CHAPTER 9
Managing Decision Making and Problem Solving
CHAPTER SUMMARY
This chapter deals with managerial decision making and problem solving. As noted in Chapter 1, decision
making relates to all management functions. However, it is most closely related to planning, so we
discuss it here in the planning section of the book. After exploring the nature of decision making, we
discuss rational and behavioral perspectives on decision making. This is followed by a discussion of
group and team decision making.
LEARNING OBJECTIVES
After covering this chapter, students should be able to:
1. Define decision making and discuss types of decisions and decision-making conditions.
2. Discuss rational perspectives on decision making, including the steps in rational decision making.
Management Update: Vikram Pandit was appointed chief executive officer to succeed Charles Prince
(an interim CEO was appointed immediately after Prince’s resignation).
LECTURE OUTLINE
I. THE NATURE OF DECISION MAKING
Management Update: In 2006, Disney acquired Pixar for over $7 billion, thus ending months of
speculation as to the future of the relationship between these strategic alliance partners. The two companies
A. Decision Making Defined
1. Decision making is the act of choosing one alternative from among a set of alternatives.
2. The decision making process includes recognizing and defining the nature of a decision
situation, identifying alternatives, choosing the “best” alternative, and putting it into
practice.
Chapter 9: Managing Decision Making and Problem Solving
Teaching Tip: Make sure students see the subtle distinctions between decision making and the
decision making process.
B. Types of Decisions
1. A programmed decision is one that is fairly structured or recurs with some frequency or both.
Extra Example: Wal-Mart is an example of a firm that relies heavily on programmed decision making.
2. A nonprogrammed decision is relatively unstructured and occurs much less often.
Group Exercise: Ask student groups to identify three examples each of programmed and non–
programmed decisions that they have recently made or been affected by.
C. Decision-Making Conditions
1. Decision making under certainty occurs when the decision maker knows with reasonable
2. Decision making under risk occurs when the availability of each alternative and its
potential payoffs and costs are all associated with probability estimates.
3. Decision making under uncertainty occurs when the decision maker does not know all
the alternatives, the risks associated with each alternative, or the consequences each
Chapter 9: Managing Decision Making and Problem Solving
Global Connection: Much of the foreign expansion that firms are doing today is characterized by
II. RATIONAL PERSPECTIVES ON DECISION MAKING
A. The Classical Model of Decision Making
1. The classical decision model is a prescriptive approach that tells managers how they
should make decisions.
Extra Example: Charles Knight, CEO of Emerson Electric, constantly stresses to his managers the
need to be rational, logical, and dispassionate when they make decisions.
B. Steps in Rational Decision Making
Teaching Tip: Note the details in Table 9.1. The table shows the general steps involved in rational
decision making and provides a running example to illustrate each step.
1. Rational decision making keeps the decision maker focused on facts and logic and helps
Extra Example: After several years of poor financial performance, Kmart defined its decision situation
as a need to recover from bankruptcy and to regain lost sales and profits.
b) The second step is to identify alternative courses of action that might be effective.
c) Next, managers should evaluate the alternatives generated according to its
feasibility, satisfactoriness, and affordable consequences.
Extra Example: Kmart evaluated each of its three options using the criteria discussed in the text.
d) The next step, the most critical step, is the selection of the “best” alternative. This
Chapter 9: Managing Decision Making and Problem Solving
Extra Example: Based on its evaluation of the alternatives, Kmart made the decision to sell off its
Extra Example: Kmart continues to pursue its refocus strategy by closing unprofitable stores,
upgrading product lines, cleaning up accounting problems and making operations more efficient.
However, the store continues to lose sales to rivals Wal-Mart and Target.
Extra Example: Kmart and Sears agreed to merge to form what its managers believe would be a
III. BEHAVIORAL ASPECTS OF DECISION MAKING
A. The Administrative Model
1. The administrative model describes how decisions often are actually made. It is based on
the assumptions that managers have incomplete and imperfect information, are
constrained by bounded rationality, and tend to satisfice when making decisions.
a) Bounded rationality suggests that decision makers are limited by their values and
Group Exercise: Have students examine their own personal choices regarding college and major in
terms of bounded rationality and satisficing.
B. Political Forces in Decision Making
A coalition is an informal alliance of individuals or groups formed to achieve a common goal.
Chapter 9: Managing Decision Making and Problem Solving
C. Intuition and Escalation of Commitment
1. Intuition—an innate belief about something without conscious deliberation
Extra Example: Intuition is often used by top managers in making decisions. For example, Michael
Eisner, former CEO of Disney, has indicated that he relied heavily on his instincts and intuition when
2. Escalation of commitment occurs when managers make a decision and become so
committed to it that they stay with it even when it appears to have been wrong.
Extra Example: The military is frequently guilty of escalation of commitment. Decision makers will
Discussion Starter: Ask students if they have ever gambled in Las Vegas or a similar location. Note
D. Risk Propensity and Decision Making
Risk propensity is the extent to which a manager is willing to gamble in making a decision.
