management chapter07

Decision Making, Learning, Creativity,

and Entrepreneurship

McGraw-Hill/IrwinContemporary Management, 5/e

Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.

chapter seven

7-3

Learning Objectives

After studying the chapter, you should be able to:• Differentiate between programmed and

nonprogrammed decisions, and explain why nonprogrammed decision making is a complex, uncertain process.

• Describe the six steps that managers should take to make the best decisions.

• Explain how cognitive biases can lead managers to make poor decisions.

7-4

Learning Objectives

• Identify the advantages and disadvantages of group decision making, and describe techniques that can improve it.

• Explain the role that organizational learning and creativity play in helping managers to improve their decisions.

• Describe how managers can encourage and promote entrepreneurship to create a learning organization and differentiate between entrepreneurs and intrapreneurs

7-5

The Nature of Managerial Decision Making

• Decision Making– The process by which managers respond to

opportunities and threats that confront them by analyzing options and making determinations about specific organizational goals and courses of action.

7-6

The Nature of Managerial Decision Making

• Decisions in response to opportunities• occurs when managers respond to ways

to improve organizational performance to benefit customers, employees, and other stakeholder groups

• Decisions in response to threats• events inside or outside the organization

are adversely affecting organizational performance

7-7

Decision Making

Programmed Decision– Routine, virtually automatic decision making

that follows established rules or guidelines.• Managers have made the same decision

many times before• Little ambiguity involved

7-8

Decision Making

Non-Programmed Decisions– Nonroutine decision made in response to

unusual or novel opportunities and threats.– The are no rules to follow since the decision

is new.• Decisions are made based on information,

and a manager’s intuition, and judgment.

7-9

Decision Making

• Intuition – feelings, beliefs, and hunches that come

readily to mind, require little effort and information gathering and result in on-the-spot decisions

7-10

Decision Making

• Reasoned judgment – decisions that take time and effort to make

and result from careful information gathering, generation of alternatives, and evaluation of alternatives

7-11

Question?

Which decision model assumes the decision maker can identify and evaluate all possible alternatives?

A. Neo-classical

B. Classical

C. Administrative

D. practical

7-12

The Classical Model

Classical Model of Decision Making– A prescriptive model of decision making that

assumes the decision maker can identify and evaluate all possible alternatives and their consequences and rationally choose the most appropriate course of action.

– Optimum decision• The most appropriate decision in light of what

managers believe to be the most desirable future consequences for their organization.

7-13

The Classical Model of Decision Making

Figure 7.1

7-14

The Administrative Model

Administrative Model of Decision Making– An approach to decision making that

explains why decision making is inherently uncertain and risky and why managers can rarely make decisions in the manner prescribed by the classical model

7-15

The Administrative Model

Administrative Model of Decision Making – Bounded rationality

• There is a large number of alternatives and available information can be so extensive that managers cannot consider it all.

• Decisions are limited by people’s cognitive limitations.

– Incomplete information• Because of risk and uncertainty, ambiguity,

and time constraints

7-16

Why Information Is Incomplete

Figure 7.2

7-17

Causes of Incomplete Information

• Risk– Present when managers know the possible

outcomes of a particular course of action and can assign probabilities to them.

• Uncertainty– Probabilities cannot be given for outcomes

and the future is unknown.

7-18


Ambiguous Information– Information whose

meaning is not clear allowing it to be interpreted in multiple or conflicting ways.

Figure 7.3

Young Woman or Old Woman

7-19


• Time constraints and information costs– managers have neither the time nor money

to search for all possible alternatives and evaluate potential consequences

7-20


• Satisficing– Searching for and choosing an acceptable,

or satisfactory response to problems and opportunities, rather than trying to make the best decision.

7-21


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

• This is the typical response of managers when dealing with incomplete information.

7-22

Six Steps in Decision Making

Figure 7.4

7-23

Decision Making Steps

Step 1. Recognize Need for a Decision– Sparked by an event such as environment changes.

• Managers must first realize that a decision must be made.

Step 2. Generate Alternatives– Managers must develop feasible alternative courses

of action.• If good alternatives are missed, the resulting

decision is poor.• It is hard to develop creative alternatives, so

managers need to look for new ideas.

7-24


Step 3. Evaluate Alternatives– What are the advantages and

disadvantages of each alternative?– Managers should specify criteria, then

evaluate.

7-25


Criteria

Legality Is the alternative legal and will not violate any domestic and international laws or government regulations?

Ethicalness

Is the alternative ethical and will not bring harm stakeholders unnecessarily?

Economic Feasibility Can organization’s performance goals sustain this alternative?

Practicality

Does the management have the capabilities and resources required to implement the alternative?

Step 3. Evaluate alternatives

7-26Figure 7.5

General Criteria for Evaluating Possible Courses of Action

7-27


Step 4. Choose Among Alternatives– Rank the various alternatives and make a

decision– Managers must be sure all the information

available is brought to bear on the problem or issue at hand

7-28


Step 5. Implement Chosen Alternative– Managers must now carry out the alternative.– Often a decision is made and 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 mistake over.

7-29

Discussion Question?

Which step in the decision making process is the most important?

A. Generating alternatives

B. Choosing an alternative

C. Evaluating alternatives

D. Learning from feedback

7-30

Feedback Procedure

1. Compare what actually happened to what was expected to happen as a result of the decision

2. Explore why any expectations for the decision were not met

3. Derive guidelines that will help in future decision making

7-31

Cognitive Biases and Decision Making

Heuristics– Rules of thumb that simplify the process of

making decisions.– Decision makers use heuristics to deal with

bounded rationality.• If the heuristic is wrong, however, then poor

decisions result from its use.• Systematic errors – errors that people make

over and over and that result in poor decision making

7-32

Sources of Cognitive Bias at the Individual and Group Levels

Figure 7.6

7-33

Types of Cognitive Biases

• Prior Hypothesis Bias– Allowing strong prior beliefs about a

relationship between variables to influence decisions based on these beliefs even when evidence shows they are wrong.

