CHAPTER 12 DECISION-MAKING AND ORGANIZATIONAL LEARNING TEACHING OBJECTIVES 1.

To define organizational decision-making and distinguish between programmed and nonprogrammed decisions. (12.1) 2. To review the following models along with their assumptions: the rational model, the Carnegie model, the incrementalist model, the unstructured model, and the garbage can model. (12.2) 3. To discuss organizational learning and distinguish between explorative and exploitative learning. (12.3) 4. To consider how cognitive biases affect decision-making and organizational learning. (12.4) 5. To examine ways to improve decision-making and learning. (12.5) CHAPTER SUMMARY This chapter examines decision-making and organizational learning. Organizational decision-making is the problem-solving process that searches for a solution to create value for stakeholders. Programmed, or routine, decisions are distinguished from nonprogrammed decisions. There are several models of decision-making. The rational model assumes that decision makers have the right information and the ability to make correct decisions. The model assumes that decision makers agree about goals. The Carnegie model recognizes that decision makers satisfice and have bounded rationality and that organizations are coalitions of various interests. The incrementalist model suggests that managers make small changes to avoid failure. The unstructured model acknowledges that managers start over when facing obstacles. The garbage can model suggests that decisions begin with solutions, not problems. Organizational learning is the process of seeking new ways to increase effectiveness. Explorative learning is distinguished from exploitative learning. Organizational learning has four levels: individual, group, organizational, and interorganizational. Promoting learning at each level and the effect of structure and culture are considered. Cognitive biases, which hurt decision-making and learning, include: cognitive dissonance, illusion of control, frequency, representatives, projection, egodefensiveness, and escalation of commitment. Decision-making and learning can improve by listening to dissenters, converting events into learning opportunities, and experimenting. A diverse top-management team can use devil’s advocacy, dialectic inquiry, and create a collateral structure, which is an informal management group to evaluate formal decisions. CHAPTER OUTLINE

PHAM HOANG HIEN, MBA, PG. (CSU)

12.1

Organizational Decision-making?

Organizational decision-making occurs when problem solving includes seeking and selecting a solution to create value for stakeholders. Managers make programmed and nonprogrammed decisions. Programmed decisions are routine decisions, developed in advance through rules, standard operating procedures (SOPs), and norms. Nonprogrammed decisions are new and unstructured decisions, without programmed rules to manage them. Managers rely on intuition and judgment, and solutions are found as problems occur. Nonprogrammed decisions require more search activity. Q. Give examples of nonprogrammed decisions. A. Nonroutine R&D activities and the selection of organizational strategy Organizations make both programmed and nonprogrammed decisions. Programmed decisions increase efficiency and reduce costs. Nonprogrammed decisions assist in adapting and managing a changing environment. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ PHAM HOANG HIEN, MBA, PG. (CSU) 12.2 Models of Organizational Decision-making

Traditional models depict decision-making as a rational process, but newer models acknowledge the uncertainty inherent in decision-making. The rational model proposes that decision-making is a three-staged process. (Fig. 12.1) 1. Identify the problem. Managers analyze the environment and recognize opportunities and threats. 2. Generate alternatives. Managers analyze skills and resources to respond to opportunities and threats. 3. Select the best solution. Under ideal conditions, managers know a decision is right because no uncertainty exists. All alternatives and their effects are known, and the same objective criteria are used to evaluate each alternative. Managers have the ability to make the right decision to maximize stakeholder value. The rational model assumes this ideal state. Yet, these conditions do not exist, so the assumptions of the rational model seem unrealistic:

