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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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