MANAGING ORGANIZATIONS

PGP 2012-14 Section C & ETerm 1:June-September 2012

Sourav MukherjiAssociate Professor of Organization & StrategyIndian Institute of Management Bangalore, India

Session 14: Organizational Decision Making

© S Mukherji

INDIVUDUALS ARE INTENDEDLY RATIONAL BUT BOUNDEDLY SO

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A sequential process comprising systematic analysis

Monitor environment

Define problem

Specify decision objective

Diagnose problem

Develop alternative solutions

Evaluate alternative

Choose best alternative

Implement

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The rational model assumesno constraints of resources and cognitive abilities

In real life, individuals are found to ‘satisfice’ , i.e., do a neighborhood search and choose the option that nearly matches their expectation

• High cost of gathering information (decreasing marginal utility)• In built biases , peer pressure• Past experiences• Cognitive limitations • Unpredictability, causal ambiguity

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CAN RATIONALITY BE JUDGED IN ABSOLUTE TERMS? 3

People were found to order greater variety of beer in pubs when order was taken sequentially and aloud. This resulted in higher dissatisfaction.

When they were asked to write down the orders, the variety reduced. This also led to greater satisfaction.

There was no difference in ordering pattern for the first person at the table. S/he was also most satisfied in the first case.

The tendency to order greater variety was different across different cultures.

Source: “Predictably Irrational” , Dan Ariely, 2008

Author portrays this as an evidence of human beings being “predictably irrational”.

He says “ In essence, people, particularly those with high need for uniqueness, may sacrifice personal utility in order to gain reputational utility”

Do you think the above behaviour to be irrational ?

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A CONTINGENCY MODEL OF ORGANIZATIONAL DECISION MAKING 4

Solution or KnowledgeCertainty

Problem Consensus

Rational / computational

Bargaining, coalition formation

Uncertain

Certain

High Low

Judgment, trial and error,complement rationality

Bargaining, Judgment, trial and error,Non systematic

Management Science modelCarnegie modelIncremental modelGarbage- Can model

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External appraisalThreats and Opportunitiesin environment

Internal appraisalStrengths and Weaknesses oforganization

Generatingstrategicalternatives

Evaluation and choice

Managerialvalues

Socialresponsibilities

Implementation

• Resource allocation• Control systems

• measures• incentives• performance evaluation • feedback

• Supporting structures and policies

5RATIONAL MODEL OF STRATEGY FORMULATION AND IMPLEMENTATION

Assumptions

Purpose

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Intended strategyPlanned, top down

Deliberate strategy

Realized strategy

Emergent strategyUnplanned, bottom-up

Unrealizedstrategy

Strategy is both a plan , i.e., a direction, a guide, a course of action into the future and a pattern, i.e., consistency in behaviour over time. On one hand it involves ‘thinking ahead’ and ‘controlling’ the way one moves forward, while on the other hand, it is about ‘learning’ and ‘adaptation’ en-route

Objectiveenvironment

Perceivedenvironment

Enactedenvironment

6IN REALITY, INTENDED STRATEGIES ARE PARTIALLY REALIAZED

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Perceived / enacted environment

Theory of business –collective wisdom

Strategic choice

Structure &processesc Performance

Error detection& correction

evaluationSingle looplearning

Double looplearning

7LEARNING MODEL OF STRATEGY FORMULATION AND IMPLEMENTATION

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WELL PERFORMING TEAMS LEARN TO DEAL WITH CONFLICTS DURING ORGANIZATIONAL DECISION PROCESSES

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Six key characteristics have been identified

Work with more rather than less information so that debates are based on facts rather than opinions1

Develop multiple alternatives to enrich level of debate2

Share commonly agreed upon goals3

Make conscious efforts to reduce hostility and stress - Use humour

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Maintain a balance of power structures5

Resolve issues without forcing consensus6

Focus on issues rather than personalities

Collaborate to find best possiblesolution for the organization

Establish fairness and equity ofthe process – proceduraljustice

© S Mukherji

MCDONNEL DOUGLAS DC 10’S DEFECTIVE DOORS 9

What do you think were the problemsthat led to the series of crashes of MD DC10, many of which were tracedto the design of its door?

Why was McDonnell Douglas reluctantto rectify its mistakes?

What was the business context in whichthe events take place?

© S Mukherji

MCDONNEL DOUGLAS DC 10’S DEFECTIVE DOORS 10

What were the reasons for Convair Engineers to oppose the change?

SafetyFamiliarity with old technology ? Lack of appreciation for cost and performanceissues ?

Light weight, easier maintenance, technologically advanced

What were the reasons for MD to change the design for the fuselageand the doors of DC 10?

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MCDONNEL DOUGLAS DC 10’S DEFECTIVE DOORS 11

Why did Convair not pursue the changes ? Why did Applegate fileaway his memo?

Mandate as per the contractLack of powerCost of modificationEye on future contracts ? MD was already aware of the problems – there was nothing new to be told to them

Structurally it is difficult for FAA to be “independent”. FAA did not want Boeing monopoly

Why did MD not make the changes ?What role was the FAA playing? Cost and schedule pressures

Acceptable risk, technology cannot be perfectReluctance to admit mistakes, escalation of commitment

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INTERORGANIZATIONAL DECISIONS ARE FURTHER COMPLICATED BY CONFLICT OF INTERESTS AND RESOURCE DEPENDENCIES

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McDonnel Douglas

Convair

Federal Aviation Administration (FAA)

Outsource, share short term financial burden

Dependence for business, reputation as a supplier

Terms of contract specifyingresponsibilities and liabilities

Pressure to come up with an airbus, Losing market share to BoeingDesign objectives:

- Safety- Ease of maintenance- Low weight

Wants competition

Dependent on airlinesfor personnel, legitimacy Cannot directly report

to FAA

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SO WHERE DOES MD DC-10 DOOR CASE LEAVE US WITH RESPECT TO ORGANIZATIONAL DECISION MAKING?

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Decision making in organizations follow a complex process because of multiplicity of objectives, involving several actors

Constraints of time and resources force decision making with incompleteinformation

Unpredictability of business environment, competitor reactions makes it necessary to take risks and deal with uncertainty

Bounded rationality, biases, group think, escalation of commitment adds to the non-rationality that is inherent in such process

What can be done about it ?

Awareness that decision making is unlikelyto follow a sequential predicable process, especially for non-routine decisions that are visible and that impact the well being of several people

• What is the primary objective and what are the other objectives that need to be kept in mind ?• What are the biases as individuals as well as an organization ? • Can we articulate our mistakes and learn from them ? • Is enough voice given to the dissenting opinion ?