Decision Making, Learning, Creativity, and Entrepreneurship Chapter Five McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives LO1 Understand the nature of managerial decision making, differentiate between programmed and nonprogrammed decisions, and explain why nonprogrammed decision making is a complex, uncertain process. LO2 Describe the six steps that managers should take to make the best decisions LO3 Identify the advantages and disadvantages of group decision making, and describe techniques that can improve it

Learning Objectives LO4 Explain the role that organizational learning and creativity play in helping managers to improve their decisions. LO5 Describe how managers can encourage and promote entrepreneurship to create a learning organization, and differentiate between entrepreneurs and intrapreneurs

The Nature of Managerial 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 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 Programmed Decision 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 Little ambiguity involved

Decision Making Non-Programmed Decisions Nonroutine decision making that occurs in response to unusual, unpredictable opportunities and threats.

Question? What are feelings, beliefs, and hunches that come readily to mind and require little effort? Reasoned Judgment Intuition Wild Guess Scientific Deduction The answer is “B”, Intuition. See slide 5-8

Decision Making Intuition Reasoned judgment 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 5-8

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

The Classical Model of Decision Making Figure 5.1 5-10

The Administrative Model Administrative Model of Decision Making 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 Bounded rationality, incomplete information Bounded rationality Cognitive limitations that constrain one’s ability to interpret, process, and act on information

Why Information Is Incomplete Figure 5.2 5-12

Causes of Incomplete Information 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 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 known such as the success of a new product introduction.

Causes of Incomplete Information Ambiguous Information Information that can be interpreted in multiple and often conflicting ways. Young Woman or Old Woman Figure 5.3 5-14

Causes of Incomplete Information Time constraints and information costs managers have neither the time nor money to search for all possible alternatives and evaluate potential consequences

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 Managers explore a limited number of options and choose an acceptable decision rather than the optimum decision Managers assume that the limited options they examine represent all options. This is the typical response of managers when dealing with incomplete information.

Six Steps in Decision Making Figure 5.4 5-17

Discussion Question? Which is the most important step in the decision making process? Recognize the need for a decision Generate Alternatives Assess Alternatives Choose among Alternatives Implement the Chosen Alternative Learn from Feedback The correct answer depends on the situation. Students may want to discuss situations in which different steps would be more important than others. In dynamic situations, problems are more easily recognized and the alternatives become more important. In situations that have only one obvious alternative, implementation becomes more important.

Decision Making Steps Step 1. Recognize Need for a Decision Sparked by an event such as environment changes. Managers must first realize that a decision must be made.

Decision Making Steps Step 2. Generate Alternatives Managers must develop feasible alternative courses of action If good alternatives are missed, the resulting decision is poor It is hard to develop creative alternatives, so managers need to look for new ideas

Decision Making Steps Step 3. Evaluate Alternatives What are the advantages and disadvantages of each alternative? Managers should specify criteria, then evaluate.

General Criteria for Evaluating Possible Courses of Action Figure 5.5 5-22

Decision Making Steps Step 4. Choose Among Alternatives Rank the various alternatives and make a decision Tendency is for managers to ignore critical information, even when available

Decision Making Steps Step 5. Implement Chosen Alternative Managers must now carry out the alternative Often a decision is made and not implemented

Decision Making Steps Step 6. Learn From Feedback Compare what happened to what was expected to happen Explore why any expectations for the decision were not met Derive guidelines that will help in future decision making

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 Allows managers to process more information Managers affected by decisions agree to cooperate 5-26

Group Decision Making 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

Group Decision Making Devil’s Advocacy Critical analysis of a preferred alternative to ascertain its strengths and weaknesses before it is implemented

Organizational Learning and Creativity The process through which 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

Senge’s Principles for Creating a Learning Organization 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. Figure 5.6 5-30

Question? What is a decision maker’s ability to discover original and novel ideas that lead to feasible alternative courses of action? Risk Decision-making Creativity Inventiveness The correct answer is “C”, creativity. See slide 5-36.

Organizational Learning and Creativity A decision maker’s ability to discover original and novel ideas that lead to feasible alternative courses of action Innovation The implementation of creative ideas in an organization. 5-32

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

Building Group Creativity 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

Building Group Creativity 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

Entrepreneurship and Creativity an individual who notices opportunities and decides how to mobilize the resources necessary to produce new and improved goods and services Social entrepreneurs individuals who pursue initiatives and opportunities to address social problems and needs in order to improve society and well-being

Entrepreneurship and Creativity 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

Entrepreneurship and Creativity Mobilization of resources to take advantage of an opportunity to provide customers with new and improved goods and services 5-38

Intrapreneurship and Creativity 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 who is deliberately separated from normal operations to encourage them to devote all their attention to developing new products 5-39

Video Case: Laser Monks Which aspect of LaserMonks’ formula—quality products, competitive prices, or social entrepreneurship—would increase the chance that you would buy from this company? Which entrepreneurial characteristics does Brother Bernard McCoy exhibit? LaserMonks   Teaching Objective: To show how a social entrepreneur has built a multi-million dollar Web-based business Summary: Brother Bernard McCoy and four fellow monks needed a source of income when McCoy thought of selling toner and ink. His start-up, offering new and recycled inkjet products comparable to name brands, has grown to a thriving $5 million business through online and catalog sales of thousands of office supply products at competitive prices. LaserMonks donates all profits to charities around the world. Questions: Which aspect of LaserMonks’ formula—quality products, competitive prices, or social entrepreneurship—would increase the chance that you would buy from this company? This question tries to identify how important social entrepreneurship is to the students. How do they value giving profits to charity compared to buying at lower prices or getting products equal in quality to those elsewhere? 2. Which entrepreneurial characteristics does Brother Bernard McCoy exhibit? He shows he has a high need for achievement. He meets high standards of personal excellence in living the disciplined life of a monk and has a strong desire to perform a challenging task—doing good in the world. He has an internal locus of control, with the knowledge that his actions as founder and CEO determine LaserMonks’ outcome. In starting a company and handling the uncertainty, he shows a high level of self-esteem. Of course he’s a social entrepreneur, since he pursued the opportunity to sell ink and toner in large part to improve society. 3. What does the fact that Brother Bernard and the other monks no longer handle their company’s operations say about them as managers? As the company grew, the monks made the good decision to entrust experienced managers with developing efficient systems and procedures and managing the operations. The monks did not have the time to manage the growing enterprise unless they compromised their study and prayer, activities integral to monastery life. Nor did they have the expertise to expand the business effectively on their own. Brother Bernard had the foresight to envision what LaserMonks could become and what it could do for others if it prospered and could donate more money to charity. He and the other monks continue to look at the “big picture” of business development.