Operational Tactics and Strategic Goals Presentation

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The Manager’s Changing Work Environment & Ethical Responsibilities

7.1 Two Kinds of Decision Making: Rational & Nonrational Major Question: How do people know when they’re being logical or illogical?

7.2 Making Ethical Decisions Major Question: What guidelines can I follow to be sure that decisions I make are not just lawful but ethical?

7.3 Evidence-Based Decision Making & Analytics Major Question: How can I improve my decision making using evidence- based management and business analytics?

7.4 Four General Decision-Making Styles Major Question: How do I decide to decide?

7.5 How to Overcome Barriers to Decision Making Major Question: Trying to be rational isn’t always easy. What are the barriers?

7.6 Group Decision Making: How to Work with Others

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Major Question: How do I work with others to make things happen?

the manager’s toolbox How Exceptional Managers Check to See If Their Decisions Might Be Biased The biggest part of a manager’s job is making decisions—and quite often they are wrong. Some questions you might ask next time you’re poised to make a decision:

“Am I Too Cocky?” The Overconfidence Bias If you’re making a decision in an area in which you have considerable experience or expertise, you’re less likely to be overconfident. Interestingly, however, you’re more apt to be overconfident when dealing with questions on subjects you’re unfamiliar with or questions with moderate to extreme difficulty.1

Recommendation: When dealing with unfamiliar or difficult matters, think how your impending decision might go wrong. Afterward pay close attention to the consequences of your decision.

“Am I Considering the Actual Evidence, or Am I Wedded to My Prior Beliefs?” The Prior-Hypothesis Bias Do you tend to have strong beliefs? When confronted with a choice, decision makers with strong prior beliefs tend to make their decision based on their beliefs—even if evidence shows those beliefs are wrong. This is known as the prior-hypothesis bias.2

Recommendation: Although it’s more comforting to look for evidence to support your prior beliefs, you need to be tough-minded and weigh the evidence.

“Are Events Really Connected, or Are They Just Chance?” The Ignoring-Randomness Bias Is a rise in sales in athletic shoes because of your company’s advertising campaign or because it’s the start of the school year? Many managers don’t understand the laws of randomness.

Recommendation: Don’t attribute trends or connections to a single, random event.

“Is There Enough Data on Which to Make a Decision?” The Unrepresentative Sample Bias If all the secretaries in your office say they prefer dairy creamer to real cream in their coffee, is that enough data on which to launch an ad campaign trumpeting the superiority of dairy creamer? It might if you polled 3,000 secretaries, but 3 or even 30 is too small a sample.

Recommendation: You need to be attuned to the importance of sample size.

“Looking Back, Did I (or Others) Really Know Enough Then to Have Made a Better Decision?” The 20-20 Hindsight Bias Once managers know what the consequences of a decision are, they may begin to think they could have

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predicted it. They may remember the facts as being a lot clearer than they actually were.3 Recommendation: Try to keep in mind that hindsight does not equal foresight.

For Discussion Facing the hard facts about what works and what doesn’t, how able do you think you are to make the tough decisions that effective managers have to make? Can you describe an instance in which you were badly wrong about something or someone?

We begin by distinguishing between rational and nonrational decision making, and we describe two nonrational models. We next discuss ethical decision making. We then consider evidence-based decision making and the use of analytics. Next we describe general decision-making styles. We follow by considering how individuals respond to decision situations and nine common decision-making biases. We conclude with a discussion of group decision making, including group problem-solving techniques.

Two Kinds of Decision Making: Rational & Nonrational How 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.

A decision is a choice made from among available alternatives. Decision making is 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?

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How Can Being the Best Affect Your Decision Making?

Most Fortune 500 companies averaged profit margins of around 5% the past 60 years. Imagine a company whose profit margin was an awesome 80%—for years and years.

No, we’re not talking about Apple, whose profit margin in 2013 was a spectacular 40%. We are referring to one of the biggest brands ever . . . Kodak.

The Curse of Being Out Front. Founded in 1888, the once-great film company filed for bankruptcy in early 2012, blindsided by the digital revolution and foreign competition.4 Before then, however, it dominated the world of film and popular photography, with film in particular driving the company’s expansion. “It is very hard,” said Kodak’s director of research in those heady days, “to find anything [with profit margins] like color photography that is legal.”5

Some believe, however, that film’s profitability contributed to Kodak’s doom—that managers feared introducing technologies that would disrupt the company’s film business. Indeed, Kodak had talented research-and-development engineers and scientists who churned out some of the world’s leading innovations, which were never introduced. “The irony,” said one innovator, “is that many—CCD arrays, digital X-rays, etc.—eventually did Kodak in.”6

In fact, in 1975, says one account, “the company invented the digital camera—then stuck it in a safe lest it destroy its lucrative film business. By the time Kodak was ready to unleash its digital prowess, everyone from Canon to Sony was selling their own digital cameras.”7

Tough Decisions about Innovation. Companies often have difficulty making decisions about how to manage innovation, says Wharton professor Christian Terwiesch. “Either they are focused on what they currently do and seek incremental innovation, or when they talk of research, they talk about what will happen in 10 years,” he says. Innovations reaching for a middle ground, such as envisioning product lines two or five years away, are much more elusive and often don’t have someone championing them within the organization.8

Afraid to cannibalize its existing business—selling film—Kodak continued to push forward with its present business model rather than look at what the market wanted. “Long-run strategies work better if you stand in the shoes of your customers and think how you are going to solve their problems,” notes Wharton professor George S. Day. “Kodak never really embraced that.”9

YOUR CALL Is being in first place the most dangerous place for decision makers? Do you think some of today’s hot companies—Apple, Google, FedEx, or Costco—on Fortune’s Most Admired list could experience what happened to Kodak?

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.

Two Systems of Decision Making In Thinking, Fast and Slow, psychologist

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Daniel Kahneman, winner of the 2002 Nobel Prize in economics, describes two kinds of thinking, which he labels System 1 and System 2:10

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.”11

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?12 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.”13 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 decisions: They may follow a rational model or various kinds of nonrational models.

Rational Decision Making: Managers Should Make Logical & Optimal Decisions The rational 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. (See Figure 7.1.)

FIGURE 7.1 The four steps in rational decision making

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EXAMPLE

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.

Making a Correct Diagnosis: Who’s Better at Financial Decisions, Men or Women?

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.14 “Women are aware of their lack of knowledge,” says a study author, while “men are less willing to admit what they don’t know.”15

Men, it seems, are put under a lot pressure to understand—or pretend they understand— financial matters. The financial industry also uses a lot of male-speak (“dominating the field”) that make women feel excluded. In general, women are less confident than men about making investment decisions.16

The Better Investors. 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%.17 The basic reason: “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,” according to one account.18 Men, says another report, “tend to trade more, and the more you trade, typically the more you lose—not to mention running up transaction costs.”19

The Buffet Approach. Warren Buffett is the renowned billionaire investor (the third richest person in the world, worth $65.9 billion in mid-2014) known as the “Oracle of Omaha” who heads the financial juggernaut Berkshire Hathaway.20 His investment decisions are so successful that $1,000 invested with him in 1957 reportedly was worth upwards of $30 million in 2014.21

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Buffett is said to “invest like a girl,” taking the same cautious approach that many women do.22 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.”23 In other words, Buffett takes pains to make a correct diagnosis before making a decision.

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 (as women investors are said to do), or do you chase “hot” tips and make snap judgments (as men reportedly do)?

Stage 2: Think Up Alternative Solutions—Both the Obvious & 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.”24

After you’ve identified the problem or opportunity and diagnosed its causes, you need to come up with alternative solutions.

Stage 3: Evaluate Alternatives & Select a Solution—Ethics, Feasibility, & Effectiveness In this stage, you need to evaluate each alternative not only according to cost and quality but also according to the following questions: (1) Is it ethical? (If it isn’t, don’t give it a second look.) (2) Is it feasible? (If time is short, costs are high, technology unavailable, or customers resistant, for example, it is not.) (3) Is it ultimately effective? (If the decision is merely “good enough” but not optimal in the long run, you might reconsider.)

Stage 4: Implement & Evaluate the Solution Chosen With some decisions, implementation is usually straightforward (though not necessarily easy—firing employees who steal may be an obvious decision, but it can still be emotionally draining). With other decisions, implementation can be quite difficult; when one company acquires another, for instance, it may take months to consolidate the departments, accounting systems, inventories, and so on.

Successful Implementation For implementation to be successful, you need to do two things: Plan carefully. Especially if reversing an action will be difficult, you need to make careful

plans for implementation. Some decisions may require written plans. Be sensitive to those affected. You need to consider how the people affected may feel about the

change—inconvenienced, insecure, even fearful, all of which can trigger resistance. This is why

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EXAMPLE

it helps to give employees and customers latitude during a changeover in business practices or working arrangements.

Now that you understand the four stages of the rational model, to what extent do you think you use them when making decisions? Would you like to improve your problem-solving skills? If yes, then you will find the following self-assessment valuable. It assesses your problem-solving skills.

SELF-ASSESSMENT 7.1

Assessing Your Problem-Solving Potential This survey is designed to assess your approach to problem solving. Go to connect.mheducation.com and take Self-Assessment 7.1. When you’re done, answer the following questions:

1. What is the status of your problem-solving skills? Are you surprised by the results? 2. Based on identifying the four lowest scored items on the assessment, what can you do to improve

your problem-solving skills? Explain. 3. Reflect on a recent decision you made that did not turn out to your satisfaction. Now, consider what

you learned about the rational model and your problem-solving skills and think through the decision for a second time. What would you do differently based on these considerations?

Faulty Implementation: Customer Service Is Often “Just Talk”

“My claim to fame, the only thing I’ve ever been really good at, is returning people’s phone calls every single day,” says Mark Powers. No doubt it is that kind of customer service that is the reason why Excelsior Roofing of San Francisco, founded by Powers’s grandfather over 100 years ago, is still in business.25

Just Talk. “Executives talk about the importance of responding to customers’ needs with top- notch customer service,” writes Wall Street Journal columnist Carol Hymowitz. “But often it’s just talk.”26

The problem with faulty customer service, however, is that sometimes the company may be the last to hear about it, but a great many other potential customers may hear of it by word of mouth. One study found that only 6% of shoppers who experienced a problem with a retailer contacted the company. However, 31% went on to tell friends, family, and colleagues what had happened. Indeed, if 100 people have a bad experience, a retailer stands to lose between 32 and 36 current or potential customers, according to the study.27

In the Shoes of Customers. Consultants working for one large telecommunications company encouraged customer service reps at one call center to share their problems and successes with each other and bring in customers to report their positive and negative experiences with the call

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EXAMPLE

center. To encourage customer reps to “step inside the shoes of customers,” the consultants also presented a weekly award of a pair of baby shoes to the employee who solved the most customer problems.28

YOUR CALL We’re all accustomed to pumping our own gas and doing our own banking through ATMs and online. Now many retailers have moved toward self-service checkout lanes, as is done by some Home Depot stores, and the airlines with their self-check-in kiosks.29

Customer support. “I really need some help here.”

