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Decision Making

 

Contact information:

Dr. Richard W. Scholl
36 Upper College Road
Kingston, RI 02881

p. 401.874.4347
f. 401.874.2954

rscholl@uri.edu

These notes are based in part on this article: Scholl, Richard W. (1981) An Analysis of Macro Models of Organizations: The Goal and Political Models.  Administration & Society, 13: 271-298.

The purpose of this discussion was to start the development of a macro model of organizational decision making. Such a model would describe the processes that decision makers, in organizational settings, use in making decisions. The model will place decision makers in the context of an organization, operating within an environment comprised of a group of claimants, each attempting to influence decisions made within that organization. Additionally, the organization's structure will be a part of this model. Once this model is developed, we will examine individual differences in responses to a decision making situations. To do this, we will be asking the question: Why don't all individuals in the same organizational situations make the same decision? Next we will replace the decision maker in our model with a decision making group and examine how group structure and group processes influence decision making.

We start our model with the assumption that all decisions are comprised of criteria, alternative, and cause/effect beliefs (cognitions, theories, expectations). The first part of the model seeks to describe how criteria are developed. We started by asking the question: What determines organizational direction? We turned the concept of the organizational goal to find an answer.

The Goal Model
What is an organizational goal? A goal is defined as a desired state of future affairs.  Goals range along a continuum from open goal to closed goal.

  1. Open goal- contains only content, or direction (e.g., improve quality, increase profit, Be excellent in undergraduate programs)
  2. Closed goal- in addition to content, a closed goal contains:
    1. Content- direction
    2. an indicator (e.g., for quality, defect rate), 
    3. a prescribed level (e.g., defect rate of 10%), 
    4. and a time limit (e.g., in two months).

What are the functions of an organizational goal?

  1. Provides Direction- If goals are to provide direction then they must impact on the process of decision making. For goals to provide direction they become the criteria in decision making. The overall organizational goal is factored down to subunits which use the subunit goal as the criteria for decision in that sub­unit. This process is continued until individual goals are established, which then become the criteria for individual performance decisions.
  2. Provides Integration/coordination- Integration involves resolving conflict among sub­units. The goal model provides for a mechanism for resolving such conflicts. The superordinate goal becomes the basis upon which sub­unit conflicts are resolved.
  3. Acts as criterion for evaluating organizational and subunit effectiveness- The rational model provides that an organization's effectiveness can be evaluated by how well it has accomplished its goals. Sub­unit effectiveness can be evaluated by how well the sub­unit accomplished its goals. Likewise individual performance is a function of individual goal accomplishment.
  4. Provides the basis for problem solving- Problems can be identified in terms of in terms of unmet goals, that is, a problem by definition, is a situation where results fall short of predetermined goals. Choices among potential solutions are then made with the expected effect on the goals as the basis for choice. Change programs would then be evaluated in terms of their progress toward the goal.

Premises of the Goal or Rational Model of organizational decision making- We now have a candidate for a macro model of organizational decision. This model describes organizational decision making as follows:

  1. The direction a organization moves in is a function of the combined effect of decisions made. Decision regarding allocation of resources, hiring, evaluation of individual performance all affect the organizations direction.
  2. The criteria used by decision makers affects the decisions they make
  3. An organizational goal is set at the top of an organization. This goal acts as the criterion for making decisions at this level and the basis for setting sub-unit goals. Sub-unit goals act as criteria in sub-unit decision making.
  4. An organization, and its sub-units, constantly assess progress toward goals. A problem is defined when progress fails to meet expectations. Alternative solutions are generated to solve this problem. The solution chosen is the one that will bring the organization or sub-unit back in line with expectations. The solution is evaluated as to whether it has brought the organization closer to its goal.
  5. When conflicts arise between subunits, they are resolved by referring to the superordinate goal, that is, the goal of the next higher unit.
  6. Organizational effectiveness, sub-unit performance, and individual performance are all evaluated in terms of goal accomplishment.

