Chapter 7 DECISION MAKING

Why study decision making? Tasks in making decisions Programmed and non-programmed decisions Decision making conditions Four decision making models Biases in making decisions Vroom and Yetton decision styles Cases and examples IKEA, Diageo, Iris, Risk Capital, Nokia, Google, Inamo, London Stock Exchange

Themes in decision making Figure 7.1 An overview of the chapter

Why study decision making? People make choices about limited resources Inputs (where to raise capital, who to employ) Transformation (how to make a product) Outputs (what price to charge) These choices affect the value added (if any) Significant choices are usually opaque, ambiguous and shaped by subjective interpretations.

(Iterative) tasks in making decisions Figure 7.2 Tasks in making decisions

Possible dilemmas in these tasks Iterative, not sequential May miss a step, or spend too much time on some Recognising problem Subjective, spotting opportunities (e.g. Iris) Setting and weighting criteria Subjective, and in itself a set of decisions (Figure 7.3) Developing alternatives Costly – how many to develop (Mintzberg, 1976)?

Deciding on a new mobile phone Figure 7.3 Illustrating the decision-making tasks – a new mobile phone

Types of decisions A commitment to action (use of resources) At all levels – focus here is organisational Visible decisions embedded in a wider process of decision making: before and after Strategic or operational Future directions or current issues, for example Programmed or non-programmed Dependent or independent Influence of history and consequential links.

Programmed and non-programmed Programmed decisions (Simon, 1960) Familiar, structured problems and information known Resolve by procedures, rules, policies and quantitative analysis. Non-programmed decisions Unfamiliar, unique problem, information unclear and open to interpretation Resolution depends on judgement, intuition, negotiation and creativity – for example, Inamo.

Decision making conditions Certainty All information available (interest rates example) Risk Enough information to estimate (loans example) Uncertainty Goals clear, but lack information to decide action (e.g. competitors’ reactions) Ambiguity Goals AND how to reach them unclear (e.g. broad strategic issues where people disagree over mission).

Degree of uncertainty and decision-making type Figure 7.5 Degree of uncertainty and decision-making type

Dependent or independent Figure 7.6 Possible relationships between decisions Source: Making Management Decisions, 2nd ed., Prentice Hall, Hemel Hempstead (Cooke, S. and Slack, N. 1991) p. 24, Copyright © Pearson Education Ltd. 1991.

Decision making models Figure 7.7 Conditions favouring different decision processes Source: Based on Thompson (1967), p. 134.

Decision making models (Continued) Computational – rational Economic assumptions, maximising gains, full information, goals known and agreed Valuable when situation has these features – Google example. Judgemental – administrative/incremental Bounded rationality (Simon, 1960) – people process limited amount of information Satisficing – rather than maximising, people select the first option that is good enough Descriptive model of how people deal with non-programmed decisions. elel

Decision making models (Continued) Compromise – political How people make decisions when they disagree over ends and means Assumes that organisations made up of diverse interest groups (e.g. Pensco) Information ambiguous Decisions the result of bargaining and political behaviour among players.

Decision making models (Continued) Inspirational – garbage can (Cohen et al., 1972) Decisions require (PPS) Participants Problems Solutions. To produce a decision, they need to come together in a ‘choice opportunity’ – for example, a meeting. PPS are independent, and decisions get taken only when all three come together (even if randomly) in the ‘garbage can’ (a meeting). Plausible in highly uncertain environments? ennn

Biases in making decisions Prior hypothesis Select information which supports previous beliefs Representativeness Generalise from small sample Optimism Systematically understate costs, overstate benefits Illusion of control Overestimate chances of favourable outcome Escalating commitment Put in more resources despite evidence of failure Emotional attachment To people or things. SGeneralise from small sample temaiueesstitatesmin

Group decision making Vroom and Yetton (1973) developed a contingency model of decision making – that is, the extent to which it is wise to involve subordinates in decision depends on the circumstances. Section 7.7 outlines the five decision styles, and eight situational factors – Figure 7. 8.

Integrating themes Entrepreneurship In small firms decisions are more centralised, less formal, and more intuitive than in larger ones. Sustainability Research shows that firms aiming for sustainability need to ensure their decision processes support this aim. Internationalisation International managers constantly balance decisions favouring integration or local diversity. Governance and control Biases in decision processes strengthen case for effective governance systems.

Summary Making good decisions depends in part on recognising features of the choices to be made, especially: The distinction between programmed and non-programmed decisions The conditions of certainty, risk, uncertainty and ambiguity Four models of decision making Six common biases which lead to poor decisions. Ially,