Decision Making, Learning,

Creativity, and Entrepreneurship

chapter seven

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives

1. 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.

2. 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.

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Learning Objectives

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

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

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

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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.

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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

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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

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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.

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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

• Reasoned judgment – decisions that take time

and effort to make and result from careful information gathering, generation of alternatives, and evaluation of alternatives

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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.

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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.

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The Classical Model of Decision Making

Figure 7.17-11

The Administrative Model

• 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.

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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

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Why Information Is Incomplete

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Figure 7.2

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

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Causes of Incomplete Information

• Ambiguous Information– Information that can be

interpreted in multiple and often conflicting ways.

7-16Figure 7.3

Young Woman or Old Woman

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

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Six Steps in Decision Making

Figure 7.4 7-18

Figure 7.5

General Criteria for Evaluating Possible Courses of Action

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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

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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

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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.

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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.

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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

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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

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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

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Devil’s Advocacy and Dialectical Inquiry

Figure 7.77-27

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.

• 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.

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Organizational Learning and Creativity

• Creativity– The ability of the

decision maker to discover novel ideas leading to a feasible course of action.

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Senge’s Principles for Creating a Learning Organization

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Figure 7.8

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

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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

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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.

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Entrepreneurship

• 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

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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.

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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.

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Entrepreneurship and Management

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

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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.

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