The Decision-Making Process

It was the type of day that airline managers dread. A record-setting blizzard moving up the East Coast—covering
roads, railroads, and airport runways with as much as 27 inches of snow. One of the major airlines that would have
to deal with the storm, American Airlines, has over 78,000 employees who make flights possible and four who
cancel those flights, if needed. Working out of the Fort Worth, Texas, control center, these employees, who deal
with all kinds of situations, know that snowstorms are relatively simple because they can be forecasted in advance
fairly easily and airline crews can quickly deploy equipment and procedures to deal with ice and snow. But still,
even this doesn’t mean that the decisions they have to make are easy, especially when those decisions affect
hundreds of flights and thousands of passengers!1 Although most decisions managers make don’t involve blizzards
(or other weather-related uncertainties), you can see that decisions—choices, judgments—play an important role in
what an organization has to do or is able to do. Managers at all levels and in all areas of organizations make
decisions. That is, they make choices. For instance, top-level managers make decisions about their organization’s
goals, where to locate manufacturing facilities, or what new markets to move into. Middle- and lower-level
managers make decisions about production schedules, product quality problems, pay raises, and employee
discipline. Our focus in this chapter is on how managers make decisions, but making decisions isn’t something that
just managers do. All organizational members make decisions that affect their jobs and the organization they work
for. Although decision making is typically described as choosing among alternatives, there’s more to it than that!
Why? Because decision making is (and should be) a process, not just a simple act of choosing among alternatives. 2
Even for something as straightforward as deciding where to go for lunch, you do more than just choose burgers or
pizza or hot dogs. Granted, you may not spend a lot of time contemplating your lunch decision, but you still go
through the process when making that decision. Exhibit 2-1 shows the eight steps in the decision-making process.
This process is as relevant to personal decisions as it is to corporate decisions. Let’s use an example—a manager
deciding what laptop computers to purchase—to illustrate the steps in the process.
Step 1: Identify a Problem
Your team is dysfunctional, your customers are leaving, or your plans are no longer relevant. 3 Every decision starts
with a problem, a discrepancy between an existing and a desired condition.4 Let’s work through an example.
Amanda is a sales manager whose reps need new laptops because their old ones are outdated and inadequate for
doing their job. To make it simple, assume it’s not economical to add memory to the old computers and it’s the
company’s policy to purchase, not lease. Now we have a problem—a disparity between the sales reps’ current
computers (existing condition) and their need to have more efficient ones (desired condition). Amanda has a
decision to make. How do managers identify problems? In the real world, most problems don’t come with neon
signs flashing “problem.” When her reps started complaining about their computers, it was pretty clear to Amanda
that something needed to be done, but few problems are that obvious. Managers also have to be cautious not to
confuse problems with symptoms of the problem. Is a 5 percent drop in sales a problem? Or are declining sales
merely a symptom of the real problem, such as poor-quality products, high prices, or bad advertising? Also, keep in
mind that problem identification is subjective. What one manager considers a problem might not be considered a
problem by another manager. In addition, a manager who resolves the wrong problem perfectly is likely to perform
just as poorly as the manager who doesn’t even recognize a problem and does nothing. As you can see, effectively
identifying problems is important, but not easy.5
Step 2: Identify Decision Criteria
Once a manager has identified a problem, he or she must identify the decision criteria important or relevant to
resolving the problem. Every decision maker has criteria guiding his or her decisions even if they’re not explicitly
stated. In our example, Amanda decides after careful consideration that memory and storage capabilities, display
quality, battery life, warranty, and carrying weight are the relevant criteria in her decision.
Step 3: Allocate Weights to the Criteria
If the relevant criteria aren’t equally important, the decision maker must weight the items in order to give them the
correct priority in the decision. How? A simple way is to give the most important criterion a weight of 10 and then
assign weights to the rest using that standard. Of course, you could use any number as the highest weight. The
weighted criteria for our example are shown in Exhibit 2-2.
