Decision-Making Models

The approach  managers use to make decisions usually falls into one of three types—the classical model,  the administrative model, or the political model. The choice of model depends on the manager’s personal preference, whether  the decision is programmed or nonprogrammed, and the extent to which the decision is characterized by risk, uncertainty, or ambiguity.

1. CLASSICAL  MODEL

The classical model of decision making is based on economic assumptions. This model has arisen within the management literature because managers are expected to make deci- sions that are economically  sensible and in the organization’s best economic interests. The four assumptions underlying this model  are as follows:

  1. The decision maker operates to accomplish  goals that are known and agreed upon.Problems are precisely formulated  and defined.
  1. The decision maker strives for conditions of certainty, gathering complete information.All alternatives and the potential results of each are calculated.
  1. Criteria for evaluating alternatives are known. The decision maker selects the alternative that will maximize the economic return to the organization.
  2. The decision maker is rational and uses logic to assign values, order preferences, evaluate alternatives, and make the decision that will maximize the attainment of organizational goals.

The classical model of decision making is considered to be normative, which means it defines how a decision  maker should make decisions. It does not describe how managers actually make decisions so much as it provides guidelines on how to reach an ideal outcome for the organization. The value of the classical model  has been its ability to help decision makers be more rational. Many managers rely solely on intuition and personal preferences for making decisions.13 For example, during this era of rising medical costs, decisions in hospitals  and medical  centers about who gets scarce resources such as expensive procedures and drugs are usually made on an ad hoc basis. Administrators at the University of Texas Medical  Branch, however, are using the classical model to provide some clear guidelines and rules that can be consistently  applied.  A committee of administrators, doctors, and mid-level  staffers codified a top-to-bottom system for allocating medical services. Patients without insurance must pay upfront to see a doctor. Strict rules bar expensive drugs being given to patients who can’t pay for them. Screeners  see patients as soon as they  come  in and follow clear, rational procedures for determining who is eligible for what services. A special fund can pay for drugs that are off-limits to poor patients, but approval has to come from the chief medical director, who often uses cost-benefit  analysis to make her decisions. The hospital’s rationing  system is controversial. However, top managers argue that it helps the institution impartially care for the poor at the same time it adheres to rational budget restrictions needed to keep the institution financially solid.14

In many respects, the classical model  represents an “ideal” model of decision making that is often unattainable by real people in real organizations. It is most valuable when ap- plied to programmed decisions and to decisions characterized by certainty or risk because relevant information is available, and probabilities  can be calculated. For example, new analytical software programs automate many programmed  decisions, such as freezing  the account of a customer  who has failed to make payments, determining  the cellular phone service plan that is most appropriate for a particular  customer, or sorting insurance claims so that cases are handled most efficiently.15  Airlines use automated systems to optimize seat pricing, flight scheduling, and crew assignment decisions. GE Energy Rentals uses a system that captures financial and organizational information about customers to help managers evaluate risks and make credit decisions. The system has enabled the division to reduce costs, increase processing  time, and improve  cash flow. In the retail industry,  software programs analyze current and historical sales data to help companies such as The Home Depot and Gap decide when, where, and how much to mark down prices.16

The growth of quantitative decision techniques that use computers  has expanded the use of the classical approach. Quantitative techniques include such things as decision trees, payoff matrices,  break-even  analysis, linear programming,  forecasting, and operations research models.  The NBC television network uses a computer-based  system to create optimum advertising schedules.

2. ADMINISTRATIVE   MODEL

The administrative model of decision making  describes how managers actually make decisions in difficult situations,  such as those characterized by nonprogrammed  decisions, uncertainty, and ambiguity. Many management decisions are not sufficiently programma- ble to lend themselves to any degree of quantification.  Managers are unable to make eco- nomically  rational decisions even if they want to.18

Bounded Rationality and Satisficing. The administrative model of deci- sion making is based on the work of Herbert A. Simon. Simon proposed two concepts that were instrumental in shaping the administrative model: bounded rationality and sat- isficing. Bounded rationality  means that people have limits, or boundaries, on how rational they can be. The organization  is incredibly complex, and managers have the time and ability to process only a limited amount of information with which to make deci- sions.19   Because managers do not have the time or cognitive ability to process complete information about complex decisions, they must satisfice. Satisficing means that deci- sion makers choose the first solution alternative that satisfies minimal decision criteria.