What do you think the self-serve trend means for customer service?

Evaluation One “law” in economics is the Law of Unintended Consequences—things happen that weren’t foreseen. For this reason, you need to follow up and evaluate the results of the decision.

What should you do if the action is not working? Some possibilities: Give it more time. You need to make sure employees, customers, and so on have had enough

time to get used to the new action. Change it slightly. Maybe the action was correct, but it just needs “tweaking”—a small change

of some sort. Try another alternative. If Plan A doesn’t seem to be working, maybe you want to scrap it for

another alternative. Start over. If no alternative seems workable, you need to go back to the drawing board—to

Stage 1 of the decision-making process.

Evaluation: The Boeing 787 Dreamliner, a Bet-the-Company Decision

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At a time when Boeing Co., the Chicago-headquartered aerospace giant, was losing business to its European rival Airbus and rising fuel costs were dramatically impacting the commercial airline industry, Boeing management made a bold decision: It would build a new medium-sized commercial jet, the 787 Dreamliner, its first new aircraft in 10 years, designed to fly faster than the competition and to consume 20% less fuel than similar-sized planes.

To achieve this, the 787 would feature more fuel-efficient engines and the fuselage would be built from plastic composite materials instead of aluminum. This would cut down on structural fatigue and corrosion, thereby reducing the number of inspections necessary and increasing the number of flights possible. “A light, strong plane is the big payoff for the huge technical risk Boeing is taking in crafting parts out of composites,” said one aerospace reporter.30

A Bumpy Ride. First planned for a summer 2007 launch, the date was revised for 2008. Then, in mid-2006, the company began encountering the first of many stories of bad news. The fuselage section had failed in testing, and engineers had discovered worrisome bubbles in its skin. The carbon-fiber wing was too heavy, adding to the plane’s overall weight. To hold costs down, Boeing had outsourced about 70% of the production to major suppliers acting as risk-sharing partners and playing a greater role in design and manufacturing. In return for investing more up front and taking on a share of the development costs, suppliers were given major sections of the airplane to build.31

By late 2007, however, it was apparent that suppliers were struggling to meet the exacting technological demands and deadlines, and their software programs were having trouble communicating with each other. In October, Boeing announced it would no longer meet its May 2008 target date and was postponing its first delivery to late fall of that year.32

Changing Dates. In early 2008, the company said the poor quality of outsourced work and the unprecedented amount of coordination among suppliers caused Boeing to shift much of the work back to its Everett, Washington, assembly plant, adding to delays. It said it was working to try to begin deliveries to customers not in late 2008 but in the first quarter of 2009, which then became the third quarter.33 Then in 2009, stress testing revealed new flaws around bolts inside the wings.34

Finally, after six delays and nearly 10 years of anticipation, the Dreamliner had its first flight, on December 15, 2009.35 Then, on October 28, 2011, after months of testing and three years behind schedule, the 787 was put into service for the first time, carrying 264 passengers for All Nippon Airways from Tokyo to Hong Kong.36

After More Problems, Finally Success. Then in January 2013, two Japanese-owned 787 Dreamliners experienced mysterious battery fires, resulting in the entire fleet of jetliners being grounded worldwide for 3½ months.37 Japan Airlines, after 10 years of ordering aircraft from Boeing, switched to Airbus.38 After addressing the battery problem, in March 2014 Boeing and a key supplier discovered hairline cracks while inspecting the wings of 42 yet-to-be-delivered Dreamliners, which forced changes to the manufacturing process.39

Through it all, as Boeing dealt with the additional setbacks, it continued to pick up orders as the airlines’ financial health improved in the wake of the Great Recession and as high fuel prices continued to drive demand for more efficient aircraft like the Dreamliner.40 Both Boeing and its rival Airbus ended 2013 with more than 10,000 jets of all kinds on order and have continued to

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boost aircraft production.41 In 2014, the U.S. company expected to deliver up to 725 of the aircraft. The plane was also cleared to fly longer oceanic and polar routes for as much as 5½ hours.42 Profits rose for Boeing’s commercial division two years in a row, and jet deliveries also surpassed those of Airbus for two years running.43 Still, the 787 was put into service three years late and cost twice the original estimate of $5 billion.44

Dream on. Boeing’s 787 Dreamliner.

The New “Dash Nine.” Boeing also began testing a larger version of the Dreamliner, the 787-9 (the “Dash Nine”), which is 20 feet longer than its predecessor, the 787-8; can hold about 40 more passengers; and fly a few hundred miles further without additional fuel.45 The company also learned from its earlier mishaps by bringing more of the Dash Nine’s manufacturing process back in-house after outsourcing it, to avoid the design and production missteps that plagued the earlier Dreamliner. The Dash Nine, which was on schedule to start deliveries in 2014, is Boeing’s “chance to make things right, and live up to the original promise of the program,” said an aerospace consultant.46

YOUR CALL How would you evaluate Boeing’s decisions? Do you think despite all the effort on the 787-8 that the Dash Nine could cause Boeing to fail to break even on the 787-8, with airlines switching their orders to the newer aircraft? Was this a risky bet-the-company decision?

What’s Wrong with the Rational Model? The rational model is prescriptive, describing how managers ought to make decisions. It doesn’t describe how managers actually make decisions. Indeed, the rational model makes some highly desirable assumptions—that managers have complete information, are able to make an unemotional analysis, and are able to make the best decision for the organization. (See Table 7.1, next page.) We all know that these assumptions are unrealistic.

TABLE 7.1 Assumptions of the Rational Model

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Nonrational Decision Making: Managers Find It Difficult to Make Optimal Decisions Nonrational models of decision making explain how managers make decisions; they assume that decision making is nearly always uncertain and risky, making it difficult for managers to make optimal decisions. The nonrational models are descriptive rather than prescriptive: They describe how managers actually make decisions rather than how they should. Two nonrational models are (1) satisficing and (2) intuition.

1. Bounded Rationality & the Satisficing Model: “Satisfactory Is Good Enough” During the 1950s, economist Herbert Simon—who later received the Nobel Prize—began to study how managers actually make decisions. From his research he proposed that managers could not act truly logically because their rationality was bounded by so many restrictions.47 Called bounded rationality, the concept suggests that the ability of decision makers to be rational is limited by numerous constraints, such as complexity, time and money, and their cognitive capacity, values, skills, habits, and unconscious reflexes. (See Figure 7.2.)

FIGURE 7.2 Some hindrances to perfectly rational decision making

Because of such constraints, managers don’t make an exhaustive search for the best alternative. Instead, they follow what Simon calls the satisficing model —that is, managers seek alternatives until they find one that is satisfactory, not optimal. While “satisficing” might seem to be a weakness, it may well outweigh any advantages gained from delaying making a decision until all information is in and all alternatives weighed.

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Nonrational decision making? Many cigarette smokers are capable of quitting, so why do they continue doing it—especially since they know it’s expensive and bad for their health? It’s not that they are especially tolerant of risk. Perhaps, some scientists suggest, it’s because they have poor self-control and “can’t resist the short-term pleasure despite the prospect of long-term disaster.”48 How do you deal with this kind of nonrational decision?

However, making snap decisions can also backfire. In the 1990s, for instance, Campbell Soup Co. tried to penetrate China’s soup market, where 20 billion servings are consumed a year (versus only 14 billion in the United States). But rather than research Chinese tastes and cooking customs, which would have revealed that most soups are made from scratch, the company simply exported its line of condensed soups—an example of satisficing. Wondering why they should pay for something that could be easily made from scratch and objecting to the can-like tastes of prepared soups, Chinese consumers rejected the Campbell product.49

2. The Intuition Model: “It Just Feels Right” Small entrepreneurs often can’t afford in- depth marketing research and so they make decisions based on hunches—their subconscious, visceral feelings. For instance, Ben Hugh, 32, decided to buy I Can Has Cheezburger?, a blog devoted to silly cat pictures paired with viewer-submitted quirky captions, when it linked to his own pet blog and caused it to crash from a wave of new visitors. Putting up $10,000 of his own money and acquiring additional investor financing, he bought the site for $2 million from the Hawaiian bloggers who started it. “It was a white-knuckle decision,” he said later. But he expanded the Cheezburger blog into an empire that now includes 53 sites.50

“Going with your gut,” or intuition, is making a choice without the use of conscious thought or logical inference.51 Intuition that stems from expertise—a person’s explicit and tacit knowledge about a person, situation, object, or decision opportunity—is known as a holistic hunch. Intuition based on feelings—the involuntary emotional response to those same matters—is known as automated experience. It is important to try to develop your intuitive skills because they are as important as rational analysis in many decisions.52 Some suggestions appear on the next page. (See Table 7.2.)

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As a model for making decisions, intuition has at least two benefits. (1) It can speed up decision making, useful when deadlines are tight.53 (2) It can be helpful to managers when resources are limited. A drawback, however, is that it can be difficult to convince others that your hunch makes sense. In addition, intuition is subject to the same biases as those that affect rational decision making, as we discuss in Section 7.5.54 Finally, says one senior executive, intuition is fine for start-ups but “often deceives CEOs as their businesses become more complex.”55 Still, we believe that intuition and rationality are complementary and that managers should develop the courage to use intuition when making decisions.56

TABLE 7.2 Guidelines for Developing Intuitive Awareness

Source: E. Sadler-Smith and E. Shefy, “The Intuitive Executive: Understanding and Applying Gut Feel in Decision Making,” Academy of Management Executive, November 2004, p. 88. Copyright © 2004 by Academy of Management. Reproduced with permission of Academy of Management via Copyright Clearance Center.

To what extent do you use intuition when making decisions? Are you curious about how you can improve your level of intuition? You can find out by taking Self-Assessment 7.2.

SELF-ASSESSMENT 7.2

Assessing Your Level of Intuition This survey is designed to assess the extent you use intuition in your current job. Go to connect.mheducation.com and take Self-Assessment 7.2. When you’re done, answer the following questions:

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1. Are you intuitive at work? Did the results surprise you? 2. What can you do to increase the amount of intuition you use at work? Describe. 3. What factors are inhibiting your use of intuition? What if anything can be done to eliminate these

hindrances?

Making Ethical Decisions What guidelines can I follow to be sure that decisions I make are not just lawful but ethical?

THE BIG PICTURE A graph known as a decision tree can help one make ethical decisions. In addition, one should be aware of “the magnificent seven” general moral principles for managers.

The ethical behavior of businesspeople has become of increasing concern in recent years, brought about by a number of events.

The Dismal Record of Business Ethics First were the business scandals of the early 2000s, from Enron to WorldCom, producing photos of handcuffed executives. “The supposedly ‘independent’ auditors, directors, accountants, and stock market advisers and accountants were all tarnished,” wrote Mortimer Zuckerman, editor-in-chief of U.S. News & World Report. “The engine of the people’s involvement, the mutual fund industry, was shown to be permeated by ripoff artists rigging the system for the benefit of insiders and the rich.”57 Then, as the Iraq war wore on, reports came back of sweetheart deals and gross abuses by civilian contractors working in Iraq war zones.