Step 4: Develop Alternatives
The fourth step in the decision-making process requires the decision maker to list viable alternatives that could
resolve the problem. In this step, a decision maker needs to be creative, and the alternatives are only listed—not
evaluated just yet. Our sales manager, Amanda, identifies eight laptops as possible choices. (See Exhibit 2-3.)
Step 5: Analyze Alternatives
Once alternatives have been identified, a decision maker must evaluate each one. How? By using the criteria
established in Step 2. Exhibit 2-3 shows the assessed values that Amanda gave each alternative after doing some
research on them. Keep in mind that these data represent an assessment of the eight alternatives using the decision
criteria, but not the weighting. When you multiply each alternative by the assigned weight, you get the weighted
alternatives as shown in Exhibit 2-4. The total score for each alternative, then, is the sum of its weighted criteria.
Sometimes a decision maker might be able to skip this step. If one alternative scores highest on every criterion, you
wouldn’t need to consider the weights because that alternative would already be the top choice. Or if the weights
were all equal, you could evaluate an alternative merely by summing up the assessed values for each one. (Look
again at Exhibit 2-3.) For example, the score for the HP ProBook would be 36, and the score for the Sony NW
would be 35.
Step 6: Select an Alternative
The sixth step in the decision-making process is choosing the best alternative or the one that generated the highest
total in Step 5. In our example (Exhibit 2-4), Amanda would choose the Dell Inspiron because it scored higher than
all other alternatives (249 total).
Step 7: Implement the Alternative
In Step 7 in the decision-making process, you put the decision into action by conveying it to those affected and
getting their commitment to it. We know that if the people who must implement a decision participate in the process,
they’re more likely to support it than if you just tell them what to do. Another thing managers may need to do during
implementation is reassess the environment for any changes, especially if it’s a long-term decision. Are the criteria,
alternatives, and choices still the best ones, or has the environment changed in such a way that we need to
reevaluate?
Step 8: Evaluate Decision Effectiveness
The last step in the decision-making process involves evaluating the outcome or result of the decision to see whether
the problem was resolved. If the evaluation shows that the problem still exists, then the manager needs to assess
what went wrong. Was the problem incorrectly defined? Were errors made when evaluating alternatives? Was the
right alternative selected but poorly implemented? The answers might lead you to redo an earlier step or might even
require starting the whole process over.

Managers Making Decisions

Although everyone in an organization makes decisions, decision making is particularly important to managers. As
Exhibit 2-5 shows, it’s part of all four managerial functions. That’s why managers—when they plan, organize, lead,
and control—are called decision makers. The fact that almost everything a manager does involves making decisions
doesn’t mean that decisions are always time-consuming, complex, or evident to an outside observer. Most decision
making is routine. For instance, every day of the year you make a decision about what to eat for dinner. It’s no big
deal. You’ve made the decision thousands of times before. It’s a pretty simple decision and can usually be handled
quickly. It’s the type of decision you almost forget is a decision. And managers also make dozens of these routine
decisions every day, for example, which employee will work what shift next week, what information should be
included in a report, or how to resolve a customer’s complaint. Keep in mind that even though a decision seems easy
or has been faced by a manager a number of times before, it still is a decision. Let’s look at four perspectives on how
managers make decisions.
Making Decisions: Rationality
We assume that managers will use rational decision making; that is, they’ll make logical and consistent choices to
maximize value.7 After all, managers have all sorts of tools and techniques to help them be rational decision makers.
What does it mean to be a “rational” decision maker? Assumptions of Rati onality A rational decision maker would
be fully objective and logical. The problem faced would be clear and unambiguous, and the decision maker would
have a clear and specific goal and know all possible alternatives and consequences. Finally, making decisions
rationally would consistently lead to selecting the alternative that maximizes the likelihood of achieving that goal.
These assumptions apply to any decision—personal or managerial. However, for managerial decision making, we
need to add one additional assumption—decisions are made in the best interests of the organization. These
assumptions of rationality aren’t very realistic and managers don’t always act rationally, but the next concept can
help explain how most decisions get made in organizations.
