I.

THE NATURE OF MANAGERIAL DECISION MAKING

A. Decision makingis the process by which managers respond to the

opportunities and threats that confront them by analyzing the options and making
determinations, or decisions about specific organizational goals and courses of
action.

1. A good decisionresults in the selection of appropriate goals and courses of

action that increase organizational performance. Bad decisionsresult in lower
performance.

2. Decision making in response to opportunities occurs when managers search for

ways to improve organizational performance. Decision-making in response to
threats occurs when events are adversely affecting organizational performance and
managers are searching for ways to increase performance.

3. Decision making is central to being a manager, and whenever managers engage in

planning, organizing, leading, and controlling, they are constantly making decisions.

4. Managers are always searching for ways to improve their decision making in order
to improve organizational performance.

B. Programmed and Non programmed Decision Making

1. All decisions made by managers are programmed or nonprogrammed.

2. Programmed decision-making is a routine, virtually automatic process. These

decisions have been made so many times in the past that managers have been able to
develop rules or guidelines to be applied when certain situations inevitably occur.
3. Most decision-making that relates to day-to-day running of an organization is
programmed decision making. Programmed decision-making is possible when
managers have the information they need to create rules that will guide decision-
making.

4. Nonprogrammed decision-making is required for nonroutine decisions.

Nonprogrammed decisions are decisions that are made in response to unusual or
novel opportunities or threats. These occur when there are no ready-made decision
rules that managers can apply to a situation.

5. To make decisions in the absence of decision rules, managers may rely upon their
intuition or they may make reasoned judgments. When using intuition,
managers rely upon feelings, beliefs, and hunches that come readily to mind, require
little effort and information gathering, and result in on the- spot decisions.
Reasoned judgments are decisions that take time and effort and result from
careful information gathering, generation of alternatives, and evaluation of
alternatives.

6. Although ‘exercising’ one’s judgment is a more rational process than ‘going’ with
one’s intuition, both processes are often flawed and can result in poor decision
making. Thus, the likelihood of error is much greater in non-programmed decision
making than in programmed decision making.

7. Sometimes managers have to make rapid decisions and don’t have the time for a
more careful consideration of the issues involved, while at other times, they do have
the time available to make reasoned judgments.

C. The Classical Modelor Rational model

1. The classical model is prescriptive, which means that is specifies how decisions
should be made. Managers using this model make a series of simplifying
assumptions about the nature of the decision-making process.
2. The model’s premise is that managers have access to all of the information they
need to make the optimum decision. It also assumes that managers can
easily list and rank each alternative from most to least preferred in order to reach an
optimum decision.

D. The Administrative Model or Bounded

Rationality model

1. The administrative modelOr Rational Model explains why decision-making

is always inherently risky and uncertain. It is based upon three important concepts:
bounded rationality, incompleteinformation, and satisficing.

2. Bounded rationality describes the situation in which the number of

alternatives a manager mustidentify is so great and the amount of information so
vast that it is difficult to evaluate it all.

3. Incomplete is information because in most cases the full range of decision-

making alternatives is unknown and the consequences associated with known
alternatives are uncertain. In other words, information is incomplete because of risk
and uncertainty, ambiguity, and time constraints.

a. Risk is present when managers know the possible outcomes of a particular

course of action and can assign probabilities to them.

b. Uncertainty exists when the probabilities of alternative outcomes cannot

bedetermined, and future outcomes are unknown.

c. Ambiguous information occurs when the meaning of information is not

clear, when it can be interpreted in multiple and often conflicting ways.
d. Time constraints and information costs create
problems because managers do not have the time or the money to search all possible
alternative solutions and evaluate all the potential consequences of those
alternatives.

4. Satisficing is the way managers cope with bounded rationality and

incomplete information. Satisficing means that managers explore a limited sample of
all potential alternatives and they choose an acceptable or satisfactory alternative
from that limited sample rather than trying to make the optimal decision.

II. STEPS IN THE DECISION-MAKING PROCESS

A. Using the work of March and Simon as a basis, researchers have developed a step-
by-step model of the decision-making process. There are six steps that managers
should consciously follow to make a good decision.