Information and uncertainty: The model assumes that managers know all alternative courses of action. It is not feasible to know every alternative in an uncertain environment, and the cost of collecting information would far outweigh the benefits. Managerial abilities: The rational model assumes the ability to evaluate all alternatives and select the best solution. Managers cannot process all the information to make perfect decisions and lack the time to follow the rational model. Many managers would be needed, and managers are costly. Preferences and values: The model assumes that managers agree about preferences, values, and goals. This assumption is false due to subunit orientations. A production manager is concerned about costs whereas an engineering manager is concerned about design. Newer models recognize these problems. The Carnegie Model Satisficing: Managers satisfice or determine the criteria to evaluate solutions, limiting the range of alternatives. Satisficing is less costly and less work than searching for every alternative. Bounded rationality: Managers are restricted by bounded rationality, a limited ability to process information. Managers improve decision-making by strengthening analytical skills and using computers. However, they don’t know all possible alternatives. Organizational coalitions: The organization is a coalition of different interests with decisions made by compromise, bargaining, and negotiation. Selected solutions are approved by the dominant coalition, those with the power to implement the chosen alternative. Over time, interests change and the dominant coalition changes. Thus decision-making changes. (Table 12.1) The Carnegie model is more accurate than the rational model. It is rational because managers seek a good solution to meet goals, regardless of uncertainty and disagreement over goals. Organizational Insight 12.1: Should GE Make or Buy Washing Machines? CEO Jack Welch had to decide whether GE should invest its washing machine division or outsource. The division was losing money due to outdated technology and needed $70 million to become competitive. GE decided to make the investment, and the washers have done well. Q. How did GE use the Carnegie model? A. Top managers satisficed and limited the alternatives to make or buy. Managers had bounded rationality and could not foresee the consequences of decisions. Managers considered costs, quality, and profitability to evaluate each alternative, but also control PHAM HOANG HIEN, MBA, PG. (CSU)

of supplies and the union. Managers had different preferences. Appliance managers wanted the make alternative to avoid layoffs. Corporate managers took a macro view and decided upon the best long-term outcome. The Incrementalist Model suggests that managers choose actions close to past actions to reduce the risk. Managers avoid and correct mistakes by making a sequence of incremental changes rather than evaluating all alternatives and selecting one. The Unstructured Model The incrementalist model is appropriate for stable environments with predictable trends, but in a dynamic environment, response is not fast enough, causing organizational decline. The unstructured model, developed by Henry Mintzberg, explains decisionmaking under high uncertainty. Decisions are made in a series of little steps that result in a major decision over time. (Fig. 12.1) 1. Identification stage. Managers develop routines to recognize problems. 2. Development stage. Managers generate problem-solving alternatives. 3. Selection stage. Managers make decisions using judgment, intuition, and formal analysis. The unstructured model requires rethinking alternatives when facing obstacles and even starting from scratch. Decision-making evolves in an unpredictable manner. Managers use intuition that requires continuous adaptation to respond to changing situations. The unstructured model concentrates on making nonprogrammed decisions, whereas the incrementalist model considers programmed decisions. The Garbage Can Model views decision-making as a highly unstructured process. Instead of identifying a problem, the model proposes that decisions begin with the solution. When solutions emerge, problems arise. An organization that makes a highquality product may expand globally. The solution is the quality competence; the problem is transferring it globally. The organization seeks solutions to identify problems whereas coalitions promote their own alternatives. The organization faces anarchy as problems, answers, and coalitions blend in a “garbage can” and compete. The selection of an alternative depends on the dominant coalition. Chance and timing play a role in decision-making. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ _____________·ð _R_e_f_e_r_ _t_o_ _d_i_s_c_u_s_s_i_o_n_ _q_u_e_s_t_i_o_n_ _1_ _h_e_r_e_ _t_o_ _r_e_v_i_e_w_ _t_h_e_ _v_a_r_i_o_u_s_ _d_e_c_i_s_i_o_n__m_a_k_i_n_g_ _m_o_d_e_l_s_._ PHAM HOANG HIEN, MBA, PG. (CSU)

______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ _____________________________________________ _ _O_r_g_a_n_i_z_a_tional Insight 12.2- Microsoft is Not All Seeing After All Microsoft was taken by surprise in 1994 by the introduction of Netscape, the first web browser. However, they were able to harness the resources and quickly bring to market Internet Explorer. Q. How did Bill Gates use “Garbage Can” thinking? A. This model proposes that decisions begin with a solution. Bill Gates determined that the solution to Microsoft’s survival was to develop its own web browser. 12.3 The Nature of Organizational Learning

