DECISION MAKING PROCESSES
Yariv Taran, PhD
IKE Research Group
AAU Business School
Aalborg University
yariv@business.aau.dk
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• Short Video: https://www.y outube.com/watch?v =qvlG_YcZS 3g
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OBJECTIVE
In this lecture you will:
1. learn the principle of the classical model of rational
decision making.
2. The limitations of rational decision making and the
important concept of bounded rationality.
3. Four decision making models integrated into a
single contingency model of organizational decision
making:
◦ the management science approach
◦ the Cyert-March-Simon (aka Carnegie) model
◦ the Mintzberg incremental decision process
◦ the garbage can model
4. Strategy under uncertainty. For more info. see:
Organization Theory and Design
Eleventh Edition – chapter 12
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Why is it important to talk about
decision-making with relations to
innovation studies?
- WHAT DECISION S ARE NE EDED TO BE MAD E? IN WHAT PHAS ES?
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Decisions, decisions, decisions..
In choosing between two options it could be that both are right (positive
payout); both are wrong (negative payout); or only one is right.
What happens when you have multiple options to choose from? The
higher the diversity of options the more difficult it is to make the “right”
(most optimal) choice.
The higher the uncertainty and complexity the more difficult it is to know
what is “right”.
Peoples' diversity, and their different values and perceptions, leads to
dissimilar choices and decisions as to what is considered to be ”right”..
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”Nothing comes to my desk that is
perfectly solvable”.
”In any given decision I make, I will
wind-up with 30 or 40 percent
chance that it isn’t going to work”.
“Reality does not conformed to
sound bites, and you have to often
times accept that the solutions
that you thought made sense, in
fact, have to be modified and
accommodate a very tough
reality”.
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Managerial Decision Making
◦ Decision making: “The process by which managers respond to
opportunities and threats by analyzing options and making decisions
about goals and courses of action” (Jones and George, 2011).
◦ Decisions in response to opportunities: managers respond to ways
to improve organizational performance.
◦ Decisions in response to threats: occurs when managers are
impacted by adverse events to the organization.
◦ Organizational decision making process – involves identifying and
solving problems
◦ Problem Identification
◦ Problem Solution
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Decision Making Types
Programmed Decisions: Routine, virtually automatic decision-making that follows
established rules or guidelines
◦ Managers have made the same decision many times before.
◦ There are rules or guidelines to follow based on experience with past decisions.
Non-programmed Decisions: Nonroutine decision making that occurs in unusual
situations that have not been often addressed.
◦ No rules to follow since the decision is new.
◦ Decisions are relatively based on limited information, and on mangers’ intuition and judgment.
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The role of rationality in decision-making
Rational - reasonable or logical.
◦ Rational people “do things” based on logic, as opposed to impulse decision.
Rational managerial approach – ideal method for how managers should make
decisions.
Bounded rationality perspective – decisions are made under severe times and
resource constraints.
Irrationality - an action or opinion given through inadequate use of reason,
emotional distress, or cognitive deficiency. The term is used to describe thinking
and actions that are, or appear to be, less useful, or more illogical than other - more
rational alternatives.
(NOTE: The meaning of "rational approach" used here differs from the notion of “rational behavior” in
economic theory. The rational model of economics assumes that individuals maximize subjective utility.) 9
Bounded Rationality
The bounded rationality perspective on decision making recognizes
that the rational approach is often inapplicable, because of:
➢limited time and mental capacity
➢limited information
➢limited resources
➢personal and social constraints on the individual
Bounded rationality constraints are mostly present under non-
programmed decisions conditions.
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Bounded Rationality as an inherent outcome
in today’s business environment
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The problem: Do mangers gamble or manage
their decision-making choices?
⚫Managers do not have the time or money to search for all
alternatives.
⚫In effect: At best, managers explore a limited number of
options and choose an acceptable decision rather than the
optimum decision.
http://www.starresults.com/
Administrative behavior theory
Herbert A. Simon
1. Managers select the first alternative that is satisfactory. 1916 – 2001
2. Managers recognize that their conception of the world is simple.
3. Managers are comfortable making decisions without determining all the alternatives.
4. Managers make decisions by the rules of thumb or heuristics.
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Satisficing
⚫ The term satisficing, a portmanteau (combination) of satisfy and suffice, -
was introduced by Herbert A. Simon in 1956.
⚫ Satisficing is a decision-making strategy, or cognitive heuristic, that entails
searching through the available alternatives until an acceptability threshold is
met (Colman, Andrew, 2006). That is, managers select the first alternative
that is good enough, since the costs in time and effort to look further are too
great.