1. Recognize the Need for a Decision: Some stimuli usually spark

the realization within the organization that a decision needs to be made. The stimuli
may originate from the actions of managers inside of the organization or from
changes in the external environment. Be it proactive or reactive, it is imperative that
managers immediately recognize this need and respond in a timely and appropriate
manner.

2. Generate Alternatives: A manager must generate a set of feasible

alternative courses of action to take in response to the opportunity or threat. Failure
to properly generate and consider a variety of alternatives can lead to bad decisions.
Sometimes managers find it difficult to generate creative, alternative solutions to
specific problems. Generating creative alternatives may require that we abandon
our existing mid-sets and develop new ones.
3. Evaluate Alternatives: Once managers have generated a set of
alternatives, they must evaluate the advantages and disadvantages of
each one. Successful managers use four criteria to evaluate the pros or experts and
cons or construction of alternative courses of action. Often a manager must consider
these four criteria simultaneously. Some of the worst managerial decisions can be
traced to poor assessment of the alternatives.

a. Legality: Managers must ensure that a possible course of action is legal.

b. Ethicalness: Managers must ensure that a possible course of action is

ethical and that it will not unnecessarily harm any stakeholder group.

c. Economic feasibility: Managers must decide whether the alternatives

can be accomplished, given the organization’s performance goals, and do not cause
harm to other goals of the organization.

d. Practicality: Managers must decide whether they have the capabilities and
resources required to implement the alternative.

4. Choose Among Alternatives: The next step is to rank the

various alternatives using the criteria listed above in order to make a decision.
Managers must be sure that all informationthat is available is used. Sometimes
managers have a tendency to ignore critical information, even when it is available.

5. Implement the Chosen Alternative: Once a course of action

has been determined, it must be implemented. Many managers make a
decision and then fail to act on it. Thousands of subsequentdecisions are
necessary to implement a course of action. To ensure that
implementation occurs, top managers must assign to middle managers
theresponsibility for making follow-updecisions, give them the sufficient
resources required to achieve the goal, and hold them accountable for
theirperformance.
6. Learning from Feedback: Effective managers always conduct a
retrospective analysis in order to learn from past successes or failures. To ensure
that they learn from experience, managers should establish a formal procedure that
includes the following steps:

a. Compare what actually happened to what was expected to happen as a result of

the decision.

b. Explore why any expectations for the decision were not met.

c. Develop guidelines that will help in future decision making.

III. COGNITIVE BIASES AND DECISION MAKING

A. Because all decision makers are subject to bounded rationality, they tend to
useheuristics, rules of thumb that simplify the process of making decisions.

B. Systematic errors are errors that people make over and over and that
result in poor decision making. Because of cognitive biases, which are caused by
systematic errors, otherwise capable managers may end up making bad decisions.

C. Four sources of cognitive bias that can adversely affect the way managers make
decisions are prior hypothesis, representativeness, the illusion of control, and
escalating commitment.

1. Decision makers who have strong prior beliefs about the relationship between two
variables tend to make decisions based on those beliefs even when presented with
evidence that their beliefs are wrong. In doing so, they are falling victim to prior
hypothesis bias.

2. Representativeness bias occurs when decision makers inappropriately

generalize from a small sample or even from a single vivid case or episode.
3. Illusion of control is the tendency of decision makers to overestimate their
ability to control activities and events.

4. Escalating commitment occurs when some managers continue to commit

more resources to aproject even if they receive feedback that the project is failing

A. They do so because their feelings of personal responsibility apparently bias their

analysis of the situation.

B. Example of Mark Gracin and his attempt to expand his landscape company into a
landscapedesign business.

D. Be Aware of Your Biases

1. Managers must become aware of biases and their effects and they must identify
their own personal style of making decisions.

2. One way to do this is for managers to review two decisions that they made recently
– one that turned out well and one that turned out poorly. Problem-solving experts
recommend that they start by determining how much time was spent on each of the
decision making steps to ensure that the amount time allocated was adequate.

