Understanding Organisation & Management: Key Concepts Explained

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LUISS Guido Carli**We aren't endorsed by this school

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ECONOMIA 8

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Management

Date

Dec 12, 2024

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Organisation & management Historical perspective Introduction: this is used for all the fields of a company. Transversal perspective: relevant for anyone or any function (both managers and workers). It studies the human dimension in business.Eﬃciency is about resources. Eﬃciency > profit. If some issues arise, eﬃciency reduces. ≠Effectiveness is about the outputA manager responsibility is to predict the output through eﬃciency means. The starting point is that organisational performance differs from the sum of individual performances; this difference comes from the quality of cooperation, culture, structure, decision-making processes, organisational choices…An organisation consists in a stable collaboration of actors, following common general objectives through division of work and functions and through specific coordination mechanisms to reach a specific goal, output. A company is made up of a hierarchical structure (structure, people), goals, objectives, resources (raw materials, infrastructures) functions, mission, vision, identity.Founding fathersThe economic relevance of the division of labour was first formalised by Adam Smithin 1776; after the second industrial revolution, large bureaucratic organisations became the dominant form of capitalism.Max Weberrelated the emergence of bureaucracy to a broader movement of social transformation based on rationality (rather than tradition) and analysed the characteristics and foundations of such modern bureaucracies. He identified 3 types of legitimacy that make people obey to authority:-Traditional legitimacy: authority is founded on tradition, customs -Charismatic legitimacy: authority is founded on the belief, devotion, dedication -Rational-legal legitimacy: authority is founded on stable, explicit, fair and impersonal rules: it lies in the hands of those who are rationally considered the most capable and qualified for exercising it. That is the only type of legitimacy that can replace discrimination and arbitrary power and is incarnated into organisations which are called bureaucratic typeFrederick Taylor was the first to theorise: he identified and promoted principles to develop rational operations. He observed a “powerless hierarchy” meaning that hierarchical control is not the best tool for eﬃcient coordination: workers were not working as hard as they could to avoid being caught by management in a spiral of rising objectives without proportional wage increase > workers and managers were not aligned. Because they master a unique technical know-how, workers have the power to select their own working processes regardless of eﬃciency concerns. As a result, Taylor designed an eﬃcient system for coordinating and optimising production, founded on a strict division between design and production, as well as specialisationand standardisationof tasks. The best way to boost productivity, he argued, was to embrace three rules:

-Break complex jobs down into simple ones-Measure everything that workers do-Link pay to performance, giving bonuses to high-achievers and sacking sluggardsHenri Fayol foresees the possibility for rational principles for the organisation as a whole at each different levels. He identifies 6 management functions within the company:1.Technical: production, processing, manufacturing 2.Commercial: purchases, sales, exchanges 3.Finance: fund raising, asset management 4.Security: property, people protection5.Accounting: inventory, balance sheet, statistics 6. Administration: planning, organising, leading, controllingTaylorism today The internet retailer uses classic Taylorist techniques to achieve eﬃciency: workers are constantly measured and those who fail to hit the numbers are ruthlessly eliminated, personal tragedies notwithstanding. This new version of Taylor’s theory starts with his three basic principles of good management but supercharges them with digital technology and applies them to a much wider range of employees: technology allows the division of labour to be applied to a much wider range of jobs: not just Taylor’s industrial workers but also service workers, knowledge workers and managers themselves. In Taylor’s world, managers were the lords of creation while in the digital world they are mere widgets in the giant corporate computer.Industrial revolutions: 1st industrial revolution = steam engines 2nd industrial revolution = electrification 3rd industrial revolution = advancing in computing 4th industrial revolution = technology (AI, IOT)