⚫ This is contrasted with optimal (most rational) decision making, an approach
that specifically attempts to find the best alternative available.
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Decision makers use in many cases heuristics to deal
with bounded rationality.
◦ Heuristic: is any approach to problem solving, learning, or discovery that employs a
practical methodology not guaranteed to be optimal or perfect, but sufficient for the
immediate goals.
◦ Where finding an optimal solution is impossible or impractical, heuristic methods can be
used to speed up the process of finding a satisficing solution. For example:
◦ Rule of thumb - (YES/NO).
◦ (expert) Educated guess - that is verified later by its results. For example: deciding something based on its
probability to occur in view of previous circumstances experiences, which were quite similar in nature.
◦ Intuitive judgment - receiving input and ideas without knowing exactly how and where you got them from
(“follow your nose”..).
◦ Stereotyping/ Profiling - a thought that can be adopted about specific types of individuals or certain ways of
doing things. These thoughts or beliefs may or may not accurately reflect reality.
◦ Archetypes- the extrapolation of information about something, based on known qualities.
◦ Common sense – ability to perceive, understand, and judge things, which is shared by (i.e. common to) nearly
all people.
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Types of Cognitive Biases
Prior hypothesis bias: managers allow strong prior beliefs about a
relationship between variables and make decisions based on these beliefs even when
evidence shows they are wrong.
Representativeness: decision makers incorrectly generalize decisions
from a small sample or one incident.
The illusion of control: manager over-estimates their ability to control
events.
Escalating commitment: managers have already committed
considerable resources to the project and then commit more even after feedback
indicates problems.
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Cognitive Biases
◦ If the heuristic method applied is incorrect, then poor decisions result from its
use, followed by, possibly, catastrophic impact to the organization.
◦ Systematic cognitive bias errors can result from use of an incorrect heuristic.
These errors will appear over and over since the rule used to make decision is
flawed.
◦ “Insanity is doing the same thing over and over again, but
expecting different results” Albert Einstein.
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The very highest level of the hierarchy. Make very big decisions that:
1) Must consider the whole organisation, not just part of it.
2) Changes the organisation’s future, and are expensive and long-term (e.g. years).
3) Could be disastrous if wrong, given that these decisions define the nature of the
organisation.
These people are still high-level, and make important decisions in their own areas.
But, they follow instructions from above (from the strategic management level).
1) Tactical managers implement many of the decisions made at the strategic level.
2) They take a big idea and work out how to make it happen.
3) Their decisions are usually limited to a business unit of the organisation (e.g.
marketing and sales, logistics, production).
4) Decisions implementation timeline are in most cases medium-term (e.g. months,
weeks).
5) Have the power to pass down decision choices to the next level of management.
Operational semi-managers are working closely with non-management staff and the
public.
1) They make day-to-day decisions that are vital to actually make things happen (e.g.
team leaders).
2) Real time decisions.
3) They are at the “epicentre” of doing business and making money.
Carpenter, Bauer, and Erdogan
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General Criteria for Evaluating Possible Courses of Action
Criteria
Legality Is the alternative legal both in this country and
abroad for exports?
Ethicalness Is the alternative ethical and will not bring
harm stakeholders unnecessarily?
Economic Feasibility Can organization’s performance goals sustain
this alternative?
Practicality Does the management have the capabilities
and resources required to implement the
alternative?
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ORGANIZATIONAL DECISION MAKING
In organizations, decisions are made by a collective rather than a single individuals, so that decision
making processes are more complicated. The complication arises from the possibility of
disagreement among influential members (such as managers), or groups (teams), within the
organization.
Small assignment in small groups: (15-20 min.)
Recall an episode in which you decided together with one or
several other persons. Describe the decision-making process.
• How was the decision-making process affected by the fact
that several persons were deciding together?
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Contingency Framework for using decision
models (Daft, Murphy and Willmott, 2010)
The contingency framework is based on 2 organizational characteristics that determine the use of
decision approaches:
◦ Problem consensus = what is the problem? degree of agreement on goals among managers. It’s especially
important for the problem identification phase. Tend to be low when organizations are differentiated, given
that differentiation leads to disagreements and conflicts. In effect, managers must make special effort to
build coalitions during decision making.
◦ Solution knowledge = how to resolve it? understanding and agreement about how to solve problems and
reach organizational goals. The means to solve identified problems is leading towards a problem solution
phase (cause-effect relationships). Disagreements here will lead to conflicting policy and sloppy
implementation activities.