In 2007, it became apparent that banks and others in the financial industry had forsaken sound business judgment—including ethical judgments—by making mortgage loans (sub-prime loans) to essentially unqualified buyers, which led to a wave of housing foreclosures and helped push the country into a recession. Since then, the media have presented us with a display of Ponzi schemes (Bernard Madoff, Allen Stanford), insider trading (Sam Waksal, Raj Rajaratnam), and corporate sleaziness (work-stressed suicides at Apple’s China supplier Foxconn, a fatal accident at a Kentucky coal mine evading safety regulations), and similar matters.

Through it all, voices were being raised that American capitalism was not doing enough to help the poorer nations in the world. Companies in wealthier countries, Microsoft’s Bill Gates has urged, should focus on “a twin mission: making profits and also improving lives for those who don’t fully benefit from market forces.”58

All these concerns have forced the subject of right-minded decision making to the top of the agenda in many organizations. Indeed, many companies now have an ethics officer, someone trained about matters of ethics in the workplace, particularly about resolving ethical dilemmas. More and more

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companies are also creating values statements to guide employees as to what constitutes desirable business behavior.59 As a result of this raised consciousness, managers now must try to make sure their decisions are not just lawful but also ethical.60

Road Map to Ethical Decision Making: A Decision Tree Undoubtedly the greatest pressure on top executives is to maximize shareholder value, to deliver the greatest return on investment to the owners of their company. But is a decision that is beneficial to shareholders yet harmful to employees—such as forcing them to contribute more to their health benefits, as IBM has done—unethical? Harvard Business School Professor Constance Bagley suggests that what is needed is a decision tree to help with ethical decisions.61 A decision tree is a graph of decisions and their possible consequences; it is used to create a plan to reach a goal. Decision trees are used to aid in making decisions. Bagley’s ethical decision tree is shown on the next page. (See Figure 7.3.)

The one-to-one model. Blake Mycoskie built his shoe empire, Toms, by selling one pair of inexpensive shoes and giving another pair away to a needy person. Later he extended this model to sell eyeglasses. More recently he unveiled Toms coffee, the sales of which will be used to provide clean water for cooking, drinking, and sanitation for people lacking these essentials. Are you more inclined to buy from companies like Toms (or eyewear seller Warby Parker or luxury department store Nieman Marcus) that tie sales of their products to helping impoverished people around the world?

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FIGURE 7.3 The ethical decision tree: What’s the right thing to do?

Source: Reprinted by permission of Harvard Business Review. Exhibit from “The Ethical Leader’s Decision Tree,” by C. E. Bagley, February 2003. Copyright © 2003 by the Harvard Business School Publishing Corporation; all rights reserved.

When confronted with any proposed action for which a decision is required, a manager should ask the following questions:

1. Is the Proposed Action Legal? This may seem an obvious question. But, Bagley observes, “corporate shenanigans suggest that some managers need to be reminded: If the action isn’t legal, don’t do it.”

2. If “Yes,” Does the Proposed Action Maximize Shareholder Value? If the action is legal, one must next ask whether it will profit the shareholders. If the answer is “yes,” should you do it? Not necessarily.

3. If “Yes,” Is the Proposed Action Ethical? As Bagley, points out, though directors and top managers may believe they are bound by corporate law to always maximize shareholder value, the courts and many state legislatures have held they are not. Rather, their main obligation is to manage “for the best interests of the corporation,” which includes the interests of the larger community.

Thus, says Bagley, building a profitable-but-polluting plant in a country overseas may benefit the shareholders but be bad for that country—and for the corporation’s relations with that nation. Ethically, then, managers should add pollution-control equipment.

4. If “No,” Would It Be Ethical Not to Take the Proposed Action? If the action would not directly benefit shareholders, might it still be ethical to go ahead with it?

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Not building the overseas plant might be harmful to other stakeholders, such as employees or customers. Thus, the ethical conclusion might be to build the plant with pollution-control equipment but to disclose the effects of the decision to shareholders.

As a basic guideline to making good ethical decisions on behalf of a corporation, Bagley suggests that directors, managers, and employees need to follow their own individual ideas about right and wrong.62 There is a lesson, she suggests, in the response of the pension fund manager who, when asked whether she would invest in a company doing business in a country that permits slavery, responded, “Do you mean me, personally, or as a fund manager?” When people feel entitled or compelled to compromise their own personal ethics to advance the interests of a business, “it is an invitation to mischief.”63

To learn more about your own ethics, morality, and/or values (while also contributing to scientific research), go to www.yourmorals.org.64

Evidence-Based Decision Making & Analytics How can I improve my decision making using evidence-based management and business analytics?

THE BIG PICTURE Evidence-based decision making, which depends on an “attitude of wisdom,” rests on three truths. This section describes seven principles for implementing evidence-based management. We also describe why it is hard to bring this approach to bear on one’s decision making. Finally, we describe analytics and its three key attributes.

It was the jet that Boeing didn’t build that avoided what could have been possibly the worst disaster in the company’s history and gave the aircraft builder the opportunity to go in a new direction.

In late 2002, Boeing was desperately trying to figure out what kind of passenger airliner to build that would allow the company to effectively compete with its European rival Airbus. In October, Boeing executives met with several global airline representatives in Seattle. A Boeing manager drew a graph on a whiteboard, with axes representing cruising range and passenger numbers. Then he asked airline representatives to locate their ideal position on the graph. “The distribution of the data,” reports Time, “favored efficiency over speed—the exact opposite of what Boeing was thinking. Two months later, Boeing ditched plans for a high-speed, high-cost jetliner to embark on a new program”—what became the massive attempt to build the 787 Dreamliner.65

Evidence-Based Decision Making “Too many companies and too many leaders are more interested in just copying others, doing what they’ve always done, and making decisions based on beliefs in what ought to work rather than what actually works,” say Stanford professors Jeffrey Pfeffer and Robert Sutton. “They fail to face the hard facts and use the best evidence to help navigate the competitive environment.”66 This is what Boeing narrowly averted in that Seattle conference, when it was getting ready to spend billions of

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dollars trying to outcompete Airbus by building a faster aircraft. Companies that use evidence-based management—the translation of principles based on best evidence into organizational practice, bringing rationality to the decision-making process, as we defined it in Chapter 2—routinely trump the competition, Pfeffer and Sutton suggest.67

Seven Implementation Principles Pfeffer and Sutton identify seven implementation principles to help companies that are committed to doing what it takes to profit from evidence-based management:68

Treat your organization as an unfinished prototype. Leaders need to think and act as if their organization is an unfinished prototype that won’t be ruined by dangerous new ideas or impossible to change because of employee or management resistance. Example: Some Internet start-ups that find their original plan not working have learned to master “the art of the pivot,” to fail gracefully by cutting their losses and choosing a new direction—as did the founders of Fabulus, a review site and social network that attracted no users, and so they launched a high- end e-commerce site called Fab.com.69

No brag, just facts. This slogan is an antidote for over-the-top assertions about forthcoming products, such as “the deafening levels of managed hype across much of Silicon Valley,” as one reporter characterized it.70 Other companies, such as DaVita, which operates dialysis centers, take pains to evaluate data before making decisions. Google has used data to find out what makes a better boss.71

Evidence-based decisions. Google used evidence-based analysis to find out what makes a better boss. They found that what employees value most are even-keeled bosses who take an interest in employees’ lives and careers, who make time for oneon-one meetings, and who help people work through problems by asking questions instead of dictating answers. Would you expect a “just-the-facts” approach to be normal in high-tech businesses or unusual?

See yourself and your organization as outsiders do. Most managers are afflicted with “rampant optimism,” with inflated views of their own talents and prospects for success, which causes them to downplay risks and continue on a path despite evidence things are not working. “Having a blunt friend, mentor, or counselor,” Pfeffer and Sutton suggest, “can help you see and act on better evidence.”

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EXAMPLE

Evidence-based management is not just for senior executives. The best organizations are those in which everyone, not just the top managers, is guided by the responsibility to gather and act on quantitative and qualitative data and share results with others.

Like everything else, you still need to sell it. “Unfortunately, new and exciting ideas grab attention even when they are vastly inferior to old ideas,” the Stanford authors say. “Vivid, juicy stories and case studies sell better than detailed, rigorous, and admittedly dull data—no matter how wrong the stories or how right the data.” To sell an evidence-based approach, you may have to identify a preferred practice based on solid if unexciting evidence, then use vivid stories to grab management attention.

If all else fails, slow the spread of bad practice. Because many managers and employees face pressures to do things that are known to be ineffective, it may be necessary for you to practice “evidence-based misbehavior”—that is, ignore orders you know to be wrong or delay their implementation.

The best diagnostic question: What happens when people fail? “Failure hurts, it is embarrassing, and we would rather live without it,” the authors write. “Yet there is no learning without failure. . . . If you look at how the most effective systems in the world are managed, a hallmark is that when something goes wrong, people face the hard facts, learn what happened and why, and keep using those facts to make the system better.” From the U.S. civil aviation system, which rigorously examines airplane accidents, near misses, and equipment problems, to Home Depot deciding to close 400 of its U.S. stores after declining sales, evidence-based management makes the point that failure is a great teacher.72 This means, however, that the organization must “forgive and remember” people who make mistakes, not be trapped by preconceived notions, and confront the best evidence and hard facts.

What Makes It Hard to Be Evidence Based Despite your best intentions, it’s hard to bring the best evidence to bear on your decisions. Among the reasons:73 (1) There’s too much evidence. (2) There’s not enough good evidence. (3) The evidence doesn’t quite apply. (4) People are trying to mislead you. (5) You are trying to mislead you. (6) The side effects outweigh the cure. (Example: Despite the belief that social promotion in school is a bad idea— that is, that schools shouldn’t advance children to the next grade when they haven’t mastered the material—the side effect is skyrocketing costs because it crowds schools with older students, and angrier students, demanding more resources.) (7) Stories are more persuasive, anyway.

Evidence-Based Decision Making: “If People Are Your Most Important Assets, Why Would You Get Rid of Them?”

It’s an axiom of many managers that it’s often necessary to cut back on workers during economic downturns—or even in good times—because it helps to increase profitability or drive the company’s stock price higher. But Stanford professor Jeffrey Pfeffer, advocate for evidence-based management, takes issue with this assumption. “There is a growing body of academic research suggesting that firms incur big costs when they cut workers,” he writes.74

What Are the Costs of Layoffs? While agreeing that there are circumstances in which layoffs

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are necessary for a firm to survive (as when an industry is shrinking or competitors are resorting to cheaper overseas labor), Pfeffer suggests companies incur big costs when they cut their labor forces. He cites the direct and indirect costs of layoffs listed by University of Colorado professor Wayne Cascio in his book Responsible Restructuring: “severance pay; paying out accrued vacation and sick pay; outplacement costs; higher unemployment-insurance taxes; the cost of rehiring employees when business improves; low morale and risk-averse survivors; potential lawsuits, sabotage, or even workplace violence from aggrieved employees or former employees; loss of institutional memory and knowledge; diminished trust in management; and reduced productivity.”