Many decisions fail due to environmental uncertainty, yet the right decisions make companies survive and prosper. Good decision-making requires learning new behaviors and unlearning inefficient ones. Organizational learning assists mangers in making better nonprogrammed decisions. It is a critical process because of the need to change due to low-cost foreign competitors. Reengineering has been driven by learning efficient operating methods. Types of Organizational Learning James March suggests two learning strategies, exploration and exploitation. Exploration seeks new activities and procedures to enhance effectiveness, discovering new management methods such as network organizations. Exploitation refines existing activities and procedures to enhance effectiveness. TQM is an example of exploitation. Exploration is more dramatic than exploitation, but both increase organizational effectiveness. A learning organization is a company that intentionally designs its structure, culture, and strategy to foster learning. A learning organization encourages all employees to make suggestions for performing activities. Levels of organizational learning include: individual, group, organizational, and interorganizational. Peter Senge developed principles for learning. (Fig. 12.2) Individual: Senge suggests that each organizational member has to develop personal mastery, meaning employees should be empowered. Organizations should encourage complex mental models that challenge employees to improve tasks. Individuals should be involved and committed to their jobs in order to experiment and take risks. PHAM HOANG HIEN, MBA, PG. (CSU)

Allowing employees to take more responsibility for decisions builds personal mastery. Cross-training, reengineering, and the use of advanced information systems establish responsibility. Group: Self-managed and cross-functional teams allow individuals to share problemsolving skills. Groups create synergies to increase performance. Group interactions produce “group routines” or team learning, which is important as decisions are made in subunits. Toyota used teams to revitalize GM’s plant. Organization: Managers promote learning through structure and culture. Mechanistic structures promote exploitative learning whereas organic structures promote explorative learning. Organizations should take advantage of both types of learning. Senge stressed the significance of building shared vision, a frame of reference for problems or opportunities. Both terminal and instrumental values direct behavior. Culture fosters organizational learning and change. Kotter and Heskett distinguish between adaptive and inert cultures. Adaptive cultures value innovation and support experimentation and risk-taking. Inert cultures do not reward risk-taking. Adaptive cultures have higher levels of learning because they can rapidly implement change. Organization with adaptive cultures have a higher probability of surviving in changing environments. Interorganizational: Structure and culture determine learning at the interorganizational level. Companies with adaptive cultures find new approaches to managing interorganizational linkages. Interorganizational learning allows for copying of core competences. Mimetic, coercive, and normative processes can increase effectiveness. Organizations promote explorative and exploitative learning by cooperating with suppliers and distributors. Tools for increasing learning include strategic alliances and network organizations. By looking at organizational learning as a system, mangers create a company that can respond quickly to environmental changes. Managers should use both explorative and exploitative learning. Risk increases because explorative learning disrupts routines. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ 12.4 Knowledge Management and Information Technology

New technologies are having a dramatic impact on how an organization operates. Knowledge management is the sharing and integrating of expertise within the organization through real-time information technologies.

PHAM HOANG HIEN, MBA, PG. (CSU)

Organizational Insight 12.3: Accenture’s Knowledge Management System Accenture is a consulting firm whose competitive advantage is first-hand knowledge and expertise. It capitalized on this advantage by creating a knowledge management system, coupled with a flatter organizational structure. Q. How did a knowledge management system contribute to Accenture’s effectiveness? A. It allowed consultants in the field to have more information available to them quicker. This, combined with the flatter structure has allowed the consultants freedom to make decisions, resulting in higher creativity and performance. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ There are two kinds of knowledge management systems: A codification approach is a collection of standardized organizational best practices, and is suited for more mechanistic systems. For example, Dell Computer uses this type of system to manage its global suppliers. A personalization approach is a system designed for more organic organizations or situations. Instead of a database of procedures, it is more focused on providing the user who in the organization might be able to provide them a solution to a complex problem 12.5 Factors Affecting Organizational Learning

Nystrom and Starbuck developed a model of factors that reduces learning. To understand poor decision-making, it is helpful to review factors that hurt decisionmaking, known as cognitive biases. As organizations make decisions, they design rules and SOPs to handle programmed decisions. Success achieved through rules can impede learning from new experiences and result in inertia. If programmed decisions eliminate nonprogrammed decisions, a crisis may emerge. Managers frequently ignore signs of problems and attribute problems to temporary interruptions in the environment. Nystrom and Starbuck state that managers use “weathering the storm strategies,” such as centralizing decision-making. An incrementalist approach to decision-making is less risky than starting in new directions. Organizational Learning and Cognitive Structures Cognitive structures—systems of beliefs, expectations, and values—develop over time and predetermine an individual’s interpretation of events. Opinions are formed based on

