chapter seven Decision Making, Learning, Creativity, and Entrepreneurship McGraw-Hill/Irwin Contemporary Management, 5/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. 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. 7-3 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 7-4 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. 7-5 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 7-6 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 7-7 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. 7-8 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 7-9 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 7-10 Question? Which decision model assumes the decision maker can identify and evaluate all possible alternatives? A. Neo-classical B. Classical C. Administrative D. practical 7-11 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. 7-12 The Classical Model of Decision Making Figure 7.1 7-13 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 7-14 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 7-15 Why Information Is Incomplete Figure 7.2 7-16 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. 7-17 Causes of Incomplete Information Young Woman or Old Woman Ambiguous Information – Information whose meaning is not clear allowing it to be interpreted in multiple or conflicting ways. Figure 7.3 7-18 Causes of Incomplete Information • Time constraints and information costs – managers have neither the time nor money to search for all possible alternatives and evaluate potential consequences 7-19 Causes of Incomplete Information • Satisficing – Searching for and choosing an acceptable, or satisfactory response to problems and opportunities, rather than trying to make the best decision. 7-20 Causes of Incomplete Information • 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. 7-21 Six Steps in Decision Making Figure 7.4 7-22 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. 7-23 Decision Making Steps Step 3. Evaluate Alternatives – What are the advantages and disadvantages of each alternative? – Managers should specify criteria, then evaluate. 7-24 Decision Making Steps Step 3. Evaluate alternatives 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? 7-25 General Criteria for Evaluating Possible Courses of Action Figure 7.5 7-26 Decision Making Steps 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 7-27 Decision Making Steps 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. 7-28 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 7-29 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 7-30 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 7-31 Sources of Cognitive Bias at the Individual and Group Levels Figure 7.6 7-32 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. 7-33 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. 7-34 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 7-35 Group Decision Making • Allows managers to process more information • Managers affected by decisions agree to cooperate 7-36 Group Decision Making • 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 7-37 Group Decision Making 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 7-38 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. 7-39 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. 7-40 Devil’s Advocacy and Dialectical Inquiry Figure 7.7 7-41 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. 7-42 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 7-43 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. 7-44 Senge’s Principles for Creating a Learning? Figure 7.8 7-45 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. 7-46 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. 7-47 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. 7-48 Building Group Creativity • 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 7-49 Building Group Creativity 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 7-50 Building Group Creativity 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 7-51 Entrepreneurship Entrepreneurs – Individuals who notice opportunities and take the responsibility for mobilizing the resources necessary to produce new and improved goods and services. 7-52 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. 7-53 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. 7-54 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 7-55 Entrepreneurship and Management • Frequently, founding entrepreneur lacks the skills, patience, and experience to engage in the difficult and challenging work of management 7-56 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. 7-57 Movie Example: You’ve Got Mail How will Kathleen use the decision making process with the arrival of the Fox Book Superstore? 7-58