Programmed and nonprogrammed decisions in management

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Decision Making, Planning, and Strategy

CHAPTER 7 Decision Making, Learning, Creativity, and Entrepreneurship

Learning Objectives After studying this chapter, you should be able to:

LO7- 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.

LO7- 2

Describe the six steps managers should take to make the best decisions, and explain how cognitive biases can lead managers to make poor decisions.

LO7- 3

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

LO7- 4

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

LO7- 5

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

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A MANAGER'S CHALLENGE

Decision Making and Learning at 1-800-Flowers.com

Why are decision making and learning the keys to entrepreneurial success? All managers must make decisions day in and day out under considerable uncertainty. And sometimes those decisions come back to haunt them if they turn out poorly. Sometimes even highly effective managers make bad decisions. And factors beyond a manager's control, such as unforeseen changes in the environment, can cause a good decision to result in unexpected negative consequences. Effective managers recognize the critical importance of making decisions on an ongoing basis as well as learning from prior decisions.

Decision making and learning have been key to Jim McCann's success in building a small florist shop into a global business with $1 billion in 2013 revenues headquartered in Carle Place, New York.1 In fact, learning and decision making have been mainstays for McCann throughout his life and career. As a child growing up in Queens, New York, McCann learned about plumbing, electrical work, and woodworking from his father, who had a small painting business. While he was bartending at night and going to college in the day, a friend let him know about an opportunity to work evenings in a group home for teenage boys. McCann decided to seize this opportunity, and while continuing to go to college in the day, he worked and slept (in his own room) in the St. John's Home for Boys in Queens. McCann was a psychology major and learned a lot from working and living with 10 teenage boys.2 When he graduated, he continued to work at the home in administration for 14 years.3

McCann continued to bartend at night to make some extra money for his family, and one of his customers told him that he was planning on selling a small flower shop.4 McCann thought he might like to learn that business and buy the shop, so he asked the customer if he could work in the shop a couple of weekends to see what it was like.5 McCann ending up buying the store for $10,000, continued to work at the home for boys, and learned the flower business—and the rest has made history.6

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When he bought the store, he decided he wanted to somehow turn it into a larger organization.7 So he kept looking for additional opportunities to buy or open up flower shops. Ten years later he had over 20 flower stores and quit his job at the home for boys to work full-time on his flower shop business (by now his siblings were also working in the business).8

In the late 1980s McCann happened to hear a commercial on the radio for 1-800-Flowers, the first company that enabled customers to call a toll-free number to order flowers.9 McCann decided to see if he could be a distributor for this company, called them, and became the florist for New York; this helped expand his business. However, over time, McCann stopped getting orders from this source of customers. McCann went to Dallas where the company was based and found out that although its owners had raised about $10 million in funding, they had ceased operating because of a lack of business.10

McCann decided to try to buy the business with his savings from his own business, while saving money by not involving lawyers, accountants, or bankers in the transaction.11 He offered the owners $2 million for their 800 flower business and they accepted. Soon after, McCann discovered that in buying the business, he had become responsible for the $7 million in debt that the business had accrued and that his decision to buy 1-800-Flowers amounted to a big mistake.12

Determined to turn around this mistake, McCann turned his store in Queens into a telemarketing firm for flowers, but business was lackluster.13 He tried to assuage his debtors while figuring out how to turn the business around. While on a trip to Dallas, he seized an opportunity to expand his business presented to him by Larry Zarin, who was marketing Kellogg's Nutri-Grain.14 Zarin and McCann agreed that they would put advertisements on boxes of Nutri-Grain indicating that if customers bought the cereal, they could buy a dozen roses from 1-800-Flowers for $14.99. To their amazement, they received 30,000 orders for flowers, didn't have the floral capacity across the United States to fill them, and so created a box to ship flowers overnight via FedEx. And the rest has been history. A similar promotion worked with Zales jewelry stores, helping make the company known across the country (its network of florists is called BloomNet).15

In the early 1990s McCann and his brother and partner, Chris, decided they wanted to put their business online.16 They met with Steve Case, one of the cofounders of AOL, and Ted Leonsis, and they were the first organization to have an online transaction over AOL. In the early days on the Internet, 1-800-Flowers.com had considerable competition. The company went public in 1999 and raised funds to create a better technological platform. By 2013 revenues had grown to $1 billion (including $200 million from franchises).17

Jim and Chris McCann and other managers at 1-800-Flowers.com continue to make decisions and learn to this day. 1-800-Flowers.com has become active in the social-mobile-local retail space and sells gifts for all occasions as well as flowers.18 For example, 1-800-Flowers.com was the first organization to sell gifts on Facebook beginning at $5.19 Clearly, learning and decision making have been crucial ingredients for the entrepreneurial success story behind 1-800-Flowers.com.20

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Overview LO7-1 Understand the nature of managerial decision making, differentiate between programmed and nonprogrammed decisions, and explain why nonprogrammed decision making is a complex, uncertain process.

