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PART II: PLANNING

CHAPTER 3 - FOUNDATIONS OF DECISION MAKING

LEARNING OUTCOMES
After reading this chapter, students should be able to:
1. Describe the decision-making process.
2. Explain the three approaches managers can use to make decisions.
3. Describe the types of decisions and decision-making conditions managers face.
4. Discuss group decision-making.
5. Discuss contemporary issues in managerial decision-making.

Opening Vignette – Flight Plan


SUMMARY
Branson, Missouri is in a location not easily accessible by air service. The city, best known for its country
music, aging pop-star variety shows, and family-style attractions, also has the kinds of outdoor activities
that attracted eight and a half million visitors last year, “earning it the unofficial nickname ‘Vegas without
the gambling.’ ” About 95 percent of those visitors come by car or bus. But now it’s show time for a new
entrant—the Branson Airport.
The $155 million airport, which opened in May 2009, is an experiment that many people are watching.
Steve Peet, the airport's chief executive and Jeff Bourk, executive director of the airport are taking a
gamble by building a private commercial airport. Without federal assistance, the airport didn't face the
usual governmental restrictions. Viewed as an incredible opportunity to attract visitors by making it easy
and affordable, the location selected, is conveniently located a short distance south of Branson's popular
theater district. The 7,140 foot runway can accommodate most narrow-body jets.
They can select airlines and negotiate exclusive contracts with such providers as Air Tran and Sun
Country to help these airlines succeed. The airport will earn money from landing fees (based on the
number of passengers, not on weight), airport fuel sales, a percentage of every sale at the airport's facility,
and an $8.24 fee paid by the city of Branson for each arriving passenger. The goal is 250,000 passengers
per year or 685 passengers a day, equivalent to 5-6 planeloads per day.
Teaching Notes
Discuss this case with students, asking them:
1. What type of information was needed prior to making the decision to build an airport?
2. Was Peet and Bourk's decision a sound one? Why or why not?
3. Do you think a private airport is too risky? Why or why not? (Answers will vary…)

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I. THE DECISION-MAKING PROCESS


A. Introduction
1. Decision-making is typically described as “choosing among alternatives.”
2. This is simplistic because decision-making is a process.
a) See Exhibit 3-1 illustrating the decision-making process.
II. WHAT DEFINES A DECISION PROBLEM?
A. Introduction
1. The decision-making process begins with the identification of a problem (Step 1), a
discrepancy between an existing and a desired state of affairs.
a) Car buying example.
2. Problem identification is subjective.
3. The manager who mistakenly solves the wrong problem perfectly is likely to perform just as
poorly as the manager who fails to identify the right problem and does nothing.
a) How do managers become aware that they have a discrepancy?
b) Managers compare their current state of affairs and some standard.
1) Past performance.
2) Previously set goals.
3) Performance of some other unit within the organization or in other organizations.
4) A vehicle that runs.
B. What Is Relevant in the Decision-Making Process?
1. Once a problem is identified, the decision criteria must be identified (Step 2).
2. Car-buying example continued.
3. Every decision maker has criteria—explicitly stated or not—that guide his/her decision.
a) What is not identified is as important as what is.
4. If a decision maker does not identify a particular factor, it is treated as irrelevant.
C. How Does the Decision Maker Weight the Criteria?
1. It is necessary to allocate weights to the items listed in Step 2 in order to give them their
relative priority in the decision (Step 3).
2. A simple approach, give the most important criterion a weight of ten and then assign weights
to the rest against that standard.
a) Exhibit 3-2 lists the criteria and weights for vehicle replacement decision.
3. Then the decision maker lists the alternatives that could succeed in resolving the problem
(Step 4).
a) No attempt is made to appraise these alternatives, only to list them.

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Chapter 3 - Foundations of Decision Making

4. Once identified, the decision maker must critically analyze each alternative (Step 5).
a) Each alternative is evaluated by appraising it against the criteria and weights established
in Steps 2 and 3.
1) Exhibit 3-3 shows the assessed values for each vehicle; it does not reflect the
weighting done in Step 3.
b) If you multiply each alternative assessment against its weight, you get Exhibit 3-4.
c) Notice that the weighting of the criteria has changed the ranking of alternatives in our
example.
D. What Determines the Best Choice?
1. The critical act of choosing the best alternative from among those enumerated and assessed
(Step 6).
E. What Is Decision Implementation?
1. The decision may still fail if it is not implemented properly (Step 7).
2. Decision implementation includes conveying the decision to those affected and getting their
commitment to it.
3. The people who must carry out a decision are most likely to enthusiastically endorse the
outcome if they participate in the decision-making process.
F. What is the Last Step in the Decision Process?
1. The last step (Step 8) appraises the result of the decision to see whether it has corrected the
problem.
2. Did the alternative chosen in Step 6 and implemented in Step 7 accomplish the desired result?
G. Common Errors Committed in the Decision-Making Process
1. Making decisions is making choices.
2. Heuristics are “rules of thumb” that managers use to simplify their decision making.
3. Exhibit 3-5 identifies 12 common decision errors and biases that managers make.
4. Some common mistakes:
a) overconfidence bias - they think they know more than they do or hold unrealistically
positive views of themselves and their performance.
b) immediate gratification bias - describes decision makers who tend to want immediate
rewards and to avoid immediate costs.
c) anchoring effect -describes when decision makers fixate on initial information as a
starting point and then, once set, fail to adequately adjust for subsequent information.
d) selective perception bias - when decision makers selectively organize and interpret events
based on their biased perceptions.
e) confirmation bias - decision makers who seek out information that reaffirms their past
choices and discount information that contradicts past judgments
f) framing bias - when decision makers select and highlight certain aspects of a situation
while excluding others.

