Managerial Decision Making and Problem Solving OBJECTIVES OUTLINE After studying this chapter, you should be able (0 ‘The Nature of Decision Making Decision Making Defined ‘Types of Decisions Decision-Making Conditions Rational Perspectives on Decision Making “The Chissieal Model of Decision Making, Steps in Rational Decision Making © Define decision making and discuss types of decisions snd decision-making conditions © Discuss rational perspectives ow decision making, in- cluding the steps in decision making fe eee akice “The Administraive Model # Describe the behavioral nature of decision snaking Pola Bites ta Desaln Maki Imuition and Escalation of Commitment 2 Discuss group decision maleng, including the adran- Risk Propensity and Decision Making tages aud disadrantages of group decision making and ee as how it can be more effectively managed. Group Decision Making in Organizations Forms of Group Decision Making Advaneiges of Group Decision Making Disadvantages of Group Decision Making” Managing Group Decision-Making ProcessesPt Korg bas made Nike one of he mse sess esi the word. Knight and is ma ap deenralzel dis ie OPENING INCIDENT IN 1958, an undergraduate business major and member of the track team at the University of Oregon complained to his coach about the lack of a good American running shoe. The German firm Adidas ruled the market then, and the student believed that considerable opportunity, existed for new entrants into the market. In 1968 he and his coach decided to start their own firm, The student ‘was Philip Knight, and the new company was Nike. For the first several years, Nike struggled for recogni- tion and market opportunity. In the mid-1980s, however, ios making 1 elp Nike took off. Fueled by spokesperson Michael Jordan, a inst sv ke Reebok and barrage of new products (like pump basketball shoes and cross trainers), the “Just Do It” slogan, and a boom in ‘aerobics exercise programs, Nike experienced tremendous growth and left rivals like Adidas and Reebok in its dust. From the begin ning, Knight served a8 CEO of the firm: he isalso “The days when a few decision its largest shareholder makers can get together in the During those heady days of phenomenal hall are over.” ‘row, Knight left the day-to-day management of his frm ta is president, Richard Donahue. Donahue, in turn, kept most of the do cision-making power for himself. He often made major decisions with ite oF no in put from athers. As long as the frm was growing at an exponential rate, this system never caused much concern By the mid-1990s, however, the serobies boom was staling, and the tastes of ‘young consumers were turning away from athletic shoes and toward hiking-style out- door boots. As a result, Nike also stalled, and management seerned to lack any clear idea of how to get things moving again. Finally, Knight decided that the frm needed to recapture the entrepreneurial style that had launched its intial success. He eased Donahue into ratiremant and installed Thomas Clarke, then 8 vice president, a present. Clarke was known as an excellent ccommunieator who beloved in shared responsibility. Clare's mandate was to launch a number of new initiatives to jumpstart the firm's growth, One of Clarke's frst stops was to call 3 series of meetings with every group of man- agers in the firm, He told them that decision making at Nike was going o change. He argued thatthe old, centralized approach to doing business had served Nike well in the past but that a new, decentralized approach to making decisions was now needed. He concluded by saying that he expected every manager inthe firm to exer cise increased control in making the decisions affecting that individual's area of re sponsibility I's to0 s00n to know how well the new approach is working, but Phil Knight himself seems genuinely excited about Nike's future prospects.’ @ Quotation: Thoms Clarke, Nike present, quoted in Banas Hick April 18,1998, p86 231© decision making ‘The act of choosing one alter~ native from among. set of al- © decision-making process Recognizing and defining che nature of a decision situation, identifying alternatives, choos ing the “bes” alternative, and puting ie into practice in organizations make decisions. In earlier days at Nike, most de- cisions were made by managers at the top of the firm, with little collaboration or participation on the part of managers at lower levels. Now, however, decision-making authority is spread throughout the firm, and more managers than ever before are expected to participate in che deci- sion-making process. Some experts believe that decision-making is the most basic and fundamental of all managerial activities. Thus we discuss ithere in the context of the first management fianction, planning. Keep in mind, however, that although decision making is pethaps most closely linked to planning, it is also part of organizing, leading, and controlling, We begin our discussion by exploring the nature of decision making, We then describe rational perspectives on decision making. Behavioral as- pects of decision making are then introduced and described. We conclude with a discussion of group decision making. E xecutives at Nike exemplify qwo extreme views of how manag THE NATURE OF DECISION MAKING Managers at BMW recently made the decision to build a new manufac turing plant in South Carolina at a cost of more than $600 million. At about the same time, the manager at the BMW dealership in Bryan, Texas, made a decision co sponsor a local youth soccer team for $150. Each of these examples includes a decision, but the decisions differ in many ways. ‘Thus as a starting point in understanding decision making, we must first explore the meaning of decision making as well as types of decisions and conditions under which decisions are made.? Decision Making Defined Decision making can refer to either a specific act or a general process. De- jon making per se is the act of choosing one alternative from among a set of alternatives. The decision-making process, however, is much more than this, One step of the process, for example, is that the person making the decision must recognize that a decision is necessary and identify the set of feasible alternatives before selecting one. Hence, the decision-mak- ing process includes recognizing and defining the nature of a decision situation, identifying alternatives, choosing the “best” alternative, and. putting it into practice.* The word “best” implies effectiveness. Effective decision making requires that the decision maker understand the situation driving the de~ cision. Most people would consider an effective decision to be one that optimizes some set of factors such as profits, sales, employee welfare, and ‘market share. In some situations, though, an effective decision may be one that minimizes loss, expenses, or employee turnover. [t may even mean se~ lecting the best method for going out of business, laying off employees, or terminating a contract. We should also note that managers make decisions about both prob- Jems and opportunities. For example, making decisions about how to cut costs by 10 percent reflects a problem—an undesired situation that requires 232° PART il Planningand Decision Makingary in situations of opportunity for ex- a solution. But de the firm is earning hig juires a decision. Should th 1 dividends, reinvested in current operations, or used to expand. jer-than-projected prof extra funds be used co increase ample, # holde Of course, it may take a long time before a manager can know if the mble afew years by trad consumer-electronics busin French company, for its medical-equipment business, Ar the time of the exch: E held 23 pei ‘ent of the U.S, color-television market and 17 percent of the U.S.VCR 1. Moreover, it was the only serious consumer-electronics business, in the United States and was however, believed that the medical omise for growth and profits ze will not