respond to the Case study

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7.1

Two Kinds of Decision Making: Rational and Nonrational

MAJOR QUESTION How do people know when they’re being logical or illogical?

THE BIG PICTURE

Decision making, the process of identifying and choosing alternative courses of action, may be rational, but often it is nonrational. Four steps in making a rational decision are (1) identify the problem or opportunity, (2) think up alternative solutions, (3) evaluate alternatives and select a solution, and (4) implement and evaluate the solution chosen. Two examples of nonrational models of decision making are (1) satisficing and (2) intuition.

The subject of decisions and decision making is a fascinating subject that is at the heart of what managers do.

A  decision  is a choice made from among available alternatives.  Decision making  is the process of identifying and choosing alternative courses of action.

If your company’s product is first place in its market and is making tons of money, is that a sign of great decision making? Consider the decisions that framed success at Starbucks.

EXAMPLE

Crisis Leading to the Strategic-Management Process: Starbucks Reclaims Its Soul

Among the many things that Starbucks has going for it is this: it survived a near-death experience. 4

Today’s CEO, Howard Schultz, joined the Seattle-based company as marketing director in 1982, when it was only a small chain selling coffee equipment. Over nearly two decades, he gained control and, inspired by the coffee houses of Europe, transformed the company into a comfortable “third place” between home and work, a place with a neighborhood feel selling fresh-brewed by-the-cup lattes and cappuccinos. By 2000, Starbucks (named for the first mate of the whaling ship in Herman Melville’s Moby Dick) had become the world’s largest specialty coffee retailer, with 3,501 stores, 78% of them in the United States. 5

“Starbucks became, for many of us, what we talk about when we talk about coffee,” wrote one reporter. “It changed how we drink it (on a sofa, with Wi-Fi, or on the subway), how we order it (‘for here, grande, two-pump vanilla, skinny extra hot latte’), and what we are willing to pay for it,” such as $4.99 for a Frappuccino. 6

Shultz Steps Down. Schultz stepped down as CEO in 2000 (remaining as chairman), and for a while the business continued to thrive. Then two things happened that provoked a crisis. First, the company “lost a certain soul,” says Schultz, as the management became more concerned with profits than store atmosphere and company values and extended existing product lines rather than creating new ones. Second, as the Great Recession took hold in 2007, tight-fisted consumers abandoned specialty coffees, causing the stock price to nosedive. In January 2008, after an eight-year absence, Schultz returned as CEO.

The Reinvention Begins. “I didn’t come back to save the company—I hate that description,” Schultz told an interviewer. “I came back to rekindle the emotion that built it.” 7

Among the risks he took to restore the company’s luster, he closed 800 U.S. stores, laid off 4,000 employees, and let go most top executives. As a morale booster, he flew 10,000 store managers to New Orleans, recently destroyed by hurricane Katrina. Along with attending strategy sessions, they bonded in community-service activities, contributing thousands of volunteer hours to helping to restore parts of the city. “We wanted to give back to that community post-Katrina,” says Schultz, “andPage 203 remind and rekindle the organization with the values and guiding principles of our company before we did a stitch of business.” Later he closed all U.S. stores for half a day so baristas could be retrained in how to make espresso.

Starbucks in India The world’s biggest coffee chain launched its first Indian outlet in October 2012 in an upscale part of Mumbai. © Punit Paranjpe/AFP/Getty Images

The Payoff. After a couple of years, the company turned around, the result of better operations, modernized technology, a reinvigorated staff, and several innovations: It offered Via premium instant coffee, offered more coffee from a single origin rather than blends, switched to a cold-brew process for iced coffee instead of simply brewing hot coffee and then chilling it, acquired (and then later closed) the La Boulange bakery chain, opened (and then closed) Teavana “tea bars,” enabled customers to pay for coffee via a mobile-payment app, and even launched alcohol sales. 8  By early 2016, it had 23,921 stores in 64 countries, it had surpassed Subway to become the No. 2 restaurant chain in U.S. sales (second only to McDonald’s), and its revenues had risen 146% in the last decade, while earnings grew more than five-fold. 9

Schultz feels strongly that “there’s an opportunity for businesses to demonstrate a role in society that’s beyond profitability,” providing health insurance even for temps, creating tuition reimbursement, helping to raise loans for small businesses, building better opportunities for minority youth. 10

YOUR CALL

Some critics feel Starbucks is the symbol of “affordable luxury.” If we can’t afford a McMansion or a Lexus, says one observer, we may be “willing to make that $5 splurge at Starbucks simply because it makes us feel a bit better about ourselves.” 11  Thus, despite the innovation in products, attempts to rekindle the cozy neighborhood café, and emphasis on positive social values, do you think another economic downturn could alter Starbucks’s fortunes?

Decision Making in the Real World

Sometimes we are able to make thoughtful decisions, making rational choices among well-defined alternatives. But that is not always the way it works in the real world.

Two Systems of Decision Making

In Thinking, Fast and Slow, psychologist Daniel Kahneman, winner of the 2002 Nobel Prize in economics, describes two kinds of thinking, which he labels System 1 and System 2: 12

· System 1—intuitive and largely unconscious: System 1 operates automatically and quickly; it is our fast, automatic, intuitive, and largely unconscious mode, as when we detect hostility in a voice or detect that one object is more distant than another.

· System 2—analytical and conscious: System 2 is our slow, deliberate, analytical, and consciously effortful mode of reasoning, which swings into action when we have to fill out a tax form or park a car in a narrow space.

“System 1 uses association and metaphor to produce a quick and dirty draft of reality,” says one explanation, “which System 2 draws on to arrive at explicit beliefs and reasoned choices.” 13

Why don’t we use the more deliberate and rational System 2 more often? Because it’s lazy and tires easily, so instead of slowing things down and analyzing them, it is content to accept the easy but unreliable story that System 1 feeds it.

The “Curse of Knowledge”

Why do some engineers design electronic products (such as DVD remote controls) with so many buttons, devices ultimately useful only to other engineers? Why are some professional investors and bankers prone to taking excess risks? 14  Why are some employees so reluctant to adopt new processes? The answer may be what’s known as the curse of knowledge. As one writer put it about engineers, for example, “People who design products are experts cursed by their knowledge, and they can’t imagine what it’s like to be as ignorant as the rest of us.” 15  Specialization improves efficiency, suggests another writer, but it also leads to tunnel vision and blind spots. 16  In other words, as our knowledge and expertise grow, we may be less and less able to see things from an outsider’s perspective—hence, we are often apt to make irrational decisions.

Let us look at the two approaches managers may take to making decisions: They may follow a rational model or various kinds of nonrational models.

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Rational Decision Making: Managers Should Make Logical and Optimal Decisions

The  rational model of decision making, also called the classical model, explains how managers should make decisions; it assumes managers will make logical decisions that will be the optimum in furthering the organization’s best interests.

Typically there are four stages associated with rational decision making. (See  Figure 7.1 .)

FIGURE 7.1  The four steps in rational decision making

Stage 1: Identify the Problem or Opportunity—Determining the Actual versus the Desirable

As a manager, you’ll probably find no shortage of  problems, or difficulties that inhibit the achievement of goals: customer complaints, supplier breakdowns, staff turnover, sales shortfalls, competitor innovations.

However, you’ll also often find  opportunities—situations that present possibilities for exceeding existing goals. It’s the farsighted manager, however, who can look past the steady stream of daily problems and seize the moment to actually do better than the goals he or she is expected to achieve. When a competitor’s top salesperson unexpectedly quits, that creates an opportunity for your company to hire that person away to promote your product more vigorously in that sales territory.

Whether you’re confronted with a problem or an opportunity, the decision you’re called on to make is how to make improvements—how to change conditions from the present to the desirable. This is a matter of  diagnosis—analyzing the underlying causes.

EXAMPLE

Making a Correct Diagnosis: Does Billionaire Warren Buffet, the World’s Third Richest Man, Invest Like a Girl?

Warren Buffett is the renowned billionaire investor (the third richest person in the world, worth $60.8 billion in early 2016) known as the “Oracle of Omaha” who heads the financial juggernaut Berkshire Hathaway. 17  His investment decisions are so successful that $1,000 invested with him in 1957 reportedly was worth upwards of $30 million in 2014. 18  “In the 50 years since Buffett took over Berkshire, its stock has appreciated by 1,826,163%,” says one reporter. “That is an astounding number.” 19

Buffett is said to “invest like a girl,” taking the same cautious approach that many women supposedly do. 20  He uses basic arithmetic to analyze several file-cabinet drawers of annual reports and other readily available company financial documents and to look for a record of “high returns on equity capital, low debt, and a consistent, predictable business with sustainable advantages—like Coca-Cola’s soft-drink franchise.” 21  In other words, Buffett takes pains to make a correct diagnosis before making a decision. 22

The Better Investors. When men and women are asked to self-assess their financial knowledge, according to a study of eight countries, men tend to give themselves high scores and women give themselves lower scores—even when that is not warranted by their actual knowledge. 23  “Women are aware of their lack of knowledge,” speculates a study author, while “men are less willing to admit what they don’t know.” 24  Unfortunately, women are also falling behind men in financial literacy, according to more recent research. The worse news is that “men apparently don’t know much about the topic in the first place.” 25

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So which sex is the better class of investors? A seven-year study of single (unmarried) investors found females outperformed males by 2.3%, female investment groups outperformed male groups by 4.6%, and women overall outperformed men by 1.4%. 26  The basic reason, suggests one account: “Women trade much less often than men, do a lot more research, and tend to base their investment decisions on considerations other than just numbers.” 27  Men, offers another report, “tend to trade more, and the more you trade, typically the more you lose—not to mention running up transaction costs.” 28

Are the Sexes Really That Different? But wait, are men really so bad at investing compared to women? Some research shows that when “everything is low-key and manageable, men and women make decisions about risk in similar ways,” says cognitive psychologist Therese Huston. 29  However, when stress is added to the situation, men are apparently more prone to taking risky bets with little payoff, according to some neuroscientists. 30  Another paper, by economist Julie Nelson, suggests that as individuals men and women aren’t all that different with regard to risk taking—but when men make decisions as part of a group, they adopt more risky strategies. 31  “Men in groups tend to show off. They egg one another on to display … the ‘cultural norm of male daring.’”

YOUR CALL

When preparing to make important decisions—especially financial decisions—do you spend a lot of time trying to make a correct diagnosis, doing deep research, or do you chase “hot” tips and make snap judgments? How well do you do when you’re under stress or participating in a group?

Stage 2: Think Up Alternative Solutions—Both the Obvious and the Creative

Employees burning with bright ideas are an employer’s greatest competitive resource. “Creativity precedes innovation, which is its physical expression,” says Fortune magazine writer Alan Farnham. “It’s the source of all intellectual property.” 32

After you’ve identified the problem or opportunity and diagnosed its causes, you need to come up with alternative solutions.

Stage 3: Evaluate Alternatives and Select a Solution—Ethics, Feasibility, and Effectiveness

In this stage, you need to evaluate each alternative not only according to cost and quality but also according to the following questions: (1) Is it ethical? (If it isn’t, don’t give it a second look.) (2) Is it feasible? (If time is short, costs are high, technology unavailable, or customers resistant, for example, it is not.) (3) Is it ultimately effective? (If the decision is merely “good enough” but not optimal in the long run, you might reconsider.)