Looking at the evidence, Pfeffer finds that firms that announce layoffs actually do not enjoy higher stock prices than their peers, either immediately or over time. Layoffs also don’t increase individual company productivity and, in fact, don’t even reliably cut costs (because companies often lose the best people first; there is lower morale among survivors, resulting in reduced customer service, innovation, and productivity; and remaining employees are spurred to look for other jobs once things improve).

The Most Successful Airline. Following the 9/11 tragedy in 2001, which coincided with the start of a recession, all U.S. airlines except one announced tens of thousands of layoffs. The exception was Southwest, which has never had an involuntary layoff in its 40-year history and which most Americans voted the most desirable brand in 2012.75 “If people are your most important assets,” Pfeffer quotes a former head of the airline’s human resources department, “why would you get rid of them?”

YOUR CALL Can you think of any instances of people being laid off unnecessarily? What is your evidence that it was not necessary?

In Praise of Analytics Perhaps the purest application of evidence-based management is the use of analytics , or business analytics, the term used for sophisticated forms of business data analysis. One example of analytics is portfolio analysis, in which an investment adviser evaluates the risks of various stocks. Another example is the time-series forecast, which predicts future data based on patterns of historical data.

Some leaders and firms have become exceptional practitioners of analytics. Gary Loveman, CEO of the Harrah’s gambling empire, wrote a famous paper, “Diamonds in the Data Mine,” in which he explained how data-mining software was used to analyze vast amounts of casino customer data to target profitable patrons.76 Marriott International, through its Total Hotel Optimization program, has used quantitative data to establish the optimal price for hotel rooms, evaluate use of conference facilities and catering, and develop systems to optimize offerings to frequent customers.77 To aid in recruitment, Microsoft studies correlations between its successful workers and the schools and companies they arrived from.78

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EXAMPLE

Analytics in Athletics: The Personal “Moneyball” Coach

Some pro basketball players have personal trainers and chefs, and now some even have their own personal statistician.

Justin Zormelo, 30, a graduate of Georgetown University and the founder of Best Ball Analytics, is described by The New York Times as “the go-to source for [basketball] players who want a private guide through the emerging world of advanced analytics.”79 He has worked with over 30 NBA clients, including Kevin Durant (Oklahoma Thunder), John Wall (Washington Wizards), and Rajon Rondo (Boston Celtics). Studying game films and poring over metrics, he provides data and advice such as whether players should take two dribbles instead of four or whether their shooting is off because they leave their feet too soon. Zormelo spends hours on his laptop computer, and his advice is as much informed by spreadsheets as by coaches’ playbooks.

Better Indicators of Player Success. Zormelo is the logical result of the whole Moneyball phenomenon. The film of that name, which starred Brad Pitt and supporting actor Jonah Hill and which received six 2012 Academy Award nominations, was adapted from a book by Michael Lewis, Moneyball: The Art of Winning an Unfair Game. The book described how the Oakland Athletics, one of the poorest teams in Major League Baseball (2002 payroll $41 million, versus the New York Yankees’ $126 million), managed to go to the playoffs five times in seven years against better-financed contenders. They accomplished this by avoiding the use of traditional baseball statistics and finding better indicators of player success in on-base percentage, slugging percentage, and the like. For a time, this creative use of analytics enabled managers of the California club to concentrate their limited payroll resources on draft picks who were primarily talented college players rather than veteran professionals.80

Analytics in the NBA & NFL. Since then the use of unusual analytics to find better ways to value players and strategies has found its way into other sports. In basketball, for instance, the Houston Rockets discovered they had allocated such a huge part of the payroll to superstars (Tracy McGrady, Yao Ming) that they couldn’t afford more stars. “So we went looking for nonsuperstars that we thought were undervalued,” says Daryl Morey, who was hired to rethink Rockets basketball.81 Looking at midlevel NBA players, he finally settled on forward Shane Battier, who doesn’t post many points, rebounds, assists, steals, or blocked shots but who applies a superior intelligence to an overview of the game that helps his teams produce winning records. (Battier was most recently with the Miami Heat.) Analytics has also spread to pro football, as successfully used by the San Francisco 49ers.82 Now it’s a tool adopted by individual players.

YOUR CALL Executives and personnel people in other lines of work are often like the old sports traditionalists, relying on resume, degree, years of experience, and even looks in evaluating job applicants. What other, more quantifiable measures might be used instead when hiring new college graduates?

Thomas H. Davenport and others at Babson College’s Working Knowledge Research Center studied 32 organizations that made a commitment to quantitative, fact-based analysis and found three key attributes among analytics competitors: use of modeling, having multiple applications, and support

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from top management.83

1. Use of Modeling: Going beyond Simple Descriptive Statistics Companies such as Capital One look well beyond basic statistics, using data mining and predictive modeling to identify potential and most profitable customers. Predictive modeling is a data-mining technique used to predict future behavior and anticipate the consequences of change. Thus, Capital One conducts more than 30,000 experiments a year, with different interest rates, incentives, direct-mail packaging, and other variables to evaluate which customers are most apt to sign up for credit cards and will pay back their debt.

2. Having Multiple Applications, Not Just One UPS (formerly United Parcel Service) applies analytics not only to tracking the movement of packages but also to examining usage patterns to try to identify potential customer defections so that sales-people can make contact and solve problems. More recently, it began testing whether UPS could be in the business of delivering direct mail, to serve as an alternative to marketing mail delivered by the U.S. Post Service.84 Analytics competitors “don’t gain advantage from one killer app [application], but rather from multiple applications supporting many parts of the business,” says Babson College’s Davenport.

3. Support from the Top “A companywide embrace of analytics impels changes in culture, processes, behavior, and skills for many employees,” says Davenport. “And so, like any major transition, it requires leadership from executives at the very top who have a passion for the quantitative approach.”

The Uses of “Big Data” A recent study suggests the world’s information will reach 40 zettabytes by 2020, a 50% growth over 2010 and equal to 57 times the number of grains of sand on all the beaches of the world.85 This has led to a concept known as Big Data, stores of data so vast that conventional database management systems cannot handle them and so very sophisticated analysis software and supercomputing-level hardware are required.86 Big Data includes not only data in corporate databases but also web-browsing data trails, social network communications, sensor data, and surveil-lance data.87 Attracting a lot of attention in science, business, medicine, and technology, the concept of Big Data has been dubbed “the next frontier for innovation, competition, and productivity.”88

Big Data analytics is the process of examining large amounts of data of a variety of types to uncover hidden patterns, unknown correlations, and other useful information. While Big Data analytics can be used to tackle large-scale problems such as how to make electricity grids and traffic flow more effective, it also has specific, practical uses in business.89 HP Labs researchers, for instance, used Twitter data to accurately predict box-office revenues of Hollywood movies.90 Business is also interested in analyzing online behavior “to create ads, products, or experiences that are most appealing to consumers—and thus most lucrative to companies,” says one technology journalist. “There’s also great potential to more accurately predict market fluctuations or react faster to shifts in consumer sentiment or supply chain issues.”91

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Serving you. This server farm, or data center, contains thousands of computers storing terabytes of information on everyone and everything—“Big Data” that can be subjected to data analytics to work on large- scale projects. With data centers like this, you can see why everything you enter online, whether via e-mail, Facebook, texting, or twittering, no matter how innocuous, can be stored and used later to try to sell you things. Are you okay with this?

Four General Decision-Making Styles How do I decide to decide?

THE BIG PICTURE Your decision-making style reflects how you perceive and respond to information. It could be directive, analytical, conceptual, or behavioral.

A decision-making style reflects the combination of how an individual perceives and responds to information. A team of researchers developed a model of decision-making styles based on the idea that styles vary along two different dimensions: value orientation and tolerance for ambiguity.92

Value Orientation & Tolerance for Ambiguity Value orientation reflects the extent to which a person focuses on either task and technical concerns or people and social concerns when making decisions. Some people, for instance, are very task focused at

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work and do not pay much attention to people issues, whereas others are just the opposite. The second dimension pertains to a person’s tolerance for ambiguity. This individual difference

indicates the extent to which a person has a high need for structure or control in his or her life. Some people desire a lot of structure in their lives (a low tolerance for ambiguity) and find ambiguous situations stressful and psychologically uncomfortable. In contrast, others do not have a high need for structure and can thrive in uncertain situations (a high tolerance for ambiguity). Ambiguous situations can energize people with a high tolerance for ambiguity.

When the dimensions of value orientation and tolerance for ambiguity are combined, they form four styles of decision making: directive, analytical, conceptual, and behavioral. (See Figure 7.4.)

FIGURE 7.4 Decision-making styles

1. The Directive Style: Action-Oriented Decision Makers Who Focus on Facts People with a directive style have a low tolerance for ambiguity and are oriented toward task and technical concerns in making decisions. They are efficient, logical, practical, and systematic in their approach to solving problems.

People with this style are action oriented and decisive and like to focus on facts. In their pursuit of speed and results, however, these individuals tend to be autocratic, to exercise power and control, and to focus on the short run.

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Fortune 500 restaurant CEO. Don Thompson is CEO of McDonald’s, a Fortune 500 company that has 32,000 restaurants worldwide and serves 68 million meals each day. A bright student, he holds a degree in electrical engineering from Purdue University. Because of racial stereotyping, African American leaders operate at a disadvantage, according to one study, with strong performance being misattributed to market factors outside their control or to humor or public speaking skills rather than to intellectual prowess.93 What kind of decision-making style would you expect Thompson to have?

2. The Analytical Style: Careful Decision Makers Who Like Lots of Information & Alternative Choices Managers with an analytical style have a much higher tolerance for ambiguity and are characterized by the tendency to overanalyze a situation. People with this style like to consider more information and alternatives than those following the directive style.

Analytic individuals are careful decision makers who take longer to make decisions but who also respond well to new or uncertain situations.

3. The Conceptual Style: Decision Makers Who Rely on Intuition & Have a Long-Term Perspective People with a conceptual style have a high tolerance for ambiguity and tend to focus on the people or social aspects of a work situation. They take a broad perspective to problem solving and like to consider many options and future possibilities.

Conceptual types adopt a long-term perspective and rely on intuition and discussions with others to acquire information. They also are willing to take risks and are good at finding creative solutions to problems. However, a conceptual style can foster an indecisive approach to decision making.

4. The Behavioral Style: The Most People-Oriented Decision Makers The behavioral style is the most people oriented of the four styles. People with this style work well with others and enjoy social interactions in which opinions are openly exchanged. Behavioral types are supportive, receptive to suggestions, show warmth, and prefer verbal to written information.

