Nonprogrammed decision making is a routine, virtually automatic process.

CHAPTER 5

Decision Making, Learning, Creativity,

and Entrepreneurship

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Learning Objectives (1 of 2)

5-1. Understand the nature of managerial decision making, differentiate between programmed and nonprogrammed decisions, and explain why nonprogrammed decision making is a complex, uncertain process.

5-2. Describe the six steps that managers should take to make the best decisions.

5-3. Identify the advantages and disadvantages of group decision making, and describe techniques that can improve it

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Learning Objectives (2 of 2)

5-4. Explain the role that organizational learning and creativity play in helping managers to improve their decisions.

5-5. 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 by analyzing options and making determinations about specific organizational goals and courses of action

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Decisions in response to opportunities occurs when managers respond to ways to improve organizational performance.

Decisions in response to threats occurs when managers are impacted by adverse events to the organization.

Decision Making (1 of 3)

Programmed Decision Making

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

Managers have made the same decision many times before.

There are rules or guidelines to follow based on experience with past decisions.

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Programmed decision making occurs:

when a school principal asks the school board to hire a new teacher whenever student enrollment increases by 40 students

when a manufacturing supervisor hires new workers whenever existing workers’ overtime increases by more than 10 percent

when an office manager orders basic office supplies, such as paper and pens, whenever the inventory of supplies drops below a certain level.

Decision Making (2 of 3)

Nonprogrammed Decisions

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

Copyright Blend Images/ Shutterstock.com RF

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When a situation occurs that is unexpected or has not occurred before, lacking the information needed to address this uncertain situation, a manager would make a nonprogrammed decision.

Examples: developing a new technology, starting a new business, or entering a new market.

Topics for Discussion (1 of 6)

What are the main differences between programmed decision making and nonprogrammed decision making? [LO5-1]

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Programmed decision making is a routine, almost automatic process. These decisions have been made so many times that managers do not need to readdress all the alternatives every time one of these decisions arises, but can use decision-making rules or guidelines that have been developed for these situations. Managers typically have all the information they need to create the rules necessary to make a decision. There is little ambiguity involved in these types of decisions.

Nonprogrammed decision making is required when a situation arises that is not easily resolved by a preexisting rule or guideline. These decisions are nonroutine and require managers to respond to uncertainty because managers in these situations lack the information that they need to develop rules that allow them to accurately predict the future.

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Decision Making (3 of 3)

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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Although both intuition and judgment have their flaws, nonprogrammed decisions are more likely to produce errors.

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The Classical Model

Classical Decision-Making Model

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 consequences for the organization

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There is an assumption in the classical model of decision making that a manager can list preferences for each choice and then rank them from least to most preferred, making the optimum decision.

The Classical Model of Decision Making

Figure 5.1

Jump to Appendix 1 long image description.

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The Administrative Model (1 of 2)

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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Topics for Discussion (2 of 6)

In what ways do the classical and administrative models of decision making help managers appreciate the complexities involved in real-world decision making? [LO5-1]

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The classical model’s main premise is that once managers recognize the need to make a decision, they should be able to generate a complete list of all alternatives and consequences from which the best choice can then be made. This premise assumes that managers will have access to all the information that they need in order to make the optimum decision. This model helps managers appreciate the complexities of decision making by requiring them to consider all the information and then attempting to make decisions that will have the most desirable consequences for their organization.

The administrative model proposes that although managers do not have access to all the information, they still must make a decision. This model more fully exposes the complexities involved of decision making by forcing us to consider the limitations we may face. Proponents of this model assert that even if managers had access to all information needed, they would lack the mental or psychological ability to absorb and correctly evaluate it. In most situations, managers do not have access to complete information. Nor do they have knowledge of all of the consequences of each alternative. This model is more realistic for managers because it concedes that risk and uncertainty, ambiguity, and time constraints often compound in ways that make nonprogrammed decision making difficult, even for the most experienced managers.

