1. B300a TUTORIAL WEEK SIX 1

2. 2 B300: Overview Decision makingStrategy Policy Organisation Business behaviour in a changing world

3. THIS TUTORIAL…. CHAPTER 11 -The Cognitive Perspective on Strategic Decision-Making by C. Schwenk CHAPTER 12 -The Impact of Organisational Culture on Approaches to Organisational Problem-Solving by P. Bate 3

4. CHAPTER 11 - The Cognitive Perspective on Strategic Decision-Making by C. Schwenk. In this chapter four topics are summarised : heuristics and biases, strategic assumptions, analogy, metaphor. These topics give us a potentially useful way in understanding decision-making and to solve strategic problems. 4

5. Heuristics are typically based on ‘what worked before will work again’. We have a vast array of heuristics to make our lives easier. Representativeness and anchoring are sometimes known as heuristics, "rules of thumb" that humans use to perform abstract reasoning in cognitively economical ways. They are innate and human-universal because they emerge from the same species-wide design. 5

6. Bias and heuristics Bias is a tendency to support or oppose a particular person or thing in an unfair way by allowing personal opinions to influence your judgment. Researchers have identified a number of heuristics or ‘rule of thumb’ which decision-maker use to simplify complex problems and a number of decisional biases which may have an impact on strategic decisions. Heuristics may provide short cuts in processing information. Heuristics are helpful, but they can also be too easy and can consequently make us complacent. 6

7. Heuristics and decision making Kahneman (1974) said heuristics are useful, but sometimes they lead to “severe and systematic error”. Strategic decisions are often influenced by judgments about the probability of certain types of changes in the environment.. Decision makers judge a future event to be likely if it is easy to recall past occurrences of the event. 7

8. Table of Selected Heuristics and Biases 8 BiasEffects AvailabilityJudgments of probability of easily recalled event distorted Selective perceptionExpectations may bias observations of variables relevant to strategy Illusory correlationEncourages belief that unrelated variables are correlated ConservatismFailure sufficiently to revise forecasts vases on new information. Law of small numbersOverestimation of the degree to which small samples are representative of populations Regression biasFailure to allow for regression to the mean Wishful thinkingProbability of desired outcomes judged to be inappropriately high Illusion of controlOverestimation of personal control over outcomes Logical reconstruction‘logical’ reconstruction of events which cannot be accurately recalled Hindsight biasOverestimation of predictability of past events Isolation effectdisregard of components that choice alternatives share, over focus on differences Groupthinkthe pressure to irrationally agree with others in strong team-based cultures Emotional amplificationexpect lots of emotion when an salient event's causes were abnormal or mutable Representativeness"like goes with like", the tendency to blindly classify objects based on surface

9. In summary the illusion of control, and other biases identified in this research may affect strategic decisions by restricting the range of strategic alternatives considered and the information used to evaluate these alternatives. It is likely that multiple biases affect strategic decision making and reinforce each other. 9

10. Cognitive maps Cognitive maps consist of concepts about aspects of the decision environment and beliefs about cause-and-effect relationships between them. Such maps serve as interpretive lenses which help decision-makers select certain aspects of an issue as important for diagnosis. Direct information search in organisations and cognitive maps may exist at the organisational level. They are discovered by organisation members and used as a basis for action. Cognitive maps may help researchers to describe more effectively the ways executives understand relations among industry factors, and to determine which factors are taken most seriously by executives in the formulation of their strategies. Cognitive maps may also help clarify the processes by which industry factors affect strategies. 10

11. Schemata Schemata is sometimes used in connection with cognitive maps. The distinction between them is not very clear! Schemata is a drawing that represents an idea or theory and makes it easier to understand.Schemata are evoked by cues in a problem-solving setting and they provide frames for problems which makes it unnecessary for decision-makers to diagnose completely each element of a new strategic problem. 11

12. Human cognitive limitations introduce bias into the development of strategic assumptions and may lead to simplification in strategic schemata. These biases and simplifications affect strategic decisions when decision-makers existing schemata are used in diagnosing and framing new strategic problems. Analysis of executives strategic schemata helps explain strategic choices in response to environmental and industry forces. 12

13. Analogy The process of drawing analogies seems to be very common when organisational actors are tying to understand an ambiguous or novel situation. Analogies are more likely to shape strategic problem formulations when they are shared by organisational members. In strategic decisions which involve a great deal of uncertainty and complexity, the use of simple analogies may mislead the decision makers to use analogies to define complex problems, and they may not recognise that there are critical differences between the analogies and the decision situations they face. 13

