Don Hellriegel

Susan E. Jackson
John W. Slocum, Jr.
MANAGING: A COMPETENCY
BASED APPROACH
11th Edition
Chapter 8Fundamentals of Decision
Making
Prepared by
Argie Butler
Texas A&M University

 Learning Goals
1. Explain certainty, risk, and uncertainty and
how they affect decision making
2. Describe the characteristics of routine,
adaptive, and innovative decisions
3. Discuss the rational and bounded rationality
models of managerial decision making
4. Explain the features of political managerial
decision making
Chapter 8: PowerPoint 8.1

1.
2.
3.
4.

defining problems,
gathering information,
generating alternatives, and
choosing a course of action

Weve got lots of challenges ahead of us. I spend about 75%

of my time solving problems of one sort or another. The
other 25% is really wonderful, though. Watching people
grow, develop, achieve, and do good things and seeing the
company succeed is very rewarding and lots of fun.
David Hoover
Chairman, CEO and President
Ball Corporation
Chapter 8: PowerPoint 8.2

Certainty

Objective
probabilities

Uncertainty

Risk

Chapter 8: PowerPoint 8.3 (Adapted from Figure 8.1)

Subjective
probabilities

 The condition under which individuals are:

1. fully informed about a problem,
2. alternative solutions are known, and
3. the results of each solution are known

Both the problem and alternative solutions are

totally known and well defined
Exception for most managers
Chapter 8: PowerPoint 8.4

What is Risk?
The condition under which individuals can:
1.
2.
3.
4.

define a problem,
specify the probability of certain events,
identify alternative solutions, and
state the probability of each solution leading
to a result

Probability: the percentage of times that a

specific result would occur if an individual were to
make the same decision a large number of times
Chapter 8: PowerPoint 8.5

 What is Risk? (contd)

Objective probability: the likelihood that a
specific result will occur, based on hard facts
and numbers

Subjective probability: the likelihood that a

specific result will occur, based on personal
judgment

Chapter 8: PowerPoint 8.6

 What is Uncertainty?
Condition under which individuals do not
have the necessary information to assign
probabilities to the outcomes of alternative
solutions
May not even be able to define the problem,
much less identify alternative solutions and
possible outcomes

Chapter 8: PowerPoint 8.7

Examples of Possible Crises as

Sources of Uncertainty and High Risk
Economic Crises

Physical Crises

Recessions
Stock market crashes
Hostile takeovers

Industrial accidents
Supply breakdowns
Product failures

Natural Disasters
Fires
Floods
Earthquakes

Other
crises

Information Crises

Theft of proprietary information

Tampering with company records
Cyberattacks

Chapter 8: PowerPoint 8.8 (Adapted from Table 8.1)

Problem Types

Unusual and Innovative

Innovative
ambiguous
Decisions
Decisions
Adaptive
Adaptive
Decisions
Decisions
Routine
de
Routine
n
u
s
Decisions
Decisions tion
i

Uncertainty
Uncertainty

ci
e
d

n
o
i
s

m
e
ar

e
d
a

ch
i
h
w
Risk
r
Risk

nd
o
C

Certainty
Certainty
Known and
well defined

Solution Types
(Alternative Solutions)

Chapter 8: PowerPoint 8.9 (Adapted from Figure 8.2)

Untried and
ambiguous

 Relatively common and well defined

Unusual and ambiguous
Firefighting
1. Solutions are incomplete
2. Problems recur and cascade
3. Urgency supersedes importance
4. Some problems become crises
Chapter 8: PowerPoint 8.10

 Standard choices made in response to

relatively well-defined and common
problems and alternative solutions
Typically made under certainty and
objective probability
Standards often used to set the framework
for making routine decisions
Chapter 8: PowerPoint 8.11

Reservations

Hotel Arrival

Phone service will be highly

The doorman (or first-contact
efficient, including: answered
employee) will actively greet
before the fourth ring; no hold
guests, smile, make eye contact,
longer than 15 seconds; or, in
and speak clearly in a friendly
case of longer holds, callmanner
Examples of
backs offered, then provided
decision rules
in less than three minutes
at Four
Seasons hotels
Messages and Paging
Hotel Departure
and resorts
Phone service will be highly
No guest will wait longer
efficient, including: answered
before the fourth ring; no
longer than 15 seconds

Chapter 8: PowerPoint 8.12 (Excerpts from Table 8.2)

than five minutes for baggage

assistance, once the bellman
is called (eight minutes in
resorts)

 Adaptive Decisions
Choices made in response to a combination of
moderately unusual problems and alternative solutions
Convergencea business shift in which two
connections with the customer that were
previously viewed as competing or separate
(e.g., brick-and-mortar bookstores and Internet
bookstores) come to be seen as complementary
Continuous improvementa management
philosophy that approaches the challenge of
product and process enhancements as an ongoing
effort to increase the levels of quality and excellence
Chapter 8: PowerPoint 8.13

Snapshot
Visa continuously strives against outages and defects on
two broad fronts. Its physical processing operations are
protected by multiple layers of redundancy and backups.
The companys IT staff continuously conducts extensive and
refined software testing. We make 2,500 system changes to
VisaNet per month and modify 2 million lines of code
annually.
Richard Knight
Senior VP for Global Operations
Inovant LLC, a Visa Subsidiary
Chapter 8: PowerPoint 8.14

 Choices based on the discovery, identification, and

diagnosis of unusual and ambiguous problems and/or the
development of unique or creative alternative solutions
Three forms of innovation for economic progress:
1. Institutional innovation: includes the legal and
institutional framework for business, such as
deregulation
2. Technological innovation: creates the possibility of new
products, services, and production methods
3. Management innovation: major changes in the way
organizations are structured and how managers
perform their functions
Chapter 8: PowerPoint 8.15

