3. ANTECEDENTES
6.2 REFERENTES DISCIPLINARES
7.4.2 Fase II: Diseño experimental
Behavioural science decision theories can be used to understand the process owners undertake when making numerous management decisions including business exits. Making decisions “is a fundamental part of the management process” (Gilligan, Neale & Murray 1983, p. 1). Exit decisions are likely to be some of the most significant management decisions owners will ever undertake. According to Dearlove (1998, p.14):
A decision is the point which a choice is made between alternative – and usually competing – options.
Therefore, it is pertinent to review this topic to gain a better understanding of the possible influences and mechanics involved in exit related decisions. In this context Gilligan et al. (1983 p. 1) define a good decision as:
Chapter 3 – BUSINESS EXITS
38
..one that achieves an objective that has been set in advance, ..one that minimises the degree of conflict within an
organisation, ..a decision that is readily accepted by those who are involved in its implementation …
Decision theory deals with situations where decision makers (often referred to as ‘actors’) make choices between given options or alternatives. Typically these options may take the form of a course of action to be undertaken, an object to possess, and how much to pay for possession (Rapoport 1989). The underlying premise to decision theory is that choices (decisions) have consequences called outcomes, and that each of the decision makers making the choices has preferences for different outcomes (Rapoport 1989).
In behavioural science the earliest work on decision theory makes a distinction between programmed and non-programmed decisions (Simon 1960). The focus of earlier studies on the topic was the decision maker at the moment of choice together with factors influencing choice behaviour (Gilligan et al. 1983, Eisenhardt & Zbaracki 1992). Gilligan et al. (1983, p. 2) noted:
..to be in pursuit of a single, fixed objective: to have perfect or near-perfect information on the outcome of the decision alternatives; to be willing and able to spend a seemingly inexhaustible amount of time evaluating this information; and to possess an almost supernatural ability to analyse, understand and retain the information inputs.
Theories relating to decision theory can be classified as being ‘descriptive’ which principally deals with questions on how people do behave when given choice situations, and ‘normative’ (sometimes referred to as ‘prescriptive’ models) which principally deals with how
people ought to behave in the same situations (Rapoport 1989, Baird 1989). The ‘normative’ classification relates to how people should behave if they are perfectly rational and under ideal operating conditions. However, in reality very few business decisions are made with access to perfect information. Whilst normative theories may have limited application, in real life situations the linkage between the two approaches is ‘how the decision process might be improved’.
According to Simon (1960) and Mintzberg, Raisinghani and Théorêt (1976) there are two groups of business decisions: straight forward, repetitive and routine, categorised as ‘programmed decisions’; and novel, unstructured and consequential, referred to as ‘non- programmed’. Programmed decisions are typical of day-to-day activities that organisations are able to undertake using formalised procedures. This type of decision allows an organisation to make routine decisions efficiently without committing significant management resources. Examples of programmed decisions are short-term operating control decisions which are routine and frequent and require the implementation of straight forward decision rules. These types of decisions are often referred to as ‘administrative decisions’. Other examples are periodic control decisions, sometimes referred to as ‘operating decisions’, occur less frequently than operating control decisions and are usually concerned with monitoring the effectiveness of resource allocation (Gilligan et al. 1983, Bridge & Dodds 1975).
On the other hand, non-programmed decisions are required when the situation is unique or complex and organisationally unforseen, so the circumstances require a custom developed decision (Simon
Chapter 3 – BUSINESS EXITS
40
1960). In these situations more creativity, experience, and judgement is required, so these types of decisions are undertaken by senior levels of management. Examples include strategic decisions (e.g. new investments, market expansion) which are significant to the future development of the organisation and have a high cost (Bridge & Dodds 1975, Ansoff 1987). According to Simon (1960), programmed and non-programmed decisions represent the two extremes of a continuum. Ansoff (1987) sees these types of decision as both interdependent and complementary. However, in most instances decisions for business exits by owners will occur at the non-programmed extremity. Table 3.1 provides a summary of the three major decision types.To understand how decisions are made in complex business environments, Gilligan et al. (1983) represent the process8 with an ‘open systems decision model’. This approach takes into account unpredictable environments in which rational concepts and mechanistic techniques may be difficult to apply. An open systems approach is able to account for the influence of the environment on both the organisation and the decision maker, with emphasis placed on feedback, learning, and adaptation.
The starting point for the above model is to define the objectives to be pursued. From this the decision maker can identify some of the courses of action open to him and then evaluate the options, referencing the level of performance required. If the performance
Periodic Control Administrative
Operating Control
Operative Strategic Decision
Group Programmed Programmed Non-Programmed Typical
Problem Structure organisation’s resources for optimum performance
Optimise realisation of
ROI* potential Select product mix
Nature of
Problem Organisation, acquisition & development of resources
Budgeting of resources Scheduling resource application
Supervision & contact
Allocate resources for market opportunities
Key Decisions Structure of information,
authority & information flows.
Structure of workflow, distribution system, facilities location Resource acquisition & development
Operating objectives & goals
Pricing & output levels Operating levels Marketing policies & strategy
Control
Objectives and goals Diversification strategy Expansion strategy Growth method Timing
Key
Characteristics Conflict between strategy & operations Conflicts between individuals & organisation Decisions triggered by strategic or operating problems Decentralised decisions Risk & uncertainty Repetitive decisions Large volume decisions Decisions self- regenerate Sub-optimisation Decision centralisation Partial ignorance Decisions non-repetitive
Table 3.1: Types of management decisions adapted from Ansoff (1965) in Bridge & Dodds (1975 p. 11).
* ROI – Return on Investment.
criterion is met, the decision can be implemented and the results evaluated for subsequent decisions. In the evaluation of options, Bazerman and Moore (2009, p.3) refer to computation of the optimal decision in which each alternative is weighted according to the
Chapter 3 – BUSINESS EXITS
42
decision criteria, and the choice of decision is made according to the highest weighting.Since the publication of Simon’s (1957) bounded-rationality framework, some of the developments in decision making have focussed on decisions made with limited information and biased human judgement (Bazerman & Moore 2009). Here it was discovered that people often rely on simplifying strategies or rules of thumb when making decisions. Bazerman and Moore refer to this process as ‘heuristics’ which act as a mechanism for coping with complex environments, but can sometimes result in severely erroneous decisions. Due to time-poor environments and limited resources, managers of SMEs will often use heuristics to help make decisions (Mole 2007, Busenitz & Barney 1997). In addition, despite a primary influence of self-interest, decision makers usually care about the impact of outcomes on others.
At a more pragmatic level, Dearlove (1998) argues that effective decision-making is more an art than a science, and is a combination and balance of logic, experience and intuition. The logic comes from hard data and rigorous analysis, but often there are intangible factors such as intuition, experience, and moral and ethical judgements. Even then, Dearlove contends that the right decisions can often be made for the wrong reasons.
As previously highlighted, undertaking a decision to exit a business is likely to be one of the most significant business decisions an owner is likely to make. Unlike administrative or operating decisions, exit decisions are strategic in nature, unprogrammed but in some cases planned, and customised to specific circumstances.
To arrive at an exit decision owners will embark on a process which firstly involves defining an exit objective and criteria for assessing possible options, then exploring and evaluating possible exit options before deciding which option best fulfils their exit objective.