Analyzing organizations along these two dimensions suggests which approach will be used to make
decisions in various circumstances.
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Contingency Framework for using decision models
(Daft, Murphy and Willmott, 2010)
Problem
Consensus
Solution
Knowledge
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Cell 1:
Rational decision procedures are used
Little uncertainty
Alternatives can be identified and the best
solution adopted through analysis and
calculations.
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INDIVIDUAL DECISION MAKING
Rational Approach
The rational approach to decision making is the systematic analysis
of a problem and choice of a solution.
Rational decision making takes place in 2 stages (problem
identification and problem solution) and can be further broken
down into e.g. 8 steps.
"The stage of the rational approach to decision making in which
alternative courses of action are considered and one is chosen and
implemented is called problem solution.“
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Rational Approach - Assumptions
• Assumes all information is available to managers
– List alternatives and consequences.
• Rank each alternative from low to high -
Assumes manager can process information.
• Select best alternative - Assumes manager
knows the best future course of the
organization.
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Management Science Approach (organization level)
Rational in nature. It is based on the use of statistical & mathematical models to find optimal solution to a
given problem.
Works best for decisions when problems are analyzable.
◦ Use of statistics to identify relevant variables.
◦ Very successful e.g. to secure traditional manufacturing efficiency related problems.
◦ Good tool for decisions where variables can be identified and measured.
A drawback: non-practical in mid to high uncertain conditions.
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Cell 2:
High uncertainty about problem and
priorities.
Bargaining and compromise are used to
reach consensus.
Particularly important at the problem
identification phase.
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Constraints and tradeoffs
[individual decision making]
o In some cases, several constraints are imposed directly on the
decision maker him/herself – the individual manager.
o For example: taking responsibility on the outcome – whatever it
may be; Conflicting opinions at the board level, put pressure back
on the CEO to make the final decision; Private (non-organizational)
matters can also affect decisions..
o Corporate culture and ethical values also influence decision
making. – Emotional intelligence (i.e., “the ability to perceive, use,
understand, manage, and handle emotions”.)
o For many important decisions, when outcome circumstances are
ambiguous, leaders are looking for social support and a shared
perspective, not necessarily for seeking acceptance and joint-
agreement, but rather for making more (self) informed decision.
"A good leader takes a little more than his share of the blame, a little less than his share of the credit." ~ Arnold H. Glasgow
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Cyert-March-Simon (Carnegie) Model
[organizational level]
o Developed by Richard Cyert, James March, and Herbert Simon, originally at Carnegie-Mellon
University. This model is the organizational analog of the bounded rationality approach at the
individual level.
o It emphasizes the group – organizational challenge of bounded rationality (limited time &
mental capacity of managers, limited information & resources, so a rational solution often
cannot be derived).
o There is often disagreement among managers about goals, so decision making often
necessitates the formation of coalitions of managers who agree on goals and priorities. Thus,
the Cyert-March-Simon model emphasizes the political process involved in decision making
under uncertain conditions.
o Hence, managers tend to engage in a problemistic search (= looking around for a quick solution
in the immediate, local environment, rather than trying to develop the optimal solution).
o Thus, solution is often chosen to "satisfice" (satisfy + suffice) rather than optimize.
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Choice processes in the Carnegie Model
Coalition – is an alliance among
several managers who agree about
organizational goals and problem
priorities.
Coalition is needed for two reasons:
1) ambiguous (overall)
organizational goals, and 2)
inconsistencies of various
departments operative goals.
It could include managers from line
departments, staff specialists and
even external stakeholders such as
powerful customers, suppliers,
union representatives etc.
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Cell 3:
Problems (identification) are certain i.e.
agreed on, but alternative technical
solutions are vague, poorly understood and
uncertain.
Agreeing about problems, but don’t know
how to solve them
Individuals will possibly use intuition;
managers will rely mostly on past experience
and judgment to make an informed decision.
Rational approach is not effective under
these circumstances.
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Judgment trail and error [Individual]
o When an individual manager face this situation, intuition (heuristics methods)
will be the decision guideline e.g. a rule of thumb; educated guess; an intuitive
judgment; Stereotyping; Profiling; common sense.
o In many cases the manager will rely on past experiences and judgments to
previous decisions made. e.g.
o “copy” a successful decision applied in similar circumstances by her/him or
others (i.e. imitation).
o Avoid decisions that didn’t succeeded and try something new. Or,
o Learn from failure - try and improve on a failure decision made in the past.