• Representativeness– The decision maker incorrectly generalizes

a decision from a small sample or a single incident.

7-34

Types of Cognitive Biases

• Illusion of Control– The tendency to overestimates one’s own

ability to control activities and events.

• Escalating Commitment– Committing considerable resources to

project and then committing more even if evidence shows the project is failing.

7-35

Group Decision Making

• Superior to individual making

• Choices less likely to fall victim to bias

• Able to draw on combined skills of group members

• Improve ability to generate feasible alternatives

7-36


• Allows managers to process more information

• Managers affected by decisions agree to cooperate

7-37


• Potential Disadvantages– Can take much longer than individuals to

make decisions– Can be difficult to get two or more

managers to agree because of different interests and preferences

– Can be undermined by biases

7-38


Groupthink– Pattern of faulty and biased decision making

that occurs in groups whose members strive for agreement among themselves at the expense of accurately assessing information relevant to a decision

7-39

Improved Group Decision Making

• Devil’s Advocacy– Critical analysis of a preferred alternative to

ascertain its strengths and weaknesses before it is implemented

– One member of the group who acts as the devil’s advocate by critiquing the way the group identified alternatives and pointing out problems with the alternative selection.

7-40

Improved Group Decision Making

• Dialectical Inquiry– Two different groups are assigned to the problem

and each group is responsible for evaluating alternatives and selecting one of them

– Top managers then hear each group present their alternatives and each group can critique the other.

• Promote Diversity– Increasing the diversity in a group may result in

consideration of a wider set of alternatives.

7-41

Devil’s Advocacy and Dialectical Inquiry

Figure 7.7

7-42

Organizational Learning and Creativity

• Organizational Learning– Managers seek to improve a employee’s

desire and ability to understand and manage the organization and its task environment so as to raise effectiveness.

• The Learning Organization– Managers try to maximize the people’s

ability to behave creatively to maximize organizational learning.

7-43

Question?

What is the ability of the decision maker to discover novel ideas leading to a feasible course of action?

A. Originality

B. Imagination

C. Creativity

D. Ingenuity

7-44

Organizational Learning and Creativity

Creativity– The ability of the decision maker to discover

novel ideas leading to a feasible course of action.• A creative management

staff and employees are the key to the learning organization.

7-45

Senge’s Principles for Creating a Learning?

Figure 7.8

7-46

Creating a Learning Organization

1. Personal Mastery– Managers empower employees and allow them to

create and explore.

2. Mental Models– Challenge employees to find new, better methods

to perform a task.

3. Team Learning– Learning that takes place in a group or team.

7-47

Creating a Learning Organization

4. Build a Shared Vision– People share a common mental model of

the firm to evaluate opportunities.

5. Systems Thinking– Knowing and understanding how actions

in one area of the firm will impact other areas of the firm.

7-48

Building Group Creativity

Brainstorming– Managers meet face-to-face to generate and debate

many alternatives. • Group members are not allowed to evaluate

alternatives until all alternatives are listed.• When all are listed, then the pros and cons of

each are discussed and a short list created.

7-49


• Production Blocking– Occurs because group members cannot

simultaneously make sense of all the alternatives being generated, think up additional alternatives, and remember what they were thinking

7-50


Nominal Group Technique– Provides a more structured way to generate

alternatives in writing and gives each manager more time and opportunity to come up with potential solutions

– Useful when an issue is controversial and when different managers might be expected to champion different courses of action

7-51


Delphi Technique– Written approach to creative problem solving.– Group leader writes a statement of the problem to

which managers respond– Questionnaire is sent to managers to generate

solutions– Team of managers summarizes the responses and

results are sent back to the participants– Process is repeated until a consensus is reached

7-52

Entrepreneurship

Entrepreneurs– Individuals who notice opportunities and

take the responsibility for mobilizing the resources necessary to produce new and improved goods and services.

7-53

Entrepreneurship

Intrapreneurs– Individuals (managers, scientists, or

researchers) who work inside an existing organization and notice an opportunity for product improvements and are responsible for managing the product development process.

7-54

Entrepreneurship and New Ventures

Characteristics of entrepreneurs—most share these common traits:– Open to experience: they are original thinkers

and take risks.– Internal locus of control: they take

responsibility for their own actions.– High self-esteem: they feel competent and

capable.– High need for achievement: they set high

goals and enjoy working toward them.

7-55

Entrepreneurship and Management

• People can become involved in entrepreneurial ventures by starting a business from scratch

• Frequently need to hire other people to help them run the business

7-56

Entrepreneurship and Management

• Frequently, founding entrepreneur lacks the skills, patience, and experience to engage in the difficult and challenging work of management

7-57

Intrapreneurship and Organizational Learning

Learning organizations encourage their employees to act as intrapreneurs: – Product champions: taking ownership of a

product from concept to market.– Skunkworks: keeping a group of intrapreneurs

separate from the rest of the firm.– Rewards for innovation: linking innovation by

workers to valued rewards.

7-58

Movie Example: You’ve Got Mail

How will Kathleen use the decision making process with the arrival of the Fox Book Superstore?

management chapter07

Education

decision model

nonprogrammed decision

acceptable decision

appropriate decision

decision maker

optimum decision

automatic decision

decision making steps