This study builds on and advances the study and application of bounded rationality in business settings, using climate change response as a real-world situation, and helps in a circular way to explain some of the debates and paradoxes that excite researchers from the climate change community. Keywords: climate change response framework, bounded rationality, behavioral economics, behavioral economics, behavioral strategy, decision making, multi-criteria decision analysis (MCDA), heuristics and biases, satisficing.
Introduction
- Overview of the Study
- Overview of Multi-criteria Decision Analysis
- The Concept of Bounded Rationality
- Research Problem, Research Questions and Contributions of Study
- The Gap
- Research Questions
- Research Objectives
- Contributions of the Study
Butler succinctly described the rational model as follows: ―The overall picture presented by the rational model is of active, highly alert decision makers who have clearly defined goals, who search until they have mastered a large amount of information and are well informed about possible solutions that they are then in a position to choose the best course of action which is then approved and implemented. By broadening the scope to cover the entire response of firms to climate change, this study will contribute to expanding the field of bounded rationality to corporate strategic decision-making in general.
Methodology
Research Methodology
The results of both processes were then used to define and refine key themes that were used to develop a corporate climate change response framework for a South African company. Senior management personnel were included in the study based on their understanding of climate change issues and corporate strategy and their involvement in its formulation and implementation.
Design, Instruments and Decisions
This is particularly important given that one of the goals of this research is to advance the theory of behavioral finance and strategy by taking it out of the laboratory settings that have hitherto been the main domain (Thaler, 2009; Lovallo, 2010) into a practical environment. in real life.
Comparative Case Study
Sampling Strategy
Given the strict selection criteria used, the two companies used in this study are considered critical cases and are therefore arguably capable of providing information that can be logically generalized (Patton, 2002). Given the strict selection criteria as described in Section 2.6, the two companies used in this thesis are considered critical cases and have therefore arguably provided the information that could logically be generalized (Patton, 2002).
Mixed Method as a Strategy of Inquiry
- Why the Mixed Methods Approach Was Chosen
- Pragmatism as a Underpinning of the Mixed Methods Approach
One of the main attributes and added value of mixed methods research that qualified it as the most appropriate method for this study is its methodological pluralism (Molina-Azorin, 2010; Bryman, 2007), which has given the research flexibility and superiority over mono. -research method (Creswell, 2009). This position was found to be the most important for this thesis given the complexity of the constructs under study.
The Characteristics of Companies Studied
The link to international business was also an important criterion, as international business interests imply that such companies are more likely to be exposed to the international trade practices and global supply chains where the impacts of climate change have already created challenges. This is likely to affect larger companies with international interests, driving such companies to take long-term action to address concerns about climate change.
The Behavioural Constructs Examined
- The ‘No Regret‘ and ‗Energy Efficiency Gap‘ Paradoxes
- Other Irrational Behaviours in Strategic Decision Making
Diffusion processes in which organizations adopt an innovation not because of their individual assessments of the action's effectiveness or returns, but because of a bandwagon caused by the large number of organizations that have already engaged in that action. The next section describes in detail the operationalization of the multi-criteria nature of the climate change challenge for organizations using the analytic hierarchy process (AHP) as the chosen multi-objective decision aid tool.
Construction of the AHP Framework
- Construction of the Hierarchy
- Pairwise Comparison by Decision Makers
- Aggregating the Weights
Its importance is shown in practice 9 Absolutely most important The evidence favoring one over the other is to. Problem framing is one of the main issues facing leaders from the challenge of climate change.
The Research Process
- Data Collection Procedure
- Primary Data
- Ethical Considerations
- Archival Data
Unstructured interviews were conducted with each participant to elicit their assessments of the climate change challenge and their preferences regarding courses of action. One of the companies provided a paper copy of their sustainability and climate change strategy as well as a copy of their environmental sustainability action plan.
Data Analysis
- Qualitative Content Analysis
- Directed (inductive category) Content Analysis
- Summative (latent) Content Analysis
- The Use of Categories
- Interpretive Content Analysis
- Examination of Other Data Sources
This study used Heish and Shannon's definition of qualitative content analysis, which is "the subjective interpretation of the content of textual data through the systematic process of coding classification and identifying themes or patterns." Approaches to generating coding schemes, derivation of codes, and threats to reliability distinguish different approaches (Hsieh & Shannon, 2005; Krippendorff, 2004) to qualitative content analysis.
