1. Chapter 15 Decision Making and Organizational Learning

2. Chapter Objectives
Differentiate between nonprogrammed and programmed decisions and explain why nonprogrammed decision making is a complex, uncertain process
Explain the difference between the two main models of decision making and describe which is the most realistic
Discuss the main sources of error in decision making

3. Chapter Objectives
Describe the advantages and disadvantages of group decision making and explain the techniques that can be used to improve it
Understand how organization learning can improve decision making and explain the steps involved in creating a learning organization

4. Opening Case: A Big Turnaround in Nike’s Decision Making
In what ways has decision-making at Nike changed?
Decisions originating from design team
Market changes
Alternative sports shoes
Shoes for urban wear
New competition
Shift to team-based decision-making
The opening case describes how Nike was forced to change its decision making format to stay competitive in the market place. Initially, the company’s managers and designers were convinced that they knew what customers wanted and needed.
However, new competitors entered the market and offered alternative kinds of sports shoes targeted for specific market segments like skateboarders, soccer players, or power walkers. Nike had no shoes in those segments.
Nike also failed to notice that consumers wanted performance shoes for walking and backpacking and dark blue and black shoes for city wear. At first, Nike hired Gordon McFadden to change the way decisions were made. McFadden recommended taking over small companies with specializations in the areas Nike was missing. But because the designers resisted changing, McFadden quit.
Eventually, Nike realized it had to get into smaller markets and it acquired ColeHaan and Hurley. Then, Phil Knight decided on a new way to design shoes for specialized niche markets. Rather than grouping all designers together, he split them into teams. Each team would focus on developing unique products to match the needs of customers in its assigned separate and independent unit.

5. What is Decision Making?
The process by which members of an organization choose a specific course of action to respond to the opportunities and problems that confront them
Decision making in response to opportunities occurs when members of an organization make choices or act in ways that result in benefits or gains.
Decision making in response to problems occurs when individual, group, or organizational goal attainment and performance are threatened.
Opportunities
Problems

6. Basic Types of Organizational Decisions
Nonprogrammed
Novel opportunities or problems
Requires extra information
Uncertainty
Programmed
Recurring opportunities or problems
Based on performance program
Whether they are responding to a potential opportunity or deciding how to solve a problem, two basic types of decisions are made in organizations: nonprogrammed and programmed.
Non-programmed decision-making involves searching for extra inform needed to make the right choice. Because the problem has not been experienced before, members of the organization are uncertain about how they should respond. Therefore, they search for any information they can find to help them make their decision.
Members of an organization also engage in programmed decision-making. This means making decisions in response to recurring opportunities and problems. To make a programmed decision, the decision maker uses a performance program. A performance program is a standard sequence of behaviors that organizational members follow routinely whenever they encounter a particular type of problem or opportunity. Organizational rules are types of performance programs developed to help members make programmed decisions.
Performance programs save time because they make it unnecessary for organizational members to search for information to make a decision. Organizations tend to be slow to change performance programs because doing things the old way is easier than devising new procedures.

7. Figure 15.1 Nonprogrammed and Programmed Decision Making
Novel problem
arises
Nonprogrammed
decision
making
Problem or
opportunity
recurs
Programmed
decision
making
Performance
Program
used
This figure illustrates the paths taken when dealing with unusual situations or recurring situations.

8. The Decision-Making Process
Classical
Decision
Making
Model
Administrative
Decision
Making
Model
When people think of decision making in organizations, the kinds of decisions they usually think of are nonprogrammed decisions involving a search for new and necessary information. The two models of decision-making shown here both refer to nonprogrammed decisions.
The classical decision making model is a prescriptive model. It is discussed on the following slides.
The administrative decision making model is a descriptive model developed by James March and Herbert Simon to address flaws in the classical model. It is also discussed more in the following slides.

