Managerial Decision Making

Every day, managers face problems that lack a clear solution or even a clear path to finding one. How they individually articulate these problems and search for solutions has a profound impact on whether or not they are able to achieve their desired goals either completely or even partially. So just put yourself in the shoes of these managers and think back to the last time you faced an important organizational decision. Now ask yourself which of the following scenarios best exemplifies the situation you found yourself in:

1. You had all the information needed to make the decision, including clarity of objectives, which allowed you to evaluate all possible alternatives objectively and reach an unbiased and fact-based decision.
2. You had some information available and some missing, but you trusted your intuition and experience and settled on the first alternative that seemed satisfactory or reasonable.
3. Conflicting objectives of various stakeholders influenced your decision making, and few facts were available to support the chosen alternative.
4. The decision-making process seemed haphazard and unpredictable, and the chosen alternative was an outcome of trial and error.

There is better than an even chance that you would claim that your decision-making process was fairly close to the first alternative. You may be swayed into grudgingly acknowledging that it also had some elements of the second alternative. You would perhaps also agree that all stakeholders impacted by the decision were made to believe in the rigor that went into the decision-making process and that external constituents, such as consultants, vetted the foundations of the methodology used to arrive at the decision. Deep inside your own conscience though, you will perhaps have a nagging suspicion that the third and the fourth options are closer to the truth, and you might recall hoping that somehow the facts you considered and presented then came together as a coherent, fact-based story.

This is not surprising at all. Every day, millions of presentations are made in the corporate world, each of which attempts to present the answer to a problem or share an opportunity. Most resemble one of the four decision-making scenarios described at the beginning of this chapter. These decisions can range from frequent operational choices to the relatively infrequent strategic choices that have a critical impact on the health and survival of an organization. Common examples of operational decisions include deciding if late fees should be waived for customers, selecting the number of employees to staff in the restaurant in anticipation of a high-traffic weekend, or ordering the appropriate quantity of raw materials in anticipation of future demand. Examples of strategic decisions, on the other hand, include long-term price formatting decisions, entry into new markets, and service workforce reduction during lean economic times.

The fact that the process of making an organizational decision has an impact on the likely success of the resulting outcome is well documented. Past evidence shows that as high as 50% of managerial decisions made in organizations either fail or are suboptimal.¹ In other words, the performance of an average manager is at best about as good as a flip of a coin—they are right one half of the time and partly or completely wrong the other half of the time. While the errors from some of these decisions are visible within a short span of time, others come to haunt organizations many years later. A lot can therefore change between the time a strategic choice is made and its ultimate outcome is realized. For example, the real impact of a loosening of the lending policy that qualifies less than creditworthy homeowners for mortgages may be seen years after the policy is first instituted.

The excuse that external constraints negatively influence the outcomes of even good decisions has limited face validity. There is evidence that suggests that, even in the presence of constraints, managers retain a substantial degree of control over their decisions. One very obvious support for this position comes from the observation that while some managers make poor choices leading to devastating consequences for the firm during extenuating external circumstances, others make much better choices and attain superior relative performance. Such variation could not exist if the external constraints alone were driving these choices. So pointing to the external circumstances and external adversities as the drivers of suboptimal decisions has little evidence to back it up.