PHAM HOANG HIEN, MBA, PG. (CSU)

past experience, and may be distorted. Cognitive structures not only shape topmanagement decision-making but also determine environmental threats and opportunities. Managers view the same environment differently due to individual cognitive structures. Types of Cognitive Biases Researchers have identified factors that prevent organizational learning and environmental adaptation. Cognitive biases cause managers to misinterpret information_ _a_n_d_ _r_e_d_u_c_e_ _t_h_e_ _q_u_a_l_i_t_y_ _o_f_ _d_e_c_i_s_i_o_n_-_m_a_k_i_n_g_._ _(_F_i_g_._ _1_2_._3_)_ _ _·ð _C_o_g_n_i_t_i_v_e_ _d_i_s_s_o_n_a_n_c_e_ _i_s_ _t_h_e_ _i_n_t_e_r_p_r_e_t_a_t_i_o_n_ _o_f_ _i_n_f_o_r_m_a_t_i_o_n_ _t_o_ _r_e_i_n_f_o_r_c_e_ _b_e_l_i_e_f_s_ _a_n_d_ _i_g_n_o_r_e_ _o_t_h_e_r_ _i_n_f_o_r_m_a_t_i_o_n_._ _I_B_M_ _i_g_n_o_r_e_d_ _r_e_s_e_a_r_c_h_ _o_n_ _p_e_r_s_o_n_a_l_ _c_o_m_p_u_t_e_r_s_ _a_n_d_ _i_n_v_e_s_t_e_d_ _h_e_a_v_i_l_y_ _i_n_ _m_a_i_n_f_r_a_m_e_s_,_ _a_ _f_a_m_i_l_i_a_r_ _c_o_m_p_u_t_e_r_ _a_r_e_a_._ _ _·ð _I_l_l_u_s_i_o_n_ _o_f_ _c_o_n_t_r_o_l_ _o_c_c_u_r_s_ _w_h_e_n_ _m_a_n_a_g_e_r_s_ _o_v_e_r_e_s_t_i_m_a_t_e_ _t_h_e_i_r_ _c_o_n_t_r_o_l_ _o_v_e_r_ _a_n_ _o_u_t_c_o_m_e_._ _U_n_c_e_r_t_a_i_n_t_y_ _i_s_ _s_t_r_e_s_s_f_u_l_,_ _a_n_d_ _m_a_n_a_g_e_r_s_ _d_e_c_r_e_a_s_e_ _s_t_r_e_s_s_ _t_h_r_o_u_g_h_ _c_o_n_f_i_d_e_n_c_e_ _i_n_ _t_h_e_i_r_ _a_b_i_l_i_t_y_ _t_o_ _c_o_n_t_r_o_l_ _t_h_e_ _e_n_v_i_r_o_n_m_e_n_t_._ _ _ _Q_._ _H_o_w_ _d_o_ _m_a_n_a_g_e_r_s_ _a_c_t_ _w_h_e_n_ _t_h_e_y_ _f_e_e_l_ _o_u_t_ _o_f_ _c_o_n_t_r_o_l_?_ _ _A_._ _T_h_e_y_ _c_e_n_t_r_a_l_i_z_e_ _a_u_t_h_o_r_i_t_y_ _t_o_ _i_n_c_r_e_a_s_e_ _c_o_n_t_r_o_l_,_ _b_u_t_ _c_o_n_t_r_o_l_ _i_s_ _a_n_ _i_l_l_u_s_i_o_n_,_ _s_o_ _t_h_e_ _c_r_i_s_i_s_ _d_e_e_p_e_n_s_._ _A_ _s_t_r_o_n_g_ _C_E_O_ _o_r_ _t_o_p_ _m_a_n_a_g_e_r_s_ _b_e_l_i_e_v_e_ _t_h_e_y_ _a_r_e_ _t_h_e_ _o_n_l_y_ _o_n_e_s_ _t_o_ _m_a_n_a_g_e_ _u_n_c_e_r_t_a_i_n_t_y_._ _ _ _·ð _F_r_e_q_u_e_n_c_y_ _a_n_d_ _r_e_p_r_e_s_e_n_t_a_t_i_v_e_n_e_s_s_ _a_r_e_ _w_a_y_s_ _of misinterpreting information. Frequency is the belief that extreme events occur more often than they really do. If one batch of supplies is defective, a firm assumes that all supplies are defective. This bias leads to vertical integration to ensure quality. Representativeness is a judgment based on small and unrepresentative samples. A company receives a few international orders and launches global expansion. Frequency and representativeness inhibit organizational learning. Organizational Insight 12.4: Mistakes and More Mistakes at the Egrocers

