been identified, a decision maker must evaluate each one. How? By using the criteria established in Step 2. Exhibit 6-3 shows the assessed values that Amanda gave each alternative after doing some research on them. Keep in mind that these data represent an assessment of the eight alternatives using the decision criteria, but not the weighting. When you multiply each alternative by the assigned weight, you get the weighted alternatives as shown in Exhibit 6-4. The total score for each alternative, then, is the sum of its weighted criteria. Sometimes a decision maker might be able to skip this step. If one alternative scores highest on every criterion, you wouldn’t need to consider the weights because that alternative would already be the top choice. Or if the weights were all equal, you could evaluate an alternative merely by summing up the assessed values for each one. (Look again at Exhibit 6-3.) For example, the score for the HP ProBook would be 36, and the score for the Sony NW would be 35.

The Decision-Making Process (cont.) Step 6: Select an Alternative Choosing the best alternative The alternative with the highest total weight is chosen. The sixth step in the decision-making process is choosing the best alternative or the one that generated the highest total in Step 5. In our example (Exhibit 6-4), Amanda would choose the Dell Inspiron because it scored higher than all other alternatives (249 total).

Exhibit 6-4 Evaluation of Alternatives

The Decision-Making Process (cont.) Step 7: Implement the Alternative Putting the chosen alternative into action - Conveying the decision to and gaining commitment from those who will carry out the alternative In Step 7 in the decision-making process, you put the decision into action by conveying 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’re more likely to support it than if you just tell them what to do. Another thing managers may need to do during implementation is reassess the environment for any changes, especially if it’s a long-term decision. Are the criteria, alternatives, and choice still the best ones, or has the environment changed in such a way that we need to reevaluate?

The Decision-Making Process (cont.) Step 8: Evaluate Decision Effectiveness 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? The last step in the decision-making process involves evaluating the outcome or result of the decision to see whether the problem was resolved. If the evaluation shows that the problem still exists, then the manager needs to assess what went wrong. Was the problem incorrectly defined? Were errors made when evaluating alternatives? Was the right alternative selected but poorly implemented? The answers might lead you to redo an earlier step or might even require starting the whole process over.

Exhibit 6-5 Decisions Managers May Make Although everyone in an organization makes decisions, decision making is particularly important to managers. As Exhibit 6-5 shows, it’s part of all four managerial functions. In fact, that’s why we say that decision making is the essence of management. And that’s why managers—when they plan, organize, lead, and control—are called decision makers.

Exhibit 6-5 Decisions Managers May Make (cont.)

Information, Technology, & Management Managers must have Technological competency Ability to understand new technologies and to use them to their best advantage Information competency Ability to locate, gather, organize, and display information for decision making and problem solving Analytical competency Ability to evaluate and analyze information to make actual decisions and solve real problems Copyright ©2015 John Wiley & Sons, Inc.

Information, Technology, & Management What is useful information? Data Raw facts and observations Information Data made useful and meaningful for decision making Information drives management functions Copyright ©2015 John Wiley & Sons, Inc.

Information, Technology, & Management Characteristics of useful information: Timely High quality Complete Relevant Understandable Analytics: systematic gathering and processing of data to make it useful as information Copyright ©2015 John Wiley & Sons, Inc.

Information, Technology, & Management Data Mining and Analytics Data mining is the process of analyzing data to produce useful information for decision makers. Big data exists in huge quantities and is difficult to process without sophisticated mathematical and computing techniques. Management with analytics involves systematic gathering and processing of data to make informed decisions. Copyright ©2015 John Wiley & Sons, Inc.

United Nations buys social data from Twitter UPS spends over $1 Billion per year on technology. UPS The company expects to save some $50 million per year form eliminating excess driving miles. Copyright ©2015 John Wiley & Sons, Inc.

Information, Technology, & Management Business intelligence and Executive Dashboards Management information systems Use IT to collect, organize, and distribute data for use in decision making Business intelligence Taps information systems to extract and report data in organized ways that are helpful to decision makers Copyright ©2015 John Wiley & Sons, Inc.