Stage 4: Implement and Evaluate the Solution Chosen

With some decisions, implementation is usually straightforward (though not necessarily easy—firing employees who steal may be an obvious decision, but it can still be emotionally draining). With other decisions, implementation can be quite difficult; when one company acquires another, for instance, it may take months to consolidate the departments, accounting systems, inventories, and so on.

Successful Implementation

For implementation to be successful, you need to do two things:

· Plan carefully. Especially if reversing an action will be difficult, you need to make careful plans for implementation. Some decisions may require written plans.

· Be sensitive to those affected. You need to consider how the people affected may feel about the change—inconvenienced, insecure, even fearful, all of which can trigger resistance. This is why it helps to give employees and customers latitude during a changeover in business practices or working arrangements.

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Now that you understand the four stages of the rational model, to what extent do you think you use them when making decisions? Would you like to improve your problem-solving skills? If yes, then you will find the following self-assessment valuable. It assesses your problem-solving skills.

SELF-ASSESSMENT 7.1  

Assessing Your Problem-Solving Potential

This survey is designed to assess your approach to problem solving. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 7.1 in Connect.

1. What is the status of your problem-solving skills? Are you surprised by the results?

2. Based on identifying the four lowest scored items on the assessment, what can you do to improve your problem-solving skills? Explain.

3. Reflect on a recent decision you made that did not turn out to your satisfaction. Now, consider what you learned about the rational model and your problem-solving skills and think through the decision for a second time. What would you do differently based on these considerations?

Evaluation

One “law” in economics is the Law of Unintended Consequences—things happen that weren’t foreseen. For this reason, you need to follow up and evaluate the results of the decision.

What should you do if the action is not working? Some possibilities:

· Give it more time. You need to make sure employees, customers, and so on have had enough time to get used to the new action.

· Change it slightly. Maybe the action was correct, but it just needs “tweaking”—a small change of some sort.

· Try another alternative. If Plan A doesn’t seem to be working, maybe you want to scrap it for another alternative.

· Start over. If no alternative seems workable, you need to go back to the drawing board—to Stage 1 of the decision-making process.

EXAMPLE

Evaluation: The Boeing 787 Dreamliner, a Bet-the-Company Decision

In 2002, a time when Boeing Co., the Chicago-headquartered aerospace giant, was losing business to its European rival Airbus and rising fuel costs were dramatically impacting the commercial airline industry, Boeing management made a bold decision: It would build a new medium-sized commercial jet, the 787 Dreamliner, its first new aircraft in 10 years, designed to fly faster than the competition and to consume 20% less fuel than similar-sized planes.

To achieve this, the 787 would feature more fuel-efficient engines and the fuselage would be built from plastic composite materials instead of aluminum. This would cut down on structural fatigue and corrosion, thereby reducing the number of inspections necessary and increasing the number of flights possible. “A light, strong plane is the big payoff for the huge technical risk Boeing is taking in crafting parts out of composites,” said one aerospace reporter. 33

A Bumpy Ride. First planned for a summer 2007 launch, the date was revised for 2008. Then, in mid-2006, the company began encountering the first of many stories of bad news. The fuselage section had failed in testing, and engineers had discovered worrisome bubbles in its skin. The carbon-fiber wing was too heavy, adding to the plane’s overall weight. To hold costs down, Boeing had outsourced about 70% of the production to major suppliers acting as risk-sharing partners and playing a greater role in design and manufacturing. In return for investing more up front and taking on a share of the development costs, suppliers were given major sections of the airplane to build. 34

Dream on. Boeing’s 787 Dreamliner.© Bloomberg/Getty ImagesPage 207

By late 2007, however, it was apparent that suppliers were struggling to meet the exacting technological demands and deadlines, and their software programs were having trouble communicating with each other. In October, Boeing announced it would no longer meet its May 2008 target date and was postponing its first delivery to late fall of that year. 35

Changing Dates. In early 2008, the company said the poor quality of outsourced work and the unprecedented amount of coordination among suppliers caused Boeing to shift much of the work back to its Everett, Washington, assembly plant, adding to delays. It said it was working to try to begin deliveries to customers not in late 2008 but in the first quarter of 2009, which then became the third quarter. 36  Then in 2009, stress testing revealed new flaws around bolts inside the wings. 37

Finally, after six delays and nearly 10 years of anticipation, the Dreamliner had its first flight, on December 15, 2009. 38  Then, on October 28, 2011, after months of testing and three years behind schedule, the 787 was put into service for the first time, carrying 264 passengers for All Nippon Airways from Tokyo to Hong Kong. 39

After More Problems, Finally Success. Then in January 2013, two Japanese-owned 787 Dreamliners experienced mysterious battery fires, resulting in the entire fleet of jetliners being grounded worldwide for 3½ months. 40  In March 2014, Boeing and a key supplier discovered hairline cracks while inspecting the wings of 42 yet-to-be-delivered Dreamliners, which forced changes to the manufacturing process. 41  In 2016, the company was ordered to fix General Electric engines on some Dreamliners after an icing problem caused them to shut down in mid-flight. 42  Even so, the Federal Aviation Administration declared the plane’s design, including its revolutionary use of composite materials and increased reliance on electronic systems, to be “fundamentally sound.” 43  The company also learned from its earlier mishaps by bringing more of the Dreamliner’s manufacturing process back in-house after outsourcing it, to avoid the design and production missteps that plagued them earlier.

Through it all, as Boeing dealt with the additional setbacks, it continued to pick up orders as the airlines’ financial health improved in the wake of the Great Recession and as high fuel prices continued to drive demand for more efficient aircraft like the Dreamliner. 44  Passengers loved the travel experience, praising the plane’s bigger windows, higher ceilings, electronic window shades, big overhead bins, better cabin speakers, lavatories with motion-activated taps and flush, better cabin pressurization, “gust proof suppression system” for a smoother ride, and great looks. 45  (The Dreamliner “is just a gorgeous craft,” said one reviewer, “with its sweptback wings and sleek lines.”) 46

From 2011 to 2014, Boeing made its profit expectations, although it missed them in 2015. 47  Still, because the 787 had been put into service three years late and cost twice the original estimate of $5 billion, it has not yet recovered its costs. 48  Will it do so?

The New 787s. The original Dreamliner was called the 787-8, which carries about 210 people and costs $224.6 million; this version accounted for nearly 80% of the Dreamliners delivered up until the end of 2015. 49  As of 2016, Boeing was making two additional versions of the plane: the 787-9, carrying 270 people and costing $264.6 million, and the 787-10, carrying 300 people and costing $306.1 million. To offset the billions of dollars in losses in building the first few hundred 787s, Boeing will need to sell more of the larger and more profitable models, particularly the 787-10. As of March 2016, Boeing needed another 150 orders on the various 787s in order to reach a target of 1,300 planes (at an average profit of $35 million per plane), and it cannot suffer any cancellations. 50

YOUR CALL

How would you evaluate Boeing’s decisions? Do you think despite all the effort on the 787-8 that the company will be able to apply what it learned regarding the use of carbon fiber composite materials and global experiments with different vendors to the newer Dreamliner versions (787-9, 787-10)? Was this a risky bet-the-company decision?

What’s Wrong with the Rational Model?

The rational model is prescriptive, describing how managers ought to make decisions. It doesn’t describe how managers actually make decisions. Indeed, the rational model makes some highly desirable assumptions—that managers have complete information, are able to make an unemotional analysis, and are able to make the best decision for the organization. (See  Table 7.1 .) We all know that these assumptions are unrealistic.

TABLE 7.1  Assumptions of the Rational Model

· Complete information, no uncertainty: You should obtain complete, error-free information about all alternative courses of action and the consequences that would follow from each choice.

· Logical, unemotional analysis: Having no prejudices or emotional blind spots, you are able to logically evaluate the alternatives, ranking them from best to worst according to your personal preferences.

· Best decision for the organization: Confident of the best future course of action, you coolly choose the alternative that you believe will most benefit the organization.

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Nonrational Decision Making: Managers Find It Difficult to Make Optimal Decisions

Nonrational models of decision making  explain how managers make decisions; they assume that decision making is nearly always uncertain and risky, making it difficult for managers to make optimal decisions. The nonrational models are descriptive rather than prescriptive: They describe how managers actually make decisions rather than how they should. Two nonrational models are (1) satisficing and (2) intuition.

1. Bounded Rationality and the Satisficing Model: “Satisfactory Is Good Enough”

During the 1950s, economist Herbert Simon—who later received the Nobel Prize—began to study how managers actually make decisions. From his research he proposed that managers could not act truly logically because their rationality was bounded by so many restrictions. 51  Called  bounded rationality, the concept suggests that the ability of decision makers to be rational is limited by numerous constraints, such as complexity, time and money, and their cognitive capacity, values, skills, habits, and unconscious reflexes. (See  Figure 7.2 .)

FIGURE 7.2  Some hindrances to perfectly rational decision making

· Complexity: The problems that need solving are often exceedingly complex, beyond understanding. · Time and money constraints: There is not enough time or money to gather all relevant information.

· Different cognitive capacity, values, skills, habits, and unconscious reflexes: Managers aren’t all built the same way, of course, and all have personal limitations and biases that affect their judgment. · Imperfect information: Managers have imperfect, fragmentary information about the alternatives and their consequences.

· Information overload: There is too much information for one person to process. · Different priorities: Some data are considered more important, so certain facts are ignored. · Conflicting goals: Other managers, including colleagues, have conflicting goals.

Because of such constraints, managers don’t make an exhaustive search for the best alternative. Instead, they follow what Simon calls the  satisficing model—that is, managers seek alternatives until they find one that is satisfactory, not optimal. While “satisficing” might seem to be a weakness, it may well outweigh any advantages gained from delaying making a decision until all information is in and all alternatives weighed.

Nonrational decision making? When gasoline prices fall, Americans do two things: They buy more gas but they also buy higher-octane gas. Thus, instead of saving money by buying their previous gallons and grades, they opt to go fancy on their fill-ups. 52  Why do you suppose this is? How do you deal with this kind of nonrational decision?© NithidPhoto/Getty Images RF

However, making snap decisions can also backfire. Example: In the fall of 2014,  Amazon.com  was about to release its new voice-controlled smart speaker (what came to be called the Echo), but there was one lingering uncertainty: the choice of “wake word” that, when spoken, would cue the device to take voice commands. (Because of technical limitations, a wake word cannot be just any sound.) One possibility was “Echo.” Another was “Alexa.” Amazon CEO Jeff Bezos thought the best word was “Amazon.” However, the difficulty with Bezos’s choice, according to Amazon’s engineers, as reported in Bloomberg Businessweek, was that “the speakers would wake upon hearing Amazon ads on television and, because it connects to a Wi-Fi network, could start buying stuff from the Internet.” 53  In the end Bezos agreed with his engineers that the wake word would be “Alexa”—a satisfactory, if not optimal, solution for Bezos.

