Schermerhorn-Management, 11th

Lecture Notes

Chapter 7:

THE DECISION-MAKING PROCESS

CHAPTER 7 OVERVIEW
As rapid advances in information technology sweep through modern organizations, innovations in
learning, problem solving, and decision-making have occurred. This chapter describes the
opportunities and challenges that information technology (IT) creates and the impact of IT on
managerial decision-making. The chapter begins by examining how IT is changing business
practices, organizations, and the ways in which work is accomplished. The chapter then discusses
how managers use information to make decisions and the types of environments in which
decisions are made. Attention is given to the different problem-solving styles that managers may
adopt. A detailed discussion of the steps in the decision-making process ensues. These steps
include: (1) identifying and defining the problem; (2) generating and evaluating alternative
solutions; (3) choosing a preferred course of action; (4) implementing the decision; and 5)
evaluating results in view of an ethics double-check. Decision-making traps including
availability bias, representative bias, anchoring and adjustment bias, the framing error, the
confirmation error, and escalating commitment are identified and their potential biasing effects
are described. The chapter concludes with a description of how creativity is used in decision
making along with personal and situational creativity drivers.
STUDY QUESTION 2: HOW DO MANAGERS USE INFORMATION TO MAKE
DECISIONS?
Information helps a leader sense the need for a decision, frame an approach to the
decision, and communicate about the decision with others.
MANAGERS AS INFORMATION PROCESSORS
FIGURE 7.3 on page 162 of the text shows the manager as an information-processing
nerve center.
All aspects of the managing process planning, organizing, leading, and controlling
involve communication and information processing:
Planning advantages of ITbetter and more timely access to useful information,
involving more people in the planning process.
Organizing advantages of ITmore ongoing and informed communication among all
parts, improving coordination and integration.
Leading advantages of ITmore frequent and better communication with staff and
diverse stakeholders, keeping objectives clear.
Controlling advantages of ITmore immediate measures of performance results,
allowing real-time solutions to problems.
MANAGERS AS PROBLEM SOLVERS
Problem solving is the process of identifying a discrepancy between an actual and desired
state of affairs and then taking action to resolve the deficiency or take advantage of the
opportunity.

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A decision is a choice among possible alternative courses of action.

A performance threat is a situation where something is already wrong or has the
potential to go wrong.
A performance opportunity occurs when an actual situation either turns out better than
anticipated or offers the potential to do so.
Openness to Problem Solving
Problem avoiders managers who ignore information that would otherwise
signal the presence of a performance opportunity or threat; they are inactive in
information gathering and do not want to make decisions or deal with the problem.
Problem solvers managers who are willing to make decisions and try to solve
problems, but only when they are forced to by the situation; they are reactive in
gathering information and in responding to problems after they occur.
Problem seekers managers who actively process information and constantly
look for problems to solve; they are proactive in anticipating problems and
opportunities and take appropriate action to gain an advantage.
Systematic and Intuitive Thinking
Managers who use systematic thinking approach problems in a rational, step-bystep, and analytical fashion.
Managers who employ intuitive thinking approach problems in a flexible and
spontaneous fashion. They also may be quite creative.
Multidimensional Thinking
Senior managers, in particular, should be capable of approaching problems from
the perspectives of both systematic thinking and intuitive thinking. Doing so
requires multidimensional thinking, which is the ability to view many problems
at once, in relationship to one another, and across long and short time horizons.
Effective multidimensional thinking requires skill at strategic opportunism the
ability to remain focused on long-term objectives while being flexible enough to
resolve short-term problems and opportunities in a timely manner.
Cognitive Styles
People with different cognitive styles approach problems and decisions in different
ways. The chart on page 165 of the text shows the cognitive styles in decision
making as:
Sensation Thinkers tend to emphasize the impersonal rather than the personal
and take a realistic approach to problem solving. They like hard facts, clear
goals, certainty, and situations of high control.

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Lecture Notes

Intuitive Thinkers are comfortable with abstraction and unstructured situations.

