Use the internet to access the home page for the City of Chicago, www.cityofchic

Question

Use the internet to access the home page for the City of Chicago, www.cityofchicago.org. Use the Programs and Initiatives link to access information about various capital projects underway in the city government. When this text went to press, these initiatives included such categories as Environment, Housing, Technology, and Transportation.
Required: Read about one or more of these capital projects, and then discuss how the organization's managers should go about making significant decisions about expenditures for major capital projects like the one you have explored.

Explanation / Answer

The City of Chicago is committed to leveraging technology to improve and expand City programs and services. In addition, the City aims to expand public access to technology across Chicago and is pursuing other digital excellence initiatives that encourage residents, businesses and communities to participate fully in 21st century online economic and social spheres.

When an executive makes a big bet, he or she typically relies on the judgment of a team that has put together a proposal for a strategic course of action. After all, the team will have delved into the pros and cons much more deeply than the executive has time to do. The problem is, biases invariably creep into any team’s reasoning—and often dangerously distort its thinking. A team that has fallen in love with its recommendation, for instance, may subconsciously dismiss evidence that contradicts its theories, give far too much weight to one piece of data, or make faulty comparisons to another business case.

That’s why, with important decisions, executives need to conduct a careful review not only of the content of recommendations but of the recommendation process. To that end, the authors—Kahneman, who won a Nobel Prize in economics for his work on cognitive biases; Lovallo of the University of Sydney; and Sibony of McKinsey—have put together a 12-question checklist intended to unearth and neutralize defects in teams’ thinking. These questions help leaders examine whether a team has explored alternatives appropriately, gathered all the right information, and used well-grounded numbers to support its case. They also highlight considerations such as whether the team might be unduly influenced by self-interest, overconfidence

, or attachment to past decisions.

By using this practical tool, executives will build decision processes over time that reduce the effects of biases and upgrade the quality of decisions their organizations make. The payoffs can be significant: A recent McKinsey study of more than 1,000 business investments, for instance, showed that when companies worked to reduce the effects of bias, they raised their returns on investment by seven percentage points.

Executives need to realize that the judgment of even highly experienced, superbly competent managers can be fallible. A disciplined decision-making process, not individual genius, is the key to good strategy.

M anagers in all organizations periodically face major decisions that involve cash flows over several years. Decisions involving the acquisition of machinery, vehicles, buildings, or land are examples of such decisions. Other examples include decisions involving significant changes in a production process or adding a major new line of products or services to the organization’s activities. Decisions involving cash inflows and outflows beyond the current year are called capital-budgeting decisions . Managers encounter two types of capital-budgeting decisions.

Acceptance-or-Rejection Decisions In acceptance-or-rejection decisions , managers must decide whether they should undertake a particular capital investment project. In such a decision, the required funds are available or readily obtainable, and management must decide whether the project is worthwhile

Capital-Rationing Decisions In capital-rationing decisions , managers must decide which of several worthwhile projects makes the best use of limited investment funds.

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