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Decision Making, Learning, Creativity, and Entrepreneurship

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1 Decision Making, Learning, Creativity, and Entrepreneurship
chapter seven McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

2 Learning Objectives Understand the nature of managerial decision making, differentiate between programmed and non-programmed decisions, and explain why non-programmed decision making is a complex, uncertain process. Describe the six steps that managers should take to make the best decisions and explain how cognitive biases can lead managers to make poor decisions.

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

4 The Nature of Managerial 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. A good decision results in the selection of appropriate goals and courses of action that increase organizational performance. Bad decisions result in lower performance. Decision making is central to being a manager, and whenever managers engage in planning, organizing, leading, and controlling, they are constantly making decisions. 4

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

6 Decision Making Programmed Decision
Routine, virtually automatic process Decisions have been made so many times in the past that managers have developed rules or guidelines to be applied when certain situations inevitably occur Managers are always searching for ways to improve their decision making in order to improve organizational performance. All decisions made by managers are programmed or nonprogrammed. Most decision-making that relates to day-to-day running of an organization is programmed decision making. Programmed decision-making is possible when managers have the information they need to create rules that will guide decision-making. 6

7 Decision Making Non-Programmed Decisions
Nonroutine decision making that occurs in response to unusual, unpredictable opportunities and threats Rules do not exist because the situation is unexpected or uncertain and managers lack the information they would need to develop rules to cover it. 7

8 Decision Making Intuition Reasoned judgment
feelings, beliefs, and hunches that come readily to mind, require little effort and information gathering and result in on-the-spot decisions Reasoned judgment decisions that take time and effort to make and result from careful information gathering, generation of alternatives, and evaluation of alternatives To make decisions in the absence of decision rules, managers may rely upon their intuition or they may make reasoned judgments. Although ‘exercising’ one’s judgment is a more rational process than ‘going’ with one’s intuition, both processes are often flawed and can result in poor decision making. Thus, the likelihood of error is much greater in nonprogrammed decision making than in programmed decision making. Sometimes managers have to make rapid decisions and don’t have the time for a more careful consideration of the issues involved, while at other times, they do have the time available to make reasoned judgments.

9 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. The classical model is prescriptive, which means that is specifies how decisions should be made. Managers using this model make a series of simplifying assumptions about the nature of the decision-making process. The model’s premise is that managers have access to all of the information they need to make the optimum decision. It also assumes that managers can easily list and rank each alternative from most to least preferred in order to reach an optimum decision. 9

10 The Classical Model Optimum decision
The most appropriate decision in light of what managers believe to be the most desirable future consequences for their organization.

11 The Classical Model of Decision Making
Figure 7.1

12 The Administrative Model
An approach to decision making that explains why decision making is inherently uncertain and risky and why managers usually make satisfactory rather than optimum decisions. It is based upon three important concepts: bounded rationality, incomplete information, and satisficing. 12

13 The Administrative Model
Bounded rationality Cognitive limitations that constrain one’s ability to interpret, process, and act on information. Incomplete information Because of risk and uncertainty, ambiguity, and time constraints March and Simon coined the term bounded rationality to describe the situation in which the number of alternatives a manager must identify is so great and the amount of information so vast that it is difficult for the manager to even come close to evaluating it all before making a decision. Incomplete is information because in most cases the full range of decision-making alternatives is unknown and the consequences associated with known alternatives are uncertain. In other words, information is incomplete because of risk and uncertainty, ambiguity, and time constraints. Risk is present when managers know the possible outcomes of a particular course of action and can assign probabilities to them. Uncertainty exists when the probabilities of alternative outcomes cannot be determined, and future outcomes are unknown.  Ambiguous information occurs when the meaning of information is not clear, when it can be interpreted in multiple and often conflicting ways. 13

14 Why Information Is Incomplete
Figure 7.2

15 Causes of Incomplete Information
Risk The degree of probability that the possible outcomes of a particular course of action will occur. Uncertainty the probabilities of alternative outcomes cannot be determined and future outcomes are unknown 15

16 Causes of Incomplete Information
Ambiguous Information Information that can be interpreted in multiple and often conflicting ways. Young Woman or Old Woman Figure 7.3 16

17 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 Satisficing Searching for and choosing an acceptable, or satisfactory response to problems and opportunities, rather than trying to make the best decision Satisficing is the way managers cope with bounded rationality and incomplete information. Satisficing means that managers explore a limited sample of all potential alternatives.