PHAM HOANG HIEN, MBA, PG. (CSU)

This case illustrates why most of the dot-com grocery companies failed to be successful. They underestimated the costs associated with distribution and delivery to home consumers, and have very little expertise other than with the internet technology. Q. How does this case illustrate the illusion of control bias? A. Managers that were technically savvy believed that they also had the skills necessary to manage a very complex process. In short, they had too much confidence in the Internet. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ _________________·ð _P_r_o_j_e_c_t_i_o_n_ _a_n_d_ _e_g_o__d_e_f_e_n_s_i_v_e_n_e_s_s_._ _P_r_o_j_e_c_t_i_o_n_ _a_l_l_o_w_s_ _m_a_n_a_g_e_r_s_ _t_o_ _j_u_s_t_i_f_y_ _a_n_d_ _r_e_i_n_f_o_r_c_e_ _p_e_r_s_o_n_a_l_ _p_r_e_f_e_r_e_n_c_e_s_ _a_n_d_ _v_a_l_u_e_s_ _b_y_ _a_t_t_r_i_b_u_t_i_n_g_ _t_h_e_m_ _t_o_ _o_t_h_e_r_s_._ _A_ _m_a_n_a_g_e_r_ _w_h_o_ _c_a_n__ t_ _s_o_l_v_e_ _a_ _p_r_o_b_l_e_m_ _b_l_a_m_e_s_ _s_u_b_o_r_d_i_n_a_t_e_s_._ _T_h_i_s_ _p_r_a_c_t_i_c_e_ _e_r_o_d_e_s_ _a_n_ _o_r_g_a_n_i_z_a_t_i_o_n__ s_ _c_u_l_t_u_r_e_._ _ _ _E_g_o_-_d_e_f_e_n_s_i_v_e_n_e_s_s_ _l_e_a_d_s_ _m_a_n_a_g_e_r_s_ _t_o_ _i_n_t_e_r_p_r_e_t_ _e_v_e_n_t_s_ _f_a_v_o_r_a_b_l_y_,_ _i_n_s_t_e_a_d_ _o_f_ _a_d_m_i_t_t_i_n_g_ _t_o_ _m_i_s_t_a_k_e_s_._ _P_r_o_j_e_c_t_i_o_n_ _a_n_d_ _e_g_o_-_d_e_f_e_n_s_i_v_e_n_e_s_s_ _i_n_h_i_b_i_t_ _o_r_g_a_n_i_z_a_t_i_o_n_ _l_e_a_r_n_i_n_g_._ _ _·ð _E_s_c_a_l_a_t_i_o_n_ _o_f_ _C_o_m_m_i_t_m_e_n_t_ _i_s_ _a_ _c_o_g_n_i_t_i_v_e_ _b_i_a_s_ _t_h_a_t_ _l_e_a_d_s_ _m_a_n_a_g_e_r_s_ _t_o_ _r_e_m_a_i_n_ _c_o_m_m_i_t_t_e_d_ _t_o_ _a_ losing course of action and refuse to admit a mistake. Managers may remain committed to an incorrect action due to egodefensiveness or the illusion of control. This bias is reinforced by incrementalist decision-making, which is destructive and managers may be faced with rapidly changing competition or technology. These biases prevent managers from having a clear view of problems, so they can develop new responses. Biased decision-making impedes organizational learning and growth.

PHAM HOANG HIEN, MBA, PG. (CSU)

Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ________________________________________________________________ _ _·ð _R_e_f_e_r_ _t_o_ _d_i_s_c_u_s_s_i_o_n_ _q_uestion 3 here to review and give examples of cognitive biases. ______________________________________________________________________ ______________________________________________________________________ ______________________ 12.6 Improving Decision-making and Learning

Managers can improve decision-making. They can adopt strategies for organizational learning, increase the breadth and diversity of the top-management team, use devil’s advocacy and dialectic inquiry, and develop a collateral organizational structure. Strategies for organizational learning, unlearning old ideas and learning new ideas, include: Listening to dissenters: To improve decision-making, top managers can surround themselves with people who express opposing points of view. They can collect information from dissenters. However, managers often select people who agree with them. This occurred at Nissan. Managers hesitate to encourage dissent because of bounded rationality; dissent increases the amount of information to process. Converting events into learning opportunities: The right organizational structure and culture can lead to new responses to a situation. Research in California shows how structure affected a hospital’s ability to respond to a doctors’ strike. An organic, decentralized structure handled the strike better than a centralized, mechanistic structure. Experimenting is the process of generating new alternatives and testing the validity of old ones. Experimenting leads to explorative learning. Managers can take an incremental or garbage can approach to experiments. Incremental experiments vary slightly from current procedures. A garbage can approach uses brainstorming to devise new solutions. Utilizing Game Theory: This approach views interactions between organizations as a competitive game. It involves analyzing what competitors will do if a certain decision is made, which involves looking forward into the future to try and predict what rivals will do, and also reason backwards to determine what they should do given what the

