Bazerman's Six Steps

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Example of Business Decision:

Experts on decision making recommend a more systematic and calculating approach. For example, Bazerman (1994, p. 4) says that rational decision-making should include the following six steps:

1. Define the problem, characterizing the general purpose of your decision.
Should I merge the acquired company into my company or operate the acquired company as a separate business entity (the results of this strategy will be two separate companies under one senior management "umbrella" (the senior management team that is responsible for running both companies)? The purpose was to make the most profitable business decision. The structure of the transaction is of critical importance because it affects the form and liabilities of the ongoing business, the protections available to its owners, and the taxation of each entity and its owners.

2. Identify the criteria, specifying the goals or objectives that you want to be able to accomplish.
a. Increase profit margin
b. Downsize in a way that will respect and motivate the most number of employees
c. Maintain as many employees as possible

3. Weight the criteria, deciding the relative importance of the goals.
In the order presented above

4. Generate alternatives, identifying possible courses of action that might accomplish your various goals.
a. Merge the acquired company into my company
b. Or operate the acquired company as a separate business entity. The results of this strategy will be two separate companies under one senior management "umbrella" the senior management team that is responsible for running both companies?

5. Rate each alternative on each criterion, assessing the extent to which each action would accomplish each goal.
a. Merge the acquired company into my company
PROS
- Potential to increase shareholder value - that of achieving cost and/or revenue benefits.
- Improve channels of delivery
- While improving sales and revenue, it can also provided a competitive advantage over the competition. For example, the proposed merger of mobile phone carriers VoiceStream and Cingular Wireless could improve service and add features, experts said, but the deal could also hurt competition in the telecommunications industry (Source: http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2002/08/21/BU76999.DTL&type=business)
CONS
- Lack of experience about the risks and activities of mergers and acquisitions – choose to go the monetary role which ignores the importance of others experience and expertise.
- Lack of agreement about the best strategic implementation strategy – Other executives has learned the hard way that when the merging of two businesses doesn't go smoothly, talent soon quits and projects drag out.
- Possibility of destroying shareholder value - Several solid studies report that as many as 75% of all mergers actually destroy shareholder value instead of achieving cost and/or revenue benefits.
- Partner decides to micromanage - Like most entrepreneurs, the American Dental Partners founder would not have welcomed pressure to acquire just for the sake of growth. "You want to make sure you bring in a partner who's not going to micromanage," he says. Company builders who sense that a potential equity partner may push too hard for acquisitions just to spur growth will be smart to delete that firm from the shortlist. The critical point is this: the entrepreneur runs the acquisition show, and must be comfortable with all likely deals ((Source: http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2002/08/21/BU76999.DTL&type=business)
b. Or operate the acquired company as a separate business entity. The results of this strategy will be two separate companies under one senior management "umbrella" the senior management team that is responsible for running both companies.
PROS
- Retain control over your own company and the strategic planning and decision making process.
- A company might benefit by teaming with the management of another corporation, or might achieve an increase in its market share.
- The combination might also improve channels of delivery for the parties to the transaction, helping them compete more effectively.
- There may be positive estate planning or retirement motives. (Source: http://library.findlaw.com/2000/Oct/1/129257.html).
- Potential tax benefits
CONS
- Potential accounting and legal concerns (see http://library.findlaw.com/2000/Oct/1/129257.html).
- Stakeholders may not agree
- Employees may create potential problems if they disagree with this strategy

6. Compute the optimal decision, evaluating each alternative by multiplying the expected effectiveness of each alternative with respect to a criterion times the weight of the criterion, then adding up the expected value of the alternative with respect to all criteria.
Two alternatives: To merge the acquired company into my company or operate the acquired company as a separate business entity. The results of this strategy will be two separate companies under one senior management "umbrella" the senior management team that is responsible for running both companies?
Best Decision: To operate the acquired company as a separate business entity. The results of this strategy will be two separate companies under one senior management "umbrella" the senior management team that is responsible for running both companies?
Based on Goals as Criteria:
a. Increase profit margin
b. Downsize in a way that will respect and motivate the most number of employees
c. Maintain as many employees as possible
I picked the alternative with the highest expected value and make a decision based on calculation, not on subjective emotional reactions. You would know it is working if your objectives have been realized, or are being realized. For example, your company is benefiting profit wise by teaming up with the management and your market share has increased. You have increased or improved your channel of delivery and have the competitive advantage over the competition. Thus, the strategy is working if your initial intentions for the acquisition are coming to pass, and other positive consequences outweigh to potential risks. (Source: http://cogsci.uwaterloo.ca/Articles/Pages/how-to-decide.html).

