Chapter 7 Decision-Making PDF

Managers must make many important decisions when they are carrying out each of the four functions of management. A decision is a choice that is made among a number of available alternatives to address a problem or opportunity. Decisions must be made about what goals, plans, and strategies to pursue...

Managers must make many important decisions when they are carrying out each of the four functions of management. A decision is a choice that is made among a number of available alternatives to address a problem or opportunity. Decisions must be made about what goals, plans, and strategies to pursue (planning); what sorts of organizational 230 Chapter 7 Decision-Making structures and systems to design and implement (organizing); how to motivate and communicate with others (leading); and the values and meaning that will provide guidance to organizational members (controlling). Because everyone makes multiple personal and professional decisions every day, it is helpful to develop a better understanding of how decisions are made, and how the decision-making process can be improved. In this chapter, we examine in detail each of the four steps of the decision-making process (see Figure 7.1), describing differences between a Financial Bottom Line (FBL), Triple Bottom Line (TBL), and Social and Ecological Thought (SET) perspective. Figure 7.1: The four-step decision-making process 2. Develop alternative responses (identify possible courses of action) 1. Identify the need for a decision 3. Evaluate options and choose one (problem or opportunity) (this may prompt need for new decision) (based on situational factors) 4. Implement and monitor the choice 1: Identify the need STEP 1: IDENTIFY THE NEED FOR A DECISION The first step of the decision-making process involves identifying the need for a decision to be made. A decision is often necessary if a problem is being experienced with some current activity, or if there is an opportunity to do some new future activity. Since managers are constantly confronted with both problems and opportunities, they must constantly make decisions. To avoid being overwhelmed, managers must filter problems and opportunities to determine which ones require a decision now, and which can be delayed or even ignored. For example, a decision is more likely to be seen as necessary if the viability of the organization is at stake, or if previous similar events have always prompted a decision. Managers, like all people, use cognitive scripts when they make decisions, akin to Managers, like all people, use scripts when they make decisions. the scripts actors use to know what to do and say in specific scenes. Cognitive scripts are learned guidelines or procedures that help people interpret and respond to what is happening around them.9 People have scripts for a variety of settings, from knowing what to do and say when meeting new people, to proper table manners and etiquette, to driving a car. For Decision-Making Chapter 7 231 example, drivers read road signs, follow routines to determine if it is safe to change lanes, and adjust their speed for weather and traffic. Disastrous outcomes may occur if drivers have limited experience in recognizing potential dangers, or are distracted from their scripts by their phones. Managers use learned scripts to recognize (or fail to recognize) whether a situation requires a decision. For example, managers learn to pay attention to key financial reports, productivity data, consumer trends, and so on. As illustrated in the opening case, scripts help managers recognize the need for a decision, but they may also cause managers to make inappropriate decisions. Just as there are different genres of movie scripts—action, comedy, romance, horror, and so on—so also there are different generic scripts for FBL, TBL, and SET management (see Table 7.1). The scripts for FBL management focus on financial well-being, and tend to be oriented toward an individual company’s situation. Managers focus on solving problems and seizing opportunities that will increase a firm’s revenues or reduce its financial costs, usually with little regard to whether a decision creates positive or negative socio-ecological externalities. The Ford recall decision in the opening case followed an FBL script, and did not have TBL or SET scripts to draw upon. Table 7.1: Relative emphases in scripts used for identifying the need to make a decision Emphasis on: FBL approach TBL approach SET approach Maximizing financial well-being High High Low Reducing negative externalities Low Medium High Attending to external stakeholders Low Medium High Enhancing positive externalities Low Low High TBL scripts are similar to FBL scripts in terms of enhancing financial well-being, but TBL scripts differ in two way. First, they are much more attuned to finding ways to reduce existing negative socio-ecological externalities when it enhances the firm’s financial well-being. Second, they are more likely to be prompted by external stakeholders rather than simply stakeholders within the organization. Therefore, a comparatively wider set of concerns can trigger the decision-making process for TBL managers. Compared to FBL managers, TBL managers are more sensitive to the needs of other stakeholders, and are committed to putting those needs on the decision-making agenda.10 For example, in light of exploitive working conditions in low-income countries, managers in a growing number of organizations have voluntarily chosen to adopt an international standard of social accountability—SA8000—where adherents agree to pay wages that are adequate to cover basic needs (not just the legislated minimums). They also refuse to employ children under 15 years of age, and do not use forced labor.  