DESIGNING ORGANISATIONS Work Framework 1: prescribed vs. real work Analysts revealed the existence of a fap between work as prescribed by the organisation and real work (work as it is lived by individuals who perform the activity. This gap is observed through the existence of informal competencies, oﬃcial rules being bypassed by operational workers or informal rules which are central for operational workers but unseen by managers. This gap can be more or less important according to managerial situations: within a certain limit, it can be positive for the company and/or individuals. However, when badly designed, prescribed work can be a source of constraint and generate organisational malfunctioning (e.g. safety problems) and psychological disturbances among individuals. Framework 2: internal interdependence 3 types to describe the intensity of interactions and behaviours within an organisational structure: -Pooled interdependence: each department performs completely separate functions, do not directly interact and do not directly depend on each other but they can share common resources and each does contribute individual pieces to the same overall puzzle. This creates an almost blind, indirect dependence on the performance of others.-Standardisationis the appropriate type of coordination for pooled interdependence. By agreeing in advance on a set of rules and processes that everyone will follow, everyone’s output can be easily combined to achieve the task. The standardised process remains unchanged as long as the situation is stable. -Sequential interdependence: when one unit in the overall process produces an output necessary for the performance by the next unit. The demand for coordination to prevent slowdown is greater than for pooled task interdependence (assembly line).-Planningis the appropriate type of coordination for sequential interdependence. Planning means coordinating schedules, deadlines, and other relevant information at the beginning of the process, as well as outlining cases where the process might need to change.-Reciprocal interdependence: similar to sequential in that the output of one department becomes the input of another, with the addition of being cyclical. In this model, departments are at their highest intensity of interaction. Reciprocal models are the most complex and diﬃcult to manage. -Mutual adjustment is the appropriate type of coordination for reciprocal interdependence. Mutual adjustment means that at any time, any team member may

introduce new information which affects who will need to coordinate with whom moving forward. It can handle the most uncertainty, and it also has the greatest risks. HyperspecialisationThe focus of Taylor was division of labour, dividing bigger task into smaller tasks > specialisation. As labor becomes more knowledge-based and communications technology advances, the division of labor accelerates. The hyperspecialisation of workers may be inevitable given the quality, speed and cost advantages it offers employers and the power it gives individuals to devote flexible hours to tasks of their choice. This will force managers to master a new set of skills: dividing work into assignable micro tasks, attracting specialised workers to perform them, ensuring acceptable quality and integrating many pieces into whole solutions.

StructureFramework 1: Basic structure typesOrganisational structure: the arrangement of activities (allocation and deployment of organisational resources and responsibilities) through an orderly set of reporting relationships and communication channels that best manage the fundamental contradiction between division of labor and integration (or coordination) of labor.Division of labor: ensures that all essential tasks are performed with accurate attention. It is the process of breaking work into different jobs, units and departments by assigning tasks and responsibilities associated with individual jobs. Integration (or coordination) of labor: ensures the consistency of the organisation as a whole. It is the process of setting relationships among individuals, groups and departments, establishing formal lines of authority, reporting and communication.1.Functionalstructure: a functional structure groups people on the basis of their common skills, expertise or resources they use. It is appropriate for companies with a limited number of products or services. •Strengths: -Deeper level of specialisation and productivity: reduces duplication of efforts; promotes standardisation; easier to monitor and evaluate individuals.-Better control of people that supervise one another on the basis of common skills and norms-Better knowledge transfer when employees are grouped together: common pool of talents, coherent professional identity and career paths-Increase buying power for purchasing and economies of scale in manufacturing•Weaknesses: -Inappropriate for companies with a variety of products, services, channels or customers-Poor horizontal coordination: barriers created across functions (marketing may not communicate with product development or sales) -Risk of overloaded hierarchy: decisions pile up on top-Risk of "moving targets": higher conflict between departments -Poor adaptation to change or local needs: different areas, new type of customer2.Divisionalstructure: a divisional structure is a superposition of “single activity sub-companies” where management has large autonomy. Each division is responsible for all tasks related to a product, product line, a geographic area or type of customer (R&D, manufacturing, marketing…). Each business unit has all resources and functions needed (finance, R&D, human resources…). The firm is divided into separate business units, each being an independent profit center.•Strengths:-Suited to fast change in unstable environment -Leads to customer satisfaction because product responsibility and contact points are clear

-Involves high coordination across functions -Allows units to adapt to differences in products, regions, customers -Best in large organisations with several products (vs. functional structure)-Decentralises decision making•Weaknesses: -Eliminates economies of scale in functional departments -Leads to poor coordination across product lines -Eliminates in-depth competence and technical specialisation -Makes integration and standardisation across product lines diﬃcult -Duplication across product lines or markets-Compete for resources between divisions3.Matrixstructure: a matrix structure groups people and resources in two ways simultaneously, by function and products. It is a rectangular grid that shows a vertical flow of functional responsibilities and a horizontal flow of product responsibility. Its main objective is to preserve the common potential of the organisation: horizontal processes are as important as vertical ones. It combines the strengths of functional and divisional structures targeting product or geographical segments for better delivery and responsiveness to local constraints with economies of scale and expertise for main functions. Matrix function is a complex network of superior-subordinate reporting relationships: each employee has two (or more) bosses. The product team is the building block and principal integration and coordination mechanism.

