The document discusses rational and nonrational models of decision making. It provides details on the four steps of rational decision making: 1) identify the problem, 2) think of alternative solutions, 3) evaluate alternatives and select a solution, and 4) implement and evaluate the chosen solution. It also discusses two examples of nonrational decision making: satisficing and intuition. Finally, it analyzes Starbucks' recovery from a crisis in the late 2000s through Howard Schultz's return as CEO and strategic changes to restore the company's values and atmosphere.

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7.1
Two Kinds of Decision Making: Rational and Nonrational
MAJOR QUESTIONHow do people know when they’re being
logical or illogical?
THE BIG PICTURE
Decision making, the process of identifying and choosing
alternative courses of action, may be rational, but often it is
nonrational. Four steps in making a rational decision are (1)
identify the problem or opportunity, (2) think up alternative
solutions, (3) evaluate alternatives and select a solution, and (4)
implement and evaluate the solution chosen. Two examples of
nonrational models of decision making are (1)
satisficing and (2) intuition.
The subject of decisions and decision making is a fascinating
subject that is at the heart of what managers do.
Adecisionis a choice made from among available
alternatives.Decision makingis the process of identifying and
choosing alternative courses of action.
If your company’s product is first place in its market and is
making tons of money, is that a sign of great decision making?
Consider the decisions that framed success at Starbucks.
EXAMPLE
Crisis Leading to the Strategic-Management Process: Starbucks
Reclaims Its Soul
Among the many things that Starbucks has going for it is this: it
survived a near-death experience.4
Today’s CEO, Howard Schultz, joined the Seattle-based
company as marketing director in 1982, when it was only a
small chain selling coffee equipment. Over nearly two decades,
he gained control and, inspired by the coffee houses of Europe,
transformed the company into a comfortable “third place”
between home and work, a place with a neighborhood feel
selling fresh-brewed by-the-cup lattes and cappuccinos. By

2. 2000, Starbucks (named for the first mate of the whaling ship in
Herman Melville’s Moby Dick)had become the world’s largest
specialty coffee retailer, with 3,501 stores, 78% of them in the
United States.5
“Starbucks became, for many of us, what we talk about when we
talk about coffee,” wrote one reporter. “It changed how we
drink it (on a sofa, with Wi-Fi, or on the subway), how we order
it (‘for here, grande, two-pump vanilla, skinny extra hot latte’),
and what we are willing to pay for it,” such as $4.99 for a
Frappuccino.6
Shultz Steps Down. Schultz stepped down as CEO in 2000
(remaining as chairman), and for a while the business continued
to thrive. Then two things happened that provoked a crisis.
First, the company “lost a certain soul,” says Schultz, as the
management became more concerned with profits than store
atmosphere and company values and extended existing product
lines rather than creating new ones. Second, as the Great
Recession took hold in 2007, tight-fisted consumers abandoned
specialty coffees, causing the stock price to nosedive. In
January 2008, after an eight-year absence, Schultz returned as
CEO.
The Reinvention Begins. “I didn’t come back to save the
company—I hate that description,” Schultz told an interviewer.
“I came back to rekindle the emotion that built it.”7
Among the risks he took to restore the company’s luster, he
closed 800 U.S. stores, laid off 4,000 employees, and let go
most top executives. As a morale booster, he flew 10,000 store
managers to New Orleans, recently destroyed by hurricane
Katrina. Along with attending strategy sessions, they bonded in
community-service activities, contributing thousands of
volunteer hours to helping to restore parts of the city. “We
wanted to give back to that community post-Katrina,” says
Schultz, “andPage 203 remind and rekindle the organization
with the values and guiding principles of our company before
we did a stitch of business.” Later he closed all U.S. stores for
half a day so baristas could be retrained in how to make