Making Decisions: Bounded Rationality
Despite the unrealistic assumptions, managers are expected to be rational when making decisions.8 They understand
that “good” decision makers are supposed to do certain things and exhibit good decision-making behaviors as they
identify problems, consider alternatives, gather information, and act decisively but prudently. When they do so, they
show others that they’re competent and that their decisions are the result of intelligent deliberation. However, a more
realistic approach to describing how managers make decisions is the concept of bounded rationality, which says
that managers make decisions rationally, but are limited (bounded) by their ability to process information. 9 Because
they can’t possibly analyze all information on all alternatives, managers satisfice, rather than maximize. That is,
they accept solutions that are “good enough.” They’re being rational within the limits (bounds) of their ability to
process information. Let’s look at an example. Suppose you’re a finance major and upon graduation you want a job,
preferably as a personal financial planner with a minimum salary of $45,000 and within 100 miles of your
hometown. You accept a job offer as a business credit analyst—not exactly a personal financial planner but still in
the finance field—at a bank 50 miles from home at a starting salary of $42,500. If you had done a more
comprehensive job search, you would have discovered a job in personal financial planning at a trust company only
25 miles from your hometown and starting at a salary of $45,000. You weren’t a perfectly rational decision maker
because you didn’t maximize your decision by searching all possible alternatives and then choosing the best. But
because the first job offer was satisfactory (or “good enough”), you behaved in a bounded-rationality manner by
accepting it. Most decisions that managers make don’t fit the assumptions of perfect rationality, so they satisfice.
However, keep in mind that their decision making is also likely influenced by the organization’s culture, internal
politics, power considerations, and by a phenomenon called escalation of commitment, an increased commitment
to a previous decision despite evidence that it may have been wrong.10 The Challenger space shuttle disaster is often
used as an example of escalation of commitment. Decision makers chose to launch the shuttle that day even though
the decision was questioned by several individuals who believed it was a bad one. Why would decision makers
escalate commitment to a bad decision? Because they don’t want to admit that their initial decision may have been
flawed. Rather than search for new alternatives, they simply increase their commitment to the original solution.
Making Decisions: The Role of Intuition
When managers at stapler-maker Swingline saw the company’s market share declining, they used a logical scientific
approach to address the issue. For three years, they exhaustively researched stapler users before deciding what new
products to develop. However, at Accentra, Inc., founder Todd Moses used a more intuitive decision approach to
come up with his line of unique PaperPro staplers.11 Like Todd Moses, managers often use their intuition to help
their decision making. What is intuitive decision making? It’s making decisions on the basis of experience,
feelings, and accumulated judgment. Researchers studying managers’ use of intuitive decision making have
identified five different aspects of intuition, which are described in Exhibit 2-6.12 How common is intuitive decision
making? One survey found that almost half of the executives surveyed “used intuition more often than formal
analysis to run their companies.”13 Intuitive decision making can complement both rational and bounded rational
decision making.14 First of all, a manager who has had experience with a similar type of problem or situation often
can act quickly with what appears to be limited information because of that past experience. In addition, a recent
study found that individuals who experienced intense feelings and emotions when making decisions actually
achieved higher decision-making performance, especially when they understood their feelings as they were making
decisions. The old belief that managers should ignore emotions when making decisions may not be the best
advice.15
Making Decisions: The Role of Evidence-Based Management
Sales associates at the cosmetics counter at department store Bon-Ton Stores Inc. had the highest turnover of any
store sales group. Using a data-driven decision approach, managers devised a more precise pre-employment
assessment test. Now, not only do they have lower turnover, they actually have better hires. 16 Suppose you were
exhibiting some strange, puzzling physical symptoms. In order to make the best decisions about proper diagnosis
and treatment, wouldn’t you want your doctor to base her decisions on the best available evidence? Now suppose
you’re a manager faced with putting together an employee recognition program. Wouldn’t you want those decisions
also to be based on the best available evidence? “Any decision-making process is likely to be enhanced through the
use of relevant and reliable evidence, whether it’s buying someone a birthday present or wondering which new
washing machine to buy.”17 That’s the premise behind evidence-based management (EBMgt), the “systematic use
of the best available evidence to improve management practice.”18 EBMgt is quite relevant to managerial decision
making. The four essential elements of EBMgt are: (1) the decision maker’s expertise and judgment; (2) external
evidence that’s been evaluated by the decision maker; (3) opinions, preferences, and values of those who have a
stake in the decision; and (4) relevant organizational (internal) factors such as context, circumstances, and
organizational members. The strength or influence of each of these elements on a decision will vary with each
decision. Sometimes, the decision maker’s intuition (judgment) might be given greater emphasis in the decision;
other times it might be the opinions of stakeholders; and at other times, it might be ethical considerations
(organizational context). The key for managers is to recognize and understand the mindful, conscious choice as to
which elements are most important and should be emphasized in making a decision.