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g) availability bias - is when decisions makers tend to remember events that are the most
recent and vivid in their memory.
h) representation bias - when decision makers assess the likelihood of an event based on
how closely it resembles other events or sets of events.
i) randomness bias - describes when decision makers try to create meaning out of random
events.
j) sunk costs error - when decision makers forget that current choices can’t correct the past.
k) self-serving bias -decision makers who are quick to take credit for their successes and to
blame failure on outside factors.
l) hindsight bias - the tendency for decision makers to falsely believe that they would have
accurately predicted the outcome of an event once that outcome is actually known.

Teaching Notes
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III. APPROACHES MANAGERS CAN USE TO MAKE DECISIONS
A. Introduction
1. Decision making is the essence of management. Managers—as they plan, organize, lead, and
control—are called decision makers. (Exhibit 3-6).
2. Managerial decision-making is assumed to be rational.
a) Managers make consistent, value-maximizing choices within specified constraints.
3. Decision maker who was perfectly rational would be fully objective and logical.
a) He or she would carefully define the problem and have a clear and specific goal.
b) The steps in the decision-making process would consistently lead to selecting the
alternative that maximizes that goal.
c) Decisions are made in the best interests of the organization.
d) Guide users through problems by asking them a set of sequential questions about the
situation and drawing conclusions based on the answers given.

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Chapter 3 - Foundations of Decision Making

Technology and the Manager’s Job


Making Better Decisions with Technology
1. Expert systems use software programs to encode the relevant experience of an expert and allow a
system to act like that expert in analyzing and solving ill-structured problems.
a.) Use specialized knowledge about a particular problem area rather than general knowledge that
would apply to all problems.
b.) Use qualitative reasoning rather than numerical calculations.
c.) Perform at a level of competence that is higher than that of non-expert humans.
2. Neural networks are the next step beyond expert systems.
a.) Use computer software to imitate the structure of brain cells and connections among them.
b.) People can’t easily assimilate more than two or three variables at once, but neural networks can
perceive correlations among hundreds of variables.
c.) Example, most banks today use neural networks to flag potential credit card fraud and it’s more
likely that the majority of credit card transactions flagged will be actual cases of fraud. Also,
fraudulent activities on a credit card can be uncovered in a matter of hours with neural networks.

B. What Is Bounded Rationality?


1. Management theory is built on the premise that individuals act rationally.
2. The essence of managerial jobs revolves around the rational decision-making process. However, few
people actually behave rationally.
From the Past to the Present
1. Herbert Simon found that within certain constraints, managers do act rationally.
2. Because it is impossible for human beings to process and understand all the information necessary,
they construct simplified models that extract the essential features from problems.
a.) Bounded rationality, decision makers behave rationally within the limits of the simplified or
bounded model.
b.) The result is a satisficing decision; the solutions are “good enough.”

3. How do managers’ actions within these boundaries differ from actions within the rational
model?
a) Once a problem is identified, the search for criteria and alternatives begins.
1) This list of criteria is generally limited and made up of the more conspicuous choices.
b) Simon found that decision makers focus on easy-to-find choices—those that are highly
visible.
c) This means developing alternatives that vary only slightly from past decisions about
similar problems.
d) Once this limited set of alternatives is identified, decision makers begin reviewing them.
1) The review will not be exhaustive.

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e) They review alternatives only until an alternative that is sufficient is found.


1) The first alternative to meet the “good enough” criterion ends the search.
(a) Accept offer as cash flow manager with mid-sized firm 60 miles from home at
starting salary of $44,500.
(b) Further searching would have revealed an opening for a cash flow manager with
a Fortune 1000 firm 25 miles from home at a starting salary of $48,000.
(c) You stopped searching when the first job was found because it was “good
enough.”
f) What are the implications of bounded rationality on the manager’s job? In situations in
which the assumptions of perfect rationality do not apply (including many of the most
important and far-reaching decisions that a manager makes), the details of the decision-
making process are strongly influenced by the decision maker’s self-interest, the
organization’s culture, internal politics, and power considerations.
g) Decision-making is also likely influenced by the organization’s culture, internal politics,
power considerations, and by a phenomenon called escalation of commitment, which is
an increased commitment to a previous decision despite evidence that it may have been
wrong.
C. Role of Intuitive Decision Making
1) It’s making decisions on the basis of experience, feelings, and accumulated judgment.
2) It’s been described as “unconscious reasoning.”
3) Exhibit 3-7 shows 5 different aspects of intuition.
4) One survey found that almost half of the executives surveyed “used intuition more
often than formal analysis to run their companies.