9. Classical Decision-Making Model
Prescriptive
Assumptions
People have access to all necessary information
People choose the best possible solution
A prescriptive model describes how people should make decisions. The classical model rests on two assumptions: 1) People have all the information they need to make a decision and 2) People make decisions by choosing the best possible solution to a problem or response to an opportunity.
This model suggests that people will seek to optimize – make the best possible decision using all necessary information.
The steps for using the classical model are on the next slide.

10. Steps in the Classical Model
List all alternatives
List consequences of each alternative
Rank sets from most preferred to least preferred based on personal preference
Select alternative that results in most preferred set of consequences
Notice that this model assumes that people know all the possible alternatives and the consequences of each alternative. It also assumes that people know their personal preferences for each alternative. Clearly, this model is unrealistic. Its faults are discussed on the next slide.

11. Problems with the Classical Model
All necessary information for optimal decision
Unable to use some information
Cognitive abilities
Information overload
At each stage of the decision-making process, the classical model assumes perfect information. However, this is not usually the case. Further, even if the information were available, individuals’ cognitive abilities are limited. When we do have additional information, it may be too much for us to sort through it all. This can be called information overload.
Ultimately, we can conclude that it is often impossible for an organization’s members to make the best possible decisions and, even if they make a good decision, the time, effort, and cost that was spent making it might not be worthwhile.
Because of these problems, James March and Herbert Simon developed a more realistic account of decision-making: the administrative decision making model.

12. Administrative Decision-Making Model
Descriptive
Assumptions
Approximations of situation used
Not all information considered
Satisficing
This model is descriptive which means it explains how people actually make decisions rather than how they should make decisions.
According to this model, decision makers choose how to respond to opportunities and problems on the basis of a simplified and approximate account of the situation. Decision makers do not take into account all information relevant to a problem or opportunity, nor do they consider all possible alternatives and their consequences.
Decision makers may follow some of the steps in the classical model, such as generating alternatives and considering the consequences of the alternatives and their own preferences. However, the information they consider is based on their definition of the situation, which is the result of psychological and sociological factors. Psychological factors include the decision maker’s personality, ability, perceptions, experiences, and knowledge. Sociological factors include the groups, organization, and national culture.
Rather than making optimal decisions, organizational members often engage in satisficing. Satisficing means searching for and choosing acceptable responses - not necessarily the best possible responses. One criterion for satisfactory decisions in any organization is that it be ethical. Ethical decisions promote well-being and do not cause harm to others.

13. Bounded Rationality
Ability to reason that is limited by the limitations of the human mind itself
Lack of cognitive abilities
Subjective definitions of situation
Satisfice rather than optimize
Unlike the classical model, which disregards the cognitive limitations of the decision maker, March and Simon acknowledge that decision makers are constrained by bounded rationality. Members of an organization try to act rationally and make good decisions but their rationality is limited by their own cognitive abilities.
It may be impossible for decision makers to simultaneously consider all the information relevant to a decision and use all this information to make an optimal choice. Rationality is limited, or bounded, by the capabilities of the human mind.

14. Sources of Error in Decision Making
Escalation of
Commitment
Shortcuts
Given that decision makers often do not have all the information they need to make a good decision and are bounded rationally, decision makers also suffer from sources of error. These sources are pervasive and recurring. One source of error is the use of shortcuts, or rules of thumb. These shortcuts are also called heuristics. They can lead to both good and bad decisions.
Three common heuristics are presented on the next slide.
The second source of error is from an escalation of commitment. This means that it is human nature to continue to invest in bad decisions.

15. Figure 15.2 Heuristics and Resulting Biases
Availability
Heuristic
Representativeness
Heuristic
In the text, this figure also illustrates the possible biases that can result. Each heuristic and the possible biases are discussed on the following slides.
Anchoring &
Adjustment
Heuristic

16. Availability Heuristic
Reflects tendency to determine the frequency of an event and its causes by how easy these events and causes are to remember
Biases
Overestimation of frequency of
vivid events
recent events
People tend to judge an event that is easy to remember as occurring more frequently than an event that is difficult to remember. Likewise, if a potential cause of an event comes to mind quickly, people are likely to think that it is an important causal factor.
The availability heuristic can aid decision making because events and causes that actually do occur frequently come easily to mind. However, factors other than frequency of occurrence also determine the availability of information that can be recalled. Consequently, the availability heuristic can cause certain biases to enter decision making. One such bias is the overestimation of the frequency of vivid or extreme events and their causes because they are easy to remember. Another is the overestimation of the frequency of recent events and their causes because they are also easy to remember.

