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77Decision Making, Learning, Creativity, EntrepreneurshipDecision Making, Learning, Creativity, Entrepreneurship

7-2© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

OverviewOverview

Programmed and non-programmed decisions

Six steps for better decision makingHow cognitive biases can lead to poor

decisions

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OverviewOverview

Advantages and disadvantages of group decision making

How organizational learning can improve decision making

The similarities between entrepreneurs and intrapreneurs

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What is Decision Making?What is Decision Making?

Decision Making:Analyzing options and selecting goals and actions to seize opportunities or deflect threats

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Decision Making Decision Making

Programmed Decision:Routine, automatic decision-making following established guidelines: “When you get down to three boxes of spark plugs, re-order.”

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Decision MakingDecision Making

Non-programmed Decision:Non-routine decision driven by unpredictable opportunities or threats

No rules: ambiguous circumstances require analysis, intuition and judgment

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Decision MakingDecision Making

Intuition – feelings and hunches that come readily to mind, require little information gathering and result in on-the-spot decisions (YOUR GUT)

Reasoned judgment – decisions requiring information gathering and the evaluation of alternatives (YOUR BRAIN)

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The Classical ModelThe Classical Model

Classical Decision-making Model> Assumes the decision-maker can identify and fully

evaluate all possible alternatives and their consequences then rationally choose the most appropriate course of action

> Produces the most appropriate decision to optimize future consequences

> Fatal flaw: assumes perfect knowledge that does not exist!

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Classical ModelClassical Model

List all possible alternatives and their consequences

Rank-order them from most to least preferred

Select the one most likely to deliver desired future consequences

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The Administrative ModelThe Administrative Model

Bounded rationality (i.e., REALITY)>Many alternatives available

>Information ambiguous and extensive so managers cannot consider it all

>Decisions limited by gathering and analyzing resources and people’s cognitive abilities

>Most decisions based on incomplete information

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Causes of Insufficient or Unreliable Information

Causes of Insufficient or Unreliable Information

Risk: The degree of probability that the possible outcomes of a particular course of action will occur

Uncertainty: Probabilities cannot be given for outcomes because the future is unknown.

Constrained Resources: Not enough time, money and people to acquire “perfect knowledge”

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Causes of Incomplete Information Causes of Incomplete Information

Ambiguous Information Unclear information

can be interpreted in multiple often conflicting ways.

Figure 7.3

Young Woman or Old

Woman?

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Solution?Solution?

Choosing an acceptable or satisfactory response to problems and opportunities rather than trying to make the best decision

Managers explore a limited number of options and choose an acceptable decision rather than the optimum decision.

Managers assume that the limited options considered represent all options -- even though they know differently

This is the typical response of managers dealing with incomplete information and limited resources

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Decision-making StepsDecision-making Steps

Step 1. Recognize Need for a Decision> Sparked by changes in the business environment

Step 2. Generate Alternatives> Managers must develop feasible alternative

courses of action.If good alternatives are missed, the decision will be poorIt is hard to develop creative alternatives, so managers

need to look for new ideas

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Decision-making StepsDecision-making Steps

Step 3: Evaluate Consequences of each: What are the advantages and

disadvantages of each? How measured? Managers should specify

criteria, then evaluate. When ranking, all available information

needs to be considered.

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Decision-making StepsDecision-making Steps

Step 4: Evaluate alternatives

> Legal?

> Ethical?

> All stakeholders treated fairly?

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Decision Making StepsDecision Making Steps

Step 5: Implement Chosen Alternative> Managers must now carry out the alternative

> Often a decision is made but not implemented

Step 6: Learn From Feedback> Managers should consider what went right and

wrong with the decision and learn for the future

> Without feedback, managers do not learn from experience and will repeat the same mistakes

> Use PDCA

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Cognitive Biases and Decision Making

Cognitive Biases and Decision Making

Heuristics:Rules of thumb decision makers use to deal with complex situations within bounded rationality.If the “thumb” is skewed, the decision will be

poorSystematic errors will appear over and over

because the rule used to make decisions is flawed

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Types of Cognitive BiasesTypes of Cognitive Biases

Prior Hypothesis Bias Allowing strong prior beliefs about a relationship

between variables (for example, the root cause of gender pay gaps) to influence decisions even when evidence shows they are wrong.

