Chapter Seven

Decision Making, Learning, Creativity and

Entrepreneurship

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

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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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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≈Non-routine decision made in response to

unusual or novel opportunities and threats.≈The are no rules to follow since the decision is

new.

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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 of Decision Making

Figure 7.1

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The Administrative Model

Administrative Model≈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

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The Administrative Model

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.

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The Administrative Model

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.≈Ambiguous Information

Information whose meaning is not clear allowing it to be interpreted in multiple or conflicting ways.

≈Time constraints and information costs Managers have neither the time nor money to search for all

possible alternatives and evaluate potential consequences

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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

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Six Steps in Decision Making

Figure 7.4

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Figure 7.5

General Criteria for Evaluating Possible Courses of Action

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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.

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≈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 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≈Committing considerable resources to a

project and then committing more even if evidence shows 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 7.7

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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≈Managers try to maximize the people’s ability

to behave creatively to maximize organizational learning.

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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. A creative management staff and employees are

the key to the learning organization.

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Senge’s Principles for Creating a Learning Organization

Figure 7.8

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Building Group Creativity

Brainstorming≈Managers meet face-to-face to generate and

debate many alternatives. 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

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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

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Entrepreneurship

Entrepreneurs≈Individuals who identify opportunities and take

responsibility for mobilizing the resources necessary to produce new and improved goods and services. MNGT 352, 353, 354, 455 Case Study: The White House restaurant, New Harmony

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≈Individuals (managers, scientists, or

researchers) who work inside an existing organization and identify an opportunity for product improvements and are responsible for managing the product development process. Case Study: Berry Plastics,

business plan competition Case Study: Evansville ARC, Ideation competition

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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.