Integration of Findings
- Categorical Analysis
- Across-Group Analysis
- Variable Score Comparison
Transcripts of field notes and notes taken during observations were analyzed for instances of the irrational behavior constructs. These patterns were viewed from the perspective of the pattern of variations and similarities of the two firms' behavioral constructs.
Validity and Reliability of Research
- Trustworthiness
- Credibility
- Transferability and External Validity
- Conformability
- Validity
Professional colleagues in the climate change field were used to check the reproducibility of the coding categories for the climate change response initiatives. Multiple sources of information for data (data triangulation), theory triangulation (multiple theories/perspectives used to interpret the findings of the study) and interpretation were used in this research. Schwandt, 2001) of design phenomenon and some of the findings were closely associated with corporate climate change responses and bounded rationality theoretical underpinnings.
The Climate Change Challenge
Climate Change History
The risks and opportunities presented by climate change are discussed, followed by some of the key drivers motivating companies to respond to climate change. A significant amount has been written (Anderson & Bows, 2008; Stern, 2006; Taviv et al., 2007) about how we know climate change is happening and what risks exist for business.
Definition of Climate Change
As more evidence on the realities of climate change becomes available and the gap between proponents and critics narrows, debates and controversies have shifted to issues of mitigation and adaptation (King & Lessidrenska, 2009; Winkler, 2010). Mitigation assumes that humans can make a concerted effort to reverse or at least halt the anthropogenic effects of global warming and climate change (IPCC, 1996), while adaptation efforts are aimed at helping humanity, communities and entire countries to survive and thrive in the midst of all the negative impacts of climate change.
Taking Action against Climate Change
Finding practical, workable and cost-effective solutions to the problems caused by climate change is therefore now also a global priority for business enterprises. Adaptation to climate change is important (Tompkins & Adger, 2005) to reduce vulnerability (Dow & Downing, 2011) and to understand and portray the opportunities it presents.
The Complexity of the Climate Change Challenge
Stern (2006) has reiterated that an understanding of the economics of climate change is needed to underpin an effective global response to this challenge. At the individual and company level, uncertainty creates challenges in dealing with potential future costs associated with climate change.
Market-Based Policy Instruments to Address Climate Change
- Cap-and-Trade
- Carbon Taxes
- Other Instruments and Measures
Governments around the world are adopting a mix of instruments (Dow & Downings, 2011; . Devarajan et al., 2009) in addition to other measures and standards that are not based on the actual amount of emissions, such as standards and regulations to increase the efficiency of energy, other economic instruments such as incentives and obligations for energy efficient equipment, encouraging the development and use of renewable energy. Adaptation strategies targeting water availability and human settlements and food security (Dow & Downing, 2011; Taviv et al., 2007) are being introduced into the mainstream of climate change adaptation and mitigation.
The Relevance of Climate Change to South African Businesses
Climate policy in South Africa is gaining momentum and frameworks for reducing and trading greenhouse gas emissions are being established (www.environment.gov.za). Operating in a “carbon constrained world” has brought innovation and competitiveness issues that businesses in South Africa need to recognize and deal with (www.environment.gov.za).
Business Impacts of Climate Change
- Legal and Regulatory Risks
- Investment Relations – Risks and Opportunities
- Brand Equity
- Supply Chain and Operational Risks and Opportunities
The lack of climate change legislation or the slow implementation of it in some jurisdictions is causing discomfort in the business community (www.nbi.org). Bank lending criteria that take climate change mitigation into account have already been incorporated by leading multinational financial institutions (www.worldbank.org).
Drivers of Corporate Climate Change Response
Organizations that are seen to be taking steps towards carbon neutrality reap benefits (Schultz & Williamson, 2005), while those that choose to ignore the calls to directly oppose climate change action may have to bear the brunt of the consequences, including increased scrutiny of business activities, decreased ability to attract talent and investment, consumer boycotts, media coverage, and potential lawsuits (www.pewclimate.org). Those companies that will succeed in portraying a positive image of their efforts to mitigate climate change will gain market share at the expense of the laggards (Deutsche Bank Research, 2007).
Corporate Climate Change Response Strategies
Therefore, companies pursuing low-cost leadership combined with climate change should follow the eco-efficiency strategy. The second possibility is what Orsato (2006) called “Beyond Compliance Leadership”, where reputation and organizational legitimacy are key drivers of climate change.