18 Six Steps in Decision Making
Using the work of March and Simon as a basis, researchers have developed a step-by-step model of the decision-making process. There are six steps that managers should consciously follow to make a good decision. Step 1. Recognize Need for a Decision Sparked by an event such as environment changes; can be internal or external. Be it proactive or reactive, it is imperative that managers immediately recognize this need and respond in a timely and appropriate manner. 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. Step 3. Evaluate Alternatives What are the advantages and disadvantages of each alternative? Managers should specify criteria, then evaluate. Successful managers use four criteria to evaluate the pros and cons of alternative courses of action. Often a manager must consider these four criteria simultaneously. Some of the worst managerial decisions can be traced to poor assessment of the alternatives. 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 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. Figure 7.4 18

19 General Criteria for Evaluating Possible Courses of Action
STEP THREE - Evaluate alternatives Once managers have generated a set of alternatives, they must evaluate the advantages and disadvantages of each one. Successful managers use four criteria to evaluate the pros and cons of alternative courses of action. Often a manager must consider these four criteria simultaneously. Some of the worst managerial decisions can be traced to poor assessment of the alternatives. 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? Figure 7.5 19

20 Feedback Procedure Compare what actually happened to what was expected to happen as a result of the decision Explore why any expectations for the decision were not met Derive guidelines that will help in future decision making STEP SIX – Learning from Feedback Effective managers always conduct a retrospective analysis in order to learn from past successes or failures. To ensure that they learn from experience, managers should establish a formal procedure that includes the following steps:

21 Cognitive Biases and Decision Making
Heuristics Rules of thumb that simplify the process of making decisions. Systematic errors errors that people make over and over and that result in poor decision making Because all decision makers are subject to bounded rationality, they tend to use heuristics to deal with bounded rationality. If the heuristic is wrong, however, then poor decisions result from its use. Because of cognitive biases, which are caused by systematic errors, otherwise capable managers may end up making bad decisions. 21

22 Sources of Cognitive Biases
Prior Hypothesis Bias A cognitive bias resulting from the tendency to base decisions on strong prior beliefs even if evidence shows that those beliefs are wrong. Representativeness A cognitive bias resulting from the tendency to generalize inappropriately from a small sample or from a single vivid event or episode. 22

23 Sources of Cognitive Biases
Illusion of Control The tendency to overestimate one’s own ability to control activities and events. Escalating Commitment A source of cognitive bias resulting from the tendency to commit additional resources to a project even if evidence shows that the project is failing. Escalating commitment - They do so because their feelings of personal responsibility apparently bias their analysis of the situation. Managers must become aware of biases and their effects and they must identify their own personal style of making decisions.  One way to do this is for managers to review two decisions that they made recently – one that turned out well and one that turned out poorly. Problem-solving experts recommend that they start by determining how much time was spent on each of the decision making steps to ensure that the amount time allocated was adequate. Another technique is for managers to list the criteria they typically use to assess and evaluate alternatives and then critically evaluate the appropriateness of these factors. Because it often difficult to identify one’s own biases, it is suggested that managers scrutinize their own assumptions by working with another manager. 23

24 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 Allows managers to process more information and correct each other’s errors. Managers affected by decisions agree to cooperate - Managers included in the making of a decision will most likely cooperate with its implementation. When a group makes a decision, each group member is usually committed to it, thereby increasing the likelihood of its successful implementation. 24

25 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

26 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 Usually occurs when group members rally around a central manager’s idea, and become blindly commit to the idea without considering alternatives. The group’s influence tends to convince each member that the idea must go forward. When managers are subject to groupthink, they collective embark on a course of action without developing appropriate criteria to evaluation alternatives. Typically, the group rallies around one central manager and becomes blindly committed to that manager’s preferred course of action without evaluating its merits.  Pressures for harmony and agreement have the unintended impact of discouraging individuals from raising dissenting opinions. 26

27 Devil’s Advocacy and Dialectical Inquiry
Both of these processes can counter the effects of cognitive biases and groupthink. In practice, devil’s advocacy is probably the easier to implement. 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. 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. Figure 7.7 27

28 Organizational Learning and Creativity
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. Learning organization An organization in which managers try to maximize the ability of individuals and groups to think and behave creatively and thus maximize the potential for organizational learning to take place. 28

29 Organizational Learning and Creativity
The ability of the decision maker to discover novel ideas leading to a feasible course of action. At the heart of every learning organization is creativity. 29

