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									                                        Chapter 5
Decision Making, Learning, Creativity
and Entrepreneurship
    CHAPTER CONTENTS

 In this chapter, we examine how managers make decisions and explore how individual, group, and
organizational factors affect the quality of the decisions they make. We discuss the nature of managerial
decision-making and examine some models of the decision-making process that help reveal its
complexities. The main steps of the decision-making process and the biases that may cause capable
managers to make poor decisions are explored. Also, how managers can promote organizational learning
and creativity and improve the quality of decision making throughout an organization is explored. Finally,
the role of both the entrepreneur and the intrapreneur are examined.


    KEY DEFINITIONS/TERMS


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.

ambiguous information Information that can be interpreted in multiple and often conflicting ways.

bounded rationality Cognitive limitations that constrain one’s ability to interpret, process, and act on
information.

classical decision-making model A prescriptive approach to decision making based on the assumption
that the decision maker can identify and evaluate all possible alternatives and their consequences and
rationally choose the most appropriate course of action.

creativity A decision maker’s ability to discover original and novel ideas that lead to feasible alternative
courses of action

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.

decision making The process by which managers respond to opportunities and threats by analyzing
options and making determinations about specific organizational goals and courses of action.
devil’s advocacy Critical analysis of a preferred alternative, made in response to challenges raised by a
group member who, playing the role of devil’s advocate, defends unpopular or opposing alternatives for
the sake of argument.

dialectical inquiry Critical analysis of two preferred alternatives in order to find an even better
alternative for the organization to adopt.

entrepreneur An individual who notices opportunities and decides how to mobilize the resources
necessary to produce new and improved goods and services.

entrepreneurship The mobilization of resources to take advantage of an opportunity to provide
customers with new or improved goods and services

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.

groupthink A 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.
heuristics Rules of thumb that simplify decision making.

illusion of control A source of cognitive bias resulting from the tendency to overestimate one’s own
ability to control activities and events.

intrapreneur 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.

intuition Feelings, beliefs, and hunches that come readily to mind, require little effort and information
gathering, and result in on-the-spot decisions.

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.

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.

nonprogrammed decision making Nonroutine decision making that occurs in response to unusual,
unpredictable opportunities and threats.

optimum decision The most appropriate decision in light of what managers believe to be the most
desirable future consequences for the organization.

organizational learning The process through which managers seek to improve employees’ desire and
ability to understand and manage the organization and its task environment.

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.

product champion A manager who takes “ownership” of a project and provides the leadership and vision
that take a product from the idea stage to the final customer.
production blocking A loss of productivity in brainstorming sessions due to the unstructured nature of
brainstorming.

programmed decision making Routine, virtually automatic decision making that follows established
rules or guidelines.

reasoned judgment A decision that takes time and effort to make and results from careful information
gathering, generation of alternatives, and evaluation of alternatives.

representativeness bias A cognitive bias resulting from the tendency to generalize inappropriately from
a small sample or from a single vivid event or episode.

risk The degree of probability that the possible outcomes of a particular course of action will occur.

satisficing Searching for and choosing an acceptable, or satisfactory, response to problems and
opportunities, rather than trying to make the best decision.

skunkworks A group of intrapreneurs who are deliberately separated from the normal operation of an
organization to encourage them to devote all their attention to developing new products.

social entrepreneur An individual who pursues initiatives and opportunities and mobilizes resources to
address social problems and needs in order to improve society and well-being through creative solutions.

systematic errors Errors that people make over and over and that result in poor decision making.

uncertainty Unpredictability.




 CHAPTER OVERVIEW


In this chapter, we examine how managers make decisions and explore how individual, group, and
organizational factors affect the quality of the decisions they make. We discuss the nature of managerial
decision-making and examine some models of the decision-making process that help reveal its
complexities. The main steps of the decision-making process and the biases that may cause capable
managers to make poor decisions are explored. Also, how managers can promote organizational learning
and creativity and improve the quality of decision making throughout an organization is explored. Finally,
the role of both the entrepreneur and the intrapreneur are examined.
LECTURE OUTLINE



I. THE NATURE OF MANAGERIAL DECISION MAKING

    A. Decision making is the process by which managers respond to the opportunities and
       threats that confront them by analyzing the options and making determinations, or
       decisions about specific organizational goals and courses of action.

           1. A good decision results in the selection of appropriate goals and courses of action
              that increase organizational performance. Bad decisions result in lower
              performance.

           2. Decision making in response to opportunities occurs when managers search for
              ways to improve organizational performance. Decision-making in response to
              threats occurs when events are adversely affecting organizational performance
              and managers are searching for ways to increase performance.