Types of Decisions and Decision-Making Conditions

Restaurant managers in Portland make routine decisions weekly about purchasing food supplies and scheduling
employee work shifts. It’s something they’ve done numerous times. But now they’re facing a different kind of
decision—one they’ve never encountered: how to adapt to a new law requiring that nutritional information be
posted.
Types of Decisions
Such situations aren’t all that unusual. Managers in all kinds of organizations face different types of problems and
decisions as they do their jobs. Depending on the nature of the problem, a manager can use one of two different
types of decisions. Structured Problems and Programmed Decisions Some problems are straightforward. The
decision maker’s goal is clear, the problem is familiar, and information about the problem is easily defined and
complete. Examples might include when a customer returns a purchase to a store, when a supplier is late with an
important delivery, a news team’s response to a fast-breaking event, or a college’s handling of a student wanting to
drop a class. Such situations are called structured problems because they’re straightforward, familiar, and easily
defined. For instance, a server spills a drink on a customer’s coat. The customer is upset and the manager needs to
do something. Because it’s not an unusual occurrence, there’s probably some standardized routine for handling it.
For example, the manager offers to have the coat cleaned at the restaurant’s expense. This is what we call a
programmed decision, a repetitive decision that can be handled by a routine approach. Because the problem is
structured, the manager doesn’t have to go to the trouble and expense of going through an involved decision process.
The “develop-the-alternatives” stage of the decision-making process either doesn’t exist or is given little attention.
Why? Because once the structured problem is defined, the solution is usually self-evident or at least reduced to a
few alternatives that are familiar and have proved successful in the past. The spilled drink on the customer’s coat
doesn’t require the restaurant manager to identify and weight decision criteria or to develop a long list of possible
solutions. Instead, the manager relies on one of three types of programmed decisions: procedure, rule, or policy. A
procedure is a series of sequential steps a manager uses to respond to a structured problem. The only difficulty is
identifying the problem. Once it’s clear, so is the procedure. For instance, a purchasing manager receives a request
from a warehouse manager for 15 tablets for the inventory clerks. The purchasing manager knows how to make this
decision by following the established purchasing procedure. A rule is an explicit statement that tells a manager what
can or cannot be done. Rules are frequently used because they’re simple to follow and ensure consistency. For
example, rules about lateness and absenteeism permit supervisors to make disciplinary decisions rapidly and fairly.
The third type of programmed decisions is a policy, a guideline for making a decision. In contrast to a rule, a policy
establishes general parameters for the decision maker rather than specifically stating what should or should not be
done. Policies typically contain an ambiguous term that leaves interpretation up to the decision maker. Here are
some sample policy statements: • The customer always comes first and should always be satisfied. • We promote
from within, whenever possible. • Employee wages shall be competitive within community standards. Notice that the
terms satisfied, whenever possible, and competitive require interpretation. For instance, the policy of paying
competitive wages doesn’t tell a company’s human resources manager the exact amount he or she should pay, but it
does guide them in making the decision. Unstructured Problems and Nonprogrammed Decisions Not all the
problems managers face can be solved using programmed decisions. Many organizational situations involve
unstructured problems, new or unusual problems for which information is ambiguous or incomplete. Whether to
build a new manufacturing facility in China is an example of an unstructured problem. So, too, is the problem facing
restaurant managers in Portland who must decide how to modify their businesses to comply with the new law. When
problems are unstructured, managers must rely on nonprogrammed decision making in order to develop unique
solutions. Nonprogrammed decisions are unique and nonrecurring and involve custom-made solutions. Exhibit 2-7
describes the differences between programmed and nonprogrammed decisions. Lower-level managers mostly rely
on programmed decisions (procedures, rules, and policies) because they confront familiar and repetitive problems.
