Understanding Decision Making in Organizations - Literature review Example

Topic: Lecturer: Presentation: Introduction Managers in modern organizations be it private or public sector are faced with numerous challenges in making sound decisions especially due to globalization and the ever changing environmental, economic and political conditions. Michel (1997) argues that a high performing organization relies on the ability to make good decisions. In some larger organizations, decisions are made by professionals in various departments but are all focused on a common organization objective. Many theorists have tried to explain the process of decision making by managers in organizations but they are all based on the rational choice theoretical model which assumes rationality of decision makers. There are also deviations in the perfect rational model in terms of bounded rationality and incremental decision making processes due to complexity of uncertainties and incomplete information. The paper will firstly thus discuss the proposition of rational choice theory. Secondly, the implication of the theory on managerial decision making will be discussed and finally, the validity of the theory will be evaluated. Rational Choice Theory This theory is based on the assumption that individuals are rational and normally act as maximizing entrepreneurs. Every action taken by an individual is seen as rational even if some irrationality exists as explanation for the action is given as being taken to serve self-interest (Gingrich, 2000). Individuals thus economically aim at achieving optimal utility under specific constraints assuming all alternatives and consequences are known (Simon, 1979). A rational individual thus ranks the alternatives and the possible consequences from the most preferred to the least preferred and chooses the best alternative among the alternatives given or the combination of consequences that result in minimum risk so as to attain his/her objective. The theory though does not explain how the alternatives are obtained but assumes they already exist and it is upon the individual to make the best choice (Rainey, 2009). It also assumes each alternative has a consequence thus the individual is certain of the outcome. According to (Gingrich, 2000), the theory stresses on the individual and builds on the relationships among individuals to explain the behaviour of the society as a whole and the complexities of larger groups and systems. The theory ignores group sentiments that could exist based on common interest which could override individual interest. The group could also bring in more alternatives to choose from and may disagree with the actions of the individual. Individual could also have limited information that could help make a better decision and thus optimize his/her objective. To take care of the limitations of perfect rationality, a more advanced theory of bounded rationality was developed. Bounded Rationality Simon (1979) argues that models of optimizing entrepreneurs who are completely certain of consequences or probability distributions for uncertain events are theories of how to decide and not what to decide (498). He further claims that no individual is in a position to make perfectly rational decisions due to limited information and new levels of uncertainty and inability to calculate consequences due to own perceptions hence make satisficing decisions rather than optimal ones. He referred this theory as ‘bounded rationality’ which involves the search for alternatives by individuals and choosing the alternative that lead to optimal or satisfying goal. The alternatives are evaluated using a certain criteria or techniques and habits. Implications on Managerial Decision Making Decision making in organizations is aimed at ensuring the organization functions effectively or to ensure high performance mainly in terms of profit maximization. According to miller et al (2001), decisions are concerned with allocation and exercise of power in organizations because power determines the decision maker. The decision making approach of a leader or leadership style thus determines the performance of an organization (Michel, 1997). In rational choice models the leader determines the course of action to be taken and how it will be implemented in order to achieve a business goal. The manager thus is assumed to know the relevant goals and how to assess them hence can rank them in order of preference. He/she is also assumed to have accurate knowledge of consequences arising out of each alternative hence can choose the most efficient alternative means for maximizing goals (March & Simon, 1993). The decision of the manager is thus applied regardless of the employees’ perceptions or without evaluating the effects on those concerned. For example, in the Pearl Harbour case, the Japanese attacked the US Navy expecting to neutralize American naval power in the pacific without evaluating the other party options and in return, the US used nuclear bomb as revenge. There is bound to be conflicting interests in the organization that may hinder realisation of the optimal goal. The manager thus guides the behaviour of employees to align with the goals set or established norms. However, there is also resistance in the organization due to the employees who feel the decisions made are irrational due to bias and incomplete information. For example, a manager may decide to redesign jobs so as to impart skills on employees without taking into account their values, beliefs and interests and hence some employees may resist. A production decision may be optimal but may have effects on prices and demand which may affect the main goal of maximizing profits because of lack of consultation with relevant stakeholders. Studies reveal that actual decision making conforms to bounded rationality rather than perfect rationality (Simon, 1979). This type of rationality emphasizes on satisficing rather than optimization. This involves a process of setting objectives, searching alternatives, comparing and evaluating alternatives, choosing alternatives, implementation and finally follow-up and control. Consultations are done in order to choose the best alternative whereby stakeholders are involved. For example if making decisions on a certain product, employees are closer to the customers and can give relevant information. A criterion for selecting the alternative is set which may be routine or programmed, standard operating procedures or techniques. For example, companies like Nike have set code of conduct to be followed by its suppliers in managing employees so as to improve productivity and quality. The production process is based on lean manufacturing techniques hence the criteria for selecting alternatives. The feedback on implementation can be used to renew the search for alternatives if desirable results are not being achieved or there is resistance due to environmental changes or conflicting interests unlike in perfect rationality where consequences are certain. Objectives can also be revised or updated. Various departments can be used in making decisions due to complexity of decision making through use of sub goals but all decisions are aligned with company goals (Michel, 1997). The decision making process thus results in a satisfying decision to all stakeholders rather than an optimal decision. However, the decision maker controls the outcome through use of power entitled to him/her as a decision maker through manipulation of decision processes and evaluative criteria. The concept of optimization however, is not ignored as decision making is sequenced and linear aimed at maximizing objectives. Validity The rational choice theory has been criticized for assuming for not elaborating on how alternatives are obtained and assumption that consequences are known hence no uncertainty. In cases of emergencies, decisions are made randomly without evaluating alternatives and in public organizations, some elements of rational decision making are not successful due to conflicting interests and political interruptions and complex programs (Rainey, 2009). However, rational choice theory is applied especially in the budget process and due to accountability of officials. Gingrich (2000) acknowledges the fact that the theory applies simple model of individual applicable to all situations hence it is a universally accepted models. Rainey (2009) argues that the Quinn’s model of logical incremental which emphasizes on incremental steps and mostly used in public organizations to reduce opposition is also aimed at achieving a long-range objective hence uses rationalism. The garbage can model on the other hand sees organization decisions as complex and dynamic rather than smoothly rational. Participation, preferences are uncertain and ambiguous and involve internal political activities of bargaining and conflict but these are also as result of self-interest as implied by rational choice theory (Rainey, 2009). The rational choice theory is thus valid as it forms the basis of other theories and forms the theoretical foundation for rational decision making in organization. References Gingrich, P. (2000, winter). “Sociology 319: Contemporary Social Theory”. University of Regina, Department of Sociology and Social Studies. http://uregina.ca/~gingrich/s319.htm March, J. and Simon, H. 1993. Organizations 2ed. Massachusetts: Blackwell. Michel, L. 1997. “Understanding Decision Making in Organizations to Focus Its Practices Where It Matters”. Measuring Business Excellence, Vol. 11(1): 33-45. Miller, S., Hickson, D. & Wilson, D. 2001. “Decision Making in Organizations” In G. Salaman and D. Asch (Ed). Decision Making for Business: A Reader. UK: Sage. Rainey, G. 2009. Understanding and Managing Public Organizations. Sanfrancisco CA: Jossey-Bass. Simon, H.A. 1979. “Rational Decision Making in Business Organizations”. American Economic Review, Vol. 69, pp. 493-513. Read More