Competitive information- Amazon Big picture information- financial results and contribution Function-specific information- cost- benefit analysis Copyright ©2015 John Wiley & Sons, Inc.

Information, Technology, & Management Executive dashboards Visually update and display key performance indicators and information on a real-time basis Copyright ©2015 John Wiley & Sons, Inc.

Copyright ©2015 John Wiley & Sons, Inc.

Copyright ©2015 John Wiley & Sons, Inc.

Copyright ©2015 John Wiley & Sons, Inc.

Information, Technology, & Management Information needs in organizations Information exchanges with the external environment: Gather intelligence information Provide public information Information exchanges within the organization: Facilitate decision making Facilitate problem solving Copyright ©2015 John Wiley & Sons, Inc.

Figure 7.1 Internal and external information needs in organizations Copyright ©2015 John Wiley & Sons, Inc.

Problem Solving and Managerial Decisions Managers as Information Processors Continually gather, give, and receive information Now as much electronic as it is face to face Always on, always connected Copyright ©2015 John Wiley & Sons, Inc.

Figure 7.2 The manager as an information-processing nerve center Copyright ©2015 John Wiley & Sons, Inc.

Problem Solving and Managerial Decisions The process of identifying a discrepancy between actual and desired performance and taking action to resolve it Decision A choice among possible alternative courses of action Performance threat Something is wrong or has the potential to go wrong Performance opportunity Situation offers the chance for a better future if the right steps are taken Copyright ©2015 John Wiley & Sons, Inc.

Problem Solving and Managerial Decisions Problem-solving approaches or styles: Problem avoiders Inactive in information gathering and solving problems Problem solvers Reactive in gathering information and solving problems Problem seekers Proactive in anticipating problems and opportunities and taking appropriate action to gain an advantage Copyright ©2015 John Wiley & Sons, Inc.

Problem Solving and Managerial Decisions Systematic versus intuitive thinking Systematic thinking approaches problems in a rational, step-by-step, and analytical fashion Intuitive thinking approaches problems in a flexible and spontaneous fashion Copyright ©2015 John Wiley & Sons, Inc.

Problem Solving and Managerial Decisions Multidimensional thinking applies both intuitive and systematic thinking Effective multidimensional thinking requires skill at strategic opportunism Copyright ©2015 John Wiley & Sons, Inc.

Problem Solving and Managerial Decisions Managers use different cognitive styles Copyright ©2015 John Wiley & Sons, Inc.

Problem Solving and Managerial Decisions Types of problems Structured problems are ones that are familiar, straightforward, and clear with respect to information needs Programmed decisions apply solutions that are readily available from past experiences to solve structured problems Copyright ©2015 John Wiley & Sons, Inc.

Problem Solving and Managerial Decisions Types of problems Unstructured problems are ones that are full of ambiguities and information deficiencies Nonprogrammed decisions apply a specific solution to meet the demands of a unique problem Commonly faced by higher-level management Copyright ©2015 John Wiley & Sons, Inc.

Problem Solving and Managerial Decisions Crisis decision making A crisis involves an unexpected problem that can lead to disaster if not resolved quickly and appropriately Copyright ©2015 John Wiley & Sons, Inc.

Problem Solving and Managerial Decisions Rules for crisis management: Figure out what is going on Remember that speed matters Remember that slow counts, too Respect the danger of the unfamiliar Value the skeptic Be ready to “fight fire with fire ” Copyright ©2015 John Wiley & Sons, Inc.

Problem Solving and Managerial Decisions Managers make decisions with various amounts of information offers complete information on possible action alternatives and their consequences Certain environment lacks complete information but offers probabilities of the likely outcomes for possible action alternatives Risk environment lacks so much information that it is difficult to assign probabilities to the likely outcomes of alternatives Uncertain environment Copyright ©2015 John Wiley & Sons, Inc.