The Starch Industry and Climate Change Response
- Worldwide Starch Industry
- Corn Starch Production Process
- Energy Efficiency of Wet Milling Processes
The drying and dewatering steps are the main energy consumers in the milling process (Galitsky et al., 2003). Corn wet milling is the most energy intensive industry in the food and related products group (Galitsky et al., 2003), using 15% of the energy in the entire food industry.
Sugar Industry
The fibers in sugar cane are increasingly used for renewable electricity production (Zuuibier & van de Vooren, 2008; Yevich & Logan, 2002). Another driving force in the form of renewable energy is the production of electricity from the burning of sugar cane fibers (Hertel et al., 2012).
The Aviation Industry
Evolutions in the industry have profound effects on how aircraft are being handled in a safer and more environmentally friendly manner than in the past (Lee et al., 2009). ANSPs are working in collaboration with aircraft manufacturers, airlines and airports to ensure that aircraft take off, navigate and land in the most efficient manner (Lee et al., 2009).
Bounded Rationality in Strategic Decision Making
Rational Economic Man Theory
Evaluating and comparing sets of consequences that result in a preferred order of alternatives; and. The theory of rational economic man says that a decision maker always acts rationally when he follows these four steps, i.e.
Bounded Rationality Explained
The systematic experimental study of reproducible errors of human reasoning, and what these errors and the underlying revelations say about mental processes, is known as heuristics and biases. These biases form the filter between what really exists, and what is perceived as true.
The Case for Bounded Rationality in Industrial Organisations
- Deliberation Costs
- Experience, Learning and Adjustment
- Investment Decisions
- Technology Adoption
- Technology Assessment in Organisations
A number of market characteristics (including the regulatory environment), along with the size, role and position of the firm in the industry, are also key determinants in the pace and timing of technology adoption. Other information required is the uptake of the technology by other businesses, the popularity of the technology and the technological maturity levels.
Behavioural Finance and Behavioural Strategy
According to Lovallo et al. 2009), the most fundamental contribution of the behavioral theory of the firm to strategy is the recognition of the fundamental importance of firm heterogeneity, with firm heterogeneity leading to industry performance heterogeneity. The idea that firms are fundamentally heterogeneous in terms of their internal knowledge, skills and resources is at the heart of the field of strategic management (Porter, 1980).
Why Bounded Rationality is Relevant in Climate Change Response
- The ―no-regret‖ Paradox in Climate Change Response
This was called the "no-regret" emissions reduction potential, which is defined as a situation in which the costs of implementing a measure are more than offset by the direct or indirect benefits (not including climate-related benefits) it generates based on traditional financial. criteria (Huntington et al., 1994). However, despite considerable efforts and calls to encourage climate-friendly investments, even simple “no regrets” choices in energy demand management (CDP, 2010), such as downsizing.
Procedural Rationality and Strategic Decision Making Process
Researchers have recognized that effective strategic decision-making is important for the evolution of organizations and for the capture and creation of value (Teece et al., 2002; Brouthers et al., 1998) through the creation and resolution of problems and opportunities. Decision making was found to be influenced by the problem/opportunity under consideration, the existing written and unwritten rules in the organization (a reflection of the previous learning of the organization), the location of decision-making responsibility in the organization and the vision and goals of the organization (Thaler, 2005; Lovallo et al., 2009; Raymond & Brown, 2011).
Strategy as Decision Making
The decision maker is therefore a satisficer; one that seeks a satisfactory solution rather than an optimal one. change response alternatives and there are still very few opportunities to learn from others and the past); and skills, competencies, and experiences needed to implement the new strategic initiatives (Raymond & Brown, 2011). Change and adaptation are both at the individual and organizational level as a result of what March and Simon referred to as, ―a complex interweaving of affective and cognitive processes‖: What a person wants and likes affects what he sees; what he sees influences what he wants and likes.
The Behavioural Theory of Organisations
Moving to a more dynamic view highlights the nature and role of knowledge and human capital (Teece et al., 2002; Eisenhardt & Martin, 2000).
Criticism and the Co-evolution of Normative and Behavioural Theories
Ross (2005) criticized the doom and gloom prophecies of standard financing models by proponents of the behavioral approach. Another criticism of the behavioral approach is the focus on individual rather than group, aggregate or market behaviour.