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2. The Intuition Model: “It Just Feels Right”

Small entrepreneurs often can’t afford in-depth marketing research and so they make decisions based on hunches—their subconscious, visceral feelings. For instance, Ben Hugh, 32, decided to buy I Can Has Cheezburger?—a blog devoted to silly cat pictures paired with viewer-submitted quirky captions—when it linked to his own pet blog and caused it to crash from a wave of new visitors. Putting up $10,000 of his own money and acquiring additional investor financing, he bought the site for $2 million from the Hawaiian bloggers who started it. “It was a white-knuckle decision,” he said later. But he expanded the Cheezburger blog into an empire that now includes 53 sites. 54

“Going with your gut,” or  intuition, is making a choice without the use of conscious thought or logical inference. 55  Intuition that stems from expertise—a person’s explicit and tacit knowledge about a person, a situation, an object, or a decision opportunity—is known as a holistic hunch. Intuition based on feelings—the involuntary emotional response to those same matters—is known as automated experience. It is important to try to develop your intuitive skills because they are as important as rational analysis in many decisions. 56  Some suggestions appear in the following Practical Action box.

PRACTICAL ACTION

Tips for Improving Your Intuition 

1. Trust your intuitive judgments. Your feelings count. Trust them and rely on your “gut” when it feels right.

2. Seek feedback. Confirm your intuitive judgments by asking trusted others for feedback.

3. Test your intuitive success rate. Think back over the last year and assess how many times you relied on your intuition. What was your success rate? If your intuition was wrong, assess why and try to use this knowledge in the future.

4. Try visualizing solutions. Visualizing solutions will help engage the System 1 thinking needed to activate your intuition.

5. Challenge your intuition. Rather than automatically accepting your intuitive thoughts, challenge them. Test your intuition by thinking of counterarguments. Then challenge those counterarguments. 57

YOUR CALL

Which of the five tips might be most helpful in improving your intuition? Outline a brief action plan for using this tip.

As a model for making decisions, intuition has at least two benefits. (1) It can speed up decision making, useful when deadlines are tight. 58  (2) It can be helpful to managers when resources are limited. A drawback, however, is that it can be difficult to convince others that your hunch makes sense. In addition, intuition is subject to the same biases as those that affect rational decision making, as we discuss in  Section 7.5 . 59  Finally, says one senior executive, intuition is fine for start-ups but “often deceives CEOs as their businesses become more complex.” 60  Still, we believe that intuition and rationality are complementary and that managers should develop the courage to use intuition when making decisions. 61

To what extent do you use intuition when making decisions? Are you curious about how you can improve your level of intuition? ●

SELF-ASSESSMENT 7.2 

Assessing Your Level of Intuition

This survey is designed to assess the extent you use intuition in your current job. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 7.2 in Connect.

1. Are you intuitive at work? Did the results surprise you?

2. What can you do to increase the amount of intuition you use at work? Describe.

3. What factors are inhibiting your use of intuition? What, if anything, can be done to eliminate these hindrances?

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7.2

Making Ethical Decisions

MAJOR QUESTION What guidelines can I follow to be sure that decisions I make are not just lawful but ethical?

THE BIG PICTURE

A graph known as a decision tree can help one make ethical decisions. 

The ethical behavior of businesspeople, as we discussed at length in  Chapter 3 , has become of increasing concern in recent years, brought about by a number of events.

The Dismal Record of Business Ethics

First were the business scandals of the early 2000s, from Enron to WorldCom, producing photos of handcuffed executives. “The supposedly ‘independent’ auditors, directors, accountants, and stock market advisers and accountants were all tarnished,” wrote Mortimer Zuckerman, editor-in-chief of U.S. News & World Report. “The engine of the people’s involvement, the mutual fund industry, was shown to be permeated by rip-off artists rigging the system for the benefit of insiders and the rich.” 62  Then, as the Iraq war wore on, reports came back of sweetheart deals and gross abuses by civilian contractors working in Iraq war zones.

In 2007, it became apparent that banks and others in the financial industry had forsaken sound business judgment—including ethical judgments—by making mortgage loans (subprime loans) to essentially unqualified buyers, which led to a wave of housing foreclosures and helped push the country into a recession. Since then, the media have presented us with a display of Ponzi schemes (Bernard Madoff, Allen Stanford), insider trading (Sam Waksal, Raj Rajaratnam), corporate sleaziness (work-stressed suicides at Apple’s China supplier Foxconn, a fatality at a Kentucky coal mine evading safety regulations), excessive profiteering (as when a pharmaceutical company raised the price of one medication from $13.50 a pill to an astonishing $750 a pill), and similar matters. 63

Through it all, voices were being raised that American capitalism was not doing enough to help the poorer nations in the world. Companies in wealthier countries, Microsoft’s Bill Gates has urged, should focus on “a twin mission: making profits and also improving lives for those who don’t fully benefit from market forces.” 64

All these concerns have forced the subject of right-minded decision making to the top of the agenda in many organizations. Indeed, many companies now have an  ethics officer, someone trained about matters of ethics in the workplace, particularly about resolving ethical dilemmas. More and more companies are also creating values statements to guide employees as to what constitutes desirable business behavior. 65  As a result of this raised consciousness, managers now must try to make sure their decisions are not just lawful but also ethical. 66

Buy a pair, give a pair. Warby Parker (named after two characters in a journal by 1950s Beat Generation writer Jack Kerouac) was established in 2010 by four former Wharton School students. The company operates on two premises: (a) Designer glasses can be sold at a fraction of the price of the hugely marked-up luxury alternatives. (b) For every pair of glasses sold, a pair could be distributed among the hundreds of thousands of people in need. “Glasses are one of the most effective poverty-alleviation tools in the world,” says one of the founders. “They increase one’s income by 20%, which is equivalent to adding a full extra day of work a week.” 67  Are you more inclined to buy from companies like Warby Parker or shoe seller TOMS (which gives away a pair of shoes to a needy person for every pair sold) that tie sales of their products to helping impoverished people around the world?© Astrid Stawiarz/WireImage/Getty Images

Road Map to Ethical Decision Making: A Decision Tree

Undoubtedly the greatest pressure on top executives is to maximize shareholder value, to deliver the greatest return on investment to the owners of their company. But is a decision that is beneficial to shareholders yet harmful to employees—such as forcing them to contribute more to their health benefits, as IBM has done—unethical? Harvard Business School professor Constance Bagley suggests that what is needed is a decision tree to help with ethical decisions. 68  A  decision tree  is a graph of decisions and their possible consequences; it is used to create a plan to reach a goal. Decision trees are used to aid in making decisions. Bagley’s ethical decision tree is shown below. (See  Figure 7.3 .)Page 211

FIGURE 7.3  The ethical decision tree: What’s the right thing to do?Source: Data from “The Ethical Leader’s Decision Tree,” by C. E. Bagley, February 2003, Harvard Business School Publishing Corporation.

When confronted with any proposed action for which a decision is required, a manager should ask the following questions.

1. Is the Proposed Action Legal?

This may seem an obvious question. But, Bagley observes, “corporate shenanigans suggest that some managers need to be reminded: If the action isn’t legal, don’t do it.”

2. If “Yes,” Does the Proposed Action Maximize Shareholder Value?

If the action is legal, one must next ask whether it will profit the shareholders. If the answer is “yes,” should you do it? Not necessarily.

3. If “Yes,” Is the Proposed Action Ethical?

As Bagley points out, though directors and top managers may believe they are bound by corporate law to always maximize shareholder value, the courts and many state legislatures have held they are not. Rather, their main obligation is to manage “for the best interests of the corporation,” which includes the interests of the larger community.

Thus, says Bagley, building a profitable-but-polluting plant in a country overseas may benefit the shareholders but be bad for that country—and for the corporation’s relations with that nation. Ethically, then, managers should add pollution-control equipment.

4. If “No,” Would It Be Ethical Not to Take the Proposed Action?

If the action would not directly benefit shareholders, might it still be ethical to go ahead with it?

Not building the overseas plant might be harmful to other stakeholders, such as employees or customers. Thus, the ethical conclusion might be to build the plant with pollution-control equipment but to disclose the effects of the decision to shareholders.

As a basic guideline to making good ethical decisions on behalf of a corporation, Bagley suggests that directors, managers, and employees need to follow their own individual ideas about right and wrong. 69  There is a lesson, she suggests, in the response of the pension fund manager who, when asked whether she would invest in a company doing business in a country that permits slavery, responded, “Do you mean me, personally, or as a fund manager?” When people feel entitled or compelled to compromise their own personal ethics to advance the interests of a business, “it is an invitation to mischief.” 70

To learn more about your own ethics, morality, and/or values (while contributing to scientific research), go to  www.yourmorals.org . 71  ●

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7.3

Evidence-Based Decision Making and Analytics

MAJOR QUESTION How can I improve my decision making using evidence-based management and business analytics?

THE BIG PICTURE

Evidence-based decision making, which depends on an “attitude of wisdom,” rests on three truths. This section describes seven principles for implementing evidence-based management. We also describe why it is hard to bring this approach to bear on one’s decision making. Finally, we describe analytics and its three key attributes.

“How do you build better bosses?”

That’s what Google Inc. wanted to know when in 2009 it embarked on a plan code-named Project Oxygen. After a year of work, statisticians produced eight rules for becoming an effective Google manager, as shown below. (See  Table 7.2 .)

TABLE 7.2  WHAT THE EVIDENCE SHOWS: GOOGLE’S EIGHT RULES FOR BEING A BETTER MANAGER  Rules are listed in order of importance.

1. Be a good coach.

2. Empower your team, don’t micromanage.

3. Express interest in team members’ success and personal well-being.

4. Don’t be a “sissy”: Be productive and results oriented.

5. Be a good communicator and listen to your team.

6. Help your employees with career development.

7. Have a clear vision and strategy for the team.

8. Have key technical skills so you can help advise the team.

Source:  J.-C. Spender and B. A. Strong, Strategic Conversations: Creating and Directing the Entrepreneurial Workforce (Cambridge, MA: Cambridge University Press, 2014), p. 141.

Some of these may seem obvious, even silly: “Have a clear vision and strategy for the team.” “Don’t be a ‘sissy’: Be productive and results oriented.” Really?

What’s important here, however, is how Google arrived at what would seem to be commonsensical advice: by analyzing performance reviews, employee surveys, nominations for top-manager awards, and other sources. “The result was more than 10,000 observations of manager behaviors,” says one report. “The research team complimented the quantitative data with qualitative information from interviews.” 72  In other words, Google looked at the evidence.