be known u to Thomson, erating enormous profits. Welch quipment business held even more ialysts believe thar the “winner” of the at least the turn of the ypes of Decisions Managers must make many different types of decisions. In ever, most decisions fal in programmed.” A prog: br recurs with some frequency (or both). For example, suppose ler of a distribution center knows from experience that she needs to keep thirty-day supply of a particular item on hand. She can then establish a stem whereby the ate quantity is automatically reordered when~ ever the inventory drops below ty-day requirement. Likewise, the Bryan BMW dealer made a decision that he will sponsor a youth soccer h year. Thus when the soccer club president calls, the dealer ‘one of two cat sob 233a Lilly Decides to Refocus A ‘After the Civil War, Eli Lily and Company ¢ ‘was created to make gelatin-coated pil ‘ Itbecame one of the world’s largest drug ‘companies and a leader in insulin therapy and antibioties. Even though it was profitable, a quar- tery loss in 1992 lad to some major dacisions that wil affect Lily for many years to come. Its chair ousted the CEO/president; hired Randall Tobias, vice chair of AT&T, to take aver those jobs; and then retired as ‘chair, enabling Tobias to assume that position, too. ‘Aiter familarizing himself with his new organiza- tion, Tobias had two strategic planning committees develop plans for Lill’s future, They suggested that Lillys medical devices and diagnostics businesses, ‘which it had acquied or developed over the years, .was diverting important executives’ attention from the $5 to $6 bilion drug business that was Lily's mainstay. Tobias's decision wes clear: Lilly should refocus on drugs by divesting itself of all other businesses, in- cluding some that had only recently been acquire. ‘Tobias decided on a major downsizing in early 1894 and prepare forthe future. He decided to exit the med- ical device and diagnostics business en masse. This meant that nine medical device companies with com bined annual sales of more than $1 bilion had to seek strategic aliances of strike out on their own, Cardiac Pacemakers Inc. (CPI), with annual sales of around $350 million, was the biggest of those companies; ‘other major companies were Origin Medsystems and ‘Advanced Cardiovascular Systems. Lilly officials say that the move is designed to ben- cfitboth the medical device businesses and Lily itself. ‘Tne medical device companies would be independent and could explore options that are best for them. Lily ‘could refocus on its core drug business and respond better to its customers. References: “Retrenchments a Lill and Boren” Meer and ‘Acq, Magch’ April 199, pp. 910; Brian Bone. “Uilly Companies May Prosper with New Independence; Hea thy Today. Match 1924 pp 6-T; "Randall Tobias Takes Prantng Hook to Lily” Busine eek, January 31, 1994, p. 3 andLet the Good Tincs Roll—And a Few More Hea to fix some problems, respond to industry changes, Bsns Nek Jay 31,1994, pp 28-29, a @ nonprogrammed decision AA decision that is relatively tunytructured; occurs much Tess often than a programmed decision 234 Plannin already knows what he will do, Many decisions regarding basic operating systems and procedures and standard organizational transactions are of this, ty and can therefore be programmed. Nonprogrammed decisions, on the other hand, are relatively un- structured and occur much less often. Consider GE decision to exchange businesses wich Thomson and BMW's decision to build a new plant: no business makes decisions like those on a regular basis. Managers faced with such decisions must treat each one as unique, investing enormous amounts of time, energy, and resources into exploring the situation from all per- spectives. Intuition and experience are major factors in nonprogrammed decisions. Most of the decisions made by top managers involving strategy (including mergers, acquisitions, and takeovers) and organization design are nonprogrammed. So are decisions about new facilities, new products, labor contracts, and legal issues. The Environment of Management box dis cusses a number of nonprogrammed decisions at Eli Lilly and Company. Decision-Making Conditions Just as there are different kinds of decisions, there are also different ‘conditions in which decisions must be made. Jack Welch at GE has no guarantees that the new medical-equipment business will be successful, Decision Makingwhereas he had a pretty clear picture of how the electronics business was doing. Managers sometimes have an almost perfect understanding of con= ditions surrounding a decision, but at other times they have few clues about those conditions, In general, the circumstances that exist for the de~ cision maker are conditions of certainty, risk, or uncertainty.’ These con in Figure 8.1 ditions are represer Decision Making Under Certainty When the decision maker knows with reasonable certainty what the alternatives are and what conditions tre associated with each alternative, a state of certainty exists. Suppose for example, that Singapore Airlines needs to buy five new jumbo jets. The decision is fiom whom to buy them, Singapore has onl Boing, McDonnell Douglas, and Airbus. Each has a proven product and will specity prices and delivery dates, The airline thus knows the alt tive conditions associated with each. There is little ambiguity and rela~ tively low chance of making a bad decision Few organizational decisions are made under conditions of «tue cer tainty." The complexity and eurbulence of the contemporary business world make such situations rare. Even che airplane purchase decision we just considered has less certainty than it appears. The aircraft companies tay not be able to guarantee delivery dates so they may write cost-in- crease or inflation clauses into contracts. Thus the airline may not be truly certain of the conditions surrounding each alternative. y three choices: Decision Making Under Risk A more common decision-making con- dition is a state of risk. Under a state of risk, the availability of each alternative and its potential payoffs and costs are all associated with prob- ability estimates.” Suppose, for example, that a labor contract negotiator sal” offer from the union right before a strike for a company receis © state of certainty A condition in which che cision maker sonable certainty what the alkernatives are and what con ditions are associated with cach alternative © state of risk A condition in which th availability of each alter: and its potential payors and costs are all associated with, probability estimates Nongrogrammed decisions are un structured and nenvoutine dec sions. When an earthquake cut power at Senta Monica's Saint dlohn’s Hospital these nurses had decisions, They fought valiantly 10 save several infants whose lives depended on various electronic ite suppor systems. The nurses had to quickly assess the condtion of tech infant and then decige how best 1 provide life supeort without electric power, jon Making and Problem Solving 285Most major decisions in organiza tions today are made undor a state of uncertainty, Managers making ecisions in these excurnstances ‘myst be sure to learn as much as possible about the situation and ‘approach the decision from a logk tal and ravonal perspective, © state of uncertainty A condition in which the de- cision maker does not know all the alternatives, the risks associated with each, or the consequences each alternative is likely to have FV URE 8.1 DecisionMaking Conditions ‘The decision maker {ces conditions of. Level of ambiguity and chances of making a bad decision Lower Moderste Higher deadline, The negotiator has two alternatives: to accept or to reject the offer, The risk centers on whether the union representatives are bluffing If the negotiator accepts the offer, she avoids a strike but commits to a costly labor contract. If she rejects the contract, she may get a more favor