Rather than pursuing all alternatives to identify the single solution that will maximize economic returns, managers will opt for the first solution that appears to solve the prob- lem, even if better solutions are presumed to exist. The decision maker cannot justify the time and expense of obtaining complete information.20

An example of both bounded rationality  and satisficing occurs when a manager on a business trip spills coffee on her blouse just before an important  meeting. She will run to a nearby  clothing store and buy the first satisfactory  replacement  she finds. Having neither the time nor the opportunity to explore all the blouses in town, she satisfices by choosing  a blouse that will solve the immediate problem. In a similar  fashion, managers sometimes  generate alternatives  for complex problems only until they find one they believe will work. For example,  several years ago,  then-CEO William Smithburg of Quaker attempted to thwart takeover attempts but had limited options. He satisficed with a quick decision to acquire Snapple, thinking he could use the debt acquired in the deal to discourage a takeover.  The acquisition had the potential to solve the problem at hand; thus, Smithburg looked no further for possibly better alternatives.21  David Stein- berg was too impatient for any kind of decision making other than satisficing, but it served him well,  as shown  here.

The administrative  model relies on assumptions different from those of the classical model and focuses on organizational factors that influence individual  decisions. It is more realistic than the classical model for complex, nonprogrammed decisions. According  to the administrative model:

  1. Decision goals often are vague,  conflicting, and lack consensus  among Managers often are unaware of problems or opportunities that exist in the organization.
  1. Rational procedures are not always used, and, when they are, they are confined to a sim- plistic view of the problem that does not capture the complexity of real organizational events.
  2. Managers’ searches for alternatives are limited because of human, information,  and re- source constraints.
  3. Most managers settle for a satisficing rather than a maximizing solution, partly because they have limited information and partly because they have only  vague criteria  for what constitutes a maximizing  solution.

The administrative model is considered to be descriptive, meaning  that it describes how managers actually make decisions in complex situations rather than dictating how they should make decisions according to a theoretical ideal. The administrative model recognizes the human and environmental limitations that affect the degree to which managers can pursue a rational decision-making  process.

Intuition. Another aspect of administrative decision making is intuition. Intuition represents a quick apprehension of a decision situation  based on past experience but with- out conscious thought.22 Intuitive decision making is not arbitrary or irrational because it is based on years of practice and hands-on experience that enable managers to quickly iden- tify solutions without going through painstaking computations. In today’s fast-paced, tur- bulent business environment,  intuition plays an increasingly important role in decision making. A survey of managers conducted by Christian and Timbers found that nearly half of executives say  they rely more on intuition than on rational analysis  to run their companies.23

Cognitive psychologist Gary Klein studied how people make good decisions using their intuition under extreme time pressure and uncertainty.24  Klein found that intuition begins with recognition. When people build a depth  of experience and knowledge  in a particular  area, the right decision often comes quickly  and effortlessly  as a recognition of information that has been largely forgotten by the conscious mind. For example, firefighters make decisions  by recog-nizing what is typical or abnormal about  a fire, based on their experience. Similarly, in the business world, man- agers continuously  perceive and process information that they may not con- sciously be aware of, and their base of knowledge and experience helps them make decisions that may be character- ized by uncertainty and ambiguity.