Evidence-Based Decision Making

“Too many companies and too many leaders are more interested in just copying others, doing what they’ve always done, and making decisions based on beliefs in what ought to work rather than what actually works,” say Stanford professors Jeffrey Pfeffer and Robert Sutton. “They fail to face the hard facts and use the best evidence to help navigate the competitive environment.” 73  Companies that use evidence-based management—the translation of principles based on best evidence into organizational practice, bringing rationality to the decision-making process, as we defined it in  Chapter 2 —routinely trump the competition, Pfeffer and Sutton suggest. 74

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Seven Implementation Principles

Pfeffer and Sutton identify seven implementation principles to help companies that are committed to doing what it takes to profit from evidence-based management: 75

· Treat your organization as an unfinished prototype. Leaders need to think and act as if their organization were an unfinished prototype that won’t be ruined by dangerous new ideas or impossible to change because of employee or management resistance. Example: Some Internet start-ups that find their original plan not working have learned to master “the art of the pivot,” to fail gracefully by cutting their losses and choosing a new direction—as did the founders of Fabulus, a review site and social network that attracted no users, and so they launched a high-end e-commerce site called  Fab.com . 76  (Unfortunately, Fab CEO Jason Goldberg was inclined to pivot the business rather than solve basic problems. “You can change a business once or twice,” says one former employee, “but after that you’re drowning.” 77  After creating and losing 500 jobs and creating and losing $850 million, Fab ended and was bought for a fraction of its value by another company.)

· No brag, just facts. This slogan is an antidote for over-the-top assertions about forthcoming products, such as “the deafening levels of managed hype across much of Silicon Valley,” as one reporter characterized it. 78  Other companies, such as DaVita, which operates dialysis centers, take pains to evaluate data before making decisions. So does SAS Institute, the privately owned software company, No. 8 on Fortune’s 2016 “Best Places to Work For” list. As we’ve seen, Google has used data to find out what makes a better boss. 79

Evidence-based decisions. Google used evidence-based analysis to find out what makes a better boss. They found that what employees value most are even-keeled bosses who take an interest in employees’ lives and careers, who make time for one-on-one meetings, and who help people work through problems by asking questions instead of dictating answers. Would you expect a “just-the-facts” approach to be normal in high-tech businesses or unusual?© Cole Burston/Bloomberg/Getty Images

· See yourself and your organization as outsiders do. Most managers are afflicted with “rampant optimism,” with inflated views of their own talents and prospects for success, which causes them to downplay risks and continue on a path despite evidence that things are not working. “Having a blunt friend, mentor, or counselor,” Pfeffer and Sutton suggest, “can help you see and act on better evidence.”

· Evidence-based management is not just for senior executives. The best organizations are those in which everyone, not just the top managers, is guided by the responsibility to gather and act on quantitative and qualitative data and share results with others.

· Like everything else, you still need to sell it. “Unfortunately, new and exciting ideas grab attention even when they are vastly inferior to old ideas,” the Stanford authors say. “Vivid, juicy stories and case studies sell better than detailed, rigorous, and admittedly dull data—no matter how wrong the stories or how right the data.” To sell an evidence-based approach, you may have to identify a preferred practice based on solid if unexciting evidence, then use vivid stories to grab management attention.

· Page 214

If all else fails, slow the spread of bad practice. Because many managers and employees face pressures to do things that are known to be ineffective, it may be necessary for you to practice “evidence-based misbehavior”—that is, ignore orders you know to be wrong or delay their implementation.

· The best diagnostic question: What happens when people fail? “Failure hurts, it is embarrassing, and we would rather live without it,” the authors write. “Yet there is no learning without failure. … If you look at how the most effective systems in the world are managed, a hallmark is that when something goes wrong, people face the hard facts, learn what happened and why, and keep using those facts to make the system better.” 80  From the U.S. civil aviation system, which rigorously examines airplane accidents, near misses, and equipment problems, to mall owners replacing vacant department stores (Macy’s, Sears) with new kinds of anchor tenants (Dick’s Sporting Goods, Wegmans Food Markets) as the backbone of shopping centers, evidence-based management makes the point that failure is a great teacher. 81  This means, however, that the organization must “forgive and remember” people who make mistakes, not be trapped by preconceived notions, and confront the best evidence and hard facts.

What Makes It Hard to Be Evidence Based

Despite your best intentions, it’s hard to bring the best evidence to bear on your decisions. Among the reasons: 82  (1) There’s too much evidence. (2) There’s not enough good evidence. (3) The evidence doesn’t quite apply. (4) People are trying to mislead you. (5) You are trying to mislead you. (6) The side effects outweigh the cure. (Example: Despite the belief that social promotion in school is a bad idea—that is, that schools shouldn’t advance children to the next grade when they haven’t mastered the material—the side effect is skyrocketing costs because it crowds schools with older students, and angrier students, demanding more resources.) (7) Stories are more persuasive, anyway.

EXAMPLE

Evidence-Based Decision Making: “If People Are Your Most Important Assets, Why Would You Get Rid of Them?”

It’s an axiom of many managers that it’s often necessary to cut back on workers during economic downturns—or even in good times—because it helps to increase profitability or drive the company’s stock price higher. But Stanford professor Jeffrey Pfeffer, advocate for evidence-based management, takes issue with this assumption. “There is a growing body of academic research suggesting that firms incur big costs when they cut workers,” he writes. 83

What Are the Costs of Layoffs? While agreeing that there are circumstances in which layoffs are necessary for a firm to survive (as when an industry is shrinking or competitors are resorting to cheaper overseas labor), Pfeffer suggests companies incur big costs when they cut their labor forces. He cites the direct and indirect costs of layoffs listed by University of Colorado professor Wayne Cascio in his book Responsible Restructuring: “severance pay; paying out accrued vacation and sick pay; outplacement costs; higher unemployment-insurance taxes; the cost of rehiring employees when business improves; low morale and risk-averse survivors; potential lawsuits, sabotage, or even workplace violence from aggrieved employees or former employees; loss of institutional memory and knowledge; diminished trust in management; and reduced productivity.”

Looking at the evidence, Pfeffer finds that firms that announce layoffs actually do not enjoy higher stock prices than their peers, either immediately or over time. Layoffs also don’t increase individual company productivity and, in fact, don’t even reliably cut costs (because companies often lose the best people first; there is lower morale among survivors, resulting in reduced customer service, innovation, and productivity; and remaining employees are spurred to look for other jobs once things improve).

The Most Successful Airline. Following the 9/11 tragedy in 2001, which coincided with the start of a recession, all U.S. airlines except one announced tens of thousands of layoffs. The exception was Southwest, which has never had an involuntary layoff in its 47-year history and which most Americans voted the most desirable brand in 2012. 84  (It still ranked high as a brand, at number 7, in 2015 and 2016 among Fortune’s World’s Most Admired Companies.) 85  “If people are your most important assets,” Pfeffer quotes a former head of the airline’s human resources department, “why would you get rid of them?”

YOUR CALL

Can you think of any instances of people being laid off unnecessarily? What is your evidence that it was not necessary?

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In Praise of Analytics

Perhaps the purest application of evidence-based management is the use of  analytics,  or  business analytics,  the term used for sophisticated forms of business data analysis. One example of analytics is portfolio analysis, in which an investment adviser evaluates the risks of various stocks. Another example is the time-series forecast, which predicts future data based on patterns of historical data.

Some leaders and firms have become exceptional practitioners of analytics. Gary Loveman, CEO of the Harrah’s gambling empire, wrote a famous paper, “Diamonds in the Data Mine,” in which he explained how data-mining software was used to analyze vast amounts of casino customer data to target profitable patrons. 86  Marriott International, through its Total Hotel Optimization program, has used quantitative data to establish the optimal price for hotel rooms, evaluate use of conference facilities and catering, and develop systems to optimize offerings to frequent customers. 87  To aid in recruitment, Microsoft studies correlations between its successful workers and the schools and companies they arrived from. 88

EXAMPLE

Analytics in Athletics: The Personal “Moneyball” Takeover of Sports

After her first set during the 2015 Bank of the West Classic at Stanford, California, pro tennis player Angelique Kerber called her coach over for a 90-second conference (recently allowed under experimental World Tennis Association rules). Referring to his data-laden iPad, as well as his courtside observations, the coach told Kerber that her opponent was serving to her backhand nearly every time. With this knowledge Kerber went on to defeat her competitor, and then her subsequent contender, to win the tournament, for her fourth title of the year. 89

Better Indicators of Player Success. The obsession with analytics in professional tennis—a latecomer, after baseball, football, basketball, and hockey, to the use of sophisticated data analysis in pro sports—is the logical result of the whole Moneyball phenomenon. The film of that name, which starred Brad Pitt and supporting actor Jonah Hill and which received six 2012 Academy Award nominations, was adapted from a book by Michael Lewis, Moneyball: The Art of Winning an Unfair Game. The book described how the Oakland Athletics, one of the poorest teams in Major League Baseball (2002 payroll $41 million, versus the New York Yankees’s $126 million), managed to go to the playoffs five times in seven years against better-financed contenders. They accomplished this by avoiding the use of traditional baseball statistics and finding better indicators of player success in on-base percentage, slugging percentage, and the like. For a time, this creative use of analytics enabled managers of the California club to concentrate their limited payroll resources on draft picks who were primarily talented college players rather than veteran professionals. 90

Analytics in Pro Sports. Since then, analytic measures, such as WAR (wins above replacement) and PER (player efficiency rating), have been used to find better ways to value players and strategies in all major sports. 91  For instance, Major League Baseball’s Kansas City Royals, operating without the huge budgets of the Yankees and Los Angeles Dodgers, has used analytics to replace its bigger-name stars with “under-the-radar veteran alternatives in search of a World Series ring,” says one report. 92

In basketball, the application of data and analytics reached its zenith with the Golden State Warriors, the National Basketball Association’s defending champion. In 2010, a group of data-loving Silicon Valley investors bought the floundering team for $450 million (it’s now worth $2 billion) and proceeded to fix it by trying to answer the question “What would happen if you built a basketball team by ignoring every orthodoxy of building a basketball team?” One unusual idea: Focus less on recruiting big men who could stuff the basket and more on players who could make 3-point shots. 93

Delving into the statistics, the executives began to rebuild the team around star 3-point shooters Stephen Curry and Klay Thompson and other players, which helped the Warriors make a higher percentage of 3-pointers than any other team in the league. The team also applied emerging technology (wearable Catapult GPS devices, SportVU cameras) during practices to learn whether players were performing to baseline standards and which might be candidates for forced rest. The Warriors became the healthiest team in the NBA, according to an ESPN study. 94

“We’re lightyears ahead of probably every other team in structure, in planning, in how we’re going to go about things,” says Golden State majority owner Joe Lacob. “We’re going to be a handful for the rest of the NBA to deal with for a long time.” 95  The Warriors won the NBA championship in 2015 and nearly did so again in 2016, ultimately losing to Cleveland.

YOUR CALL

Executives and personnel people in other lines of work are often like the old sports traditionalists, relying on resume, degree, years of experience, and even looks in evaluating job applicants. What other, more quantifiable measures might be used instead when hiring new college graduates?

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Thomas H. Davenport and others at Babson College’s Working Knowledge Research Center studied 32 organizations that made a commitment to quantitative, fact-based analysis and found three key attributes among analytics competitors: use of modeling, multiple applications, and support from top management. 96

1. Use of Modeling: Going beyond Simple Descriptive Statistics

Companies such as Capital One look well beyond basic statistics, using data mining and predictive modeling to identify potential and most profitable customers.  Predictive modeling  is a data-mining technique used to predict future behavior and anticipate the consequences of change. Thus, Capital One conducts more than 30,000 experiments a year, with different interest rates, incentives, direct-mail packaging, and other variables to evaluate which customers are most apt to sign up for credit cards and will pay back their debt.