3. Another technique is for managers to list the criteria they typically use to assess
and evaluate alternatives and then critically evaluate the appropriateness of these
factors.

4. Because it often difficult to identify one’s own biases, it is suggested that managers
scrutinize their own assumptions by working with another manager.

IV. GROUP DECISION MAKING

A. Many important decisions are made by groups or teams of managers instead of

individuals.
B. When managers work as a team, their choices of alternatives are less likely to
suffer from biases.

C. They are able to draw on the group’s combined skills and accumulated knowledge.

D. Group decision-making allows managers to process more information and correct

each other’s errors.

E. Managers included in the making of a decision will most likely cooperate with its
implementation. When a group makes a decision, each group member is usually
committed to it, thereby increasing the likelihood of its successful implementation.

F. The disadvantages of group decision making include the long length of time it
often takes and the possibility of being undermined by biases. A major source of
group bias is groupthink.

G. The Perils of Groupthink

1. Groupthink is a pattern of faulty and biased decision making that occurs in groups
whose members

Strive for agreement within the group at the expense of accurately assessing
information.

2. When managers are subject to groupthink, they collective embark on a course of

action without developing appropriate criteria to evaluation alternatives. Typically,
the group rallies around one central manager and becomes blindly committed to
that manager’s preferred course of actionwithout evaluating its merits.

3. Pressures for harmony and agreement have the unintended impact of

discouraging individuals fromraising dissenting opinions.

H. Devil's Advocacy and Dialectical Inquiry: Both of these processes can counter the
effects of cognitive biases and groupthink. In practice, devil’s advocacy is probably
the easier to implement.
1. Devil’s advocacy is a technique used to counteract groupthink. It
involves a critical analysis of the

Group’s preferred alternative in order to ascertain its strengths and weaknesses

before

Implementation. One member of the decision making group plays the role of devil’s
advocate by critiquing and challenging the way in which the group evaluated
alternatives and selected one alternative over the other.

2. Dialectical inquiry: Two groups of managers are assigned to a problem

and each group is responsible for evaluating alternatives and selecting one of
them. Each group presents it preferred alternative to top management, each group
critiques the other, and a debate ensues. Both groups are then challenged to uncover
potential problems and perils associated with their solutions, with the goal of
identifying the best alternative course of action for the organization to adopt.

I. Diversity among Decision Makers

1. Promoting diversity within decision-making groups also improves group decision

making by broadening the range of experiences and opinions that the group
members can draw from as theygenerate, assess, and choose among alternatives.

2. Groups containing members from diverse backgrounds are less prone to

groupthink because of the differences that exist.

V. ORGANIZATIONAL LEARNING AND CREATIVITY

A. The quality of organizational decision making ultimately depends on innovative

responses to opportunities and threats.

B. Organizational learning is the process through which managers seek to improve

employees’ desire andability to understand and manage the organization.
C. A learning organization is one in which managers do everything possible to
maximize the potential for organizational learning to take place.

1. At the heart of every learning organization is creativity, the ability of a decision

maker to discover original and novel ideas that lead to feasible alternative courses of
action.

D. Creating a Learning Organization: Peter Senge developed five principles for

creating a learning organization. They are:

1. Top managers must allow every person in the organization to develop a sense of
personal mastery.

2. Organizations need to encourage employees to develop and use complex mental

models.

3. Managers must do everything they can to promote group creativity and team
learning.

4. Managers must emphasis the importance of building a shared vision.

5. Managers must encourage systems thinking.

6. Building a learning organization is neither a quick or easy process. It requires

managers to change their management assumptions radically.

E. Promoting Individual Creativity: Research indicates that when certain conditions

are met, managers are more likely to be creative. They include:

1. Providing employees the opportunity and freedom to generate new ideas

2. Allowing them an opportunity to experiment, to take risks, and to make mistakes

and learn from them.
3. Also employees must not fear that they will be penalized or looked down upon for
ideas that at first seem outlandish.

4. Other ways of promoting individual creativity are providing constructive feedback

so that employees will know how they are doing and visibly rewarding employees
who come up with creative ideas.