Framework 2: Mintzberg’s typology -Simple structure -Machine bureaucracy -Divisionalised form -Professional bureaucracy -Adhocracy There are 4 elements of differentiation: 1.Key part of organisation2.Key means of coordination3.Dominant pull

4.Contingency factors Main advantages & problems, psychiatric riskOrganic structures The mechanism - organic distinction is useful as a way to characterise the central tendencies of different forms of organising at any level of analysis

Holacracy - idea-The hype: holacracy and other forms of self-organisation have been getting a lot of press. Proponents hail them as “flat” environments that foster flexibility, engagement, productivity, and eﬃciency. Critics say they’re naïve, unrealistic experiments. -The reality: neither view is quite right. Although the new forms can help organisations become more adaptable and nimble, most companies shouldn’t adopt their principles wholesale. It always depends on the organisational context. -The potential: a piecemeal approach usually makes sense. Organisations can use elements of self-management in areas where the need for adaptability is high, and traditional models where reliability is paramount. A lot of potential but also considerable risks -Complicates the work, because the employees fight against the fragmentation of tasks. Employees are more likely to wonder where to focus their attention and how to prioritise (but also getting organised between circles is diﬃcult, planning problems…)-Having so many roles complicates compensation. As people assemble their personal role portfolios, it becomes diﬃcult to find clear benchmarks or market rates.-The proliferation of roles complicates hiring, both in the organisation and in specific roles.-One type of profile is preferred over another: this structure is particularly suitable for extroverts and not necessarily for introverts. However, an organisation needs a variety of profiles to be successful.In conclusion top executives periodically evaluate organisation structure to determine whether it is appropriate to changing needs. As a general rule, when organisation structure is out of alignment with organisation needs, one or more of the following symptoms of structural deficiency appear:-Decision making is delayed or lacking in quality: decision-makers may be overloaded because the hierarchy funnels too many problems and decisions to them and delegation to lower levels may be insuﬃcient. Another cause of poor quality decisions is that information may not reach the correct people.-The organisation does not respond innovatively to a changing environment: one reason for lack of innovation is that departments are not coordinated horizontally. The identification of customer needs by the marketing department and the identification of technological developments in the research department must be coordinated. -Employee performance declines and goals are not being met: employee performance may decline because the structure doesn’t provide clear goals, responsibilities and mechanisms for coordination. The structure should reflect the complexity of the market environment yet be straightforward enough for employees to effectively work within. -Too much conflict is evident: organisation structure should allow conflicting departmental goals to combine into a single set of goals for the entire organisation. When departments act at cross-purposes or are under pressure to achieve departmental goals at the expense of organisational goals, the structure is often at fault. Horizontal linkage mechanisms are not adequate.

Culture The topic of organisational culture came into its own during the 1980s when managers and researchers began to look for keys to firms’ survival in a competitive and turbulent environment. It is a pattern of shared basic assumptions that the group learned as it solved its problems of external adaptation and internal integration, that has worked well enough to be considered valid, and therefore, to be taught to new members as the correct way to perceive, think and feel in relation to those problems. Culture creates meaning for those who adhere to it. It is a management tool, a way to reinforce organisational values, to control behaviours, and maintain cohesion within the organisation despite possible ambient turbulence. How can culture be maintained? How to maintain a strong culture? Social validation. Framework 1: elements of organisational culture (Schein, 2004)Visible (but not always decipherable)Invisible (below thesurface)ArtifactsName:it can represent an ambition (Apple, Kodak, Sony…)Logo: it has the same role, but it can also symbolise the history and/or specificities of the company (Yamaha, BMW propeller).Physical structures/décor:building structure > may shape and reflect culture; oﬃce design conveys cultural meaning; furniture, oﬃce size, wall hanging; dress codeStories/legends: social prescriptions of desired (undesired) behaviour; provides a realistic human side to expectations; most effective stories and legends > describe real people, assumed to be true, known throughout the organisation, are prescriptiveRituals/ceremonies: rituals such as programmed routines (passage rites, development and upgrading rites, integration rites…); ceremonies > planned activities for an audience (award ceremonies)Organisational language: words used to address people, describe customers; leaders use phrases and special vocabulary as cultural symbols like referring to “clients” rather than “customers”; language also found in subcultures, like Whirlpool’s “PowerPoint culture”