They tend to be idealistic and prone toward intellectual and theoretical positions.
They are logical and impersonal, but also avoid details.
Intuitive Feelers prefer broad and global issues. They are insightful and tend to
avoid details, being comfortable with intangibles; they value flexibility and human
relationships.
Sensation Feelers tend to emphasize both analysis and human relations. They
tend to be realistic and prefer facts; they are open communicators and sensitive to
feelings and values.
REAL PEOPLE on page 165 of the text tells the story of John Vlahakiss
commitment to making earth friendly products to prevent harm to the
environment.
TYPES OF MANAGERIAL DECISIONS
Programmed and Non-programmed Decisions
Programmed decisions apply solutions that are already available from past
experiences to solve structured problems ones that are familiar,
straightforward, and clear with respect to information needs.
Programmed decisions apply best to routine problems that, while not necessarily
predictable, can be anticipated.
Non-programmed decisions develop novel solutions to meet the demands of
unique situations that present unstructured problems ones that are full of
ambiguities and information deficiencies.
Most problems faced by higher-level managers are unstructured and most of their
decisions are non-programmed.
Crisis Decisions
A crisis involves the occurrence of an unexpected problem that can lead to disaster
if it is not resolved quickly and appropriately. A crisis creates the conditions for
making an extreme type of non-programmed decision.
Post-9/11 terrorism, workplace violence, man-made environmental disasters,
ethical scandals, and IT failures are good examples of crisis situations. Information,
assistance, and teamwork are especially crucial for the manager in solving a crisis
situation.
MANAGEMENT SMARTS 7.1 on page 167 of the text provides six rules for crisis
management:
1. Figure out what is going on Take the time to understand whats happening and
the conditions under which the crisis must be solved.
2. Remember that speed matters Attack the crisis as quickly as possible, trying to
catch it when it is as small as possible.
3. Remember that slow counts, too Know when to back off and wait for a better
opportunity to make progress with the crisis.
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4. Respect the danger of the unfamiliar Understand the danger of all-new territory
where you and others have never been before.
5. Value the skeptic Dont look for and get too comfortable with agreement;
appreciate skeptics and let them help you see things differently.
6. Be ready to fight fire with fire When things are going wrong and no one
seems to care, you may have to start a crisis to get their attention.
DECISION CONDITIONS
Risk and uncertainty are more common at higher management levels.
Figure 7.4 on page 167 of the text identifies three environments for managerial decision
making and problem solving. These three environments involve certainty, risk, and
uncertainty.
Certain Environment
A certain environment offers complete information about possible action alternatives
and their outcomes. Few managerial problems occur in certain environments.
Risk Environment
Risk environments lack complete information about action alternatives and their
consequences, but offer some estimates of probabilities or the degree of likelihood
of the outcomes for possible action alternatives. Risk is typical for entrepreneurs
and organizations that depend on ideas and continued innovation for their success.
Uncertain Environment
An uncertain environment occurs when information is so poor that managers are
unable even to assign probabilities to the likely outcomes of known alternatives. High
uncertainty forces managers to rely heavily on creativity in problem solving.

STUDY QUESTION 3: WHAT ARE THE STEPS IN THE DECISION-MAKING

PROCESS?
The decision-making process involves a set of activities that begin with the identification
of a problem, include making a decision, and end with the evaluation of results.
FIGURE 7.5 on page 169 of the text identifies five steps in the decision-making process:
1. Identify and define the problem.
2. Generate and evaluate alternative courses of action
3. Decide on a preferred course of action.
4. Implement the decision.
5. Evaluate results.
STEP 1 IDENTIFY AND DEFINE THE PROBLEM

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Lecture Notes

The first step in decision-making is to find and define the problem. This is a stage of
information gathering, information processing, and deliberation. It is important to clarify
goals by identifying exactly what a decision should accomplish.
Three common mistakes occur in this critical first step in decision making.
1. Defining the problem too broadly or too narrowly.
2. Focusing on symptoms instead of causes.
3. Choosing the wrong problem with which to deal.
STEP 2GENERATE AND EVALUATE ALTERNATIVE COURSES OF ACTION
Several potential solutions are formulated at this stage. More information is gathered, data
are analyzed, and the advantages and disadvantages associated with possible alternative
courses of action are identified.
A useful approach for evaluating alternatives is the cost-benefit analysis which involves
the comparison of what an alternative will cost in relationship to the expected benefits. At
a minimum, the benefits should exceed the costs.
Criteria for evaluating alternatives:
Costs: What are the costs of implementing the alternative, including resource
investments as well as potential negative side effects?
Benefits: What are the benefits of using the alternative to solve a performance
deficiency or take advantage of an opportunity?
Timeliness: How fast can the alternative be implemented and a positive impact
achieved?
Acceptability: To what extent will the alternative be accepted and supported by those
who must work with it?
Ethical soundness: How well does the alternative meet acceptable ethical criteria in
the eyes of the various stakeholders?
Common mistakes in generating and evaluating possible solutions include:
1. Selecting a particular solution too quickly.
2. Choosing a convenient alternative that may have damaging side effects or may not be
as good as other alternatives that might be discovered with some extra effort.
STEP 3 DECIDE ON A PREFERRED COURSE OF ACTION
Management theory recognizes two major models of decision-making: the classical
decision model and the behavioral decision model. Differences in these two models are
highlighted in FIGURE 7.6 on page 172 of the text.
The classical decision model views the manager as acting rationally in a certain world.
It assumes that the manager faces a clearly defined problem and has knowledge of all
possible action alternatives and their consequences.
In this model, an optimizing decision is made, whereby the decision maker chooses the
absolute best solution to the problem.
The behavioral decision model, which is perhaps best represented by the work of Nobel
Prize winner Herbert Simon, assumes that people act only in terms of what they perceive
about a given situation.

