TOURISM MANAGEMENT

LECTURE 5
«Managerial Decisions,
Essence and Types»
 A key to success in
management and in
your career is knowing
how to be an effective
problem-solver
 It was the type of day that airline
managers dread. A record-setting
blizzard moving up the East Coast—
covering roads, railroads, and
airport runways with as much as 27
inches of snow. One of the major
airlines that would have to deal with
the storm, American Airlines,
has over 78,000 employees who
make flights possible and four who
cancel those flights, if needed.
 Working out of the Fort Worth, Texas,
control center, these employees, who deal
with all kinds of situations, know that
snowstorms are relatively simple because
they can be forecasted in advance fairly
easily and airline crews can quickly
deploy equipment and procedures to deal
with ice and snow. But still, even this
doesn’t mean that the decisions they have
to make are easy, especially when those
decisions affect hundreds of flights and
thousands of passengers!
 Although most decisions managers
make don’t involve blizzards (or other
weather-related uncertainties), you can
see that decisions—choices,
judgments—play an important
role in what an organization has
to do or is able to do.
 Managers at all levels and in all areas of
organizations make decisions. That is, they make
choices. For instance, top-level managers make
decisions about their organization’s goals, where to
locate manufacturing facilities, or what new
markets to move into. Middle- and lower-level
managers make decisions about production
schedules, product quality problems, pay raises,
and employee discipline.
 All organizational
members make decisions
that affect their jobs and
the organization they
work for.
Decision Making

Decision
Making a choice from two or more alternatives.
The Decision-Making Process
Identifying a problem and decision criteria and
allocating weights to the criteria.
Developing, analyzing, and selecting an alternative
that can resolve the problem.
Implementing the selected alternative.
Evaluating the decision’s effectiveness.
 Step 1: Identify a Problem

Your team is dysfunctional, your customers are leaving,

or your plans are no longer relevant. Every decision
starts with a problem, a discrepancy between an
existing and a desired condition. Let’s work through an
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new laptops because their old ones are outdated and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.
Step 1: Identifying the Problem

Problem
A discrepancy between an existing and desired state
of affairs.
Characteristics of Problems
A problem becomes a problem when a manager
becomes aware of it.
There is pressure to solve the problem.
The manager must have the authority, information, or
resources needed to solve the problem.
Step 2: Identify Decision Criteria
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.
Step 2: Identifying Decision Criteria

Decision criteria are factors that are important

(relevant) to resolving the problem.
Costs that will be incurred (investments required)
Risks likely to be encountered (chance of failure)
Outcomes that are desired (growth of the firm)
 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. 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 Figure.
 Step 3: Allocating Weights to the
Criteria

• Decision criteria are not of equal importance:

Assigning a weight to each item places the items in
the correct priority order of their importance in the
decision making process.
Important Decision Criteria
Step 4: Develop Alternatives

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.
 Step 4: Developing Alternatives

Identifying viable alternatives

Alternatives are listed (without evaluation)
that can resolve the problem.
 Step 5: Analyze Alternatives

Once alternatives have been identified, a decision maker

must evaluate each one. How? By using the criteria
established in Step 2. Exhibit 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. 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.
For example, the score for the HP ProBook
would be 36, and the score for the Sony NW
would be 35.
 Step 5: Analyzing Alternatives

• Appraising each alternative’s strengths

and weaknesses
An alternative’s appraisal is based on its
ability to resolve the issues identified in
steps 2 and 3.
 Step 6: Select an
Alternative

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 2-4), Amanda
would choose the Dell Inspiron because it
scored higher than all other alternatives
(249 total).
 Step 6: Selecting an Alternative

Choosing the best alternative

The alternative with the highest total weight
is chosen.
Step 7: Implement 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 choices still the best ones, or has the
environment changed in such a way that we need to reevaluate?
 Step 7: Implementing the
Alternative

• Putting the chosen alternative into action.

Conveying the decision to and gaining
commitment from those who will carry out the
decision.
 Step 8: Evaluate Decision
Effectiveness

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.
 Although everyone in an
organization makes
decisions, decision making is
particularly important to
managers.
 Step 8: Evaluating the Decision’s
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?
Decisions in the Management Functions
Making Decisions

 Rationality
 Managers make consistent, value-maximizing choices with specified
constraints.
 Assumptions are that decision makers:
 Are perfectly rational, fully objective, and logical.
 Have carefully defined the problem and identified all viable alternatives.
 Have a clear and specific goal
 Will select the alternative that maximizes outcomes in the organization’s
interests rather than in their personal interests.
Assumptions of Rationality
 Making Decisions
Bounded Rationality
Managers make decisions rationally, but are limited
(bounded) by their ability to process information.
Assumptions are that decision makers:
Will not seek out or have knowledge of all alternatives
Will satisfice—choose the first alternative encountered that
satisfactorily solves the problem—rather than maximize the outcome of
their decision by considering all alternatives and choosing the best.
Influence on decision making
Escalation of commitment: an increased commitment to a previous
decision despite evidence that it may have been wrong.
The Role of Intuition

Intuitive decision making

Making decisions on the basis of experience,
feelings, and accumulated judgment.
What is Intuition?
 Types of Problems and Decisions

Structured Problems
Involve goals that clear.
Are familiar (have occurred before).
Are easily and completely defined—information about the
problem is available and complete.