3. espresso.
Starbucks in India The world’s biggest coffee chain launched its
first Indian outlet in October 2012 in an upscale part of
Mumbai. © Punit Paranjpe/AFP/Getty Images
The Payoff. After a couple of years, the company turned around,
the result of better operations, modernized technology, a
reinvigorated staff, and several innovations: It offered Via
premium instant coffee, offered more coffee from a single
origin rather than blends, switched to a cold-brew process for
iced coffee instead of simply brewing hot coffee and then
chilling it, acquired (and then later closed) the La Boulange
bakery chain, opened (and then closed) Teavana “tea bars,”
enabled customers to pay for coffee via a mobile-payment app,
and even launched alcohol sales.8 By early 2016, it had 23,921
stores in 64 countries, it had surpassed Subway to become the
No. 2 restaurant chain in U.S. sales (second only to
McDonald’s), and its revenues had risen 146% in the last
decade, while earnings grew more than five-fold.9
Schultz feels strongly that “there’s an opportunity for
businesses to demonstrate a role in society that’s beyond
profitability,” providing health insurance even for temps,
creating tuition reimbursement, helping to raise loans for small
businesses, building better opportunities for minority youth.10
YOUR CALL
Some critics feel Starbucks is the symbol of “affordable
luxury.” If we can’t afford a McMansion or a Lexus, says one
observer, we may be “willing to make that $5 splurge at
Starbucks simply because it makes us feel a bit better about
ourselves.”11 Thus, despite the innovation in products, attempts
to rekindle the cozy neighborhood café, and emphasis on
positive social values, do you think another economic downturn
could alter Starbucks’s fortunes?
Decision Making in the Real World
Sometimes we are able to make thoughtful decisions, making
rational choices among well-defined alternatives. But that is not
always the way it works in the real world.

4. Two Systems of Decision Making
In Thinking, Fast and Slow, psychologist Daniel Kahneman,
winner of the 2002 Nobel Prize in economics, describes two
kinds of thinking, which he labels System 1 and System 2:12
· System 1—intuitive and largely unconscious: System 1
operates automatically and quickly; it is our fast, automatic,
intuitive, and largely unconscious mode, as when we detect
hostility in a voice or detect that one object is more distant than
another.
· System 2—analytical and conscious: System 2 is our slow,
deliberate, analytical, and consciously effortful mode of
reasoning, which swings into action when we have to fill out a
tax form or park a car in a narrow space.
“System 1 uses association and metaphor to produce a quick and
dirty draft of reality,” says one explanation, “which System 2
draws on to arrive at explicit beliefs and reasoned choices.”13
Why don’t we use the more deliberate and rational System 2
more often? Because it’s lazy and tires easily, so instead of
slowing things down and analyzing them, it is content to accept
the easy but unreliable story that System 1 feeds it.
The “Curse of Knowledge”
Why do some engineers design electronic products (such as
DVD remote controls) with so many buttons, devices ultimately
useful only to other engineers? Why are some professional
investors and bankers prone to taking excess risks?14 Why are
some employees so reluctant to adopt new processes? The
answer may be what’s known as the curse of knowledge. As one
writer put it about engineers, for example, “People who design
products are experts cursed by their knowledge, and they can’t
imagine what it’s like to be as ignorant as the rest of
us.”15 Specialization improves efficiency, suggests another
writer, but it also leads to tunnel vision and blind spots.16 In
other words, as our knowledge and expertise grow, we may be
less and less able to see things from an outsider’s perspective—
hence, we are often apt to make irrational decisions.
Let us look at the two approaches managers may take to making