    B. Programmed and Nonprogrammed Decision Making

           1. All decisions made by managers are programmed or nonprogrammed.

           2.    Programmed decision-making is a routine, virtually automatic process. These
                decisions have been made so many times in the past that managers have been able
                to develop rules or guidelines to be applied when certain situations inevitably
                occur. 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.

           3. Nonprogrammed decision-making is required for nonroutine decisions.
              Nonprogrammed decisions are decisions that are made in response to unusual or
              novel opportunities or threats. These occur when there are no ready-made decision
              rules that managers can apply to a situation.

           4. To make decisions in the absence of decision rules, managers may rely upon their
              intuition or they may make reasoned judgments. When using intuition,
              managers rely upon feelings, beliefs, and hunches that come readily to mind,
              require little effort and information gathering, and result in on-the-spot decisions.
              Reasoned judgments are decisions that take time and effort and result from
              careful information gathering, generation of alternatives, and evaluation of
              alternatives.

           5. 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.
C. The Classical Model
       1. 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.

       2.    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.


D. The Administrative Model
       1. The administrative model explains why decision-making is always inherently
           risky and uncertain. It is based upon three important concepts: bounded
           rationality, incomplete information, and satisficing.

       2. Bounded rationality describes 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 to evaluate it all.

       3.    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.

               a. 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.

               b. Much of the information that managers have at their disposal is
                  ambiguous, and therefore can be interpreted in multiple and often
                  confusing ways.

               c. Because of time constraints and information costs, managers are
                  unable search for all possible alternatives and evaluate all the
                  potential consequences.

       4.    Because of the limitations mentioned above, managers do not attempt to
            discover every alternative in an attempt to reach the optimum decision.
            Instead, they search for and choose an acceptable or satisfactory solution
            from a limited sample of potential alternatives. This strategy is called
            satisficing.
II. STEPS IN THE DECISION-MAKING PROCESS

    A. 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.

           1. Recognize the Need for a Decision
              Some stimuli usually spark the realization within the organization that a decision
              needs to be made. The stimuli may originate from the actions of managers inside
              of the organization or from changes in the external environment. Be it proactive or
              reactive, it is imperative that managers immediately recognize this need and
              respond in a timely and appropriate manner

           2. Generate Alternatives
              A manager must generate a set of feasible alternative courses of action to take in
              response to the opportunity or threat. Failure to properly generate and consider a
              variety of alternatives can lead to bad decisions. Sometimes managers find it
              difficult to generate creative, alternative solutions to specific problems.
              Generating creative alternatives may require that we abandon our existing mid-
              sets and develop new ones.

           3. 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.

                     a. Legality: Managers must ensure that a possible course of action is legal.

                     b. Ethicalness: Managers must ensure that a possible course of action is
                        ethical and that it will not unnecessarily harm any stakeholder group.

                     c. Economic feasibility: Managers must decide whether the alternatives can
                       be accomplished, given the organization’s performance goals, and do not
                       cause harm to other goals of the organization.

                     d. Practicality: Managers must decide whether they have the capabilities
                        and resources required to implement the alternative.

           4. Choose Among Alternatives
              The next step is to rank the various alternatives using the criteria listed above in
              order to make a decision. Managers must be sure that all information that is
              available is used. Sometimes managers have a tendency to ignore critical
              information, even when it is available.

           5. Implement the Chosen Alternative
              Once a course of action has been determined, it must be implemented. Many
              managers make a decision and then fail to act on it. Thousands of subsequent
              decisions are necessary to implement a course of action. To ensure that
                implementation occurs, top managers must assign to middle managers the
                responsibility for making follow-up decisions, give them the sufficient resources
                required to achieve the goal, and hold them accountable for their performance.

            6. 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:

                      a. Compare what actually happened to what was expected to happen as a
                         result of the decision.
                      b. Explore why any expectations for the decision were not met.
                      c. Develop guidelines that will help in future decision making


III. GROUP DECISION MAKING

    A. Many important decisions are made by groups or teams of managers instead of
       individuals.

    B. When managers work as a team, their choices of alternatives are less likely to suffer from
       biases. They are able to draw on the group’s combined skills and accumulated
       knowledge. Group decision-making allows managers to process more information and
       correct each other’s errors.

    C. 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.

    D. The disadvantages of group decision making include the long length of time it often takes
       and the possibility of being undermined by biases. A major source of group bias is
       groupthink.

    G. The Perils of Groupthink
           1. Groupthink is a pattern of faulty and biased decision making that occurs in
               groups whose members strive for agreement within the group at the expense of
               accurately assessing information.

            2. 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.

            3. Pressures for harmony and agreement have the unintended impact of discouraging
               individuals from raising dissenting opinions.

