SESSION 5: STRATEGIC

Decision Making
York University - ADMS 1000
Jason Yarmolinsky
Learning Goals

 The success or failure of any organization ultimately is tied to the quality of

the organization’s strategic decisions. This chapter is intended to offer a
framework for understanding the process of strategic decision making and to
draw attention to the biases that influence the wisdom of strategic decision-
makers.
Questions to Keep in Mind…

 1. What is the Rational model of strategic decision-making?

 2. Can you explain how non-rationality enters into the strategic decision-
making process?
 3. What is the strategic decision fiasco known as escalation of commitment?
 4. How does the concept of “double-loop learning” influence strategic
decision making?
 5. What is a paradigm and how does it relate to strategic decisions?
Decision Making
 a conscious process of making choices among one or more alternatives with the
intention of moving toward some desired state of affairs.
 There are two major characteristics of organizational decisions.
 How structured or unstructured is the context within which the decision must be made?
 How much risk or uncertainty is involved in the decision options?
 Routine decisions are known as “programmed decisions”
 Complex, out of the ordinary decisions are “non-programmed decisions”

Higher level management

● Problem Ill-defined
● No Ready-made Solutions Available
● Non-programmed Decisions

Lower level management

● Problem Well-defined
● Ready-made Solutions Available
● Programmed Decisions
The Rational Model of Decision Making

1. Identify problems and opportunities.

2. Choose the best decision style.
3. Develop alternative solutions.
4. Choose the best solution.
5. Implement the solution.
6. Evaluate decision outcomes.
Are We Really Rational Strategic Decision-
Makers?

 Assumptions of the model

 that all alternatives are known
 that all consequences of each alternative are known
 that all preferences are known
 that there is a decision-rule for choosing alternatives
 Is this realistic/reasonable?
Bounded Rationality

 the idea that in decision-making, rationality of individuals is limited by the

information they have, the cognitive limitations of their minds, and the finite
amount of time they have to make a decision.

 Consider: Public Health Recommendations re: Masks during COVID 19

Satisficing

 As opposed to finding an optimal decision/outcome, once an alternative has

been identified and the outcome is considered satisfactory, that alternative
will be chosen
 Do we buy the “optimal” everything– or is “good enough” sufficient?
 Consider school supplies, produce etc.
NON-RATIONALITY IN STRATEGIC DECISION
MAKING: DECISION MAKING UNDER RISK
AND UNCERTAINTY
 The classical model seems to explain well the process of decision making
when the situation is relatively routine, for programmed decisions.
 Decision making in modern organizations is characterized, more than ever, by
elements of risk, uncertainty and ambiguity.
 It is rare (impossible?) that decision-makers will possess complete certainty in
a given decision situation; and so, some risk is almost always present in our
decision-making process.
Gender and Risk

 Evidence that gender differences do exist with regard to risk preferences

among decision-makers.
 The results of a number of studies suggested that females were more cautious in
their decisions and less likely to take gambles compared to males
 The differences in gender role socialization between men and women can be
considered as one key source of variation in risk tolerance
 The literature suggests that women may be socialized to be more conservative in
their risk preference
Risk Preferences and Strategic Decision
Frame

 prospect theory: when faced with a choice of alternatives or prospects, the

choice that we make will very much depend on how we have framed the
alternatives.
 when faced with a choice between options that have been framed as gains, people
tend to become risk-averse
 Prefer “sure gains” over “potential gains” and “sure losses”
Prospect Theory Continued…

 decision-makers will tend to become risk seeking when the decision is framed
as a choice between losses, and they will become risk-averse when the
decision is framed as a choice between gains
Prospect Theory and Negotiations

 In Negotiations:
 negotiators who are risk-averse (positive frame something is better than
nothing) will be more likely to make concessions to avoid an impasse
 risk-seeking negotiators (negative frame all or nothing) will be less likely to
make concessions and more likely to risk an impasse
 Consider the language you hear those who are in negotiation use…this can be
a hint in terms of whether they are risk averse or risk seeking!
Strategic Decision Fiascos

 Escalation of Commitment: behavior pattern in which an individual or group

facing increasingly negative outcomes from a decision, action, or investment
nevertheless continues the behavior instead of altering course.
 typical escalation scenario as situations where:
 initial decision results in loss or negative outcome
 decision-maker commits more resources to the project
 further losses experienced
 Consider: Businesses that continue to reinvest in losing/unprofitable divisions
 WHY DO WE ESCALATE COMMITMENT
TO A FAILING COURSE OF ACTION?
 Social and Structural Determinants
 Social includes protecting “reputation”, keeping colleagues happy, not “rocking
the boat”
 Structural determinants include
 Economic obstacles (i.e. financial)
 technical obstacles (i.e. difficulties stopping production line)
 political obstacles

 administrative inertia (too difficult to stop a bureaucratic decision)

WHY DO WE ESCALATE COMMITMENT
TO A FAILING COURSE OF ACTION?