“A Manager's Challenge” illustrates how decision making and learning are an ongoing challenge for managers that can profoundly influence organizational effectiveness. McCann's decision to seize an opportunity and buy a small flower shop and his subsequent decisions along the way have had a dramatic effect on his business.21 The decisions managers make at all levels in companies large and small can change the growth and prosperity of these companies and the well-being of their employees, customers, and other stakeholders. Yet such decisions can be difficult to make because they are fraught with uncertainty.

In this chapter we examine how managers make decisions, and we explore how individual, group, and organizational factors affect the quality of the decisions they make and ultimately determine organizational performance. We discuss the nature of managerial decision making and examine some models of the decision- making process that help reveal the complexities of successful decision making. Then we outline the main steps of the decision-making process; in addition, we explore the biases that may cause capable managers to make poor decisions both as individuals and as members of a group. Next we examine how managers can promote organizational learning and creativity and improve the quality of decision making throughout an organization. Finally we discuss the important role of entrepreneurship in promoting organizational creativity, and we differentiate between entrepreneurs and intrapreneurs. By the end of this chapter you will appreciate the critical role of management decision making in creating a high-performing organization.

The Nature of Managerial Decision Making Every time managers act to plan, organize, direct, or control organizational activities, they make a stream of decisions. In opening a new restaurant, for example, managers have to decide where to locate it, what kinds of food to provide, which people to employ, and so on. Decision making is a basic part of every task managers perform. In this chapter we study how these decisions are made.

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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As we discussed in the last three chapters, one of the main tasks facing a manager is to manage the organizational environment. Forces in the external environment give rise to many opportunities and threats for managers and their organizations. In addition, inside an organization managers must address many opportunities and threats that may arise as organizational resources are used. To deal with these opportunities and threats, managers must make decisions—that is, they must select one solution from a set of alternatives. Decision making is the process by which managers respond to opportunities and threats by analyzing the options and making determinations, or decisions, about specific organizational goals and courses of action. Good decisions result in the selection of appropriate goals and courses of action that increase organizational performance; bad decisions lower performance.

Decision making in response to opportunities occurs when managers search for ways to improve organizational performance to benefit customers, employees, and other stakeholder groups. In “A Manager's Challenge,” Jim McCann seized the opportunities to buy a flower shop and expand his business in multiple ways including going online. Decision making in response to threats occurs when events inside or outside the organization adversely affect organizational performance and managers search for ways to increase performance.22 Decision making is central to being a manager, and whenever managers engage in planning, organizing, leading, and controlling—their four principal tasks—they are constantly making decisions.

Managers are always searching for ways to make better decisions to improve organizational performance. At the same time they do their best to avoid costly mistakes that will hurt organizational performance. Examples of spectacularly good decisions include Martin Cooper's decision to develop the first cell phone at Motorola and Apple's decision to develop the iPod.23 Examples of spectacularly bad decisions include the decision by managers at NASA and Morton Thiokol to launch the Challenger space shuttle—a decision that killed six astronauts in 1986—and the decision by NASA to launch the Columbia space shuttle in 2003, which killed seven astronauts.

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Programmed and Nonprogrammed Decision Making Regardless of the specific decisions a manager makes, the decision-making process is either programmed or nonprogrammed.24

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

PROGRAMMED DECISION MAKING Programmed decision making is a routine, virtually automatic process. Programmed decisions are decisions that have been made so many times in the past that managers have developed rules or guidelines to be applied when certain situations inevitably occur. Programmed decision making takes place 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; and when an office manager orders basic office supplies, such as paper and pens, whenever the inventory of supplies drops below a certain level. Furthermore, in the last example, the office manager probably orders the same amount of supplies each time.

This decision making is called programmed because office managers, for example, do not need to repeatedly make new judgments about what should be done. They can rely on long-established decision rules such as these:

Rule 1: When the storage shelves are three-quarters empty, order more copy paper. Rule 2: When ordering paper, order enough to fill the shelves.

Managers can develop rules and guidelines to regulate all routine organizational activities. For example, rules can specify how a worker should perform a certain task, and rules can specify the quality standards that raw materials must meet to be acceptable. Most decision making that relates to the day-to-day running of an organization is programmed decision making. Examples include deciding how much inventory to hold, when to pay bills, when to bill customers, and when to order materials and supplies. Programmed decision making occurs when managers have the information they need to create rules that will guide decision making. There is little ambiguity involved in assessing when the stockroom is empty or counting the number of new students in class.

As profiled in the accompanying “Focus on Diversity” feature, effectively training new employees is essential to reap the benefits of programmed decision making.