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The Administrative Model (2 of 2)

Bounded Rationality

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

Incomplete Information

Happens because the full range of decision-making alternative is unknowable in most situations and the consequences are uncertain

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March and Simon’s bounded rationality says that a person has cognitive limitations—not possessing the complete knowledge (there might be vast quantities of options that are unknowable) in order to make an optimal decision.

Why Information Is Incomplete

Figure 5.2

Jump to Appendix 2 for long image description.

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Causes of Incomplete Information (1 of 4)

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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Managers know enough about a given outcome to be able to assign probabilities for the likelihood of its failure or success. Many decision outcomes are not know—such as the success of a new product introduction.

Causes of Incomplete Information (2 of 4)

Figure 5.3

Young Woman or Old Woman?

Ambiguous Information

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

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Managers often interpret the same piece of information differently and make decisions based on their own interpretations.

Causes of Incomplete Information (3 of 4)

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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The text gives the example of the Ford Motor Company purchasing manager. With the time constraint of a month to choose a supplier for a small engine part and 20,000 potential suppliers for this part in the United States alone, the manager cannot contact all potential suppliers to gather the needed information on the costs and terms.

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Causes of Incomplete Information (4 of 4)

Satisficing

Satisficing is a strategy of searching for and choosing an acceptable, or satisfactory, response to problems and opportunities, rather than trying to make the best decision.

Managers search for and choose acceptable, or satisfactory, ways to respond to problems and opportunities rather than trying to make the optimal decision.

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Managers assume that the limited options they examine represent all options. This is the typical response of managers when dealing with incomplete information.

Topics for Discussion (3 of 6)

Why do capable managers sometimes make bad decisions? What can individual managers do to improve their decision-making skills? [LO5-1, 5-2]

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Capable managers sometimes make bad decisions because the decision-making process can often be risky and uncertain. Failure to think creatively in order to generate a wide variety of alternatives and failure to evaluate all relevant information available can lead to a bad decision. Also, failure to consider the economic feasibility, legality, or ethicalness of decision prior to its implementation can result in disastrous consequences.

Managers should identify their own personal style of decision making in order to recognize inconsistencies that may prevent them from making good decisions. By reviewing two recent decisions—one that turned out well and one that turned out poorly—and seeing how they were made, a manager can gain insight into his or her decision-making process. Another technique that is useful is to list the criteria used to assess and evaluate alternatives. This can help managers critically evaluate the effectiveness and the appropriateness of each criterion. Working with others may be helpful as well, as it is often difficult to recognize our own biases and weaknesses.

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Steps in the Decision-Making Process

Figure 5.4

Jump to Appendix 3 long image description.

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General Criteria for Evaluating Possible Courses of Action

Figure 5.5

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Group Decision Making (1 of 4)

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

Allows managers to process more information

Managers affected by decisions agree to cooperate

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Because a group of managers includes varied skills, competencies, and knowledge, the decision of this group has a higher likelihood of succeeding.

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Group Decision Making (2 of 4)

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

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Groupthink can lead to a course of action that does not question the decision nor develop the criteria to evaluate alternatives. A group may follow the lead of the central manager and follow the course of action blindly.

Topics for Discussion (4 of 6)

In what kinds of groups is groupthink most likely to be a problem? When is it least likely to be a problem? What steps can group members take to ward off groupthink? [LO5-3]

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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 relevant to a decision. When this occurs, alternatives are not critically examined, potentially leading to a poor decision. Emotion, rather than objective assessment, guides the selection of the optimal course of action. This is most likely to be a problem in groups where pressure toward agreement is seen as more important than finding a workable solution or reaching an optimum decision. If the culture of the organization is not tolerant of criticism or innovative thinking, groupthink is more likely to occur during the group decision-making process. If one person in a group is allowed to be highly vocal and controlling during the decision- making process, others may feel too intimidated to present their suggestions or opinions.

Groupthink is least likely to be a problem when all the members of the group feel comfortable making suggestions and offering radical alternatives. If the culture supports risk-taking and innovative thinking, group members will not feel pressure to conform to the feeling of the majority. Also, if the contribution of the group is emphasized, rather than individual achievement, managers will see the opportunity to build upon the suggestions of others.