PHAM HOANG HIEN, MBA, PG. (CSU)

competitor’s future moves will be. Figure 12.4 shows a game-theory scenario between FedEx and UPS. Nature of the Top-Management Team: The members of the team and the team organization affect the level of organizational learning. Top management sets the tone for the organization. Two team configurations are possible, the wheel or the circle. (Fig. 12.5) A wheel has a CEO who receives data and makes decisions. Top-level managers have no interaction, so this design works only for simple problems with minimum coordination. Complex problems require a circle with a CEO and top managers who interact; they function as a team, which promotes organizational learning. The level and quality of learning are also a function of the personal traits and backgrounds of team members. Diversity offers various perspectives, as members from different industries and functions generate a variety of ideas. Diversity avoids groupthink, the conformity that emerges when like-minded people reinforce each other’s tendencies and interpret events and information in similar ways. Sometimes, the CEO or top management team must be replaced to promote organizational learning. The fastest way to delete organizational memory and programmed decision-making is to replace the top-management team. This replacement occurred at IBM and GM. PHAM HOANG HIEN, MBA, PG. (CSU) Devil’s advocacy and dialectic inquiry reduce cognitive biases and the problems associated with incrementalism. Managers become cognizant of alternatives and analyze the pros and cons of each proposed course of action. Devil’s advocacy officially appoints a person to disagree by evaluating decision-making and questioning assumptions. Dialectic inquiry establishes teams to produce and evaluate alternatives and recommend the best one. Parts of each team’s proposal are merged into a final plan. (Fig. 12.6) Collateral organizational structure improves decision-making by creating a collateral organizational structure, an informal organization of managers that operates parallel to the formal structure. Informal managers evaluate the decisions of formal managers. Because formal managers know about the evaluations, they review decisions more carefully. A collateral structure promotes change, whereas a formal structure maintains stability. Managerial Implications: Decision-making and Learning To guard against rigidity in decision-making, managers must be aware of new problems and be open to new solutions. Managers must develop a questioning attitude and not discount warnings of problems. Managers should analyze cognitive structures and watch for cognitive biases. Strategies for organizational learning must be developed.

DISCUSSION QUESTIONS AND ANSWERS 1. What are the critical differences between the rational and the Carnegie approaches to decision-making? What are the critical differences between the incrementalist and garbage can models? Which models best describe how decisionmaking takes place in (a) a fast-food restaurant and (b) the research and development laboratory of a major drug company? The rational model assumes that decision makers have all the information, the time and ability to evaluate all alternatives and choose the best one, and the same preferences. The Carnegie model states that limited information is available, managers have bounded rationality, and organizational coalitions result in different preferences. The Carnegie model also considers the costs of decision-making, such as the costs of managers and information. The incrementalist model suggests that managerial decisions differ slightly from past decisions to reduce the risk of mistakes. This model functions well in stable environments with accurately forecasted trends and for improving programmed decision-making. The garbage can model entails nonprogrammed decisions in a dynamic, complex environment. An organization makes decisions by starting with a solution and then creating a problem. Pressures from different coalitions make the decision-making process highly uncertain. PHAM HOANG HIEN, MBA, PG. (CSU) (a) A fast-food restaurant operates in a stable environment and would use the incrementalist model to make gradual changes. Decisions are routine and programmed in advance. Managers make minor changes, such as adding new menu items. (b) An R&D lab operates in a complex, uncertain environment. Scientists may find solutions first and then exploit these solutions. Decisions are highly nonprogrammed. Managers use judgment and intuition for problem solving. This company would use the garbage can model of decision-making. 2. What is organizational learning? In what ways can managers promote the development of organizational learning by acting at various levels in the organization? Organizational learning improves the ability to manage the organization, the environment, and make better nonprogrammed decisions. Organizational learning occurs at four levels: individual, group, organizational, and interorganizational. At the individual level, managers empower individuals to experiment, gaining more interest in their work and personal mastery. Managers should challenge employees to use complex mental models. Cross-training employees stimulates ideas on improving processes or reengineering a task. At the group level, self-managed or cross-functional teams share knowledge and gain synergy. At the organizational level, the right structure and culture facilitate learning. Mechanistic structures promote exploitative learning whereas organic structures