232 Chapter 7 Decision-Making Knowing that adopting these higher standards could reduce the risk of a negative brand image, large TBL retailers have committed themselves to choosing suppliers who follow these standards, even if they were not offering the lowest price. For example, the large European retailer C&A stopped dealing with 19 of its suppliers when managers discovered the suppliers had not been following the company’s code of conduct.11 SET management scripts share and extend the emphasis that TBL scripts place on attending to external stakeholders and reducing negative socio-ecological externalities, but SET scripts differ from TBL scripts in two additional ways. First, SET scripts place a greater emphasis on enhancing positive externalities by seeking out and trying to address society’s vexing problems. Second, unlike FBL and TBL approaches, SET scripts may lead to decisions that enhance certain non-financial benefits (e.g., employee satisfaction) even if doing so does not yield financial or productivity benefits. For example, AT&T manager Robert Greenleaf noticed that the decision-making scripts used in recruitment and promotion at his firm were resulting in women being under-represented in its workforce, and in African-American employees being promoted at a slower rate than their white co- workers. Because issues like these were not perceived to be associated with AT&T’s financial well-being at the time, a manager with an FBL or TBL perspective would not have identified them as problems or opportunities. However, because of his SET approach to management, Greenleaf recognized them as issues calling for decisions to be made, and this prompted him to work with others to develop new scripts to address them. These new scripts eventually became the new norms and guidelines that informed subsequent decision-making at AT&T.12 Recognition that there is a need for a decision in a particular situation is influenced by whether a manager is using scripts based on the FBL, TBL or SET approach. For example, suppose a manager receives information that a very profitable product the company is selling is potentially dangerous to the health of customers (e.g., the Ford Pinto). An FBL manager may not feel a decision is necessary because the situation is only Managers who sell soda pop face a similar dilemma as the recall director of the Ford Pinto. “potentially” dangerous, whereas a SET manager who is confronted with the same information would likely decide to start the decision-making process to reduce the potential for harm to customers. Managers in companies that sell carbonated soft drinks and/or fast food face a similar dilemma, since both products have been implicated in childhood obesity.13 2: Develop alternatives Decision-Making Chapter 7 233 STEP 2: DEVELOP ALTERNATIVE RESPONSES Once the need for a decision has been established, the next step is to develop alternatives for addressing the problem or opportunity that has been identified. In the most general sense, managers can respond in one of three ways: 1) do nothing 2) apply an existing routine (i.e., make a programmed decision) 3) develop a new routine (i.e., make a non-programmed decision) The first approach—“do nothing”—is the appropriate response in situations where action is not worth the effort or the cost. For example, doing nothing might be the appropriate response if someone arrives late at work due to an unexpected traffic jam. The second approach involves following an existing script or routine. Doing so results in making programmed decisions (also called routine decisions). In programmed decisions the response to an organizational problem or opportunity is chosen from a set of standard alternatives. For example, organizations have numerous routines for things like re-ordering office supplies, responding to employees who arrive late for work, dealing with irate customers who do not receive their order on time, and so on. These decision rules and policies have been developed to simplify the handling of situations that recur frequently. Sometimes managers may be tempted to use the easiest script Managers may be instead of choosing the most appropriate script. This may happen if tempted to use the using the most appropriate script requires extra time and effort. For easiest, rather than example, if an employee arrives late for work, the easiest response is to ”do nothing,” or to follow a simple script to “dock the the most employee’s pay.” However, if someone arrives late for work appropriate,script. repeatedly, the manager is well-advised to find out what is causing the behavior (perhaps the employee’s child is sick, or the employee is fearful of a conflict with a co-worker, or the employee is simply irresponsible). A different script may be appropriate in each case. The third approach is to make a non-programmed decision. A non-programmed decision involves developing and choosing a new way of dealing with a problem or opportunity. The quality of non-programmed decisions often depends on the time and resources a manager is willing to invest in developing them.14 The amount of time and resources invested in making non-programmed decisions increases with the perceived importance and newness of the decision, and decreases with the urgency of the decision. Increased time is needed for strategic decisions such as responding to a new competitor, coping with changes in legal regulations, or deciding whether or not to go ahead with a major expansion. Some non-programmed decisions may be developed for a one-of-a-kind decision (for example, where to locate a new company headquarters), whereas other non- programmed decisions will become new scripts to be used in future programmed 234 Chapter 7 Decision-Making decisions. When smartphones first became commonplace in organizations, guidelines were needed on issues like whether employees were expected to respond to business emails during evenings and weekends, whether employees could use a company phone for personal matters, and so on. Once these non-programmed decisions were made, they became the new norm for programmed decisions in subsequent years. Consider how the three possible responses (do nothing, make a programmed decision, make a non-programmed decision) played out in a situation that confronted Nils Vik, the owner of a small inner-city café called Parlour Coffee. One evening the police called to tell him that his business had been broken into. His first reaction was to “do nothing” since he was at home with his young children, and didn’t want to go to the shop to clean up the mess (of course, the “do nothing” option wasn’t realistic in the long- term; he eventually needed to go to the shop and address the mess). His second response was more along the lines of a “programmed response” that you might expect from any shop owner in his situation: he installed an alarm system. But after installing the alarm, he started thinking about the situation facing the person(s) who had broken into his shop: “I couldn't help but think... man, you have to be in pretty rough shape that you think the best means of acquiring some income is to break in somewhere in the middle of the night.” Upon further reflection he realized that installing his alarm system only addressed a symptom of the problem, and only transferred the potential for break-ins to someone else’s business. “So if we want to try and make any lasting change, we have to prevent these things from happening at the root cause. Clearly it has to do with inequality and income disparity and poverty. Those things an alarm system can't fix.” Eventually he decided to donate a percentage of his sales for the rest of the year to a not- for-profit agency that provides support and shelter for homeless people in his neighbourhood.15 Thus, his third action involved making a non-programmed decision. 