chapter        9          Managing Decision                                                 Making and Problem            ...
C H A P T E R 9 • Managing Decision Making and Problem Solving   233             quickly increase expertise so he turned t...
234     P A R T T H R E E • Planning and Decision Making       State engineers in Florida have been       We begin our dis...
C H A P T E R 9 • Managing Decision Making and Problem Solving          235           made several major decisions that wi...
236     P A R T T H R E E • Planning and Decision Making                                                Decision Making Un...
C H A P T E R 9 • Managing Decision Making and Problem Solving     237           Decision Making Under Risk A more common ...
238      P A R T T H R E E • Planning and Decision Making                                                          To make...
C H A P T E R 9 • Managing Decision Making and Problem Solving              239           Steps in Rational Decision Makin...
240     P A R T T H R E E • Planning and Decision Making                                                causes, and its re...
C H A P T E R 9 • Managing Decision Making and Problem Solving       241           judge different alternatives. The figur...
242   P A R T T H R E E • Planning and Decision Making                                            candidate and, if necess...
C H A P T E R 9 • Managing Decision Making and Problem Solving        243               At this point, both Boeing and Air...
244      P A R T T H R E E • Planning and Decision Making                                                                •...
C H A P T E R 9 • Managing Decision Making and Problem Solving          245                                               ...
246      P A R T T H R E E • Planning and Decision Making                                                                 ...
C H A P T E R 9 • Managing Decision Making and Problem Solving         247           conservative counterparts to achieve ...
248      P A R T T H R E E • Planning and Decision Making                                                   Interacting Gr...
C H A P T E R 9 • Managing Decision Making and Problem Solving           249           Advantages of Group and Team Decisi...
Ch09 managing decision making and problem solving
Ch09 managing decision making and problem solving
Ch09 managing decision making and problem solving
Ch09 managing decision making and problem solving
Ch09 managing decision making and problem solving
Ch09 managing decision making and problem solving
Ch09 managing decision making and problem solving
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Ch09 managing decision making and problem solving

  1. 1. chapter 9 Managing Decision Making and Problem Solving LEARNING OBJECTIVES After studying this chapter, you should FIRST THINGS FIRST be able to: 1. Define decision making and discuss Team Decision Making at Barclays types of decisions and decision- “[I] spend an awful lot of time with the business making conditions. until I have tremendous confidence. . . . At that 2. Discuss rational perspectives on point, it is equally important to step away.” decision making, including the steps —BOB DIAMOND, PRESIDENT, BARCLAYS BANK in rational decision making. 3. Describe the behavioral aspects of Barclays Bank, headquartered in the United Kingdom, eliminated almost all of decision making. its investment banking division in a sell-off ten years ago. Performance was so 4. Discuss group and team decision low that much of the operation was sold to rivals. The remains, a bond unit and making, including the advantages some small leftovers, was nicknamed “the rump” of Barclays by British newspa- and disadvantages of group and pers. U.S. manager Bob Diamond was picked to lead Barclays Capital, the group team decision making and how it with the undignified alias. Diamond has built his unit into one of the stars of can be more effectively managed. Barclays, with sales up 12 percent and leadership positions in many of its prod- ucts. Appropriate use of teamwork is at the heart of his success. When Diamond took over the discouraged and neglected division, he knew that growth was the only thing that would persuade Barclays’ top managers that the unit was a valuable addition to the company’s portfolio. He needed to Once relegated to also-run status, Barclays is once again becoming a major player in the global banking market. Key strategic decisions have played a significant role in Barclays’ turnaround.Specially prepared for d03371341 on 21 Apr, 2010
  2. 2. C H A P T E R 9 • Managing Decision Making and Problem Solving 233 quickly increase expertise so he turned to hiring from competitors. He hand- picked top performers from rivals, while at the same time letting go of under- performing workers. Diamond enjoys working in Barclays’ meritocracy, saying that that system is “where we are all in competition with the same information and where the guy who works hardest or works smartest wins.” Diamond is notorious for his competitive nature and his reliance on teamwork, developed during his days as a high school football star. Once a good staff was in place, Diamond shifted focus to emphasize team- work. “My style has been to spend an awful lot of time with the business until I have tremendous confidence that I have the right people, who understand the plan,” Diamond states. “At that point, it is equally important to step away and delegate.” Diamond delegates many decisions to his team of executives, includ- ing the choice of who will make managing director. Thirty senior managers con- sider each candidate, anonymously voting on each via electronic buttons. Candidates must score at least 85 percent to be chosen, ensuring that every managing director has the support of the rest of the team. Another innovation in group decision making is Diamond’s approach to Bar- clays’ customers, bond issuers such as large corporations or government enti- ties. While many banks allow employees from each product-related subunit to work directly with a client, Diamond feels that approach can be overwhelming. “We don’t unleash everyone on a client—the loan salespeople, the debt capital market team, the commercial paper team, the institutional sales,” says Diamond. Instead, the workers form into client-based teams that focus on understanding each organization’s needs. Workers self-select for the teams where they can bring the most value. Barclays’ diversified teams, with members’ varying backgrounds, help to boost creativity and improve the quality of decisions. Team decisions have led to the cre- ation of a number of innovative products, including unique derivatives, securitiza- tions, and convertible bonds. The new products are key to the success of the division. Barclays Capital is now the top bank in five of its most important products and is in the top five in an additional five categories. From being “the rump” in 1997, Barclays Capital today dominates capital raising for corporations. Diamond is a success too and was promoted to president of Barclays in June 2005. Yet it is the Barclays Capital employees who make the most significant contribution to Barclays’ success, working together to make the decisions that guide the organization.1 Bob Diamond made several important decisions to get his division at Barclays turned around. And he continues to infuse effective decision-making methods in the business today. Making effective decisions, as well as recognizing when a bad decision has been made and quickly responding to mistakes, is a key ingredient in organizational effectiveness. Indeed, some experts believe that decision making is the most basic and fundamental of all managerial activities.2 Thus we discuss it here, in the context of the first management function, planning. Keep in mind, however, that although decision making is perhaps most closely linked to the plan- ning function, it is also part of organizing, leading, and controlling.Specially prepared for d03371341 on 21 Apr, 2010