able contract if the union is bluffing; she may provoke a strike if it is not ‘On the basis of past experiences, relevant information, the advice of others, and her own intuition, she may believe that there is a 75 percent chance that the union is bluffing and a 25 percent chance that they'll back up their threats. Thus she can base a calculated decision on the two al- ternatives (accept ot reject the contract demands) and the probable con- sequences of each, When making decisions under a state of risk, managers must determine the probabilities associated with each alternative. For ex- ample, if the union negotiators are committed to a strike if their demands are not met, and the company negotiator rejects their demands because she guesses they will not strike, her miscalculation will prove costly. As shown in Figure 8.1, decision making under conditions of risk is accom- panied by moderate ambiguity and chances of a bad decision." Decision Making Under Uncertainty Most of the major decision mak- ing in contemporary organizations is done under a state of uncertainty. ‘The decision maker does not know all the alternatives, the risks associ- ated with each, or the likely consequences of each alternative."! This uncertainty stems from the complexity and dynamism of contemporary ‘organizations and their environments. Consider, for example, the decision that Nike's founders made regarding footwear. They could have decided to use existing sneaker technology to reduce risk and avoid uncertainty: But they also saw that they would then have fewer competitive advantages over Adidas. Thus they based their shoes on a new waffle-type design that gave them another unique feature to highlight. But this choice carried With it considerable uncertainey because they had no idea how ic would be received in the marketplace Indeed, many of the decisions already discussed BMW's decision co build a new plant and GE’s decision to get out of consumer electronics— were made under conditions of uncertainty. To make effective decisions 236 © PART Itt Planning and Decision Makingin these circumstances, managers must acquire as much relevane informa- tion as possible and approach the situation fom a logical and rational per- spective. Intuition, judgment, and experience always play major roles in the decision-making process under conditions of uncertainty. Even so, un= certainty is the most ambiguous condition for managers and the one most prone t0 error. RATIONAL PERSPECTIVES ON DECISION MAKING Most managers like to think of themselves as rational decision makers And indeed, many experts argue that managers should try £0 be as ra- tional as possible in making decisions."? The Classical Model of Decision Making ‘The classical decision model is a prescriptive approach that tells man~ agers how they should make decisions. Ie rests on the assumptions that managers are logical and rational and that they make decisions that are in the best interests of the organization. Figure 8.2 shows how the classical model views the decision-making process: (1) Decision makers have com- plete information about the decision situation and possible alternatives. (2) They can effectively eliminate uncertainty to achieve a decision con- dition of certainty. (3) They evaluate all aspects of the decision situation logically and rationally. As we see later, these conditions rarely, if ever, ac~ tually exist. Steps in Rational Decision Making ‘A manager who really wants to approach a decision rationally and lo; cally should try to follow the steps in rational decision making, listed in Table 8.1. These steps in rational decision making help keep the deci sion maker focused on facts and logic and help guard against inappropri- ate assumptions and pitfalls Recognizing and Defining the Decision Situation The first step in ra~ sional decision making is recognizing that a decision is necessary—that is, there must be some stimulus or spark to initiate the process.!" For many jon model AA prescriptive approach co de= cision making that tells man= agers how they should make decisions. 1 assumes that man- agers are logical and rational and that their decisions will be in the best interests of the or- ganization © classical de. The classical model of dacision ‘making assumes that managers ‘xe ratonel and ogial. i attempts to prescribe how managers should eppr0ach decision stuations FIG URE 8.2 The Clossical Model of Decision Making * Obtain complete and | When faced witha perfect information decision situation, — | ——} Eliminate uncertainty | + ‘managers should. *Evaluate everthing | rationally and lgicaly | | and end up with ‘decision that best serves tho interests ofthe organization, CHAPTER § Managerial Decision Making and Problem Solving 287Step. Example 1, Recognizing and defining the Identifying alcernatives 3, Evaluating alternatives 4, Selecting the best alternative Implementing che chosen alternative 6, Follow-up and ‘evaluation Some stimulus indicates that a deci- |A plant manager sees that employee sion must be made, The stimulus turnover has increased by 5 percent. may be positive or negative. Both obvious and creative alter- ‘The plant manager ean increase natives are desired. In general, the wages, increase benefits, or change more important the decision, the hiring standards more alternatives should be generated. Each alternative is evaluated t0 Increasing benefits may not be fea determine its feasibility, its satisfac sible. Increasing wages and chang~ toriness, and its consequences. ging hiring standards may satisfy all conditions Consider all situational factors, and Changing hiring standards will rake choose the alternative that best fits an extended period of time to cut the manager's situation. turnover, so increase wages. ‘The chosen alternative is implemen- ‘The plane manager may need per- ted into the organizational system. mission of corporate headquarters, The human resource department establishes a new wage structure, ‘Ac some time in the future, the ‘The plant manager notes that, six manager should ascertain the extent months later, earnover dropped to to which the alternative chosen in its previous level seep 4 and implemented in step 5 has worked. Although the presumptions ofthe ‘assial decision mode rarely ox- ist, managers can approach deci ‘ion making with ationalty. By following the steps of rational dec sion making, managers ensure that they are leaning as much as pos sible about the decision situation and its alternatives decisions and problem situations, the stimulus may occur without any prior warning. When equipment malfunctions, the manager must decide whether to repair or replace it. Or when a major erisis erupts, as described in Chapter 3, the manager must quickly decide how to deal with it. As we already note, the stimulus for a decision may be either positive or neg~ ative. A manager who must decide how to invest surplus funds, for e: mple, faces a positive decision situation. A negative financial stimulus could involve having to trim budgets because of cost overruns." Inherent in problem recognition is the need to define precisely what the problem is. The manager must develop a complete understanding of the problem, its causes, and its relationship to other factors. This under- standing comes from careful analysis of the situation, Consider the recent situation faced by Olin Pool Products. Even though Olin controlled half the market for chlorine-based pool treatment systems, its profits were slip- ping and it was rapidly losing market share to new competitors. These in- dicators provided clear evidence to General Manager Doug Cahill that something needed to be done. He went on to define the problem as a need to restore profitability and regain lost market share."