Handbook of Decision Making

Paul C. Nutt, David C. Wilson, Paul C. Nutt, David C. Wilson

• Publisher: Wiley-Blackwell
• Year: 2010
• Print ISBN: 9781405161350
• eBook ISBN: 9781444323122
• Edition: 1
• Topic: Business
• Subtopic: Decision Making
• Index: Business

HANDBOOK OF DECISION MAKING

This handbook offers a state-of-the-art overview of research and theories on decision making in organizations at the strategic level of analysis.

Chapters are authored by leading international scholars, with some illustrative case vignettes from practitioners. Each contributor was selected for his/her special knowledge of the field.

The Handbook addresses key questions confronting the decision making research of the past and the present, offers critiques, and suggests future research directions. Topics covered emphasize the classic decision theory perspectives while also incorporating recent insights from the fields of strategic choice, risk & uncertainty, scenario planning and complexity theory, with a broad social science perspective on the disciplinary roots of decision theory in economics, politics, and social theory.

This is a landmark reference volume for the field, offering scholars and practitioners:

• Comprehensive, but accessible, coverage of classic and recent developments
• Chapters by established international experts
• Case analyses illustrating practical consequences of theories
• Guide to new research directions and theory

Part I

INTRODUCTION

1

Crucial Trends and Issues in Strategic Decision Making

PAUL C. NUTT AND DAVID C. WILSON

INTRODUCTION¹

Studies of strategic decision making are central to organization theory. March and Simon (1958) suggested that managing organizations and decision making are virtually synonymous. The dynamics of organizing require a deep understanding of decision making. As organizations grow and become more complex, decision making becomes a central activity. Managers are expected to make choices among alternatives that are often uncertain and to choose wisely in order to benefit both the organization and its key stakeholders. This has prompted researchers to study decision processes to find ways in which decisions can be improved.

The study of decision making has spanned a number of levels of analysis, which range from individual cognition to the cultural characteristics of nation states. Many disciplines inform our knowledge from mathematics to behavioural theories of social science. The term strategic decision making is often used to indicate important or key decisions made in organizations of all types. The term organization includes any collective social, economic or political activity involving a plurality of human effort. Strategic decisions emphasize the social practice of decision making as it is carried out among and between individuals in the organization. When studying decision making, both the organizing of decision activity as a collective phenomena and the cognitive processes of individual decision makers take centre stage.

Strategic decision making is more than computation carried out to make judgements and choices. Various branches of mathematics can inform us about risk, options, game theory and choice. All have their utility in understanding choice processes, but are less useful when considering how people in organizations make decisions. As an example, consider the most well known variant of game theory (decisions between two players), the prisoners’ dilemma. Two criminals in separate cells have to decide whether to betray each other, having agreed not to betray one another in advance of the game. The greatest pay-off results when both prisoners stick to their agreement, but most betray each other and experience a significantly reduced pay-off. Computational mathematics help the players maximize their returns, but this is just part of the strategic decision-making story.

Handbook of Decision Making. Edited by Paul C. Nutt and David C. Wilson ^© 2010 John Wiley & Sons, Ltd

Why consider strategic decisions? As we will discuss later in this chapter, the term strategic has become more confusing than enlightening. Popularized by Mintzberg et al. (1976), strategic decisions are seen as large, expensive, and precedent setting producing ambiguity about how to find a solution and uncertainty in the solution’s outcomes. Once implemented, a strategic decision stipulates premises that guide operational decisions that follow. A strategic decision is often difficult to reverse once human and financial resources have been committed to their cause. Furthermore, strategic decisions have the following characteristics:

• They are elusive problems that are difficult to define precisely.

• They require an understanding of the problem to find a viable solution.

• They rarely have one best solution, but often a series of possible solutions.

• Questions about trade-offs and priorities appear in the solutions.

• Solution benefits are difficult to assess as to their effectiveness, in part because they lack a clear final end point against which effectiveness can be judged.

• Other problems in the organization are connected to solutions for a focal problem.

• High levels of ambiguity and uncertainty are associated with solutions.

• Realizing hoped for benefits has considerable risk.

• Strategic decisions have competing interests that prompt key players to use political pressure to ensure that a choice aligns with their preferences.