  3. 3. 234 P A R T T H R E E • Planning and Decision Making State engineers in Florida have been We begin our discussion by exploring the nature of decision making. We then struggling with decisions about how describe rational perspectives on decision making. Behavioral aspects of decision to best protect the endangered Ever- making are then introduced and described. We conclude with a discussion of group glades ecosystem. One option under and team decision making. consideration is storing polluted water on farmland until it can be cleaned and then pushed into the The Nature of Decision Making Everglades. Engineers believe that a Managers at Disney recently made the decision to buy Pixar Animation for $7.4 bil- consistent influx of clean water lion.3 At about the same time, the general manager of the Ford dealership in Bryan, would help reduce phosphorous pol- Texas, made a decision to sponsor a local youth soccer team for $200. Each of these lution that is choking wetlands life. examples reflects a decision, but the decisions differ in many ways. Thus, as a starting point in understanding decision making, we must first explore the meaning of decision making as well as types of decisions and conditions under which decisions are made.4 Decision Making Defined Decision making can refer to either a specific act or a general process. Decision making per se is the act of choosing one alternative from among a set of alternatives. The decision-making process, however, is much more than this. One step of the process, for example, is that the person making the decision must both recog- nize that a decision is necessary and identify the set of feasible alternatives before selecting one. Hence, the decision-making process includes recognizing and defining the nature of a decision situation, identifying alternatives, choosing the “best” alternative, and decision making putting it into practice.5 The act of choosing one alternative from among a set of alternatives The word best, of course, implies effectiveness. Effective decision making requires that the decision maker understand the situation driving the decision. Most people would consider an effective decision to be one that optimizes some set decision-making process of factors, such as profits, sales, employee welfare, and market share. In some situ- Recognizing and defining the nature ations, though, an effective decision may be one that minimizes loss, expenses, or of a decision situation, identifying employee turnover. It may even mean selecting the best method for going out of alternatives, choosing the “best” business, laying off employees, or terminating a strategic alliance. alternative, and putting it into practice We should also note that managers make decisions about both problems and opportunities. For example, making decisions about how to cut costs by 10 percent reflects a problem—an undesirable “ The dumbest thing to do is sit on too much cash. situation that requires a solution. But decisions are also It’s not a good return on shareholder’s capital. ” necessary in situations of opportunity. Learning that the Bryant Riley, market analyst firm is earning higher-than-projected profits, for example, (USA Today, March 2, 2004, p. 1B) requires a subsequent decision. Should the extra funds be used to increase shareholder dividends, reinvest in current operations, or expand into new markets? Of course, it may take a long time before a manager can know if the right deci- sion was made. For example, the top management team at Eastman Kodak hasSpecially prepared for d03371341 on 21 Apr, 2010
  4. 4. C H A P T E R 9 • Managing Decision Making and Problem Solving 235 made several major decisions that will affect the company for decades. Among other things, for example, it sold off several chemical- and health-related busi- nesses, reduced the firm’s debt by $7 billion in the process, launched a major new line of advanced cameras and film called Advantix, and made major new invest- ments in new and emerging technology, such as digital photography. But analysts believe that the payoffs from these decisions will not be known for several years.6 Types of Decisions Managers must make many different types of decisions. In general, however, most decisions fall into one of two categories: programmed and nonprogrammed.7 A programmed decision is one that is relatively structured or recurs with some fre- programmed decision quency (or both). Starbucks uses programmed decisions to purchase new supplies A decision that is fairly structured or of coffee beans, cups, and napkins, and Starbucks employees are trained in exact recurs with some frequency (or both) procedures for brewing coffee. Likewise, the Bryan Ford dealer made a decision that he will sponsor a youth soccer team each year. Thus, when the soccer club president calls, the dealer already knows what he will do. Many decisions regarding basic operating systems and procedures and standard organizational transactions are of this variety and can therefore be programmed.8 Nonprogrammed decisions, on the other hand, are relatively unstructured and nonprogrammed decision occur much less often. Disney’s decision to buy Pixar was a nonprogrammed deci- A decision that is relatively unstructured and occurs much less sion. Managers faced with such decisions must treat each one as unique, investing often than a programmed decision enormous amounts of time, energy, and resources into exploring the situation from all perspectives. Intuition and experience are major factors in nonprogrammed decisions. Most of the decisions made by top managers involving strategy (includ- ing mergers, acquisitions, and takeovers) and organization design are nonpro- grammed. So are decisions about new facilities, new products, labor contracts, and legal issues. Decision-Making Conditions Just as there are different kinds of decisions, there are also different conditions in which decisions must be made. Managers sometimes have an almost perfect under- standing of conditions surrounding a decision, but at other times they have few clues about those conditions. In general, as shown in Figure 9.1, the circumstances that exist for the decision maker are conditions of certainty, risk, or uncertainty.9 The decision maker faces conditions of . . . Figure 9.1 DECISION-MAKING CONDITIONS Most major decisions in organiza- tions today are made under a state of uncertainty. Managers making Certainty Risk Uncertainty decisions in these circumstances must be sure to learn as much as possible about the situation and Level of ambiguity and chances of making a bad decision approach the decision from a logi- Lower Moderate Higher cal and rational perspective.Specially prepared for d03371341 on 21 Apr, 2010
  5. 5. 236 P A R T T H R E E • Planning and Decision Making Decision Making Under Certainty When the decision maker knows with reason- able certainty what the alternatives are and what conditions are associated with state of certainty each alternative, a state of certainty exists. Suppose, for example, that managers at A condition in which the decision Singapore Airlines make a decision to buy five new jumbo jets. Their next decision maker knows with reasonable certainty is from whom to buy them. Because there are only two companies in the world that what the alternatives are and what make jumbo jets, Boeing and Airbus, Singapore Airlines knows its options exactly. conditions are associated with each Each has proven products and will guarantee prices and delivery dates. The airline alternative thus knows the alternative conditions associated with each. There is little ambigu- ity and relatively little chance of making a bad decision. Few organizational decisions, however, are made under conditions of true cer- tainty. The complexity and turbulence of the contemporary business world make such situations rare. Even the airplane purchase decision we just considered has less certainty than it appears. The aircraft companies may not be able to really guar- antee delivery dates, so they may write cost-increase or inflation clauses into con- tracts. Thus the airline may be only partially certain of the conditions surrounding each alternative. The Business of Ethics Speeding Up Drug R&D On the one hand, drug makers must ensure that prod- Ruffolo instituted annual reviews, examining costs, ucts are thoroughly