* 238 © PART Ill Plansingand Decision Makingidentifying Alternatives Once the decision situation hay been revog~ d-and defined, the second step is co identify alternative courses of ef ctive action. Developing both obvious, standard alternatives and innovative alternatives is generally useful." In general, the more impor tant the decision, the more attention is directed to developing alternatives. If the decision involves a multimillion-dollar relocation, a great deal of time and € LC. Penney Company spent wo years searchi rtise will be devoted to identifying the best locations: selecting the he probl the company softball ream uniforms, less time and pertise will be broughe to bear, Alchou ognize that v befor Dallas-Fort Worth area for its new corporate headquarters. | sto choose a color for hy managers should seek creative solutions, they must abo ree ous constraints offen limis their alternatives. Common constraints include legal restrictions, moral and ethical norms, authority Constraints, or constraints imposed by the power and auchority of the man~ available tec ‘onsiderations, and unofficial social Cahill at Olin identified several alternatives that miight help The frst step in cational decision his fitm: seek a bigger firm co take control of Olin and inject new — making is recognizing and defining ‘esoulrces, buy One OF More Competitors to increase Olin’s own size. main~ _ @ deci stuation. In late 9 norms. C ovary atractve 635 tin the status quo and hope that competitors stub their toes, or overhaul < organization to become more competitive Evaluating Alternatives The third step in the decision-making process ich of th Figure 8.3 presents a decision tree ‘an be used to judge different alternatives. The figure st each alternative be evaluated in terms of its feasibility. its satisfactoriness, ind its consequences. The first question to ask is whether an alternative < feasible. Is it within the realm of probability and practicality? For a small ‘wgling firm, an alternative requiring a huge financial outlay is proba-__ many auton ut of the question, Other alternatives may not be feasible because of ‘example, is pepoing a barriers. And limited human, material, and information resources ae a ests that le firms. Ths may make other alternatives impractical When an altern examined to see how well it satisties the condition ibility, it must next be of the decision situ- ative has passed the test of fe ation. For example, a manager searching for ways to double production capacity might consider purchasing an existing plant from another com~ any. If closer examination reveals that the new plant would increase duction capacity by only 35 percent, this alternative may not be satis- retory. Finally, when an alternative has proven both feasible and sa tory, its probable consequences must still be assessed. To what extent w 2 particular alternative influence other parts of the organization? What pancial and nonfinancial costs will be associated with such influence prices may disrupt cash ows, need a new advertising program, and alter the behavior of sales represen~ tatives because it requites a different commission structure. The man hen, must put “price & alternative that is both feasible and satisfactory must be climinated if onsequences are too expensive for the coral system. Cahill decided that example, a plan to boost sales by cuttin x" on the consequences of each aleernat being taken over would cause too great a loss of autonomy (consequences not affordable), that buyi and that doing nothi x a competitor was too expensive (not feasible). would not solve the problem (not satisfactory) CHAPTER & Managerial Decision Making and Problem Solving 289FV GU RE 8.3 Evaluating Alernaves in the Decision Moking Process| © eliminate from oe Managers must through eval ae allof the alternatives, wich in- ‘raases the chances thatthe ‘ternative finaly chosen wil be successful, Faire to evaluat an atemative's feast, satisfstor ness, and consequences can lead toa wrong decision. Selecting an Alternative Even though many alternatives fail to pass the triple tests of feasibility, satisfactoriness, and affordable consequences, ewo or more alternatives may remain. Choosing the best of these is the real crux of decision making. One approach is to choose the alternative with the highest combined level of feasibility, satisfactoriness, and affordable consequences. Even though most situations do not lend themselves to ob- jective, mathematical analysis, the manager can often develop subjective estimates and weights for choosing an alternative. Optimization is also a frequent goal. Because a decision is likely to af fect several individuals or subunits, any feasible alternative will probably not maximize all of the relevant goals. Suppose that the manager of the Kansas City Royals needs co select a starting center fielder for the next baseball season. Bill hits .350 but is not able to catch a fly ball; Joe hits only .175 but is outstanding in the field; and Sam hits .290 and is a solid but not outstanding fielder. The manager would probably select Sam be~ cause of the optimal balance of hitting and fielding. Decision makers should remember that finding multiple acceptable alternatives may be pos sible—selecting just one alternative and rejecting all the others may not be necessary. For example, the Royals’ manager might decide that Sam will start each game, Bill will be retained as a pinch hitter, and Joe will be re- tained as a defensive substitute. In many hiring decisions, the candidates remaining after evaluation are ranked. If the top candidate rejects the of fer, it may be automatically extended 0 the number-two candidate, and, if necessary, to the remaining candidates in order. Olin Pool Products’ man- agers selected the alternative of overhauling the organization to become more competitive Implementing the Chosen Alternative _ After an alternative has been se lected, the manager must put it into effect. In some decision situations, implementation is fairly easy; in others, it is more difficult. In the case of an acquisition, for example, managers must decide how co integrate all the activities of the new business, including purchasing, human resource prac~ tices, and distribution, inzo an ongoing organizational framework. When American Telephone & Telegraph Co. (AT&T) acquired NCR Corp., it took months to consolidate NCR's operations into existing systems. Op- erational plans, which we discuss in Chapter 6, are useful in implement- ing aleernatives. 240 PART HIE Planning and Decision MakingMan: Jementing decisions. The jers must also consider people's resistance co change when im: easons for such resistance include insecurity. inconvenience, and fear of the unknown, When Penney’s decided to move igs headquarters from New York to Texas, many employees chose to resign rather chan relocate, Managers should anticipate potential resistance at var= ious stages of the implementation process, (Resistance to change is cov~ fered in Chapter 12.) Managers should also recognize that. even when all n evaluated as precisely as possible and the conse~ inces of each alternative weighed, unanticipated consequences are stil wely, Any num n-perfect fit fects on cash flow or opel mentation process has be; management at Olin, combined fourteen depart authority t0 every man: control over their work. natives have be of situations such as unexpected cost increases, a less ich existi anizational subsystems, or unpredicted ef ing expenses could develop after the imple in. Greg Cahill eliminated several levels of ts into eight, ger, and empowered employees to take Following Up and Evaluating the Results The tinal step in the deci= on-making proces requires that manag ceir decision—that is, they should make bas served its original purpose. If an implemented alcernative appears not to be working, che manager can respond in several ways. Another previ- ously identified alternative (che second or third choice) could be adopted Or the manager might recognize that the situation was not correctly de- in the process all over