Focus on Diversity

Programmed Decision Making at UPS

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UPS is unrivaled in its use of programmed decision making. Practically all the motions, behaviors, and actions that its drivers perform each day have been carefully honed to maximize efficiency and minimize strain and injuries while delivering high-quality customer service. For example, a 12-step process prescribes how drivers should park their trucks, locate the package they are about to deliver, and step off the truck in 15.5 seconds (a process called “selection” at UPS).25 Rules and routines such as these are carefully detailed in UPS's “340 Methods” manual (UPS actually has far more than 340 methods). Programmed decision making dictates where drivers should stop to get gas, how they should hold their keys in their hands, and how to lift and lower packages.26

When programmed decision making is so heavily relied on, ensuring that new employees learn tried-and- true routines is essential. UPS has traditionally taught new employees with a two-week period of lectures followed by practice.27 In the 2000s, however, managers began to wonder if they needed to alter their training methods to suit their new Generation Y trainees (Generation Y typically refers to people born after 1980), who were not so keen on memorization and drills.28 Generation Y trainees seemed to require more training time to become effective drivers (90–180 days compared to a typical average of 30–45 days), and quit rates for new drivers had increased.29

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Given the fundamental importance of performance programs for UPS operations, managers decided to try to alter the training new hires receive so it would be better received by Generation Y trainees. In the late 2000s, UPS opened an innovative Landover, Maryland, training center called UPS Integrad, which has over 11,000 square feet and cost over $30 million to build and equip. Integrad was developed over a three-year period through a collaborative effort of over 170 people, including UPS top managers (many of whom started their careers with UPS as drivers), teams from Virginia Tech and MIT, animators from the Indian company Brainvisa, and forecasters from the Institute for the Future with the support of a grant from the Department of Labor for $1.8 million.30 Results thus far suggest that Integrad training results in greater driver proficiency and fewer first-year accidents and injuries.31

Training at Integrad emphasizes hands-on learning.32 For example, at Integrad a UPS truck with transparent sides is used to teach trainees selection so they can actually see the instructor performing the steps and then practice the steps themselves rather than trying to absorb the material in a lecture. Trainees can try different movements and see, with the help of computer diagrams and simulations, how following UPS routines will help protect them from injury and how debilitating work as a driver can be if they do not follow routines. Video recorders track and document what trainees do correctly and incorrectly so they can see it for themselves rather than relying on feedback from an instructor, which they might question. As Stephen Jones, Director of International Training & Development at UPS,33 indicates, “Tell them what they did incorrectly, and they'll tell you, ‘I didn't do that. You saw wrong.’ This way we've got it on tape and they can see it for themselves.”34

At Integrad, trainees get practice driving in a pseudo town that has been constructed in a parking lot.35 They also watch animated demonstrations on computer screens, participate in simulations, take electronic quizzes, and receive scores on various components that are retained in a database to track learning and performance. Recognizing that Generation Y trainees have a lot of respect for expertise and reputation, older employees also are brought in to facilitate learning at Integrad. For example, long-time UPS employee Don Petersik, who has since retired from UPS,36 trained facilitators at Integrad and shared stories with them to reinforce the UPS culture—such as the time he was just starting out as a preloader and, unknown to him, the founder of UPS, Jim Casey, approached him and said, “Hi, I'm Jim. I work for UPS.”37 As Petersik indicated, “What's new about the company now is that our teaching style matches your learning styles.”38 Clearly, when learning programmed decision making is of utmost importance, as it is at UPS, it is essential to take into account diversity in learning styles and approaches.

NONPROGRAMMED DECISION MAKING Suppose, however, managers are not certain that a course of action will lead to a desired outcome. Or in even more ambiguous terms, suppose managers are not even sure what they are trying to achieve. Obviously rules cannot be developed to predict uncertain events.

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

Nonprogrammed decision making is required for these nonroutine decisions. Nonprogrammed decisions are made in response to unusual or novel opportunities and threats. Nonprogrammed decision making occurs when there are no ready-made decision rules that managers can apply to a situation. 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. Examples of nonprogrammed decision making include decisions to invest in a new technology, develop a new kind of product, launch a new promotional campaign, enter a new market, expand internationally, or start a new business as did Jim McCann in “A Manager's Challenge.”

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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 A decision that requires time and effort and results from careful information gathering, generation of alternatives, and evaluation of alternatives.

How do managers make decisions in the absence of decision rules? They may rely on their intuition— feelings, beliefs, and hunches that come readily to mind, require little effort and information gathering, and result in on-the-spot decisions.39 Or they may make reasoned judgments—decisions that require time and effort and result from careful information gathering, generation of alternatives, and evaluation of alternatives. “Exercising” one's judgment is a more rational process than “going with” one's intuition. For reasons that we examine later in this chapter, both intuition and judgment often are 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.40 In the remainder of this chapter, when we talk about decision making, we are referring to nonprogrammed decision making because it causes the most problems for managers and is inherently challenging.

