MGT504 - Organization Theory and Design - Lecture Handout 34

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INDIVIDUAL DECISION MAKING

Individual decision making managers can be described in two ways. First is the rational approach, which suggests how manager should try to make decisions. Second is the bounded rationality perspective, which describes how decisions actually have to be made under severe time and resource constraints. The rational approach is an ideal manager may work toward but never reach.

RATIONAL APPROACH

The rational approach to individual decision making stresses the need for systematic analysis of a problem followed by choice and implementation in a logical step – by step sequence. The rational approach was developed to guide individual decision making because many managers were observed to be unsystematic and arbitrary in their approach to organizational decisions. Although the rational model is an “ ideal “ not fully achievable in the real world of uncertainty, complexity, and rapid change highlighted in example, the model does help managers think about decision more clearly and rationally. Managers should use systematic procedures to make decisions whenever possible, when managers have a deep understanding of the rational decision – making process, it can help them make better decision even when there is a lack of clear information. The authors of a recent book on decision making use the example of the U.S. Marines, who have a reputation for handling, complex problems quickly and decisively However, he Marines are trained to quickly go through a series of mental routines that help them analyze the situation and take action.

According to the rational approach, decision making can be broken down into eight steps, as illustrated in below.

  1. Monitor the decision environment. In the first step, a manager monitors internal and external information that will indicate deviations form planned or acceptable behavior. He or she talks to colleagues and reviews financial statements, performance evolutions, industry indices, competitors’ activities, and so forth. For example, during the
    pressure – packed five-week Christmas season, Linda Koslow, general manager of Marshall Field’s Oakbrook,
    Illinois, store, checks out competitors around the mall, eyeing whether they are marking down merchandise. She
    also scans printouts of her store’s previous day’s sales to learn what is or is not moving.
  2. Define the decision problem. He manager responds to deviations by identifying essential details for the problem; where, when, who was involved, who was affected, and how current activities are influenced. For Koslow, this means defining whether store profits are low because overall sales are less than expected or because certain lines of merchandise are not moving as expected.
  3. Specify decision objectives. The manager determines what performance out- comes should be achieved by a decision.
  4. Diagnose the problem. In this step, the manager digs below the surface to analyze the cause of the problem. Additional data may be gathered to facilitate this diagnosis, Understanding the cause enables appropriate treatment. For Koslow at Marshall Fields, the cause of slow sales may be competitors’ marking down of merchandise or Marshall Field’s failure to display hot-selling items in a visible location.
  5. Develop alternative solutions. Before a manager can move ahead with a decisive action plan, he or she must have a clear understanding of the various options available to achieve desired objective. The manager may seek ideas and suggestions from other people. Koslow’s alternatives for increasing profits could include buying fresh merchandise, running a sale, or reducing the number of employees.
  6. Evaluate alternative. This step may involve the use of statistical techniques or personal experience to assess the
    probability of success. The merits of each alternative are assessed as well as the probability that it will reach the
    desired objectives.
  7. Chose the best alternative. This step is the core of the decision process. The manager uses his or her analysis of the problem, objectives, and alternatives to select a single alternative that has the best chance for success. At Marshall Fields, Koslow may choose to reduce the number of staff as a way to meet the profit goals rather than
    increase advertising or markdowns.
  8. Implement the chosen alternative. Finally, the manger uses managerial, administrative, and persuasive abilities and gives directions to ensure that the decision is carried out. The monitoring activity (step 1) begins again as soon as the solution is implemented. For Linda Koslow, the decision cycle is a continuous process, with new decision, made daily based on monitoring her environment for problems and opportunities?

The first steps in this sequence are the problem identification stage, and the next four steps are the problem solutions stage of decision making, as indicated previously. All eight steps normally appear in a manager’s decision, although each step may not be a distinct element. Managers may know from experience exactly what to do in a situation, so one or more steps will be minimized. The following case illustrates how the rational approach I used to make a decision about a personnel problem.

BOUNDED RATIONALITY PERSPECTIVE

The point of the rational approach is that manager should try to use systematic procedures to arrive at good decisions. When organizations are facing little competition and are dealing with well – understood issues, manager generally use rational procedures to make decisions. Yet search into managerial decisions making shows manager often are unable to follow an ideal procedure. In today’s competitive environment, decisions often must be made very quickly. Time pressure, a large number of internal and external factors affecting a decision, and the ill- defined nature of many problems make systematic analysis virtually impossible, managers have only so much time and mental capacity and, hence cannot evaluate every goal, problem, and alternative. The attempt to be rational is bounded (limited) by the enormous complexity of many problems. There is a limit to how rational manager can be. For example, an executive in hurry may have a choice of fifty ties on a rack but will take the first or second one that matches his suit. The executive don’t carefully weigh all fifty alternatives because the short amount of time and the large number of plausible alternatives would be overwhelming. The manager simply selects the first tie that solves the problem and moves on the next task.

