Sunday, January 11, 2004
Chapter 14 – Decision Making
Opening Case – Alteon Websystems Shows How To Use Information Technology To Make Fast Effective Decisions
Founded in 1996, AW is a leading maker of web and e-business hardware and software. An in-house software application enables better communication and collaboration. Alteon’s employees meet together once per week to problem-solve and prioritize. Nortel bought Alteon in 2002.
Types of Decisions
Decision Making – The process by which members of an organization choose a specific course of action to respond to both problems and opportunities.
Nonporgrammed Decision Making – Decision making in response to novel problems and opportunities.
Programmed Decision Making – Decision making in response to recurring problems and opportunities.
Performance Program – A standard sequence of behaviors that organizational members follow routinely when they encounter a particular type of problem or opportunity.
The Decision Making Process
The Classical Model of Decision Making
Classical Decision Making Model – A prescriptive approach based on the assumption that the decision maker has all the necessary information and will make the best possible solution or response.
The decision maker should choose how to respond to problems and opportunities by engaging in these four steps:
1) Listing all alternatives from which a chose will be selected: These alternatives represent different responses to the problem or the opportunity.
2) Listing the consequences of each alternative: The consequences are what would occur if a given alternative were selected.
3) Considering his or her own preferences for each alternative or set of consequences and the ranking the sets from most to least preferred
4) Selecting the alternative that will result in the most preferred set of consequences
The classical model is unrealistic because decision makers often don’t know all of the alternatives, all of the consequences, an don’t always know what they want. It is often impossible for organizational members to make the best possible decision.
March and Simon’s Administrative Model of Decision Making
Administrative Decision Making Model – A descriptive approach stressing that incomplete information, psychological and sociological processes, and the decision maker’s cognitive abilities affect decision making and that decision makers often choose satisfactory, not optimal, solutions.
Satisficing – Searching for and choosing an acceptable response or solution, not necessarily the best possible one.
Insight 14.1 - Why The Price Of Vitamins Was Too High
In 1999, six global pharmaceutical companies including Hoffman-La Roche and BASF admitted to colluding on vitamin prices, to eliminate competition on a global basis. All paid high fines and replaced their management teams, as well as add ethics offers to their management teams.
Bounded Rationality – An ability to reason that is constrained by the limitations of the human mind itself.
Members of organizations try to make optimal decisions and act rationally, but their rationality is limited by their own cognitive abilities.
Sources of Error in Decision Making
Two major sources of error arise from:
1) The shortcuts or rules of thumb people use in decision making
2) The human tendency to throw good money after bad or continue involvement in unfruitful activities
Heuristics – Rules of thumb that simplify decision making
Availability Heuristic – The rule of thumb that says an event that is easy to remember is likely to have occurred more frequently than an event that is difficult to remember.
Likewise, if a potential cause of an event comes to mind very easily, people are likely to think it is an important causal factor. We are led to make decisions by a kind of mental laziness.
Representative Heuristics – The rule of thumb that says similar kinds of event that happened in the past are a good predictor of future events. Representative Heuristics fails to take Base Rate, or the actual likelihood of events, into account.
Anchoring and Adjustment Heuristics – The rule of thumb that says that decisions about how big or small an amount can be make by making adjustments from some initial amount. This can lead to unrealistic decision making.
Escalation of Commitment – The tendency to invest additional time, money, or effort into what are essentially bad decisions or unproductive courses of action.
Why does this tendency exist?
1) Decision makers often don’t want to admit their mistakes
2) They erroneously believe that an additional commitment will help recoup losses
3) They take more risks when they frame decisions in the negative (recoup losses) rather than the positive (make more money)
Sunk Costs – Costs that are irreversible and are not affected by future decisions
The Role of New IT
- It can reduce the role of Heuristics by providing information
- It can link managers at different levels
- It can routinize nonprogrammed decisions, and make the programmed
Group Decision Making
- Ability of Group Members’ Skill, Knowledge, and Expertise
- Enhanced Memory for Facts
- Capability of Error Detection
- Greater Decision Acceptance
Insight 14.2 – Promoting Cohesiveness in Diverse Work Groups
Since diversity sometimes results in conflict and low cohesiveness, some organizations are instituting diversity programs. In Diversity Training, members of diverse groups describe and share with an audience their own experiences and difficulties. Other approaches include self-assessment questionnaires, role-plays, personal action plans.
Disadvantages of Group Decision Making
- The Potential for Groupthink
- Groupthink – Symptoms of Groupthink are illusions of invulnerability, belief in the inherent morality of the group, collective rationalization, stereotypes of other groups, self-censorship, illusions of unanimity, direct pressure on dissenters, and emergence of self-appointed mind guards
To prevent groupthink, group leaders can take the following steps:
- The group leader encourages all members to be critical of proposed alternatives
- The group leader refrains from expressing his own views until the group has considered all alternatives
- The leader encourages the team to gather information about the decision from sources outside the group
- The leader assigns devils advocates, to criticize and raise objections to decisions the group reaches.
Other Consequences of Group Decision Making
- Diffusion of Responsibility
- Group Polarization
- Potential for Conflict
Group Decision Making Techniques
Brainstorming – A spontaneous, participative decision-making technique that groups use to generate a wide range of alternatives from which a decision is made.
Production Blocking – Loss of productivity in brainstorming groups due to various distractions and limitation inherent in brainstorming.
The Nominal Group Technique
A decision making technique that includes these steps:
1) Group members generate ideas on their own and write them down
2) Group members communicate ideas among themselves
3) Ideas are discussed and evaluated by the entire group
The Delphi Technique
A decision making technique in which a series of questionnaires are sent to experts on the issue at hand, who never meet face to face.
After the questionnaires are returned, the leader compiles responses and sends a summary of them back to the group members, along with additional questions that need to be answered for a decision to be made. This is repeated until a consensus is reached.
Total Quality Management Techniques
Benchmarking – Selecting a high-performing group and using it as a model
Empowerment – Giving workers throughout an organization decision making authority
Insight 14.3 – A Change In Decision Making Leads To A Quick Turnaround
Cavalier Gage and Electronic lost IBM as its client, and President Betty Wagner realized that she had to reevaluate the way she ran her company. She began to involve all lower-level managers in decision making; she opened the company’s books and showed them how fragile the company was.
With the new approach, Cavalier reduced the bidding time on new contracts from two days to one hour. Cavalier continues to refine its decision making process.
Creativity – A decision making process that produces novel and useful ideas.
Innovation – The successful implementation of creative ideas.
The Creative Process
1) Recognition of problem or opportunity
2) Information gathering
3) Production of creative ideas
4) Selection of creative ideas
5) Implementation of creative ideas
Characteristics of Decision Makers That Contribute to Creativity
- Individual Differences
- Task-Relevant Knowledge
- Intrinsic Motivation
Characteristics of Organizational Situations that Contribute to Creativity
- Level of Autonomy – Independence is an important factor
- Form of Evaluation – creative people like feedback and encouragement
- Reward System
- Importance of a Decision
How Walt Disney Innovates New Ideas
The goal is to make employees feel save about generating and expressing ideas, so that they compete to present their ideas and improvements for existing projects. Each team is disciplined, is given a budget. Top performers are recognized and rewarded, and become project leaders. Creativity is critical to Disney, since competitors take advantage of IT to produce animated films and television quickly and cheaply.