17. Representativeness Heuristic
Reflects the tendency to predict the likelihood of an event occurring from the extent to which the event is typical of similar kinds of past events
Biases
Failure to consider base rate
Overestimating likelihood of rare event
This heuristic can sometimes be a good shortcut used to estimate the likelihood of an upcoming event because the fact that similar kinds of events happened in the past may be a good predictor of the upcoming event. However, this heuristic can also cause decision makers to disregard important information about the frequency of events. One source of bias emanating from the representativeness heuristic is the failure to take into account the base rate. The base rate is the actual frequency with which events occur.

18. Anchoring and Adjustment Heuristic
Reflects tendency to make decisions based on adjustments from some initial amount
Biases
Inappropriate decisions when initial amounts are too high or too low
Decisions about salary increases are often made by choosing a percentage increase from an employee’s current salary. If the initial amount is reasonable, then this heuristic might be a good shortcut.
By using this heuristic, decision makers need to consider only the degree to which the current level needs to be changed. But if the original amount is not reasonable, then heuristic will lead to biased decision making.

19. Escalation of Commitment
Tendency of decision makers to invest additional time, money, or effort into poor decisions
Reconfirm correctness of original decision
Desire to recoup losses
Sunk costs
Risky behaviors increased by negative situation
Escalation of commitment is common in organizations and in people’s personal lives. It occurs for three reasons which are stated on the slide.
Decision makers often do not want to admit to themselves and to other people that they have made a mistake. In this case, they commit more resources to the course of action in order to reconfirm the rightness of the original decision.
Given the amount of money or resources that have been lost, decision makers erroneously believe that an additional commitment of resources is justified to recoup some of those losses. The costs that are already incurred are called sunk costs. Sunk costs are costs that could not be recovered or affected by subsequent decision making. Sunk costs should not enter into decision making.
Decision makers tend to take more risks when they frame or view decisions in negative terms rather than in positive terms.
Biases resulting from escalation of commitment and the use of heuristics can result in poor decision making at all levels in an organization.

20. Figure 15.3 Escalation of Commitment

21. Enterprise Resource Planning System (ERP)
Company-wide Intranet based on multi-module software
Reduces errors in decision making
Reduces biases
Generates more useful information
Links and coordinates functional activities
The use of IT can help to reduce the effect of biases and heuristics on decision making. An Enterprise Resource Planning (ERP) system is a company-wide Intranet based on multi-module software that allows an organization to link and coordinate its functional activities and operations. Using IT can reduce errors and biases and generate more useful information while linking and coordinating functional activities in the organization.

22. Group Decision Making Advantages
Availability/ diversity of members’ skills, knowledge, expertise
Enhanced memory
Greater ability to correct errors
Greater decision acceptance
Disadvantages
Time to make a decision
Group conflict
Potential for groupthink
Frequently groups, rather than individuals, make decisions in organizations. The groups may have a formal leader or be a self-managing team. There are advantages and disadvantages to using groups for decision making.
When groups make decisions, each group member’s “tool box” can be brought into play. Whenever a decision requires sills, knowledge, and expertise in several areas (such as marketing, finance, engineering, etc.) group decision making has a clear advantage over individual decision making. This advantage suggests that there should be diversity among group members. In addition to diversity of knowledge, it is also desirable to have diversity in age, gender, race, and ethnic backgrounds. Diversity gives a group the opportunity to consider different points of view.
People may forget pieces of information but the group can rely on all members to remember as much as possible. When a group makes a decision, errors made by some may be detected and corrected by others. It is often necessary for several members of an organization to accept a decision in order for the decision to be implemented. The likelihood of acceptance increases when people take part in the decision-making process.
While these are definite advantages, group decisions do take more time to make than individual decisions and groupthink might occur. Further, diverse groups may have trouble getting along with each other.