Shared values Stable, evaluative beliefs that guide our preferences: enable employees to evaluate what is good or bad, right or wrong; conscious beliefs about use of time and how much people work in a given organisation, about the way things ought to beExamples of dominant values: “customers are number one”; high quality products; travel style; importance of familyDifferent types of values: -Core values: are the deeply ingrained principles that guide all of a company’s actions; they serve as its cultural cornerstones-Espoused values: the values we say we use and often think we use VS.-Enacted values:values we actually rely on to guide our decisions and actions-Aspirational values:are those a company need to succeed in the future but currently lacksDecisions and behaviours linked to values when: we are mindful of our values; we have logical reasons to apply values in that situation; the situation does not interfereShared assumptions Unconscious, taken-for-granted beliefs, mental models of ideals. Shared assumptions provide answers to some fundamental questions members of the organisation may have:The image of the organisation:•Is the organisation solid and eternal, or unsafe and vulnerable?•Is it unique, prestigious, rewarding?•Is it caring and protective, or a brutal and unfair place, or a cold yet fair system?The image of the profession and qualifications required:•What is expected of me?•What does it take to be successful, what is the profile of a winner, should one be a shark or a team player?•What does it means to be a good engineer, auditor, foreman…?The image of the power structure:•Who are the important people or groups?•What kind of gap is there between the oﬃcial hierarchy and real power?•Who are the powerful stakeholders (customers, shareholders, regulation authorities…)?Framework 2: the cultural web (Johnson, 2005)The cultural web is a representation of the taken-for-granted assumptions or paradigm of an organisation and the physical manifestations of organisational culture

Framework 3: integrated culture (Groysberg, 2018)Mapping corporate cultures along two dimensions:-How people interact (independence to interdependence)-Their response to change (flexibility to stability)8 culture styles emerge People interactions(axe orizontal): an organisation’s orientation toward people interactions and coordination will fall on a spectrum from highly independent to highly interdependent. Cultures that lean toward “highly independent” place greater value on autonomy, individual action and competition. Those that lean toward “highly interdependent” emphasise integration, managing relationships and coordinating group effort. People in such cultures tend to collaborate and to see success through the lens of the group.Response to change(axe vertical): whereas some cultures emphasise stability (prioritising consistency, predictability and maintenance of the status quo) others emphasise flexibility (adaptability, and receptiveness to change). Those that favour stability tend to follow rules, use control structures such as seniority-based staﬃng, reinforce hierarchy, and strive for eﬃciency. Those that favour flexibility tend to prioritise innovation, openness, diversity and a longer-term orientation.

4 levers for evolving a culture 1.Articulate the aspiration: begin with an analysis of the current culture, using a framework that can be openly discussed throughout the organisation. Leaders must understand what outcomes the culture produces and how it does or doesn’t align with current and anticipated market and business conditions2.Select and develop leaders who align with the target culture: leaders serve as important catalysis for change by encouraging it at all levels and creating a safe climate. Candidates for recruitment should be evaluated on their alignment with the target culture. Incumbent leaders who are unsupportive of desired change can be engaged and re-energised through training and education about the important relationship between culture and strategic direction. However, culture change can and does lead to turnover.3.Use organisational conversations about culture to underscore the importance of change: culture frameworks can be used to discuss current and desired culture styles and also differences in how senior leaders operate. Various kinks of organisational conversations, such as listening tours or structured group discussion, can support change 4.Reinforce the desired change through organisational design: when a company’s structures, systems and processes are aligned and support the aspirational culture and strategy instigating new culture styles and behaviours will become far easier. The degree of centralisation and the number of hierarchical levels in the organisational structure can be adjusted to reinforce behaviours inherent to the aspirational culture