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Lecture Notes

The behavioral decision model recognizes limits to human information-processing

capabilities.
1. Cognitive limitations make it hard for managers to become fully informed and make
perfectly rational decisions.
2. Bounded rationality occurs such that managerial decisions are rational only within the
boundaries defined by the available information.
In this model, decision makers make satisficing decisions by choosing the first alternative
that appears to provide a satisfactory resolution to the problem.
STEP 4 IMPLEMENT THE DECISION
Implementation involves taking action to make sure the solution decided upon becomes a
reality.
Managers need to have the determination and creativity to reach a decision, as well as the
ability and willingness to implement it.
The lack-of-participation error the failure to adequately involve in the process those
persons whose support is necessary to implement a decision is a common
implementation difficulty. To ensure a successful implementation, the manager must use
participation appropriately and wisely.

STEP 5 EVALUATE RESULTS

Evaluation involves comparing the actual and desired results to insure that the problem
has really been solved or that no undesired side effects have occurred. Both positive and
negative consequences of the chosen course of action should be examined.
If actual results fall short of desired results, the manager needs to return to earlier steps in
the decision-making process, thereby making it a dynamic and ongoing activity.
AT ALL STEPS CHECK ETHICAL REASONING
Choices made at each step of the decision-making process often have a moral dimension
that is overlooked. To help in checking ethical reasoning, systematically ask and answer
the following questions:
1.
2.
3.
4.

Utility Does the decision satisfy all constituents or stakeholders?

Rights Does the decision respect the rights and duties of everyone?
Justice Is the decision consistent with the canons of justice?
Caring Is the decision consistent with my responsibilities to care?

The spotlight questions describe in Chapter 3 test the ethics of a decision by exposing it
to scrutiny through the eyes of family, community members, and ethical role models.
The spotlight questions include:
How would I feel if my family found out about this decision?

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Lecture Notes

How would I feel if this decision were published in the local newspaper or posted
on the Internet?
What would the person you know or know of who has the strongest character and
best ethical judgment do in this situation?

STUDY QUESTION 4: WHAT ARE THE CURRENT ISSUES IN MANAGERIAL

DECISION MAKING?
DECISION ERRORS AND TRAPS
People sometimes make bad decisions because they use simplifying strategies
heuristics for making decisions when faced with limited time, information, and energy.
Availability Bias

The availability bias occurs when people use information readily available from
memory as a basis for assessing a current event or situation. Example: deciding
whether or not to invest in a new product based upon your recollection of how well
similar new products have performed in the recent past. Potential bias: readily
available information may be fallible and irrelevant.

Representation Bias

The representativeness bias occurs when people assess the likelihood of something
happening based upon its similarity to a stereotyped set of occurrences. Example:
deciding to hire someone for a job vacancy simply because he/she graduated from the
same school attended by your last and most successful new hire. Potential bias: the
representative stereotype may fail to identify important and unique factors relevant to
the decision.

Anchoring and Adjustment Bias

The anchoring and adjustment bias involves making decisions based on adjustments
to a previously existing value or starting point. Example: deciding on a new salary
level for an employee by simply adjusting upward the prior years salary by a
reasonable percentage. Potential bias: the decision may be inappropriately biased
toward only incremental movement from the starting point.

Framing Error

A framing error occurs when a problem is evaluated and resolved in the context in
which it is perceived either positive or negative.

Confirmation Error

A confirmation error occurs when we notice, accept, and even seek out information
that is confirming or consistent with a decision we have just made.

Escalating Commitment
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Lecture Notes

Escalating commitment the tendency to increase effort and perhaps apply more
resources to pursue a course of action that is not working is another source of
potential decision-making error.

RESEARCH BRIEF on page 175 of the text describes how escalation increases the risk of
ethical breaches in decision making.
MANAGEMENT SMARTS 7.2 on page 176 of the text identifies actions that a person
can take to avoid the escalation trap in making decisions.
1. Set advance limits on your involvement and commitment to a particular course of
action; stick with these limits.
2. Make your own decisions; dont follow the lead of others, since they are also prone to
escalation.
3. Carefully assess just why you are continuing a course of action; if there are no good
reasons to continue, dont.
4. Remind yourself of what a course of action is costing; consider saving these costs as a
reason to discontinue.
5. Watch for escalation tendencies in your behaviors and those of others.

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