tested and safe. On the other hand, likelihood of success, and expected sales. In 2004 a group they also must take risks. If they do not, patients suffer of scientists decided to stop development of a new drug from a lack of innovative new treatments. Robert Ruf- that had disappointing results. Ruffolo gave the group an folo, chief of research and development (R&D) at phar- award, encouraging more review teams to do the same. maceutical maker Wyeth, is well aware of this dual Instead of advancing projects to the next stage based on nature of risk. He is changing the culture at Wyeth’s lab- one scientist’s say-so, that decision is now made by a oratories to encourage more risk taking and creativity team that includes R&D and marketing specialists. without undermining safety processes. Scientists have learned that Ruffolo’s tactics can When Ruffolo assumed leadership of Wyeth’s R&D work. They now deliver 12 new drugs annually, up from in 2002, he established minimum quotas for new prod- just 4 in 2002. Increased emphasis on speed and greater uct creation. He began a first-ever review of every com- standardization of processes have cut trial periods from pound in development. Ruffolo wanted to increase 18 months to just 6. innovation, but paradoxically, many of Wyeth’s scien- Will Ruffolo’s approach increase new drug releases? tists feared that this approach would stifle creativity. It’s too early to tell, but it has increased the number of “There was a lot of fear and loathing about going drugs in the research pipeline, upping the odds of suc- through that process,” says researcher Steven Projan. cess. The entire pharmaceutical industry is suffering “Everybody was convinced that this was a tool to kill off from a sharp decline in new product approvals. Maybe their favorite project.” Ruffolo’s strategy will help drug manufacturers get more As they examined project outcomes, Ruffolo and the products more quickly to those anxiously awaiting the 70 R&D scientists noted one fact. Development projects next miracle drug. that appeared to be failing often received the most References: Amy Barrett, “Cracking the Whip at Wyeth,” Business- resources. Scientists were willing to starve more prom- Week, February 6, 2006, pp. 70–71; Aaron Smith, “Drug Industry ising drugs to rescue those with the lowest chances of Could Use a Face Lift,” Money, August 19, 2005, on April 10, 2006; “Wyeth’s Profit Rises on Higher Drug Sales,” For- success. The best drugs were sometimes abandoned as tune, April 21, 2006, on April 25, 2006. resources were diverted elsewhere.Specially prepared for d03371341 on 21 Apr, 2010
  6. 6. C H A P T E R 9 • Managing Decision Making and Problem Solving 237 Decision Making Under Risk A more common decision-making condition is a state of risk. Under a state of risk, the availability of each alternative and its poten- state of risk tial payoffs and costs are all associated with probability estimates. Suppose, for A condition in which the availability of example, that a labor contract negotiator for a company receives a “final” offer each alternative and its potential pay- from the union right before a strike deadline. The negotiator has two alternatives: offs and costs are all associated with probability estimates to accept or to reject the offer. The risk centers on whether the union representa- tives are bluffing. If the company negotiator accepts the offer, she avoids a strike but commits to a relatively costly labor contract. If she rejects the contract, she state of uncertainty may get a more favorable contract if the union is bluffing, but she may provoke a A condition in which the decision strike if it is not. maker does not know all the alterna- On the basis of past experiences, relevant information, the advice of others, and tives, the risks associated with each, her own judgment, she may conclude that there is about a 75 percent chance that or the consequences each alternative union representatives are bluffing and about a 25 percent chance that they will is likely to have back up their threats. Thus she can base a calculated decision on the two alterna- tives (accept or reject the contract demands) and the proba- ble consequences of each. When making decisions under a Managers today make many significant decisions under con- state of risk, managers must reasonably estimate the proba- ditions of uncertainty. The skyrocketing costs of materials and bilities associated with each alternative. For example, if the labor have toppled several high-profile luxury condominium union negotiators are committed to a strike if their demands projects, dramatically increasing the uncertainty surrounding are not met, and the company negotiator rejects their such ventures. These workers install exterior wall panels at demands because she guesses they will not strike, her mis- Turnberry Place in Las Vegas, Nevada. At least six projects calculation will prove costly. As indicated in Figure 9.1, deci- have publicly folded or stalled in a little more than a year, a sion making under conditions of risk is accompanied by fraction of the more than 100 projects once proposed, but moderate ambiguity and chances of a bad decision. Execu- enough to make some real estate watchers declare a bust to tives at Porsche have made several recent decisions under the boom. conditions of risk, starting with the question of whether the firm should join most of the world’s other auto makers and build sport-utility vehicles (and potentially earn higher rev- enues) or maintain its focus on high-performance sports cars. Although the additional revenue is almost certain, the true risk in the firm’s ultimate decision to build its Cayenne SUV is that the brand may lose some of its cachet among its existing customers. And now the firm is facing additional risky decisions regarding potential new products, including a four-door coupe, a smaller SUV, and even a minivan.10 The Business of Ethics highlights how a manager at the pharma- ceutical company Wyeth is attempting to increase the firm’s willingness to make riskier decisions. Decision Making Under Uncertainty Most of the major decision making in contemporary organizations is done under a state of uncertainty. The decision maker does not know all the alternatives, the risks associated with each, or the likely consequences of each alternative. This uncertainty stems from the complexity and dynamism of contemporary organizations and their environments. The emergence of the Internet as a significant force in today’s competitive environ- ment has served to increase both revenue potential and uncertainty for most managers.Specially prepared for d03371341 on 21 Apr, 2010
  7. 7. 238 P A R T T H R E E • Planning and Decision Making To make effective decisions in these circumstances, managers must acquire as much relevant information as possible and approach the situation from a logical and rational perspective. Intuition, judgment, and experience always play major roles in the decision-making process under conditions of uncertainty. Even so, uncertainty is the most ambiguous condition for managers and the one most prone to error.11 Indeed, many of the problems associated with the downfall of Arthur Andersen resulted from the firm’s apparent difficulties in responding to ambiguous and uncertain decision parameters regarding the firm’s moral, ethical, and legal responsibilities.12 concept CHECK What are the two basic types of deci- Identify examples of decisions you sions? Provide an example of each. have recently made under each of the three general conditions. Rational Perspectives on Decision Making Most managers like to think of themselves as rational decision makers. And, indeed, many experts argue that managers should try to be as rational as possible in making decisions.13 This section highlights the fundamental and rational per- spectives on decision making. The Classical Model of Decision Making classical decision model The classical decision model is a prescriptive approach that tells managers how A prescriptive approach to decision they should make decisions. It rests on the assumptions that managers are logical making that tells managers how they and rational and that they make decisions that are in the best interests of the organ- should make decisions; assumes that ization. Figure 9.2 shows how the classical model views the decision-making managers are logical and rational and process. that their decisions will be in the best interests of the organization 1. Decision makers have complete information about the decision situation and possible alternatives. 2. They can effectively eliminate uncertainty to achieve a decision condition of certainty. 3. They evaluate all aspects of the decision situation logically and rationally. As we see later, these conditions rarely, if ever, actually exist. • obtain complete . . . and end up with When faced with a and perfect information a decision that best decision situation, • eliminate uncertainty serves the interests managers should . . . • evaluate everything of the organization. rationally and logically Figure 9.2 THE CLASSICAL MODEL OF DECISION MAKING The classical model of decision making assumes that managers are rational and logical. It attempts to prescribe how managers should approach decision situations.Specially prepared for d03371341 on 21 Apr, 2010