promote explorative learning. A culture based on a shared vision directs behavior through terminal and instrumental values. Adaptive cultures value innovation and support risk-taking. Adaptive cultures manage interorganizational linkages effectively. Mimetic, coercive, and normative processes promote interorganizational learning. Managers foster cooperation with suppliers and distributors. Strategic alliances and network organizations provide organizational learning. 3. How can knowledge management promote organizational learning? What determines which kind of knowledge management system a company should adopt? An effective system provides managers with more information and information of a higher-quality. This real time data is very effective for helping managers solve problems more creatively and quickly. The type of system is generally determined by the type of problem. Structured organizations or problems should use a codification system, while unstructured organizations or problems should use a personalization approach. 4. How do cognitive biases affect organizational learning and the quality of decision-making? What can be done to reduce their negative impact? Cognitive biases hurt organizational learning and decrease the quality of decisionmaking. Organizations need to develop strategies to improve decision-making, including listening to your opponents, experimenting with new solutions, encouraging diversity, and using dialectical inquiry. PHAM HOANG HIEN, MBA, PG. (CSU) ORGANIZATIONAL THEORY IN ACTION In small groups, students are top managers of a major clothing store. Although the store has been the leader for the last 15 years, competition has resulted in declining sales. Managers should design a program to increase the level of organizational learning and recommend ways to promote organizational learning at all levels. Making the Connection Students will find an example of an organization that has been trying to change decision-making methods or increase learning. They will explain why the organization is making the change and what it is doing to foster new learning. The Ethical Dimension This chapter fits well with the discussion of ethics, since many ethical situations stem from flaws in managerial decision-making. You might want to trace back through ethical and unethical cases and show how cognitive biases play a role in unethical decisions, and how good ethical decisions are often made when organizations have a system in place to help them. You might draw upon the previously discussed example of Johnson & Johnson’s ethics credo. ANALYZING THE ORGANIZATION

Students determine which decision model their organization has used over time, and what decision-making approach the top-management team uses. They will analyze organizational learning to determine how the organization resolved crises. Students will identify any changes their organization has made and what capabilities it has improved. Finally, they will use the change model to analyze their organization and to determine whether change has been revolutionary or evolutionary. CASE FOR ANALYSIS Encouraging Learning at Baxter International To change the culture and attitudes, CEO Loucks rewarded managers on company not divisional performance. This new environment promoted learning. 1. What factors impeded organizational learning at Baxter?

Until 1990, division managers had complete decision-making authority and received rewards based on the performance of their divisions. They focused on their divisions and did not take a company wide perspective. This environment did not foster innovation. Divisions lacked any incentive to cooperate with one another. 2. What steps did CEO Loucks take to promote organizational learning at Baxter?

3. How could it have made use of IT and knowledge management? Loucks has most of the systems in place that would allow them to focus more on learning. The final step in getting the divisions to take a company wide view would seem to be to take advantage of a knowledge management system. This would allow managers across divisions to share ideas and insights, resulting in faster, high quality decisions. TEACHING SUGGESTIONS 1. To illustrate the difference between the rational model and the Carnegie model, divide the class into four groups. Each group must come to an agreement about where to eat lunch. Point out that a limited number of alternatives were developed based on certain criteria, such as type of food—Mexican, American, Italian. Note that it is

PHAM HOANG HIEN, MBA, PG. (CSU)

Loucks changed the reward system to promote organizational learning. He rewarded managers on company, not divisional, performance. He mandated that top managers purchase seven times their annual salary in stock. Middle managers received stock options tied to company performance. This new environment promoted learning because divisions shared knowledge. Decision-making was improved because divisional managers questioned decisions. New ideas were discussed, and everyone contributed opinions. This new approach resulted in a stock price that has doubled since 1990.

