Decision Making

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.

6–2
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.

6–3
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: 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.
6–4
Step 4: Developing Alternatives
• Identifying viable alternatives
 Alternatives are listed (without evaluation) that can
resolve the problem.

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.

6–5
Step 6: Selecting an Alternative
• Choosing the best alternative
 The alternative with the highest total weight is chosen.

Step 7: Implementing the Decision

• Putting the chosen alternative into action.
 Conveying the decision to and gaining commitment
from those who will carry out the decision.

6–6
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?

6–7
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.

6–8
Making Decisions (cont’d)
• 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.

6–9
Influences on Decision Making
• Escalation of Commitment
 Increasing or continuing a commitment to previous
decision despite mounting evidence that the decision
may have been wrong.
• The Role of Intuition
 Intuitive decision making
 Making decisions on the basis of experience, feelings,
and accumulated judgment.

6–10
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

6–11
Decision-Making Styles (cont’d)
• 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 long-term decisions.
 Behavioral
 Avoid conflict by working well with others and being
receptive to suggestions.

6–12
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.

6–13
Decision-Making Biases and Errors
(cont’d)
• Anchoring Effect
 Fixating on initial information and ignoring subsequent
information.
• Selective Perception
 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.

6–14
Decision-Making Biases and Errors
(cont’d)
• 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.

6–15
Decision-Making Biases and Errors
(cont’d)
• 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).

6–16
Decision Making for Today’s World
• Guidelines for making effective decisions:
 Know when it’s time to call it quits.
 Practice the five “whys”.
 Be an effective decision maker.
• 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

6–17
Session 8

Planning - I

1–18
What Is Planning?
• Planning
 A primary functional managerial activity that involves:
 Defining the organization’s goals
 Establishing an overall strategy for achieving those goals
 Developing a comprehensive set of plans to integrate
and coordinate organizational work.
 Types of planning
 Informal:not written down, short-term focus; specific to
an organizational unit.
 Formal: written, specific, and long-term focus, involves
shared goals for the organization.

7–19
Why Do Managers Plan?
• Purposes of Planning
 Provides direction
 Reduces uncertainty
 Minimizes waste and redundancy
 Sets the standards for controlling

7–20
Planning and Performance
• The Relationship Between Planning And
Performance
 Formal planning is associated with:
 Higher profits and returns of assets.
 Positive financial results.

 The quality of planning and implementation affects

performance more than the extent of planning.
 The external environment can reduce the impact of
planning on performance,
 Formal planning must be used for several years
before planning begins to affect performance.
7–21
How Do Managers Plan?
• Elements of Planning
 Goals (also Objectives)
 Desired outcomes for individuals, groups, or entire
organizations
 Provide direction and evaluation performance criteria

 Plans
 Documents that outline how goals are to be
accomplished
 Describe how resources are to be allocated and
establish activity schedules

7–22
Types of Goals
• Financial Goals
 Are related to the expected internal financial
performance of the organization.
• Strategic Goals
 Are related to the performance of the firm relative to
factors in its external environment (e.g., competitors).
• Stated Goals versus Real Goals
 Broadly-worded official statements of the organization
(intended for public consumption) that may be
irrelevant to its real goals (what actually goes on in the
organization).

7–23
Types of Plans
• Strategic Plans
 Apply to the entire organization.
 Establish the organization’s overall goals.
 Seek to position the organization in terms of its
environment.
 Cover extended periods of time.
• Operational Plans
 Specify the details of how the overall goals are to be
achieved.
 Cover short time period

7–24
Types of Plans (cont’d)
• Long-Term Plans
 Plans with time frames extending beyond three years
• Short-Term Plans
 Plans with time frames on one year or less
• Specific Plans
 Plans that are clearly defined and leave no room for
interpretation
• Directional Plans
 Flexible plans that set out general guidelines, provide
focus, yet allow discretion in implementation.