MANAGING ORGANISATIONS IncentivesThere are 3 approaches for activating control in organisations with the purpose to control in a dynamic way the organisation: -By motivation (psychologists): intrinsic motivation (identity, culture, image, pride, empowerment…)-By incentives (economists): management by objectives and financial objectives (compensation packages, promotion, recognition, family support, medical benefits, retirement plans…). An example of incentive for CEOs are stock options and shares-By power (sociology): control, rules and procedures, mission statements, job definition Framework 1: psychological contract Motivation is an equilibrium (a psychological contract) between contribution and retribution: each party’s involvement is based on this notion of social exchange in which each party demands certain things and contributes accordingly to the exchange Individuals will stay in companies as long as the retributions (salary, status, self-actualisation) they receive exceed the contributions (work time, effort, subordination) they make. If the organisational system doesn’t allow for a psychological balance between contribution and retribution, organisational members try to re-establish this balance themselves by reducing their contribution (being late, absenteeism, unjustified absences…) and by raising the retribution they get (stealing, charging unjustified expenses…). What counts is not the objective measurable and monetary, value of the contributions and retributions, but the subjective, symbolic perception of the organisational membersConsulting can be a paramount example: when you enter the salary is not high: learning is a trade offfor salary (lot of turnover). Later what you value can change and your perceptionas well. Different benefits and preferences: a mother is interested in day care, others are interested in cars and others in alternative benefits and retributions.Framework 2: Ouchi’s control theory (1979)Incentives cannot be understood only on the individual level. Organisational models and contingencies are very structuring. According to Ouchi, there are 3 different control strategies that organisations could adopt: bureaucratic, market and clan. Each form of control is based on different types of requirements. All 3 types may appear simultaneously in an organisation •Bureaucraticcontrol: is the use of rules, policies, hierarchy of authority, written documentation, standardisation and other bureaucratic mechanisms to standardise behaviour and assess performance. The primary purpose of bureaucratic rules and procedures is to standardise and control employee behaviour. As organisations progress through the life cycle and grow larger, they become more formalised and

standardised. To make bureaucratic control work, managers must have the authority to maintain control over the organisation.•Marketcontrol: occurs when price competition is used to evaluate the output and productivity of an organisation or its major departments and divisions. The use of market control requires that outputs be suﬃciently explicit for a price to be assigned and that competition exist. Each division contains resource inputs needed to produce a product. Each division can be evaluated on the basis of profit or loss compared with other divisions.•Clancontrol: is the use of social characteristics, such as shared values, commitment, traditions, and beliefs, to control behaviour. Organisations that use clan control have strong cultures that emphasise shared values and trust among employees. Clan control is important when ambiguity and uncertainty are high. High uncertainty means the organisation cannot put a price on its services, and things change so fast that rules and regulations are not able to specify every correct behaviour.Purpose driven organisation Sometimes employees get stuck in a rut, disengage from their work and stop performing to their potential, so managers respond with tighter oversight and control, yet nothing improves. According to Quinn and Thakor (2018), most management practices and incentives are based on conventional economic logic, which assumes that employees are self-interested agents and that assumption becomes a self-fulfilling prophecy. To overcome this problem managers need to reconnect people with a sense of higher purpose. When employees feel that their work has meaning, they become more committed and engaged. They take risks, learn, and raise their game.They propose an eight step framework to strive for a purpose driven organisation. 1.Envision an inspired workforce:organisation’s relationships with its workers are not only based on a principal-agent logic. One way to change that perception is to expose leaders to positive exceptions to the rule. By finding one positive example (a person, a team, a unit that exceeds the norms) others can be inspired.