again. Finally, the man= rs evaluace the effectiveness of ware that the chosen alternative fined to start with and bey et might decide tha the original alternative is in fact appropriate but has not yet had time to work or should be implemented in a different way Failure to evaluate decision effectiveness may have serious conse~ ences. The Pentagon spent $1.8 billion and eight years developing the Sergeant York antiaircraft gun, From the b problems with the weapon system, but nor until ic was in its final stages when it was demonstrated to be completely ineffective, was the project scrapped." In a classic ease of poor decision making, managers at Coca Cola decided to change the formula for the soft drink. Consumer response was extremely negative. In contrast to immediately reacted: it reintroduced the old formula within three months s Coca-Cola Classic, Had man 1d failed to evaluate its effectiveness, the results would have been diss trous, Grey Cahill’s decisions at Olin are paying big dividends—the firm’s profits are back up and most of the market share it recently lost has been ned ay well nning, tests revealed major 1¢ Pentagon, however, Coea-Cola ers stubbornly stuck with their decision BEHAVIORAL ASPECTS OF DECISION MAKING all decision situations were approached as logically as described in the previous section, more decisions would prove to be successful. Yet deci sions are often made with little consideration for I Kepner-Tr and rationality x Princeton-based consulting firm, estimates that US. CHAPTER & Managerial De or managers select an atema- implemented effective, When managers a P cies aga, they knew they had te do it fight. One key ingredient tothe ‘ormation system that k9908 W3ck individual customers have od in the past, what cond armotonal coupons plementation has hel Pizza Hut overtake Domino's, and for markt jon Making and Problem Solving 241making model that frgues that decision makers (1) have incomplete and imperfect information, 2) are con- strained by bounded rational~ ity, and (3) cond to satisice ‘when making decisions © bounded rationality A concept suggesting that de~ cision makers are limited by their values and unconscious reflexes, skills, and habits © satisticing The tendency to search for al- ternatives only until one is found that meets some mini- ‘mum standard of sufficiency companies use rational decision-making techniques less than 20 percent of the time.” And even when organizations try to be logical, they some~ times fail. For example, managers at Coca-Cola decided to change Coke's formula after four years of extensive marketing research, taste tests, and ra tional deliberation—but the decision was still wrong. On the other hand, sometimes when a decision is made with litte regard for logic, it can still turn out to be correct, An important ingredient in how these forces work is the behavioral aspect of decision making.*" The administrative model better reflects these subjective considerations. Other behavioral aspects in clude political forces, intuition and escalation of commitment, risk propensity, and ethics. Herbert A. Simon was one of the first people to recognize that decisions are not always made with rationality and logic.”! Simon was subsequently awarded the Nobel Prize in economics. Rather than prescribing how de- cisions should be made, his view of decision making, now called the ad~ ministrative model, describes how decisions often actually are made. As illustrated in Figure 8.4, the model holds that managers (1) have incom- plete and imperfect information, (2) are constrained by bounded ratio- nality, and (3) tend to satisfice when making decisions Bounded rationality suggests that decision makers are limited by their values and unconscious reflexes, skills, and habits. They are also limited by less than complete information and knowledge. Bounded rationality par- tially explains how U.S, auto executives allowed Japanese automakers to become so strong in the United States. For years, executives at General Motors, Ford, and Chrysler compared theit companies’ performance to only one another and ignored foreign imports. The foreign “threat” wasn’t acknowledged until the domestic auto market had been changed forever. If managers had gathered complete information from the begin- ning, they might have been better able to thwart foreign competitors. Es sentially, then, the concept of bounded ritionality suggests that although people try to be rational decision makers, their rationality has limits ‘Another important part of the administrative model is satisficing. This concept suggests that rather than conducting an exhaustive search for the best possible alternative, decision makers tend to search only until they identify an alternative that meets some minimum standard of sufficiency. ‘A manager looking for a site for a new plant, for example, may select the first site she finds that meets basic requirements for transportation, wtii- ties, and price, even though farther search might yield a better location. People satisfice for a variety of reasons. Managers may simply be unwill- ing to ignore their own motives (such as reluctance to spend time making a decision) and therefore not be able to continue searching after a minimally acceptable alternative is identified, The decision maker may be unable to weigh and evaluate large numbers of alternatives and cri teria, Also, subjective and personal considerations often intervene in de- cision situations. Because of the inherent imperfection of information, bounded ratio- nality, and satisficing, the decisions made by a managet may or may not actually be in the best interests of the organization, A manager may choose 242 PART Ill Planning and Decision Making£16 URE 8,4 The Administaive Model of Decision Making « particular location for the new plant because i offers the lowest price and best availability of utilities and transportation. Or she may choose the Tocation because it’ in a community in which she wants to live. in summary, then, the classical and administrative models paint quice different pictures of decision making. Which is more correct? Actually, teach can be used to better understand how managers make decisions. The Classical model is prescriptive: it explains how managers can at least at- tempe co be more rational and logical in their approach to decisions. The idiministrative model can be used by managers to develop a better under- scanding of their inherent biases and limitations.” In the following sec- tions, we describe more fully other behavioral Forces that can influence decisions, Political Forces in Decision Making Political forces are another major element that contributes to the behav- joral nature of decision making. Organizational politics is covered in Chapter 17, but one major clement of politics, coalitions, is especially rel- evant to decision making. A coalition is an informal alliance of individ- uals or groups formed to achieve a common goal. This common goal is often a preferred decision alternative. For example, coalitions of stock- holders frequently band together to force a board of directors to make a certain decision ‘Coalitions led to the formation of Unisys Corporation, a large com- puter firm, Sperry was once one of the United States’ computer giants, puta series of poor decisions put the company on the edge of bankruptcy. Two major executives waged battle for three years over what to do, One wanted to get out of the computer business altogether, and the other ‘wanted to stay in, Finally, the manager who wanted to remain in the com- puter business, Joseph Kroger, garnered enough support to earn promo- tion to the corporation's presidency. The other manager, Vincent McLean, took early retirement. Shortly thereafter, Sperry agreed co be acquired by Burroughs Wellcome Co. The resulting combined company is called Unisys. The impact of coalitions can be either positive or