Management under Uncertainty - Example

nаgеmеnt under Unсеrtаinty Name Institutional affiliation Date Маnаgеmеnt under Unсеrtаinty Decision Summary Last year, I worked in a medium-sized management consultancy firm and witnessed the company’s management make an important rational decision. The decision involved relocating the company’s head office to a new building. The current lease was expiring in two months with no option for renewing the tenancy agreement. It was therefore necessary for the firm to be relocated to new offices in time to avoid the inconveniences of last minute rush. The company’s chief operations officer (COO) was tasked with the responsibility of leading a team that would coordinate the relocation. In order to coordinate all tasks well and ensure everything dovetailed as planned, the project team developed a detailed time plan for all tasks and processes that were critical to the relocation. The time plan was presented to the CEO who in turn presented it to the Board of Directors for approval. Pertinent issues such office space, partitioning, rent, proximity to the main road, and security of the office premises were taken into account in making the decision to approve the new office. The CEO and the COO took cognizant of the fact that not all employees were likely to be uncomfortable with the new location. During the end of year celebrations, the CEO informed all employees of the decisions to relocate and solicited for their support. He assured them that the relocation would not have any undesired effects on their jobs. Involvement of the employees was necessary to reduce chances of change resistance during the transition. The coordinating team announced that the company would move to its new offices at the beginning of the second month of the following year. Among other benefits, the new premises would make it easier for the company to reach out to new corporate clients especially because it was situated in a robust commercial district. An added advantage was that by relocating, the company could cut down costs associated with fixed expenses such as rent. Most importantly, the new offices were spacious with a modern design, which would make the staff more comfortable. The relocation happened as scheduled and the employees acclimatized quickly to the new work environment. The Rational Model of Decision Making This model provides a method of selecting rational choices between two or more alternatives. The model consists of four sequential steps, namely identification of the problem; analysis of possible alternative solutions; selection of the most optimal solution, and implementation of the solution (Roe, Busemeyer & Townsend, 2001). The implemented solution is evaluated against set goals and if it does not work as anticipated, the decision maker can go back to the problem identification stage. The model is based on the assumption that when making decisions, people will choose options that minimize costs and maximize potential benefits. Further, the model assumes that the decision maker has insufficient facts or information about the various alterative decision options. Therefore, any decision made is only based on the quality of available information, meaning that should new information be found, the initial decision can be reviewed as long as other factors allow (Guo, 2008). Gabor (1976) argues that in order for the rational model to be effective in problem solving, there should be some measurable criteria for collecting and analyzing data. This is done after the best solution has been identified and implemented. Time, financial resources and cognitive abilities are critical requirements for data analysis. Moreover, the decision maker should have sufficient knowledge about the risks associated with the different alterative solutions. The rational decision model can be applied to the decision identified in the previous section. As already explained, the impeding expiry of the tenancy lease was the sole cause of the problem. Unless an alternative office was identified within the two months, the company could be locked out of their current offices, which could be disastrous to its business. Therefore, the CEO was under pressure to lead the company in making optimal decisions about the matter. Most importantly, it was necessary to ensure that the company continued operating and that the transition could not cause any disruptions to critical business operations. The decision made by the CEO to create a team to spearhead the process was rational because it could lead to a viable solution to the problem. The problem was identified clearly and all aspects pertaining to it discussed in detail before the team was formed. The COO and his team held several meetings and evaluated different alternatives in order to choose the best. Among the factors that the team considered included alternative rental prices, size of the offices and accessibility among others. The team took note of the fact that the best alternative decisions should result in net benefits to the company in terms of reduced costs and increased convenience to the employees and customers. After identifying different alternative solutions, the team allocated weights to each decision. The team then evaluated the scores against the set criteria, and then settled on what was considered to be the best and most viable alternative solution to