Making Decisions in Organizations Chapter Ten Making Decisions in Organizations

© Copyright Prentice-Hall 2004 Decision-Making Chester Barnard (1938): The Functions of the Executive defines DM as ‘… largely techniques for narrowing choice.’ Herbert Simon (1960): The New Science of Management Decisions indicates 3 phases of DM Intelligence: identify the problem Design: develop and analyze course of action Choice: select a course of action © Copyright Prentice-Hall 2004

The Decision-Making Process © Copyright Prentice-Hall 2004

© Copyright Prentice-Hall 2004 Cultural Differences Recognizing problems Preference for decision-making unit Who makes the decisions? Time taken to make decisions © Copyright Prentice-Hall 2004

Organizational Decisions Programmed vs. Nonprogrammed Certain vs. Uncertain Top-down vs. Empowered © Copyright Prentice-Hall 2004

Programmed versus Nonprogrammed Programmed decisions are routine decisions, made by lower-level personnel, that rely on predetermined courses of action Nonprogrammed decisions are decisions for which there are no ready-made solutions. The decision maker confronts a unique situation in which the solutions are novel Strategic decisions are nonprogrammed decisions that have important long-term implications for the organization and are made by coalitions of high-level executives © Copyright Prentice-Hall 2004

Examples of Strategic Decisions © Copyright Prentice-Hall 2004

Certain versus Uncertain Usually expressed as statements of risk What makes an outcome risky is the probability of obtaining the desired outcome Objective probabilities are based on concrete, verifiable data Subjective probabilities are based on personal beliefs or hunches To make the best possible decisions in organizations, people seek to “manage” the risks they take © Copyright Prentice-Hall 2004

Top-down versus Empowered Top-down decision-making puts the power to make decisions in the hands of managers, leaving lower-level workers with little or no opportunity to make decisions Empowered decision-making allows employees to make the decisions required to do their jobs without seeking supervisory approval More likely to lead to effective decisions Helps build commitment to decisions © Copyright Prentice-Hall 2004

Decision-Making Approaches The Rational-Economic Model The Administrative Model Image Theory © Copyright Prentice-Hall 2004

The Rational-Economic Model Rational Decisions: Decisions that maximize the attainment of individual, group, or organizational goals Rational-Economic Model: The model of decision making according to which decision makers consider all possible alternatives to problems before selecting the optimal solution: MC=MR, EVA, MVA, ABC © Copyright Prentice-Hall 2004

The Administrative Model (Simon’s Bounded Rationality Model) A model of decision making that recognizes that decision makers may have a limited view of the problems confronting them Satisficing Decisions: Decisions made by selecting the first acceptable alternative as it becomes available Bounded Rationality: The idea that people lack the cognitive skills required to formulate and solve highly complex business problems in a completely objective, rational way (use rule of thumb) Bounded Discretion: The tendency to limit decision alternatives to those that fall within the bounds of current moral and ethical standards © Copyright Prentice-Hall 2004

Characteristics of Decisions Decision makers have a limited view of the problems confronting them Bounded rationality Decision makers consider solutions as they become available Satisficing Decision makers face time constraints Decision makers are sensitive to political “face saving” pressure © Copyright Prentice-Hall 2004

© Copyright Prentice-Hall 2004 The Social Model A model of decision making that recognizes that decision makers are influenced by social processes Asch: Provides evidence of human irrationality Staw: Escalation of commitment © Copyright Prentice-Hall 2004

Escalation of Commitment The tendency for individuals to continue to support previously unsuccessful courses of action because they have sunk costs invested in them © Copyright Prentice-Hall 2004

© Copyright Prentice-Hall 2004 Image Theory A theory of decision making that recognizes that decisions are made in an automatic, intuitive fashion based on actions that best fit their personal standards, goals, and plans for the future © Copyright Prentice-Hall 2004

Biases in Decision Making Framing effects refers to the tendency for people to make different decisions based on how a problem is presented to them Positive framing tends to make decision makers risk averse Negative framing tends to make decision makers risk seeking © Copyright Prentice-Hall 2004

Biases in Decision Making Heuristics are simple rules that are used to guide the decision maker through a complex array of decision alternatives Availability heuristic: The tendency for people to base their judgments on information that is readily available to them, although it may be inaccurate (more words begin with R or more words with third letter R?) Representativeness heuristic: The tendency to perceive others in stereotypical ways if they appear to be typical representatives of the category to which they belong (most likely: BBBBBBBB, BBBBGGGG, BGBBGGGB) © Copyright Prentice-Hall 2004

Participative Decision-Making Plans The Scanlon Plan: committees of labor and management trying to solve problems, rewards for ideas are divided equally Suggestion boxes Quality circles: small groups of volunteers to solve problems Self-managed teams Brainstorming: used for creative problem-solving Encourage all to participate: diversity and conflict © Copyright Prentice-Hall 2004

Group vs. Individual Decisions Advantages of group decision making Pooling of resources Specialization of labor Greater decision acceptance Disadvantages of group decision making Wasted time Group conflict Intimidation by group leaders Conclusion: neither groups nor individuals are always superior © Copyright Prentice-Hall 2004

Group vs. Individual Decisions © Copyright Prentice-Hall 2004

Group vs. Individual DM Process Social Decision Schemes (Davis, 1973) Majority wins Truth wins 2/3 majority wins (juries) Minority influence (Moskovici) Consistent Support from one other person in group Group Valence Model (Hoffman, 1979): Solution to problem with highest group valence is adopted © Copyright Prentice-Hall 2004

© Copyright Prentice-Hall 2004 Groupthink (Janis, 1971) When members of a group develop a very strong group spirit – high levels of cohesiveness – they sometimes become so concerned about not disrupting the like-mindedness of the group that they may be reluctant to challenge the group’s decisions When this happens, group members tend to isolate themselves from outside information, and the process of critical thinking deteriorates ‘Not Invented Here’ syndrome. © Copyright Prentice-Hall 2004

Group Polarization (Risky Shift) People believe they are more extreme than other group members: more fair, more liberal, etc. When they discover they are not the extreme, they shift Resulting from: Persuasive arguments Social comparison Diffusion of responsibility © Copyright Prentice-Hall 2004

© Copyright Prentice-Hall 2004 Avoiding Groupthink © Copyright Prentice-Hall 2004

Improving Group Decision Making The Stepladder Technique The Delphi Technique The Nominal Group Technique © Copyright Prentice-Hall 2004

© Copyright Prentice-Hall 2004 Stepladder Technique A technique for improving the quality of group decisions that minimizes the tendency for group members to be unwilling to present their ideas by adding new members to a group one at a time and requiring each to present his or her ideas independently to a group that already has discussed the problem at hand © Copyright Prentice-Hall 2004

Effectiveness of Stepladder Technique © Copyright Prentice-Hall 2004

© Copyright Prentice-Hall 2004 Delphi Technique A systematic way of collecting and organizing the opinions of several experts into a single decision © Copyright Prentice-Hall 2004

Nominal Group Technique A technique for improving group decisions in which small groups of individuals systematically present and discuss their ideas before privately voting on their preferred solution. The most preferred solution is accepted as the group’s decision © Copyright Prentice-Hall 2004

Computer-Based Approaches Electronic Meeting Systems: Involve holding teleconferences in which individuals in different locations participate in group conferences by means of telephone lines or direct satellite transmissions Computer-Assisted Communication: The sharing of information, such as text messages and data relevant to the decision, over computer networks Group Decision Support Systems (GDSS): Interactive computer-based systems that combine communication, computer, and decision technologies to improve the effectiveness of group problem-solving meetings © Copyright Prentice-Hall 2004