Multi-criteria Decision Aid (MCDA)
Introduction to Decision Support Methodology
Multi-criteria Decision Aid Methods
Mathematical modelling of a MCDM Problem
Critics have questioned the theoretical basis, the validity of the figures produced and the tools used in environmental cost-benefit analysis decisions (Spash et al., 2004). Multi-criterion decision-making methods are proposed as a way to approach the rational human economic model in the response to climate change.
Limitations of Cost-Benefit Analysis Models in Climate Change Response
It is very difficult to reduce the effects or benefits of a climate change mitigation initiative to a few financial figures (Tudela et al., 2006; Joubert et al., 1997). It is clear from the above analysis that cost-benefit analysis is based on the normative, rational, economic human approach and is therefore not suitable for climate change decision-making.
Analytical Hierarchy Process (AHP) as a MCDA Method
- Structuring complexity
- Interaction of Decision Makers with Model
Since the response to climate change could have undesirable social and economic consequences, the most balanced choice is necessary for the continued survival and well-being of the organization. Therefore, special attention should be paid to reflect their interests and views in decisions about the response to climate change.
Why the Analytical Hierarchy Process Was Chosen
Using a mixed methods approach, this study sought to explain how particular behaviors, cultures, structures and drivers of corporate actions in climate change individually or collectively promote or hinder response. Bounded rationality and multi-criteria decision support were drawn upon to help explain the differences in climate change response options and how bounded rationality concepts influence strategic decision-making and consequently explained the similarities and differences in the type of climate change initiatives chosen.
The Cases
- Tongaat Hulett
- Air Traffic and Navigation Services (ATNS)
ATNS is in the business of airports and air traffic, which places it in the high impact climate change category under the JSE SRI classification. It is a member of the Civil Air Navigation Service Organizations (CANSO), which is the global voice for companies providing air traffic control services worldwide.
General Findings
For ATNS, climate change response was identified as a strategic priority during one of their corporate strategy formulation sessions. Interestingly, on May 11, 2011, when we went out for our strategy session at Birchwood, one of the objectives that came out of the strategy was to have this climate change and sustainability.
Similarities in Climate Change Response Drivers and Motivations
- Financial Business Case
- Moral Responsibility
- Organisational Legitimacy
The carbon tax, the National Climate Change Response Strategy and the Waste Act were mentioned. ICAO has produced the Civil Aviation Environmental Protection (CAEP) document, which details how each civil aviation member should respond to climate change issues.
Similarities in Climate Change Response Initiatives
- Raising Awareness
- Adaptation and Operational Efficiencies
- New Products and Revenue Streams
- Fully Integrated into Corporate Strategy
What are the new institutions and technologies that shape the low-emission business of the future. That, Dr. Khosa says, is that "they don't understand the needs of the 21st century".
Differences in Climate Change Response Drivers and Motivations
- Financial Business Case
- Security of Supply Risks: Energy and Raw Materials
- Gaining Competitive Advantage
- Moral Responsibility
- Organisational Legitimacy
In line with our vision, "To be the only provider of air traffic and navigation services", we want to be number one in Africa and the surrounding regions. But we should really take a different angle to say, "Why can't we just donate where we can and help, give the skills, even for free?" So those are also the perceptions.
Differences in Climate Change Response Initiatives
- Raising Awareness
- Adaptation and Operational Efficiencies
- New Products and Revenue Streams
- Fully Integrated into Corporate Strategy
If we want to have real quality, we have to invest in water treatment plants." If we want to have real quality, we have to invest in water treatment plants.
Summary of Findings
Both companies have a general understanding that climate change affects the way they do business. However, there are varying levels of understanding of the risks and opportunities of climate change among different managers in the same company.
Business Risks Driven by Climate Change
- Physical risks
- Security of Resource and Energy Supply Risks
- Regulatory and Compliance Risks
- Reputational Risks
- Investor and Shareholder Risks
- Business Model Redundancy
One of the companies in the study specifically mentioned the need to be in line with shareholders' expectations of climate change during the interviews. ATNS, one of the companies in the study, is leveraging climate change communication programs and also increasing collaboration in other business areas.