Strategic decision making is often treated as an instantaneous choice between two or more known alternatives. However, this ‘point of decision’ approach is unable to capture the richness and complexity of the processes that unfolded to the point of decision including how problems were uncovered, the way in which search was conducted, what was done to ensure decision adoption and the steps taken to assess benefits. Decision making from a point of decision perspective also assumes that managers have complete control over decisions. It is more likely that the decision maker has limited discretion in selecting among courses of action. This occurs, for example, when strategic decisions are constrained by interventionist government policies, such as privatization or deregulation, requiring all strategic actions to be framed and shaped by this wider context. Nevertheless, managers still have some degree of strategic choice even if the wider context (e.g. privatization) is firmly set in place. This includes strategic decisions involving topics such as organizational design, choice of suppliers, choice and sophistication of information systems and general product or service portfolios.

Theorists such as Drucker (1974) and Weick (1995) show how decision-making processes in organizations are as much about defining the question as they are about providing an answer. To understand a strategic decision one must decide whether there is a need for a decision and, if so, what that decision is about. Weick likens this process to those of boards of inquiry following a disastrous event. Such a board has a number of roles. The board acts like a historian - reconstructing the past to make sense of what happened and to prevent future disasters happening again should similar events occur. The ‘historian’ takes an outcome and interprets it as the result of a series of decisions, which are seldom seen by those involved as discrete choices made to resolve a problematic situation. Much of strategic decision-making research requires this kind of social reconstruction.

There are many other views of strategic decision making. Mintzberg (1987) provided a useful way to categorize decisions with his five Ps classification. We summarize it here because it raises some key questions about the nature and definition of a strategic decision. Strategic decisions can be viewed as a Plan: the decision is an intended course of action carried out in advance with a clear purpose. Alternatively, strategic decisions can be seen as a Ploy. Here, decisions take shape as a set of actions designed to outwit the competition, which may not be the ‘obvious’ content of the decision. For example, a decision to build a new building in order to expand may not be the overt strategy, but is more concerned with increasing barriers to entry for potential competitors. There are connections here with the military roots of strategic decision making. The plans of campaigns may have similar characteristics to those of a ploy to outwit the ‘enemy’. Thirdly, strategic decisions can be seen as a Pattern: decisions are not necessarily taken with a clear planned purpose and decision makers do not always have access to the range of knowledge required to create a plan of action. However, decisions taken over time form a pattern. It is this pattern of resulting (emergent) behaviour that we call the strategy of the firm. Strategy is therefore characterized as a pattern that emerges from a stream of decisions and may not be an attribute or descriptor of a single decision.

Strategic decision making can be seen as achieving a Position. A decision is less about the dynamics of planning or gamesmanship and more about trying to realize a match between the organization and its environment. This position can be one of alignment, so that the organization matches its environment, such as designing highly decentralized structures to cope with a turbulent and unpredictable environment, or one of trying to secure competitive advantage, where the organization solidifies a unique position in the market.

Finally, strategic decision making can be viewed as a Perspective. Here decisions are characterized as a reflection of how strategists in an organization perceive the world and their organization. To illustrate, the strategic perspective of Nokia is one of continuous and sometimes radical change (Nokia began as a paper and pulp company); IBM favours a dominant marketing perspective; and Hewlett-Packard favours an engineering excellence perspective. Such a perspective, if pervasive enough, can influence the kinds of decisions taken, in respect of their content and their processes. We can see the effects of this embedded view of decision making by observing that organizations in similar industries often choose similar strategic decisions and become second movers. From this perspective universities tend to follow broadly similar strategies, as do large retailers and service organizations.

These decision types divide into strategic and organizational. Organizational decisions tend to result in plans or ploys. However important or costly such individual decisions may be, the strategic element of them is apparent only when a number of decisions are examined together and the patterns and themes in them are uncovered. Using the term strategic for individual (or single) decisions that are plans or ploys seems poor practice. Strategic decisions are more apt to be a pattern, a position, or a perspective. Interestingly, researchers often examine plans and ploys using a process perspective whereas patterns, positions, and perspective receive very little attention by researchers to uncover their generative nature. We return to this debate surrounding the application of the term strategic to decision making later in this chapter.