Devil’s advocacy is a technique that can be used to reduce the probability of the occurrence of groupthink. This technique involves the critical analysis of the preferred alternative and the process that was used to select that alternative. Typically, one member of the group is selected to play the role of the devil’s advocate by critiquing and challenging the way in which the group evaluated each alternative and selected one over the others. The purpose is to identify any reason that may make the selected alternative unacceptable after all.

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Group Decision Making (3 of 4)

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

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One member of a group is assigned the role of devil’s advocate. That person then critiques and challenges decisions made, as well as the decision-making process.

Group Decision Making (4 of 4)

Diversity among Decision Makers

Diverse groups are often less prone to groupthink because group members already differ from each other and thus are less subject to pressures for uniformity

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A diverse group that includes different genders, as well as people from various backgrounds brings a range of life experiences and opinions that inform the decision-making process of the group.

Organizational Learning and Creativity (1 of 3)

Organizational Learning

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

Copyright Morgan Lane Photography/Alamy RF

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Example or organizational learning from text: Managers at Walmart have used the lessons derived from its failures and successes in one country to promote global organizational learning across the many countries in which it now operates. When Walmart entered Malaysia, it was convinced customers there would respond to its one-stop shopping format. It found, however, that Malaysians enjoy the social experience of shopping in a lively market or bazaar and thus did not like the impersonal efficiency of the typical Walmart store.

Topics for Discussion (5 of 6)

What is organizational learning, and how can managers promote it? [LO5-4]

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Organizational learning is the process through which managers seek to improve organization members’ desire and ability to understand and manage the organization and its environment, so that they can make decisions that continuously raise organizational effectiveness. A learning organization is one that promotes creativity, or the ability of a decision maker to discover original and novel ideas that lead to feasible alternative courses of action. Creativity is at the heart of organizational learning, and managers can promote both by adopting Peter Senge’s five principles for creating a learning organization. If every employee is allowed to develop a sense of personal mastery, employees will be able to experiment and create and explore what they want. Employees must also be encouraged to develop complex mental models that challenge them to find new and better ways of doing things. Promoting group creativity is also essential because groups, rather than individuals, make most important decisions. Building a shared vision among employees requires managers to build a common mental model that all organizational members use to frame threats and opportunities. Finally, systems thinking is required for organizational learning. Learning at each level affects learning on other levels, and this must be understood for organizational learning to increase efficiency and effectiveness in the organization.

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Organizational Learning and Creativity (2 of 3)

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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A creative management team can improve the success of an organization. See the example of the Ford Motor Company in the text. Developing a learning organization is not quick nor is it easy, but it could prove beneficial to a company.

Senge’s Principles for Creating a Learning Organization

Figure 5.6

Jump to long image description.

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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

Is more important than individual learning since most decisions are made in groups.

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.

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Organizational Learning and Creativity (3 of 3)

Creativity

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

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Organizations often hire outside experts to help them develop programs to train managers creative thinking and problem solving.

Promoting Individual Creativity

Certain conditions enhance individual creativity

Opportunity and freedom to generate new ideas

Opportunity to experiment and learn from mistakes

No punishment for ideas that seem outlandish

Constructive feedback

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Having an anxious manager hover over an employee, trying to push a creative solution, may end up only stifling creativity.

Promoting 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.

Group member are encouraged to be as innovative and radical as possible.

When all alternatives are listed, the pros and cons of each are discussed and a short list created.

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Brainstorming can be used in groups, or individually. It’s usefulness is many; for example, it may be a creative way to come up with new branding or a new process within the organization.

Building Group Creativity (1 of 2)

Production Blocking

Loss of productivity in brainstorming sessions due to the unstructured nature of brainstorming

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

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The main reason for the loss of productivity in brainstorming appears to be production blocking, which occurs because group members cannot always 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 (2 of 2)

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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What happens if managers are in different cities or in different parts of the world and cannot meet face-to-face? Videoconferencing is one way to bring distant managers together to brainstorm. Another way is to use the Delphi technique, which is a written approach to creative problem solving.