Snapshot
You have to innovate and optimize at the same time.
After all, youre under pressure to optimize 24 hours a
day, but no one is pushing you to innovate. In order
for us to be able to compete over a long period of time,
we give everyone in our organization all of the
information needed so they can make decisions
that will drive innovation throughout
our company.
Jack Stack
CEO
Springfield ReManufacturing Corporation
Chapter 8: PowerPoint 8.16

 Prescribes a set of phases that individuals or

teams should follow to increase the likelihood
that their decisions will be logical and optimal
Rational decision: results in the maximum
achievement of a goal in a situation
Usually focuses on meanshow best to achieve
one or more goals

Chapter 8: PowerPoint 8.17

Environmental influences
11
Define
Defineand
and
diagnose
diagnosethe
the
problem
problem

22
Set
Set
goals
goals

33
Search
Searchfor
for
alternative
alternative
solutions
solutions
44
Compare
Compareand
and
evaluate
evaluate
alternative
alternativesolutions
solutions

77
Follow-up
Follow-up
and
andcontrol
control
the
theresults
results

66
Implement
Implement
the
thesolution
solution
selected
selected

Environmental influences

Chapter 8: PowerPoint 8.18 (Adapted from Figure 8.3)

55
Choose
Chooseamong
among
alternative
alternative
solutions
solutions

Rational Model: Define and

Diagnose the Problem
Noticing skill: identifying and monitoring numerous
external and internal environmental factors and
deciding which ones are contributing to the problem(s)
Interpreting skill: assessing the factors noticed and
determining which are causes, not merely symptoms, of
the real problem(s)
Incorporating skill: relating those interpretations to the
current or desired goals
Need to ask probing questions
Chapter 8: PowerPoint 8.19

 Goals: results to be attained and indicate the

direction
toward which decisions and actions
should be aimed
General goals: provide broad direction for decision
making in qualitative terms
Operational goals: state what is to be achieved
in quantitative terms, for whom, and within what
time period
Hierarchy of goals: represents the formal
linking
of goals between organizational
levels
Chapter 8: PowerPoint 8.20

Rational Model: Search for

Alternative Solutions
I think many people in a rush to make a decision do not
have enough of the alternatives out in the open. So, they
have two of the alternatives and say, Okay, Im going this
way but they didnt think through it enough when there
were possibly three or four alternatives. One of the
hidden ones might have been the best, and so the issue is
making sure that either all or enough of the alternatives
are out in the open to allow you to make the best decision.
Gary Tooker
Former CEO & Chairman of Board of Directors
Motorola
Chapter 8: PowerPoint 8.21

 Contends that the capacity of the human mind for formulating

and solving complex problems is small compared with what is
needed for objectively rational behavior

Decision Biases
Inadequate Problem Description
Limited Search for Alternatives
Limited Information
Satisficing

Chapter 8: PowerPoint 8.22 (Adapted from Figure 8.5)

Bounded Rationality Model: Decision

Biases
Selective perception
bias

Gamblers
fallacy bias

Chapter 8: PowerPoint 8.23

Concrete information
bias

Availability
bias

Law of small
numbers bias

When someone comes to you, you often have

a bias about what they are talking about. If you have
been in business for 20 to 30 years, chances are youve
been there and done that. Their idea is generally not
so new or innovative as they think. You have a strong
prejudice about outcomes. That is a dangerous thing.
One of the things you have to do very cognitively to be
a good leader is not let your biases or your filters
totally cloud the message someones
trying to deliver.

Chapter 8: PowerPoint 8.24

Jeffrey McKeever
Chairman and CEO
MicroAge

 Inadequate problem definition

New problems often are viewed as being like old
problems
Too much focus on symptoms as problems
Laziness

Limited search for alternatives

Options considered until one that seems adequate

Limited information
Ignorance: the lack of relevant information or the
incorrect interpretation of the information that is
available
Chapter 8: PowerPoint 8.25

Satisficing is intended to be used in contrast to the classical

economists idea that in making decisions in business or
anywhere in real life, you somehow pick, or somebody gives
you, a set of alternatives from which you select the best one
maximize. The satisficing idea is that first of all, you dont
have the alternatives, youve got to go out and scratch for
themand that you have mighty shaky ways of evaluating
them when you do find them. So you look for alternatives
until you get one from which, in terms of your experience and
in terms of what you have reason to expect, you will get a
reasonable result.
Herbert Simon
Recipient of Nobel Prize in Economics
Chapter 8: PowerPoint 8.26

Bounded Rationality Model

Level of Satisficing Can be Raised By:
1. Personal determination
2. Setting higher individual or organization
standards (goals)
3. Use of management science and computerbased decision-making and problemsolving techniques
4. Following the seven steps in the rational
model
Chapter 8: PowerPoint 8.27

Multiple stakeholders with power such as:

Customers

Investors

Employees

Divergence in problem definition

Divergence in goals
Divergence in solutions
Unions

Suppliers

Political decision
making

Regulatory Agencies

Chapter 8: PowerPoint 8.28 (Adapted from Figure 8.6)

Competitors

Legislative Bodies

 Snapshot
Recognize up front the amount of time and attention to
organizational politics, the informal systems and
processes that influence so much about how things
actually get done in an organizationPolitics, by the
way, is not a bad thing. Any enterprise has its own
political system, if we can call it that. But, I think what
makes the difference is the curiosity and the inquiry by
you to learn how the political system works.

Eliza Hermann
Vice president for Human Resources Strategy
BP PLC
Chapter 8: PowerPoint 8.29