Although they like to hold meetings, people with this style have a tendency to avoid conflict and to be concerned about others. This can lead behavioral types to adopt a wishy-washy approach to decision making and to have a hard time saying no.

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Which Style Do You Have? Research shows that very few people have only one dominant decision-making style. Rather, most managers have characteristics that fall into two or three styles. Studies also show that decision-making styles vary across occupations, job level, and countries.94 There is not a best decision-making style that applies to all situations.

You can use knowledge of decision-making styles in three ways:

Know Thyself Knowledge of styles helps you to understand yourself. Awareness of your style assists you in identifying your strengths and weaknesses as a decision maker and facilitates the potential for self-improvement.

Influence Others You can increase your ability to influence others by being aware of styles. For example, if you are dealing with an analytical person, you should provide as much information as possible to support your ideas.

Deal with Conflict Knowledge of styles gives you an awareness of how people can take the same information and yet arrive at different decisions by using a variety of decision-making strategies. Different decision-making styles represent one likely source of interpersonal conflict at work.

What style of decision making do you prefer? Would you like to learn how to use all of the styles more effectively? The following self-assessment can help.

SELF-ASSESSMENT 7.3

What Is Your Decision-Making Style? This survey is designed to assess your decision-making style. Go to connect.mheducation.com and take Self-Assessment 7.3. When you’re done, answer the following questions:

1. What is your dominant decision-making style? 2. What are the pros and cons of your style? 3. Based on your results, what are some things you can do to incorporate aspects of your less dominant

styles into your decision making? Explain.

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Success. Russell Wilson, quarterback for the Seattle Seahawks, led his team to victory 48-3 over the Denver Broncos in the 2014 Super Bowl. As the leader of his team, a quarterback must make many decisions about what is the right way to success. If you were a quarterback, which of the four general decision-making styles do you think you would embody?

How to Overcome Barriers to Decision Making Trying to be rational isn’t always easy. What are the barriers?

THE BIG PICTURE Responses to a decision situation may take the form of four ineffective reactions or three effective reactions. Managers should be aware of nine common decision-making biases.

Do your moods influence your decisions? Do you, for instance, spend more when you’re sad and self- absorbed? That’s what one experiment found: When researchers exposed student participants to a sadness-inducing video clip about the death of a boy’s mentor, the students were inclined to offer more money for a product (a sporty-looking water bottle) than were other subjects who had watched a neutral clip.95

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Decision Making & Expectations about Happiness Not just the moods themselves but your expectations about how happy or unhappy you think future outcomes will make you perhaps also can influence your decisions. It seems that people expect certain life events to have a much greater emotional effect than in fact they do, according to Harvard University psychologist Daniel Gilbert, who has studied individual emotional barometers in decision making. College professors, for example, expect to be quite happy if they are given tenure and quite unhappy if they aren’t. However, Gilbert found those who received tenure were happy but not as happy as they themselves had predicted, whereas those denied tenure did not become very unhappy.

The expectation about the level of euphoria or disappointment was also found to be true of big- jackpot lottery winners and of people being tested for HIV infection. That is, people are often right when they describe what outcome will make them feel good or bad, but they are often wrong when asked to predict how strongly they will feel that way and how long the feeling will last. Even severe life events have a negative impact on people’s sense of well-being and satisfaction for no more than three months, after which their feelings at least go back to normal.96

Perhaps knowing that you have this “immune system” of the mind, which blunts bad feelings and smoothes out euphoric ones, can help make it easier for you to make difficult decisions.

How Do Individuals Respond to a Decision Situation? Ineffective & Effective Responses What is your typical response when you’re suddenly confronted with a challenge in the form of a problem or an opportunity? There are perhaps four ineffective reactions and three effective ones.97

Four Ineffective Reactions There are four defective problem-recognition and problem-solving approaches that act as barriers when you must make an important decision in a situation of conflict:

1. Relaxed Avoidance—“There’s No Point in Doing Anything; Nothing Bad’s Going to Happen.” In relaxed avoidance, a manager decides to take no action in the belief that there will be no great negative consequences. This condition, then, is a form of complacency: You either don’t see or you disregard the signs of danger (or of opportunity).

Example: Relaxed avoidance was vividly demonstrated in the months before the subprime mortgage meltdown, when banks made cheap housing loans to a lot of unqualified buyers, precipitating a huge financial crisis and drying up of credit. During that time, a lot of smart people in denial said not to worry, that the mortgage mess would be “contained.” They included many bank presidents and even Ben Bernanke, chairman of the Federal Reserve.98 One nationwide online survey has also found that investors’ forecasts of future returns go up after the stock market has risen and go down after it has fallen—complacency indeed.99

2. Relaxed Change—“Why Not Just Take the Easiest Way Out?” In relaxed change, a manager realizes that complete inaction will have negative consequences but opts for the first available alternative that involves low risk. This is, of course, a form of “satisficing”; the manager avoids exploring a variety of alternatives in order to make the best decision.

Example: Perhaps people really don’t like a lot of choices. In one experiment, 40% of customers stopped by a large assortment of jam jars (24) and only 30% by a small assortment (6)—but only 3%

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made a purchase in the first case versus 30% in the second.100

3. Defensive Avoidance—“There’s No Reason for Me to Explore Other Solution Alternatives.” In defensive avoidance, a manager can’t find a good solution and follows by (a) procrastinating, (b) passing the buck, or (c) denying the risk of any negative consequences. This is a posture of resignation and a denial of responsibility for taking action.

By procrastinating, you put off making a decision (“I’ll get to this later”).101 In passing the buck, you let someone else take the consequences of making the decision (“Let George do it”). In denying the risk that there will be any negative consequences, you are engaging in rationalizing (“How bad could it be?”). As one article states, deliberating on the matter of why no one at Penn State did more to pursue allegations that an assistant football coach was abusing young boys, “companies overlook internal problems that at best impede performance and at worst could bring down the entire organization.”102

Example: Defensive avoidance often occurs in firms with high turnover. Although some executives try to stop high performers from exiting by offering raises or promotions, others react defensively, telling themselves that the person leaving is not a big loss. “It’s psychologically threatening to those who are staying to acknowledge there’s a reason some people are leaving,” says the CEO of a corporate-psychology consulting company, “so executives often dismiss them as untalented or even deny that an exodus is occurring.”103 He mentions one financial-services company whose executives insisted turnover was low when in fact 50% of hundreds of new employees quit within years.

4. Panic—“This Is So Stressful, I’ve Got to Do Something—Anything—to Get Rid of the Problem!” This reaction is especially apt to occur in crisis situations. In panic, a manager is so frantic to get rid of the problem that he or she can’t deal with the situation realistically. This is the kind of situation in which the manager has completely forgotten the idea of behaving with “grace under pressure,” of staying cool and calm. Troubled by anxiety, irritability, sleeplessness, and even physical illness, if you’re experiencing this reaction, your judgment may be so clouded that you won’t be able to accept help in dealing with the problem or to realistically evaluate the alternatives.

Example: Not only panic but frequent worry and anxiety, of the sort experienced by poor people, can adversely affect decision making. For instance, shoppers at a New Jersey mall were asked to make decisions about how they would spend money when facing emergency expenses. When the expenses were large, the cognitive performance of low-income shoppers fell by 13 IQ points (equivalent to a lost night’s sleep), whereas the IQ levels of middle-income shoppers remained the same.104 “When you don’t have enough [money],” said one of the study authors, “it occupies your mind and takes away bandwidth [mental capacity] that you could use for other things.”105

Three Effective Reactions: Deciding to Decide In deciding to decide, a manager agrees that he or she must decide what to do about a problem or opportunity and take effective decision-making steps. Three ways to help you decide whether to decide are to evaluate the following:106

1. Importance—“How High Priority Is This Situation?” You need to determine how much priority to give the decision situation. If it’s a threat, how extensive might prospective losses or damage be? If it’s an opportunity, how beneficial might the possible gains be?

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EXAMPLE

2. Credibility—“How Believable Is the Information about the Situation?” You need to evaluate how much is known about the possible threat or opportunity. Is the source of the information trustworthy? Is there credible evidence?

3. Urgency—“How Quickly Must I Act on the Information about the Situation?” Is the threat immediate? Will the window of opportunity stay open long? Can actions to address the situation be done gradually?

Deciding to Decide: How Should a Paper Maker Reinvent Itself?

“Failure isn’t fatal, but failure to change might be,” legendary UCLA basketball coach John Wooden once said.107

In 2000, the paper industry was at its height, with 94 million tons of paper and paper-based packaging being produced. Then the computer revolution and the vogue phrase “the paperless office” really began to be felt, and the demand for paper plummeted. Paper companies such as 83- year-old family-owned Mohawk Fine Papers, located in a Civil War–era ax handle factory in Cohoes, New York, saw failure looming as companies cut back on paper for brochures, reports, and marketing materials. President Thomas D. O’Connor Jr. faced the dilemma of rescuing the firm founded by his grandfather.

Is This High-Priority? The first decision about how to handle the response—Should this be considered a high-priority matter?—was certainly much in evidence, as revenues slipped and operations at Mohawk’s 350,000-square-foot mill shrank from seven days a week to five and then to four. Clearly, this was a high-priority concern.

Is the Data Believable? The second decision—How believable is the information?—was reinforced in depressing numbers throughout the paper industry, with the decline in orders for newsprint and writing paper, which accounted for about 85% of the decrease in paper sales. The copy-machine paper business also shrank. Meanwhile, the U.S. government stepped up its campaign to “go paperless,” creating more government websites and permitting taxpayers to file income tax returns online.

How Fast Do We Need to Act? The answer to the final decision—How quickly should this information be acted on?—was evident in the speed of the preceding events. “For the first time in hundreds of years,” O’Connor said, “paper had to justify itself.”108 As the digital revolution appeared ready to wipe out Mohawk and every other paper company, in 2004, reports The Wall Street Journal, O’Connor made an extraordinary bet: His company decided to expand into the fine stationery business, borrowing millions of dollars to do so.109 It decided to take advantage of paper’s transformation from commodity to keepsake, supplying high-quality, highly profitable paper for personalized holiday cards, photo books, and announcements from Shutterfly, Minted.com, and others.

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YOUR CALL Today Mohawk’s sales, which first began declining in 1996, are way up. “We couldn’t just downsize and hope to survive,” O’Connor said later. “We knew we had to change our product completely.” With this knowledge in hindsight, how would you have handled O’Connor’s initial decisions about finding a new direction for the company?

Nine Common Decision-Making Biases: Rules of Thumb, or “Heuristics” If someone asked you to explain the basis on which you make decisions, could you even say? Perhaps, after some thought, you might come up with some “rules of thumb.” Scholars call them heuristics (pronounced “hyur-ris-tiks”)—strategies that simplify the process of making decisions.