  8. 8. C H A P T E R 9 • Managing Decision Making and Problem Solving 239 Steps in Rational Decision Making A manager who really wants to approach a decision rationally and logically should try to follow the steps in rational decision making, listed in Table 9.1. These steps steps in rational decision in rational decision making help keep the decision maker focused on facts and logic making and help guard against inappropriate assumptions and pitfalls. Recognize and define the decision situation; identify appropriate Recognizing and Defining the Decision Situation The first step in rational deci- alternatives; evaluate each alternative in sion making is recognizing that a decision is necessary—that is, there must be some terms of its feasibility, satisfactoriness, stimulus or spark to initiate the process. For many decisions and problem situa- and consequences; select the best tions, the stimulus may occur without any prior warning. When equipment mal- alternative; implement the chosen functions, the manager must decide whether to repair or replace it. Or, when a alternative; follow up and evaluate the major crisis erupts, as described in Chapter 3, the manager must quickly decide results of the chosen alternative how to deal with it. As we already noted, the stimulus for a decision may be either positive or negative. A manager who must decide how to invest surplus funds, for example, faces a positive decision situation. A negative financial stimulus could involve having to trim budgets because of cost overruns. Inherent in problem recognition is the need to define precisely what the prob- lem is. The manager must develop a complete understanding of the problem, its Table 9.1 Although the presumptions of the classical decision model rarely exist, managers can still approach STEPS IN THE RATIONAL decision making with rationality. By following the steps of rational decision making, managers ensure DECISION-MAKING PROCESS that they are learning as much as possible about the decision situation and its alternatives. Step Detail Example 1. Recognizing and defining Some stimulus indicates that a A plant manager sees that the decision situation decision must be made. The stimulus employee turnover has may be positive or negative. increased by 5 percent. 2. Identifying alternatives Both obvious and creative alternatives The plant manager can are desired. In general, the more increase wages, increase important the decision, the more benefits, or change hiring alternatives should be generated. standards. 3. Evaluating alternatives Each alternative is evaluated to Increasing benefits may determine its feasibility, its not be feasible. Increasing satisfactoriness, and its wages and changing consequences. hiring standards may satisfy all conditions. 4. Selecting the best Consider all situational factors Changing hiring standards alternative and choose the alternative that will take an extended best fits the manager’s situation. period of time to cut turnover, so increase wages. 5. Implementing the chosen The chosen alternative is The plant manager may alternative implemented into the need permission from corporate organizational system. headquarters. The human resource department estab- lishes a new wage structure. 6. Following up and At some time in the future, The plant manager notes evaluating the results the manager should ascertain that, six months later, the extent to which the turnover dropped to its alternative chosen in step 4 previous level. and implemented in step 5 has worked.Specially prepared for d03371341 on 21 Apr, 2010
  9. 9. 240 P A R T T H R E E • Planning and Decision Making causes, and its relationship to other factors. This understanding comes from care- ful analysis and thoughtful consideration of the situation. Consider the situation currently being faced in the international air travel industry. Because of the growth of international travel related to business, education, and tourism, global carriers like Singapore Airlines, KLM, JAL, British Airways, American Airlines, and others need to increase their capacity for international travel. Because most major inter- national airports are already operating at or near capacity, adding a significant number of new flights to existing schedules is not feasible. As a result, the most log- ical alternative is to increase capacity on existing flights. Thus Boeing and Airbus, the world’s only manufacturers of large commercial aircraft, have recognized an important opportunity and have defined their decision situation as how to best respond to the need for increased global travel capacity.14 Identifying Alternatives Once the decision situation has been recognized and defined, the second step is to identify alternative courses of effective action. Devel- oping both obvious, standard alternatives and creative, innovative alternatives is generally useful. In general, the more important the decision, the more attention is directed to developing alternatives.15 If the decision involves a multimillion-dollar relocation, a great deal of time and expertise will be devoted to identifying the best locations. J. C. Penney spent two years searching before selecting the Dallas–Fort Worth area for its new corporate headquarters. If the problem is to choose a color for the company softball team uniforms, less time and expertise will be brought to bear. Although managers should seek creative solutions, they must also recognize that various constraints often limit their alternatives. Common constraints include legal restrictions, moral and ethical norms, authority constraints, and constraints imposed by the power and authority of the manager, available technology, eco- nomic considerations, and unofficial social norms. Boeing and Airbus identified three different alternatives to address the decision situation of increasing interna- tional airline travel capacity: They could independently develop new large planes, they could collaborate in a joint venture to create a single new large plane, or they could modify their largest existing planes to increase their capacity. Evaluating Alternatives The third step in the decision-making process is evalu- ating each of the alternatives. Figure 9.3 presents a decision tree that can be used to Are the alternative’s Is the alternative Is the alternative Retain for further Yes Yes consequences Yes feasible? satisfactory? consideration. affordable? No No No Eliminate from Eliminate from Eliminate from consideration. consideration. consideration. Figure 9.3 EVALUATING ALTERNATIVES IN THE DECISION-MAKING PROCESS Managers must thoroughly evaluate all the alternatives, which increases the chances that the alternative finally chosen will be successful. Failure to evaluate an alternative’s feasibility, satisfactoriness, and consequences can lead to a wrong decision.Specially prepared for d03371341 on 21 Apr, 2010