3: Choose alternative STEP 3: CHOOSE THE APPROPRIATE ALTERNATIVE The third step—choosing the best alternative—lies at the heart of the decision-making process. This step has two highly interrelated sub-steps, namely evaluating the different alternatives developed in step 2, and then selecting the best alternative. A systematic evaluation of the relative merits of the alternatives is particularly important for strategic and non-programmed decisions. How a choice is made depends on two key factors: 1) the quality of knowledge available to decision-makers about the outcomes that are likely to result with each of the alternatives, and 2) the level of agreement among decision-makers regarding an organization’s aims and the best means to achieve those aims. These two factors can be combined to form the two-dimensional framework shown in Figure 7.2. The figure also shows five general approaches decision-makers use as they choose among possible alternatives. We first explain the two dimensions of the figure, and then describe each of the five general approaches. Decision-Making Chapter 7 235 Figure 7.2: Five general approaches for evaluating options and choosing one High Low AVAILABLE KNOWLEDGE Agreement on aims and means Administrative model Trial-and-error Random Classical rational Low Political High Available knowledge As shown along the horizontal dimension of Figure 7.2, the decision-making process is influenced by the knowledge that is available to decision-makers. Three factors are important regarding the available knowledge: 1) is it possible to identify an optimal choice?, 2) do decision-makers have good knowledge about the likelihood and pay-offs of each possible outcome?, and 3) is the knowledge explicit or tacit? We will examine each of these questions in turn. Is it possible to identify an optimal choice? Many decisions are dilemmas, meaning that no optimal choice can be made because there are both positive and negative aspects associated with each alternative and the resulting trade-offs are complex and defy complete analysis.16 Examples like choosing the best strategy to implement, the best idea for a new start-up, the best romantic partner, the best neighborhood to live in, and the best career to pursue are all dilemmas. In partial dilemmas, decision-makers have enough knowledge to make informed decisions (e.g., decision-makers may not know which is the best idea for a start-up, but they do have enough experience in the industry to discern between better and worse ideas). In total dilemmas, decision-makers do not have enough information to predict with any confidence which choices might be better than others. Do decision makers have good knowledge about the likelihood and pay-offs of each possible outcome? Unless they are facing a total dilemma, decision-makers usually have some knowledge about the risks associated with a choice. Managers make decisions in situations that range from certain to uncertain (see Figure 7.3). Certainty exists when managers know exactly what outcomes are associated with each alternative they are choosing among, the possible payoffs associated with each possible outcome for each alternative, and the probability or likelihood that each pay-off will occur. This situation is obviously rare in business decisions. At the other extreme, uncertainty exists when managers do not know what 236 Chapter 7 Decision-Making outcomes are associated with each alternative they are choosing among, do not know the possible payoffs associated with each possible outcome for each alternative, and do not know the probability or likelihood that each pay-off will occur. This type of situation is also uncommon, but more common than certainty. Some new start-ups, for example, may face an extreme amount of uncertainty. In between certainty and uncertainty is a wide area of risk. Risk is evident when decision-makers have at least some knowledge about the likelihood of the different possible outcomes that might occur if they choose to implement a particular alternative, and the pay-offs associated with each outcome.17 Risk involves decisions where managers are able to develop some (but not all) alternatives, estimate (but not know for certain) payoffs for each alternative, and estimate (but not know for certain) the probabilities of the payoffs. Thus, there is no way to guarantee that choosing a particular alternative will lead to a particular outcome or payoff. This is obviously the situation faced by most business most of the time. Figure 7.3: A continuum depicting uncertainty, risk and certainty in decision-making Uncertainty Certainty Risk To illustrate these ideas in a business setting, imagine that you work for an investment firm, and that you must decide which one of five entrepreneurial business plans to invest in. Which venture you choose will be based on your best attempt to answer a host of questions, including the following: Will there be sufficient demand for the firm’s goods and services? Has the product been fully developed? What sort of marketing strategy is best? What management and technical skills does the new start-up require? How profitable will it be? What kind of socio-ecological externalities will it generate?18 You will likely not have full knowledge about any of these matters, but you may be pretty confident about the answers to some of these questions. In the end there may not be one clear best choice to make, especially if you invoke multiple measures of performance. Your decision is a dilemma characterized by a moderate amount of risk. Scripts are important for understanding how decision-makers interpret and perceive the knowledge that is available to them. For example, in the 1950s, Ford spent 10 years and more than $250 million in production and marketing costs (the equivalent of over $2 billion in today’s dollars) in order to develop a car called the Edsel (named after the owner’s son). As the manager of market research noted: “History had never witnessed anything like it before. More money was spent in its launching