Despite the fact that people use such rules of thumb all the time, that doesn’t mean they’re reliable. Indeed, some are real barriers to high-quality decision making (as we saw in the Manager’s Toolbox at the start of this chapter). Among those that tend to bias how decision makers process information are (1) availability, (2) representativeness, (3) confirmation, (4) sunk cost, (5) anchoring and adjustment, (6) overconfidence, (7) hindsight, (8) framing, and (9) escalation of commitment.110

1. The Availability Bias: Using Only the Information Available If you had a perfect on-time work attendance record for 9 months but then were late for work 4 days during the last 2 months because of traffic, shouldn’t your boss take into account your entire attendance history when considering you for a raise? Yet managers tend to give more weight to more recent behavior. This is because of the availability bias —managers use information readily available from memory to make judgments.

The bias, of course, is that readily available information may not present a complete picture of a situation. The availability bias may be stoked by the news media, which tends to favor news that is unusual or dramatic. Thus, for example, because of the efforts of interest groups or celebrities, more news coverage may be given to AIDS or to breast cancer than to heart disease, leading people to think the former are the bigger killers when in fact the latter is.

2. The Representativeness Bias: Faulty Generalizing from a Small Sample or a Single Event As a form of financial planning, playing state lotteries leaves something to be desired. When, for instance, in 2014 the Tennessee Powerball jackpot reached $259.8 million, the odds of winning it were put at 1 in 175,223,510.111 (A person would have a far greater chance of being struck by lightning.) Nevertheless, millions of people buy lottery tickets because they read or hear about a handful of fellow citizens who have been the fortunate recipients of enormous winnings. This is an example of the representativeness bias, the tendency to generalize from a small sample or a single event.

The bias here is that just because something happens once, that doesn’t mean it is representative— that it will happen again or will happen to you. For example, just because you hired an extraordinary sales representative from a particular university, that doesn’t mean that same university will provide an equally qualified candidate next time. Yet managers make this kind of hiring decision all the time.

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3. The Confirmation Bias: Seeking Information to Support One’s Point of View The confirmation bias is when people seek information to support their point of view and discount data that do not. Though this bias would seem obvious, people practice it all the time.

4. The Sunk-Cost Bias: Money Already Spent Seems to Justify Continuing The sunk-cost bias, or sunk-cost fallacy, is when managers add up all the money already spent on a project and conclude it is too costly to simply abandon it.

Most people have an aversion to “wasting” money. Especially if large sums have already been spent, they may continue to push on with an iffy-looking project to justify the money already sunk into it. The sunk-cost bias is sometimes called the “Concorde” effect, referring to the fact that the French and British governments continued to invest in the Concorde supersonic jetliner even when it was evident there was no economic justification for the aircraft.

5. The Anchoring & Adjustment Bias: Being Influenced by an Initial Figure Managers will often give their employees a standard percentage raise in salary, basing the decision on whatever the workers made the preceding year. They may do this even though the raise may be completely out of alignment with what other companies are paying for the same skills. This is an instance of the anchoring and adjustment bias, the tendency to make decisions based on an initial figure.

The bias is that the initial figure may be irrelevant to market realities. This phenomenon is sometimes seen in real estate sales. Before the 2008 crash in real estate markets, many homeowners might have been inclined at first to list their houses at an extremely high (but perhaps randomly chosen) selling price. These sellers were then unwilling later to come down substantially to match the kind of buying offers that reflected what the marketplace thought the house was really worth.

6. The Overconfidence Bias: Blind to One’s Own Blindness The overconfidence bias is the bias in which people’s subjective confidence in their decision making is greater than their objective accuracy. “Overconfidence arises because people are often blind to their own blindness,” says behavioral psychologist Daniel Kahneman. For instance, with experienced investment advisors whose financial outcomes simply depended on luck, he found “the illusion of skill is not only an individual aberration; it is deeply ingrained in the culture of the industry.”112 In general, he advises, we should not take assertive and confident people at their own evaluation unless we have independent reasons to believe they know what they’re talking about.

7. The Hindsight Bias: The I-Knew-It-All-Along Effect The hindsight bias is the tendency of people to view events as being more predictable than they really are, as when at the end of watching a game we decide the outcome was obvious and predictable, even though in fact it was not. Sometimes called the “I knew it all along” effect, this occurs when we look back on a decision and try to reconstruct why we decided to do something.

8. The Framing Bias: Shaping How a Problem Is Presented The framing bias is the tendency of decision makers to be influenced by the way a situation or problem is presented to them. For instance, customers have been found to prefer meat that is framed as “85% lean meat” instead of “15% fat,” although of course they are the same thing.113 Framing is important because how a problem is presented to us (the same idea comes from Democrats? Or Republicans?) may influence us to consider a certain solution simply because of the way it was framed.

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9. The Escalation of Commitment Bias: Feeling Overly Invested in a Decision If you really hate to admit you’re wrong, you need to be aware of the escalation of commitment bias, whereby decision makers increase their commitment to a project despite negative information about it. History is full of examples of heads of state (presidents Lyndon Johnson in Vietnam and George W. Bush in Iraq) who escalated their commitment to an original decision in the face of overwhelming evidence that it was producing detrimental consequences. A website called Swoopo.com capitalizes on this bias by offering a penny auction in which, say, a $1,500 laptop is offered for bidding starting at a penny and going up one cent at a time—but it costs bidders 60 cents to make a bid. “Once people are trapped into playing,” suggests one account about this form of bias, “they have a hard time stopping.”114

The bias is that what was originally made as perhaps a rational decision may continue to be supported for irrational reasons—pride, ego, the spending of enormous sums of money, and being “loss averse.” Indeed, scholars have advanced what is known as the prospect theory, which suggests that decision makers find the notion of an actual loss more painful than giving up the possibility of a gain.115 We see a variant of this in the tendency of investors to hold on to their losers but cash in their winners.

Group Decision Making: How to Work with Others How do I work with others to make things happen?

THE BIG PICTURE Group decision making has five potential advantages and four potential disadvantages. There are a number of characteristics of groups that a manager should be aware of as group problem-solving techniques.

The movies celebrate the lone heroes who, like Bruce Willis or Mark Wahlberg, make their own moves, call their own shots. Most managers, however, work with groups and teams (as we discuss in Chapter 13). Although groups don’t make as high-quality decisions as the best individual acting alone, research suggests that groups make better decisions than most individuals acting alone.116 Thus, to be an effective manager, you need to learn about decision making in groups.

Advantages & Disadvantages of Group Decision Making Because you may often have a choice as to whether to make a decision by yourself or to consult with others, you need to understand the advantages and disadvantages of group-aided decision making.

Advantages Using a group to make a decision offers five possible advantages.117 For these benefits to happen, however, the group must be made up of diverse participants, not just people who all think the same way.

Greater pool of knowledge. When several people are making the decision, there is a greater

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pool of information from which to draw. If one person doesn’t have the pertinent knowledge and experience, someone else might.

Different perspectives. Because different people have different perspectives—marketing, production, legal, and so on—they see the problem from different angles.

Intellectual stimulation. A group of people can brainstorm or otherwise bring greater intellectual stimulation and creativity to the decision-making process than is usually possible with one person acting alone.

Better understanding of decision rationale. If you participate in making a decision, you are more apt to understand the reasoning behind the decision, including the pros and cons leading up to the final step.

Deeper commitment to the decision. If you’ve been part of the group that has bought into the final decision, you’re more apt to be committed to seeing that the course of action is successfully implemented.

Disadvantages The disadvantages of group-aided decision making spring from problems in how members interact.118

A few people dominate or intimidate. Sometimes a handful of people will talk the longest and the loudest, and the rest of the group will simply give in. Or one individual, such as a strong leader, will exert disproportional influence, sometimes by intimidation. This cuts down on the variety of ideas.

Groupthink. Groupthink occurs when group members strive to agree for the sake of unanimity and thus avoid accurately assessing the decision situation. Here the positive team spirit of the group actually works against sound judgment.119

Satisficing. Because most people would just as soon cut short a meeting, the tendency is to seek a decision that is “good enough” rather than to push on in pursuit of other possible solutions. Satisficing can occur because groups have limited time, lack the right kind of information, or are unable to handle large amounts of information.120

Goal displacement. Although the primary task of the meeting may be to solve a particular problem, other considerations may rise to the fore, such as rivals trying to win an argument. Goal displacement occurs when the primary goal is subsumed by a secondary goal.

What Managers Need to Know about Groups & Decision Making If you’re a manager deliberating whether to call a meeting for group input, there are four characteristics of groups to be aware of:

1. They Are Less Efficient Groups take longer to make decisions. Thus, if time is of the essence, you may want to make the decision by yourself. Faced with time pressures or the serious effect of a decision, groups use less information and fewer communication channels, which increases the probability of a bad decision.121

2. Their Size Affects Decision Quality The larger the group, the lower the quality of the

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decision.122 Some research says that seven people is the optimal size.123 Others suggest five is best.124 (An odd number is also considered best, when the group uses majority rules.)

3. They May Be Too Confident Groups are more confident about their judgments and choices than individuals are. This, of course, can be a liability because it can lead to groupthink.

4. Knowledge Counts Decision-making accuracy is higher when group members know a good deal about the relevant issues. It is also higher when a group leader has the ability to weight members’ opinions.125 Depending on whether group members know or don’t know one another, the kind of knowledge also counts. For example, people who are familiar with one another tend to make better decisions when members have a lot of unique information. However, people who aren’t familiar with one another tend to make better decisions when the members have common knowledge.126

Different perspectives or groupthink? A diversified team can offer differing points of view, as well as a greater pool of knowledge and intellectual stimulation. Or it can offer groupthink and satisficing. What has been your experience as to the value of decision making in the groups you’ve been in?

Remember that individual decisions are not necessarily better than group decisions. As we said, although groups don’t make as high-quality decisions as the best individual acting alone, groups generally make better decisions than most individuals acting alone. Some guidelines to using groups are presented on the next page. (See Table 7.3.)

In general, group decision making is more effective when members feel that they can freely and safely disagree with each other. This belief is referred to as minority dissent, dissent that occurs when a minority in a group publicly opposes the beliefs, attitudes, ideas, procedures, or policies assumed by the majority of the group.127 Minority dissent is associated with increased innovation within groups.128 Do your teams at school or work allow minority dissent? If not, what can be done to

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increase its existence? Self-Assessment 7.4 (next page) can help answer these questions.

TABLE 7.3 When a Group Can Help in Decision Making: Three Practical Guidelines These guidelines may help you as a manager decide whether to include people in a decision-making process and, if so, which people.

Source: Derived from George P. Huber, Managerial Decision Making (Glenview, IL: Scott Foresman, 1980), p. 149.

SELF-ASSESSMENT 7.4

Assessing Participation in Group Decision Making The following survey measures minority dissent, participation in group decision making, and satisfaction with a group. Go to connect.mheducation.com and take Self-Assessment 7.4. When you’re done, answer the following questions:

1. What is the level of minority dissent in the group, and to what extent are you satisfied with being a member of this group?

2. Use the three lowest items that measure minority dissent to answer the following question: What can you do to increase the level of minority dissent in this group? Be specific.