2. Multiple Applications, Not Just One

UPS (formerly United Parcel Service) applies analytics not only to tracking the movement of packages but also to examining usage patterns to try to identify potential customer defections so that salespeople can make contact and solve problems. More recently, as e-commerce has required UPS to make lots of single-package deliveries throughout neighborhoods, it has invested in a same-day delivery startup called Deliv Inc., hoping to prevail in the so-called last-mile delivery, considered the priciest part of an order’s journey. 97  The company is also exploring the use of drones to deliver life-saving medicines. 98  Analytics competitors “don’t gain advantage from one killer app [application], but rather from multiple applications supporting many parts of the business,” says Davenport.

3. Support from the Top

“A companywide embrace of analytics impels changes in culture, processes, behavior, and skills for many employees,” says Davenport. “And so, like any major transition, it requires leadership from executives at the very top who have a passion for the quantitative approach.” 99

“Big Data”: What It Is, How It’s Used

A recent study says the world’s information will reach 40 zettabytes by 2020, a 50% growth over 2010 and equal to 57 times the number of grains of sand on all the beaches of the world. 100  (Just 1 zettabyte is equal to the contents of 20 million four-drawer file cabinets—multiplied by a million.) 101  This has led to a concept known as Big Data, stores of data so vast that conventional database management systems cannot handle them and so very sophisticated analysis software and supercomputing-level hardware are required. 102   Big Data  includes not only data in corporate databases but also web-browsing data trails, social network communications, sensor data, and surveillance data. 103

“One of the most extraordinary features of Big Data is that it signals the end of the reign of statistics,” suggests technology writer Michael Malone. “For 400 years, we’ve been forced to sample complex systems and extrapolate. Now, with Big Data, it is possible to measure everything, from the movement of billions of stars to every beat of the human heart [our emphasis added].” 104  Attracting a lot of attention in science, business, medicine, and technology, the concept of Big Data has been dubbed “the next frontier for innovation, competition, and productivity.” 105  Today 62.5% of Fortune 1000 firms in one survey reported they are using Big Data, twice what the rate was in 2013, and 69.9% view Big Data as very important or critical to their business success. 106   Big Data analytics  is the process ofPage 217 examining large amounts of data of a variety of types to uncover hidden patterns, unknown correlations, and other useful information. Among some of the uses of Big Data analytics are the following: 107

· Analyzing consumer behavior and spurring sales: Online behavior can be analyzed “to create ads, products, or experiences that are most appealing to consumers—and thus most lucrative to companies,” says one technology journalist. “There’s also great potential to more accurately predict market fluctuations or react faster to shifts in consumer sentiment or supply chain issues.” 108  Specialists in what’s known as financial planning and analysis (FP&A) at Dunkin Brands have mined customer loyalty data to encourage customers to buy more coffee and doughnuts. 109   Salesforce.com  offers tools that draw on staff e-mails, calendars, and databases to offer tips to salespeople on how to interact with specific customers. 110  Real estate analytics firm RealtyTrac looks at the impact of Trader Joe’s and Whole Foods groceries on the price of homes near the stores’ neighborhoods. 111  

· Improving hiring and personnel management: JetBlue applies people analytics to hiring for all the airline’s positions, which helps the company sort through the 125,000 job applications it receives each year. 112  Google uses data to figure out how to put together optimal-sized teams for projects and to figure out what characteristics make for effective leaders. 113  Some firms are using Big Data to figure out which employees might get sick, based on “the prescription drugs workers use, how they shop, and even whether they vote,” in an effort to contain health costs, according to one description. 114  

· Tracking movie, music, TV, and reading data: HP Labs researchers have used Twitter data to accurately predict box-office revenues of Hollywood movies. 115  Record collectors and the music industry use  Discogs.com  to keep track of records and their various releases and to identify sources of royalties where copyrighted songs are played. 116  Television networks use new ways of pinpointing audience data to pitch live programs to advertisers. 117  Jellybooks, a reading analytics company based in London, hopes to use data about people’s reading habits to reshape how publishers acquire, edit, and market books. 118  

· Exploiting farm data: Farmers can use data-collection devices to gather information about crops and soil conditions to sell to seed, pesticide, and equipment makers looking into how and when farmers use machinery and supplies. 119  Similar data can be used “to come up with trillions of scenarios for insurance coverage,” says Michael Malone. 120  

· Advancing health and medicine: New internal and external monitoring devices are helping medical researchers gather enormous quantities of health data, helping us to understand, for instance, the effects of external influences on autism, what changes in lifestyle (social media usage, diminishing movement) can produce depression, or what procedures are more apt to lead to malpractice claims. 121  

· Aiding public policy: On the wall of his office, Boston mayor Marty Walsh has a so-called dashboard with dozens of different charts and graphs that use data to indicate whether the city is fulfilling its goals, such as quicker ambulance response times. Analytics can tackle large-scale public sector problems such as traffic congestion, train passenger commute patterns, and handling of federal funds in child welfare. 122  Social scientists are using Big Data to fight poverty, finding out which policies actually work. 123  They are doing the same thing with crime-fighting strategies. 124  

Page 218 Down on the farm. This server farm, or data center, contains thousands of computers storing terabytes of information on everyone and everything—“Big Data” that can be subjected to data analytics to work on large-scale projects. With data centers like this, you can see why everything you enter online, whether via e-mail, Facebook, texting, or twittering, no matter how innocuous, can be stored and used later to try to sell you things. Are you okay with this?© Bloomberg/Getty Images

EXAMPLE

Data, Hacking, and Privacy: Who’s Driving My Car?!

Big Data and analytics clearly have enormous benefits. But half the people in a Pew Research Center survey said they felt they had little or no control over their personal data. Indeed, two-thirds of adults said they were not confident that online video sites, search engine providers such as Google, or social media sites such as Facebook protected their information. 125  Are they right to be concerned?

Rise of the Cyberthieves. Hacking—gaining illegal access to computer systems—has become a major concern when, for example, an intruder is able to gain access to information on thousands of employees at the U.S. Justice Department and the Department of Homeland Security, as happened in 2016 (although there was no indication information had been stolen). 126  Hackers—so-called cyberthieves—have broken into hospital systems, such as that at Hollywood Presbyterian Hospital, demanding a ransom of roughly $17,000 to return control of the network. 127  Data thieves have successfully infiltrated Target’s computers, stealing customer names and credit card numbers of as many as 40 million accounts. 128  Cyberthieves have also scammed $3 million from Mattel Inc., maker of Barbie dolls. 129

Auto Corrupt. Even some cars can be hacked, as two security researchers proved in 2015 with a Jeep. “From the Internet,” says one report, “they were able to track cars down by their location, see how fast they were going, turn their blinkers and lights on and off, mess with their windshield wipers, radios, navigation, and, in some cases, control their brakes and steering.” 130  Scary stuff.

With all this, no wonder each case of unauthorized computer access by hackers trying to steal information or disrupt a firm’s operations on average costs a U.S. company $3.5 million. 131  No wonder that companies are adding cybersecurity experts to their boards of directors. 132

YOUR CALL

As companies begin to monitor their employees’ health and habits, with a view toward reducing health costs, are you concerned how that information might be used? For instance, if an employer picks up symptoms of diabetes in you after you’ve used a retina scanner to enter secure facilities, should you be informed of that fact, or is that an invasion of privacy? How would you feel if devices were used to track your presence at, say, union meetings or meetings with other companies who might recruit you? 133

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7.4

Four General Decision-Making Styles

MAJOR QUESTION How do I decide to decide?

THE BIG PICTURE

Your decision-making style reflects how you perceive and respond to information. It could be directive, analytical, conceptual, or behavioral.

A  decision-making style  reflects the combination of how an individual perceives and responds to information. A team of researchers developed a model of decision-making styles based on the idea that styles vary along two different dimensions: value orientation and tolerance for ambiguity. 134

Value Orientation and Tolerance for Ambiguity

Value orientation reflects the extent to which a person focuses on either task and technical concerns or people and social concerns when making decisions. Some people, for instance, are very task focused at work and do not pay much attention to people issues, whereas others are just the opposite.

The second dimension pertains to a person’s tolerance for ambiguity. This individual difference indicates the extent to which a person has a high need for structure or control in his or her life. Some people desire a lot of structure in their lives (a low tolerance for ambiguity) and find ambiguous situations stressful and psychologically uncomfortable. In contrast, others do not have a high need for structure and can thrive in uncertain situations (a high tolerance for ambiguity). Ambiguous situations can energize people with a high tolerance for ambiguity.

When the dimensions of value orientation and tolerance for ambiguity are combined, they form four styles of decision making: directive, analytical, conceptual, and behavioral. (See  Figure 7.4 .)

FIGURE 7.4  Decision-making styles Page 220 Success. Peyton Manning, quarterback for the Denver Broncos, led his team to victory 24–10 over the Carolina Panthers in the 2016 Super Bowl. As the leader of his team, a quarterback must make many decisions about what is the right way to success. If you were a quarterback, which of the four general decision-making styles do you think you would embody?© Zuma Press Inc/Alamy

1. The Directive Style: Action-Oriented Decision Makers Who Focus on Facts

People with a directive style have a low tolerance for ambiguity and are oriented toward task and technical concerns in making decisions. They are efficient, logical, practical, and systematic in their approach to solving problems.

People with this style are action oriented and decisive and like to focus on facts. In their pursuit of speed and results, however, these individuals tend to be autocratic, to exercise power and control, and to focus on the short run.

2. The Analytical Style: Careful Decision Makers Who Like Lots of Information and Alternative Choices

Managers with an analytical style have a much higher tolerance for ambiguity and are characterized by the tendency to overanalyze a situation. People with this style like to consider more information and alternatives than those following the directive style.

Analytical individuals are careful decision makers who take longer to make decisions but who also respond well to new or uncertain situations.

Fortune 500 CEO. Ursula M. Burns is chairwoman and CEO of Xerox, a company long known for making copiers and printers but now also selling business services. A bright student, she holds bachelor’s and master’s degrees in mechanical engineering and is the first African American woman to head a Fortune 500 company. Because of racial stereotyping, African American leaders operate at a disadvantage, according to one study, with strong performance being misattributed to market factors outside their control or to humor or public speaking skills rather than to intellectual prowess. 135  What kind of decision-making style would you expect Burns to have?© Paul Morigi/Getty ImagesPage 221

3. The Conceptual Style: Decision Makers Who Rely on Intuition and Have a Long-Term Perspective

People with a conceptual style have a high tolerance for ambiguity and tend to focus on the people or social aspects of a work situation. They take a broad perspective to problem solving and like to consider many options and future possibilities.

Conceptual types adopt a long-term perspective and rely on intuition and discussions with others to acquire information. They also are willing to take risks and are good at finding creative solutions to problems. However, a conceptual style can foster an indecisive approach to decision making.

4. The Behavioral Style: The Most People-Oriented Decision Makers

The behavioral style is the most people oriented of the four styles. People with this style work well with others and enjoy social interactions in which opinions are openly exchanged. Behavioral types are supportive, are receptive to suggestions, show warmth, and prefer verbal to written information.