Global Connection: The extent to which managers are comfortable with different degrees of risk
Discussion Starter: Ask students for examples of recent ethical dilemmas they have faced when
making a decision.
IV. GROUP AND TEAM DECISION MAKING IN ORGANIZATIONS
A. Forms of Group and Team Decision Making
1. Interacting groups and teams—the most common form of group and team decision
Global Connection: Group decision making is very common in Japan. Indeed, managers who make
decisions without involving their subordinates are likely to be perceived as bad managers.
Chapter 9: Managing Decision Making and Problem Solving
2. Delphi groups—used for developing a consensus of expert opinion. The Delphi
procedure solicits input from a panel of experts who contribute individually. Their
B. Advantages of Group and Team Decision Making
1. The availability of more information and knowledge.
Discussion Starter: Ask students to recount examples of when they have participated in group or team
decision making. Ask if they prefer to make decisions alone or as part of a group or team.
C. Disadvantages of Group and Team Decision Making
1. One disadvantage is the additional time and resources required.
D. Managing Group and Team Decision-Making Processes
1. Managers who are aware of the pros and cons of group decision making can be more
careful about how they manage the group’s time and resources.
END OF CHAPTER QUESTIONS
Questions for Review
1. Describe the difference between programmed and nonprogrammed decisions. What are the
implications of these differences for decision makers?
Programmed decisions are either structured or recur frequently or both. Non-programmed decisions
are typically complex, lengthy, and difficult to resolve.
2. Describe the behavioral nature of decision making. Be certain to provide some detail about political
forces, risk propensity, ethics, and commitment in your description.
Political forces in decision making are common. Coalitions often attempt to influence the decision–
Chapter 9: Managing Decision Making and Problem Solving
3. What is meant by the term escalation of commitment? In your opinion, under what conditions is
escalation of commitment likely to occur?
Escalation of commitment occurs when a decision maker persists in supporting their original
4. Explain the differences between three common methods of group decision making—interacting
groups, Delphi groups, and nominal groups.
Interacting groups are the most common of the three and consist of a group of individuals who meet,
Questions for Analysis
5. Was your decision about what college or university to attend a rational decision? Did you go
through each step in rational decision making? If not, why not?
Two extreme possible answers are: (1) My decision to come to this university was not a rational
6. Most business decisions are made under conditions of either risk or uncertainty. In your opinion, is
it easier to make a decision under a condition of risk or a condition of uncertainty? Why?
Answers will vary. Some students may prefer risk in which the possible alternatives are known and
7. Consider the following list of business decisions. Which decisions would be handled most
effectively by group or team decision making? Which would be handled most effectively by
individual decision making? Explain your answers.
• A decision about switching pencil suppliers
Chapter 9: Managing Decision Making and Problem Solving
Questions for Application
8. Interview a local business manager about a major decision that he or she made recently. Try to
determine whether the manager used a rational decision-making process or whether behavioral
elements were also present. If the process was wholly rational, why do you think there was no
behavioral component? If the process contained behavioral components, why were these
components present?
Answers will vary, but most students will find that virtually every important decision in a real
9. Describe a recent decision you made that relied on intuition. In your opinion, what experiences
formed the source of your intuition? Did the decision lead to attainment of the desired outcomes?
Did your intuition play a positive or negative role in goal attainment? Explain.
Students should have little trouble thinking of a decision that involved the use of intuition. They
10. Interview a department head at your college or university to determine whether group or team
decision making is used. If it is, how does the head attempt to overcome the disadvantages of group
decision making? Are the attempts successful? Why or why not?
University faculty make many decisions where group or team decision making will be used, such as
END OF CHAPTER EXERCISES
Building Effective Conceptual Skills
I. Purpose
This exercise gives students a demonstration of the power of behavior factors in decision making.
II. Format
The survey portion of this exercise takes about 10 minutes. Discussion time will vary.
III. Follow-Up
Duplicate the following forms pages and then cut along the lines so that every student will have one
Chapter 9: Managing Decision Making and Problem Solving
After students answer the question, ask for a show of hands and fill in each of the squares in this
matrix. Show the chart to the students.
Positive
Negative
Every one of the outcomes (A, B, C, and D) have exactly the same expected value, that is, that 200
people will live and 400 people will die. There are two differences in the way that the scenarios are
The main message of this survey is: “Humans are non–rational.” In a perfectly rational world,
students would be indifferent between the four cells of the matrix, and they all would have about the
same number of responses. However, the students will most likely find that more people chose the
A and D cells. The reason has to do with how individuals think about risk. When faced with a
positive outcome or gain, people tend to want to hold on to it. They imagine the regret they would
Say to the students, “Imagine I offer you a (hypothetical) gift. I will pay anyone $10 right now.
Or, if you prefer to gamble, I will let you pick a number between 1 and 10. If you choose one of the
nine ‘wrong’ numbers, I will pay you nothing. But if you choose the one ‘right’ number, I will pay
you $100. Assume the gamble is honest. What would you do?” Point out to them that the expected
value is the same in both cases: $10. The only difference is the choice between a certainty and a
risk. Ask for a show of hands, and record the number who would prefer the certainty and the risk.