5. decisions: They may follow a rational model or various kinds
of nonrational models.
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Rational Decision Making: Managers Should Make Logical and
Optimal Decisions
Therational model of decision making, also called the classical
model, explains how managers should make decisions; it
assumes managers will make logical decisions that will be the
optimum in furthering the organization’s best interests.
Typically there are four stages associated with rational decision
making. (SeeFigure 7.1.)
FIGURE 7.1 The four steps in rational decision making
Stage 1: Identify the Problem or Opportunity—Determining the
Actual versus the Desirable
As a manager, you’ll probably find no shortage of problems, or
difficulties that inhibit the achievement of goals: customer
complaints, supplier breakdowns, staff turnover, sales
shortfalls, competitor innovations.
However, you’ll also often find opportunities—situations that
present possibilities for exceeding existing goals. It’s the
farsighted manager, however, who can look past the steady
stream of daily problems and seize the moment to actually
do better than the goals he or she is expected to achieve. When
a competitor’s top salesperson unexpectedly quits, that creates
an opportunity for your company to hire that person away to
promote your product more vigorously in that sales territory.
Whether you’re confronted with a problem or an opportunity,
the decision you’re called on to make is how to
make improvements—how to change conditions from the
present to the desirable. This is a matter of diagnosis—
analyzing the underlying causes.
EXAMPLE
Making a Correct Diagnosis: Does Billionaire Warren Buffet,
the World’s Third Richest Man, Invest Like a Girl?
Warren Buffett is the renowned billionaire investor (the third
richest person in the world, worth $60.8 billion in early 2016)

6. known as the “Oracle of Omaha” who heads the financial
juggernaut Berkshire Hathaway.17 His investment decisions are
so successful that $1,000 invested with him in 1957 reportedly
was worth upwards of $30 million in 2014.18 “In the 50 years
since Buffett took over Berkshire, its stock has appreciated by
1,826,163%,” says one reporter. “That is an astounding
number.”19
Buffett is said to “invest like a girl,” taking the same cautious
approach that many women supposedly do.20 He uses basic
arithmetic to analyze several file-cabinet drawers of annual
reports and other readily available company financial
documents and to look for a record of “high returns on equity
capital, low debt, and a consistent, predictable business with
sustainable advantages—like Coca-Cola’s soft-drink
franchise.”21 In other words, Buffett takes pains to make a
correct diagnosis before making a decision.22
The Better Investors. When men and women are asked to self-
assess their financial knowledge, according to a study of eight
countries, men tend to give themselves high scores and women
give themselves lower scores—even when that is not warranted
by their actual knowledge.23 “Women are aware of their lack of
knowledge,” speculates a study author, while “men are less
willing to admit what they don’t know.”24 Unfortunately,
women are also falling behind men in financial literacy,
according to more recent research. The worse news is that “men
apparently don’t know much about the topic in the
first place.”25
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So which sex is the better class of investors? A seven-year
study of single (unmarried) investors found females
outperformed males by 2.3%, female investment groups
outperformed male groups by 4.6%, and women overall
outperformed men by 1.4%.26 The basic reason, suggests one
account: “Women trade much less often than men, do a lot more
research, and tend to base their investment decisions on
considerations other than just numbers.”27 Men, offers another

7. report, “tend to trade more, and the more you trade, typically
the more you lose—not to mention running up transaction
costs.”28
Are the Sexes Really That Different? But wait, are men really
so bad at investing compared to women? Some research shows
that when “everything is low-key and manageable, men and
women make decisions about risk in similar ways,” says
cognitive psychologist Therese Huston.29 However,
when stress is added to the situation, men are apparently more
prone to taking risky bets with little payoff, according to some
neuroscientists.30 Another paper, by economist Julie Nelson,
suggests that as individuals men and women aren’t all that
different with regard to risk taking—but when men make
decisions as part of a group, they adopt more risky
strategies.31 “Men in groups tend to show off. They egg one
another on to display … the ‘cultural norm of male daring.’”
YOUR CALL
When preparing to make important decisions—especially
financial decisions—do you spend a lot of time trying to make a
correct diagnosis, doing deep research, or do you chase “hot”
tips and make snap judgments? How well do you do when
you’re under stress or participating in a group?
Stage 2: Think Up Alternative
Solution
s—Both the Obvious and the Creative
Employees burning with bright ideas are an employer’s greatest
competitive resource. “Creativity precedes innovation, which is
its physical expression,” says Fortune magazine writer Alan
Farnham. “It’s the source of all intellectual property.”32

8. After you’ve identified the problem or opportunity and
diagnosed its causes, you need to come up with alternative
solutions.
Stage 3: Evaluate Alternatives and Select a