2. Decision Making, Learning, Creativity, and Entrepreneurship
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.

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.

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

5. 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.

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. 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

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.

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

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

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.

12. The Classical Model of Decision Making
Figure 7.1

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

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

15. Why Information Is Incomplete
Figure 7.2

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.

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

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

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.

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.

21. Six Steps in Decision Making
Figure 7.4

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.

23. Decision Making Steps Step 3. Evaluate Alternatives
What are the advantages and disadvantages of each alternative?
Managers should specify criteria, then evaluate.

24. Decision Making Steps
Step 3. Evaluate alternatives

25. General Criteria for Evaluating Possible Courses of Action
Figure 7.5

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

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.

28. 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

29. 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

30. Sources of Cognitive Bias at the Individual and Group Levels
Figure 7.6

31. 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.

32. 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.

33. 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

34. Group Decision Making Allows managers to process more information
Managers affected by decisions agree to cooperate

35. 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

36. 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.

37. 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.

38. 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.

39. Devil’s Advocacy and Dialectical Inquiry
Figure 7.7

40. 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.
The Learning Organization
Managers try to maximize the people’s ability to behave creatively to maximize organizational learning.

41. Organizational Learning and 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.

42. Senge’s Principles for Creating a Learning?
Figure 7.8

43. 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.

44. Creating a Learning Organization
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.

45. 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.

46. 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

47. 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

48. 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

49. Entrepreneurship Entrepreneurs
Individuals who notice opportunities and take the responsibility for mobilizing the resources necessary to produce new and improved goods and services.
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. 19

50. 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.
Intrapreneurs frustrated with the lack of support or opportunity at their firm often leave and form their own new ventures. 19

51. 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. 20

52. 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

53. Entrepreneurship and Management
Frequently, founding entrepreneur lacks the skills, patience, and experience to engage in the difficult and challenging work of management

54. 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. 23