Rational versus holistic: Two very different approaches to executive decision making

When complicated decisions have to be made — whether about salaries, layoffs or growth strategy — executives often rely on their underlying values to help them sort through possible options. Profit maximization and rationality form the basis of one such set of values; many leaders follow this approach. Some, however, employ a more holistic approach. They believe that a company's strength can manifest itself in any number of ways, and that firm value is derived from socially complex resources and relationships. New research from the W. P. Carey School of Business shows "holistic" decision-making may create better long-term results for a company than the more traditional "rational" approach.

When complicated decisions have to be made — whether about salaries, layoffs or growth strategy — executives often rely on their underlying values to help them sort through possible options. Profit maximization and rationality form the basis of one such set of values, one frequently used by executives when making these decisions.

"By making things quantifiable and rational, executives can have more confidence in their decisions, even when they create uncomfortable outcomes," explains Nathan Washburn, a management researcher currently finishing up his PhD at the W. P. Carey School of Business. "But when it comes to working for these executives, that way of thinking might turn their employees off."

That unsettled feeling about the calculated nature of rational decision making, with its emphasis on profits as guiding principle, inspired Washburn to launch a study about rational decision making. Although it is the dominant management value set today, could rational decision making actually harbor faults? And, could a less widely accepted, but more forward-thinking, "holistic" approach to management decision making turn out to be more effective?

Autocratic vs. visionary

In his paper, "Rational Versus Holistic Values as a Basis for Leadership," Washburn and co-authors make the case that managers who are guided by financial statements alone (practitioners of the rational approach) are more likely to be viewed as "autocratic" and uninspiring by their subordinates.

In contrast, leaders who take a more "holistic" approach — a style characterized by attention to multiple factors, including relationships — are seen as "visionary." It is these "holistic" managers, Washburn says, not their by-the-numbers counterparts, who are more likely to have a positive impact on their organizations by fostering a greater sense of employee optimism and improving overall firm performance.

The paper is the first to show that "holistic" decision making may create better long-term results for a company than the more traditional "rational" approach. Says Washburn: "What we found is that executives emphasizing rationality in their decision making are less likely to be seen as visionary by their subordinates and more likely to be seen as autocratic. But the more holistic executives are seen as more visionary and less autocratic."

Contrasting approaches

By definition, these two approaches (rational vs. holistic) to decision making are wildly different. "Rational" managers believe that precise ends should be sought through precise and calculated means. Supporters of the rational approach believe "the best method for attaining this desired outcome is by focusing their attention on quantifiable activities that can be observed and measured. In this way, the uncertainties associated with opportunistic behaviors and the environment can be managed."

It is a logical, sensible approach — and one that many executives seem to believe in. Given the pressures of the modern business environment, and the fact that the rational approach has been considered the standard among academics for so long, that makes sense: The rational approach is one that uses profit maximization as the guiding principle and so Wall Street, at least, surely supports it.

Holistic managers, meanwhile, are a bit more complicated. These executives look beyond the bottom line and believe a company's strength can manifest itself in any number of ways. Supporters of the holistic approach say "firm value is derived from socially complex resources and relationships." Critics, meanwhile, deride this approach as inexact, and lament the fact that it provides no quantifiable means of finding the "right" decision.

But Washburn sees value in the holistic approach, which he says can allow executives to look at the big picture, rather than just the bottom line. He writes: "More than quantification and rational decision making, the role of the executive requires holistic consideration of resources and relationships. … So while improving performance may still be the goal, the implication for executive decision making is to more generally focus on building core processes that could potentially add value to the organization in the long run."

In other words, Washburn believes even though holistic executives are not basing their decisions on the bottom line — as the rational side would prefer — the holistic approach can still be effective because of its broader positive implications. The point, Washburn says, is that executives aren't just decision makers. They are leaders, and being a leader involves a great deal more than simply deciding among options. It also involves inspiring confidence among staff, getting the most out of employees and getting people to go the extra mile for the company.

"We proposed that if you're a rational decision maker, there will be negative influences, not necessarily on your decision making, but on the leadership you exhibit — and people aren't going to like you as well." Washburn says. "But if you're this more holistic person, where you take into account the different relationships you have with other employees, then you're going to come across as a much better person. It's a pretty simple idea, really."

Looking for fallout

To test his ideas, Washburn and his co-authors studied the decision-making methods of hundreds of executives with the help of a huge data sample gathered from the Global Leadership and Organizational Behavior Effectiveness (GLOBE) project, an international, cross-cultural study on leadership. In total, they combed through survey results of executives from nearly 700 companies in 15 different countries. The companies studied represented a wide variety of industries, from manufacturing to IT to tourism, with an average size of about 500 employees.

The executives completed surveys about their management style — surveys that would help the research team determine whether each was "rational" or "holistic." Later, three lower-level managers were asked whether they thought their bosses' leadership style was visionary or autocratic. Finally, three more subordinates were asked to assess the executives' overall impact on firm performance.

"I'm looking at the fallout," Washburn explains. "It's the secondary influence. The strategy literature hasn't incorporated this idea of leadership very well. If you don't think about managers as leaders, then they're just decision makers — and people just do what they say. But when you have this more complex idea, that managers are social actors, then you need to take into account other factors."

Contrary to the arguments of supporters of the rational approach, Washburn found that "a managerial emphasis on rational or profit maximization values does not form the basis for the type of visionary leadership qualities necessary to realize important firm outcomes." That's because the rational approach "appears to be more predictive of authoritarian forms of leadership" while the holistic, socially responsible management style was "predictive of visionary leadership and favorable firm outcomes."

Or, more simply: The number-crunchers may think they're being responsible by basing their strategy decisions on the bottom line, but unless they consider the broader influence of their actions as executives, they may be driving their companies, slowly but surely, into the ground. Decision making at the executive level, Washburn contends, should be about more than just profits and losses.

"If you value your people and you value your customers," Washburn says, "that's going to come across in the type of leader you are." Mary Sully De Luque of The Garvin School of International Management and David A. Waldman of Arizona State University's West campus School of Global Management and Leadership were Washburn's co-authors.

Bottom line

• Many management strategy theorists believe in an economics-based view of management in which profit maximization is the guiding principle for decision making.
• Executives who follow this "rational" style of management believe that precise ends should be sought through precise and calculated means.
• A "holistic" approach, in contrast, takes into account any number of different factors. These managers believe firm value is derived from "socially complex resources and relationships," and they better understand the impact of their decisions on the overall culture of their company.
• Results from a new study show that holistic managers are viewed as less autocratic and more visionary than their rational counterparts. The study also showed holistic managers had a more positive effect on overall firm performance.