2.Discover the purpose:do not invent a higher purpose: it already exists. You can discover it through empathy, by feeling and understanding the deepest common needs of the workforce. That involves asking provocative questions, listening and reflecting. 3.Recognise the need for authenticity:if your purpose is authentic, people know, because it drives every decision and you do things other companies would not. Often an organisation discovers its purpose and values when things are going badly and that its true nature is revealed by what its leaders do in diﬃcult times.4.Turn the authentic message into a constant message:when a leader communicates the purpose with authenticity and constancy, employees recognise their commitment, begin to believe in the purpose themselves and reorient. The change is signaled from the top and then it unfolds from the bottom5.Stimulate individual learning:learning and development are powerful incentives. Employees actually want to think, learn and grow. By helping employees understand the relationship between the higher purpose and the learning process, leaders can strengthen it.6.Turn midlevel managers into purpose-driven leaders:to build an inspired, committed workforce, middle managers not only need to know the organisation’s purpose but also need to deeply connect with it and lead with moral power. For example by communicating their personal purpose to their teams and discuss how it links to their professional lives and the organisation’s reason for being.7.Connect the people to the purpose:once leaders at the top and in the middle have internalised the organisation’s purpose, they must help frontline employees see how it connects with their day-to-day tasks. But a top-down mandate does not work (ex: KPMG poster challenge)8.Unleash the positive energisers:every organisation has a pool of change agents that usually goes untapped: the network of positive energisers. Spread randomly throughout the organisation are mature, purpose-driven people with an optimistic orientation. They naturally inspire others. Once enlisted, they can assist with every step of the cultural change.In conclusion, it is important not only to focus on monetary incentives; no study could clearly establish the direct link between an incentive and the achievement of a task. We often find a negative correlation between salary and performance: if we cut a salary by half the performance will certainly decrease, however, if we double a salary we will not see a significantly better performance. Incentives only lead to temporary improvements, with a permanent cost that can become rather high. The notion of punishment is linked to incentives in the sense that, not receiving an available bonus can be perceived as a punishment: the more you focus on those who receive bonuses, the more you punish those who do not. It may therefore sometimes be preferable to only punish a small number of real under-performers and avoid rewarding highly just a selected few. To make sure they keep their bonuses, employees may play down any diﬃculties or refrain from asking for help even if it is needed. Overcoming these problems by striving for a purpose-driven organisation

Power & legitimacyPoweris the ability of one person to influence and change the attitudes or behaviour of others which they wouldn’t have without that interventionInfluencecorresponds to the informal aspect of power. The term is used to influence to emphasise the psychological and unconscious aspect of the relationship (pressure, seduction, politics): the process of affecting the thoughts, behaviour and feelings of another Authorityis the formal aspect of power. It finds its source in rules, laws and regulations governing the institution. Its legitimacy confers the right to obtain, without the use of physical restraint, a certain behaviour on the part of those who are submitted to it. It therefore requires the consent of the other. Linked to a role or function, authority is hence temporary.It is important to understand the subtle difference among those terms: for instance a manager can have authority but no power, you can have the right to tell someone what to do, but nor the ability, nor the skills to influence them effectively.Framework 1: bases of power There are 5 bases of power in all organisations:-Formal power= result of individual’s position in the organisation-Reward: the power to control and distribute rewards that others view as valuable (salary increases, bonuses and promotions)-Coercive: power base dependent on fear of consequences -Legitimate: formal authority to control and use resources based on a person’s position in the formal hierarchy and mutual agreement -Personal power= result of an individual’s unique characteristics -Referent: an elusive influence based on interpersonal attraction of an individual’s desirable resources or personal traits. An agent has referent power over the target because the latter identifies or wants to be like the agent. Charismatic people often have referent power-Expert: based on the recipient’s belief that the power holder has a high level of expertise. Expert power exists under 3 conditions: the expertise must be trusted to be accurate, the knowledge involved must be relevant and the agent must be perceived as an expert Framework 2: verticalsources of powerAll employees along the vertical hierarchy have access to some sources of power. Although a large amount of power is typically allocated to top managers by the organisation structure, people throughout the organisation often obtain (or dont obtain) power disproportionate to their formal position. 4 major sources of vertical power:

Framework 3: horizontalsources of powerHorizontal power pertains to relationships across departments, divisions or other units. All vice presidents are usually at the same level on the organisation chart but they do not necessarily have the same amount of power. Horizontal power is not defined by the formal hierarchy or the organisation chart (IT departments have growing power in many organisations even though is not visible in organisation charts). 5 major sources of horizontal power:Power in organisations is not primarily a phenomenon of the individual: it is related to the resources departments command, the role departments play in an organisation and the environmental contingencies with which departments cope. Position and responsibility, more than personality and style may determine a manager’s ability to influence outcomes in the organisation. However, power is used through individual political behaviour: to fully understand the use of power within organisations, it is important to look at both structural components and individual behaviour. Although power often comes from larger organisational forms and processes, the political use of power involves individual-level activities and skills.