Entrepreneurship and Creativity (1 of 3)

Entrepreneur

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

Social Entrepreneur

An individual who pursues initiatives and opportunities and mobilizes resources to address social problems and needs in order to improve society and wellbeing through creative solutions

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Entrepreneurs are an important source of creativity in the organizational world. Mentioned in the text are David Filo and Jerry Yang (founders of Yahoo!). One of the first to come to mind would be Steve Jobs, but we can also look to the past for successful entrepreneurs: Henry Ford, W.K. Kellogg, Ray Kroc. And female entrepreneurs Estee Lauder, Ruth Fertel (Ruth’s Chris Steak House), as well as Beyonce, Oprah Winfrey, and Arianna Huffington in the entertainment and media industries.

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Entrepreneurship and Creativity (2 of 3)

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

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Many managers with intrapreneurial talents have become entrepreneurs when their superiors decide neither to support nor to fund new product ideas and development efforts that the managers think will succeed.

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Entrepreneurship and Creativity (3 of 3)

Entrepreneurship

Mobilization of resources to take advantage of an opportunity to provide customers with new and improved goods and services

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Downsides of entrepreneurship include the lack of the founder’s patience to engage in the challenging work of management. Some may find it difficult to delegate authority, or become overloaded, making the quality of their decisions questionable.

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Topics for Discussion (6 of 6)

What is the difference between entrepreneurship and intrapreneurship? [LO5-5]

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Employees of existing organizations who notice opportunities for either quantum or incremental product improvements and are responsible for managing the product development process within their employer’s organization are called intrapreneurs. Entrepreneurs are persons who undertake the risk of starting and managing their own business.

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Intrapreneurship and Organizational Learning

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

Skunkworks

A group that is deliberately separated from normal operations to encourage members to devote all their attention to developing new products

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The text gives the example of 3M: 3M is a company well known for its attempts to promote intrapreneurship, encourages all its managers to become product champions and identify new product ideas. A product champion becomes responsible for developing a business plan for the product. Armed with this business plan, the champion appears before 3M’s product development committee, a team of senior 3M managers who probe the strengths and weaknesses of the plan to decide whether it should be funded. If the plan is accepted, the product champion assumes responsibility for product development.

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BE THE MANAGER

What are you doing to do?

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In this scenario, the CEO and the COO do not seem to be risk takers and appear afraid to venture beyond the status quo. You will have to convince them that your new ideas do not involve excessive levels of risk because they have been thoroughly researched. To do so, consider requesting a formal meeting with the CEO and COO at which the sole topic of discussion is your three proposals. At the meeting, the practicality and economic feasibility of each idea must be emphasized. Also, consider engaging in "devil’s advocacy" with the CEO and COO, which would give them the opportunity to thoroughly critique each proposal and address areas of uncertainty.

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APPENDICES

Long descriptions of images

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Appendix 1: The Classic Model of Decision Making

The following steps are presented in the graphic:

1. List all the alternative courses of action possible and the consequences of the different alternatives, which assumes all information about alternatives is available to managers.

2. Rank each alternative from least preferred to most preferred according to personal preferences, which assumes managers possess the mental facility to process this information.

3. Select the alternative that leads to desired future consequences, which assumes that managers know when future course of action is best for the organization.

Copyright McGraw-Hill Education. Permission required for reproduction or display.

Return to slide.

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Appendix 2: Why Information Is Incomplete

The cluster diagram has "incomplete information" in the center. Three factors are shown as causes for incomplete information. They are uncertainty and risk, ambiguous information, and time constraints and information costs.

Copyright McGraw-Hill Education. Permission required for reproduction or display.

Return to slide.

©McGraw-Hill Education.

Appendix 3: Steps in the Decision-Making Process

The graphics shows steps in the decision-making process. 1. recognize the need for a decision, 2. generate alternatives, 3. assess alternatives, 4. choose among alternatives, 5. implement the chosen alternative, and 6. learn from feedback.

Return to slide.

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