than any other previous product offered upon the consumer market anywhere. It was to be the most perfectly conceived automobile the world had ever seen, with every part of its planning guided by public opinion polls, motivational research, Science.”19 Despite this great attention to optimizing certainty and reducing risk, the Edsel was a failure. Why? Because Ford managers took all this available knowledge and interpreted it using their Decision-Making Chapter 7 237 pre-existing scripts, “ignoring data in order to support their worldview and their position within managerial career hierarchies.”20 In other words, available knowledge may be ignored or perceived as irrelevant. ThescriptsusedbyFBL,TBL,andSETmanagementmay influence whether a decision is perceived to have an optimal solution, and how risks and uncertainties are perceived. For example, the FBL script in the Ford Pinto example focused on the financial costs associated with each option, but did not take into account the trauma of victims (which may have been included in a SET script), or possible damage to the company’s brand image (which may have been included in a TBL script). Is the available knowledge tacit, or explicit? In addition to the amount of knowledge available, the decision-making process will also be influenced by the nature of the knowledge, and in particular whether the knowledge is tacit or explicit. Explicit knowledge is information that can be codified or articulated. Explicit knowledge includes data found in financial statements, manuals on how to operate technology, and an organization’s business plan. Programmed decisions are often related to the availability of extensive explicit knowledge. For example, a firm’s programmed decisions related to bookkeeping and accounting practices are based on explicit knowledge drawn from generally accepted accounting principles, and these decisions in turn create a lot of explicit knowledge embedded in financial statements. This sort of explicit knowledge allows decision-makers to reduce uncertainties and understand the risks associated with both major decisions (e.g., expansion overseas, dropping an existing product line, purchasing another company), and with minor decisions (can we afford to purchase new computers, which computer supplier offers the best prices and warranties). Tacit knowledge is information or other insight that people have that is difficult to codify or articulate. Intuition is an example of how tacit knowledge may be used. Intuition refers to making decisions based on tacit knowledge, which can be based on experience, hunches, or “gut feel”. Experienced managers and experts are valued for their tacit knowledge. Instances of intuitive decision-making are especially striking when they counter explicit available knowledge. For example, prior to Ray Kroc's purchase of McDonalds, his accountant advised against it, but Kroc had a “gut feel” that this investment would turn out to be a winner.21 Similarly, the owner of Parlour Café felt that it was the right thing to do to donate a portion of sales revenues to an agency that helps the homeless. Decision- makers are more likely to rely on tacit knowledge when explicit knowledge is not available, and when making non-programmed decisions. Programmed decisions are often based on explicit knowledge, and create explicit knowledge that perpetuates them, but non-programmed decisions often involve choices that decision-makers have little explicit knowledge about. Pre-existing scripts can cause managers to ignore relevant information. 238 Chapter 7 Decision-Making FBL, TBL, and SET decision-makers all draw on both explicit and tacit knowledge. However, there are two reasons why SET decision-makers may be more likely to rely more heavily on tacit knowledge. First, because the FBL and TBL approaches have been popular for quite awhile, there has been more opportunity to develop the sorts of explicit SET management may rely more on tacit knowledge. knowledge that they use. Second, the FBL and TBL approaches tend to place a greater emphasis on things that can be measured, rather than the more holistic SET approach that emphasizes more difficult-to-codify ideas such as meaningful work and treating the environment with care. AGREEMENT ON AIMS AND MEANS As shown in Figure 7.2, the level of agreement on organizational aims and means that exists among decision-makers is the second key dimension in helping us understand how decision-makers choose among various alternatives. Agreement on aims and means refers to the level of consensus among decision-makers about the goals of an organization and the best way to achieve those goals.22 Goals refer to the objectives or desired results that members in an organization are pursuing, and means are similar to plans, which describe the steps and actions that are required to achieve goals. Low agreement on aims and means indicates that there is considerable debate about what the aims should be and/or about the best means to achieve those aims. These disagreements may exist because different members identify problems or opportunities an organization is facing in different ways (step #1 of the process). For example, even among FBL and TBL managers who agree that maximizing shareholder financial well-being is the ultimate aim, there may be considerable disagreement about the best means of doing so. This was the case in the famous Saturday Evening Post magazine, where some managers wanted to maximize sales revenue, others to reduce costs, others to optimize the profit margin, and others to invest in research and development.23 Such disagreements, and a failure to understand how these sub-aims were related to each other, contributed to the demise of the 150-year old publication. FBL and TBL approaches generally share a high level of agreement that aims should improve financial well-being, but there is less agreement about means, particularly in the TBL approach because it includes factors related to social and ecological well-being, and this creates added complexity. Whereas FBL managers may give little thought to reducing GHG emissions, TBL managers may emphasize reducing those emissions, and may also have debates about whether the best way to do that is to purchase a fleet of electric vehicles or to develop wind or solar power sources. On the face of it, we might expect the SET approach to have the lowest level of agreement in terms of both aims and means. In terms of aims, SET management seeks to enhance both social and ecological well-being, which can be considerably