negative. They can help astute managers get the organization on a path toward effectiveness and profitability, or they can strangle well-conceived strategies and deci sions. Managers must recognize when to use coalitions, how to assess whether coalitions are acting in the best interests of the organization, and how to constrain their dysfunctional effects. + Use incomplete and sand end up with When faced with 2 imperfect information ‘decision that may decision situation, ‘Ace constrained by ‘ormay not serve the ‘managers actualy. bounded rationality ierests ofthe ‘Tend ta stishice organization. ‘The administrative model is based con behavioral processes thet affect, how managers make decisions. Father than prescribing now dec sions shouldbe made, i focuses fore on describing how they a@ made © coalition {An informal alliance of indi~ viduals or groups formed to achieve a common goal CHAPTER 8 Managatial Decision Making and Problem Soling 283,can play an important roe in the decision making process nikenerg arved in Prague, ner intuition told her that tha city’s booming business sector would suagort an Englshianguage newspaper. She and a parner started the business-anentod Prague Post, which now has 8 cr An innate belief about some © escalation of com- A decision maker’ staying with a decision even when it Intuition and Escalation of Commitment Two other decision processes that go beyond logic and rationality are in tuition and escalation of commitment to a chosen course of action, Intuition Intuition isan innate belief about something without con- scious consideration, Managers sometimes decide to do something because i “feels right” or they have a hunch. This feeling is usually not arbitrary, however. Rather, it is based on years of experience and practice in mak- ing decisions in similar situations. An inner sense may help managers make an occasional decision without going through a full-blown rational sequence of steps. Liz Claiborne and three partners founded Liz Claiborne, Inc. to design and sell clothes for working women. Conventional wisdom at the time suggested that they needed to build plants to make the cloth: ing and develop a traveling salesforce to market it. Pure intuition, however, told them not to follow this “wisdom.” They subcontracted pro- duction to other makers instead of building plants, and they sold their clothes to only large department and specialty store buyers willing to travel to New York. The result? Very low overhead and annual sales of more than 81 billion." OF course, all managers, but most especially inexperienced ones, should be careful not to rely on intuition too heavily. If rationality and logic are continually flaunted for what “feels right.” the odds are that disaster will strike one day. Escalation of Commitment Another important behavioral process that influences decision making is escalation of commitment to a chosen coutse of action, In particular, decision makers sometimes make decisions and then become so committed to the course of action suggested by that decision that they stay with it, even when it appears to have been wrong. For example, when people buy stock in a company, they sometimes refuse to sell it even after repeated drops in price. They chos tion—buying the stock in anticipation of making a profit with ic even in the face of increasin A few years ago IBM decided to develop a new operating system to re place what was then the industry standard, DOS. DOS had been jointly developed several years earlier by IBM and Microsoft Corp. IBM recog- nized that DOS was becoming outdated and that Microsoft was develop- ing its own new system called Windows. IBM countered with a system called OS/2. Windows went on to become the most successful software product in history, garnering more than 75 percent of the market, white 0S/2 became only a minor player in the market. But in 1995,as Microsoft was introducing a new version of its system called Windows 95, IBM sim- ilarly announced a new version of OS/2. Many experts, however, predicted that the new OS/2 would meet the same fate as its predecessor.” Thus decision makers must walk a fine line. On the one hand, they must guard against sticking with an incorrect decision too long. To do so can bring about financial decline. On the other hand, they should not bail out of a seemingly incorrect decision too soon, as did Adidas. Adidas once dominated the market for professional athletic shoes. It subsequently en- tered the market for amateur sports shoes and did well there also. Bu agers interpreted a sales slowdown as a sign that the boom in athletic shoes a course of ac ind then stay losses, Decision Makingwas over. They thought that they had made the wrong decision and or- dlered drastic cutbacks, The market took off again with Nike at the head of the pack, and Adidas never recovered.” Risk Propensity and Decision Making The behavioral element of risk propensity is the extent to which a de cision maker is willing to gamble when making a decision. Some man- agers are cautious about every decision they make. They try to adhere to the rational model and are extremely conservative in what they do. Such managers are more likely to avoid mistakes, and they infrequently make cisions that lead to big losses. Other managers are extremely aggressive in making decisions and are willing to take risks. They rely heavily on in tuition, reach decisions quickly, and often risk big investments on their decisions. As in gambling, these managers are more likely than their con servative counterparts to achieve big successes with their decisions; they are also more likely to incur greater losses. The organization's culture is a prime ingredient in fostering different levels of risk propensity. As we introduce in Chapter 4, individual ethics are personal beliefs about right and wrong behavior. Ethics are clearly related to decision making in a number of ways.” For example, suppose after careful analysis a manager realizes that her company could save money by closing her department and subcontracting with a supplier for the same services. But to recom- mend this course of action would result in the loss of several jobs, in- cluding her own. Her own ethical standards will clearly shape how she proceeds. Indeed, each component of managerial ethics (relationships of the firm to its employees, of employees to the firm, and of the firm to other economic agents) involves a wide variety of decisions, all of which are likely to have an ethical component. A manager must remember, then, that just as behavioral processes such as politics and risk propensity affect, the decisions she makes, so too do her ethical beliefs GROUP DECISION MAKING IN ORGANIZATIONS In more and more organizations today, important decisions are made by groups rather than by individuals. Examples include the executive com- mittee of Rockwell International, product design teams at Texas Instra- ments, and marketing planning groups at General Foods. The Managing in «@ Changing World box discusses group decision making at Procter & Gam- ble. Managers can typically choose whether to have individuals or groups make a particular decision. Thus knowing about forms of group decision, making and their advantages and disadvantages is important.