Critique of the Goal or Rational Model may be a very appealing normative or prescriptive model for organizational decision making we began to question its accuracy as a positive or descriptive model. The following emerged as problems:

  1. The goal paradigm is imbedded in most of the macro and micro level theory building in organizational behavior. Its major weakness is that it does not deal with power. When it does, it does so by attempting to distinguish between rational behavior (good and collectively based) and political behavior (bad and selfishly based).
  2. It assumes that decision makers will always identify will the organizational or sub-unit goal rather there own individual goal. Two potential situations exist here. The first is that individuals have no particular interest in the organization or its goal or second, the individual cares deeply about the organization's goal, but his/her view of what the goal should be is very different from the one set at the top.
  3. Very few, if any, organizations have a single goal. Most have multiple goals. With multiple goals come the potential, and likelihood, of conflict among. The goal model does not provide any explanation of how these types of conflict are resolved.
  4. The goal model relies on the ability to set clear goals and measure effectiveness in terms of them. Many goals are not easily articulated and/or measured. What happens in situations where this is true? There must be some other mechanism for decision making, because decisions are made in these situations. In many cases, performance is measured in terms of adherence to process, rather than through outcomes.
  5. Many organizations do not have formally stated goals. How are decisions made in these organizations?
 
 
The Operative Goal Model

The basic flaw with the goal model was the fact that it did not account for environmental influence, that is, influence over organizational decision making by outside claimants or constituency groups. An accurate model must explain how owners, participants, public-in-contact, and public-at-large groups influence (or fail) to influence decisions. (note: for the remainder of these notes, the terms claimant and stakeholder will be used interchangeably)

If we expand this notion of the four classes of claimants attempting to influence the decision making of top management (and thus the direction the organization takes), we have developed the basis for the operative goal model. This model suggests that:

  1. Organizational direction is determined, not by a single organizational goal, but rather a set of organizational goals. This goal set is a function of a set of claimant demands on the organization's top decision makers. The priority, or weight given to a goal in the goal set is a function of the relative power of the claimant group.
  2. This is not meant to imply that there are only four claimants or the each claimant has a unitary demand. Market segments are groups of customers (public-in-contact) with similar demand profiles in terms of quality, price, service, and time. Various shareholders (Owners) have different preferences for dividends versus capital growth, etc. In actuality, the top decision makers must deal with hundreds of potential claimants in developing their goal set.
  3. Once the goal set is established, these goals are used in developing a goal structure throughout the hierarchy (process termed goal factoring). Department, unit, and finally individual goals are all tied to the organizational goal set through this process. Thus the goal set provides direction, becomes the basis of evaluation, and acts the integrative mechanism for the organization.

The Political Model

While the operative goal model might be an appealing normative model for organizational decision making, it is not an accurate descriptive model. The recognition that organizational direction is a function of the relative power of the claimants in its environment is an important improvement of the operative goal model over the rational goal model, but still does not capture the true human nature of decision making. The political model is the extension of the operative goal model that brings us closer to an accurate descriptive model of organizational decision making. Elements of the political model are the following:

  1. While claimants or stakeholders do attempt to influence organizational decision making, they do not only do so at the top decision making levels. Stakeholders may attempt to influence decision making at all levels of the organization. This brings the model into the category of a true open systems model.
  2. The basic unit of the model is the decision maker. Organizations are envisioned as networks of interdependent decision makers operating within some hierarchy of organizational structure. Each decision maker (or decision making group) deals with the following set of general stakeholders or claimants:
    1. Decision Maker’s Supervisors
    2. Subordinates
    3. Peers
    4. Direct relationships with Public-in-Contact (customers, clients, students, etc.)
    5. Direct contact with Public-at-Large
    6. The decision makers values and personal goals
  3. Stakeholders make demands on the decision maker when the outcome of the decision is of interest to them. These demands may take the form of demand that a particular alternative (position) be selected or a demand a specific outcome be achieved (interest). The demand by a stakeholder with high relative power over the decision maker becomes a constraint, or criterion, in the decision making process.
  4. When the decision maker has high relative power over all of the stakeholders in his/her environment (or at least none of them has power over him/her), the decision maker acts autonomously, making decisions using his/her values and personal goals. This is not meant to imply that all autonomous decision makers are self serving, but they may define what they feel the organization should do.
  5. When power resides in the hierarchy, that is, of all the stakeholders listed above, the highest relative power over the decision maker is held by the decision maker's boss, the model starts to resemble the rational goal model.
  6. Organizational direction is determined incrementally by the cumulative effect of these decisions. Once that direction is determined, a goal is often used to label this direction. However, it is not this goal that actually determined the direction. The fact that the goal model is an inaccurate descriptive model can be seen by the fact that many, if not most organizations, continue to make decisions without a formal goal, mission, or vision statement.