Teaching Notes
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Chapter 3 - Foundations of Decision Making

IV. TYPES OF DECISIONS AND DECISION-MAKING


A. Introduction
1. Types of problems faced by managers often determine how a problem is treated.
B. How Do Problems Differ?
1. Some problems are straightforward. The goal of the decision maker is clear, the problem
familiar, and information about the problem easily defined and complete.
a) examples of well-structured problems include a supplier’s tardiness with an important
delivery, a customer’s wanting to return an Internet purchase, etc.
2. Many situations, however, are ill-structured problems. They are new or unusual. Information
about such problems is ambiguous or incomplete.
a) examples of ill-structured problems include the decision to enter a new market segment,
to hire an architect to design a new office park, etc.
C. How Does a Manager Make Programmed Decisions?
1. Programmed, or routine, decision making is the most efficient way to handle well-structured
problems.
2. When problems are ill structured, managers must rely on nonprogrammed decision making.
a) Automotive mechanic example.
3. Decisions are programmed to the extent that they are repetitive and routine and to the extent
that a specific approach has been worked out for handling them.
a) Programmed decision making is relatively simple and tends to rely heavily on previous
solutions.
b) The develop-the-alternatives stage is given little attention because programmed decision
making becomes decision making by precedent.
4. Procedure is a series of interrelated sequential steps that a manager can use when responding
to a well-structured problem.
a) The only real difficulty is in identifying the problem.
b) Once the problem is clear, so is the procedure.
c) Example of purchasing manager and request for 250 copies of Norton Antivirus Software
5. A rule is an explicit statement that tells a manager what he or she ought or ought not to do.
a) Rules are frequently used with a well-structured problem because they are simple to
follow and ensure consistency.
6. A policy provides guidelines to channel a manager’s thinking in a specific direction.
a) In contrast to a rule, a policy establishes parameters for the decision maker rather than
specifically stating what should or should not be done.
b) Example, “we promote from within, whenever possible.”
c) Analogy, think of the Ten Commandments as rules and the U.S. constitution as policy.

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D. In What Ways Do Nonprogrammed Decisions Differ from Programmed Decisions?


1. Examples of nonprogrammed decisions: deciding whether to acquire another organization,
deciding which global markets offer the most potential, engineering work processes to
improve efficiency, etc.
2. Such decisions are unique and nonrecurring, involving an ill-structured problem with no cut-
and-dried solution.
The creation of a new organizational strategy is an example of a nonprogrammed decision.
a) Example, Amazon.com Jeff Bezos’ strategy to “get big fast”
1) Bezos’ strategy to “get big fast” helped the company grow but at the cost of perennial
financial losses.
2) To make a profit, Bezos made decisions affecting how the company operated,
including allowing other sellers to sell their books at Amazon. For the first time,
Amazon made a profit.
E. How Can You Integrate Problems, Types of Decisions, and Level in the Organization?
1. Exhibit 3-8 describes the relationship between types of problems, types of decisions, and
level in the organization.
2. Well-structured problems are responded to with programmed decision making.
a) Lower-level managers essentially confront familiar and repetitive problems.
3. Ill-structured problems require nonprogrammed decision making.
a) The problems confronting managers up the organizational hierarchy are more likely to
become ill structured.
4. Few managerial decisions are either fully programmed or fully nonprogrammed.
5. Organizational efficiency is facilitated by the use of programmed decision making.
a) Whenever possible, management decisions are likely to be programmed.
b) There are strong economic incentives for top management to create policies, standard
operating procedures, and rules to guide other managers.
c) Programmed decisions minimize the need for managers to exercise discretion.
d) This benefit is important because discretion costs money.
F. Decision-Making Conditions
1. Certainty - which is a situation where a manager can make accurate decisions because the
outcome of every alternative is known.
2. Risk - conditions in which the decision maker is able to estimate the likelihood of certain
outcomes.
3. Uncertainty - is when you’re not certain about the outcomes and can’t even make reasonable
probability estimates.

Teaching Notes
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Chapter 3 - Foundations of Decision Making

V. GROUP DECISION-MAKING
A. Do managers make a lot of decisions in groups?
1. Many decisions in organizations, especially important decisions that have far-reaching effects
on organizational activities and personnel, are typically made in groups.
2. In many cases, these groups represent people who will be most affected by the decisions.
3. Managers spend a significant portion of their time in meetings.
B. What Are the Advantages of Group Decision Making?
1. Individual and group decisions have their own set of strengths—neither is ideal for all
situations.
2. Group decisions provide more complete information than do individual ones.
3. A group will bring a diversity of experiences and perspectives to the decision process.
4. Groups also generate more alternatives.
a) Quantity and diversity of information are greatest when group members represent
different specialties.
5. Group decision making increases acceptance of a solution.
6. This process increases legitimacy.
MANAGING DIVERSITY | The Value of Diversity in Decision Making
Have you decided what your major is going to be? How did you decide? Do you feel your decision is a
good one? Is there anything you could have done differently to make sure that your decision was the best
one? Managers continuously make decisions. Including diverse employees can provide fresh perspectives
on issues and provide additional ideas plus potential solutions. Even though diversity in decision making
can be valuable, there are drawbacks. The lack of a common perspective and communication can be a
barrier. Although these drawbacks are valid concerns, the value of diversity in decision making
outweighs the potential disadvantages.
1. Did you ask others for their decision about your major?
2. Did you get diverse perspectives?
3. Drawing upon diverse employees can prove valuable to a manager’s decision making. Why?
4. What are any challenges?
C. What Are the Disadvantages to Group Decision Making?
1. First, they are time-consuming.
2. There may also be a situation in which there is minority domination.
a) Members of a group are never perfectly equal.
b) A minority that dominates a group frequently has an undue influence on the final
decision.
3. Another problem focuses on the social pressures to conform in groups.
a) Irving Janis’ groupthink—a form of conformity in which group members withhold
deviant, minority, or unpopular views in order to give the appearance of agreement.
4. Finally, there is ambiguous responsibility. In a group decision, the responsibility of any single
member is watered down.