As managers move up the organizational hierarchy, the problems they confront become more unstructured. Why?
Because lower-level managers handle the routine decisions and let upper-level managers deal with the unusual or
difficult decisions. Also, upper-level managers delegate routine decisions to their subordinates so they can deal with
more difficult issues.20 Thus, few managerial decisions in the real world are either fully programmed or
nonprogrammed. Most fall somewhere in between.
Decision-Making Styles
William D. Perez’s tenure as Nike’s CEO lasted a short and turbulent 13 months. Analysts attributed his abrupt
dismissal to a difference in decision-making approaches between him and Nike cofounder Phil Knight. Perez tended
to rely more on data and facts when making decisions, whereas Knight highly valued, and had always used, his
judgment and feelings to make decisions.23 As this example clearly shows, managers have different styles when it
comes to making decisions.
Linear–Nonlinear Thinking Style Profile
Suppose you’re a new manager. How will you make decisions? Recent research done with four distinct groups of
people says the way a person approaches decision making is likely affected by his or her thinking style. 24 Your
thinking style reflects two things: (1) the source of information you tend to use (external data and facts OR internal
sources such as feelings and intuition), and (2) whether you process that information in a linear way (rational,
logical, analytical) OR a nonlinear way (intuitive, creative, insightful). These four dimensions are collapsed into two
styles. The first, linear thinking style, is characterized by a person’s preference for using external data and facts and
processing this information through rational, logical thinking to guide decisions and actions. The second, nonlinear
thinking style, is characterized by a preference for internal sources of information (feelings and intuition) and
processing this information with internal insights, feelings, and hunches to guide decisions and actions. Look back at
the earlier Nike example and you’ll see both styles described. Managers need to recognize that their employees may
use different decisionmaking styles. Some employees may take their time weighing alternatives and relying on how
they feel about it, while others rely on external data before logically making a decision. These differences don’t
make one person’s approach better than the other. It just means their decision-making styles are different.
Decision-Making Biases and Errors
When managers make decisions, they not only use their own particular style, they may use “rules of thumb,” or
heuristics, to simplify their decision making. Rules of thumb can be useful because they help make sense of
complex, uncertain, and ambiguous information.25 Even though managers may use rules of thumb, that doesn’t
mean those rules are reliable. Why? Because they may lead to errors and biases in processing and evaluating
information. Exhibit 2-11 identifies 12 common decision errors of managers and biases they may have. Let’s look at
each.26 When decision makers tend to think they know more than they do or hold unrealistically positive views of
themselves and their performance, they’re exhibiting the overconfidence bias. The immediate gratification bias
describes decision makers who tend to want immediate rewards and to avoid immediate costs. For these individuals,
decision choices that provide quick payoffs are more appealing than those with payoffs in the future. The anchoring
effect describes how decision makers fixate on initial information as a starting point and then, once set, fail to
adequately adjust for subsequent information. First impressions, ideas, prices, and estimates carry unwarranted
weight relative to information received later. When decision makers selectively organize and interpret events based
on their biased perceptions, they’re using the selective perception bias. This influences the information they pay
attention to, the problems they identify, and the alternatives they develop. Decision makers who seek out
information that reaffirms their past choices and discounts information that contradicts past judgments exhibit the
confirmation bias. These people tend to accept at face value information that confirms their preconceived views and
are critical and skeptical of information that challenges these views. The framing bias is when decision makers
select and highlight certain aspects of a situation while excluding others. By drawing attention to specific aspects of
a situation and highlighting them, while at the same time downplaying or omitting other aspects, they distort what
they see and create incorrect reference points. The availability bias happens when decision makers tend to remember
events that are the most recent and vivid in their memory. The result? It distorts their ability to recall events in an
objective manner and results in distorted judgments and probability estimates. When decision makers assess the
likelihood of an event based on how closely it resembles other events or sets of events, that’s the representation
bias. Managers exhibiting this bias draw analogies and see identical situations where they don’t exist. The
randomness bias describes the actions of decision makers who try to create meaning out of random events. They do
this because most decision makers have difficulty dealing with chance even though random events happen to
everyone, and there’s nothing that can be done to predict them. The sunk costs error occurs when decision makers
forget that current choices can’t correct the past. They incorrectly fixate on past expenditures of time, money, or
effort in assessing choices rather than on future consequences. Instead of ignoring sunk costs, they can’t forget them.