Chapter 9: Managing Decision Making and Problem Solving
Scenario A: Imagine that you decided to see a play and paid the admission price of $10 per ticket. As
you enter the theater you discover that you have lost the ticket. The seat was not marked and the ticket
cannot be recovered. Would you pay $10 for another ticket?
Scenario A: Imagine that you are about to purchase a jacket for $150 and a calculator for $25. The
salesman informs you that the calculator you wish to buy is being given away for free at another branch
of the store, located 10 minutes’ drive away. Would you make the trip to the other store?
Scenario B: Imagine that you are about to purchase a jacket for $150 and a calculator for $25. The
Answer the list of brief questions that your professor will provide to you. No answer is correct or
incorrect; simply choose your most likely response. Then, when the professor asks, share your
answers with the class.
A. Discuss the answers given by the class. Why do students’ answers differ?
B. What have you learned about from this exercise about decision-making biases and risk
propensity?
Students will learn about how risk propensity changes for one individual, depending on
Chapter 9: Managing Decision Making and Problem Solving
Forms for Conceptual Skills Exercise
____________________________________________________________________________________
Answer the question below.
Form P
Imagine that the U.S. is preparing for the outbreak of an unusual disease, which is expected to kill
600 people. Two alternative programs to combat the disease have been proposed. Which program do you
favor?
_____________________________________________________________________________________
_____________________________________________________________________________________
Answer the question below.
Form N
Imagine that the U.S. is preparing for the outbreak of an unusual disease, which is expected to kill
600 people. Two alternative programs to combat the disease have been proposed. Which program do you
favor?
_____________________________________________________________________________________
Answer the question below.
Form P
Imagine that the U.S. is preparing for the outbreak of an unusual disease, which is expected to kill 600
people. Two alternative programs to combat the disease have been proposed. Which program do you
favor?
If Program A is adopted, 200 people will be saved.
Chapter 9: Managing Decision Making and Problem Solving
_____________________________________________________________________________________
Answer the question below.
Form N
Imagine that the U.S. is preparing for the outbreak of an unusual disease, which is expected to kill
600 people. Two alternative programs to combat the disease have been proposed. Which program do you
favor?
_____________________________________________________________________________________
Building Effective Decision-Making Skills
I. Purpose
This exercise aids students in developing their decision-making skills by giving them exposure
to making decisions using the nominal groups technique.
II. Format
This in-class exercise is done by the entire class and takes about 30 minutes to complete. Follow-up
III. Follow-Up
Describe the problem situation to the students. Then allow 5–10 minutes for individual solutions
to be written down, silently. Be sure to encourage “second round” ideas after the students have
expansion.
A. Listen as your professor describes the problem situation to the class.
B. Write down as many creative responses to the problem as you can. Don’t worry about whether
or not they’re practical. In fact, try come up with as many unexpected—even “far out”—
responses as you can.
Chapter 9: Managing Decision Making and Problem Solving
F. Vote on the list, focusing on the “creativity” of individual items. Which suggestion does the
class regard as the “best” solution to the problem at hand?
Students’ answer will vary. Encourage students to come up with creative responses. Some
possible responses are: refusal to make the changes, hiring less expensive faculty, offering
distance or online courses, increasing class size, or entering into a cooperative arrangement
with another university.
G. Did the nominal group technique generate more creative alternatives than those that you
MANAGEMENT AT WORK
THE VERDICT ON GROUPTHINK
The closing case highlights the tendency of groupthink in court decisions by juries. The classic movie, 12
Angry Men, starts out with the jury members leading toward consensus, but the Henry Fonda steers the
group away from this and asks each man to question his stance on the case. The case points out that not
all juries are like the one portrayed in the movie and that because of the factors identified earlier by Irving
Janis there is a strong tendency toward groupthink.
1. Case Question 1: In your experience, have you found that decision-making groups tend toward
groupthink? If so, what factors contributed to this tendency? If not, what factors helped to prevent it?
2. Case Question 2: Review the steps in the rational decision making model (especially steps 1-4).
This model, of course, applies to individuals and might be difficult to apply to group decision-
making situations. If, however, you were a juror, how might you apply these steps to your own
deliberations? In what ways might they give you some useful guidance? In what ways would you
have to make adjustments because of the context(trial) and situation (a group process)?
The first four steps in the rational decision making model are: recognizing and defining the decision
3. Case Question 3: In what ways might bounded rationality affect a juror’s approach to a decision?
How about satisficing? Intuition? Ethics?
Chapter 9: Managing Decision Making and Problem Solving
Bounded rationality comes into play in a jury decision because the jury is limited to the evidence
4. Case Question 4: A recent study found that racially mixed juries “deliberated longer, raised more
facts, and conducted broader and more wide-ranging deliberations” than either all–white or all-black
juries. Why do you think this was so? Do you think that “mixed” juries are more likely to avoid
groupthink than racially homogeneous juries? Explain your reasoning.
One of the seven antecedents to groupthink identified by Irving Janis is cohesiveness. One could