The Concept of Bounded Rationality Theory - Essay Example

? MANAGING UNDER UNCERTAINTY By of the of the of the School 17 June, Summary of Observation There are numerous companies that have continued to perform well in the changing economic situation of the world. Some had been reluctant in their past performances, but today, they stand out for being very organized and profitable. Tables have turned; companies and their management have to adjust with the economic and technological changes, to reinforce their decision making. This contributes to the different performances of companies that deal with products or services in a similar field. However, urgencies, as well as external and internal conditions influence the decision making of the management in organizations, whose effect could be unanticipated. Having been in operation for slightly more than 10 years, a growing business was soon headed for failure. Call it RIMPA for confidential purposes; it was established to offer transportation services for companies dealing with large cargo. Eventually, its operating commercial vehicles were hired by government companies, and beer and bottling firms, let alone the private and small scale firms. The company also run parallel businesses in agriculture and had various investments within the country. In the hard economic times of the 2007 to 2008 global recession, RIMPA had complex problems with its management branches. What later followed was questionable resource depletion and bankruptcy in some branches, since they were managed separately. The problems called for quick remedy to prevent further loss and keep the business operational. Each branch had its manager and a team of advisors as its board, then lower the operational managers, then the employees. In the general context, the top executives of the general company were separate, but involved with decisions at the branch level. Various factors were not adding up, from accounting, management, to performances; and the top executives had to step in to make the decisions. Due to the deteriorated performances and losses in three branches, they were offered for sale to minimize the loss. The managers had 3 months termination notices for what the executives believed was lost trust and management discrepancies. It was evident that the aim of their decision was to cut down costs that were already spreading to the performing branches. Initially, before their grand decision, there were some efforts to bail them out, which were initiated by the branches management though never successful. In the long run, the grand decision managed to save the little left, not to mention that the sales of the branches were at a loss. A good number of employees were laid off, but that ended up in court, as they sought for compensation. The whole situation affected the rest of the branches. The employees’ salaries were shrunk by 18 percent, from the middle managers to the least employees. As though never enough, the top management decided to increase the cost of their services by 12 % to maintain profits. In less than 2 months, most employees had resigned for better paying jobs in other companies. The company’s clients had also reduced their requests for services, since they opted for alternative means to transport their goods. Explaining the Decision using Bounded Rationality Theory The implications of a decision can be difficult to detect in the beginning. Most of them unfold with time, or even develop into a complex problem if not well controlled. It is obvious that most people would feel that the decisions made in RIMPA were probably out of scope. However, placed in the situation and with similar constraints, making such decisions would have been inevitable. For this reason, the decision behavior of the top executives must have been affected by their limited cognitive capabilities. The decision behavior of humans cannot conform to the idea of full rationality because they lack unlimited cognitive capabilities (Selten, 1999). Hence, it was reasonable for the top executives to make those decisions to the best of their different limited cognitive capabilities. Often, because of their limited rationality, they had to address the critical problem that they could point out from various sources. The mangers had not been sucked earlier, even in the event of seeking bailout from other branches. Nevertheless, they had the opportunity to remedy the situation, but since it was a failure, the top management decision seems rational. The numerous limiting factors and human cognitive ability must have influenced the decision after weighing the available alternatives. The top executives consisted of the various stakeholders in the business investment who shared all the losses and profits. They owned the business and despite providing employment, they would not bear risks for the sake of job creation. Individuals have motives and in this case, their central motive was profit making. In the trend the business was following, it was doomed for failure and some measures had to be taken. Though not certain, a blocking strategy had to be taken. Clearly, top management used heuristics to cope with the complexities inherent in the decisions, equating clarity with proximity (Hammond, 2006). The future was uncertain and the business was sinking deep in failure. Planning for more rescues from other branches was no longer an option. In any case, more money would be to service the debt of poorly performing company branches. Furthermore, the managers had stayed in the position for some years to understand and solve the existing problems. The logic behind sales of the branches was to eliminate the accumulation of debt from increasing operational costs. Employees had to receive salaries, since they were working, which forced a hasty decision to be reached before declaring bankruptcy. The recession had affected the prices of fuels creating inflation in most economies. Considering the same business branches in one specific economy had opted to bail out