Decision makers who are quick to take credit for their successes and to blame failure on outside factors are
exhibiting the self-serving bias. Finally, the hindsight bias is 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. Managers avoid
the negative effects of these decision errors and biases by being aware of them and then not using them! Beyond
that, managers also should pay attention to “how” they make decisions and try to identify the heuristics they
typically use and critically evaluate the appropriateness of those heuristics. Finally, managers might want to ask
trusted individuals to help them identify weaknesses in their decision-making style and try to improve on those
weaknesses.
Overview of Managerial Decision Making
Exhibit 2-12 provides an overview of managerial decision making. Because it’s in their best interests, managers
want to make good decisions—that is, choose the “best” alternative, implement it, and determine whether it takes
care of the problem, which is the reason the decision was needed in the first place. Their decision-making process is
affected by four factors: the decision-making approach, the type of problem, decision-making conditions, and their
decision-making style. In addition, certain decisionmaking errors and biases may impact the process. Each factor
plays a role in determining how the manager makes a decision. So whether a decision involves addressing an
employee’s habitual tardiness, resolving a product quality problem, or determining whether to enter a new market, it
has been shaped by a number of factors.
Effective Decision Making in Today’s World
Per Carlsson, a product development manager at IKEA, “spends his days creating Volvo-style kitchens at Yugo
prices.” His job is to take the “problems” identified by the company’s product-strategy council (a group of globe-
trotting senior managers that monitors consumer trends and establishes product priorities) and turn them into
furniture that customers around the world want to buy. One “problem” identified by the council: the kitchen has
replaced the living room as the social and entertaining center in the home. Customers are looking for kitchens that
convey comfort and cleanliness while still allowing them to pursue their gourmet aspirations. Carlsson must take
this information and make things happen. There are a lot of decisions to make—programmed and nonprogrammed
—and the fact that IKEA is a global company makes it even more challenging. Comfort in Asia means small, cozy
appliances and spaces, while North American customers want oversized glassware and giant refrigerators. His
ability to make good decisions quickly has significant implications for IKEA’s success. 28 Today’s business world
revolves around making decisions, often risky ones, usually with incomplete or inadequate information, and under
intense time pressure. Making good business decisions in today’s rapid-paced and messy world isn’t easy. Things
happen too fast. Customers come and go in the click of a mouse or the swipe of a screen. Market landscapes can
shift dramatically overnight along several dimensions. Competitors can enter a market and exit it just as quickly as
they entered. Thriving and prospering under such conditions means managerial decision making must adapt to these
realities. Most managers make one decision after another; and as if that weren’t challenging enough, more is at stake
than ever before. Bad decisions can cost millions. What do managers need to do to make effective decisions in
today’s fast-moving world? First, let’s look at some suggested guidelines. Then, we’ll discuss an interesting new
line of thinking that has implications for making effective decisions— especially for business types—called design
thinking.