  10. 10. C H A P T E R 9 • Managing Decision Making and Problem Solving 241 judge different alternatives. The figure suggests that each alternative be evaluated in terms of its feasibility, its satisfactoriness, and its consequences. The first question to ask is whether an alternative is feasible. Is it within the realm of probability and practicality? For a small, struggling firm, an alternative requiring a huge financial outlay is probably out of the question. Other alternatives may not be feasible because of legal barriers. And limited human, material, and information resources may make other alternatives impractical. When an alternative has passed the test of feasibility, it must next be examined to see how well it satisfies the conditions of the decision situation. For example, a manager searching for ways to double production capacity might initially consider purchasing an existing plant from another company. If more detailed analysis reveals that the new plant would increase production capacity by only 35 percent, this alternative may not be satisfactory. Finally, when an alternative has proven both feasible and satisfactory, its probable consequences must still be assessed. To what extent will a particular alternative influence other parts of the organization? What financial and nonfinan- cial costs will be associated with such influences? For “We don’t think [building the A380] is a very smart example, a plan to boost sales by cutting prices may dis- thing to do. ” rupt cash flows, require a new advertising program, and Randy Baesler, Boeing executive (Wall Street Journal, May 27, 2005, p. A1) alter the behavior of sales representatives because it requires a different commission structure. The man- ager, then, must put “price tags” on the consequences of each alternative. Even an alternative that is both feasible and satisfactory must be eliminated if its conse- quences are too expensive for the total system. Airbus felt it would be at a disad- vantage if it tried to simply enlarge its existing planes, because the Boeing 747 is already the largest aircraft being made and could readily be expanded to remain the largest. Boeing, meanwhile, was seriously concerned about the risk inherent in building a new and even larger plane, even if it shared the risk with Airbus as a joint venture. Selecting an Alternative Even though many alternatives fail to pass the triple tests of feasibility, satisfactoriness, and affordable consequences, two or more alter- natives may remain. Choosing the best of these is the real crux of decision making. One approach is to choose the alternative with the optimal combination of feasi- bility, satisfactoriness, and affordable consequences. Even though most situations do not lend themselves to objective, mathematical analysis, the manager can often develop subjective estimates and weights for choosing an alternative. Optimization is also a frequent goal. Because a decision is likely to affect several individuals or units, any feasible alternative will probably not maximize all of the relevant goals. Suppose that the manager of the Kansas City Royals needs to select a new outfielder for the upcoming baseball season. Bill hits .350 but has difficulty catching fly balls; Joe hits only .175 but is outstanding in the field; and Sam hits .290 and is a solid but not outstanding fielder. The manager probably would select Sam because of the optimal balance of hitting and fielding. Decision makers should also remember that finding multiple acceptable alternatives may be possible; selecting just one alternative and rejecting all the others might not be necessary. For exam- ple, the Royals’ manager might decide that Sam will start each game, Bill will be retained as a pinch hitter, and Joe will be retained as a defensive substitute. In many hiring decisions, the candidates remaining after evaluation are ranked. If the top candidate rejects the offer, it may be automatically extended to the number-twoSpecially prepared for d03371341 on 21 Apr, 2010
  11. 11. 242 P A R T T H R E E • Planning and Decision Making candidate and, if necessary, to the remaining candidates in order. For the reasons noted earlier, Airbus proposed a joint venture with Boeing. Boeing, meanwhile, decided that its best course of action was to modify its existing 747 to increase its capacity. As a result, Airbus then decided to proceed on its own to develop and manufacture a new jumbo jet. Boeing, however, also decided that in addition to modifying its 747 it would also develop a new plane to offer as an alternative, albeit one not as large as the 747 or the proposed Airbus plane. Implementing the Chosen Alternative. After an alternative has been selected, the manager must put it into effect. In some decision situations, implementation is fairly easy; in others, it is more diffi- cult. In the case of an acquisition, for example, managers must decide how to inte- grate all the activities of the new business, including purchasing, human resource practices, and distribution, into an ongoing organizational framework. For exam- ple, when Hewlett-Packard announced its acquisition of Compaq, managers also acknowledged that it would take at least a year to integrate the two firms into a single one. Operational plans, which we discuss in Chapter 7, are useful in imple- menting alternatives. Managers must also consider people’s resistance to change when implementing decisions. The reasons for such resistance include insecurity, inconvenience, and fear of the unknown. When J. C. Penney decided to move its headquarters from New York to Texas, many employees resigned rather than relocate. Managers should anticipate potential resistance at various stages of the implementation process. (Resistance to change is covered in Chapter 13.) Managers should also recognize that even when all alternatives have been evaluated as precisely as possible and the consequences of each alternative weighed, unanticipated consequences are still likely. Any number of factors—unexpected cost increases, a less-than-perfect fit with existing organizational subsystems, or unpredicted effects on cash flow or operating expenses, for example—could develop after implementation has begun. Boeing has set its engineers to work expanding the capacity of its 747 from today’s 416 passen- gers to as many as 520 passengers by adding 30 feet to the plane’s body. The com- pany has also been developing its new plane intended for international travel, the 787. Airbus engineers, meanwhile, have been developing and constructing its new jumbo jet equipped with escalators and elevators, and capable of carrying 655 pas- sengers. Airbus’s development costs alone are estimated to be more than $12 billion. Following Up and Evaluating the Results The final step in the decision-making process requires that managers evaluate the effectiveness of their decision—that is, they should make sure that the chosen alternative has served its original purpose. If an implemented alternative appears not to be working, the manager can respond in several ways. Another previously identified alternative (the original second or third choice, for instance) could be adopted. Or the manager might recognize that the sit- uation was not correctly defined to begin with and start the process all over again. Finally, the manager might decide that the original alternative is in fact appropriate but has not yet had time to work or should be implemented in a different way.16 Failure to evaluate decision effectiveness may have serious consequences. The Pentagon once spent $1.8 billion and eight years developing the Sergeant York anti- aircraft gun. From the beginning, tests revealed major problems with the weapon system, but not until it was in its final stages, when it was demonstrated to be completely ineffective, was the project scrapped.Specially prepared for d03371341 on 21 Apr, 2010