Over the last 50 years, there have been radical changes in how strategic decision making is researched. For example, in the 1950s and 1960s research emphasized a planning approach to decision making. Such tools included industry structure analyses and portfolio matrices, for example, the matrices offered by Ansoff and the Boston Consulting Group. In this era, strategic decision making was mostly about planning. The 1970s onwards saw a different emphasis. Decisions began to emphasize the pay-offs to organizations should different strategic directions (options) be pursued. Typical options were diversification decisions, but this was also the era of innovation (R&D), acquisition, joint venture, and internationalization decisions.

The 1980s saw a move away from examining the content of strategic decisions - what they were about - to examining them more as processes. The question became whether we could map the progress of a strategic decision and make inferences about why such processes might occur. David Hickson and his colleagues (1986) characterized such processes as sporadic (discontinuous), fluid (continuous and smooth), or constricted (restricted to a small group of stakeholders and highly political). This work also underscored the importance of such processes since they underpinned the recognition among managers of the need for strategic change. The 1990s onwards have seen a continuing interest in unfolding the characteristics of decision processes, but the emphasis has changed to focus on whether or not there are any links between decision making and results. For example, did the decision succeed or fail (e.g. Nutt, 1999, 2002; Hickson et al., 2003)? Do a number of failed strategic decisions lead to organizational failure as Landis Gabel and Sinclair-Desagne (2008), for example, suggest?

Finally, some recent approaches to strategic decision making have concentrated upon the more micro aspects of how managers think, act, and interpret strategic decisions. Such an approach has been termed the strategy as practice perspective (Whittington, 1996) or as activity-based (Heracleous, 2003; Jarzabkowski, 2005). Here, the thrust is to dig into what managers actually ‘do’ when they ‘strategize’, a term that seems to have emerged alongside the emerging popularity of this perspective. As Jarzabkowski and Wilson (2006) note, much of ‘traditional’ strategic decision-making theory has been criticized because it is not actionable in practice, so researchers should concentrate on what managers do when they engage in strategic activities. However, it is by no means easy to tell when strategic activity is taking place and when it is not; nor is it easy to identify an appropriate level (or levels) of analysis to examine such activities. For example, should we examine the cognitive and psychological aspects of individuals when they engage in strategic activities, or should we look at their physical activities and try to describe the processes in which they engage (such as decision making), or all three? There are no concrete answers to the above questions. All would be legitimate ways of drilling deep into what managers do when they engage in decision making.

Jarzabkowski (2005) provides a useful perspective to the practice approach by concentrating on what she terms an ‘activity-based’ view. By this, she means that managers themselves define what is, and is not, strategic by their actions. These discussions and decisions constitute an important part of understanding decision making. One of the key contributions made by Jarzabkowski’s (2005) study is that decision making is a ‘situated’ activity. Although there are many arguments about what is meant by the term ‘situated’, it identifies the relational nature of managers as actors with situations being the contexts in which they operate. Any particular action by managers must be seen and understood in the context of the situation in which that action occurs. Managers are both recipients and creators of the situational context in which they carry out the activities that go into decision making.

Why is such a micro focus useful? The main answer is that the strategy as practice perspective highlights differences in strategic decision making that might otherwise be missed. From a more macro perspective, organizations can look fundamentally similar. They face similar social, political, and economic contexts in which they are embedded. However, this similarity can be deceptive. Jarzabkowski (2005) shows how ...

Table of contents

• Title Page
• Copyright Page
• Dedication
• Notes on the Contributors
• About the Editors
• Part I - INTRODUCTION
• Part II - KEY THEORETICAL PERSPECTIVES
• Part III - CONCEPTUALIZING STRATEGIC DECISION MAKING
• Part IV - FACTORS AND CONSIDERATIONS THAT IMPINGE ON DECISION MAKING
• Part V - RECENT EMPIRICAL FINDINGS THAT SUPPORT THEORIES AND VIEWS
• Part VI - METHODOLOGY FOR THE STUDY OF DECISION MAKING
• Part VII - DIRECTIONS AND PERSPECTIVES
• Index