°° Forms of Group Decision Making The most common methods of group decision making are interacting groups, Delphi groups, and nominal groups © risk propensity The extent to which a deci- sion maker is willing to gam- ble in making a decision CHAPTER & Managerial Decision Making and Problem Solving 2a,© interacting group Interacting Groups An interacting group is the most common for A decision-making group in. of decision-making group. The format is simple—either an existing oF a hich members openly 4 group is asked to make a decision. Existing groups might cular work g argue about, and pe functional partments, re fon the best alternaci Mevly designated Go mitces task forces, or Work up members talk among themselves, argue, form internal coalitions, and so forth. Finally, after some pe teams. The riod of deliberation, the group makes a decision. An advantag method is that the interaction between people often sparks ne’ promotes understanding. A major disadvantage, though © Delphi group. Delphi Groups A Delphi group is sometimes used for developing a A form of group decision consensus of expert opinion. Developed by the Rand Corporation. the making in which a group Delphi procedure solicits input from a panel of experts who contribute used to achieve a consensus of individually. Their opinions are combined and, in effect, averaged. As on sume, for example, that the problem is to establish an expected date for a The first step in using the Delphi procedure is to obtain the cooperation of a panel of experts. For this situation, experts might include various re search scientists, university researchers, and executives in a relevant energy ‘ndustry. At first, the experts ate asked to anonymously predict a time frame for the expected breakthrough. The persons coordinating the Del phi group collect the responses, average them, and ask the experts for an- experts who provided unusual ot ex ustify them. When the predictions stabilize, the other prediction. In this round, ¢ treme predictions may be asked se explinations may hen be relayed to the other exper iverage prediction is taken to represent the decision o! logistics of the Delphi technique rule out he “group” of ex perts, The time, expens forecasting technological breakthroughs at Boeing, market potential for ew products at General Motors, research and development patterns at Eli Lilly, and future economic conditions by the U.S. governme 246 0 pART OM ng 7CE Procter & Gamble Lee ‘The Procter & Gamble Co. (P&G) was formed by the merger of two small busi- nesses in 1837. Wiliam Procter, a candle- ‘maker, and James Gamble, a soapmaker, joined forces and soon became one of Cincinnati's, largest businesses. With the introduction ofa floating soap, ory, and shortening, Crisco, in 1911, P&G soon became one of the country’s and then the world's largest organizations. Indeed, by the early 1990s, it vias number-one or -twa in terms of market share in about three-fourths of the major categories in which it competed. Early in 1993, P&G had been identified as 8 prime ‘example of the type of organization that managed to stop the turnaver that so many other companies were ‘experiencing during the 1980s and 1990s. But P&G's CEO, Edwin Artzt, decided that turmoil was better than stagnation and changed all that. P&G began 2 massive global restructuring designed to eliminate three or more management levels and more than ten thousand jobs by 1995, The intention was to hasten’ decision making in everything from product develop ment in its research and development laboratories to promotion, advertising, sales, and marketing, ‘Amit believed that, although P&G was stil making ‘money, its strategic direction had become unclear. He intended to build a tougher, faster, and more globally compettive organization. He initiated value or every day low pricing to become more competitive and to e- spond to increasingly price-sensitive consumers. Faster product development to beat competitors to the market and individual financial cesults became es- sential criteria in managerial evaluation. P&G ce designed almost everything about the company—the way it develops, manufactures, distributes, prices, markets, and sells its products. The intent was to tighten the distribution chain so that manufacturer, supplier, wholesaler, retailer, and customer were in much closer contact. In making these changes, P&G ‘went by four “cules”: change the tasks or the work it- self, do more with less, do it right the first time to climinate rework, and reduce costs that reduce P&G's earings. Additionally, P&G's team approach to decision mak- ing was modified. Att insisted that all teams have ex- plicit missions and develop clear goals for individual team members to ensure that those teams were as accountable for performance as were al individuals in the P&G organization References ill Saporit,"Behind the Tum a P&G) tame, Marc 7 194, pp. 74-82: dit Springer Riddle, "Proce ter & Gamble Sets Sweeping Eniployee Cut 0 Stay Compet- tive Bnndeok Jay 19.1993, pp. 6eWillam G. Ouchi and Raymond U.Price "Hissachie, Clans, and Theory Z:A New Ponpertive on Organization Development” Onsnisational Dy- nmi, Spring 1993, 9p. 62-70; Milton Moskowitz, Robert, {Levering and Michael Kate, Erba’ Busines (New Yor: Doubleday, 190), pp. SMes9Tr and “No More Mr. Nice Guy ae P&G-Not byt Long Shot” Buea Het, February 3, 1992, pp. 130-132, en A EA A fominal Groups Another useful roup decision-making technique oc- © nominal group casionally wsed is the nominal group. Unlike the Delphi method, where {group members do not see one another, nominal group members are brought cogether. The members represent a group in name only, however; they do not talk to one another freely like the members of interacting groups. Nominal groups are used most often to generate creative and in- novative alternatives or ideas, To begin, the manager assembles a group of snowledgeable people and outlines the problem to them. The group inembers are then asked to individually write down as many alternatives as they can think of. The members then take turns stating their ideas, which are recorded on a flip chart or blackboard a¢ the front of the room. Discussion is limited to simple clarification, After all alternatives have been listed, more discussion takes place. Group members then vote, usually CHAPTER A structured technique used t0 {generate creative and innova- tive alternatives oF ideas Manegeia Oecision Making and Prabiem Solving 247a To increase the chances that roup's decision willbe success ful, managers must lear Now 10 manage the process of group dec Sion making, Westinghouse FedEx, an IBM are increasingly Using groups 19 the decision making proves. by rank-ordering the various aleernatives ‘The highest-ranking alternat represents the decision of the group. ‘Of course, the manager in charge : eretipe authority to accept oF reject the group decision. Be may Advantages of Group Decision Making “The advantages and disadvantages of group decision making relative to ing Tidal decaion making are summarized in Table 8.2. One advantage of troup decision making # simply that more informayinn available ina Group settings suggested by the old axiom “TW heads are better than, aoe A roup represents a vaiety of edueation, experience, snd Penpen, cee aga result of this increased information, groups eypicaly ca sicieify and evaluate more alternatives than can one Person, 2 The peo ble involved in a group decision understand the lone and rationale bee Pie care more likely to accept it, and are equipped to commenicate the hing it Mp their work groups or departments. Finally, research evidence Seggests that groups may make better decisions chan individuals. : Disadvantages of Group Decision Making Perhaps the biggest drawback of group decision making the additional | Fane vad (hence) the greater expense entailed. The increased time stems | time anfpmaction and discussion among group members. Ifa given mane Sern, time is worth $50 an hour, nd if che manager spends two hour] wetking a decision, the decision costs the organization ‘$100. For the same mak pup of five managers might cequie three hours of cine A decir chour rate che decison costs the opganization $7). ws ine ang the group decision is beter, the additional expense May be juste fi ac the fact remains that group decision making is More costly. Group decisions may aso represent undesirable compromises M For exe may be a bad decision in the vor be able vo respond adequately to vat ample, hiring a compromise top manage Jong run because he or she may Advantages 1. The process takes longer, s0 itt costlier 1. More information and know! edge are available, Compromise decisions revit may emer ‘More alternatives ate likely to be generated. fiom indecisiveness 3, More acceptance of the final 3, One person may dominate the decision is likely. group. 