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5. Groupthink applies to a situation in which a group’s ability to appraise alternatives


objectively and arrive at a quality decision is jeopardized.
a) Because of pressures for conformity, groups often deter individuals from critically
appraising unusual, minority, or unpopular views.
b) Consequently, there is a deterioration of an individual’s mental efficiency, reality testing,
and moral judgment.
6. How does groupthink occur?
a) Group members rationalize any resistance to the assumptions they have made.
b) Members apply direct pressures on those who momentarily express doubts about any of
the group’s shared views or who question the arguments favored by the majority.
c) Those members who have doubts or hold differing points of view seek to avoid deviating
from what appears to be group consensus.
d) There is an illusion of unanimity. Silence is assumed as being in full accord.
7. Does groupthink really hinder decision making?
a) Yes.
8. Groupthink can be minimized if:
a) The group is cohesive.
b) It fosters open discussion.
c) Is led by an impartial leader who seeks input from all members.
D. When Are Groups Most Effective?
1. Group decisions tend to be more accurate.
2. On the average, groups make better decisions than individuals—although groupthink may
occur.
3. If decision effectiveness is defined in terms of speed, individuals are superior.
4. If creativity is important, groups tend to be more effective than individuals.
5. If effectiveness means the degree of acceptance the final solution achieves, then groups are
better.
6. The effectiveness is also influenced by the size of the group.
a) The larger the group, the greater the opportunity for heterogeneous representation.
b) A larger group requires more coordination and more time to allow for contributions.
c) A minimum of five to a maximum of about fifteen is best.
d) Because five and seven are odd numbers, strict deadlocks are avoided.
7. Effectiveness should not be considered without also assessing efficiency.
a) Groups almost always are less efficient than the individual decision maker.

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Chapter 3 - Foundations of Decision Making

E. How Can You Improve Group Decision Making?


1. Three ways of making group decision making more creative: brainstorming, the nominal
group technique, and electronic meetings.
2. What is brainstorming?
a) A relatively simple technique for overcoming pressures for conformity.
b) It utilizes an idea-generating process that specifically encourages any and all alternatives.
1) A half-dozen to a dozen people sit around a table.
2) The leader states the problem clearly, ensuring understanding by all participants.
3) Members then “free-wheel” as many alternatives as they can in a given time.
4) No criticism is allowed; all the alternatives are recorded.
(a) Brainstorming is merely a process for generating ideas.
3. How does the nominal group technique work?
a) The technique restricts discussion during the decision-making process.
b) Group members must be present, but they are required to operate independently.
c) They secretly write a list of general problem areas or potential solutions.
d) The chief advantage is that it permits a formal meeting but does not restrict independent
thinking.
4. How can electronic meetings enhance group decision making?
a) This approach—called the electronic meeting—blends the nominal group technique with
computer technology.
b) Once the technology for the meeting is in place, the concept is simple.
c) Numerous people sit around a horseshoe-shaped table that is empty except for a series of
computer terminals.
d) Issues are presented to participants, who type their responses onto their computer screens.
e) Individual comments, as well as aggregate votes, are displayed on a projection screen in
the room.
f) The major advantages of electronic meetings are anonymity, honesty, and speed.
1) Participants can anonymously type any message they want, and it will flash on the
screen for all to see at the push of a board key.
2) It is fast—chitchat is eliminated, discussions do not digress, and many participants
can “talk” at once without interrupting the others.
5. Experts claim that electronic meetings are significantly faster and much cheaper than
traditional face-to-face meetings.
a) Nestle example.
6. Drawbacks
a) Those who can type quickly can outshine those who may be verbally eloquent but are
lousy typists.

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b) Those with the best ideas don’t get credit for them.
c) The process lacks the informational richness of face-to-face oral communication.
7. The future of group decision making is very likely to include extensive usage of electronic
meetings.
8. A variation of the electronic meeting is the video conference.
a) By linking together media from different locations, people can have face-to-face
meetings even when they are thousands of miles apart.
b) This has enhanced feedback among the members, saved countless hours of business
travel, and ultimately saved companies hundreds of thousands of dollars.