3. Why do you think many groups muzzle the level of minority dissent?

Toward consensus. Working to achieve cooperation in a group can tell you a lot about yourself. How well do you handle the negotiation process? What do you do when you’re disappointed in a result achieved by

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consensus?

Group Problem-Solving Techniques: Reaching for Consensus Using groups to make decisions generally requires that they reach a consensus, which occurs when members are able to express their opinions and reach agreement to support the final decision. More specifically, consensus is reached “when all members can say they either agree with the decision or have had their ‘day in court’ and were unable to convince the others of their viewpoint,” says one expert in decision making. “In the final analysis, everyone agrees to support the outcome.”129 This does not mean, however, that group members agree with the decision, only that they are willing to work toward its success.

One management expert offers the following dos and don’ts for achieving consensus.130

Dos: Use active listening skills. Involve as many members as possible. Seek out the reasons behind arguments. Dig for the facts.

Don’ts: Avoid log rolling and horse trading (“I’ll support your pet project if you’ll support mine”). Avoid making an agreement simply to keep relations amicable and not rock the boat. Finally, don’t try to achieve consensus by putting questions to a vote; this will only split the group into winners and losers, perhaps creating bad feelings among the latter.

More Group Problem-Solving Techniques Decision-making experts have developed several group problem-solving techniques to aid in problem solving. Three we will discuss here are (1) brainstorming, (2) the Delphi technique, and (3) computer- aided decision making.

1. Brainstorming: For Increasing Creativity Brainstorming is a technique used to help groups generate multiple ideas and alternatives for solving problems.131 Developed by advertising executive A. F. Osborn, the technique consists in having members of a group meet and review a problem to be solved. Individual members are then asked to silently generate ideas or solutions, which are then collected (preferably without identifying their contributors) and written on a board or flip chart. A second session is then used to critique and evaluate the alternatives. (Incidentally, taking a brief stroll, even around the office, can significantly increase creativity.132)

A modern-day variation is electronic brainstorming, sometimes called brainwriting, in which members of a group come together over a computer network to generate ideas and alternatives.133 Technology has also turned the smartphone into a device that uses various apps to spur the thinking process and unblock creative juices.134

Some rules for brainstorming suggested by IDEO, a product design company, are shown below. (See Table 7.4.)

TABLE 7.4 Seven Rules for Brainstorming

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Source: R. Kreitner and A. Kinicki, Organizational Behavior, 10th ed., 2012, p. 353. These recommendations and descriptions were derived from B. Nussbaum, “The Power of Design,” BusinessWeek, May 17, 2004, pp. 86–94. Reprinted with permission of The McGraw-Hill Companies.

The benefit of brainstorming is that it is an effective technique for encouraging the expression of as many useful new ideas or alternatives as possible. That said, brainstorming also can waste time generating a lot of unproductive ideas, and it is not appropriate for evaluating alternatives or selecting solutions.135

2. The Delphi Technique: For Consensus of Experts The Delphi technique was originally designed for technological forecasting but now is used as a multipurpose planning tool. The Delphi technique is a group process that uses physically dispersed experts who fill out questionnaires to anonymously generate ideas; the judgments are combined and in effect averaged to achieve a consensus of expert opinion.

The Delphi technique is useful when face-to-face discussions are impractical. It’s also practical when disagreement and conflicts are likely to impair communication, when certain individuals might try to dominate group discussions, and when there is a high risk of groupthink.136

3. Computer-Aided Decision Making As in nearly every other aspect of business life, computers have entered the area of decision making, where they are useful not only in collecting information more quickly but also in reducing roadblocks to group consensus.

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PRACTICAL ACTION

Traditional group work. This photo shows the kind of traditional arrangement we expect of groups— colleagues are seated close together in clusters to better focus on their particular projects. Do you think you’d rather work in this type of arrangement than in one that is more individually based? Why or why not?

A decision support system, for instance, is a computer-based information system that provides a flexible tool for analysis and helps managers focus on the future. This kind of computer-based system aims to produce collected information known as business intelligence, gathering data from a wide range of sources in a way that can be interpreted by humans and used to support better business decision making. Example: American Airlines developed a decision support system called the yield management system that helps managers decide how much to overbook and how to set prices for each seat so that a plane is filled and profits are maximized.137

How Exceptional Managers Make Decisions

“Failure is a great teacher.” That was one of the life lessons expressed by one CEO who has had to make thousands of decisions during his career.138 Failure is always a possibility, but that possibility can’t stop one from making decisions. And you can probably always learn from the result.

“When Should I Make a Decision & When Should I Delay?” Often you want to stay open- minded before making a decision. But sometimes that can just be a cover for procrastination. (After all, not making a decision is in itself a kind of decision.) How do you know when you’re keeping an open mind or are procrastinating? Here are some questions to consider:139

Understanding: “Do I have a reasonable grasp of the problem?” Comfort level about outcome: “Would I be satisfied if I chose one of the existing

alternatives?”

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Future possible alternatives: “Would it be unlikely that I could come up with a better alternative if I had more time?”

Seizing the opportunity: “Could the best alternatives disappear if I wait?” If you can answer “yes” to those questions, you almost certainly should decide now, not wait.

“Are There Guidelines for Making Tough Choices?” “On a daily and weekly basis we can be faced with making hundreds of decisions,” says management consultant Odette Pollar. “Most of them are small, but the larger ones where more is at stake can be truly painful.” Here are some ways she suggests making decision making easier:140

Decide in a timely fashion: “Rarely does waiting significantly improve the quality of the decision,” says Pollar. In fact, delay can result in greater unpleasantness in loss of money, time, and peace of mind.

Don’t agonize over minor decisions: Postponing decisions about small problems can mean that they simply turn into large ones later.

Separate outcome from process: Does a bad outcome mean you made a bad decision? Not necessarily. The main thing is to go through a well-reasoned process of choosing among alternatives, which increases the chances of success. But even then you can’t be sure there will always be a positive outcome.

Learn when to stop gathering facts: “Gather enough information to make a sound decision,” suggests Pollar, “but not all the possible information.” Taking extra time may mean you’ll miss a window of opportunity.

When overwhelmed, narrow your choices: Sometimes there are many good alternatives, and you need to simplify decision making by eliminating some options.

YOUR CALL Some experts suggest that to help make good decisions you should “Be visual,” using more pictures and diagrams, and “Walk and point” to stimulate areas of the brain that control memory, emotion, and problem solving.141 What have you found aids you in making decisions?

Key Terms Used in This Chapter analytics anchoring and adjustment bias availability bias Big Data Big Data analytics bounded rationality brainstorming confirmation bias consensus deciding to decide

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decision decision making decision-making style decision support system decision tree defensive avoidance Delphi technique diagnosis electronic brainstorming escalation of commitment bias ethics officer framing bias goal displacement groupthink heuristics hindsight bias intuition minority dissent nonrational models of decision making opportunities overconfidence bias panic predictive modeling problems rational model of decision making relaxed avoidance relaxed change representativeness bias satisficing model sunk-cost bias

Key Points

7.1 Two Kinds of Decision Making: Rational & Nonrational • A decision is a choice made from among available alternatives. Decision making is the

process of identifying and choosing alternative courses of action. Two models managers follow in making decisions are rational and nonrational.

• In the rational model, there are four steps in making a decision: Stage 1 is identifying the problem or opportunity. A problem is a difficulty that inhibits the achievement of goals. An opportunity is a situation that presents possibilities for exceeding existing goals. This is a

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matter of diagnosis—analyzing the underlying causes. Stage 2 is thinking up alternative solutions. Stage 3 is evaluating the alternatives and selecting a solution. Alternatives should be evaluated according to cost, quality, ethics, feasibility, and effectiveness. Stage 4 is implementing and evaluating the solution chosen. The rational model of decision making assumes managers will make logical decisions that will be the optimum in furthering the organization’s best interests. The rational model is prescriptive, describing how managers ought to make decisions.

• Nonrational models of decision making assume that decision making is nearly always uncertain and risky, making it difficult for managers to make optimum decisions. Two nonrational models are satisficing and intuition. (1) Satisficing falls under the concept of bounded rationality—that is, that the ability of decision makers to be rational is limited by enormous constraints, such as time and money. These constraints force managers to make decisions according to the satisficing model—that is, managers seek alternatives until they find one that is satisfactory, not optimal. (2) Intuition is making choices without the use of conscious thought or logical inference. The sources of intuition are expertise and feelings.

7.2 Making Ethical Decisions • Corporate corruption has made ethics in decision making once again important. Many

companies have an ethics officer to resolve ethical dilemmas, and more companies are creating values statements to guide employees as to desirable business behavior.

• To help make ethical decisions, a decision tree—a graph of decisions and their possible consequences—may be helpful. Managers should ask whether a proposed action is legal and, if it is intended to maximize shareholder value, whether it is ethical—and whether it would be ethical not to take the proposed action.

7.3 Evidence-Based Decision Making & Analytics • Evidence-based management means translating principles based on best evidence into

organizational practice. It is intended to bring rationality to the decision-making process. • Scholars Jeffrey Pfeffer and Robert Sutton identify seven implementation principles to help

companies that are committed to doing what it takes to profit from evidence-based management: (1) treat your organization as an unfinished prototype; (2) “no brag, just facts”; (3) see yourself and your organization as outsiders do; (4) have everyone, not just top executives, be guided by the responsibility to gather and act on quantitative and qualitative data; (5) you may need to use vivid stories to sell unexciting evidence to others in the company; (6) at the very least, you should slow the spread of bad practices; and (7) you should learn from failure by using the facts to make things better.

• Applying the best evidence to your decisions is difficult, for seven reasons: (1) There’s too much evidence. (2) There’s not enough good evidence. (3) The evidence doesn’t quite apply. (4) People are trying to mislead you. (5) You are trying to mislead you. (6) The side effects outweigh the cure. (7) Stories are more persuasive, anyway.

• Perhaps the purest application of evidence-based management is the use of analytics, or business analytics, the term used for sophisticated forms of business data analysis. Analytics competitors have three key attributes: (1) They go beyond simple descriptive statistics and use data mining and predictive modeling to identify potential and most profitable customers. (2) They don’t have just one principal application but rather use analytics in multiple

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applications. (3) The use of analytics is supported by top executives. • A new concept is that of Big Data, which requires handling by very sophisticated analysis

software and supercomputing-level hardware. Big Data includes not only data in corporate databases but also web-browsing data trails, social network communications, sensor data, and surveillance data.

• Big Data analytics is the process of examining large amounts of data of a variety of types to uncover hidden patterns, unknown correlations, and other useful information.

7.4 Four General Decision-Making Styles • A decision-making style reflects the combination of how an individual perceives and responds

to information. • Decision-making styles may tend to have a value orientation, which reflects the extent to

which a person focuses on either task or technical concerns versus people and social concerns when making decisions.

• Decision-making styles may also reflect a person’s tolerance for ambiguity, the extent to which a person has a high or low need for structure or control in his or her life.