    B. 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.
           1. Devil’s advocacy is a technique used to counteract groupthink It involves a
              critical analysis of the group’s preferred alternative in order to ascertain its
              strengths and weaknesses before implementation. One member of the decision
              making group plays the role of devil’s advocate by critiquing and challenging the
              way in which the group evaluated alternatives and selected one alternative over
              the other.

           2. Dialectical inquiry: Two groups of managers are assigned to a problem and each
              group is responsible for evaluating alternatives and selecting one of them. Each
              group presents it preferred alternative to top management, each group critiques the
              other, and a debate ensues. Both groups are then challenged to uncover potential
              problems and perils associated with their solutions, with the goal of identifying
              the best alternative course of action for the organization to adopt.

    C. Diversity among Decision Makers:
          1. Promoting diversity within decision-making groups also improves group decision
               making by broadening the range of experiences and opinions that the group
               members can draw from as they generate, assess, and choose among alternatives.

           2. Groups containing members from diverse backgrounds are less prone to groupthink
               because of the differences that exist.


IV. ORGANIZATIONAL LEARNING AND CREATIVITY

    A. The quality of organizational decision making ultimately depends on innovative responses
       to opportunities and threats. Organizational learning is the process through which
       managers seek to improve employees’ desire and ability to understand and manage the
       organization. A learning organization is one in which managers do everything possible
       to maximize the potential for organizational learning to take place.
                 1. At the heart of every learning organization is creativity, the ability of a
                      decision maker to discover original and novel ideas that lead to feasible
                      alternative courses of action.


    B. Creating a Learning Organization: Peter Senge developed five principles for creating a
       learning organization. They are:

           1. Top managers must allow every person in the organization to develop a sense of
              personal mastery.
           2. Organizations need to encourage employees to develop and use complex mental
              models.
           3. Managers must do everything they can to promote group creativity and team
              learning.
           4. Managers must emphasis the importance of building a shared vision.
           5. Managers must encourage systems thinking.
C. Promoting Individual Creativity: Research indicates that when certain conditions are
   met, managers are more likely to be creative. They include
       1. providing employees the opportunity and freedom to generate new ideas
       2. allowing them an opportunity to experiment, to take risks, and to make mistakes
           and learn from them.
       3. Also employees must not fear that they will be penalized or looked down upon for
           ideas that at first seem outlandish.
       4. 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.


D. Promoting Group Creativity: Brainstorming, nominal group technique and the Delphi
   technique are used to encourage creativity at the group level.

       1. Brainstorming is a group problem solving technique in which managers meet
           face-to-face to generate and debate a wide variety of alternatives from which to
           make a decision. This technique is very useful in some situations but at other
           times can result in a loss of productivity due to production blocking. 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.

       2. The Nominal Group Technique The nominal group technique is more structured
          way of generating alternatives. 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.
          3. Delphi Technique: If managers are in different locations, videoconferencing is
             one way to bring them together to brainstorm. Another way is to use the Delphi
             Technique, a written approach to creative problem solving. It works as follows:

                    a. The group leader writers a statement of the problem and a series of
                       questions to which participating managers are to respond.

                    b. The questionnaire is sent to the managers and departmental experts who
                      are most knowledgeable about the problem; they are asked to generate
                      solutions and mail the questionnaire back to the group leader.


                    c. A team of top managers record and summarize the responses. The results
                      are then sent back to the participants with additional questions to be
                      answered before a decision can be made.

                    d. The process is repeated until a consensus is reached and the most suitable
                      course of action is apparent.

  E. Promoting Creativity at the Global Level: Organizations are under increasing pressure
     to reduce costs and develop global products.

          1. To do so, they typically centralize their R&D expertise to bring R&D managers
             together from different countries.

          2. Because this can pose some unique problems, managers must take special steps to
             encourage creativity among people from different countries who work together.

V. INTRAPRENEURSHIP AND ORGANIZATIONAL LEARNING

  A. Intapreneurship and Organizational
      Learning : The intensity of competition today has made it increasingly important to
      promote intrapreneurship to raise the level of innovation and organizational learning. The
      higher the level of intrapreneurship, the higher will be level of learning and innovation.
      Below are ways to increase intrapreneurship within an organization.

          1. Product Champions: A product champion is a manager who takes ownership of a
              project and provides the leadership and vision that is needed to take a product
              from the idea stage to market introduction.

                    a. 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.

          2. Skunkworks: A skunkworks is a group of intrapreneurs who are deliberately
              separated from the normal operation of an organization. By being isolated, these
              employees become intensely involved in the project. Development time is
              shortened and the quality of the product enhanced.
3. Rewards for Innovation: To encourage managers to bear risk and uncertainty, it
    is necessary to link performance to rewards.

         a. 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.

         b. In addition to money, they often receive promotion to the ranks of top
           management.

         c. 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.

								
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