  12. 12. C H A P T E R 9 • Managing Decision Making and Problem Solving 243 At this point, both Boeing and Airbus are nearing the crucial period when they will learn whether they made good decisions. Airbus’s A380 is scheduled to make its first commercial flight in 2007. Its final design allows seating for up to 850 people, and major airports around the world have been building new runways and termi- nal areas to accommodate the behemoth. Boeing’s expanded 747 should be in ser- vice around the same time. Meanwhile, though, it appears that Boeing’s secondary initiative for designing the new 787 may prove to be the best decision of all. A key element of the new plane is that it is much more fuel-efficient than other interna- tional airplanes. Given the dramatic surge in fuel costs in recent years, a fuel effi- cient option like the 787 is likely to be an enormous success. However, the 787 will not be available for passenger service until 2009, so its real impact will not be known for a few more years.17 concept What are the steps in rational decision Recall a decision you recently made CHECK making? and believed to be rational. Trace the process through each of the steps noted above and reassess its real rationality. Behavioral Aspects of Decision Making If all decision situations were approached as logically as described in the previous section, more decisions might prove to be successful. Yet decisions are often made with little consideration for logic and rationality. Some experts have estimated that U.S. companies use rational decision-making techniques less than 20 percent of the time.18 And, even when organizations try to be logical, they sometimes fail. For example, when Starbucks opened its first coffee shops in New York, it relied on sci- entific marketing research, taste tests, and rational deliberation in making a deci- sion to emphasize drip over espresso coffee. However, that decision still proved wrong, as New Yorkers strongly preferred the same espresso-style coffees that were Starbucks mainstays in the West. Hence, the firm had to hastily reconfigure its stores to better meet customer preferences. On the other hand, sometimes when a decision is made with little regard for logic, it can still turn out to be correct.19 An important ingredient in how these forces work is the behavioral aspect of decision making. The administrative model better reflects these subjective considerations. Other behavioral aspects include political forces, intuition and escalation of commitment, risk propensity, and ethics. The Administrative Model Herbert A. Simon was one of the first experts to recognize that decisions are not administrative model always made with rationality and logic.20 Simon was subsequently awarded the A decision-making model that argues Nobel Prize in Economics. Rather than prescribing how decisions should be made, that decision makers (1) use incom- plete and imperfect information, (2) are his view of decision making, now called the administrative model, describes how constrained by bounded rationality, and decisions often actually are made. As illustrated in Figure 9.4, the model holds that (3) tend to “satisfice” when making managers (1) use incomplete and imperfect information, (2) are constrained by decisions bounded rationality, and (3) tend to “satisfice” when making decisions.Specially prepared for d03371341 on 21 Apr, 2010
  13. 13. 244 P A R T T H R E E • Planning and Decision Making • use incomplete and . . . and end up with a When faced with a imperfect information decision that may or may decision situation • are constrained by not serve the interests managers actually . . . bounded rationality of the organization. • tend to satisfice Figure 9.4 THE ADMINISTRATIVE MODEL OF DECISION MAKING The administrative model is based on behavioral processes that affect how managers make decisions. Rather than prescribing how decisions should be made, it focuses more on describing how they are made. bounded rationality Bounded rationality suggests that decision makers are limited by their values A concept suggesting that decision and unconscious reflexes, skills, and habits. They are also limited by less-than- makers are limited by their values and complete information and knowledge. Bounded rationality partially explains how unconscious reflexes, skills, and habits U.S. auto executives allowed Japanese auto makers to get such a strong foothold in the U.S. domestic market. For years, executives at GM, Ford, and Chrysler compared their companies’ performance only to one another’s and ignored foreign imports. The foreign “threat” was not acknowledged until the domestic auto market had been changed forever. If managers had gathered complete information from the beginning, they might have been better able to thwart foreign competitors. Essen- tially, then, the concept of bounded rationality suggests that although people try to be rational decision makers, their rationality has limits. satisficing Another important part of the administrative model is satisficing. This concept The tendency to search for alternatives suggests that rather than conducting an exhaustive search for the best possible only until one is found that meets alternative, decision makers tend to search only until they identify an alternative some minimum standard of sufficiency that meets some minimum standard of sufficiency. A manager looking for a site for a new plant, for example, may select the first site she finds that meets basic require- ments for transportation, utilities, and price, even though further search might yield a better location. People satisfice for a variety of reasons. Managers may simply be unwilling to ignore their own motives (such as reluctance to spend time making a decision) and therefore not be able to continue searching after a mini- mally acceptable alternative is identified. The decision maker may be unable to weigh and evaluate large numbers of alternatives and criteria. Also, subjective and personal considerations often intervene in decision situations. Because of the inherent imperfection of information, bounded rationality, and satisficing, the decisions made by a manager may or may not actually be in the best interests of the organization. A manager may choose a particular location for the new plant because it offers the lowest price and best availability of utilities and transportation. Or she may choose the location because it is located in a commu- nity where she wants to live. In summary, then, the classical and administrative models paint quite different pictures of decision making. Which is more correct? Actually, each can be used to better understand how managers make decisions. The classical model is prescrip- tive: It explains how managers can at least attempt to be more rational and logical in their approaches to decisions. The administrative model can be used by man- agers to develop a better understanding of their inherent biases and limitations.21 In the following sections, we describe more fully other behavioral forces that can influence decisions.Specially prepared for d03371341 on 21 Apr, 2010
  14. 14. C H A P T E R 9 • Managing Decision Making and Problem Solving 245 Political forces can play a major role in decision making. When the U.S. Congress was considering a decision regarding funding for smoking prevention and education programs, the American Cancer Society arranged to have yellow daffodils placed on every legislator’s desk on the date the funding bill was coming to a vote. The purpose of the daffodils was, in part, to remind legislators that a number of public interest groups were plan- ning to monitor the votes and pub- licize how each member of Congress voted. Political Forces in Decision Making Political forces are another major element that contributes to the behavioral nature of decision making. Organizational politics is covered in Chapter 17, but one major element of politics, coalitions, is especially relevant to decision making. A coalition coalition is an informal alliance of individuals or groups formed to achieve a common goal. An informal alliance of individuals or This common goal is often a preferred decision alternative. For example, coalitions groups formed to achieve a common of stockholders frequently band together to force a board of directors to make a cer- goal tain decision. The impact of coalitions can be either positive or negative. They can help astute managers get the organization on a path toward effectiveness and prof- itability, or they can strangle well-conceived strategies and decisions. Managers must recognize when to use coalitions, how to assess whether coalitions are acting