Quản trị kinh doanh - Chapter 5: Decision making

Chapter 5: Decision Making13/29/2020Chapter 5: Decision MakingThe Organization of an EconomyMarkets as Information SystemsMarkets as Incentive SystemsMarkets and InnovationBenefits of Central Planning The Market as Metaphor for Organizational DesignBenefits of CentralizationEconomies of Scale or Public Goods Better Use of Central KnowledgeCoordinationControlBenefits of DecentralizationSpecific versus General KnowledgeInformation That Is PerishableInformation That is ComplexInformation That Requires Technical SkillsInformation That is Unforeseeable/IdiosyncraticInformation That is Subjective/ExperientialOther Benefits of DecentralizationSaves Management TimeDevelops Management Skills Intrinsic MotivationCreativity Decision Management and Control Decision Making as a Multistage ProcessCreativity versus ControlA Tradeoff between Two Types of Errors Three Examples of Authority PatternsSmall upside, large downsideLarge upside, small downsideSymmetric payoffsInvestments in Better-Quality Decision MakingAn Application: Air Traffic RoutesSummary 23/29/2020Chapter 5: Decision MakingOn completing this chapter, you will gain an economic perspective on:The Theory of the FirmMarket metaphors for organizational designSpecific knowledge and decision authorityThe effect of organizational design on risk-takingHow organizational design can affect Type I and Type II errors33/29/2020Economic Organization3/29/20204Key IdeasMicro ToolsMarket Metaphor for organizational designimperfect & asymmetric informationagency theoryinvestmentdifferent methods of economic contractingHow we will use these toolsmodel an organization as a buyer, creator & processor of knowledgeemphasize creativity v. controlemphasize incentive problems & motivation53/29/2020Theory of the FirmFundamental to economic theoryWhy do firms exist?Available models have distinct approachesTransaction costsManagerial approachBehavioral and/or Team analysesFirm specificity (Oliver Williamson)Understanding the forces holding the firm together can inform our understanding how to manage the firm63/29/2020Centralization vs. Decentralization3/29/20207LessonsYour organizational design needs touse local knowledge for effective decision makingmove the knowledge to the decision maker, or the decision to the knowledgecoordinate across the firmprovide good incentives for bothTo do these, you need to think aboutcentralization v. decentralizationkey pieces of knowledge that drive your firm’s businessfinding & developing talentperformance evaluation & incentivesHow did AirTex’s design address these needs?83/29/2020The Market MetaphorHolds that a firm should utilize market mechanisms in the design of its internal organization – wherever practicable Useful for thinking about organizational designSpecific features of markets to strive for:Self-organizing; Dispersed knowledge; Competitive and adaptable; Decentralized; Incentives through ownership 93/29/2020The Market Metaphor (cont’d)Q1: Are there examples of firms that fully embrace the Market Metaphor in organizational design?Q2: What difficulties might a firm encounter in striving for a market-driven organization?Q3: What management practices do you think would be useful to a firm seeking to realize the MM in its organization?103/29/2020Benefits of CentralizationCentralize decisions for which specific knowledge is not crucial, or if “market failures” inside the firm are importantCoordination (externalities)synchronizationconsistency, standardizationknowledge sharing / transferEconomies of Scale (natural monopoly)common assets (e.g., physical capital, brand name, reputation)aggregate knowledge from across the organizationmanagement talentControlpredictability, risk management113/29/2020Specific KnowledgeHayek emphasized “specific knowledge of time & place”local knowledge needed to make decisions, that is costly to communicate to a Central Planner, & thus likely to be ignored under centralizationknowledge lies on a spectrum from more costly (specific) to communicate to less costly (general)[Jargon warning: economics uses several terms that sound the same, but are not]they’re even related conceptuallymake sure you understand eachthe first is specific knowledgeknowledge (usually held by a lower level employee) that is costly to communicate123/29/2020Communication Costs & “Specific” KnowledgePerishable – must be acted on quickly or loses valueComplex – many dimensions, interdependenciesTechnical – requires specialized skills to understandSubjective / Experiential – hard to describe rigorouslyexamples of each?13Cost of Transferring KnowledgeLow HighGeneral Knowledge Specific Knowledge3/29/2020Specific KnowledgeDefined as knowledge that is costly to communicate – convey or receiveConverse is General KnowledgeSpecific Knowledge includes the following categories of information:Perishable: Loses its value if not acted upon quicklyComplex: Multi-faceted; InterdependentTechnical: Requires special skills to interpretIdiosyncratic: Specific to a task or settingExperiential: Difficult to quantify or describe 143/29/2020Specific Knowledge Favors DecentralizationWhen