Guidelines for Effective Decision Making
Decision making is serious business. Your abilities and track record as an effective decision maker will determine
how your organizational work performance is evaluated and whether you’ll be promoted to higher and higher
positions of responsibility. Here are some additional guidelines to help you be a better decision maker. • Understand
cultural differences. Managers everywhere want to make good decisions. However, is there only one “best” way
worldwide to make decisions? Or does the “best way depend on the values, beliefs, attitudes, and behavioral patterns
of the people involved?”29 • Create standards for good decision making. Good decisions are forward-looking, use
available information, consider all available and viable options, and do not create conflicts of interest. 30 • Know
when it’s time to call it quits. When it’s evident that a decision isn’t working, don’t be afraid to pull the plug. For
instance, the CEO of L.L.Bean pulled the plug on building a new customer call center in Waterville, Maine
—“literally stopping the bulldozers in their tracks”—after T-Mobile said it was building its own call center right
next door. He was afraid that the city would not have enough qualified workers for both companies and so decided
to build 55 miles away in Bangor.31 He knew when it was time to call it quits. However, as we said earlier, many
decision makers block or distort negative information because they don’t want to believe their decision was bad.
They become so attached to a decision that they refuse to recognize when it’s time to move on. In today’s dynamic
environment, this type of thinking simply won’t work. • Use an effective decision-making process. Experts say an
effective decisionmaking process has these six characteristics: (1) it focuses on what’s important; (2) it’s logical and
consistent; (3) it acknowledges both subjective and objective thinking and blends analytical with intuitive thinking;
(4) it requires only as much information and analysis as is necessary to resolve a particular dilemma; (5) it
encourages and guides the gathering of relevant information and informed opinion; and (6) it’s straightforward,
reliable, easy to use, and flexible.”32 • Develop your ability to think clearly so you can make better choices at work
and in your life.33 Making good decisions doesn’t come naturally. You have to work at it. Read and study about
decision making. Keep a journal of decisions in which you evaluate your decision making successes and failures by
looking at the process you used and the outcomes you got.
Design Thinking and Decision Making
The way managers approach decision making—using a rational and analytical mindset in identifying problems,
coming up with alternatives, evaluating alternatives, and choosing one of those alternatives—may not be the best,
and is certainly not the only, choice in today’s environment. That’s where design thinking comes in. Design
thinking has been described as “approaching management problems as designers approach design problems.”35
More organizations are beginning to recognize how design thinking can benefit them.36 For instance, Apple has long
been celebrated for its design thinking. The company’s lead designer, Jonathan “Jony” Ive (who was behind some of
Apple’s most successful products, including the iPod and iPhone and was just knighted in the United Kingdom for
services to design and enterprise) had this to say about Apple’s design approach: “We try to develop products that
seem somehow inevitable—that leave you with the sense that that’s the only possible solution that makes sense.” 37
While many managers don’t deal specifically with product or process design decisions, they still make decisions
about work issues that arise, and design thinking can help them be better decision makers. What can the design
thinking approach teach managers about making better decisions? Well, it begins with the first step of identifying
problems. Design thinking says that managers should look at problem identification collaboratively and
integratively, with the goal of gaining a deep understanding of the situation. They should look not only at the
rational aspects, but also at the emotional elements. Then invariably, of course, design thinking would influence how
managers identify and evaluate alternatives. “A traditional manager (educated in a business school, of course) would
take the options that have been presented and analyze them based on deductive reasoning and then select the one
with the highest net present value. However, using design thinking, a manager would say, “What is something
completely new that would be lovely if it existed but doesn’t now?” 38 Design thinking means opening up your
perspective and gaining insights by using observation and inquiry skills and not relying simply on rational analysis.
We’re not saying that rational analysis isn’t needed; we are saying that there’s more needed in making effective
decisions, especially in today’s world. Just a heads up: Design thinking also has broad implications for managers in
other areas, and we’ll be looking in future chapters at its impact on innovation and strategies.