more complex than simply focusing on enhancing financial well-being (as in the FBL and TBL approaches). A similar argument is evident in terms of means, where the potential for Decision-Making Chapter 7 239 disagreement is expected to be higher in the SET approach simply because of the added complexity that develops when an organization seeks to reduce negative externalities and enhance positive externalities. This problem may be reduced to some degree since SET managers are more willing to accept and even embrace disagreements (see Chapter 16). Whereas FBL and TBL approaches make an implicit assumption that it is ideal to have complete agreement on aims and means (even if this ideal is seldom realized), this assumption does not hold in the SET approach, where decision-makers accept that the world is simply too complex for there to be one best set of aims and means. Whereas a SET approach suggests that embracing diversity in aims and means will contribute to overall organizational performance, the traditional FBL and TBL approaches suggest that uniformity in views about aims and means will enhance an organization’s financial performance. It turns out that research provides some empirical support for both SET and for FBL/TBL approaches regarding the effect of disagreement about aims and means.24 Consistent with the SET view, the level of agreement is negatively related to organizational performance measures (including how well the organization performs its main function). However, consistent with the FBL/TBL approaches, the level of agreement is positively related to individual-based measures of performance (including their financial contributions). Now that we have discussed the two dimensions of Figure 7.2—available knowledge, and level of agreement on aims and means—we can take a closer look at each of the five general approaches to decision-making that are used by managers: classical, political, trial-and-error, random, and administrative. CLASSICAL RATIONAL (HIGH AGREEMENT, HIGH KNOWLEDGE) The classical rational decision-making approach involves listing all possible options to choose from, determining the costs and benefits associated with each, and then choosing the best option.25 This method tends to assume that decisions are made in conditions of certainty, that there is a best choice to be made, and that explicit knowledge is more valuable than tacit knowledge.26 The classical rational method has traditionally been a favorite of FBL management, but it has been criticized for its unrealistic assumption that there is agreement on aims and means, complete information, and an ability to compute and analyze all of the information.27 That said, arguably management practices are getting better at facilitating agreement,28 and improvements in information systems and technologies are getting better at providing increasing amounts of data and data processing capacities, including technologies when there are multiple goals rather than single goals.29 SET management recognizes the world is too complex for there to be one best set of aims and means.  240 Chapter 7 Decision-Making Many tools have been developed for managers who want to use the classical approach to decision-making, including decision trees, break-even analysis, inventory and supply chain management models, and various techniques in the field of management science, to name just a few. Sometimes such tools developed for the classical rational approach are adapted and used in other decision-making quadrants. We use the material in the opening case to briefly highlight decision trees as an illustrative example of how this approach might be used. Imagine that in the case of the Ford Pinto, managers did not know exactly how many customers would bring in their car if the company decided to offer a recall (and thus how costly the recall would be). But based on information about previous recalls, the managers predicted that there was a 50% chance the recall costs would be $130 million and a 50% chance the cost would be $145 million. As shown in Figure 7.4, the expected costs would be $137.5 million (.50 x $130 +.50 x $145). Similarly, let’s assume the decision-makers did not know for certain how many people would have an accident because of the design flaw, nor did they know for certain what the actual costs of lawsuit claims would be. But based on past experience, they predicted that there was an 80% chance that total claims would be $20 million, and a 20% chance that claims would costs 167.5 million. The expected cost would therefore be $49.5 million: (.80 x $20 million) + (.20 x $167.5 millions). Based on strictly financial considerations, they would choose to pay the expected claims, because $49.5 million is a lot less than $137.5 million. Figure 7.4: Example of a simple decision tree Two options Recall vehicles Pay claims 50% = $130 million 50% = $145 million 80% = $20 million 20% = $167.5 million net = $137.5 million net = $49.5 million Finally, even with the new information processing technologies, full-fledged rational decision-making techniques are evident in only a minority of managerial decisions.30 In particular, it is rare to find situations where managers have complete information at their disposal and where no dilemmas are evident. Moreover, as illustrated in the opening case and the case of Edsel, poor decisions may be made even in situations where managers think that they have all the information they require to make a rational decision. Given the increased complexity associated with socio-ecological externalities, and the reality that many decisions facing SET organizations do not have one best choice to make, this method may be least likely in SET management (and most likely in FBL management). Decision-Making Chapter 7 241 POLITICAL (LOW AGREEMENT, HIGH KNOWLEDGE) The political decision-making approach involves negotiations about which means and ends to pursue, identifying costs and benefits associated with various options, with the final choice often reflecting a compromise that partially satisfies the competing interests of those involved. In this method, disagreement among decision-makers can be intense, even when there is agreement that the overarching goal is to maximize the financial interests of shareholders. For example, suppose there are three ways—increasing sales revenues, reducing production costs, and developing more technologically-advanced products--that are expected to be equally effective in increasing shareholder value by 10%. It is likely to be the case that marketing