3: Decision Making and Business Ethics

Decision making

• Decision making: the process by which managers respond to opportunities and threats by analyzing options and selecting a course of action.

  • Opportunities: seek to improve performance to benefit stakeholders

  • Threats: managers seek to improve performance and mitigate threats to organizational performance.

• Programmed decisions: routine, practically automatic processes, prescribed; there is a right answer.

  • these decisions have been made many times before, rules & guidelines exist.

  • e.g. ordering more inventory, giving bonuses, handling customer requests. Removes discretion and risk.

• Non-programmed decisions: non-routine decision making that occurs in response to unpredictable opportunities and trends.

  • no precedent, based on information, intuition and judgement.

  • e.g. reacting to a competitor’s price decrease, investing in new technologies.

  • Lots of research!!

• Decision series: industry? price? hire? motivate?

• Is a decision rational or irrational?

Programmed or non-programmed:

• How are they recruited? → precedent.

  • Job requirements & description

  • Qualifications

  • Interviews → there’s precedent.

• Assigning them to roles → non-programmed

• Orient & onboard → precedent.

• Compensation → precedent.

• Scheduling → non-programmed, but also programmed as there’s set hours.

• Performance evaluation → (relatively) non-programmed.

• Designing work → non-programmed decision into where to place these workers.

• qualifications needed → programmed: age, educational requirement?, physically able, employment eligibility, criminal records

• write a job description → programmed

• post the job description → non-programmed, but there’s precedent.

• how much to pay → greater than minimum wage, competitiveness,

• what hours will the new hires work → programmed: labour laws, non-programmed based on needs

• short list → large companies might have a programmed scoring mechanism,

• conduct interviews → questions are non-programmed, and then repetition becomes programmed. must be objective & fair.

• make hires → non-programmed, who are potential people who could be hired?

the degree to which someone has discretion.

Classical model: a decision making model that assumes managers have access to all the information needed to reach the best decision. They rank their own preferences among alternatives.

• List all courses of action & their consequences

• Rank each based on preference

• Select the alternatives that lead to desired future consequences.

• Ignores important factors that influence decision making

  • values, personalities, emotions, social context

  • power of conformity → weird psych line-length experiment.

  • risk taking tendency.

Intuition: an unconscious or relatively automatic decision-making process that integrates experiences, goals and values without using direct reasoning.

• The higher up, the more intuitive decisions are made.

Heuristics: experienced-based technique to problem solving, e.g. mental shortcuts to problem solving. Cognitive miser model.

Administrative model: recognizes that decision makers have incomplete information, are constricted by bounded rationality and tend to sacrifice.

• Bounded rationality: a large number of alternatives and information that cannot all be considered, either cognitively or based on their capabilities.

• Information is incomplete because of risk, uncertainty, ambiguity and time constraints.

• Managers explore a limited number of options and choose an acceptable decision.

Good decision making

• Recognize the need for a decision → what’s the problem and decision question?

• Identify criteria

• Generate alternatives

• Assess the alternatives

  • ethical issues, legal issues, feasibility issues, practicality issues

• Choose among the alternatives

• Implement the chosen alternative

• Evaluate and learn from feedback.

Decision making biases

• Heuristic: a rule of thumb to deal with complex decision making.

• Escalating commitment, recency effect, representativeness bias, fundamental attribution error, prior hypothesis bias, clustering illusion, confirmation bias, illusion of control and overconfidence bias

Ethics

• Ethics: moral principals or beliefs about what is right or wrong that govern the conduct of people and/or organizations.

• Ethical dilemma: the dilemma that people find themselves in when they have to decide if they should act in a way that might help another person or group even though doing so might go against their self-interest.

  • Situations in which there is no agreement over exact accepted ethical principles.

• Stakeholders: individuals or groups that have an interest/claim/stake in an organization.

  • Shareholders, managers, non-managerial employees, customers, suppliers, citizens and community members.

    • Shareholders: owners, they like profits, dividends, good social impact and reputation.

    • Managers: decision-makers; unethical decisions can be traced back to individual managers. e.g. Volkswagen emissions coverup

    • Community and society: environmental deregulation, corporate social responsibility.

  • They may have different preferred decisions and outcomes.

• Lobby groups and laws exist to govern businesses.

• Laws specify sanctions or punishments for unethical behaviour

• Neither are fixed principals! They change and evolve as time passes.

Code of ethics: derives from three main sources: societal ethics, professional ethics, individual ethics or personal standards.

Social responsibility: the manager’s duty or obligation to make decisions that promote the well-being of stakeholders and society as a whole.

• Managers accrue benefits:

  • workers & society benefits

  • quality of life improvements

  • ‘it’s the right thing to do’

  • improves reputation.

• We gain positive social outcomes, e.g. low crime, low unemployment, higher literacy.

• giving back to the community. → charity & advertising.

• Milton Friedman: corporations only maximize their profits and shareholder value. 

• In the short run, social responsibility & profit maximization aren’t compatible. But expanding the timeframe, the benefit can be helpful to long-term profits.

Models of ethics:

• Utilitarian model: greatest good for the greatest number of people. Analyze costs and benefits, select the course of action that maximizes these benefits.

  • e.g. the Ford Pinto: it costed more to improve it for safety than the benefits they’d reap from it.

• Moral Rights Model: ethical decisions should maintain/protect people’s fundamental rights.

  • These decisions may require the balancing of various rights: e.g. safety & privacy.

• Justice model: ethical decisions distribute costs and benefits among individuals and groups in a fair, equitable, or impartial way.

  • Transparency is critical: everyone’s aware of exactly how decisions are made.

Code of ethics

• Code of ethics derives from three main sources:

  • societal ethics governing how everyone deals with each other

  • professional ethics, how members of the profession should make decisions → professional designations: CHRP

  • individual ethics/personal standards.