each other, meant a great risk ahead. Chances of receiving external rescue were very slim with no predictions of the end of the inflation. The company may have missed the benefit of other options, while concluding to sell the businesses. The longer the decision delayed, the more the loss and debt accumulation. The rate of deterioration increased with the rate of inflation, making the decision to be made in a finite bounded period. There were no situations where comprehensive analytical studies of the market performance were made, before selling the business. Some businesses had not consecutively failed since their establishment apart from the recession period. In fact, some previous performances projected gave some vivid hope of recovery, but more effort was not devoted to realize it. The decisions as in bounded rationality were based on incomplete information, uncertainty, existing constraints and complexities arising from the costs (Simon, 1972). The decisions had their benefits, but caused more complications with the employees and remaining branches performance. It was clear that the only information they heavily relied upon in terminating managers’ jobs were limited to period of failure. Therefore, one is left to wonder whether the management was the real course of the business’s failure. If so, concluding to sell the branches affirms that there was lack of comprehension and analysis of important information. This potential relevant information necessary in making decisions was left out, and paved way for risks in production and competition. Precisely, the employees were not involved in decision making, nor were other alternatives considered to rescue their jobs. Decision making was strictly confined to the superior leadership ignoring the branches’ management comments over the problem. Alternative Decisions Firms have always had challenges and managed to solve them in time. However, the complexity of the problem depends on how much effort was dedicated to solve it from the beginning. It’s not that the top executive were not aware of the development of the problem, since they were involved in the branches’ decisions. Meaning they had watched, but failed to maximize their opportunities for the firms’ recovery. Selling the business at a loss seems a naive choice because there were options of business closure or seeking partnership. Business closure may have retained their capital for better sales in future, without a hurry though unemployment would have prevailed. Merging on the other hand would have enabled the company to solve double problems effectively with suitable partners. Mergers provide numerous benefits; they include reducing chances of bankruptcy through diversification, taking advantage of corporate managers and resources (Keenan and White). As a future prospect based on bounded rationality, curbing the loss by forming alliances would have been the rational choice. It would have required them not to concentrate on past performances, and avoid the emotional influences by seeking external advisory. Before making a decision, engaging advisory team would have helped gather market information and willing partners for evaluation of alternatives. That was the first mistake committed, limiting the decision makers knowledge from essential information in the market. Not that the decision makers were wrong in their decisions, but probably feared taking another risk in forming alliances. Each company has its own rules and routines of addressing problems in case of conflicts. The management of the branches and past businesses records would have been allocated a quick investigation period. This would establish the origin and development of the problem to influence the end decision. Because of the difficulty in realizing and analyzing potential information, decision makers need other coping means to solve business complexities. This would involve developing and using routine responses, techniques, and standard operating procedures to assist decision makers under bounded rationality (msu.edu, 1996). In case of the discrepancies mentioned above, accounting analysis would have been initiated parallel to businesses operations. The management practice and decisions would have been reviewed to justify or nullify their performances too. A protocol would have been used to influence the decision. What about reshuffling of managers and employees in different branches to spur performance and spread creative or innovative ideas? The management problem could have been fixed by reshuffles to stream in fresh ideas and management practices suitable for the business. Managers should have been demoted to bring in potential management skills and experience, or bringing an external team on board for quality advice in the company. Similarly, there was need for active consultation with the human resource department to negotiate on employees’ salaries and jobs. Just like the top executives, in the same situation, shrinking salaries and increasing service cost would have been the best option. However, the only problem was that they were implemented quickly and simultaneously. Cutting back such amount of salaries was definitely difficult to adjust for employees, not to mention of those laid off. The decision was okay, but ought to have been gradual, probably in rationed phases. For example, 6% reduction in 3 phases and 3% increase of service cost to achieve profits and monitor competition. Reference List Bounded Rationality, 1996. [Online] Available at: [Accessed 18 June 2013]. Hammond, J.S., Keeney, R.L., and Raiffa, H., 2006. The Hidden Traps in Decision Making. [Online] Available at: [Accessed 17 June 2013].  Keenan, M., and White, L. J., eds., 1982. Mergers and Acquisitions: Issues from the Mid-century Merger Wave. Washington, D.C: D.C Health and Company. Selten, R., 1999. What is Bounded Rationality? [Online] Available at: [Accessed 17 June 2013]. Simon, H. A., 1972. Theories of Bounded Rationality. [Online] Available at: [Accessed 18 June 2013]. Read More