Fast-Track Management & Organizational Behavior

Chapter 6: Decision-Making

This chapter will discuss:Understanding the various steps required to

objectively make management decisions Appreciating the significance of the definition

of the critical problem as an initial step in decision-making

Focusing on the use of a weight & point system to quantify alternative actions & reach a decision

Consider how risk management has affected decision-making

Be aware of decision-making issues in the 21st century

Managerial Decision-MakingDecision-making should be viewed as a process

of thoughtfully investigating all reasonable alternativesMany managers seem to merely choose among

alternativesPeter Drucker: leading management thinker on

decision-making Steps in the process

1. Definition of the problem2. Analysis of facts and issues3. Formulation of alternative actions4. Do nothing!5. Analysis of alternative courses of action6. Recommendation

Step 1. Definition of the Problem

What is the critical problem? In other words, what is that thing which must be changed or altered before anything else can be changed? Too often, we focus on symptoms of the problem &

not the underlying problem The most visible symptoms are usually the least

revealing ones E.g., many cost-cutting programs mask inefficient

functional design (in engineering, manufacturing or purchasing)

Find the functional design problem & fix it

Ask: “What will happen if nothing is changed?” & “What could have improved the situation when the problem first appeared?”

Step 2. Analysis of Facts and Issues

Data should be assembled from the company’s internal records & is available from print/Internet sources Information must be scrutinized for underlying

patterns that indicate that the problem has been correctly or incorrectly defined

Managers seldom obtain all of the facts about any situation

Most decisions are based on incomplete knowledge − either because the data is not available or because it would require too much time or cost to obtain

The thoughtful manager will determine which data are missing in order to judge the risk of a decision

Step 3. Formulation of Alternative Actions

Determine the conditions for a solution to the critical problem based on the company's missions and goals Should always focus on business performance &

results, but may require changing established practicesScientific method: a set of procedures for

investigating observable activities, acquiring information, or correcting & integrating previous knowledge Requires consideration of various approaches to a

problemCompanies are particularly difficult to subject to the

scientific method because of the many variables that can affect a situation

Steps 4 & 5. Do Nothing! Analysis of Alternative Courses of Action

Do nothing: To take no action is a decision fully as much as to take specific actionsThe analyst must specify the consequences of not

actingOccasionally the problem will self-correct, & a

decision to do nothing may be entirely appropriateAnalysis of Alternatives: Based on –

The Risk: choose the highest risk/return relationship The Effort: consideration of the investment of time,

money & persuasion necessary Timing: “heroic” act take time; what “tactical”

actions are possible?Limitations: Who will carry out the action?

Step 6. Recommendation

The development of a recommendation should logically follow from the complete analysis Always try to select an action that is

practicable rather than heroic, particularly given the resources, time & risk constraints faced

The organization needs a plan for implementation or “road map” as a guide to the correct actions; too often this element is missing from the process. The recommended action Findings from the analysis Required implementation step(s)

How Managers Make Decisions IScenario analysis for Chinese fast-food business (in

Chapter 5) Now the company must decide on --

Locations Whether to joint venture with a local partner Who the vendors of food ingredients & supplies will be How to advertise & market the stores

Determine which the “must” factors are & which are less important but desirable

Assign weights to each criterion and point values for each alternative (perhaps on a 1 to 5 scale, with 5 as the highest)

Important factors: population at the location; accessibility of vendors; cost and freshness of ingredients; availability of marketing channels; the potential pool of management & food service workers; issues with regard to local regulations & licenses

How Managers Make Decisions IIWeight each criterion (including “musts”) and

multiply times the point value to provide a weighted scoreSumming effectively makes decision-making

relatively objectiveThe 1st-round may result in a prioritization of

choices that is not consistent with a priori expectations

Managers can then examine the weights & points assigned in the analysis to make adjustments to either affirm or revise the original calculations

In addition, it may be necessary after further review to add additional criteria

How Managers Make Decisions III A 2nd-Round Decision Matrix-Fast Food Location in China

(Selected from Figure 6-2)

Locations and Points Assigned

Criteria and Weights Beijing Shanghai GuangzhouPopulation size (5%) 5 5 3

Access to vendors (20%) 5 5 4

Cost/freshness of ingredients (15%)

5 4 4

Marketing channels available? (15%)

4 4 3

Criteria & Weighted Points

Population size (5%) 0.25 0.25 0.15

Access to vendors (20%) 1.00 1.00 0.80

Cost/freshness of ingredients (15%)

0.75 0.60 0.60

Marketing channels available? (15%)

0.60 0.60 0.45

Weighted Points 4.40 4.45 3.85

Risk Management & Decision-Making IRisk is the possibility of loss or injury

The single most significant issue that confronts companies is risk & uncertainty

Traditionally been the frequency of human or property loss in specific categories Managed using insurance, with the policyholder accepting a

small certain loss – the premium expense – rather than the possibility of a large catastrophic loss

Operational risk -- inherent in business activities as arising from problems with technology, employees or operations Policies & procedures govern the conduct of ongoing

activities Assigning specific duties states the company’s position on

responsibilities, sets a charter for responsible corporate behavior & assesses penalties should violations occur

Risk Management & Decision-Making IIFinance-based risks include:

Credit risk concerns the failure of customers to pay amounts owed & due in a timely manner.

Liquidity risk is a company’s inability to pay obligations as they come due

Information reporting risk is the receipt of inaccurate information from a financial institution or vendor

Foreign exchange/interest rate/commodity risk involves adverse movements in the price of raw materials or financial instruments

Enterprise risk management (ERM): views risk as pervasive in a company & considers a coordinated approach through a formal organizational function

Decision-Making & Payoffs

($ in thousands) Competitor’s Reaction

Our Strategy No Reaction

Lower Price Policy

More Advertising

Coupon Offer

Introduce new sandwich $100 $50 $65 $40Do not introduce new sandwich 0 -$25 -$35 -$15

Structured problems: familiar, easily defined and subject to decision rules (often called programmed decisions)An unstructured problem has ambiguous (unclear) information with no rule or standard procedure

Figure 6-4: Profit Payoff Matrix for Fast-Food Operation

Should introduce the sandwich because all outcomes provide positive results as long as we cover our costs

Decision-Making ConsiderationsAdvanced techniques known as operations research,

management science or decision sciencesMathematical models that can be used to analyze & optimize

complex systemsUses: project planning, factory layout and production

scheduling, transportation routing, global supply chain management & pricing

Rules on Decision-MakingUnderstand cultural differences

Involve the local managers in the decision & use research & marketing tools to determine if your plans are viable

Admit failure Real options ( “managerial options”) – the reconsideration of

capital investments at future pre-determined decision pointsScan the environment – to notice unexpected but potentially

damaging events and develop a quick-response mechanism

Discussion & Review Questions

What are the steps in a comprehensive decision-making process?

Once a decision is reached, what is a required document to assure that the decision will proceed successfully? What are the necessary components in this document?

How can a point & weight matrix can assist decision-makers in arriving at a thoughtful result?

How is risk management integrated into the decision-making process?

How can a profit payoff matrix support the decision-making process?

What are the essential rules to improve current-day decision-making?