managers will prefer the option that focuses on increasing sales revenue, that manufacturing managers will prefer the option that focuses on reducing production costs, and research & development managers will prefer the option that focuses on developing the most technologically-advanced product. Often these competing alternatives will be mutually exclusive, or the organization will lack the resources to pursue all of them at the same time. Situations like this usually lead to a politicized decision where a variety of tactics may be used as different managers try to achieve their own preferred outcomes. These tactics include (but are not limited to): networking (ensuring that one has many friends in positions of influence) compromise (giving in on an unimportant issue in order to gain an ally who will support you when an issue that is important to you comes up) image building (engaging in activities that are designed to improve one’s image) selective use of information (using information selectively to further one’s career) scapegoating (ensuring that someone is blamed for a failure) trading favors (such as when a marketing manager agrees to support the manufacturing manager this year, but expects a favor in return next year). forming alliances (agreeing with key people that a certain course of action should be taken).31 The political decision-making method may be especially likely when decision- makers are seeking to enhance their own power, status, and financial interests. This is often assumed to be the case in traditional FBL and TBL management, since the approaches assume that individuals are motivated by self-interest.32 When employees perceive managers to be acting politically, anxiety increases, job satisfaction decreases, and managers are judged as being ineffective.33 In SET organizations, it is more likely that managers are willing to forgo their own gain in order to enhance positive social and ecological externalities, and debate with other decision-makers about the best ways of doing so. Decision-makers in such organizations may still participate in trading favors, forming coalitions, and building 242 Chapter 7 Decision-Making alliances, but the nature of this political behavior is qualitatively different because it is not as self-serving. Rather than decision-makers politicking to enhance their own interests, though that will still happen in SET organizations, they are politicking on behalf of others, and developing a more well-rounded understanding of externalities in the process.34 Several specific decision-making techniques have been proposed that are useful when the political approach to decision-making is used. Perhaps the most widely used technique is the decision matrix, which requires that certain subjective issues be systematically analyzed and quantified (to at least some extent) so that managers can more effectively compare the alternatives they are considering. (The decision matrix can actually be used with any of the other approaches to decision-making that are shown in Figure 7.2.) For example, suppose a company is deciding which one of three possible suppliers it will use. Managers can use the following 6-step process to do this (with opportunity for negotiation and political processes in many of the steps). Step 1 is to list the three alternatives (i.e., the three possible suppliers: A, B, and C). In step 2, criteria are established that will be used to compare the suppliers (these criteria might be things like discounts that suppliers are willing to give, their delivery reliability, their credit terms, their ecological footprint, and how well they treat their workers). Step 3 involves weighting the criteria in terms of their relative importance. In step 4, each alternative is scored on a 10-point scale, where 1 is poor and 10 is excellent (i.e., each supplier is rated on how well they perform on each criterion). In step 5, the total score for each supplier is calculated using the following formula: (criterion #1 score x the weight of criterion #1) + (criterion #2 score x the weight of criterion #2) +.... (criterion #6 score x the weight of criterion #6) = total score. In Step 6, the supplier with the highest score (Company C: 3,540) is chosen. The results of the analysis are shown in Table 7.2.) Table 7.2: A decision matrix for the example of choosing a supplier Weights 120 150 20 40 75 80 Criteria Alternatives Discount Assurance of supply Credit terms Ecological footprint Equipment loans Employee treatment Totals Company A 10 8 3 5 2 7 3,370 Company B 9 10 5 9 0 6 3,520 Company C 6 9 10 7 10 3 3,540 Decision-Making Chapter 7 243 TRIAL-AND-ERROR (HIGH AGREEMENT, LOW KNOWLEDGE) The trial-and-error decision-making method involves listing possible incremental options to choose from, attempting to determine the costs and benefits associated with each, and then choosing the option that offers the greatest opportunity for improvement with the lowest chance of making a mistake. For example, managers may agree that they want to increase the sales of their key product via advertising, but they may not agree on whether to use television, radio, print, or social media because they lack knowledge about the relative effectiveness of these different media for their product. As a marketing manager once said, “I know that half my advertising expenditures have no effect on sales; the trouble is, I don’t know which half.” In this case, managers often opt for an incremental approach, which might include making small changes or running pilot tests in various regional markets or with a small group of employees or customers. Continuous improvement refers to making many small, incremental improvements with regard to how things are done in an organization. Continuous improvement (kaizen) has been a pillar of the success for companies like Toyota, where it helps members to be open to new ideas and to build high quality automobiles. This method works best in a stable environment, and over the course of time, even incremental changes can result in major change within an organization.35 Finally, note that, because decision-makers in this quadrant have little knowledge available, especially for non-incremental decisions, when making such decisions managers must be more open to speculation and guessing.36 RANDOM (LOW AGREEMENT, LOW KNOWLEDGE) The random decision-making approach involves negotiations among decision-makers about which means and ends to pursue, and then making a choice even though decision-makers are unable to determine the costs and benefits