Decision Making Chapter 11 Gabriella Morzi, Jill Hodgins, Sai Tian

Chapter Overview Definitions Individual Decision Making Special Decision Circumstances Organizational Decision Making The Learning Organization Contingency Decision-Making Framework Closing Thoughts

Decision Making in Today’s Environment

Definitions Two major stages: Problem identification stage Problem solution stage Two categories of organizational decisions: Programmed decisions Non-programmed decisions

Individual Decision Making One manager decides on problem identification and problem solution Consists of: Rational approach Bounded rationality approach

Rational Approach Steps: 1.Monitor the decision environment 2.Define the decision problem 3.Specify decision objectives 4.Diagnose the problem 5.Develop alternative solutions 6.Evaluate alternatives 7.Choose the best alternative 8.Implement the chosen alternative

Rational Approach Framework

Example: Rational Decision Making Process Beginning: In this session, we have many perspectives and models to introduce Goal: To help the class understand this session and to have a better mark for us as session leader Decision: Should I use a chart to help the class better understand how the decision session fits into our course? Solutions: Yes, because it can actually help and Trevor Loves it! Alternatives: NO ALTERNATIVE!

Remember the Rational Process? Overviewing the data and evaluating the chosen decision

Bounded Rationality Approach Less formal approach to individual decision making Consists of: 1.Constraints & trade-offs 2.Role of intuition

Bounded Rationality Approach Constraints and Trade-offs

Bounded Rationality Approach The role of intuition: Uses experience and judgment to make decisions A 2002 survey found that 45% of corporate executives say they rely more on instinct than on facts and figures to make business decisions New research dictates that most managers are making decisions with intuition and figures

Organizational Decision Making Many managers giving their input on problem identification and problem solution. Consists of: Management Science Carnegie Model Incremental Decision Process Garbage Can Model

Management Science Uses mathematical models for a quantitative approach Used when variables can be analyzed and measured Inputs variables to compare them and pick most the appropriate alternative i.e. Hotwire Hotels

Limitations Doesn’t account for human oversight & judgment Quantitative data might not be sufficient enough Important qualitative factors can’t be accounted for

Appropriate To Use When… Structure: mechanistic & vertical Goals: efficiency & productivity Culture: mission Environment: simple + stable Strategy: defender Innovation: incremental change Life Cycle Stage: formalization

Carnegie Model Decisions are made from several managers through a coalition Consensus is reached regarding what the main goals and problems are Coalition is important because Operational goals are ambiguous Difficult to agree on what problems to prioritize Limitations in human cognitive abilities

Limitations Coalition building: outcomes are subjected to organizational politics Managers have to do bargaining to convince others there’s a problem Leads to satisficing performance Problemistic search yields low quality solution

Appropriate To Use When… Structure: mechanistic & vertical Goal: efficiency & overall performance Culture: bureaucratic → mission Environment: complex + stable Strategy: reactor Innovation: incremental change Life Cycle Stage: elaboration

Incremental Process Examines the series of sequential events that takes place from the problem identification stage to the problems solution stage Usually small decisions made over a lengthy period of time to reach final outcome Decision interrupts Decision loops Moves through 3 stages: Identification Development Selection

Identification Phase Initial stage moves through 2 steps: 1.Recognition: manager becomes aware of a problem or opportunity. 2.Diagnosis: sufficient information has been gathered on the issue. Will move further systematically or informally depending on severity.

Development Phase Solution starts forming Search procedures are used if this problem has come up before A custom solution is made if it’s a new problem; trial and error

Selection Phase Solution that is feasible is picked Final authorization is required 3 methods to picking: Judgment Analysis Bargaining

Limitations Can be very time consuming (i.e decision loops) Employees can become frustrated and discouraged if higher level management doesn’t authorize final decision

Appropriate To Use When… Structure: organic & horizontal Goals: overall performance, growth, innovation Culture: adaptability Environment: simple + unstable Strategy: prospector Innovation: radical change Life Cycle Stage: collectivity

The Learning Organization Approaches are used when there is a heavy level of uncertainty in both the problem identification and problem solution. Consists of: Combining Carnegie & Incremental Garbage Can Model

Carnegie & Incremental Combining of the 2 approaches Carnegie is useful in problem identification stage; coalition agrees which problems to prioritize Incremental is useful in problem solution stage; take small steps and compare outcomes i.e MediaNet Digital

Appropriate To Use When… Structure: organic & horizontal Culture: clan Environment: unstable + complex Innovation: radical change

The Garbage Can Model Focuses on whole organization and flows or patterns of ongoing decision making process Describes decision making processes, but isn’t really a tool Shows relationship between 3 concepts: Organized Anarchy Streams of Events Consequences

Organized Anarchy Characterized by: Problematic preferences Unclear, poorly understood technology Turnover

Streams of Events 4 streams: Problems Potential solutions Participants Choice opportunities

Consequences 4 specific consequences: Solutions proposed for non-existent problems Choices made, but no problems solved Problems persist without being solved A few problems are solved

When, Where or Why??? Environment unstable + complex = uncertain Goals effectiveness, innovation Strategy differentiation Structure Learning organization extremely organic, horizontal Life Cycle Stage entrepreneurial stage Culture clan culture or adaptability

Preventative Measures: Define goals Add some structure; collaborative managerial role Strong interaction with external environment to make knowledgeable, relevant decisions Use clan controls and develop a strong clan culture, with dynamic, charismatic leadership

Contingency Decision-Making Framework

Consists of 2 Dimensions: Problem consensus Technical knowledge

Problem Consensus The degree to which managers agree on: 1.What the problem or the possible opportunity is 2.What outcomes, goals and objectives to focus on

Technical Knowledge The degree to which managers understand and agree on: 1.How to solve problems and reach goals 2.The methods or tools available

Special Decision Cricumstances Can Include: High-velocity environment Decision mistakes and learning Escalating commitment

High-Velocity Environment The rate of competitive and technological change is so extreme that market data is either unavailable or obsolete Strategic windows open and shut quickly, perhaps within a few months The cost of poor decisions can result in failure to meet company goals

High-Velocity Environment Point-Counterpoint: A tool that helps managers make decisions in a limited time: Divides decision makers into 2 groups and assigns them different, often competing, responsibilities The groups develop and exchange proposals and debate options until they arrive at a common set of understandings ensuring diverse opinions are considered

Decision Mistakes and Learning Decisions can result in many errors, especially when made in conditions of great uncertainty Decision makers should see mistakes as an opportunity to learn i.e. Student/professor feedback loop

Escalating Commitment Commit to a mistake, even when its failing Tends to do more harm than good Decision makers can’t accept failure

Closing Thoughts Decision making has many facets and is not a perfect process Social processes play a large role in decision making Degree of certainty & agreement determine best approaches to decision making