Teaching Notes
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VI. CONTEMPORARY DECISION-MAKING ISSUES
A. Introduction - National culture affects decision-making
1. Research shows that, to some extent, decision-making practices differ by country.
2. Two decision variables.
a) The way decisions are made: Who makes the decision?
b) The degree of risk a decision maker is willing to take.
3. India, power distance and uncertainty avoidance are high.
a) Only very senior-level managers make decisions, and they are likely to make safe ones.
4. Sweden, power distance and uncertainty avoidance are low.
a) Swedish senior managers tend not to be afraid to make risky decisions and also push
decisions down in the ranks.
5. Egypt, where time pressures are low, managers make decisions at a slower and more
deliberate pace than managers in the United States.
6. Italy, history and traditions are valued, managers tend to rely on tried and proven alternatives.
7. Decision making in Japan is much more group oriented than in the United States.
a) The Japanese value conformity and cooperation.
b) Japanese CEOs collect a large amount of information, to build consensus, called
“ringisei.”
c) Managerial decisions take a long-term perspective.
8. France, autocratic decision making is widely practiced, and managers avoid risks.

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Chapter 3 - Foundations of Decision Making

9. Managerial styles in Germany reflect the German culture’s concern for structure and order,
extensive rules and regulations, and managers accept that decisions must go through
channels.
10.Managers who deal with employees from diverse cultures need to recognize what is common
and accepted behavior regarding decision making.
11.Managers who can accommodate diversity in decision-making philosophies and practices can
expect a high payoff.
Right or Wrong?
The 75 employees of Atomic Games worked nearly four years creating a realistic video game called Six
Days in Fallujah. Relatives of dead Marines are reacting with the belief that this video game is
trivializing the battle.
1. What do you think?
2. What ethical issues do you see here?
3. Should the company proceed with the game’s release? Why or why not?

B. Why is Creativity Important in Decision Making?


1. The rational decision maker needs creativity—the ability to produce novel and useful ideas.
a) Different from what’s been done before and appropriate to the problem or opportunity
presented.
2. Creativity allows the decision maker to appraise and understand the problem more fully,
including “seeing” problems other can’t see.
3. Creativity’s most obvious value is in helping the decision maker identify all viable alternatives.
Developing Your Creativity Skill
About the Skill
Creativity is a frame of mind. You need to open your mind to new ideas. Every individual has the ability
to be creative, but many people simply don’t try to develop that ability. In contemporary organizations,
those people may have difficulty being successful. Dynamic environments and managerial chaos require
that managers look for new and innovative ways to attain their goals, as well as those of the organization.
The following are suggestions for developing your creativity by opening your mind up to new ideas, a
critical skill for you as a manager:
1. Think of yourself as creative.
2. Pay attention to your intuition.
3. Move away from your comfort zone.
4. Engage in activities that put you outside your comfort zone.
5. Seek a change of scenery.
6. Find several right answers.
7. Play your own devil’s advocate.
8. Believe in finding a workable solution.
9. Brainstorm with others.
10. Turn creative ideas into action.

Practicing the Skill

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How many words can you make using the letters in the word Brainstorm? There are at least 95.
Teaching Tips
Allow students a set time to work as individuals on this exercise. Perhaps 3-5 minutes. Emphasize the
importance of not talking—NO collaboration.
Call time and ask students to total their word list. Emphasize there is still NO collaborating or sharing of
word lists.
You might also want to write on the board the words created by the students, polling students around the
room until no additional words are left.
You can stop at this point and discuss why some people may have created more words than others. Did
the class as a whole (with each student’s individual words included on the board) create more words than
any one individual student? You might ask the students about working in groups for another project
requiring creativity. If they were to work in groups on such an exercise or project, you might ask their
opinions about group formation. Based on the outcomes of the previous exercise, would they want
homogeneous vs. heterogeneous groups? What factors would be the basis of those groupings? Should
groups be created based on their productivity as individuals? Why or why not? What would be the
expected impact on group effectiveness?

C. What is Creative Potential?


1. Most people have creative potential.
a) They have to get out of the psychological ruts.
b) They have to learn how to think about a problem in divergent ways.
2. People differ in their inherent creativity.
a) Exceptional creativity is scarce.
b) A study of lifetime creativity of 461 men and women.
1) Fewer than 1 percent were exceptionally creative.
2) 10 percent were highly creative.
3) About 60 percent were somewhat creative.
3. Expertise is the foundation of all creative work
a) Creative-thinking skills encompass personality characteristics associated with creativity,
the ability to use analogies, as well as the talent to see the familiar in a different light.
1) Individual traits associated with the development of creative ideas include
intelligence, independence, self-confidence, risk-taking, an internal locus of control,
tolerance for ambiguity, and perseverance in the face of frustration.
b) Intrinsic task motivation is the desire to work on something because it’s interesting,
involving, exciting, satisfying, or personally challenging.
1) Determines the extent to which individuals fully engage their expertise and creative
skills.
2) Creative people often love their work, to the point of seeming obsessed.

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4. Five organizational factors can impede creativity.


a) Expected evaluation—focusing on how your work is going to be evaluated.
b) Surveillance—being watched while you’re working.
c) External motivators—emphasizing external, tangible rewards.
d) Competition—facing win-lose situations with your peers.
e) Constrained choices—being given limits on how you can do your work.