2. Make sure your email addresses the following issues: Were there any discrepancies between the calculated "optimal" decision and your actual (or favored) decision? If so, what might account for the discrepancies?

Actually they coincided, but only because I was considering the fact that the optimal decision had more cons listed than did the optimal decision. So maybe I cheated a bit. I had a “gut feeling” about one alternative to the other, just because it “made more sense” to me. In this case, it coincided with the chosen decision, but that is not always the case. In fact, that is one criticism of this model, that there is little room for intuition and emotional judgments based on this “rational” decision-making model.
Explanation for “gut feeling” decisions: Abductive inference is accomplished in humans by a neural network that performs parallel constraint satisfaction in a way that maximizes explanatory coherence. People have no conscious access to this process: when you realize you prefer one theory over another, you do not really know why, although you may be able to retrace your intellectual history of acquiring the various hypotheses and evidence that contributed to your preference. All you can say is that one theory "makes more sense" to you than the other. This is not to say that inferences based on explanatory coherence are irrational, since they may well involve maximization of coherence with respect to the available hypotheses and evidence. But given the limited access to mental processes, there is no way you can directly know that you have maximized coherence. This is where emotions are crucial. According to this author’s recent theory of emotional coherence, the way you know that you have achieved explanatory coherence is by a feeling of happiness that emerges from the satisfaction of many constraints in your neural network (Thagard 2000, p. 194ff.) Highly coherent theories are praised by scientist for their elegance and beauty. Because we cannot extract from our brains judgments such as "Acceptance of theory T1 satisfies .69 of the relevant constraints", we have to fall back on the overall emotional judgment such as "T1 just makes sense." Thus the feeling of happiness that emerges from a coherence judgment is part of our ability to assess scientific theories. Ideally, a good theory generates a kind of emotional gestalt that signals its coherence with the evidence and the rest of our beliefs. Negative emotions attached to a theory signal that it does not fit with our other beliefs, and a general feeling of anxiety may signal that none of the available theories is very coherent. In fact, such anxiety triggered a search for new hypotheses.
So my gut feeling could represent an emotional gestalt and, according to this theory, may be a valid sign of a highly coherent evaluation of competing hypotheses to the “rational” decision making process.

The problem is that such a feeling may instead signal a different kind of coherence based on wishful thinking or motivated inference rather than fit with the evidence. I once got a letter from someone urging me to send my explanatory coherence computer program to him right away, because he had a theory of the universe that no one else believed, and my program might help him convince other people. Presumably his attachment to his theory was based more on satisfaction of personal goals than on it providing the best explanation of all the evidence. Noting the role of emotion in appreciating coherence may seem to endorse the romantic view: If it feels good, believe it (See http://cogsci.uwaterloo.ca/Articles/Pages/critique.html for more coverage).

What problems, if any, did you encounter when completing the steps? (For example, were you able to compute an optimal decision? If not, why not?)

It was too mechanical for my liking, and I felt held back by ignoring my inner senses of intuition, my “got feeling.” See attached article “ Emotional Reason” for more on this topic.

Are there any weaknesses in the "fully rational" model of decision-making? If so, what are they?
Yes, there is because often our “gut feeling” means something when making business decisions. One author says it like this: Practical inference is not simply produced by practical syllogisms or cost-benefit calculations, but requires assessment of the coherence of positively and negatively interconnected goals and actions. This assessment is an unconscious process based in part on emotional valences attached to the various goals to be taken into consideration, and yields a conscious judgment that is not just a belief about what is the best action to perform but also a positive emotional attitude toward that action. Reason and emotion need not be in conflict with each other, if the emotional judgment that arises from a coherence assessment takes into account the relevant actions and goals and the relations between them. The procedure I recommend, Informed Intuition, shows how decisions can be both intuitive and reasonable (http://cogsci.uwaterloo.ca/Articles/Pages/how-to-decide.html).
See more about this in the article below:

How to Make Decisions:
Coherence, Emotion, and Practical Inference
Paul Thagard
Philosophy Department
University of Waterloo
[email protected]
Thagard, P. (2001). How to make decisions: Coherence, emotion, and practical inference. In E. Millgram (Ed.), Varieties of practical inference . Cambridge, MA: MIT Press. 355-371.
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