Representativeness The decision maker incorrectly generalizes a

decision from a small sample (“My wife thinks…”)

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Types of Cognitive BiasesTypes of Cognitive Biases

Illusion of ControlThe tendency to overestimate your ability to control activities and events -- ego

Escalating CommitmentCommitting considerable resources to a project and then committing more even if evidence shows the project is failing (Gurney)

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In SummaryIn Summary

Flawed assumptions and ego are the parents of most screw-ups; misplaced loyalty runs a close third.

Be skeptical!

Use facts!

Demand results!

Be tough!

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Group Decision-makingGroup Decision-making

Usually superior to individual decision-makingChoices less likely to fall victim to biasAble to draw on member’s combined skills and

experience Builds ownership of the decision and the plans

flowing from itCan be slow and lead to risk-avoidance, mediocrity

and lack of creativity

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Improving Group Decision-makingImproving Group Decision-making

Devil’s Advocacy

A member defends opposing alternatives by criticizing

group-preferred alternatives and pointing out their problems

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Improving Group Decision MakingImproving Group Decision Making

Dialectical Inquiry Two different groups are assigned the problem. Each group presents its alternatives and each

group critiques the other.Promote Diversity

Diversity in a group may result in consideration of more alternatives and better evaluation of the strengths and weaknesses of each

7-25© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Organizational Learning and Creativity

Organizational Learning and Creativity

Organizational Learning Managers seek to improve an employee’s desire

and ability to understand and manage the organization and its environment in order to improve effectiveness.

The Learning Organization Managers try to maximize employee creativity in

order to enhance organizational learning; requires mistakes to be viewed as learning experiences rather than causes for blame and punishment

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Creating a Learning OrganizationCreating a Learning Organization

Build a Shared Vision People share a common mental model of

the firm to evaluate opportunitiesSystems Thinking

People understand how actions in one area of the firm will impact other areas

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Promoting Individual CreativityPromoting Individual Creativity

Organizations can build a supportive environment for creativity Managers must provide employees the

opportunity to take risks Failure musts be rewarded (or at least not

punished) and learned from

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Building Group CreativityBuilding Group Creativity

BrainstormingManagers meet face-to-face to generate and debate alternatives Group members are not allowed to evaluate

alternatives until all are listedThe pros and cons of each are discussed and a

short list is createdSomeone must keep this sorting and sifting

process on track

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EntrepreneurshipEntrepreneurship

EntrepreneursIndividuals who notice opportunities and needs then mobilize resources to seize them with new or improved goods and servicesIntrapreneursEntrepreneurs inside existing organizations who uncover opportunities and manage the development process (people with an urgent heart)

7-30© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Entrepreneurial/Intrapreneurial Traits

Entrepreneurial/Intrapreneurial Traits

> High self-esteem> Open to new experience> Creative thinker> Internal locus of control> High need for achievement> Risk-taker

LEADER!

7-31© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Summary for the Tool BoxSummary for the Tool Box

Create and support a diverse, creative, organization that rewards risk-taking and learns from failure

Encourage and reward intrapreneursUse cross-functional teams, brainstorming

and devil’s advocacy to maximize analyzed alternatives and improve decision-making

Constantly re-examine assumptions in light of new information

7-32© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

For the Tool BoxFor the Tool Box

Unless it will deliver first-mover advantage, don’t make any decision before its time; but prepare and don’t hesitate when the time arrives; you will never have perfect knowledge

Maintain on-the-shelf alternativesLearn from both success and failureInstitutionalize continuous improvement with

PDCA