23. Figure 15.4 Advantages and Disadvantages of Group Decision Making

24. Use Individual Decision Making When…
An individual has all capabilities necessary to make a good decision
An individual can gather and assess all necessary information
Acceptance of decision is unnecessary or likely to occur anyway
These are the situations when individual decision making should be preferred to group decision making.

25. Figure 15.5 Symptoms of Groupthink
Illusion of invulnerability
Belief in inherent mortality of group
Collective rationalizations
Stereotypes of other groups
Self-censorship
Illusions of unanimity
Direct pressure on dissenters
Emergence of self-appointed mind guards
Groupthink is a pattern of faulty decision making that occurs in cohesive groups whose members strive for agreement at the expense of accurately assessing information relevant to the decision.
The term was coined in 1972 by Irving Janis to describe a paradox that he observed in group decision making: Sometimes groups of highly qualified and experienced individuals make very poor decisions.
When groupthink occurs, members of a cohesive group unanimously support a decision favored by the group leader without carefully assessing its pros and cons. This unanimous support is often based on members’ exaggerated beliefs about the group’s capabilities and moral standing. They think the group is more powerful than it is and could never make a decision that might be morally or ethically questioned. Even when members have doubts about decisions, they are likely to discount the doubts. Figure 15.5 summarizes the basic model of groupthink.

26. Steps for Minimizing Groupthink
Group leader encourages thoughtfulness/ criticism
Group leader refrains from expressing own opinion and views until group has considered all alternatives
Group leader encourages group members to gather information from outside people
Group leader assigns devil’s advocate
Group leader holds second meeting for important decisions
A group leader can take these steps to prevent the occurrence of groupthink. These steps also contribute to good decision making in groups in general.
A devil’s advocate has the role of criticizing, raising objectives, and identifying potential problems with any decisions the group reaches. Even if the devil’s advocate doesn’t believe his or her points are valid, the points should be raised.
During a second meeting, members can raise any doubts or misgivings about the initial choice.

27. Other Consequences of Group Decision Making
Diffusion of
Responsibility
Group
Polarization
Potential
for
Conflict
Three other consequences of group decision making may also occur.
Group decisions are characterized by a diffusion of responsibility. In other words, the group as a whole rather than any one individual is accountable for the decision. If the decision is a good one, the group gets credit. If the decision was a poor one, no single person is blamed. Diffusion of responsibility can be an advantage for group decision making because some people are inclined to make a decision that will not come back to haunt them rather than make the best decision. However, diffusion of responsibility can also be a disadvantage if group members do not take the time and effort needed to make a good decision because there is no individual accountability. This consequence is related to social loafing (see Chapter 11).
Group polarization means that groups tend to make more extreme decisions than do individuals. This means making more risky or conservative decisions rather than taking a middle-of-the-road approach. This might occur because of the diffusion of responsibility, or because the group is overconfident, or because of persuasive arguments created in support of the favored alternative.
There is always the potential for conflict in decision-making groups. Conflict can be functional when it forces the group to evaluate alternatives carefully. However, it can be dysfunctional when individuals become more concerned with winning the battle than making a good decision.