Decision making The complexity of decision making process: the success of any organisation depends on its ability to make effective decisions: -Timely-Acceptable to the individuals affected by it-Meeting the desired objective. Decision making is a critical activity in management: decisions range from simple and routine, where there is established decision rules and procedures (programmed decisions) to new and complex decisions that require creative solutions (non-programmed decisions). Decision making process in organisation is highly complex: it involves individual influences, group bias and collective liabilities, as well as organisational design and constraints (structure, interests and politics, culture) that can either enhance an effective decision process or impede it. Challenges: -Decision making is stressful: managers must make decisions with significant pressure, risks and uncertainty and most of the time without all necessary information. They must trust and rely on others even if they are eventually responsible of the outcome-Most companies cultivate a failure-fearing culture, where penalties for making wrong decisions are overly severe; few companies have established “effective decision making rules and processes”, and most of the time they rely on the leader’s final decisionsRational model: is the classical approach of decision making. Vision of decision as resulting from intended rational choice. It stands as an ideal that managers strive for and follows a logical step by step approach, with thorough analysis of alternatives and consequences and their probability to occur. It’s an unrealistic model (utopia), given its assumptions that do not take into account time constraints, limit to human knowledge, information-procession capabilities.Bounded rationality model: is the idea that the environment is too complex for one person to understand and know. In decision making, rationality of individuals is limited by various elements: information they can have, cognitive limitations of their minds and the inevitable selective perception, number of alternatives which is too large to be all considered, impossibility to figure out all consequences in time and space, the finite amount of time individuals have to make a decision. Herbert Simon has shown that to deal with the complexity, the uncertainty and the diﬃculties of discovering and designing alternatives, decision making models can replace “optimisation criteria” with “satisfactory performance” criteria. Bounded Rationality is the “real world” model: managers choose the first satisfactory and suﬃcient solution (not the optimal one), that respects organisational status quo, and which can be rapidly taken from incomplete information.Organisations are decision-making support systems: they help to overcome bounded rationality to get closer to rational decision making. Structure, procedures, rules, cultures, incentives are used to overcome human shortcomings, reduce complexity and absorb uncertainty.Framework 1: Carnegie model Organisation-level decisions based on coalitions among managers The Carnegie model of organisational decision making is based on the work of Richard Cyert, James March, and Herbert Simon, who were all associated with Carnegie-Mellon University. Their research helped formulate the bounded rationality approach to individual

decision making, as well as provide new insights about organisational decisions. Research by the Carnegie group indicated that organisation-level decisions are based on coalitions among managers.Large firms are coalitions of individuals or sub-groups (managers, stockholders, workers, suppliers…) each of one with different interests. All groups participate in setting goals and making decisions.Specific goals (production, inventory, market share, sales and profits) are compromises negotiated by the sub-groups: priorities and information vary by group, potentially creating conflicts. All goals must be satisfied, following an implicit order of priority among them.The problem is divided into sub-problems (secondary goals) that different sub-groups have to solve, depending on their specialty: each one uses its standard procedures to solve the problem, in order to satisfy their own hierarchy.Once a satisfactory solution vis-à-vis the hierarchy is found, the process stops. The overall solution is the simple juxtaposition of local solutions.Choice process in the Carnegie model: as a manager, use a coalition-building approach when organisational goals and problem priorities are in conflict. When managers disagree about priorities orthe true nature of the problem, they should discuss and seek agreement about priorities.Organisational slack: a large organisation can afford not to apply optimal decision making, because of its organisational slack = is the excess capacity maintained by organisations (e.g. when resources are ordinarily not being completely used to keep the various sub-groups in the organisation > wages higher than required to retain employees and for the eﬃcient working of the firm, products prices lower than necessary for not loosing customers, high dividends paid to shareholders…) Organisational slack plays a stabilising and adaptive role:-A solution for maintaining the coalition of sub-group that form the organisation-A surplus in case of crisis-A steering wheel for short-term adaptationFramework 2: Garbage Can model Following a study of the functioning of American universities (which they call “organised anarchies”), Cohen, March and Olsen proposed an original model of decision-making in organisations, which they humorously call the garbage can model. The garbage can model deals with the pattern or flow of multiple decisions within organisations, whereas the Carnegie models focus on how a single decision is made. They find that many decisions are both:-Unsurprising to the members of the organisation, and surprising to an outside eye-Inexplicable: fundamental choices made in general indifference, or on the contrary unanimous decisions made in enthusiasm and never implemented.