Teaching Notes
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REVIEW AND APPLICATIONS


CHAPTER SUMMARY
3.1 Describe the decision-making process. The decision-making process consists of eight steps: (1)
identify problem, (2) identify decision criteria, (3) weight the criteria, (4) develop alternatives, (5)
analyze alternatives, (6) select alternative, (7) implement alternative, and (8) evaluate decision
effectiveness. As managers make decisions, they may use heuristics to simplify the process, which
can lead to errors and biases in their decision making. The 12 common decision-making errors and
biases include overconfidence, immediate gratification, anchoring, selective perception, confirmation,
framing, availability, representation, randomness, sunk costs, self-serving bias, and hindsight.
3.2 Explain the three approaches managers can use to make decisions. The first approach is the
rational model. The assumptions of rationality are as follows: The problem is clear and unambiguous,
a single, well-defined goal is to be achieved, all alternatives and consequences are known and the
final choice will maximize his or her economic payoff. The second approach, bounded rationality,
says that managers make rational decisions but are bounded (limited) by their ability to process
information. In this approach, managers satisfice, which is when decision makers accept solutions
that are good enough. Finally, intuitive decision making is making decisions on the basis of
experience, feelings, and accumulated judgment.
3.3 Describe the types of decisions and decision-making conditions managers face. Programmed
decisions are repetitive decisions that can be handled by a routine approach and are used when the
problem being resolved is straightforward, familiar, and easily defined (structured). Nonprogrammed
decisions are unique decisions that require a custom-made solution and are used when the problems
are new or unusual (unstructured) and for which information is ambiguous or incomplete. Certainty
is a situation when a manager can make accurate decisions because all outcomes are known. Risk is a
situation when a manager can estimate the likelihood of certain outcomes. Uncertainty is a situation
where a manager is not certain about the outcomes and can’t even make reasonable probability
estimates.

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Part 2 – Planning

3.4 Discuss group decision making. Groups offer certain advantages when making decisions—more
complete information, more alternatives, increased acceptance of a solution, and greater legitimacy.
On the other hand, groups are time-consuming, can be dominated by a minority, create pressures to
conform, and cloud responsibility. Three ways of improving group decision making are brainstorming
(utilizing an idea-generating process that specifically encourages any and all alternatives while
withholding any criticism of those alternatives), the nominal group technique (a technique that
restricts discussion during the decision-making process), and electronic meetings (the most recent
approach to group decision making, which blends the nominal group technique with sophisticated
computer technology).
3.5 Discuss contemporary issues in managerial decision-making. As managers deal with employees
from diverse cultures, they need to recognize common and accepted behavior when asking them to
make decisions. Some individuals may not be as comfortable as others with being closely involved in
decision making, or they may not be willing to experiment with something radically different. Also,
managers need to be creative in their decision making since creativity allows them to appraise and
understand the problem more fully, including “seeing” problems that others can’t see.

To check your understanding of outcomes 3-1 – 3-5, go to mymanagementlab.com and try the chapter
questions.

UNDERSTANDING THE CHAPTER:


1. Why is decision making often described as the essence of a manager’s job?
Answer: Although everyone in an organization makes decisions, decision making is particularly
important to managers. As Exhibit 3-6 shows, it’s part of all four managerial functions. In fact, that’s
why we say that decision making is the essence of management. And that’s why managers—as they
plan, organize, lead, and control—are called decision makers. Although many decisions aren't
complex, managers are paid to make decisions.
2. All of us bring biases to the decisions we make. What would be the drawbacks of having biases?
Could there be any advantages to having biases? Explain. What are the implications for
managerial decision making?
Answer: Exhibit 3-5 shows the common managerial biases used in decision-making. Any of these
biases could contribute to poor decision-making that could negatively impact individuals and/or the
organization. Managers need to be cognizant of any potential biases prior to making important
decisions. Managers also should pay attention to “how” they make decisions and try to identify the
heuristics they typically use and critically evaluate how appropriate those are. Finally, managers
might want to ask those around them to help identify weaknesses in their decision-making style and
try to improve on them.

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Chapter 3 - Foundations of Decision Making