• When the dimensions of value orientation and tolerance for ambiguity are combined, they form four styles of decision making: directive (action-oriented decision makers who focus on facts), analytical (careful decision makers who like lots of information and alternative choices), conceptual (decision makers who rely on intuition and have a long-term perspective), and behavioral (the most people-oriented decision makers).

7.5 How to Overcome Barriers to Decision Making • When confronted with a challenge in the form of a problem or an opportunity, individuals

may respond in perhaps four ineffective ways and three effective ones. • The ineffective reactions are as follows: (1) In relaxed avoidance, a manager decides to take

no action in the belief that there will be no great negative consequences. (2) In relaxed change, a manager realizes that complete inaction will have negative consequences but opts for the first available alternative that involves low risk. (3) In defensive avoidance, a manager can’t find a good solution and follows by procrastinating, passing the buck, or denying the risk of any negative consequences. (4) In panic, a manager is so frantic to get rid of the problem that he or she can’t deal with the situation realistically.

• The effective reactions consist of deciding to decide—that is, a manager agrees that he or she must decide what to do about a problem or opportunity and take effective decision-making steps. Three ways to help a manager decide whether to decide are to evaluate (1) importance —how high priority the situation is; (2) credibility—how believable the information about the situation is; and (3) urgency—how quickly the manager must act on the information about the situation.

• Heuristics are rules of thumb or strategies that simplify the process of making decisions. Some heuristics or barriers that tend to bias how decision makers process information are availability, confirmation, representativeness, sunk-cost, anchoring and adjustment, and escalation of commitment.

• (1) The availability bias means that managers use information readily available from memory to make judgments. (2) The confirmation bias means people seek information to support their own point of view and discount data that do not. (3) The representativeness bias is the tendency to generalize from a small sample or a single event. (4) The sunk-cost bias is when

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managers add up all the money already spent on a project and conclude that it is too costly to simply abandon it. (5) The anchoring and adjustment bias is the tendency to make decisions based on an initial figure or number. (6) The escalation of commitment bias describes when decision makers increase their commitment to a project despite negative information about it. An example is the prospect theory, which suggests that decision makers find the notion of an actual loss more painful than giving up the possibility of a gain.

7.6 Group Decision Making: How to Work with Others • Groups make better decisions than most individuals acting alone, though not as good as the

best individual acting alone. • Using a group to make a decision offers five possible advantages: (1) a greater pool of

knowledge; (2) different perspectives; (3) intellectual stimulation; (4) better understanding of the reasoning behind the decision; and (5) deeper commitment to the decision.

• It also has four disadvantages: (1) a few people may dominate or intimidate; (2) it will produce groupthink, when group members strive for agreement among themselves for the sake of unanimity and so avoid accurately assessing the decision situation; (3) satisficing; and (4) goal displacement, when the primary goal is subsumed to a secondary goal.

• Some characteristics of groups to be aware of are (1) groups are less efficient, (2) their size affects decision quality, (3) they may be too confident, and (4) knowledge counts—decision- making accuracy is higher when group members know a lot about the issues.

• Using groups to make decisions generally requires that they reach a consensus, which occurs when members are able to express their opinions and reach agreement to support the final decision.

• Three problem-solving techniques aid in problem solving. (1) Brainstorming is a technique used to help groups generate multiple ideas and alternatives for solving problems. A variant is electronic brainstorming, in which group members use a computer network to generate ideas. (2) The Delphi technique is a group process that uses physically dispersed experts who fill out questionnaires to anonymously generate ideas; the judgments are combined and in effect averaged to achieve a consensus of expert opinion. (3) In computer-aided decision making, decision support systems provide flexible tools for analysis and help managers focus on the future. This kind of computer-based system aims to produce collected information known as business intelligence, gathering data from a wide range of sources in a way that can be interpreted by humans and used to support better business decision making.

Understanding the Chapter: What Do I Know? 1. What are the steps in rational decision making? 2. What are two models of nonrational decision making? 3. What are four ethical questions a manager should ask when evaluating a proposed action to

make a decision? 4. Competitors using analytics have what three key attributes? 5. What is Big Data? 6. Describe the four general decision-making styles. 7. Discuss the four ineffective and three effective ways that individuals can respond to a decision

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situation. 8. Can you name the nine common decision-making biases? 9. What are the advantages and disadvantages of group decision making.

10. What are three group problem-solving techniques?

Management in Action

Companies Use Tracking Devices to Help Make Decisions Fan Zhang, the owner of Happy Child, a trendy Asian restaurant in downtown Toronto, knows that 170 of his customers went clubbing in November [2013]. He knows that 250 went to the gym that month, and that 216 came in from Yorkville, an upscale neighborhood. And he gleans this information without his customers’ knowledge, or ever asking them a single question.

Mr. Zhang is a client of Turnstyle Solutions Inc., a year-old local company that has placed sensors in about 200 businesses within a 0.7 mile radius in downtown Toronto to track shoppers as they move in the city.

The sensors, each about the size of a deck of cards, follow signals emitted from Wi-Fi-enabled smartphones. That allows them to create portraits of roughly 2 million people’s habits as they have gone about their daily lives, traveling from yoga studios to restaurants, to coffee shops, sports stadiums, hotels, and nightclubs.

“Instead of offering a general promotion that may or may not hit a nerve, we can promote specifically to the customer’s taste,” says Mr. Zhang. He recently emblazoned workout tank-tops with his restaurant’s logo, based on the data about his customers’ gym visits.

Turnstyle is at the forefront of a movement to track consumers who are continuously broadcasting their location from phones. Other start-ups, such as San Francisco–based Euclid Analytics Inc., use sensors to analyze foot-traffic patterns, largely within an individual retailer’s properties, to glean insight about customer behavior.

But Turnstyle is among the few that have begun using the technology more broadly to follow people where they live, work and shop. The company’s dense network of sensors can track any phone that has Wi-Fi turned on, enabling the company to build profiles of consumers’ lifestyles.

Turnstyle’s weekly reports to clients use aggregate numbers and don’t include people’s names. But the company does collect the names, ages, genders, and social media profiles of some people who log in with Facebook to a free Wi-Fi service that Turnstyle runs at local restaurants and coffee shops, including Happy Child. It uses that information, along with the wider foot traffic data, to come up with dozens of lifestyle categories, including yoga-goers, people who like theater, and hipsters.

A business that knows which sports team is most favored by its clients could offer special promotions on game days, says Turnstyle’s 27-year-old founder Chris Gilpin. Czehoski, a local restaurant, hired an 80s-music DJ for Friday nights after learning from Turnstyle that more than 60% of the restaurant’s Wi-Fi-enabled customers were over 30.

But as the industry grows in prominence, location trackers are bound to ignite privacy concerns. A company could, for example, track people’s visits to specialist doctors or hospitals and sell that data to marketers.

“Locations have meanings,” says Eloise Gratton, a privacy lawyer. Marketers can infer that a person has a certain disease from their Internet searches. A geolocation company can actually see the person visiting the doctor, “making the inference that the individual has this disease probably

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even more accurate,” she says. In the U.S., companies don’t have to get a consent before collecting and sharing most personal information, including people’s locations. A bill proposed by Minnesota Senator Al Franken would require consent before collecting location data. The U.S. Federal Trade Commission settled its first location privacy case in December, against an app developer that misled consumers into believing their location data wouldn’t be sold to marketers.

Even as they covet the data, stores and businesses recognize it is a touchy subject. “It would probably be better not to use this tracking system at all if we had to let people know about it,” says Glenna Weddle, the owner of Rac Boutique, a women’s clothing store that is a Turnstyle client. “It’s not invasive. It might raise alarms for no reason.”

Right now, the only way to opt-out of geolocation is to either switch off the Wi-Fi on a cellphone or make a request through a website of one the data companies (like Turnstyle) that has an opt-out option.

As these companies operate mostly behind the scenes, the nascent industry is keeping a close watch on Google Inc. and Apple. With their Android and iOS mobile operating systems, respectively, Google and Apple know the location of every customer’s Wi-Fi-enabled phone—far more location data than any start-up could access. The Silicon Valley giants aren’t allowing access to such data by outsiders. Both Google and Apple declined to comment.

Places where people didn’t think they were being watched are now repositories for collecting information, says Ryan Calo, assistant professor at the University of Washington School of Law. “Companies are increasingly able to connect between our online and offline lives,” he says.

FOR DISCUSSION 1. How do the tracking devices discussed in this case aid in making more rational and intuitive

decisions? Explain. 2. Which of the seven evidence-based decision-making implementation principles is consistent

with the use of tracking data for making decisions? 3. Use Figure 7.3 to assess the ethical orientation of what is being done by Turnstyle. Is the

company behaving ethically? 4. Which of the common decision-making biases are likely to be reduced by using location data

to make product promotion decisions? 5. What is your overall opinion about companies collecting and selling tracking data without

your consent? Explain.

Source: Excerpted from Elizabeth Dwoskin, “What Secrets Your Phone Is Sharing about You,” The Wall Street Journal, January 14, 2014, pp. B1, B4.

Legal/Ethical Challenge

Would You Agree to Wear a Sensor So Your Employer Can Track Your Movements & Conversations? The onset of Big Data and its application has prompted companies to ask employees to wear tracking sensors. For example, Bank of America Corp. decided to study whether face time among coworkers at call centers affected performance. Ninety employees were asked to wear sensors “for a few weeks that contained tiny sensors to record their movements and the tone of their

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conversations.” Results from the study showed that close-knit teams talked more together and had higher

productivity. The bank then decided to schedule workers for group breaks rather than individual breaks in order to foster more social interactions.

“But there’s a fine line between Big Data and Big Brother,” says The Wall Street Journal, “at least in the eyes of some employees, who might shudder at the idea of the boss tracking their every move. Sensor proponents, however, argue that smartphones and corporate ID badges already can transmit their owner’s location.”

A survey of 50 large- and medium-sized firms that have asked employees to wear sensors reveals that 10% of employees refused to wear the tracking device. Because of the backlash this might create for people, firms selling these devices have created “dummy badges” for people to wear. They are identical to the actual technology but don’t record or transmit data.

SOLVING THE CHALLENGE What would you do if your employer asked you to wear a tracking device for a few weeks? Choose your best response and explain why. Or refer to option 5 if the first four options are not satisfactory.

1. No problem, I would wear it. After all, results from the study might be used to improve the work environment.

2. No way. This violates my privacy. 3. I would do it only if I was assured that the company would only be given group-based data. In this way, the

company would not have information about specific individuals. 4. While I like the idea behind option 3, I don’t trust that my employer would not request or force the provider

of the technology to provide individual-level data. I wouldn’t do it. 5. Propose and explain other options.

Source: Excerpted from R. E. Silverman, “Tracking Sensors Invade the Workplace,” The Wall Street Journal, March 7, 2013, http://online.wsj.com/news/articles/SB10001424127887324034804578344303429080678d (accessed June 14, 2014).