4. Enhanced communication of 4. Groupthink may occu the decision may result 5, Berter decisions generally Planning anc Decision Makingious subunits in the organization. Sometimes one individual dominates the group process to the point where others cannot make a fall contribution This dominance may stem from a desire for power or from a naturally dominant personality. The problem is chat what appears to emerge as a group decision may actually be the decision of one person Finally, a group may succumb to a phenomenon known as groupthink. Groupthink occurs when the group’s desire for consensus and cohesi ness overwhelms its desire to reach the best possible decisions.°* Under the influence of groupthink, the group may arrive at decisions chat are not n the best interest of either the group or the organization but rather avoid conflict among group members. One of the clearest examples of group- think involved the space shuttle Challenger disaster. As NASA was prepar- ing to launch the shuttle, numerous problems and questions arose. At each step of the way, however, decision makers argued that there was no reason to delay and hat everything would be fine. Shortly after the launch on January 28, 1986, the shuttle exploded, killing all seven crew members. aging Group Deci n-Making Processes Managers can do several things to help promote the effectiveness of group decision making. One is simply being aware of the pros and cons of hav- ing a group make a decision. Time and cost can be managed by setting a deadline by which the decision must be made final. Dominance can be at least partially avoided if a special group is formed just to make the deci: sion. An astute manager, for example, should know who in the organiza tion may try to dominate a group and can either avoid putting that person in the group or put several scrong-willed people together To avoid groupthink, each member of the group should critically ev uate all alternatives. So that members present divergent viewpoints, the leader should not make his or her own position known too early. At least fone member of the group should be assigned the role of devil’ ‘And, after reaching a preliminary decision, the group should hold a fol- low-up meeting wherein divergent viewpoints can be raised again if any group members wish to do so.** Gould Paper Company, Inc., used these methods by assigning managers to two different teams. The teams then spent an entire day in a structured debate presenting the pros and cons of tach side of an issue to ensure the best possible decision. These proce- dures are similar to those practiced at Sun Microsystems advocate, SUMMARY OF KEY POINTS cisions are an integral part of all managerial activities, but they are per P* most central to che planning process. Decision making is the act of \eosing one alternative from among a set of alternatives. The decision Process includes recognizing and defining the nature of a decision ution, idenifying alternatives, choosing the “best” alternative, and ing it into practice. Two common types of decisions are programmed ‘nprogrammed. Decisions may be made under states of certainty, OF uncertainy. CHAPTER Managerial Decision Making and Problem Soiving 249 © groupthink A situation that oceurs when a group's desire for consensus and cohesiveness overwhelms its desire to reach the best pos sible decisionreavional perspectives on decision makin ATE on the classical model. sqiks model assumes that managers have ink plete information and that Tray gil behave rationally. The primary £0 P rational decision making he) recognizing and defining the a Seon, (2) identifying sbtermatives: {3) evaluating alternatives, (4) leet ve ‘best alternative, (3) imple- ©) ng the chosen alternative, and (6) following up and evaluating the Mieretveness of ehe aleernacive after it's implemented. road aspects of decision making 19 2% he administrative mode! ‘this model recognizes that managers BTL have incomplete information Tad hat chey will not always behave + nally The administrative model and thfgnizes the concep of bounded rionality and satisficing. Polit= ae recinies by coatiions, manageTil aration, and the rendency t© ica me increasingly committed © 2 CHO Course of action are all im= portant, Risk propensity is aso 3” Fpareant behavioral perspective OF de- ore aking, Finally, ethics also affect hom managers make decisions ion ip enhance decision-making effectors managers often use in- cenceing: Delphi, oF nominal groups, Grove Mecision making in general eeeeral advantages as well 38 discon ee relative to individual deci- ve making, Managers can adopt * Number of strategies co help g°0UPS make better decisions DISCUSSION QUESTIONS ‘Questions for Review 1. Describe the nature of decision making 3. What are che main features ofthe clas a} model of the decision-making process? What ae the main Fates pf che administrative model? ‘3,_What are the steps in rational decioot making? Which step do you chink WIR dpost difficult co eaery ou? WHY? ‘a, Deseribe the behavioral narare of devise" making. Be certain co provide eset detail about politcal forces, sk rapensiy ethics, and commitment jn your description. questions for Analysis 5, Was your decision about what college OF aniversity to atcend a rational se gon? Did you go through each steP 18 onal decision making? HF net why n0 \ 46. Can any decision be purely rational oF 2 all decisions at Teast partially DE + | Can 2m in mature? Defend your answer 960% alternatives. j 1. Under what conditions would you exPect EDT decision making t0 DE | teferabe co individual decision MAKIN fond view versa? Why? questions for Application a, tnverview a local Business manage abOW" 8 SEP decision that he or 4 ter evenchy Try #o determine se he mame vised each of the steps i rragesal decision making. not, which Were Smiteed? Why might ee tiger have omitted those SEP aso PART I Parsing and Doason Making9 Interview a local business manager about a major decision that he or she ine if aspects of the behavioral nature of deci- involved. If so, which were involved? Why might this have made recently: Try to deter 10. Interview a department head at your college oF university to group decision making is used at all. [i if determine if what types of decisions is it ILL SELF-ASSESSMENT Decision-Making Styles Introduction: Decision making is clearly important, However, individ- uals differ in their decision-making style, or the way that they approach decisions. The following assessment is designed to help you understand your decision-making style. Instructions: Respond to the following statements by indicating the ex- tens to which they describe you. Circle the response that best represents your self-evaluation 1. Over all, @. quick b. moderately fast «slow 2 I spend amount of time making important decisions as I do mak- ing less important ones, about the same b. a greater «a much greater 3 When making decisions, 1__ go with my fise though usually '. occasionally early 4 When making a decision, I'm concerned about making . nirely b. occasionally & often | 5. When making decisions, recheck my work more than once | @ crely . occasionally & usally 4 When making decisions, | gather —__— information «. lle b. some & low of % When making decisions | consid alternatives fe b. some lots of 4% Uusally make decisions before the deadline wy somewhat just j . After making a decision, 1 had waited rarely b. — look for other alternatives, wishing I - occasionally usually ret having made a decision, b. occasionally offen turn t9 page 724. 1 N. Spenion Ski M by Richard D Irwin Ine Used with CHAPTER & Managerial Decision Making and Problem Solving