in the best interests of the organization, and how to constrain their dysfunctional effects.22 Intuition and Escalation of Commitment Two other important decision processes that go beyond logic and rationality are intuition and escalation of commitment to a chosen course of action. Intuition Intuition is an innate belief about something, without conscious consid- intuition eration. Managers sometimes decide to do something because it “feels right” or they An innate belief about something, have a “hunch.” This feeling usually is not arbitrary, however. Rather, it is based on without conscious consideration years of experience and practice in making decisions in similar situations.23 An inner sense may help managers make an occasional decision without going through a full-blown rational sequence of steps. For example, the New York Yankees once contacted three major athletic shoes manufacturers—Nike, Reebok, and Adidas— and informed them that they were looking to make a sponsorship deal. While Nike and Reebok were carefully and rationally assessing the possibilities, managers at Adidas quickly realized that a partnership with the Yankees made a lot of sense for them. They responded very quickly to the idea and ended up hammering out aSpecially prepared for d03371341 on 21 Apr, 2010
  15. 15. 246 P A R T T H R E E • Planning and Decision Making contract while the competitors were still analyzing “Nothing is more difficult, and therefore more pre- details.24 Of course, all managers, but most especially cious, than to be able to decide.” inexperienced ones, should be careful not to rely too heav- Napoleon ily on intuition. If rationality and logic are continually (quoted in Fortune, June 27, 2005, p. 55) flouted for “what feels right,” the odds are that disaster will strike one day. Escalation of Commitment Another important behavioral process that influences escalation of commitment decision making is escalation of commitment to a chosen course of action. In par- A decision maker’s staying with a deci- ticular, decision makers sometimes make decisions and then become so committed sion even when it appears to be wrong to the courses of action suggested by those decisions that they stay with them, even when the decisions appear to have been wrong.25 For example, when people buy stock in a company, they sometimes refuse to sell it even after repeated drops in price. They chose a course of action—buying the stock in anticipation of making a profit—and then stay with it even in the face of increasing losses. Moreover, after the value drops, they rationalize that they can’t sell now because they will lose money. For years Pan American World Airways ruled the skies and used its profits to diver- sify into real estate and other businesses. But, with the advent of deregulation, Pan Am began to struggle and lose market share to other carriers. Experts today point out that when Pan Am managers finally realized how ineffective their airline operations had become, the “rational” decision would have been to sell off the remaining airline oper- ations and concentrate on the firm’s more profitable businesses. But because they still saw the company as being first and foremost an airline, they instead began to slowly sell off the firm’s profitable holdings to keep the airline flying. Eventually, the company was left with nothing but an ineffective and inefficient airline, and then had to sell off its more profitable routes before eventually being taken over by Delta. Had Pan Am man- agers made the more rational decision years earlier, chances are the firm could still be a profitable enterprise today, albeit one with no involvement in the airline industry.26 Thus decision makers must walk a fine line. On the one hand, they must guard against sticking too long with an incorrect decision. To do so can bring about finan- cial decline. On the other hand, managers should not bail out of a seemingly incor- rect decision too soon, as Adidas once did. Adidas had dominated the market for professional athletic shoes. It subsequently entered the market for amateur sports shoes and did well there also. But managers interpreted a sales slowdown as a sign that the boom in athletic shoes was over. They thought that they had made the wrong decision and ordered drastic cutbacks. The market took off again with Nike at the head of the pack, and Adidas never recovered. Fortunately, a new manage- ment team has changed the way Adidas makes decisions, and the firm is again on its way to becoming a force in the athletic shoe and apparel markets. Risk Propensity and Decision Making risk propensity The behavioral element of risk propensity is the extent to which a decision maker The extent to which a decision maker is willing to gamble when making a decision. Some managers are cautious about is willing to gamble when making a every decision they make. They try to adhere to the rational model and are decision extremely conservative in what they do. Such managers are more likely to avoid mistakes, and they infrequently make decisions that lead to big losses. Other man- agers are extremely aggressive in making decisions and are willing to take risks.27 They rely heavily on intuition, reach decisions quickly, and often risk big invest- ments on their decisions. As in gambling, these managers are more likely than theirSpecially prepared for d03371341 on 21 Apr, 2010
  16. 16. C H A P T E R 9 • Managing Decision Making and Problem Solving 247 conservative counterparts to achieve big successes with their decisions; they are also more likely to incur greater losses.28 The organization’s culture is a prime ingre- dient in fostering different levels of risk propensity. The Business of Ethics feature that appears earlier in this chapter illustrates how an individual manager’s risk propensity can be diffused in an organization. Ethics and Decision Making As we introduced in Chapter 4, individual ethics are personal beliefs about right and wrong behavior. Ethics are clearly related to decision making in a number of ways. For example, suppose that, after careful analysis, a manager realizes that his company could save money by closing his department and subcontracting with a supplier for the same services. But to recommend this course of action would result in the loss of several jobs, including his own. His own ethical standards will clearly shape how he proceeds.29 Indeed, each component of managerial ethics (relationships of the firm to its employees, of employees to the firm, and of the firm to other economic agents) involves a wide variety of decisions, all of which are likely to have an ethical compo- nent. A manager must remember, then, that, just as behavioral processes such as pol- itics and risk propensity affect the decisions he makes, so, too, do his ethical beliefs. concept Summarize the essential components Recall a recent decision that you CHECK of the administrative model of decision observed or were involved in that had making. strong behavioral overtones. Describe how various behavioral elements affected the process or outcome. Group and Team Decision Making in Organizations In more and more organizations today, impor- Group decision making and problem-solving are commonplace in organiza- tant decisions are made by groups and teams tions. These people are attending a recent international conference in Spain rather than by individuals. Examples include aimed at improving relations between different religious groups. They are the executive committee of General Motors, participating in an offbeat brainstorming exercise that requires them to write product design teams at Texas Instruments, down issues they see as critical for bringing about peace between their faiths. and marketing planning groups at Dell Com- puter. Managers can typically choose whether to have individuals or groups and teams make a particular decision. Thus knowing about forms of group and team decision making and their advantages and disadvantages is important.30 Forms of Group and Team Decision Making The most common methods of group and team decision making are interacting groups, Delphi groups, and nominal groups. Increasingly, these methods of group decision making are being conducted online.31Specially prepared for d03371341 on 21 Apr, 2010
