Chapter Seven

Decision Making,
Learning, Creativity and
Entrepreneurship

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
 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.

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 Decision Making

 Programmed Decision
≈ Routine, virtually automatic process
≈ Decisions have been made so many times in
the past that managers have developed rules
or guidelines to be applied when certain
situations inevitably occur

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 Decision Making

 Non-Programmed Decisions
≈ Non-routine decision made in response to
unusual or novel opportunities and threats.
≈ The are no rules to follow since the decision is
new.

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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
 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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 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.

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The Classical Model of Decision Making

Figure 7.1

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 The Administrative Model

 Administrative Model
≈ 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

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 The Administrative Model

 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 people’s cognitive
limitations.

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 The Administrative Model

 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.
≈ Ambiguous Information
 Information whose meaning is not clear allowing it to be
interpreted in multiple or conflicting ways.
≈ 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

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 Six Steps in Decision Making

Figure 7.4

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General Criteria for Evaluating Possible
Courses of Action

Figure 7.5

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 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.
 Systematic errors
≈ errors that people make over and over and
that result in poor decision making

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 Sources 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
episode.

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 Sources of Cognitive Biases

 Illusion of Control
≈ The tendency to overestimate one’s own
ability to control activities and events.
 Escalating Commitment
≈ Committing considerable resources to a
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

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 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

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 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

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Devil’s Advocacy and Dialectical Inquiry

Figure 7.7

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 Organizational Learning and Creativity

 Organizational learning
≈ 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.
 Learning organization
≈ Managers try to maximize the people’s ability
to behave creatively to maximize
organizational learning.

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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.

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Senge’s Principles for Creating a
Learning Organization

Figure 7.8

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 Building Group Creativity

 Brainstorming
≈ Managers meet face-to-face to generate and
debate many alternatives.
 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

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 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

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 Entrepreneurship

 Entrepreneurs
≈ Individuals who identify opportunities and take
responsibility for mobilizing the resources
necessary to produce new and improved goods
and services.
 MNGT 352, 353, 354, 455
 Case Study: The White House restaurant, New Harmony
 Social entrepreneurs
≈ those who pursue initiatives and opportunities to
address social problems and needs in order to
improve society

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 Entrepreneurship

 Intrapreneurs
≈ Individuals (managers, scientists, or
researchers) who work inside an existing
organization and identify an opportunity for
product improvements and are responsible for
managing the product development process.
 Case Study: Berry Plastics,
business plan competition
 Case Study: Evansville ARC, Ideation competition

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 Characteristics of Entrepreneurs

 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.

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 Entrepreneurship and Management

 Frequently, founding entrepreneur lacks

the skills, patience, and experience to
engage in the difficult and challenging
work of management

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 Intrapreneurship and
Organizational Learning

 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.

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