14. Strategic Problem Comprehension 14 Development of strategic schemata Application to particular strategic problems heuristics and biases Assumptions and cognitive maps Analogy and metaphor

15. The model is based in the assumption that there are two ways in which understanding of strategic problems can be achieved: 1 In order to comprehend some type of strategic problems, data may be carefully analysed and a new schema may be developed 2 Understanding may be achieved by applying a previously developed schema to the current strategic problem. This involves less diagnosis and information search. Mintzberg states that some case solutions are designed to deal with strategic problems. On other cases, preexisting solutions which were developed for other problems are applied to the problem. Mintzberg suggested that two fundamentally different thought processes underlay the activities of design and search. In this model, heuristics and biases affect the development of strategic assumptions and cognitive maps, which then affect the development of strategic schemata. 15

16. Speculations on the effects of cognitive heuristics and biases on strategic assumptions and cognitive maps provide the basis for hypotheses to guide future research, as follows: 1. Decision makers subject to the illusion of control will overestimate the causal role of their own actions in constructing their cognitive maps. 2.Cognitive heuristics and biases will reduce the number of variables included in decision makers cognitive maps. 3. Heuristics and biases will lead to a smaller of conflicting strategic assumptions on cognitive map when dealing with complex problems. 4. Decision makers who report greater number of recent successful business decisions will assign a larger causal role to their own action in their cognitive maps. 5.Differences in strategists’ personal experience and industry experience will affect their choice of analogies in constructing cognitive maps. 16

17. Conclusions Decision makers who report greater number of recent successful business decision will be more likely to define new strategic problems using analogies to situations in which they previously had a high level of personal control. Differences in the strategists’ personal experiences and industry experience will determine which cues are used in selecting analogies to define new strategic problems. A better understanding of strategists’ cognitive structures and process will provide a basis for better recommendations for improving strategic decision making. 17

18. CHAPTER 12 - The Impact of Organisational Culture on Approaches to Organisational Problem Solving by P. Bate In this chapter Bate examines how cultures impact upon decision making. People in organisations evolve in their daily interactions with one another a system of shared perspectives of ‘collectively’ held and sanctioned definitions of the situation’ which make up the culture of the organisations. 18

19. Culture creates our cognitive makeup. It: Provides us with a language; Provides us with important background knowledge; Provides us with ways of thinking about the world; Provides us with tools; Provides social and cognitive structures; Provides us with ways of solving problems. 19

20. What is culture? The term ‘culture’ can defined as the meaning or aspects of the conceptual structures which people hold in common and which define the social or organisational ‘reality’. 20

21. Research Studies measured the culture in 3 organisations. The task was to build up a picture from the data of how individuals defend aspects of their work situation, to ascertain from this which meaning or definitions were widely shared in the organisation. The main aim was to identify those aspects of each culture that had a strong impact on organisational problem-solving. They were identified as follows: unemotionality depersonalization subordination conservation isolationism antipathy Your tutor will explain these terms to you and will give examples relevant to your regional area. 21

22. Findings The findings from the three research studies support the view that organisational culture can shape patterns of organisational behaviour, and that culture orientations can constrain problem-solving behaviour. The table on the next slide suggests six basic organisational issues, in the form of questions, to which six cultural orientations are the imperfect??? solution. 22

23. 23 Basic Organisational IssuesCultural Responses how emotionally bound up do people becomes with others in the work setting? (affective orientation) Unemotionally How far do people attribute responsibility for personal problems to others, or to the system? (animate-inanimate orientation to causality) depersonalisation How do people respond to differences in position, role, power and responsibility? (hierarchical orientation) subordination How far are people willing to embark with others on new ventures? (change orientation) conservation How fare do people choose to work along or with through others? (individualist-collectives orientation) isolationism How do people in different interest group relate to each other? (unitary-pluralistic orientations) antipathy

24. WEEK 8 ACTIVITIES Please select from the following activities which could be undertaken by students at this stage: Activity Twelve (page 53 of the Decision Making Study Guide) Activity Thirteen (page 55 of the Decision Making Guide) 24

25. READING TO BE COMPLETED BY NEXT WEEK Please re-read pages 52 - 56 of the Decision Making Study Guide to refresh your study of Chapters eleven and twelve. Please read pages 209 - 232 (Chapters 13 and 14) of Decision Making for Business Text Book. If you have time, read pages 57 - 62 of the Decision Making Study Guide to prepare you for next week. 25