28. Group Decision Making Techniques
Brainstorming
Nominal Group Technique
Delphi Technique
This slide lists tree common techniques for helping groups make good decisions that promote high levels of performance and positive attitudes. Brainstorming is a spontaneous, participative, decision-making technique that groups use to generate a wide range of alternatives from which to make a decision. A typical brainstorming session goes like this: 1) Group sits around a table and one member describes the problem or opportunity; 2) group members share their own ideas in a free and open manner without any critical evaluation of the ideas; 3) group members come up with as many ideas as possible and also “piggy-back” on the ideas of others; 4) one member records ideas for later evaluation.
With the nominal group technique (NGT), group members sit around a table, and one member of the group describes the problem or opportunity. Members are given a certain amount of time to come up with ideas and write them down on a piece of paper. Members then present the ideas in a round-robin fashion. After all ideas are listed, the group discusses them one by one. Members raise questions and objections, and critically evaluate each idea. Then, each member privately ranks all alternatives from most preferred to least preferred. The alternative with the highest ranking is chosen.
When the Delphi Technique is used, group members never meet face to face. The advice of experts may be sought through written communication. The leader describes the problem and solicits help by asking others to complete and return a questionnaire. After questionnaires have been returned, the leader compiles the responses and sends a summary of them to all group members, along with additional questions that need to be answered for a decision to be made. This process is repeated as many times as needed to reach a consensus.

29. Brainstorming Problems
Suppression Of
Ideas
Production
Blocking
Research suggests that individuals working separately come up with more ideas than do brainstorming groups. Why? Group members may be inhibited from sharing all ideas with others and production blocking may take place.
Production blocking may be caused when group members cannot give their full attention to generating ideas because they are listening to other people’s ideas. Electronic brainstorming can overcome some of these problems.

30. Group Decision Making Techniques for TQM
Benchmarking
Selecting a high-performing group or organization
Using this group as a model
Improving to reach standard of model
Empowerment
Giving employees authority to make decisions
Giving employees responsibility for those decisions
Total quality management is a philosophy and set of practices that have been developed to improve the quality of an organization’s goods and services and the efficiency with which they are produced. TQM includes two group decision-making techniques: benchmarking and empowerment.
The objective of these techniques is to encourage group members to make suggestions and use their knowledge to come up with ways to reduce costs and waste and increase quality with the ultimate goals of pleasing the final customer.
A benchmark is a standard against which something can be measured or judged. Benchmarking helps groups figure out what they should be trying to accomplish when making a decision.
A guiding principle of TQM is that performance and quality improvements are the responsibility of all organizational members. Employees are often in the best position to come up with ways to improve performance and quality.

31. Organizational Learning
Process managers seek out to improve decision making ability of employees and enhance organizational efficiency and effectiveness
Exploration
Exploitation
Exploration and exploitation are two principal types of organizational learning strategies.
Exploration involves organizational members searching for and experimenting with new kinds or forms of behaviors and procedures to increase effectiveness. Learning that involves exploration might involve finding new ways to make and sell goods and services or inventing new ways to organize employees such as developing cross-functional or virtual teams.
Exploitation involves organizational members learning ways to refine and improve existing organizational behaviors and procedures to increase effectiveness. Exploration is a more radical learning process than exploitation although both are important for improved decision making.
A learning organization is an organization that purposefully takes steps to enhance and maximize the potential for explorative and exploitative organizational learning to take place.

32. Figure15.6 Principles of Organizational Learning
Personal Mastery
Principles
Systems
Thinking
Complex
Mental Models
Peter Senge developed these principles for creating a learning organization. Personal mastery means that managers need to so all they can to facilitate the learning of new skills, norms, and values so that individuals can increase their own personal ability to help build the organization’s core competencies.
As a part of attaining personal mastery, organizations need to encourage employees to develop and use complex mental models that challenge them to find new or better ways to perform a task. A learning organization can do this by providing employees with the opportunity to assume more responsibility for their decisions. This could be accomplished through cross-training, or reengineering.
At the group level, managers need to encourage learning by promoting the use of various kinds of groups (self-managed or cross-functional teams) so that individuals can share their skills and abilities to solve problems. Groups allow for the creation of synergy.
Building a shared vision involves creating an ongoing frame of reference or mental model that all the members use to frame problems or opportunities and that binds them to an organization.
The last principle, system thinking, emphasizes that in order to create a learning organization, managers must recognize how learning at the individual and group level affect each other.
Shared Vision
Team Learning