1. Chapter 1 1 7 7 Decision Making, Learning, Creativity, Entrepreneurship

2. 7-2 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Overview Programmed and non-programmed decisions Six steps for better decision making How cognitive biases can lead to poor decisions

3. 7-3 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Overview Advantages and disadvantages of group decision making How organizational learning can improve decision making The similarities between entrepreneurs and intrapreneurs

4. 7-4 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin What is Decision Making? Decision Making: Analyzing options and selecting goals and actions to seize opportunities or deflect threats

5. 7-5 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Decision Making Programmed Decision: Routine, automatic decision-making following established guidelines: “When you get down to three boxes of spark plugs, re-order.”

6. 7-6 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Decision Making Non-programmed Decision: Non-routine decision driven by unpredictable opportunities or threats No rules: ambiguous circumstances require analysis, intuition and judgment

7. 7-7 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Decision Making Intuition – feelings and hunches that come readily to mind, require little information gathering and result in on-the-spot decisions (YOUR GUT) Reasoned judgment – decisions requiring information gathering and the evaluation of alternatives (YOUR BRAIN)

8. 7-8 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin The Classical Model Classical Decision-making Model > Assumes the decision-maker can identify and fully evaluate all possible alternatives and their consequences then rationally choose the most appropriate course of action > Produces the most appropriate decision to optimize future consequences > Fatal flaw: assumes perfect knowledge that does not exist!

9. 7-9 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Classical Model List all possible alternatives and their consequences Rank-order them from most to least preferred Select the one most likely to deliver desired future consequences

10. 7-10 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin The Administrative Model Bounded rationality (i.e., REALITY) >Many alternatives available >Information ambiguous and extensive so managers cannot consider it all >Decisions limited by gathering and analyzing resources and people’s cognitive abilities >Most decisions based on incomplete information

11. 7-11 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Causes of Insufficient or Unreliable Information Risk: The degree of probability that the possible outcomes of a particular course of action will occur Uncertainty: Probabilities cannot be given for outcomes because the future is unknown. Constrained Resources: Not enough time, money and people to acquire “perfect knowledge”

12. 7-12 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Causes of Incomplete Information Ambiguous Information  Unclear information can be interpreted in multiple often conflicting ways. Figure 7.3 Young Woman or Old Woman?

13. 7-13 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Solution? 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 considered represent all options -- even though they know differently This is the typical response of managers dealing with incomplete information and limited resources

14. 7-14 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Decision-making Steps Step 1. Recognize Need for a Decision > Sparked by changes in the business environment Step 2. Generate Alternatives > Managers must develop feasible alternative courses of action. If good alternatives are missed, the decision will be poor It is hard to develop creative alternatives, so managers need to look for new ideas

15. 7-15 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Decision-making Steps Step 3: Evaluate Consequences of each:  What are the advantages and disadvantages of each?  How measured? Managers should specify criteria, then evaluate.  When ranking, all available information needs to be considered.

16. 7-16 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Decision-making Steps Step 4: Evaluate alternatives > Legal? > Ethical? > All stakeholders treated fairly?

17. 7-17 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Decision Making Steps Step 5: Implement Chosen Alternative > Managers must now carry out the alternative > Often a decision is made but not implemented Step 6: Learn From Feedback > Managers should consider what went right and wrong with the decision and learn for the future > Without feedback, managers do not learn from experience and will repeat the same mistakes > Use PDCA

18. 7-18 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Cognitive Biases and Decision Making Heuristics: Rules of thumb decision makers use to deal with complex situations within bounded rationality. If the “thumb” is skewed, the decision will be poor Systematic errors will appear over and over because the rule used to make decisions is flawed

19. 7-19 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Types of Cognitive Biases Prior Hypothesis Bias  Allowing strong prior beliefs about a relationship between variables (for example, the root cause of gender pay gaps) to influence decisions even when evidence shows they are wrong. Representativeness  The decision maker incorrectly generalizes a decision from a small sample (“My wife thinks…”)

20. 7-20 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Types of Cognitive Biases Illusion of Control The tendency to overestimate your ability to control activities and events -- ego Escalating Commitment Committing considerable resources to a project and then committing more even if evidence shows the project is failing (Gurney)

21. 7-21 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin In Summary Flawed assumptions and ego are the parents of most screw-ups; misplaced loyalty runs a close third. Be skeptical! Use facts! Demand results! Be tough!

22. 7-22 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Group Decision-making Usually superior to individual decision-making Choices less likely to fall victim to bias Able to draw on member’s combined skills and experience Builds ownership of the decision and the plans flowing from it Can be slow and lead to risk-avoidance, mediocrity and lack of creativity

23. 7-23 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Improving Group Decision-making Devil’s Advocacy A member defends opposing alternatives by criticizing group-preferred alternatives and pointing out their problems

24. 7-24 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Improving Group Decision Making Dialectical Inquiry  Two different groups are assigned the problem.  Each group presents its alternatives and each group critiques the other. Promote Diversity  Diversity in a group may result in consideration of more alternatives and better evaluation of the strengths and weaknesses of each

25. 7-25 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Organizational Learning and Creativity Organizational Learning  Managers seek to improve an employee’s desire and ability to understand and manage the organization and its environment in order to improve effectiveness. The Learning Organization  Managers try to maximize employee creativity in order to enhance organizational learning; requires mistakes to be viewed as learning experiences rather than causes for blame and punishment

26. 7-26 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Creating a Learning Organization Build a Shared Vision  People share a common mental model of the firm to evaluate opportunities Systems Thinking  People understand how actions in one area of the firm will impact other areas

27. 7-27 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Promoting Individual Creativity Organizations can build a supportive environment for creativity  Managers must provide employees the opportunity to take risks  Failure musts be rewarded (or at least not punished) and learned from

28. 7-28 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Building Group Creativity Brainstorming Managers meet face-to-face to generate and debate alternatives Group members are not allowed to evaluate alternatives until all are listed The pros and cons of each are discussed and a short list is created Someone must keep this sorting and sifting process on track

29. 7-29 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Entrepreneurship Entrepreneurs Individuals who notice opportunities and needs then mobilize resources to seize them with new or improved goods and services Intrapreneurs Entrepreneurs inside existing organizations who uncover opportunities and manage the development process (people with an urgent heart)

30. 7-30 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Entrepreneurial/Intrapreneurial Traits > High self-esteem > Open to new experience > Creative thinker > Internal locus of control > High need for achievement > Risk-taker LEADER!

31. 7-31 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Summary for the Tool Box Create and support a diverse, creative, organization that rewards risk-taking and learns from failure Encourage and reward intrapreneurs Use cross-functional teams, brainstorming and devil’s advocacy to maximize analyzed alternatives and improve decision-making Constantly re-examine assumptions in light of new information

32. 7-32 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin For the Tool Box Unless it will deliver first-mover advantage, don’t make any decision before its time; but prepare and don’t hesitate when the time arrives; you will never have perfect knowledge Maintain on-the-shelf alternatives Learn from both success and failure Institutionalize continuous improvement with PDCA