Although they like to hold meetings, people with this style have a tendency to avoid conflict and to be concerned about others. This can lead behavioral types to adopt a wishy-washy approach to decision making and to have a hard time saying no.

Which Style Do You Have?

Research shows that very few people have only one dominant decision-making style. Rather, most managers have characteristics that fall into two or three styles. Studies also show that decision-making styles vary across occupations, job levels, and countries. 136  There is not a best decision-making style that applies to all situations.

You can use knowledge of decision-making styles in the following three ways.

Know Thyself

Knowledge of styles helps you to understand yourself. Awareness of your style assists you in identifying your strengths and weaknesses as a decision maker and facilitates the potential for self-improvement.

Influence Others

You can increase your ability to influence others by being aware of styles. For example, if you are dealing with an analytical person, you should provide as much information as possible to support your ideas.

Deal with Conflict

Knowledge of styles gives you an awareness of how people can take the same information yet arrive at different decisions by using a variety of decision-making strategies. Different decision-making styles are one likely source of interpersonal conflict at work.

What style of decision making do you prefer? Would you like to learn how to use all of the styles more effectively? The following self-assessment can help. ●

SELF-ASSESSMENT 7.3 

What Is Your Decision-Making Style?

This survey is designed to assess your decision-making style. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 7.3 in Connect.

1. What is your dominant decision-making style?

2. What are the pros and cons of your style?

3. Based on your results, what are some things you can do to incorporate aspects of your less dominant styles into your decision making? Explain.

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7.5

How to Overcome Barriers to Decision Making

MAJOR QUESTION Trying to be rational isn’t always easy. What are the barriers?

THE BIG PICTURE

Responses to a decision situation may take the form of four ineffective reactions or three effective reactions. Managers should be aware of nine common decision-making biases.

Do your moods influence your decisions? Do you, for instance, spend more when you’re sad and self-absorbed? That’s what one experiment found: When researchers exposed student participants to a sadness-inducing video clip about the death of a boy’s mentor, the students were inclined to offer more money for a product (a sporty-looking water bottle) than were other subjects who had watched a neutral clip. 137

Decision Making and Expectations about Happiness

Not just moods themselves perhaps can influence your decisions, but also so can your expectations about how happy or unhappy you think future outcomes will make you. It seems that people expect certain life events to have a much greater emotional effect than, in fact, they do, according to Harvard University psychologist Daniel Gilbert, who has studied individual emotional barometers in decision making. College professors, for example, expect to be quite happy if they are given tenure and quite unhappy if they aren’t. However, Gilbert found those who received tenure were happy but not as happy as they themselves had predicted, whereas those denied tenure did not become very unhappy.

The expectation about the level of euphoria or disappointment was also found to be true of big-jackpot lottery winners and of people being tested for HIV infection. That is, people are often right when they describe what outcome will make them feel good or bad, but they are often wrong when asked to predict how strongly they will feel that way and how long the feeling will last. Even severe life events have a negative impact on people’s sense of well-being and satisfaction for no more than three months, after which their feelings at least go back to normal. 138

Perhaps knowing that you have this “immune system” of the mind, which blunts bad feelings and smoothes out euphoric ones, can help make it easier for you to make difficult decisions.

How Do Individuals Respond to a Decision Situation? Ineffective and Effective Responses

What is your typical response when you’re suddenly confronted with a challenge in the form of a problem or an opportunity? There are perhaps four ineffective reactions and three effective ones. 139

Four Ineffective Reactions

There are four defective problem-recognition and problem-solving approaches that act as barriers when you must make an important decision in a situation of conflict.

1. Relaxed Avoidance—“There’s No Point in Doing Anything; Nothing Bad’s Going to Happen”

In  relaxed avoidance, a manager decides to take no action in the belief that there will be no great negative consequences. This condition, then, is a form of complacency: You either don’t see or you disregard the signs of danger (or of opportunity).

Example: Relaxed avoidance was vividly demonstrated in the months before the subprime mortgage meltdown that began in 2007, when banks made cheap housingPage 223 loans to a lot of unqualified buyers, precipitating a huge financial crisis and drying up of credit. During that time, a lot of smart people in denial said not to worry, that the mortgage mess would be “contained.” They included many bank presidents and even Ben Bernanke, chairman of the Federal Reserve. 140  One nationwide online survey has also found that investors’ forecasts of future returns go up after the stock market has risen and go down after it has fallen—complacency indeed. 141

2. Relaxed Change—“Why Not Just Take the Easiest Way Out?”

In  relaxed change, a manager realizes that complete inaction will have negative consequences but opts for the first available alternative that involves low risk. This is, of course, a form of “satisficing”; the manager avoids exploring a variety of alternatives in order to make the best decision.

Example: Perhaps people really don’t like a lot of choices. In one experiment, 40% of customers stopped by a large assortment of jam jars (24) and only 30% by a small assortment (6)—but only 3% made a purchase in the first case versus 30% in the second. 142

3. Defensive Avoidance—“There’s No Reason for Me to Explore Other Solution Alternatives”

In  defensive avoidance, a manager can’t find a good solution and follows by (a) procrastinating, (b) passing the buck, or (c) denying the risk of any negative consequences. This is a posture of resignation and a denial of responsibility for taking action.

By procrastinating, you put off making a decision (“I’ll get to this later”). 143  In passing the buck, you let someone else take the consequences of making the decision (“Let George do it”). In denying the risk that there will be any negative consequences, you are engaging in rationalizing (“How bad could it be?”). As one article states, deliberating on the matter of why no one at Penn State did more to pursue allegations that an assistant football coach was abusing young boys, “companies overlook internal problems that at best impede performance and at worst could bring down the entire organization.” 144

Example: Defensive avoidance often occurs in firms with high turnover. Although some executives try to stop high performers from exiting by offering raises or promotions, others react defensively, telling themselves that the person leaving is not a big loss. “It’s psychologically threatening to those who are staying to acknowledge there’s a reason some people are leaving,” says the CEO of a corporate-psychology consulting company, “so executives often dismiss them as untalented or even deny that an exodus is occurring.” 145  He mentions one financial-services company whose executives insisted turnover was low, when in fact 50% of hundreds of new employees quit within years.

4. Panic—“This Is So Stressful, I’ve Got to Do Something—Anything—to Get Rid of the Problem”

This reaction is especially apt to occur in crisis situations. In  panic, a manager is so frantic to get rid of the problem that he or she can’t deal with the situation realistically. This is the kind of situation in which the manager has completely forgotten the idea of behaving with “grace under pressure,” of staying cool and calm. Troubled by anxiety, irritability, sleeplessness, and even physical illness, if you’re experiencing this reaction, your judgment may be so clouded that you won’t be able to accept help in dealing with the problem or to realistically evaluate the alternatives.

Example: “The day we left,” writes Kevin Thornton about the panicky May 2016 flight of 88,000 people from the enormous (four times the size of New York City) Fort McMurray wildfire in Alberta, Canada, “some of our friends were dousing their cedar-shingled roofs with their garden hoses. It was futile, and they knew it, but the brain seizes under pressure. One neighbor packed his lawn mower, surely not an essential wherever he was heading.” 146

Three Effective Reactions: Deciding to Decide

In  deciding to decide, a manager agrees that he or she must decide what to do about a problem or opportunity and take effective decision-making steps. Three ways to help you decide whether to decide are to evaluate the following. 147

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1. Importance—“How High Priority Is This Situation?”

You need to determine how much priority to give the decision situation. If it’s a threat, how extensive might prospective losses or damage be? If it’s an opportunity, how beneficial might the possible gains be?

2. Credibility—“How Believable Is the Information about the Situation?”

You need to evaluate how much is known about the possible threat or opportunity. Is the source of the information trustworthy? Is there credible evidence?

3. Urgency—“How Quickly Must I Act on the Information about the Situation?”

Is the threat immediate? Will the window of opportunity stay open long? Can actions to address the situation be done gradually?

EXAMPLE

Deciding to Decide: How Should a Paper Maker Reinvent Itself?

“Failure isn’t fatal, but failure to change might be,” legendary UCLA basketball coach John Wooden once said. 148

At the beginning of the 21st century, the paper industry was at its height, with 94 million tons of paper and paper-based packaging being produced. Then the computer revolution and the vogue phrase “the paperless office” really began to be felt, and the demand for paper plummeted. Paper companies such as 83-year-old family-owned Mohawk Fine Papers, located in a Civil War–era ax handle factory in Cohoes, New York, saw failure looming as companies cut back on paper for brochures, reports, and marketing materials. President Thomas D. O’Connor Jr. faced the dilemma of rescuing the firm founded by his grandfather.

Is This High-Priority? The first decision about how to handle the response—Should this be considered a high-priority matter?—was certainly much in evidence, as revenues slipped and operations at Mohawk’s 350,000-square-foot mill shrank from seven days a week to five and then to four. Clearly, this was a high-priority concern.

Are the Data Believable? The second decision—How believable is the information?—was reinforced in depressing numbers throughout the paper industry, with the decline in orders for newsprint and writing paper, which accounted for about 85% of the decrease in paper sales. The copy-machine paper business also shrank. Meanwhile, the U.S. government stepped up its campaign to “go paperless,” creating more government websites and permitting taxpayers to file income tax returns online.

How Fast Do We Need to Act? The answer to the final decision—How quickly should this information be acted on?—was evident in the speed of the preceding events. “For the first time in hundreds of years,” O’Connor said, “paper had to justify itself.” 149  As the digital revolution appeared ready to wipe out Mohawk and every other paper company, in 2004, reports The Wall Street Journal, O’Connor made an extraordinary bet: His company decided to expand into the fine stationery business, borrowing millions of dollars to do so. 150  It decided to take advantage of paper’s transformation from commodity to keepsake, supplying high-quality, highly profitable paper for personalized holiday cards, photo books, and announcements from Shutterfly,  Minted.com , and others. In 2015, Mohawk solidified its position by forming a strategic alliance with Arjowiggins Creative Papers, maker of creative and technical papers, to share manufacturing capabilities, technologies, and sales and marketing resources. 151

YOUR CALL

Today Mohawk’s sales, which first began declining in 1996, are way up. “We couldn’t just downsize and hope to survive,” O’Connor said later. “We knew we had to change our product completely.” With this knowledge in hindsight, how would you have handled O’Connor’s initial decisions about finding a new direction for the company?

Nine Common Decision-Making Biases: Rules of Thumb, or “Heuristics”

If someone asked you to explain the basis on which you make decisions, could you even say? Perhaps, after some thought, you might come up with some “rules of thumb.” Scholars call them  heuristics  (pronounced “hyur-ris-tiks”)—strategies that simplify the process of making decisions.