3. “Because managers have software tools to use, they should be able to make more rational
decisions.” Do you agree or disagree with this statement? Why?
Answer: Students should realize that technology helps decision making, it doesn’t make decisions.
The human factor—hidden agendas, power relationships, office politics, etc., will still be present.
Students should tie their answer into the characteristics of the technology, however.
The electronic meeting blends the nominal group technique with computer technology. Numerous
people sit around a horseshoe-shaped table that is empty except for a series of computer terminals.
Issues are presented to participants, who type their responses onto their computer screens. Individual
comments, as well as aggregate votes, are displayed on a projection screen in the room. The major
advantages of electronic meetings are anonymity, honesty, and speed. Participants can anonymously
type any message they want, and it will flash on the screen for all to see at the push of a board key. It
is fast—chitchat is eliminated, discussions do not digress, and many participants can “talk” at once
without interrupting the others. But there are drawbacks. Those who can type quickly can outshine
those who may be verbally eloquent but are lousy typists. Those with the best ideas don’t get credit
for them. The process lacks the informational richness of face-to-face oral communication
4. Is there a difference between wrong decisions and bad decisions? Why do good managers
sometimes make wrong decisions? Bad decisions? How might managers improve their decision-
making skills?
Answer: Students answers will vary. There could be a difference. Good managers can sometimes
make the wrong choices due to inadequate information, biases, a lack of education or experience, etc.
Bad decisions can be based in haste, emotion and a host of other reasons. They could improve
through the use of research, experience, a reduction in bias, asking others for support, etc.
5. Describe a decision you’ve made that closely aligns with the assumptions of perfect rationality.
Compare this decision with the process you used to select your college. Did you depart from the
rational model in your college decision? Explain.
Answer: Students’ answers will vary. Students should take all eight steps into consideration and may
have some difficulty in applying all the steps. This may show that their college choice was a
satisficing decision.
6. Explain how a manager might deal with making decisions under conditions of uncertainty.
Answer: He/she would assign degrees of probability to the various alternatives considered and
choose the decision with the highest probability of a beneficial outcome
7. Why do you think organizations have increased the use of groups for making decisions? When
would you recommend using groups to make decisions?
Answer: More organizations are utilizing groups and participative management to make decisions.
Students will see a significant increase in the use of groups in the workplace. Decisions in
organizations, especially important decisions that have far-reaching effects on organizational
activities and personnel, are typically made in groups. In many cases, these groups represent people
who will be most affected by the decisions. Managers spend up to 40 percent or more of their time in
meetings. Groups are most effective if creativity is important, if effectiveness means the degree of
acceptance of the final solution, then groups are better, and if the group is relatively small in size.

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Part 2 – Planning

8. Find two examples each of procedures, rules, and policies. Bring your examples to class and be
prepared to share them.
Answer: Student responses will vary
9. Do a Web search on the phrase “dumbest moments in business” and get the most current
version of this list. Choose three of the examples and describe what happened. What’s your
reaction to each example? How could the managers in each have made better decisions?
Answer: Student responses will vary according to their respective list.

UNDERSTANDING YOURSELF
Am I a Deliberate Decision Maker?
People differ in how they make decisions. Some people prefer to collect information, carefully weigh
alternatives, and then select the best option. Others prefer to make a choice as quickly as possible. This
self-assessment exercise assesses how deliberate you are when making decisions.
INSTRUMENT Indicate to what extent the following statements describe you when you make decisions.
1 = To a very little extent
2 = To a little extent
3 = Somewhat
4 = To a large extent
5 = To a very large extent
1. I jump into things without thinking. 12345
2. I make rash decisions. 12345
3. I like to act on a whim. 12345
4. I rush into things 12345
5. I don’t know why I do some of the things I do. 12345
6. I act quickly without thinking 12345
7. I choose my words with care. 12345

SCORING KEY To score the measure, first reverse-code items 1, 2, 3, 4, 5, and 6 so that 1 = 5, 2 = 4, 3
= 3, 4 = 2, and 5 = 1. Then, compute the sum of the seven items. Your score will range from 7 to 35.
ANALYSIS AND INTERPRETATION
If you scored at or above 28, you tend to be quite deliberate.
If you scored at or below 14, you tend to be more hasty in making decisions. Scores between 14 and 27
reveal a more blended style of decision making.
How should decisions be made? The rational model states that individuals should define the problem,
identify what criteria are relevant to making the decision and weigh those criteria according to
importance, develop alternatives, and finally evaluate and select the best alternative. Though this sounds
like an arduous process, research has shown that the rational model tends to result in better decisions.
If you tend to make decisions on a whim, you may want to be especially careful in auction settings, like
those found on eBay. The time pressures involved, along with the emotional arousal that comes with
bidding, can result in “auction fever” and suboptimal decisions. Put simply, if you make quick, impulsive
decisions, you may pay more than you should have, and that’s true not only for buying on eBay, but in
other situations as well.

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Chapter 3 - Foundations of Decision Making

Overview
This scale assesses how deliberate you are when making decisions. People differ in how they make
decisions. Some people prefer to collect information, carefully weigh alternatives, and then select the
best option, while others prefer to make a choice as quickly as possible.
How should decisions be made? The rational model states that individuals should define the problem,
identify what criteria are relevant to making the decision and weigh those criteria according to
importance, develop alternatives, and finally evaluate and select the best alternative. Though this sounds
like an arduous process, research has shown that the rational model tends to result in better decisions.
If you tend to make decisions on a whim, you may want to be especially careful in auction settings, such
as those found on the website EBay. The time pressures involved, along with the emotional arousal that
comes with bidding, can result in “auction fever” and suboptimal decisions. Put simply, if you make
quick, impulsive decisions, you may pay more than you should have.
Interestingly, personality is related to a person’s decision-making style. Individuals who are deliberate
and decisive tend to be high in emotional stability and high in conscientiousness, while individuals who
are more impulsive tend to be low on these two traits. Thus, while your decision-making style is likely to
be somewhat stable, following the rational model should help you to avoid making rash decisions.
Teaching Notes
This instrument lends itself to an interesting sidebar discussion related to Fiedler's twist on leadership
theory: that is, since leaders will not change their basic traits and behaviors, it is best to fit the appropriate
leader into a given situation rather than to ask leaders to change their behaviors to match that situation.
Ask students if being a deliberate decision-maker is always the best method of making a choice. Should
emergency medical technicians, firefighters, military personnel, or police when faced with an immediate,
challenging, and life-threatening situation think deliberately or reactively? Which would increase their
likelihood of success? Would it be better to select people who are not deliberate decision-makers to fill
these positions?
Exercises
1. Creativity and Rashness. To be competitive in our current environment, businesses must encourage
innovation and creativity. There is a belief in society that artists and other creative people act rashly;
that they are not deliberate decision-makers. Is this view accurate? Have your students research
some of the famous artists and creative people in society to find out. Have them share their findings
either orally in class or as a written assignment.
Learning Objective(s): To discover the relationship between creativity and deliberate decision-
making.
Preparation/Time Allotment: 10 minutes of class time to provide the assignment, an hour of class
discussion time, should that option be exercised.
Advantages/Disadvantages/Potential Problems: This can be a very revealing exercise. It can help
students understand that the best creativity often comes from the best preparation and decision-
making. The most famous artists, even those known for breaking the rules such as Salvador Dali or
James Joyce, all began by learning the formal rules of their art. That is, they became deliberate
decision-makers in terms of their use or misuse of aesthetic principles. It has been said that the only
way to successfully change art is to learn the formal rules of aesthetics in order to break them:
ignorance of the rules or simply doing “whatever feels right” leads to chaos, not art.