valuable knowledge is costly to communicate, consider decentralizing the decisionscreativity is an important example (below)Otherwise, there are important benefits to centralizationAs in all things, balance this tradeoff153/29/2020Decision Management and Control3/29/202016Decision-Making ProcessesDecision processes, or protocols, provide consistency and methodical expansion of knowledgeLazear and Gibbs framework:Initiate; Ratify; Implement; MonitorQ: Does this process resemble what you’ve encountered in the field?173/29/2020a. How Do You Allocate a Decision?First, break the decision into stages (we see why soon), e.g.,initiatives (“brainstorming”)ratification (“strategy”)implementation (“tactics”)monitoringNext ask, Who has the relevant knowledge to make the decision at that stage?(don’t ask, Who has the right incentives? why not?)two kinds of knowledge:needed to make the decision itselfof how the decision affects others: for coordination183/29/2020b. Creativity v. ControlEarlier we said, break a decision into stagesinitiatives (“brainstorming”)ratification (“strategy”)implementation (“tactics”)monitoringHere’s why that’s usefulfirst, it provides oversight (“checks & balances”) when incentives are imperfectsecond 193/29/2020Creativity & Control in Decision MakingBy breaking a decision into stages, you can allocate them to different levelsthis gives benefits of decentralization & centralization at the same timesteps 1 & 3 usually need lower-level specific knowledge – decentralizethese are the “creative” stepssteps 2 & 4 usually need coordination w/ the rest of the org – centralizethese are the “control” stepsThere is a fundamental tradeoff between creativity & controlfor the same resources, more creativity implies less control, & vice versalet’s look at a simple model to see why 203/29/2020Trading Off Creativity & ControlConsider 2 product development structures, each with 2 employeesHierarchyWillie evaluates new ideas, rejecting some & passing the others to GladysGladys evaluates Willie’s ideas, rejecting some & implementing othersFlatboth evaluate & implement new ideas21FlatHierarchyGladysWillieGladysWillie3/29/2020NotationN = # of ideas “creative” worker generates each periodFlat structure generates twice as many new ideas per period50-50 odds of good or bad ideap = probability of correct decision at 1st evaluationp > ½, or the firm should toss a coin to make decisionsq = probability of correct decision at 2nd evaluationq > p is a reasonable assumption2 kinds of mistakesFalse Positive: implementing bad ideaFalse Negative: rejecting good idea223/29/2020Evaluation of Ideas23Outcome Correct False Negative False NegativeNew IdeaGoodBadAccepted1-pRejectedpAcceptedpRejected1-pStage 1(both) Correct Correct False PositiveAcceptedp∙qRejectedp(1-q)Rejected1-pStage 2(hierarchy only)Accepted(1-p)(1-q)Rejected(1-p)qRejectedpIs a Hierarchy Conservative?Hierarchiesevaluate ideas more slowlyevaluate fewer ideas for the same # of employeesmake fewer changes, good & badmake fewer mistakes of either kindWhat environments favor a hierarchical or flat structure?“When Google Met Moto”243/29/2020Trading off Creativity & ControlThere is a fundamental tradeoff between creativity & controlimproving control  creativity suffers, & vice versaOnly way to break tradeoff: spend more resources (e.g., NASA)more skilled decision makers; training; better info & analysis toolsOther ways to adjust the balance toward creativity or controlpersonality of staff conservative or liberalconstraints to limit downside risk (e.g., budgets)incentives downside punishments & upside rewards“Skunkworks” – separating parts of org. from each other253/29/2020Decentralization/Improved CoordinationBenefits includeLowering decision burden on upper levels of managementReducing action time by eliminating required communication stepsDeveloping management capability deeper into the organizationMotivating through job enrichment or designed-in incentives263/29/2020Hierarchical StructuresMore decision layers mean greater filteringValue of hierarchy affected by risk characteristics inherent to an industryIn this context, there are two ways to be wrong:Accepting something that turns out to be badRejecting something that would have been goodA.k.a. Type I and Type II error273/29/2020SummaryYour organizational design needs touse local knowledge for effective decision makingmove knowledge to the decision maker, or decisions to the knowledgecoordinate decision makers across the firmprovide good incentives for bothTo do these, you need to think aboutcentralization v. decentralizationkey pieces of knowledge that drive your businessfinding & developing talentmotivation: intrinsic, performance evaluation, incentives283/29/2020RECAP of Chapter 5: Decision MakingThe Theory of the Firm is a key theoretical area of economicsMarket metaphors for organizational design are useful for stylized analysesSpecific Knowledge can be: perishable, complex, technical, idiosyncratic or experientialDecision processes can be categorized as follows: initiative, ratification, implementation and monitoring An organization’s structure directly affects outcomes293/29/2020