Despite the fact that people use such rules of thumb all the time, that doesn’t mean they’re reliable. Indeed, some are real barriers to high-quality decision making (as wePage 225 saw in the Manager’s Toolbox at the start of this chapter). Among those that tend to bias how decision makers process information are (1) availability, (2) representativeness, (3) confirmation, (4) sunk cost, (5) anchoring and adjustment, (6) overconfidence, (7) hindsight, (8) framing, and (9) escalation of commitment. 152

1. The Availability Bias: Using Only the Information Available

If you had a perfect on-time work attendance record for nine months but then were late for work four days during the last two months because of traffic, shouldn’t your boss take into account your entire attendance history when considering you for a raise? Yet managers tend to give more weight to more recent behavior. This is because of the  availability bias—managers use information readily available from memory to make judgments.

The bias, of course, is that readily available information may not present a complete picture of a situation. The availability bias may be stoked by the news media, which tend to favor news that is unusual or dramatic. Thus, for example, because of the efforts of interest groups or celebrities, more news coverage may be given to AIDS or to breast cancer than to heart disease, leading people to think the former are the bigger killers, when in fact the latter is.

2. The Representativeness Bias: Faulty Generalizing from a Small Sample or a Single Event

As a form of financial planning, playing state lotteries leaves something to be desired. When, for instance, in 2016 the U.S. Powerball jackpot reached $1.6 billion, the largest in world history, the odds of winning it were put at 1 in 292.2 million. 153  (A person would have a far greater chance of being struck by lightning, 1 in 700,000.) Nevertheless, millions of people buy lottery tickets because they read or hear about a handful of fellow citizens who have been the fortunate recipients of enormous winnings. This is an example of the  representativeness bias, the tendency to generalize from a small sample or a single event.

The bias here is that just because something happens once, that doesn’t mean it is representative—that it will happen again or will happen to you. For example, just because you hired an extraordinary sales representative from a particular university, that doesn’t mean that the same university will provide an equally qualified candidate next time. Yet managers make this kind of hiring decision all the time.

3. The Confirmation Bias: Seeking Information to Support One’s Point of View

The  confirmation bias  is when people seek information to support their point of view and discount data that do not. Though this bias would seem obvious, we practice it all the time, listening to the information we want to hear and ignoring the rest. “We typically focus on anything that agrees with the outcome we want,” suggests economist Noreena Hertz. “We need to be aware of our natural born optimism… . We need to acknowledge our tendency to incorrectly process challenging news and actively push ourselves to hear the bad as well as the good.” 154

4. The Sunk-Cost Bias: Money Already Spent Seems to Justify Continuing

The  sunk-cost bias, or  sunk-cost fallacy,  is when managers add up all the money already spent on a project and conclude it is too costly to simply abandon it.

Most people have an aversion to “wasting” money. Especially if large sums have already been spent, they may continue to push on with an iffy-looking project to justify the money already sunk into it. The sunk-cost bias is sometimes called the “Concorde” effect, referring to the fact that the French and British governments continued to invest in the Concorde supersonic jetliner even when it was evident there was no economic justification for the aircraft.

5. The Anchoring and Adjustment Bias: Being Influenced by an Initial Figure

Managers will often give their employees a standard percentage raise in salary, basing the decision on whatever the workers made the preceding year. They mayPage 226 do this even though the raise may be completely out of alignment with what other companies are paying for the same skills. This is an instance of the  anchoring and adjustment bias, the tendency to make decisions based on an initial figure.

The bias is that the initial figure may be irrelevant to market realities. This phenomenon is sometimes seen in real estate sales. Before the 2008 crash in real estate markets, many homeowners might have been inclined at first to list their houses at an extremely high (but perhaps randomly chosen) selling price. These sellers were then unwilling later to come down substantially to match the kind of buying offers that reflected what the marketplace thought the house was really worth.

6. The Overconfidence Bias: Blind to One’s Own Blindness

The  overconfidence bias  is the bias in which people’s subjective confidence in their decision making is greater than their objective accuracy. Overconfidence, it’s suggested, may be behind the reasons for the BP Deepwater Horizon drilling rig explosion and disaster in 2010 that flooded the Gulf of Mexico with 200 million gallons of oil. Because technology often works flawlessly, BP ignored warning signs such as a dead battery, a leaky cement job, and loose hydraulic fittings. 155

“Overconfidence arises because people are often blind to their own blindness,” says behavioral psychologist Daniel Kahneman. For instance, with experienced investment advisors whose financial outcomes simply depended on luck, he found “the illusion of skill is not only an individual aberration; it is deeply ingrained in the culture of the industry.” 156  In general, he advises, we should not take assertive and confident people at their own evaluation unless we have independent reasons to believe they know what they’re talking about.

7. The Hindsight Bias: The I-Knew-It-All-Along Effect

The  hindsight bias  is the tendency of people to view events as being more predictable than they really are, as when at the end of watching a game we decide the outcome was obvious and predictable, even though in fact it was not. Sometimes called the “I-knew-it-all-along” effect, this occurs when we look back on a decision and try to reconstruct why we decided to do something.

8. The Framing Bias: Shaping How a Problem Is Presented

The  framing bias  is the tendency of decision makers to be influenced by the way a situation or problem is presented to them. For instance, customers have been found to prefer meat that is framed as “85% lean meat” instead of “15% fat,” although they are the same thing. 157  In general, people view choices more favorably when they are framed in terms of gains rather than losses. 158  You would be more likely to invest in a product that had a 60% chance of success rather than a 40% chance of failure. Try framing your decision questions in alternate ways to avoid this bias.

9. The Escalation of Commitment Bias: Feeling Overly Invested in a Decision

If you really hate to admit you’re wrong, you need to be aware of the  escalation of commitment bias, whereby decision makers increase their commitment to a project despite negative information about it.

Would you invest more money in an old or broken car? The Drug Enforcement Administration and the Pentagon continued to spend on a spy plane for use in Afghanistan that was supposed to be completed in 2012 at a cost of $22 million, even though the project had missed every projected delivery date. In March 2016, it had not yet left the ground, and total payouts had reached $86 million. 159

To reduce the escalation of commitment, researchers recommend that decision makers set minimum targets for performance and then compare their performance results with their targets. Managers should also be rotated in key positions during a project, and decision makers should be encouraged to become less ego involved with the work. Finally, decision makers should be made aware of the costs of persistence. 160

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7.6

Group Decision Making: How to Work with Others

MAJOR QUESTION How do I work with others to make things happen?

THE BIG PICTURE

Group decision making has five potential advantages and four potential disadvantages. The disadvantage of groupthink merits focus because it leads to terrible decisions. There also are a number of characteristics of groups that a manager should be aware of as group problem-solving techniques.

The movies celebrate the lone heroes who, like Bruce Willis or Mark Wahlberg, make their own moves, call their own shots. Most managers, however, work with groups and teams (as we discuss in  Chapter 13 ). Although groups don’t make as high-quality decisions as the best individual acting alone, research suggests that groups make better decisions than most individuals acting alone. 161  Thus, to be an effective manager, you need to learn about decision making in groups.

Advantages and Disadvantages of Group Decision Making

Because you may often have a choice as to whether to make a decision by yourself or to consult with others, you need to understand the advantages and disadvantages of group-aided decision making.

Advantages

Using a group to make a decision offers five possible advantages. 162  For these benefits to happen, however, the group must be made up of diverse participants, not just people who all think the same way.

· Greater pool of knowledge. When several people are making the decision, there is a greater pool of information from which to draw. If one person doesn’t have the pertinent knowledge and experience, someone else might.

· Different perspectives. Because different people have different perspectives—marketing, production, legal, and so on—they see the problem from different angles.

· Intellectual stimulation. A group of people can brainstorm or otherwise bring greater intellectual stimulation and creativity to the decision-making process than is usually possible with one person acting alone.

· Better understanding of decision rationale. If you participate in making a decision, you are more apt to understand the reasoning behind the decision, including the pros and cons leading up to the final step.

· Deeper commitment to the decision. If you’ve been part of the group that has bought into the final decision, you’re more apt to be committed to seeing that the course of action is successfully implemented.

Disadvantages

The disadvantages of group-aided decision making spring from problems in how members interact. 163

· A few people dominate or intimidate. Sometimes a handful of people will talk the longest and the loudest, and the rest of the group will simply give in. Or one individual, such as a strong leader, will exert disproportionate influence, sometimes by intimidation. This cuts down on the variety of ideas.

· Groupthink.  Groupthink  occurs when group members strive to agree for the sake of unanimity and thus avoid accurately assessing the decision situation.Page 228 Here the positive team spirit of the group actually works against sound judgment. 164  See more about groupthink below.

· Satisficing. Because most people would just as soon cut short a meeting, the tendency is to seek a decision that is “good enough” rather than to push on in pursuit of other possible solutions. Satisficing can occur because groups have limited time, lack the right kind of information, or are unable to handle large amounts of information. 165

· Goal displacement. Although the primary task of the meeting may be to solve a particular problem, other considerations may rise to the fore, such as rivals trying to win an argument.  Goal displacement  occurs when the primary goal is subsumed by a secondary goal.

Different perspectives or groupthink? A diversified team can offer differing points of view, as well as a greater pool of knowledge and intellectual stimulation. Or it can offer groupthink and satisficing. What has been your experience as to the value of decision making in the groups you’ve been in?© Sam Edwards/agefotostock RF

Groupthink

Cohesiveness isn’t always good. When it results in groupthink, group or team members are friendly and tight-knit but unable to think “outside the box.” Their “strivings for unanimity override their motivation to realistically appraise alternative courses of action,” says Irwin Janis, author of Groupthink. 166

The results of groupthink can include failure to consider new information and a loss of new ideas. For instance, some blame the 2015 ouster of Ellen Kullman, DuPont’s high-performing CEO, who had 27 years with the company, on a case of groupthink by the firm’s insulated board of directors, who never asked Kullman to meet with them to defend her actions. 167  Investors in Silicon Valley also often show a herd mentality in their desire to be part of “the next big thing,” according to one writer. 168

Symptoms of Groupthink

How do you know that you’re in a group or team that is suffering from groupthink? Some symptoms include the following: 169

· Sense of invulnerability. Group members have the illusion that nothing can go wrong, breeding excessive optimism and risk taking. They may also be so assured of the rightness of their actions that they ignore the ethical implications.

· Rationalization. Rationalizing protects the pet assumptions underlying the group’s decisions from critical questions.

· Illusion of unanimity and peer pressure. The illusion of unanimity is another way of saying that a member’s silence is interpreted as consent. If people do disagree, peer pressure leads other members to question the dissenters’ loyalty.

· “The wisdom of crowds.” Groupthink’s pressure to conform often leads members with different ideas to censor themselves—the opposite of collective wisdom, says James Surowiecki, in which “each person in the group is offering his or her best independent forecast. It’s not at all about compromise or consensus.” 170

No doubt you’ve felt yourself pulled into a “groupthink opinion” at some point. Probably we all have.  Self-Assessment 7.4  provides you with a way to evaluate the extent to which groupthink is affecting a team. Results provide insight into reducing this counterproductive group dynamic.

SELF-ASSESSMENT 7.4  

Assessing Groupthink

The following survey was designed to assess groupthink. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 7.4 in Connect.

1. Where does the team stand on the three aspects of groupthink?

2. Based on your survey scores, what would you do differently to reduce groupthink in the group you evaluated? Be specific.