Research  by a  growing number of psychologists  and neuroscientists  af- firms the power of  our unconscious minds in making decisions. Studies of intuition indicate that the unconscious mind has cognitive abilities that some- times surpass  those of the conscious mind.25  Howard Schultz turned Star- bucks into a household   name  by fol- lowing his intuition that the leisurely caffe model  he observed in Italy would work in the United States. Jerry Jones based  his decision  to buy the losing Dallas Cowboys on intuition, and then made  a series of further intuitive decisions that turned the team back into a winner.26 Another example comes from the Fox television network, where prime-time ratings were dismal until Steven Chao came up with America’s Most Wanted and Cops. Initially, everyone hated the idea of these raw, crime-oriented shows, but Chao and his boss Barry Diller stuck with their gut feelings and pushed the projects.27

However,  many other examples show intuitive decisions that failed, and scholarly stud- ies emphasize that managers should take a cautious approach, applying intuition under the right circumstances and in the right way rather than considering it a magical way to make important  decisions.28 Managers may walk a fine line between two extremes: on the one hand, making arbitrary decisions without careful study, and on the other, relying obses- sively on rational analysis. One is not better than the other, and managers need to take a balanced approach by considering both rationality  and intuition as important components of effective decision making.29

3. POLITICAL  MODEL

The third model of decision making is useful for making nonprogrammed decisions when conditions are uncertain, information  is limited, and managers may disagree about what goals to pursue or what course of action to take. Most organizational  decisions involve many managers who are pursuing different  goals, and they have to talk with one another to share information and reach an agreement. Managers often engage in coalition building for making complex organizational decisions. A coalition is an informal alliance among man- agers who support  a specific goal. Coalition  building  is the process of forming alliances among managers. In other words, a manager who supports  a specific alternative,  such as increasing the corporation’s growth by acquiring another company, talks informally to other executives and tries to persuade them to support the decision.

The political model closely resembles the real environment  in which most managers and decision makers operate. For example, interviews with CEOs in high-tech industries found that they strived to use some type of rational  process in making decisions, but the way they actually decided things was through  a complex interaction  with other managers,

subordinates, environmental  factors, and organizational  events.31 Decisions are complex and involve many people, information is often ambiguous, and disagreement and conflict over problems and solutions  are normal. The political model begins with four basic assumptions:

  1. Organizations are made up of groups with diverse interests, goals, and values. Managers disagree about problem  priorities  and may not understand or share the goals and inter- ests of other managers.
  2. Information is ambiguous and incomplete. The attempt to be rational is limited by the complexity of many problems as well  as personal and organizational constraints.
  3. Managers do not have the time, resources, or mental capacity to identify all dimensions of the problem  and process all relevant information.  Managers talk to each other and exchange viewpoints  to gather information and reduce ambiguity.
  4. Managers engage in the push and pull of debate to decide goals and discuss alternatives. Decisions are the result of bargaining and discussion among coalition  members.

An example of the political model was when AOL chief executive Jonathan Miller built a coalition  to support the development of a Yahoo-like free Web site. Opposition to offer- ing AOL’s rich content for free was strong, but Miller talked with other executives and formed  a coalition  that supported the move  as the best way to rejuvenate the declining AOL in the shifting Internet service business. The decision proved to be a turning point, making AOL  once more  a relevant  force on the Web and enticing tech titans such  as Google and Microsoft as potential partners.32

The inability of leaders to build coalitions often makes it difficult or impossible for managers to get their decisions implemented.  Hershell Ezrin resigned as CEO of Canada’s Speedy Muffler King because he was unable to build a coalition  of managers who supported his decisions for change at the troubled company. Many senior-level  executives resented Ezrin’s appointment  and refused to go along with his ideas for reviving the company.33

Similarly,  former U.S. Treasury Secretary Lawrence Summers took the job as president  of Harvard University in 2001 with plans for shaking up many of the university’s long-time ways of doing things. However, his inability to build a coalition  to support his changes led Summers  to resign five years later with the campus in turmoil and few of his desired changes effectively implemented.34

The key dimensions of the classical, administrative,  and political models are listed in Exhibit 6.2. Research into decision-making procedures found  rational,  classical procedures to be associated with high performance for organizations in stable environments. However, administrative and political decision-making procedures and intuition have been associated with high performance in unstable environments in which decisions must be made rapidly and under more difficult conditions.

Source: Daft Richard L., Marcic Dorothy (2009), Understanding Management, South-Western College Pub; 8th edition.

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