the problem. Evidently, the team followed all steps of the rational model, and therefore the alternative solution that was implemented could be beneficial to the company in the long-term. A key shortcoming of the rational model in a decision making scenario like this one is that the model does not take into account critical factors whose impact is not quantifiable (Turpin & Marais, 2004). For example, factor such as ethical concerns, personal feelings and sense of obligation are omitted out when making rational decisions. The model appears to be biased in favor of data and facts, which leaves out desires and intuition. For instance, if some employees were opposed to the new location because of the distance, this reason could most likely be given little consideration. Similarly, if some employees felt that the best solution could be for the company to build its own offices, the decision could not be implemented even though it was good. Bounded Rationality Bounded rationality is a theory of decision making that states that the cognitive abilities of decision makers are limited and that these limitations influence the decisions made. Regardless of the decision maker’s level of intelligence, they have to make decisions under three inevitable constraints. The first constraint is that only limited and sometimes unreliable facts are available about the possible alternative solutions, and their benefits as well as consequences. The second constraint is that the mind of the decision maker is limited in terms of the capacity to process and evaluate all available information. The last constraint is that in any decision making situation, the decision maker has limited time, which means that they can only consider alternatives that satisfy the time constraints. In view of these constraints, it is evident that even if a decision maker wishes to make the most rational choices, they can only make a satisficing choice and not an optimizing one. The three limits constitute bounds on rationality, and necessitate the need for the decision maker to rely on subjective evaluation of alterative choices (Aviad & Roy, 2012). According to Munier, Selten and Bouyssou et al, (1999), bounded rationality is applicable in most decision making situations because it is not based on unrealistic assumptions but considers the limitations that influence the decision making process. The decision maker’s cognitive abilities, quality of information and attention are important factors in any decision making process. If these factors are limited, then the final decision will not be fully optimal but satisficing. It can be noted that in corporate and organizational decision making, individuals are faced with severe limitations in terms of time, information and ability to process the available information. In most cases, therefore, organizational decisions are outcomes of bounded rationality meant to solve a specific problem under the prevailing circumstances. The theory of bounded rationality can be applied to the office relocation case to evaluate aspects of the decision that could have been impacted by this theory. According to the bounded rationality, information for decision making is limited. Evidently, the team that was coordinating the relocation exercise had limited information about all available office premises in the city. Getting such formation could be very difficult and expensive. Therefore, they used the little information evaluable to make the decision. The theory further states that decision makers have cognitive limitations, which impede the ability to evaluate and analyze all information. This means that even if the project team had all the information about alternative office locations, they could not analyze all of it. The bounded rationality also posits that time is a limited factor. Indeed, the company had only two months to vacate the current premises, meaning that the team had to make a decision in less than two months. If the two months’ notice was to expire before a decision was made, the company could be locked out of office and possibly face legal consequences for beaching the tenancy agreement. In conclusion, all aspects of the decision made by the project team reflected principles of bounded rationality (Muramatsu & Fonseca, 2012). References Aviad, B. & Roy, G. (2012). A decision support method, based on bounded rationality concepts, to reveal feature saliency in clustering problems. Decision Support Systems, 54(1), 292-303. Gabor, P. (1976). Management Theory and Rational Decision Making. Management Decision, 14(5), 274 - 281. Guo, K. L. (2008). DECIDE: a decision-making model for more effective decision making by health care managers. The Health Care Manager, 27(2), 118–127. Munier, B., Selten, R., Bouyssou, D., Bourgine, P., Day, R., Harvey, N. & Wensley, R. (1999). Bounded Rationality Modeling. Marketing Letters, 10(3), 233-248. Muramatsu, R., & Fonseca, P. (2012). Freedom of choice and bounded rationality: a brief appraisal of behavioral economists' plea for light paternalism. Brazilian Journal of Political Economy, 33(2), 445-458. Roe, R. M., Busemeyer, J. R., & Townsend, J. T. (2001). Multialternative decision field theory: A dynamic connectionist model of decision making. Psychological Review, 108(2), 370-392. Turpin, S. & Marais, M. (2004). Decision-making: Theory and practice. ORiON, 20(2), 143–160. Read More