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Preventing Groupthink: Making Criticism and Other Perspectives Permissible

Janis believes it is easier to prevent groupthink than to cure it. As preventive measures, he and other writers suggest the following: 171

· Allow criticism. Each member of a team or group should be told to be a critical evaluator, able to actively voice objections and doubts. Subgroups within the group should be allowed to discuss and debate ideas. Once a consensus has been reached, everyone should be encouraged to rethink his or her position to check for flaws. It is sometimes helpful for the group leader to withhold his or her opinion at first, to encourage others to speak up.

· Allow other perspectives. Outside experts should be used to introduce fresh perspectives. Different groups with different leaders should explore the same policy questions. Top-level executives should not use policy committees to rubber-stamp decisions that have already been made. When major alternatives are discussed, someone should be made devil’s advocate to try to uncover all negative factors.

What Managers Need to Know about Groups and Decision Making

If you’re a manager deliberating whether to call a meeting for group input, there are four characteristics of groups to be aware of.

1. They Are Less Efficient

Groups take longer to make decisions. Thus, if time is of the essence, you may want to make the decision by yourself. Faced with time pressures or the serious effect of a decision, groups use less information and fewer communication channels, which increases the probability of a bad decision. 172

2. Their Size Affects Decision Quality

The larger the group, the lower the quality of the decision. 173  Some research says that seven people is the optimal size. 174  Others suggest five is best. 175  (An odd number is also considered best, when the group uses majority rules.)

3. They May Be Too Confident

Groups are more confident about their judgments and choices than individuals are. This, of course, can be a liability because it can lead to groupthink.

4. Knowledge Counts

Decision-making accuracy is higher when group members know a good deal about the relevant issues. It is also higher when a group leader has the ability to weight members’ opinions. 176  Depending on whether group members know or don’t know one another, the kind of knowledge also counts. For example, people who are familiar with one another tend to make better decisions when members have a lot of unique information. However, people who aren’t familiar with one another tend to make better decisions when the members have common knowledge. 177

Toward consensus. Working to achieve cooperation in a group can tell you a lot about yourself. How well do you handle the negotiation process? What do you do when you’re disappointed in a result achieved by consensus?© Xavier Arnau/Getty Images RF

Remember that individual decisions are not necessarily better than group decisions. As we said, although groups don’t make as high-quality decisions as the best individual acting alone, groups generally make better decisions than most individuals acting alone. Some guidelines to using groups are presented on the next page. (See  Table 7.3 .)

TABLE 7.3   When a Group Can Help in Decision Making: Three Practical Guidelines These guidelines may help you as a manager decide whether to include people in a decision-making process and, if so, which people.

1. When it can increase quality: If additional information would increase the quality of the decision, managers should involve those people who can provide the needed information. Thus, if a type of decision occurs frequently, such as deciding on promotions or who qualifies for a loan, groups should be used because they tend to produce more consistent decisions than individuals do.

2. When it can increase acceptance: If acceptance within the organization is important, managers need to involve those individuals whose acceptance and commitment are important.

3. When it can increase development: If people can be developed through their participation, managers may want to involve those whose development is most important.

Source: Derived from George P. Huber, Managerial Decision Making (Glenview, IL: Scott, Foresman, 1980), p. 149.

In general, group decision making is more effective when members feel that they can freely and safely disagree with each other. This belief is referred to as  minority dissent, dissent that occurs when a minority in a group publicly opposes the beliefs, attitudes, ideas, procedures, or policies assumed by the majority of the group. 178  MinorityPage 230 dissent is associated with increased innovation within groups. 179  Do your teams at school or work allow minority dissent? If not, what can be done to increase its existence?  Self-Assessment 7.5  can help answer these questions.

SELF-ASSESSMENT 7.5 

Assessing Participation in Group Decision Making

The following survey measures minority dissent, participation in group decision making, and satisfaction with a group. Please be prepared to answer these questions if your instructor has assigned Self-Assessment 7.5 in Connect.

1. What is the level of minority dissent in the group, and to what extent are you satisfied with being a member of this group?

2. Use the three lowest items that measure minority dissent to answer the following question: What can you do to increase the level of minority dissent in this group? Be specific.

3. Why do you think many groups muzzle the level of minority dissent?

Group Problem-Solving Techniques: Reaching for Consensus

Using groups to make decisions generally requires that they reach a  consensus, which occurs when members are able to express their opinions and reach agreement to support the final decision. More specifically, consensus is reached “when all members can say they either agree with the decision or have had their ‘day in court’ and were unable to convince the others of their viewpoint,” says one expert in decision making. “In the final analysis, everyone agrees to support the outcome.” 180  This does not mean, however, that group members agree with the decision, only that they are willing to work toward its success.

One management expert offers the following dos and don’ts for achieving consensus. 181

· Dos: Use active listening skills. Involve as many members as possible. Seek out the reasons behind arguments. Dig for the facts.

· Don’ts: Avoid log rolling and horse trading (“I’ll support your pet project if you’ll support mine”). Avoid making an agreement simply to keep relations amicable and not rock the boat. Finally, don’t try to achieve consensus by putting questions to a vote; this will only split the group into winners and losers, perhaps creating bad feelings among the latter.

More Group Problem-Solving Techniques

Decision-making experts have developed several group problem-solving techniques to aid in problem solving. Three we will discuss here are (1) brainstorming, (2) the Delphi technique, and (3) computer-aided decision making.

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1. Brainstorming: For Increasing Creativity

Brainstorming  is a technique used to help groups generate multiple ideas and alternatives for solving problems. 182  Developed by advertising executive A. F. Osborn, the technique consists of having members of a group meet and review a problem to be solved. Individual members are then asked to silently generate ideas or solutions, which are then collected (preferably without identifying their contributors) and written on a board or flip chart. A second session is then used to critique and evaluate the alternatives. (Incidentally, taking a brief stroll, even around the office, can significantly increase creativity.) 183

A modern-day variation is  electronic brainstorming, sometimes called  brainwriting,  in which members of a group come together over a computer network to generate ideas and alternatives. 184  Technology has also turned the smartphone into a device that uses various apps to spur the thinking process and unblock creative juices. 185

Some rules for brainstorming suggested by IDEO, a product design company, are shown below. (See  Table 7.4 .)

TABLE 7.4   Six Rules for Brainstorming

1. Defer judgment. Don’t criticize during the initial stage of idea generation. Phrases such as “we’ve never done it that way,” “it won’t work,” “it’s too expensive,” and “our manager will never agree” should not be used.

2. Build on the ideas of others. Encourage participants to extend others’ ideas by avoiding “buts” and using “ands.”

3. Encourage wild ideas. Encourage out-of-the-box thinking. The wilder and more outrageous the ideas, the better.

4. Go for quantity over quality. Participants should try to generate and write down as many new ideas as possible. Focusing on quantity encourages people to think beyond their favorite ideas.

5. Be visual. Use different-colored pens (for example, red, purple, blue) to write on big sheets of flip-chart paper, whiteboards, or poster boards that are put on the wall.

6. One conversation at a time. The ground rules are that no one interrupts another person, no dismissing of someone’s ideas, no disrespect, and no rudeness.

Source: These recommendations and descriptions were derived from B. Nussbaum, “The Power of Design,” BusinessWeek, May 17, 2004, pp. 86–94.

The benefit of brainstorming is that it is an effective technique for encouraging the expression of as many useful new ideas or alternatives as possible. That said, brainstorming also can waste time generating a lot of unproductive ideas, and it is not appropriate for evaluating alternatives or selecting solutions. 186

2. The Delphi Technique: For Consensus of Experts

The Delphi technique was originally designed for technological forecasting but now is used as a multipurpose planning tool. The  Delphi technique  is a group process that uses physically dispersed experts who fill out questionnaires to anonymously generate ideas; the judgments are combined and in effect averaged to achieve a consensus of expert opinion.

The Delphi technique is useful when face-to-face discussions are impractical. It’s also practical when disagreement and conflicts are likely to impair communication, when certain individuals might try to dominate group discussions, and when there is a high risk of groupthink. 187

3. Computer-Aided Decision Making

As in nearly every other aspect of business life, computers have entered the area of decision making, where they are useful not only in collecting information more quickly but also in reducing roadblocks to group consensus.

Traditional group work. This photo shows the kind of traditional arrangement we expect of groups—colleagues are seated close together in clusters to better focus on their particular projects. Do you think you’d rather work in this type of arrangement than in one that is more individually based? Why or why not?© Rawpixel.com/Shutterstock RF

A  decision support system, for instance, is a computer-based information system that provides a flexible tool for analysis and helps managers focus on the future. This kind of computer-based system aims to produce collected information known as business intelligence,Page 232 gathering data from a wide range of sources in a way that can be interpreted by humans and used to support better business decision making. Example: American Airlines developed a decision support system called the yield management system that helps managers decide how much to overbook and how to set prices for each seat so that a plane is filled and profits are maximized. 188 ●

PRACTICAL ACTION

How Exceptional Managers Make Decisions

“Failure is a great teacher.” That was one of the life lessons expressed by one CEO who has had to make thousands of decisions during his career. 189  Failure is always a possibility, but that possibility can’t stop one from making decisions. And you can probably always learn from the result.

“When Should I Make a Decision and When Should I Delay?” Often you want to stay open-minded before making a decision. But sometimes that can just be a cover for procrastination. (After all, not making a decision is in itself a kind of decision.) How do you know when you’re keeping an open mind or are procrastinating? Here are some questions to consider: 190

· Understanding: “Do I have a reasonable grasp of the problem?”

· Comfort level about outcome: “Would I be satisfied if I chose one of the existing alternatives?”

· Future possible alternatives: “Would it be unlikely that I could come up with a better alternative if I had more time?”

· Seizing the opportunity: “Could the best alternatives disappear if I waited?”

If you can answer yes to those questions, you almost certainly should decide now, not wait.

“Are There Guidelines for Making Tough Choices?” “On a daily and weekly basis we can be faced with making hundreds of decisions,” says management consultant Odette Pollar. “Most of them are small, but the larger ones where more is at stake can be truly painful.” Here are some ways she suggests making decision making easier: 191

· Decide in a timely fashion: “Rarely does waiting significantly improve the quality of the decision,” says Pollar. In fact, delay can result in greater unpleasantness in loss of money, time, and peace of mind.

· Don’t agonize over minor decisions: Postponing decisions about small problems can mean that they simply turn into large ones later.

· Separate outcome from process: Does a bad outcome mean you made a bad decision? Not necessarily. The main thing is to go through a well-reasoned process of choosing among alternatives, which increases the chances of success. But even then you can’t be sure there will always be a positive outcome.

· Learn when to stop gathering facts: “Gather enough information to make a sound decision,” suggests Pollar, “but not all the possible information.” Taking extra time may mean you’ll miss a window of opportunity.

· When overwhelmed, narrow your choices: Sometimes there are many good alternatives, and you need to simplify decision making by eliminating some options.

YOUR CALL

Some experts suggest that to help make good decisions you should “be visual,” using more pictures and diagrams, and “walk and point” to stimulate areas of the brain that control memory, emotion, and problem solving. 192  What have you found aids you in making decisions?

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Reference:

https://newconnect.mheducation.com/flow/connect.html