Big Data and Decision Making
• Amazon.com, Earth’s biggest online retailer, earns billions of dollars of revenue each year—estimated at one-third
of sales—from its “personalization technologies” such as product recommendations and computer-generated e-
mails.39 • At AutoZone, decision makers are using new software that gleans information from a variety of databases
and allows its 5,000-plus local stores to target deals and hopefully reduce the chance that customers will walk away
without making a purchase. AutoZone’s chief information officer says, “We think this is the direction of the
future.”40 • It’s not just businesses that are exploiting big data. A team of San Francisco researchers was able to
predict the magnitude of a disease outbreak halfway around the world by analyzing phone patterns from mobile
phone usage.41 Yes, there’s a ton of information out there—100 petabytes here in the decade of the 2010s, according
to experts. (In bytes, that translates to 1 plus 17 zeroes, in case you were wondering!) 42 And businesses—and other
organizations—are finally figuring out how to use it. So what is big data? It’s the vast amount of quantifiable
information that can be analyzed by highly sophisticated data processing. One IT expert described big data with
“3V’s: high volume, high velocity, and/or high variety information assets.”43 What does big data have to do with
decision making? A lot, as you can imagine. With this type of data at hand, decision makers have very powerful
tools to help them make decisions. However, experts caution that collecting and analyzing data for data’s sake is
wasted effort. Goals are needed when collecting and using this type of information. As one individual said, “Big
data is a descendant of Taylor’s ’scientific management’ of more than a century ago.” 44 While Taylor used a
stopwatch to time and monitor a worker’s every movement, big data is using math modeling, predictive algorithms,
and artificial intelligence software to measure and monitor people and machines like never before. But managers
need to really examine and evaluate how big data might contribute to their decision making before jumping in with
both feet. Why? Because big data, no matter how comprehensive or well analyzed, needs to be tempered by good
judgment.
Chapter Summary by Learning Objectives
Describe the eight steps in the decision-making process.
A decision is a choice. 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.
Explain the four ways managers make decisions.
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 the payoff.
Bounded rationality says that managers make rational decisions but are bounded (limited) by their ability to process
information. Satisficing happens when decision makers accept solutions that are good enough. With escalation of
commitment, managers increase commitment to a decision even when they have evidence it may have been a wrong
decision. Intuitive decision making means making decisions on the basis of experience, feelings, and accumulated
judgment. Using evidence-based management, a manager makes decisions based on the best available evidence.
Classify decisions and decision-making conditions.
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 in which a manager
can make accurate decisions because all outcomes are known. Risk is a situation in which a manager can estimate
the likelihood of certain outcomes. Uncertainty is a situation in which a manager is not certain about the outcomes
and can’t even make reasonable probability estimates. When decision makers face uncertainty, their psychological
orientation will determine whether they follow a maximax choice (maximizing the maximum possible payoff); a
maximin choice (maximizing the minimum possible payoff); or a minimax choice (minimizing the maximum regret
— amount of money that could have been made if a different decision had been made).
Describe different decision-making styles and discuss how biases affect decision making.
A person’s thinking style reflects two things: the source of information you tend to use (external or internal) and
how you process that information (linear or nonlinear). These four dimensions were collapsed into two styles. The
linear thinking style is characterized by a person’s preference for using external data and processing this information
through rational, logical thinking. The nonlinear thinking style is characterized by a preference for internal sources
of information and processing this information with internal insights, feelings, and hunches. 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. The
managerial decision-making model helps explain how the decision-making process is used to choose the best
alternative(s), either through maximizing or satisficing and then implementing and evaluating the alternative. It also
helps explain what factors affect the decision-making process, including the decision-making approach (rationality,
bounded rationality, intuition), the types of problems and decisions (well structured and programmed or unstructured
and nonprogrammed), the decision-making conditions (certainty, risk, uncertainty), and the decision maker’s style
(linear or nonlinear).
Identify effective decision-making techniques.
Managers can make effective decisions by understanding cultural differences in decision making, creating standards
for good decision making, knowing when it’s time to call it quits, using an effective decision-making process, and
developing their ability to think clearly. An effective decision-making process (1) focuses on what’s important; (2)
is logical and consistent; (3) acknowledges both subjective and objective thinking and blends both analytical and
intuitive approaches; (4) requires only “enough” information as is necessary to resolve a problem; (5) encourages
and guides gathering relevant information and informed opinions; and (6) is straightforward, reliable, easy to use,
and flexible. Design thinking is “approaching management problems as designers approach design problems.” It can
be useful when identifying problems and when identifying and evaluating alternatives. Using big data, decision
makers have power tools to help them make decisions. However, no matter how comprehensive or well analyzed the
big data, it needs to be tempered by good judgment. LO4 LO5