30 Senge’s Principles for Creating a Learning Organization
Personal Mastery - Managers empower employees and allow them to create and explore. Mental Models - Challenge employees to find new, better methods to perform a task. Team Learning - Learning that takes place in a group or team. Build a Shared Vision - People share a common mental model of the firm to evaluate opportunities. Systems Thinking - Knowing and understanding how actions in one area of the firm will impact other areas of the firm. Building a learning organization is neither a quick or easy process. It requires managers to change their management assumptions radically. Promoting Individual Creativity: Research indicates that when certain conditions are met, managers are more likely to be creative. They include: Providing employees the opportunity and freedom to generate new ideas Allowing them an opportunity to experiment, to take risks, and to make mistakes and learn from them. Also employees must not fear that they will be penalized or looked down upon for ideas that at first seem outlandish. Other ways of promoting individual creativity are providing constructive feedback so that employees will know how they are doing and visibly rewarding employees who come up with creative ideas. Figure 7.8 30

31 Building Group Creativity
Brainstorming Managers meet face-to-face to generate and debate many alternatives. 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 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. A brainstorming session is conducted as follows: One manager describes the problem in broad outline. Group members share their ideas and generate courses of action. Group members are not allowed to criticize each alternative until all have been heard. Group members are encouraged to be as creative as possible. Anything goes, and the greater the number of ideas put forth, the better. When all alternatives have been generated, the group members debate the pros and cons of each and develop a list of the best alternatives. 31

32 Building Group Creativity
Nominal Group Technique A decision making technique in which group members write down ideas and solutions, read their suggestions to the whole group, and discuss and then rank the alternatives. Useful when an issue is controversial and when different managers might be expected to champion different courses of action Provides a more structured way to generate alternatives in writing and gives each manager more time and opportunity to come up with potential solutions It avoids production blocking and is especially useful when an issue is controversial.  A nominal group technique session is conducted as follows: One manager outlines the problem to be addressed and group members write down ideas and solutions. Managers read their suggestions to the group with no criticism allowed. The alternatives are discussed, and group members can critique or ask for clarification. Each member ranks all the alternatives, and the highest-ranking one is selected. 32

33 Building Group Creativity
Delphi Technique A decision-making technique in which group members do not meet face-to-face but respond in writing to questions posed by the group leader. 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 33

34 Entrepreneurship Entrepreneurs Social entrepreneurs
Individuals who notice opportunities and take the responsibility for mobilizing the resources necessary to produce new and improved goods and services. Social entrepreneurs those who pursue initiatives and opportunities to address social problems and needs in order to improve society Entrepreneurs start new businesses and carry out all of the management functions. Entrepreneurs assume all of the risks for losses and receive all of the returns (profits) from their ventures. 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 Frequently, founding entrepreneur lacks the skills, patience, and experience to engage in the difficult and challenging work of management Entrepreneurs make all of the planning, organizing, leading, and controlling decisions necessary to start new ventures. Despite the fact that an estimated 80 percent of small businesses fail in the first three to five years, 38% of men and 50% of women in today’s workforce want to start their own companies. 34 19

35 Entrepreneurship Intrapreneurs
A manager, scientist, or researcher who works inside an organization and notices opportunities to develop new or improved products and better ways to make them. Intrapreneurs frustrated with the lack of support or opportunity at their firm often leave and form their own new ventures. 35 19

36 Characteristics of Entrepreneurs
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. 20 36

37 Entrepreneurship and Management
Frequently, founding entrepreneur lacks the skills, patience, and experience to engage in the difficult and challenging work of management One way people become involved in entrepreneurial ventures is to start a business from scratch. When people who do start solo ventures succeed, they frequently need to hire other people to help them run the business.  Some entrepreneurs often have difficulty managing the organization as it grows, since entrepreneurship and management are not the same thing. Frequently, a founding entrepreneur lacks the skills, patience, and experience to engage in the work of management.  Some entrepreneurs find it hard to delegate authority, so they become overloaded, and the quality of their decision-making declines. Others lack the detailed knowledge necessary to establish state-of-the-art information systems and technology or create management procedures that are critical to increasing organizational efficiency.  Thus, to succeed, it necessary to do more than create a new product. An entrepreneur must hire managers who can create an operating system that will let the new venture survive and prosper.

38 Intrapreneurship and Organizational Learning
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. Product champions become responsible for developing a business plan for the product. If the plan is accepted, the production champion assumes responsibility for product development The term skunkworks was coined at the Lockheed Corporation, which formed a team of design engineers to develop special aircraft, such as the U2 spy plane. The secrecy of this unit and the speculation about its goals led others to give it this name. By being isolated, these employees become intensely involved in the project. Development time is shortened and the quality of the product enhanced.  Increasingly, companies are rewarding intrapreneurs on the basis of the outcome of the product development process by granting them large bonuses and stock options if the product sells. In addition to money, they often receive promotion to the ranks of top management. Organizations must reward intrapreneurs equitably if they wish to prevent them from leaving to become outside entrepreneurs who might compete against them. Nevertheless, they frequently do. 38 23

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