Programmed Decision
A repetitive decision that can be handled by a routine
approach.
Types of Programmed Decisions

Policy
A general guideline for making a decision about a
structured problem.
Procedure
A series of interrelated steps that a manager can use to
respond (applying a policy) to a structured problem.
Rule
An explicit statement that limits what a manager or
employee can or cannot do.
Policy, Procedure, and Rule Examples

Policy
Accept all customer-returned merchandise.

Procedure
Follow all steps for completing merchandise return
documentation.

Rules
Managers must approve all refunds over $50.00.
No credit purchases are refunded for cash.
Problems and Decisions

Unstructured Problems
Problems that are new or unusual and for which
information is ambiguous or incomplete.
Problems that will require custom-made solutions.

Nonprogrammed Decisions
Decisions that are unique and nonrecurring.
Decisions that generate unique responses.
Programmed versus Nonprogrammed Decisions
Decision-Making Conditions

Certainty
A situation in which a manager can make an accurate
decision because the outcome of every alternative choice is
known.
Risk
A situation in which the manager is able to estimate the
likelihood (probability) of outcomes that result from the
choice of particular alternatives.
Expected Value for Revenues from the Addition
of One Ski Lift

Expected
Expected × Probability = Value of Each
Event Revenues Alternative
Heavy snowfall $850,000 0.3 = $255,000
Normal snowfall 725,000 0.5 = 362,500
Light snowfall 350,000 0.2 = 70,000
$687,500
Decision-Making Conditions

Uncertainty
Limited information prevents estimation of outcome
probabilities for alternatives associated with the problem
and may force managers to rely on intuition, hunches, and
“gut feelings”.
Maximax: the optimistic manager’s choice to maximize the
maximum payoff
Maximin: the pessimistic manager’s choice to maximize the
minimum payoff
Minimax: the manager’s choice to minimize maximum regret.
Decision-Making Styles

Dimensions of Decision-Making Styles

Ways of thinking
Rational, orderly, and consistent
Intuitive, creative, and unique

Tolerance for ambiguity

Low tolerance: require consistency and order
High tolerance: multiple thoughts simultaneously
 Decision-Making Styles
Types of Decision Makers
Directive
Use minimal information and consider few alternatives.
Analytic
Make careful decisions in unique situations.
Conceptual
Maintain a broad outlook and consider many alternatives in
making decisions.
Behavioral
Avoid conflict by working well with others and being receptive to
suggestions.
Decision-Making Matrix
Common Decision-Making Errors and Biases
Decision-Making Biases and Errors
Heuristics
Using “rules of thumb” to simplify decision making.

Overconfidence Bias
Holding unrealistically positive views of one’s self
and one’s performance.

Immediate Gratification Bias

Choosing alternatives that offer immediate rewards
and that to avoid immediate costs.
 Decision-Making Biases and Errors
Anchoring Effect
Fixating on initial information and ignoring subsequent
information.
Selective Perception Bias
Selecting organizing and interpreting events based on the
decision maker’s biased perceptions.
Confirmation Bias
Seeking out information that reaffirms past choices and
discounting contradictory information.
 Decision-Making Biases and Errors

 Framing Bias
 Selecting and highlighting certain aspects of a situation while
ignoring other aspects.
 Availability Bias
 Losing decision-making objectivity by focusing on the most
recent events.
 Representation Bias
 Drawing analogies and seeing identical situations when none
exist.
 Randomness Bias
 Creating unfounded meaning out of random events.
 Decision-Making Biases and Errors
Sunk Costs Errors
Forgetting that current actions cannot influence past events
and relate only to future consequences.
Self-Serving Bias
Taking quick credit for successes and blaming outside factors
for failures.
Hindsight Bias
Mistakenly believing that an event could have been predicted
once the actual outcome is known (after-the-fact).
Overview of Managerial Decision Making
Decision Making for Today’s World

 Guidelines for making effective decisions:

 Understand cultural differences.
 Know when it’s time to call it quits.
 Use an effective decision-making process.
 Habits of highly reliable organizations (HROs)
 Are not tricked by their success.
 Defer to the experts on the front line.
 Let unexpected circumstances provide the solution.
 Embrace complexity.
 Anticipate, but also anticipate their limits.
Characteristics of an Effective
Decision-Making Process
 It focuses on what is important.
 It is logical and consistent.
 It acknowledges both subjective and objective thinking
and blends analytical with intuitive thinking.
 It requires only as much information and analysis as is
necessary to resolve a particular dilemma.
 It encourages and guides the gathering of relevant
information and informed opinion.
 It is straightforward, reliable, easy to use, and flexible.
 Terms to Know

 decision  policy
 decision-making process  unstructured problems
 problem  nonprogrammed decisions
 decision criteria  certainty
 rational decision making  risk
 bounded rationality  uncertainty
 satisficing  directive style
 escalation of commitment
 analytic style
 intuitive decision making
 conceptual style
 structured problems
 behavioral style
 programmed decision
 heuristics
 procedure
 business performance management (BPM)
 rule software