 Psychological Determinants
 Sunk Costs - previous losses/costs that are not expected to recur should not enter
into decision calculations. Specifically, the need to justify sunk costs will impede
decision-makers from objectively and critically examining the utility of the
investment.
 Framing and decision fiascos - Decisions that lead to failures/fiascos are most
naturally framed as a choice between two or more unattractive options
Avoiding Strategic Decision-Making Fiascos
 Don’t Ignore Negative Feedback
 that decision-makers continually seek to improve perceptual accuracy in
decisions
 Consider multiple framing—that is, try to see a problem and its alternatives in
different lights
 Hire an “External Auditor” to Provide a More Objective Assessment
 Don’t Be Afraid to Withhold Further Funding
 researchers have suggested that the organization have some kind of stop-loss
routine—whereby the decision to abort a project, for example, is automatic
beyond a certain point
 Don’t Obsess Over Managing Impressions
WHY COMPANIES FAIL TO CHANGE
STRATEGIC DIRECTION

 The ability to become “organic” means an organization can adapt to change.

Therefore, a critically important and related question is, what are the
elements required for an organization to be adaptive to change?
 A change in strategic direction requires double-loop learning
 Related to the “detection and correction of error”
Single Loop Learning

 Error detection and correction

 Deals with symptoms
 Addresses current problems
 Maintains status quo
 I.E Fixing a broken machine
Double-Loop Learning

 Examines the underlying system

 Looks at root causes
 Changes status quo (goals, policies)
 Promotes innovation
 Identifies new problems & new solutions
 Modifies policies
A Change in Strategic Direction Requires A
Paradigm Shift

 Paradigm: our set of beliefs or mental framework for understanding how

the world operates
 Paradigm Shift: making a dramatic departure from the present way of doing
things.
 Consider Blockbuster and Netflix (another Netflix example is in the
 Blockbuster could have bought Netflix for $50 million in 2000 and then rejected a
strategic alliance
 Blockbuster could not imagine an alternative method of media consumption on a
“rental’ basis
A Change in Strategic Direction Requires A
Paradigm Shift

 In order to “shift” paradigms, we must be aware of our current paradigms

 What are our unstated assumptions?
 Requires a high degree of self analysis and self awareness.
 A Change in Strategic Direction Requires Individuals to
“think outside” of their Cognitive Scripts.
 “Think Differently” or see things from different perspectives and filters
Case – Blackberry

 Start with the requirements/questions

 Q1. “Managers are more likely to make non-rational decisions when the
decisions are non-routine or non-programmed”.
 Discuss the meaning of this statement with reference to this case.
 Q2. How might the concept of escalation of commitment be relevant to the
poor decision choices made by BlackBerry?
Case – Blackberry – Question 1

 Q1. “Managers are more likely to make non-rational decisions when the
decisions are non-routine or non-programmed”.
 Discuss the meaning of this statement with reference to this case.

Higher level management

● Problem Ill-defined
● No Ready-made Solutions Available
● Non-programmed Decisions

Lower level management

● Problem Well-defined
● Ready-made Solutions Available
● Programmed Decisions
Case – Blackberry – Question 1

 Relevant Case Facts:

 The BlackBerry became the norm, especially among business executives. However,
the smartphone market faced a huge change in 2007 [The Year Apple Launched the
iPhone]
 the iPhone changed the nature of the smartphone market. Up until that time,
smartphones were seen more along the lines of something that business people
used—like the BlackBerry. However, Apple came to establish the smartphone as
something more than an efficient device—it became a cultural phenomenon and a
“must-have” device for the consumer.
 [The Organization] failed to see the change in consumer behaviour that appeared
to shift away from the BlackBerry brand.
Case – Blackberry – Question 1

 Analysis:
 Decision facing the organization was non-routine
 Problem was multi-faced
 not just iPhone as a competitor, but changing preferences of consumers and
organizations
 Consumers seeing phones as fun, not just work
 Organizations looking to defray their costs and have employees shoulder the cost of
technology

 dealing with changing preferences/cultural force of iPhone required an unknown

 Given the lack of identification of: assumptions re: consumer behaviour and the
changing force of the market (and the inability to clearly articulate what the issue
was), management was unable to rationally approach this issue.
Case – Blackberry- Question 2

 Q2. How might the concept of escalation of commitment be relevant to the

poor decision choices made by BlackBerry?
 Reminder of relevant criteria:
 “Escalation of Commitment: behavior pattern in which an individual or group
facing increasingly negative outcomes from a decision, action, or investment
nevertheless continues the behavior instead of altering course.
Case – Blackberry- Question 2

 Relevant case facts:

 BlackBerry established itself as a serious, business users’ phone, and it never really
seems to get rid of that image.
 BlackBerry continued to somehow target the same market it began with and never
seemed set on a serious repositioning of its product, despite feedback that
indicated its approach was not attracting enough consumer interest.
Case – Blackberry- Question 2

 Potentially due to technological issues, political issues or framing issues (i.e

not identifying the issue clearly as discussed in the response to Q1),
Blackberry failed to recognize the change in the market (particularly in terms
of consumer tastes and preferences).
 This resulted in the firm continuing to invest in a failing strategy, which only
hurt the organization from a results (profit) and market share perspective.