Business Opportunities Driven by Climate Change
Climate Change Response Initiatives
- Driving Efficiencies
For most companies, there is no dedicated person responsible for climate change strategy or corporate sustainability (Setthasakko, 2009). This is because the motivators and drivers for responding to climate change are multifaceted, covering efficiency, emission credit generation (through energy efficiency credits, renewable energy credits (RECs), Clean Development Mechanism (CDM) and other voluntary emission reductions (VERs)), and diversification (for products, markets and industries).
Technology Choices
This is consistent with previous studies that found that where possible, and particularly in jurisdictions where climate change legislation is not sufficiently developed, firms use climate change as an opportunity to increase competitiveness (Jones & Levy, 2007; Kolk & .Pinkse, 2008; Porter & Reinhardt, 2007) through cost savings and the development of low-carbon goods and services. Several deliberation technologies have been developed with increasing levels of sophistication, but ultimately deliberation technologies should merge standard modeling techniques with bounded rational approaches.
Considering all Plausible Options
This is in stark contrast to Gruber's (2006) organizational routined behavior explanation for "no regrets" and energy efficiency gaps. Market and competitive forces force organizations to pursue all climate change-related initiatives that yield competitive advantage, so routine explanations of behavior are not enough to explain no-regret and energy efficiency paradoxes.
Sources of Information for Evaluation of Options
Could this be the case with technology maturity as a key criterion in technology adoption decisions. One such statement worth quoting from the manager of Tongaat Hulett is: "But as I think about it now, we may have missed some opportunities from different suppliers." This supports previous arguments about biases associated with technology adoption decisions (Ellison, 2006; Spiegler, 2006).
Barriers to corporate climate change response
This is in direct contrast to the behavioral explanations presented as the causes of the “no regrets” paradoxes and the energy efficiency gap. Market barriers such as short-termism, expensive technology, access to technological resources and capacity, and tariff distortions are plausible explanations for the paradoxes of “no regrets” and energy efficiency gaps.
Product and Market Diversification and Vertical Partnerships
- Supply Chain Partnerships
- Green Marketing
Taking a proactive stance by actively engaging both upstream and downstream supply chain partners in response to climate change can be an effective way to lower greenhouse gases and generate value. Supply chain collaboration is an effective way to use reciprocity, conditional cooperation and soft paternalism to advance the corporate climate change response agenda.
Towards an Interpretive Model of Climate Change Response
Understanding all the levers and drivers of responding to climate change is an important part of the process of creating and understanding available options. This holistic and comprehensive approach to corporate response to climate change is unlike any approach proposed before.
The Corporate Climate Change Response Framework
- Finding the Best-Balanced Choice Responses
- The Building Blocks
- The Detail
- Support Elements of the Climate Change Response Framework
As Figure 7-3 shows, most of ATNS' climate change response initiatives show the phenomenon's infancy in the organization. The project office is responsible for all reporting and monitoring and evaluation of the various climate change response initiatives.
Using AHP as a Strategic Decision Making Aid
- Climate Change Response Mission and Planning Horizon
- Climate Change Response Criteria
- Qualitative and Quantitative Evaluation
- Understanding the Decision Environment using SWOT
Tongaat Hulett's climate change response strategy is part of the larger sustainability strategy (see the Results section for their sustainability strategic intent). A similar process is used to select the initiatives under each level of the climate change response continuum.
Conclusion of the Framework
The result of this analysis is a quantitative value that shows the preferences of each response alternative to climate change. The added value of integrating corporate and climate change initiatives was illustrated by the positive examples cited by both companies.
Conclusions
This, along with the role of risk and uncertainty, time constraints, knowledge, self-interest, self-control (Kahneman & Tversky, 1979) or the need for organizations to respond to moral and other social consequences, seemed to favor the arguments. that business decision-makers are not always limited to risk-equivalent alternatives (Magni, 2009, Gigerenzer, 2006) in responding to climate change. AHP allowed quantitative and qualitative components for the structuring, evaluation and synthesis of climate change response problems, taking into account the perceptual distortions, imprecise judgments and sometimes illogical interpretations that turn out to be true for organizational actors.
Contributions of the Study
An understanding of the true drivers of corporate response to climate change should also provide feedback to regulators regarding some of the apathy surrounding climate change policy and provide a framework and pathway for future engagements with key stakeholders. Understanding the behavioral side of corporate response to climate change, for example soft paternalism, should help policy makers in their policy formulation processes.
Study Limitations and Future Research Directions
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Introductory Session Agenda
Unstructured Interview Questions