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Nonprogrammed decision making covers areas with no previous benchmarks or rubrics, such as seen in this photo.

Sometimes managers have to make rapid decisions and don't have time to carefully consider the issues involved. They must rely on their intuition to quickly respond to a pressing concern. For example, when fire chiefs, captains, and lieutenants manage firefighters battling dangerous, out-of-control fires, they often need to rely on their expert intuition to make on-the-spot decisions that will protect the lives of the firefighters and save the lives of others, contain the fires, and preserve property—decisions made in emergency situations entailing high uncertainty, high risk, and rapidly changing conditions.41 In other cases managers do have time to make reasoned judgments, but there are no established rules to guide their decisions, such as when deciding whether to proceed with a proposed merger.

Regardless of the circumstances, making nonprogrammed decisions can result in effective or ineffective decision making. As indicated in the accompanying “Manager as a Person” feature, managers have to be on their guard to avoid being overconfident in decisions that result from either intuition or reasoned judgment.

Manager as a Person

Curbing Overconfidence Should managers be confident in their intuition and reasoned judgments?42 Decades of research by Nobel Prize winner Daniel Kahneman, his longtime collaborator the late Amos Tversky, and other researchers suggests that managers (like all people) tend to be overconfident in the decisions they make, whether based on intuition or reasoned judgment.43 And with overconfidence comes failure to evaluate and rethink the wisdom of the decisions one makes and failure to learn from mistakes.44

Kahneman distinguishes between the intuition of managers who are truly expert in the content domain of a decision and the intuition of managers who have some knowledge and experience but are not true experts.45

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Although the intuition of both types can be faulty, that of experts is less likely to be flawed. This is why fire captains can make good decisions and why expert chess players can make good moves, in both cases without spending much time or deliberating carefully on what, for nonexperts, is a complicated set of circumstances. What distinguishes expert managers from those with limited expertise is that the experts have extensive experience under conditions in which they receive quick and clear feedback about the outcomes of their decisions.46

Unfortunately managers who have some experience in a content area but are not true experts tend to be overly confident in their intuition and their judgments.47 As Kahneman puts it, “People jump to statistical conclusions on the basis of very weak evidence. We form powerful intuitions about trends and about the replicability of results on the basis of information that is truly inadequate.”48 Not only do managers, and all people, tend to be overconfident about their intuition and judgments, but they also tend not to learn from mistakes. Compounding this undue optimism is the human tendency to be overconfident in one's own abilities and influence over unpredictable

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events. Surveys have found that the majority of people think they are above average, make better decisions, and are less prone to making bad decisions than others (of course it is impossible for most people to be above average on any dimension).49

Examples of managerial overconfidence abound. Research has consistently found that mergers tend to turn out poorly—postmerger profitability declines, stock prices drop, and so forth. For example, Chrysler had the biggest profits of the three largest automakers in the United States when it merged with Daimler; the merger was a failure and both Chrysler and Daimler would have been better off if it never had happened.50 One would imagine that top executives and boards of directors would learn from this research and from articles in the business press about the woes of merged companies (such as the AOL–Time Warner merger and the Hewlett-Packard–Compaq merger).51 Evidently not. Top managers seem to overconfidently believe that they can succeed where others have failed.52 Similarly, whereas fewer than 35 percent of new small ventures succeed as viable businesses for more than five years, entrepreneurs, on average, tend to think that they have a 6 out of 10 chance of being successful.53

Jeffrey Pfeffer, a professor at Stanford University's Graduate School of Business, suggests that managers can avoid the perils of overconfidence by critically evaluating the decisions they have made and the outcomes of those decisions. They should admit to themselves when they have made a mistake and really learn from their mistakes (rather than dismissing them as flukes or situations out of their control). In addition, managers should be leery of too much agreement at the top. As Pfeffer puts it, “If two people agree all the time, one of them is redundant.”54

The classical and administrative decision-making models reveal many of the assumptions, complexities, and pitfalls that affect decision making. These models help reveal the factors that managers and other decision makers must be aware of to improve the quality of their decision making. Keep in mind, however, that the classical and administrative models are just guides that can help managers understand the decision-making process. In real life the process is typically not cut-and-dried, but these models can help guide a manager through it.

The Classical Model 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.

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

One of the earliest models of decision making, the classical model, is prescriptive, which means it specifies how decisions should be made. Managers using the classical model make a series of simplifying assumptions about the nature of the decision-making process (see Figure 7.1). The premise of the classical model 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 and make the best choice. In other words, the classical model assumes managers

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