Figure 7.3 Three environments for managerial decision making and problem solving Copyright ©2015 John Wiley & Sons, Inc.

Figure 7.4 Steps in managerial decision making and problem solving Copyright ©2015 John Wiley & Sons, Inc.

The Decision-Making Process Step 1 — Identify and define the problem Focuses on information gathering, information processing, and deliberation Decision objectives should be established Common mistakes in defining problems: Defining the problem too broadly or too narrowly Focusing on symptoms instead of causes Choosing the wrong problem Copyright ©2015 John Wiley & Sons, Inc.

The Decision-Making Process Step 2 — Generate and Evaluate Alternative Courses of Action Potential solutions are formulated and more information is gathered, data are analyzed, the advantages and disadvantages of alternative solutions are identified Approaches for evaluating alternatives: Stakeholder analysis Cost-benefit analysis Copyright ©2015 John Wiley & Sons, Inc.

The Decision-Making Process Step 2 — Generate and Evaluate Possible Courses of Action (cont.) Criteria for evaluating alternatives: Benefits Costs Timeliness Acceptability Ethical soundness Copyright ©2015 John Wiley & Sons, Inc.

The Decision-Making Process Step 2 — Generate and Evaluate Possible Courses of Action (cont.) Common mistakes: Abandoning the search for alternatives too quickly Copyright ©2015 John Wiley & Sons, Inc.

The Decision-Making Process Step 3 — Decide on a Preferred Course of Action Two different approaches Behavioral model leads to satisficing decisions Classical model leads to optimizing decisions Copyright ©2015 John Wiley & Sons, Inc.

Figure 7.5 Differences in the classical and behavioral decision-making models Copyright ©2015 John Wiley & Sons, Inc.

The Decision-Making Process Step 4 — Implement the Decision Involves taking action to make sure the solution decided upon becomes a reality Managers need to have willingness and ability to implement action plans Lack-of-participation error should be avoided Copyright ©2015 John Wiley & Sons, Inc.

The Decision-Making Process Step 5 — Evaluate Results Involves comparing actual and desired results Positive and negative consequences of chosen course of action should be examined If actual results fall short of desired results, the manager returns to earlier steps in the decision-making process Copyright ©2015 John Wiley & Sons, Inc.

The Decision-Making Process At all steps, check ethical reasoning! Ask these spotlight questions Does the decision satisfy all constituents or stakeholders? Utility Does the decision respect the rights and duties of everyone? Rights Is the decision consistent with the canons of justice? Justice Is the decision consistent with my responsibilities to care? Caring Copyright ©2015 John Wiley & Sons, Inc.

Issues in Managerial Decision Making Issues in decision making How do decision errors happen? Heuristics are strategies for simplifying decision making Copyright ©2015 John Wiley & Sons, Inc.

Issues in Managerial Decision Making Bases a decision on recent information or events Availability Bias Bases a decision on similarity to other situations Representativeness Bias Bases a decision on incremental adjustment from a prior decision point Anchoring and Adjustment Bias Trying to solve a problem in the context in a positive or negative context Framing Error Focusing on information that confirms a decision already made Confirmation Error Continuing a course of action even though it is not working Escalating Commitment Copyright ©2015 John Wiley & Sons, Inc.

Issues in Managerial Decision Making Creative Decision making: Creativity is the generation of a novel idea or unique approach that solves a problem or crafts an opportunity Big-C creativity occurs when extraordinary things are done by exceptional people Little-C creativity occurs when average people come up with unique ways to deal with daily events and situations Copyright ©2015 John Wiley & Sons, Inc.

Issues in Managerial Decision Making Personal creativity drivers Creativity Task Expertise Task Motivation Creativity Skills Copyright ©2015 John Wiley & Sons, Inc.

Issues in Managerial Decision Making Situational creativity drivers Creativity Team Creativity Skills Management Support Organizational Culture Copyright ©2015 John Wiley & Sons, Inc.