  17. 17. 248 P A R T T H R E E • Planning and Decision Making Interacting Groups and Teams Interacting groups and teams are the most interacting group or team A decision-making group or team in common form of decision-making group. The format is simple—either an existing which members openly discuss, argue or a newly designated group or team is asked to make a decision. Existing groups or about, and agree on the best alternative teams might be functional departments, regular work teams, or standing commit- tees. Newly designated groups or teams can be ad hoc committees, task forces, or newly constituted work teams. The group or team members talk among them- selves, argue, agree, argue some more, form internal coalitions, and so forth. Finally, after some period of deliberation, the group or team makes its decision. An advantage of this method is that the interaction among people often sparks new ideas and promotes understanding. A major disadvantage, though, is that political processes can play too big a role. Delphi group Delphi Groups A Delphi group is sometimes used to develop a consensus of A form of group decision making in expert opinion. Developed by the Rand Corporation, the Delphi procedure which a group is used to achieve a solicits input from a panel of experts who contribute individually. Their opin- consensus of expert opinion ions are combined and, in effect, averaged. Assume, for example, that the prob- lem is to establish an expected date for a major technological breakthrough in converting coal into usable energy. The first step in using the Delphi procedure is to obtain the cooperation of a panel of experts. For this situation, experts might include various research scientists, university researchers, and executives in a relevant energy industry. At first, the experts are asked to anonymously pre- dict a time frame for the expected breakthrough. The persons coordinating the Delphi group collect the responses, average them, and ask the experts for another prediction. In this round, the experts who provided unusual or extreme predictions may be asked to justify them. These explanations may then be relayed to the other experts. When the predictions stabilize, the average predic- tion is taken to represent the decision of the group of experts. The time, expense, and logistics of the Delphi technique rule out its use for routine, every- day decisions, but it has been successfully used for forecasting technological breakthroughs at Boeing, market potential for new products at General Motors, research and development patterns at Eli Lilly, and future economic conditions by the U.S. government.32 Nominal Groups Another useful group and team decision-making technique nominal group that is occasionally used is the nominal group. Unlike the Delphi method, in A structured technique used to gener- which group members do not see one another, nominal group members are ate creative and innovative alternatives brought together in a face-to-face setting. The members represent a group in or ideas name only, however; they do not talk to one another freely like the members of interacting groups. Nominal groups are used most often to generate creative and innovative alternatives or ideas. To begin, the manager assembles a group of knowledgeable experts and outlines the problem to them. The group mem- bers are then asked to individually write down as many alternatives as they can think of. The members then take turns stating their ideas, which are recorded on a flip chart or board at the front of the room. Discussion is limited to simple clarification. After all alternatives have been listed, more open discussion takes place. Group members then vote, usually by rank-ordering the various alterna- tives. The highest-ranking alternative represents the decision of the group. Of course, the manager in charge may retain the authority to accept or reject the group decision.Specially prepared for d03371341 on 21 Apr, 2010
  18. 18. C H A P T E R 9 • Managing Decision Making and Problem Solving 249 Advantages of Group and Team Decision Making The advantages and disadvantages of group and team decision making relative to individual decision making are summarized in Table 9.2. Working with Diversity reinforces several of the advantages as they relate to diversity. One advantage is simply that more information is available in a group or team setting—as suggested by the old axiom, “Two heads are better than one.” A group or team represents a vari- ety of education, experience, and perspective. Partly as a result of this increased information, groups and teams typically can identify and evaluate more alternatives than can one person.33 The people involved in a group or team decision understand the logic and rationale behind it, are more likely to accept it, and are equipped to communicate the decision to their work group or department.34 Finally, research evidence suggests that groups may make better decisions than individuals.35 Working with Diversity Diverse Groups Make Better Decisions Behavioral factors have a profound effect on decision needed extra help to participate. This technique making. Those factors are heightened when diverse could work for any group dominated by forceful groups make decisions. Professor Samuel Sommers members. published a 2006 study showing diverse groups making • Another technique for encouraging wider participa- better decisions. He staged mock trials with juries of all- tion was used by a firm that designs public play- white, all-black, and mixed members. The mixed juries grounds. To allow children and adults an equal “deliberated longer, raised more facts, and conducted chance to contribute, meetings were held at the broader and more wide-ranging deliberations,” Som- building site. Everyone explored the site and then mers writes. In addition, the mixed juries made fewer expressed their views by drawings or notes attached factual errors, and any errors made were more quickly to a detailed site map. Even children too young to corrected. write could participate in the group effectively. Sommers adds, “Traditionally, [researchers] assumed • Even simple ideas are helpful. A city government that the influences of racial diversity result from the con- was overwhelmed by too many volunteers when it tributions of the minority members, who in effect bear the asked for the public’s help in evaluating commu- burden of bringing new perspectives . . . to the table.” Yet nity projects. Rather than limit involvement, the his research points to a startling conclusion: Changes in city formed a main committee and several sub- white behavior made the difference. While black mem- committees. This technique kept participation bers behaved consistently, whites became more involved high, while maintaining a group size that facili- and focused in the mixed group, even before discussion tated discussion and consensus. began. When white members in mixed juries realized the group’s mixed composition, they changed their behavior, Diversity in decision-making groups can improve for example, by taking better notes during the trial. decision quality. Managers should find decision strate- So how can organizations get the full benefits of gies that maximize the benefits of diversity for their inclusion in decision making? Here are some cases. organizations. References: “Decision Making Case Studies,” The Media Trust web- • A nonprofit’s decision-making committees included site, on April 10, 2006; Scott Dyer, persons with and without learning difficulties. “Leadership and Diversity in Louisiana,” Diverse Education, April 21, Nondisabled members dominated group decisions. 2005, on April 10, 2006; Samuel R. Som- mers, “On Racial Diversity and Group Decision Making: Identifying Therefore, members with disabilities served as Multiple Effects of Racial Composition on Jury Deliberations,” Journal “advisors,” preparing remarks before the sched- of Personality and Social Psychology, April 2006, vol. 90, no. 4, uled meeting. Everyone was heard, even those who on April 10, 2006.Specially prepared for d03371341 on 21 Apr, 2010