PHAM HOANG HIEN, MBA, PG. (CSU)

impossible to consider every restaurant in town. Then note that different group members had different preferences. 2. Use a role-play to demonstrate the garbage can a_p_p_r_o_a_c_h_._ _T_h_e_ _c_l_a_s_s_ _i_s_ _a_ _t_e_l_e_c_o_m_m_u_n_i_c_a_t_i_o_n_s_ _o_r_g_a_n_i_z_a_t_i_o_n_ _a_n_d_ _y_o_u_ _a_r_e_ _t_h_e_ _C_E_O_._ _O_n_e_ _s_t_u_d_e_n_t_ _i_s_ _a_n_ _e_n_g_i_n_e_e_r_ _w_h_o_ _d_e_v_e_l_o_p_s_ _a_ _n_e_w_ _w_i_r_e_l_e_s_s_ _p_h_o_n_e_._ _·ð _O_n_e_ _g_r_o_u_p_ _o_f_ _s_t_u_d_e_n_t_s_ _i_s_ _t_h_e_ _m_a_r_k_e_t_i_n_g_ _f_u_n_c_t_i_o_n_ _t_h_a_t_ _h_e_l_p_s_ _t_h_e_ _e_n_g_i_n_e_e_r_ _d_e_c_i_d_e_ _h_o_w_ _t_o_ _m_a_r_k_e_t_ _t_h_e_ _p_r_o_d_u_c_t_._ _N_o_t_e_ _t_h_a_t_ _d_e_c_i_s_i_o_n_-_m_a_k_i_n_g_ _b_e_g_a_n_ _w_i_t_h_ _a_ _s_o_l_u_t_i_o_n_._ _T_h_e_ _m_a_r_k_e_t_i_n_g_ _s_e_c_t_i_o_n_ _f_i_g_u_r_e_s_ _o_u_t_ _h_o_w_ _t_o_ _a_d_v_e_r_t_i_s_e_ _l_o_n_g_-_d_i_s_t_a_n_c_e_ _s_e_r_v_i_c_e_s_ _a_n_d_ _a_n_s_w_e_r_i_n_g_ _m_a_c_h_i_n_e_s_._ _ _·ð _O_n_e_ _g_r_o_u_p_ _i_s_ _m_a_n_u_f_a_c_t_u_r_i_n_g_ _t_h_a_t_ _d_e_v_e_l_o_p_s_ _m_o_r_e_ _e_f_f_i_c_i_e_n_t_ _p_r_o_d_u_c_t_i_o_n_ _m_e_t_h_o_d_s_,_ _u_s_i_n_g_ _t_h_e_ _i_n_c_r_e_m_e_n_t_a_l_ _m_o_d_e_l_._ _ _·ð _O_n_e_ _g_r_oup is researching new technologies and wants money. They all want organizational resources and attention. You briefly note each activity, but are unaware of the details and benefits of these activities. The engineering department is powerful and adamant about the new wireless phone, so you decide to invest in it. At a later date, another coalition may become dominant. Decision-making is highly unstructured. 3. Students can give examples of devil’s advocacy and dialectic inquiry. Devil’s advocacy is more informal and simply involves appointing someone to question the assumptions of a decision. The decision maker will adjust his or her plan accordingly. The dialectic inquiry involves writing down plans and synthesizing many plans into a final plan. 4. To help students understand how logical managers fall prey to cognitive biases, use personal examples. They may have had a bad experience with an auto mechanic and think all auto mechanics are bad; this is representativeness. They may have kept putting money in a slot machine; this is escalation of commitment. It is tempting to blame others for problems; this is projection. Frequency and representativeness both involve using a small sample to make conclusions. Frequency overestimates the number of occurrences; receiving a couple of defective parts draws the conclusion that all parts are defective. Representativeness applies the results of a couple of incidents to a large group; a bad experience with a supplier leads to the conclusion that all suppliers are bad. 5. Using the internet, find some examples of organizations that have recently failed, and discuss how poor decision-making played a role. Arthur Andersen and some of the dot-com grocery companies might be a good example. Ask students what cognitive biases could have contributed to the problems. Contrast this with successful companies, such as Amazon.com and Microsoft.

6. To show how a knowledge management system might work, give the students a short pop quiz that is rather difficult. Instead of collecting the quizzes, have them discuss what the answers should be as a class. Most likely, the scores will go up dramatically after you give them the correct answers. Point out that a knowledge management system is similar, only technology allows the system to exist without being face-to-face in a room.

PHAM HOANG HIEN, MBA, PG. (CSU)

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