Decision Making,

Learning, Creativity,
and Entrepreneurship
McGraw-Hill/Irwin
Contemporary Management, 5/e
Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.
chapter seven
7-3
Learning Objectives
After studying the chapter, you should be able
to:
Differentiate between programmed and
nonprogrammed decisions, and explain why
nonprogrammed decision making is a
complex, uncertain process.
Describe the six steps that managers
should take to make the best decisions.
Explain how cognitive biases can lead
managers to make poor decisions.
7-4
Learning Objectives
Identify the advantages and disadvantages
of group decision making, and describe
techniques that can improve it.
Explain the role that organizational learning
and creativity play in helping managers to
improve their decisions.
Describe how managers can encourage and
promote entrepreneurship to create a
learning organization and differentiate
between entrepreneurs and intrapreneurs

7-5
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.
7-6
The Nature of Managerial
Decision Making
Decisions in response to opportunities
occurs when managers respond to ways
to improve organizational performance to
benefit customers, employees, and other
stakeholder groups
Decisions in response to threats
events inside or outside the organization
are adversely affecting organizational
performance

7-7
Decision Making
Programmed Decision
Routine, virtually automatic decision making
that follows established rules or guidelines.
Managers have made the same decision
many times before
Little ambiguity involved
7-8
Decision Making
Non-Programmed Decisions
Nonroutine decision made in response to
unusual or novel opportunities and threats.
The are no rules to follow since the decision
is new.
Decisions are made based on information,
and a managers intuition, and judgment.
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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
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Decision Making
Reasoned judgment
decisions that take time and effort to make
and result from careful information
gathering, generation of alternatives, and
evaluation of
alternatives

7-11
Question?
Which decision model assumes the
decision maker can identify and
evaluate all possible alternatives?
A. Neo-classical
B. Classical
C. Administrative
D. practical

7-12
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.
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The Classical Model of Decision Making
Figure 7.1
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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 can
rarely make decisions in the manner
prescribed by the classical model
7-15
The Administrative Model
Administrative Model of Decision Making
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 peoples cognitive
limitations.
Incomplete information
Because of risk and uncertainty, ambiguity,
and time constraints
7-16
Why Information Is Incomplete
Figure 7.2
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Causes of 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.
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Causes of Incomplete Information
Ambiguous
Information
Information whose
meaning is not
clear allowing it to
be interpreted in
multiple or
conflicting ways.
Figure 7.3
Young Woman
or Old Woman
7-19
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
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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.

7-21
Causes of Incomplete Information
Managers explore a limited number of
options and choose an acceptable
decision rather than the optimum
decision.
This is the typical response of managers
when dealing with incomplete
information.
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Six Steps in Decision Making
Figure 7.4
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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.
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.
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Decision Making Steps
Step 3. Evaluate Alternatives
What are the advantages and
disadvantages of each alternative?
Managers should specify criteria, then
evaluate.
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Decision Making Steps
Criteria

Legality Is the alternative legal and will not violate any
domestic and international laws or
government regulations?
Ethicalness

Is the alternative ethical and will not bring
harm stakeholders unnecessarily?
Economic Feasibility Can organizations performance goals sustain
this alternative?
Practicality

Does the management have the capabilities
and resources required to implement the
alternative?

Step 3. Evaluate alternatives
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Figure 7.5
General
Criteria for
Evaluating
Possible
Courses of
Action
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Decision Making Steps
Step 4. Choose Among Alternatives
Rank the various alternatives and make a
decision
Managers must be sure all the information
available is brought to bear on the problem
or issue at hand

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Decision Making Steps
Step 5. Implement Chosen Alternative
Managers must now carry out the alternative.
Often a decision is made and 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 mistake over.
7-29
Discussion Question?
Which step in the decision making process
is the most important?
A. Generating alternatives
B. Choosing an alternative
C. Evaluating alternatives
D. Learning from feedback
7-30
Feedback Procedure
1. Compare what actually happened to
what was expected to happen as a
result of the decision
2. Explore why any expectations for the
decision were not met
3. Derive guidelines that will help in future
decision making
7-31
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.
If the heuristic is wrong, however, then poor
decisions result from its use.
Systematic errors errors that people make
over and over and that result in poor
decision making
7-32
Sources of Cognitive Bias at the
Individual and Group Levels
Figure 7.6
7-33
Types 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
incident.
7-34
Types of Cognitive Biases
Illusion of Control
The tendency to overestimates ones own
ability to control activities and events.
Escalating Commitment
Committing considerable resources to
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

7-36
Group Decision Making
Allows managers to process more
information
Managers affected by decisions agree to
cooperate
7-37
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
7-38
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
7-39
Improved Group Decision Making
Devils Advocacy
Critical analysis of a preferred alternative to
ascertain its strengths and weaknesses
before it is implemented
One member of the group who acts as the
devils advocate by critiquing the way the
group identified alternatives and pointing out
problems with the alternative selection.
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Improved Group Decision Making
Dialectical Inquiry
Two different groups are assigned to the problem
and each group is responsible for evaluating
alternatives and selecting one of them
Top managers then hear each group present their
alternatives and each group can critique the other.
Promote Diversity
Increasing the diversity in a group may result in
consideration of a wider set of alternatives.
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Devils Advocacy and Dialectical Inquiry
Figure 7.7
7-42
Organizational Learning and
Creativity
Organizational Learning
Managers seek to improve a employees
desire and ability to understand and
manage the organization and its task
environment so as to raise effectiveness.
The Learning Organization
Managers try to maximize the peoples
ability to behave creatively to maximize
organizational learning.
7-43
Question?
What is the ability of the decision maker to
discover novel ideas leading to a
feasible course of action?
A. Originality
B. Imagination
C. Creativity
D. Ingenuity

7-44
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.
7-45
Senges Principles for Creating a
Learning?
Figure 7.8
7-46
Creating a Learning Organization
1. Personal Mastery
Managers empower employees and allow them to
create and explore.
2. Mental Models
Challenge employees to find new, better methods
to perform a task.
3. Team Learning
Learning that takes place in a group or team.
7-47
Creating a Learning Organization
4. Build a Shared Vision
People share a common mental model of
the firm to evaluate opportunities.
5. Systems Thinking
Knowing and understanding how actions
in one area of the firm will impact other
areas of the firm.
7-48
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.
7-49
Building Group Creativity
Production Blocking
Occurs because group members cannot
simultaneously make sense of all the
alternatives being generated, think up
additional alternatives, and remember what
they were thinking

7-50
Building Group Creativity
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
7-51
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
7-52
Entrepreneurship
Entrepreneurs
Individuals who notice opportunities and
take the responsibility for mobilizing the
resources necessary to produce new and
improved goods and services.
7-53
Entrepreneurship
Intrapreneurs
Individuals (managers, scientists, or
researchers) who work inside an existing
organization and notice an opportunity for
product improvements and are responsible
for managing the product development
process.

7-54
Entrepreneurship and New Ventures
Characteristics of entrepreneursmost
share these common traits:
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.
7-55
Entrepreneurship and Management
People can become involved in
entrepreneurial ventures by starting a
business from scratch
Frequently need to hire other people to
help them run the business
7-56
Entrepreneurship and Management
Frequently, founding entrepreneur lacks
the skills, patience, and experience to
engage in the
difficult and
challenging work
of management

7-57
Intrapreneurship and
Organizational Learning
Learning organizations encourage their
employees to act as intrapreneurs:
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.
7-58
Movie Example: Youve Got Mail
How will Kathleen use
the decision making
process with the
arrival of the Fox
Book Superstore?