Large organizational decisions are not only too complex to fully comprehend, but many other constraints impinge on the decision maker, as illustrated. The circumstances are ambiguous, requiring social support, a shared perspective on what happens, and acceptance and agreement, for example, in a study of the decision making surrounding the Cuban missile crisis, the executive committee in the White House knew a problem existed but was unable to specify exact goals and objective. The act of discussing the decision led to personal objections and finally to the discovery of desired objectives that helped clarify the desired course of actions and possible consequences. In addition, personal constraints – such as decision style, work pressure, desire for prestige, or simple feelings of insecurity – may constrain either the search for alternatives or the acceptability of alternatives. All of these factors constrain a perfectly rational approach that should lead to an obviously ideal choice. Even seemingly simple decisions, such as selecting a job on graduation from college, can quickly become so complex that a bounded rationality approach is used. Graduating students have known to search for a job until they have two or three acceptable job offers, at which point their search activity rapidly diminishes. Hundreds of firms may be available for interviews, and two or three job offers are far short of the maximum number that would be possible if students made the decision based on perfect rationality.

The bounded rationality perspective is often associated with intuitive decision processes, in intuitive decision making, experience and judgment rather than sequential logic or explicit reasoning are used to make decision. Intuition is not arbitrary or irrational because it is based on years of practice and hands – on experience, often stored in the subconscious. When managers use their intuition based on long experience with organizational issues, they more rapidly perceive and understand problems and they develop a gut feeling or hunch about which alternative will solve a problem, speeding the decision – making process. Indeed, many universities are offering courses in creativity and intuition so business students can learn to understand and rely on these processes.

In a situation of great complexity or ambiguity, previous experience and judgment are needed to incorporate intangible elements at both the problem identification and problem solution stages. A study of manager problem finding showed that thirty of thirty – three problems were ambiguous and ill defined. Bits and scraps of unrelated information from informal sources resulted in a pattern in the manager’s mind. The manager could not “prove” a problem existed but knew intuitively that a certain area needed attention. A too simple view of a complex problem is often associated with decision failure, and research shows managers are more likely to respond intuitively to a perceived threat to the organization than to an opportunity

Intuitive processes are also used in the problem solutions stages. A survey found that executives frequently made decisions without explicit reference to the impact on profits or to other measurable outcomes. These factors cannot be quantified in a systematic way. So intuition guided the choice of a solution. Managers may make a decision based on what they sense to be right rather than on what they can document with hard data.

Partizio Bertelli, CEO of Prada, has transformed the family business into a European fashion powerhouse by making good intuitive decision --- some of which seem inexplicable to his industry colleagues. Even though Bertelli’s decision often seem to come from “ out of the blue, “ they are actually based on a depth of experience, knowledge, and understanding developed over many years in the fashion business. Another example is Jodie Foster, who is known for making good decisions based on gut instinct at her production company, Egg Pictures. Foster made her movie debut at the age of eight, and her manager mother involved her in almost all decision making regarding roles, script changes, and so forth, “ she understands Hollywood almost mathematically,” said one producers. Thus, intuition may be thought of as “recognition” because when managers develop a depth of experience and knowledge in a particular area, problem of information that has largely been forgotten by the conscious mind.

However, managers may walk a fine line between two extremes; on the one hand, making arbitrary decisions without careful study and on the other, relying obsessively on numbers and rational analysis. Remember that the bounded rationality perspective and the use of intuition apply mostly to non – programmed decisions. The novel, unclear, complex aspects of non-programmed decisions mean hard data and logical producers are not available. A study of executive decision making found that managers imply could not use the rational approach for nonprogrammed decision, such as when to buy a CT scanner for an osteopathic hospital or whether a city had a need for and could reasonably adopt an enterprise resources planning system. In those cases, manager had limited time and resources, and some factors simply couldn’t be measured and analyzed. Trying to quantify such information could cause mistakes because it may over simplify decision criteria. When Michael Eisner was president of Paramount Pictures, he learned to rely on intuition for making non-programmed decisions. His decision approach was astonishingly successful at Paramount and, more recently, at Disney

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