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Part 2 – Planning

2. Look Before You Leap. The United States’ society values deliberate decision-making and always
has. Proof of this can be found in the folk wisdom and sayings still taught to school- age children.
Have the class list as many folk sayings that deal with deliberate decision-making as possible. This
can be done as an individual homework exercise, as a competitive team exercise in class, or as a
class-wide discussion of you writing the results on the board. Some suggested starting points: a stitch
in time saves nine, a fool and his money are soon parted, or, marry in haste/repent in leisure (yes, Ben
Franklin's Poor Richard’s Almanack is a great source for these).
Learning Objective(s): To highlight the social preference for deliberate decision-making in the United
States.
Preparation/Time Allotment: Allow 30 minutes for explanation and class discussion.
Advantages/Disadvantages/Potential Problems: This can be a fun and energizing activity. It may
become somewhat problematic if a large percentage of the class is composed of foreign students. In
that case, broaden the exercise into a search for worldwide folk sayings regarding the importance of
deliberate decision-making.

FYIA (For Your Immediate Action)


Magic Carpet Software
To: Rajiv Dutta, Research Manager
From: Amanda Schrenk, Vice President of Operations
Re: Software Design Decisions
There is a problem in our software design unit. Our diverse pool of extremely talented and skilled
designers is one of our company’s most important assets. Our designers’ emotional attachment to the
software they’ve created overshadows other important factors that should be considered in the decision
whether to proceed with the new product design.
Please research the role of emotions in decision making. What do the “experts” say? Is it even an issue
that we need to be concerned about? What’s the best way to deal with it? Please provide me with a one-
page bulleted list of the important points you find from your research. And be sure to cite your sources in
case I need to do some follow-up.
This fictionalized company and message were created for educational purposes only. It is not meant to reflect
positively or negatively on management practices by any company that may share this name.

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Chapter 3 - Foundations of Decision Making

CASE APPLICATION
In Tune
Summary: Martin Guitar Company is an interesting blend of old and new. The company employees
remain true to the principle of high standards of musical excellence and the customers expect exceptional
quality.
Like many businesses, Martin’s sales have dropped off—some 20 percent since fall 2008—as consumer
spending nosedived. Guitars aren’t exactly necessities and consumers were being extremely cautious in
spending. Meanwhile, the company’s inventories of its higher-priced guitars ballooned. Chris didn’t want
to lay off employees, especially since it takes special woodworking skills to make the guitars. “The
company figured it is better to find a way to keep workers occupied than face the challenge of having to
train new ones after the economy recovered.” Chris and his managers came up with a solution: “Copy
what many big retailers do by offering a lower-priced alternative.” The challenge was how to do that
without sacrificing quality or harming its image.
Discussion Questions
1. How do you think good decision making has contributed to the success of this business?
Answer: Good decision-making has resulted in loyal customers and quality equipment. Retaining
good employees and managing your talent also contributes to higher profitability.
2. A decision to move into a new market as Chris did is a major decision. How could he have used
the decision- making process to help him make this decision?
Answer: By utilizing all of the steps in the decision-making model including brainstorming
alternatives, the selection process, implementing the decision and evaluating it, a sound decision can
be made. Determining the decision criteria and the factors that are relevant plus weighing the criteria
will assist in choosing the best alternative.
3. What criteria do you think would be most important to Chris as he makes decisions about the
company’s future?
Answer: The relevant criteria could encompass a number of answers. The competition should be
considered along with the company's financials, the target market, their operational capabilities, their
employees’ thoughts, focus groups, etc.
4. Would you characterize the conditions surrounding C. F. Martin Guitar Company as conditions
of certainty, risk, or uncertainty? Explain your choice. How would these conditions affect
managerial decision making?
Answer: The conditions are risky since the conditions are such that the decision-maker can estimate
some of the outcomes. Although, Martin hasn't offered a lower quality guitar, other competitors have
done so successfully and they have the infrastructure and loyal employees and customer base that
should result in a positive outcome.

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