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Incremental Decision Model
[organizational level]
Focus on structured sequence of activities from discovery to
solution.
Large decisions are a collection of small choices.
Decisions are taking place systematically in accordance with three
distinct phases:
◦ Identification phase
◦ Development phase
◦ Selection phase
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Incremental Decision Process Model -
[Organizational level]
Developed by Henry Mintzberg at McGill
University, based on empirical research
into the actual decision-making process of
firms developing new products.
The incremental decision process model
emphasizes the structured sequence of
activities leading towards a solution to a
given problem.
Major decisions are broken down in small
steps taking place in three major phases:
the identification, development,&
selection phases. Followed by three
dynamic Factors.
This model places less emphasis on the
political and social factors described in the
Carnegie model, but tells more about the
structured sequence of activities.
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Cell 4:
High uncertainty regarding both problems
(what to do?) and solutions (how to do it?).
Managers can possibly also employ
techniques from Cells 2 or 3.
Inspiration (innovative and creative) and/or
imitation techniques may be required.
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Option 1: Combination of models [to both single and
organization levels] - When problem identification and problem solution are
uncertain
As part of organizational learning activities, in situations where high uncertainty and complexity evolve a
combination of two models could be considered.
One model for problem identification, and one model for problem solution.
There is no conflict between the two models. This combination may evolve into a “garbage can” (option 2) model.
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Option 2: Garbage-Can Model
Thinking of the whole organization, the garbage can model was developed by Cohen, March, & Olsen to
describe organizations characterized by organized anarchy (= high uncertainty in both problem
identification and problem solution),
Non comparable to other models mentioned, because it deals with the pattern or flow of multiple
decisions within organizations, whereas the incremental and the Carnegie models focus on how a single
decision can be made.
Organized anarchy: an extremely organic organization, rapid changes which do not rely on normal vertical
hierarchy of authority and bureaucratic decision rules due to:
◦ Problematic preferences of goals, alternatives, solutions.
◦ Unclear, poorly understood technology.
◦ Turnover uncertainties. Performance challenges.
Systemic view: The model suggests to investigate streams of events instead of defined problems and
solutions sequence of steps that begin with a problem and end with a solution.
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Illustration of Independent Streams of Events in
the Garbage Can Model of Decision-Making
The four streams of the model:
1. Problems – dissatisfaction with current
activities and performance.
2. Potential solutions - proposed for adoption
(could also be independent from problems).
3. Choice opportunities - occasions when an
organization usually makes a decision. Usually
occur when the right mix of participants,
solutions (proposals), and problems exists.
4. Participants – employees in the organization.
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Possible consequences of the
Garbage Can Model
1. Solutions may be proposed even when problems do not exist
2. Choices are made without solving problems
3. Problems may persist without being solved
4. A few problems are solved
“..Thus, when viewing the organization as a whole, and considering its high level of uncertainty, one sees a
problem arise that are not solved, and solutions tried that do not work” (Daft et al. 2010 P. 512)
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Food for thought..
• ”Managers may walk a fine line between two extremes: on the one
hand, making arbitrary decisions without carful study, and on the
other, relying obsessively on numbers and rational analysis.
Remember that the bounded rationality perspective, and the use
on (heuristics) intuition, apply mostly to nonprogrammed decisions.
The novel, unclear, complex aspects of nonprogrammed decisions
[such as radical/disruptive innovations] mean hard data and logical
procedures are not available” (Daft et al. 2010 P. 498)
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Strategy Under Uncertainty (Courtney et al. 1997; Courtney , 2003 )
New to the
industry/world
innovations
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(Courtney , 2003)
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The Three Strategic Postures (i.e. positions)
First Mover – proactive Fast Second – reactive Late Mover – proactive/reactive
Prospector strategy Analyzer strategy Prospector/ Analyzer strategy
“shapers” - When shaking up “adapters” - React to the opportunities the market offers: Relevant only in levels 2, 3 and 4.
relatively stable level 1 • In environments with little uncertainty (levels 1 and 2), Involves making incremental investments today that
industries or by trying to “adapters” choose a strategic positioning focused on put a company in a privileged position, through either
control the direction of the how to compete in the current industry. superior information, cost structures, or relationships
market in industries with • At higher levels of uncertainty, (levels 3 and 4) their between customers and suppliers. That allows the
higher levels of uncertainty strategies are designed on the ability to recognize and company to wait until the environment becomes less
(levels 2, 3 or 4). respond quickly to market developments. uncertain before formulating a strategy.
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THANK YOU!
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