While the political model may be the most accurate descriptive model, it is not likely to make management students comfortable. The question with which we will deal with throughout the remainder of this course is: How does one direct an organization and promote increased levels of organizational effectiveness as a manager, given the reality of this model? The answer lies in the structure and culture of the organization. The structure will be viewed as the control and coordination systems developed by management. In addition, this model provides the basis for examining the ways in which one should view a demand placed on a decision maker by any stakeholder. In evaluating a demand, a decision can view the situation from the following perspectives:

  1. Behavioral- What are the potential behavioral consequences of not satisfying the stakeholder? That is what impact will a dissatisfied customer, employee, shareholder, etc., have on the decision maker?  The analytical tools and models used to view the demand from this perspective come from the power model and the Economic segments of this module.
  2. Legal- What are the legal consequences of not satisfying the stakeholder? The legal component of this module will provide the tools and models to analyze the demand from this perspective. And finally;
  3. Ethical- What are the moral and ethical implications involved in this decision?

As managers you must learn to look at all decisions from these three perspectives simultaneously and integrate your analyses into a single decision.  

Power

During this session we took a brief side journey to develop a model of organizational power. Admittedly this was brief and should be reinforced with readings from the texts. However, basic elements of the power model we will use are as follows:

  1. Power is the ability of Party A to exert influence over the decision making and/or behavior of Party B, despite resistance on the part of Party B.
    1. Resistance was viewed as a relative concept and measured by the notion of the zone of indifference. Specific behavior can be depicted as lying in one of the following zones:
      1. Preference zone- behaviors the individual would do on his/her own without inducement from others
      2. Indifference zone- behaviors the individual has neither preference or resistance to
      3. Legitimate zone- behaviors the individual is somewhat resistant to, but recognizes they are part of his/her psychological contract
      4. Influence zone- behaviors that the individual believes are outside his/her job requirements (psychological contract), but can be persuaded to do.
      5. Non Influence zone- behaviors the individual would not do and cannot be persuaded to do.
    2. The more outside the zone of indifference of Party B a particular demand by Party A, the greater the power balance must favor Party A before Party B meets that demand.
  2. Power is a function of exchange relationships between two parties, that is, for a power balance to exist there must be an exchange of resources. Resources, in this, case, are defined very broadly and may include symbols of acceptance and positive reinforcement of one's self concept, as well as more tangible resources such as a product or money.
  3. It is important to view power as a balance, that is, both parties have some power over each other. The party with the greatest power over the other in this balance is the one that may exert influence over the other.
  4. Power is the inverse of dependency and the power of A over B is a function of the importance of the resource A is providing to B and the replacability of A providing that resource to B. The notion of importance and replacability is entirely a perceptual one. It is B's perception of importance and replacability that give A any power over B. B can always reduce A's power by eliminating the need (reducing importance) or finding or developing alternatives to A in satisfying that need.
with Multiple Conflicting Criteria

Maximizing and Satisficing are two strategies used for dealing with multiple conflicting criteria

  1. Maximizing involves placing a value, priority, or weight on each criterion in the criteria set and compute a utility function by multiplying an alternative's rating on a criterion by its weight and summing these products. The decision maker then maximizes the utility function.
  2. Satisficing involves determining a minimum satisfactory level for each criterion in the criteria set and selecting an alternative that satisfies all of these minimum constraints. Using the political model, this minimum level would be the level of satisfaction at which a stakeholder would discontinue the exchange. For example, customers might wish to get a 3 year warranty with their new computers. If you can still continue to sell all the computers you wish by offering a one year warranty, one year represents the satisficing level. The satisficing level is a function of the relative power between the organization and the stakeholder or claimant.
Economic Profit Distribution

The purpose of this section is to show how various claimants (owners, participants, public-in-contact, public-at-large) are involved in the distribution of economic, when it exists. Two questions emerge with respect to the distribution of economic profit:

  1. Who (which stakeholder) should economic profit go to? While most of the class believed that economic profit should go to the owners (shareholders) of the organization, we identified numerous situations where economic profits go to other claimants, such as:
    1. Organizational Participants- profit sharing, Gainsharing, negotiated settlements, executive bonuses
    2. Public-at-Large- Windfall taxes and other formed of taxes that return high levels of economic profit to the public.
    3. Public-in-Contact- Anti-trust and restraint of trade settlements, PUC directed customer rebates.

Value based arguments were made for each of these stakeholders.

  1. Who (which claimant) does economic profit go to? While individuals do have differing values as to who should get any economic profits, the descriptive model suggests that distribution is a function of the relative power of the various claimant seeking a share, rather than any rational goal setting process on the part of top management

 
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