associated with possible options. This is chaotic decision-making. Often decision-makers in this quadrant do not fully understand the problems and opportunities their organization is facing, and thus simply choose to address the problem-of-the-day with an idea they recently heard about. As such, this quadrant encompasses what has been called the “garbage can model” of decision- making, or organized anarchy. In the garbage can model, choosing a solution (step 3) often precedes identifying a problem (step 1). In other words, decision-makers in this quadrant recognize a possible strength and implement it, and hope that it solves some problem. For example, a manufacturer who thinks 3D printers are the wave of the future might purchase several without knowing how they might be used. An accounting firm may recognize that it has several accountants skilled at auditing non-profit organizations, and so set up a new department focusing on non-profit auditing, even though it currently has no non-profit clients.  244 Chapter 7 Decision-Making ADMINISTRATIVE MODEL (MEDIUM AGREEMENT/KNOWLEDGE) Because managers usually have at least some knowledge and at least partial agreement on aims and means, they often use some aspects of all of the decision-making models mentioned so far. The administrative approach is characterized by satisficing, which is evident when decision-makers do not attempt to develop an optimal solution to a problem, but rather collect enough information and develop enough alternatives until they feel they are able to choose one that provides an adequate solution. Satisficing is the result of bounded rationality which explains that individuals make sub-optimal decisions because they lack complete information and have limited abilities to process information (see Chapter 2).37 Satisficing means that individuals normally make adequate rather than optimal choices, which suggests that it falls short of what constitutes optimal decision-making. However, satisficing also has a great and compelling strength: it reduces the time decision-makers must spend when they are developing and evaluating alternatives. Of course, there is still the challenge of stipulating what constitutes an “adequate” analysis Satisficing means making adequate rather than optimal decisions. and/or solution. If managers view satisficing as an interim solution rather than a cast-in-stone decision, and if they are willing to learn from their mistakes, and if they are willing to un- do former decisions based on what they have learned, this contributes to an ongoing learning process. This brings us to final step in the decision-making process. 4: Implement & monitor STEP 4: IMPLEMENT AND MONITOR THE CHOICE The fourth step involves implementing and monitoring the chosen alternative. After implementation, the four-phase cycle starts over again at the first step, as the outcome is monitored to see if it has solved the problem or perhaps unintentionally created a new problem. Managers face two key challenges in this step: 1) overcoming resistance to implementing a decision (i.e., resistance to change); and 2) overcoming resistance to recognizing and admitting decision mistakes. We will look at each in turn. OVERCOMING RESISTANCE TO THE IMPLEMENTATION Obviously, some decisions require more effort to implement than others. Generally, a routine programmed decision will be easier to implement than a non-programmed decision. For example, buying a new copying machine will be easier than acquiring another company. The most difficult decisions to implement are the ones that challenge an organization’s entrenched scripts and ways of operating. Even a technically brilliant decision will fail if it is not implemented in a way that members will embrace. Chapter 13 deals at length with the change implementation process, so at this point we will simply describe how the earlier steps in the decision-making process can be helpful in reducing resistance to change. Perhaps the most fundamental way that managers can increase the likelihood that decisions will be implemented is to involve members in the decision-making process at the outset. Such involvement can be financially costly and is not necessary for many decisions, but it may be cost-effective and critical for some decisions.38 A manager is encouraged to involve members in the decision-making process when the manager lacks information to make the decision, when members can be trusted because their goals are aligned with the manager’s, when commitment from others is critical to success, and when there is ample time to make the decision.39 FBL/TBL approaches are inclined to limit employee participation in order to reduce financial costs,40 but they encourage participative decision-making when it serves the organization’s financial interests.41 SET managers are more likely to welcome participative decision-making because they recognize its inherent value in involving others and thereby increasing social well-being. As a result, SET managers are likely to meet less resistance during step 4, and are more likely to respect any resistance they do experience.42 Managers must not naïvely assume that participation will always lead to unanimity. The fact is that there will often be people who would rather not implement a particular decision. One way to deal with this reality is to make implementation invitational rather than required. SET managers may allow members who oppose implementing a decision to not implement it. For example, when Robert Greenleaf made managers at AT&T aware of the problem of low promotion rates for African-American employees (step 1 of the decision-making process), a number of alternatives were developed (step 2), and two were chosen for implementation (step 3) on an invitational and experimental basis (step 4). In the first experiment, Greenleaf worked with those who were agreeable to deliberately recruiting African-American employees for AT&T management training programs. The second experiment involved offering African-American technical specialists a broader range of job experiences in order to better prepare them for managerial positions. Initially some members opted out of both experiments, but over time these became the new normal “scripts” and helped to increase the proportion of African-American managers at AT&T almost tenfold (addressing issues in step 1).43 OVERCOMING RESISTANCE TO RECOGNIZING A MISTAKE Once a decision has been implemented, the decision-making process goes back again to step 1, where managers monitor its outcomes. If a decision