7–25
Types of Plans (cont’d)
• Single-Use Plan
 A one-time plan specifically designed to meet the
need of a unique situation.
• Standing Plans
 Ongoing plans that provide guidance for activities
performed repeatedly.

7–26
Approaches to Establishing Goals
• Traditional Goal Setting
 Broad goals are set at the top of the organization.
 Goals are then broken into subgoals for each
organizational level.
 Assumes that top management knows best because
they can see the “big picture.”
 Goals are intended to direct, guide, and constrain
from above.
 Goals lose clarity and focus as lower-level managers
attempt to interpret and define the goals for their
areas of responsibility.

7–27
Approaches to Establishing Goals
(cont’d)
• Maintaining the Hierarchy of Goals
 Means-Ends Chain
 The integrated network of goals that results from a
establishing a clearly-defined hierarchy of
organizational goals.
 Achievement of lower-level goals is the means by which
to reach higher-level goals (ends).

7–28
Approaches to Establishing Goals
(cont’d)
• Management By Objectives (MBO)
 Specific performance goals are jointly determined by
employees and managers.
 Progress toward accomplishing goals is periodically
reviewed.
 Rewards are allocated on the basis of progress
towards the goals.
 Key elements of MBO:
 Goal specificity, participative decision making, an
explicit performance/evaluation period, feedback

7–29
Does MBO Work?
• Reason for MBO Success
 Top management commitment and involvement
• Potential Problems with MBO Programs
 Not as effective in dynamic environments that require
constant resetting of goals.
 Overemphasis on individual accomplishment may
create problems with teamwork.
 Allowing the MBO program to become an annual
paperwork shuffle.

7–30
Characteristics of Well-Designed Goals
• Written in terms of • Challenging but attainable
outcomes, not actions  Low goals do not motivate.
 Focuses on the ends, not  High goals motivate if they
the means. can be achieved.
• Measurable and • Written down
quantifiable  Focuses, defines, and
 Specifically defines how the makes goal visible.
outcome is to be measured • Communicated to all
and how much is expected.  Puts everybody “on the
• Clear as to time frame same page.”
 How long before measuring
accomplishment.

7–31
Steps in Goal Setting
1. Review the organization’s mission statement.
1. Do goals reflect the mission?
2. Evaluate available resources.
1. Are resources sufficient to accomplish the mission?
3. Determine goals individually or with others.
1. Are goals specific, measurable, and timely?
4. Write down the goals and communicate them.
1. Is everybody on the same page?
5. Review results and whether goals are being met.
1. What changes are needed in mission, resources, or goals?

7–32
Developing Plans
• Contingency Factors in A Manager’s Planning
 Manager’s level in the organization
 Strategicplans at higher levels
 Operational plans at lower levels

 Degree of environmental uncertainty

 Stable
environment: specific plans
 Dynamic environment: specific but flexible plans

 Length of future commitments

 Current plans affecting future commitments must be
sufficiently long-term to meet the commitments.

7–33
Approaches to Planning
• Establishing a formal planning department
 A group of planning specialists who help managers
write organizational plans.
 Planning is a function of management, should never
become the sole responsibility of planners.
• Involving organizational members in the process
 Plans are developed by members of organizational
units at various levels and then coordinated with other
units across the organization.

7–34
Contemporary Issues in Planning
• Criticisms of Planning
 Planning may create rigidity.
 Plans cannot be developed for dynamic
environments.
 Formal plans cannot replace intuition and creativity.
 Planning focuses managers’ attention on today’s
competition not tomorrow’s survival.
 Formal planning reinforces success, which may lead
to failure.

7–35
Contemporary Issues in Planning
(cont’d)
• Effective Planning in Dynamic Environments
 Develop plans that are specific but flexible.
 Understand that planning is an ongoing process.
 Change plans when conditions warrant.
 Persistence in planning eventually pay off.
 Flatten the organizational hierarchy to foster the
development of planning skills at all organizational
levels.

7–36