Streams of events: the unique characteristic of the garbage can model is that the decision process is not seen as a sequence of steps that begins with a problem and ends with a solution. Indeed, problem identification and problem solution may not be connected to each other. An idea may be proposed as a solution when no problem is specified. A problem may exist and never generate a solution. Decisions are the outcome of independent streams of events within the organisation. Problems are points of dissatisfaction with current activities and performance: a problem may lead to a proposed solution or it may not. Problems may not be solved when solutions are adopted. A solution is an idea somebody proposes for adoption. The point is that solutions exist independent of problems. Organisation participants are employees who come and go throughout the organisation. Choice opportunities are occasions when an organisation usually makes a decision. Consequences: 1.Solutions may be proposed even when problems do not exist. An employee might be sold on an idea and might try to sell it to the rest of the organisation. 2.Choices are made without solving problems. A choice - for example, creating a new department or revising work procedures - may be made with the intention of solving a problem but, under conditions of high uncertainty, the choice may be incorrect. Choices may be oriented toward problems but do not necessarily solve them.3.Problems may persist without being solved. Organisation participants get used to certain problems and give up trying to solve them or participants may not know how to solve certain problems because the technology is unclear.4.A few problems are solved: the decision process does work in the aggregate. Solutions do connect with appropriate problems and participants so that a good choice is made. Of course, not all problems are resolved when choices are made, but the organisation does move in the direction of problem reduction. Common biases that affect business decisions: psychologists and behavioural economists have identified many cognitive biases that impair our ability to objectively evaluate information, form sound judgments and make effective decisions. Here are several biases that can be particularly problematic in business contexts.

Action-oriented biases:-Excessive optimism: we are overly optimistic about the outcome of planned actions. We overestimate the likelihood of positive events and underestimate that of negative ones. -Overconfidence: we overestimate our skill level relative to others’ and consequently our ability to affect future outcomes. We take credit for past positive outcomes without acknowledging the role of chance.Biases related to perceiving and judging alternatives: -Confirmation bias: we place extra value on evidence consistent with a favoured belief and not enough on evidence that contradicts it. We fail to search impartially for evidence. -Anchoring and insuﬃcient adjustment: we root our decisions in an initial value and fail to suﬃciently adjust our thinking away from that value. -Groupthink: we strive for consensus at the cost of a realistic appraisal of alternative courses of action. -Egocentrism: we focus too narrowly on our own perspective to the point that we can’t imagine how others will be affected by a policy or strategy. We assume that everyone has access to the same information we do.Biases related to the framing of alternatives:-Loss Aversion: we feel losses more acutely than gains of the same amount, which makes us more risk-averse than a rational calculation would recommend. -Sunk-cost fallacy: we pay attention to historical costs that are not recoverable when considering future courses of action. -Escalation of commitment: we invest additional resources in an apparently losing proposition because of the effort, money and time already invested. -Controllability bias: we believe we can control outcomes more than is actually the case, causing us to misjudge the riskiness of a course of action. Stability biases:-Status quobias: we prefer the status quoin the absence of pressure to change it. -Present bias: we value immediate rewards very highly and undervalue long-term gains Solutions: executives have a range of options they can use to encourage greater deliberation and analysis in decision making.Use joint, rather than separate, evaluations: evaluating decision alternatives simultaneously, rather than sequentially, reduces biasCreate opportunities for reflection: taking time out of our busy days to just think may sound costly, but it is an effective way to engage in slow, logical and deliberate mode of processing information and making decisions.Use planning prompts: people often resolve to act in a particular way but forget or fail to follow through. Simple prompts can help employees stick to the plan.Inspire broader thinking: we commonly approach problems by asking ourselves, “what should I do?” asking “what could I do?” helps us recognise alternatives to the choice we are facing, thus reducing bias in the evaluation of the problem and in the final decision.Increase accountability: holding individuals accountable for their judgments and actions increases the likelihood that they will be vigilant about eliminating bias from their decision making.

Encourage the consideration of disconfirming evidence: when we think that a particular course of action is correct, our tendency is to interpret any available information as supporting that thinking (confirmation bias). Furthermore, once we invest resources in a course of action, we tend to justify those investments by continuing down that path, even when new information suggests that doing so is unwise (escalation of commitment). Together, these biases lead decision makers to discount contradictory evidence and to ignore the possibility of superior alternatives. Organisations can solve this problem by actively encouraging counterfactual thinking.