has resolved the original issue, managers can continue to support the decision. However, research suggests that about half of all non-routine decisions fail.44 In such cases, where the decision has failed to resolve a problem or may have created unanticipated additional problems, the key for managers is to learn from their mistakes and to transform them into knowledge-creating events that can be used in future decision-making processes. As the great inventor Thomas Edison put it: “I have not failed. I have just found ten thousand ways that won’t Decision-Making Chapter 7 245 Participants in decision-making are less likely to resist implementing them. 246 Chapter 7 Decision-Making work.”45 In fact, CEOs from corporations like Netflix, Amazon, and Coca-Cola worry when their firms’ new projects do not fail often enough, suggesting that it means they’re not bold enough and not getting enough chances to learn from their failures.46 Unfortunately, many poor decisions persist for longer than they should because managers are reluctant to admit that they made a mistake. This persistence leads to escalation of commitment, which occurs when a manager perseveres with the implementation of a poor decision in spite of evidence that it is not working. Figure 7.6 shows three specific reasons why escalation of commitment occurs, but the most fundamental reason is that managers refuse to admit that they made a poor decision. First, escalation of commitment often occurs in tandem with information distortion, which refers to the tendency to overlook or downplay feedback that makes a decision look bad, and instead to focus on feedback that makes the decision look good. For example, one study found that, despite rising mortality rates in the pediatric cardiac surgery program at Bristol Royal Infirmary in England, key decision-makers in the hospital (in particular, the CEO and surgeons) chose to ignore indicators of poor performance and negative feedback, and developed norms and routines that limited the likelihood they would abandon their bad decisions and learn from their failing practices (see also Chapter 17 on managers’ reluctance to accept feedback).47 Figure 7.5: Factors that contribute to escalation of commitment Information distortion Too much persistence Escalation of commitment Administrative inertia Second, escalation of commitment can also be caused by giving too much emphasis to persistence, which refers to remaining committed to a course of action despite obstacles. Persistence can be expressed as “When the going gets tough, the tough get going.” For example, when asked about the key secret to his success, Facebook CEO and co-founder Mark Zuckerberg said: “Don’t give up.”48 This is reinforced by stories about managers who refused to admit failure despite early negative feedback and were subsequently treated as heroes when their decision turned out to be right. For example, an engineer named Chuck House at Hewlett-Packard received a “Medal of Defiance” because, even though Dave Packard himself had told him to quit working on a particular project, he persisted with using organizational resources to develop what eventually became a highly-successful new product.49 In this case not listening to the boss garnered a positive response, but in many other cases it will garner a certificate of a different sort (i.e., a “pink slip” indicating termination of employment). The challenge of knowing when to persist, and when to abandon and learn for a mistaken decision, is especially relevant for entrepreneurs operating in a context with a high level of uncertainty. For example, there Decision-Making Chapter 7 247 have been many occasions where software game developers invested too many resources into games that were never released.50 Third, escalation of commitment can also occur because of administrative inertia. Administrative inertia happens when existing structures and systems persist simply because they are already in place. Administrative inertia is related to the concept of sunk costs, which suggests that once investments have been made in a project, managers are more likely to persist with that project even when it is not going well. Inertia is a particularly salient for the decision-makers who made the decision in the first place. If millions of dollars have been spent on a merger that is of questionable value, once that merger has become part of the organization’s new structure, managers will be reluctant to undo that decision even though it has led to poor organizational performance.51 What can be done to reduce the likelihood that escalation of commitment will occur? One option is to make decisions in groups, rather than give decision-making responsibility to a specific manager, because groups may feel less threatened when admitting a decision-mistake.52 Another tactic is to set specific criteria or performance milestones when the decision is made regarding what will constitute unacceptable performance outcomes. Software game developer Steve Fawkner describes how, even though a project was failing to meet milestone performance targets, his company persisted on the project for an additional 6 months, by which time: “Our studio had been ruined, and we were down to three employees.”53 Rather than view decisions as a legacy to be maintained, managers should ask themselves what they have learned from their decision that can improve future decisions. In particular, managers must be bold enough to take what they have learned and undo poor decisions. Recognizing a previous faulty decision is often easier for new managers than for the managers who originally made the poor decision. For example, new managers are 100 times more likely to sell a business unit that was acquired as a result of a poor decision than the managers who made the acquisition decision in the first place.54 Managers who regularly challenge the status quo, as SET managers may be more likely than FBL/TBL managers to do, may find it easier to avoid escalation of commitment because they are more likely to see decisions as “experiments” which can be improved via subsequent feedback and participation. More generally, managers who are predisposed to improving decisions for the overall good, rather than defending their own narrow agendas or values, are more likely to be open to change.55 This reduces the likelihood of escalation of commitment, information distortion, inappropriate persistence, and administrative inertia. It also increases the likelihood that managers will learn from poor decisions. Entrepreneurship