F. Promoting Group Creativity: Brainstorming, nominal group technique and the

Delphi technique are used to encourage creativity at the group level.

1. Brainstorming is a group problem solving technique in which managers meet face-

to-face to generate and debate a wide variety of alternatives from which to make a
decision.

a. This technique is very useful in some situations but at other times can result in a
loss of productivity due to production blocking, which occurs because group
members cannot always simultaneously make sense of all the alternatives being
generated, think up additional alternatives, and remember what they were thinking.

b. A brainstorming session is conducted as follows:

i. One manager describes the problem in broad outline.

ii. Group members share their ideas and generate courses of action.

iii. Group members are not allowed to criticize each alternative until all have been
heard.

iv. Group members are encouraged to be as creative as possible. Anything goes, and
the greater the number of ideas put forth, the better.

v. When all alternatives have been generated, the group members debate the pros
and cons of each and develop a list of the best alternatives.
2. The Nominal Group Technique The nominal group technique is more
structured way of generating alternatives.

a. It avoids production blocking and is especially useful when an issue is

controversial.

b. A nominal group technique session is conducted as follows:

i. One manager outlines the problem to be addressed and group members write
down ideas and solutions.

ii. Managers read their suggestions to the group with no criticism allowed.

iii. The alternatives are discussed, and group members can critique or ask for
clarification.

iv. Each member ranks all the alternatives, and the highest-ranking one is selected.

3. Delphi Technique: If managers are in different locations, videoconferencing is one

way to bring them together to brainstorm. Another way is to use the Delphi
Technique, a written approach to creative problem solving. It works as follows:

a. The group leader writers a statement of the problem and a series of questions to
which participating managers are to respond.

b. The questionnaire is sent to the managers and departmental experts who are most
knowledgeable about the problem; they are asked to generate solutions and mail the
questionnaire back to the group leader.

c. A team of top managers record and summarize the responses. The results are then
sent back to the participants with additional questions to be answered before a
decision can be made.
d. The process is repeated until a consensus is reached and the most suitable course
of action is apparent.

VI. ENTREPRENEURSHIP AND CREATIVITY

A. Entrepreneurs are individuals who notice opportunities and decide how to

mobilize the resources necessary to produce new and improved goods and services.
Thus, entrepreneurs are a very important source of creativity.

1. Social entrepreneurs are individuals who pursue initiatives and opportunities to

address socialproblems and needs in order to improve society and well-being.

2. Entrepreneurs make all of the planning, organizing, leading, and controlling

decisions necessary to start new ventures. Despite the fact that an estimated 80
percent of small businesses fail in the first three to five years, 38% of men and 50%
of women in today’s workforce want to start their own companies.

3. An intrapreneur is an employee of an existing organization who notices

opportunities for either quantum or incremental product improvements and is
responsible for managing the product development process.

4. Many intrapreneurs become dissatisfied when their superiors decide not to

support or to fund their new product ideas and development efforts and, as a result,
sometimes decide to leave their employer to start their own organization.

B. Entrepreneurship and New Ventures

1. Characteristics of Entrepreneurs
a. Entrepreneurs are likely to be high on the personality trait of openness to
experience. They also are likely to have an internal locus of control and believe that
they are responsible for what happens to them.

b. Entrepreneurs are likely to have a high level of self-esteem, a high need for
achievement, and a strong desire to perform challenging tasks and meet high
personal standards of excellence.

2. Entrepreneurship and Management

a. One way people become involved in entrepreneurial ventures is to start a business

from scratch. When people who do start solo ventures succeed, they frequently need
to hire other people to help them run the business.

b. Some entrepreneurs often have difficulty managing the organization as it grows,

sinceentrepreneurship and management are not the same thing. Frequently, a
founding entrepreneurlacks the skills, patience, and experience to engage in the
work of management.

c. Some entrepreneurs find it hard to delegate authority, so they become overloaded,

and the quality of their decision-making declines. Others lack the detailed
knowledge necessary to establish state-of-the-art information systems and
technology or create management procedures that are critical to increasing
organizational efficiency.

d. Thus, to succeed, it necessary to do more than create a new product. An

entrepreneur must hire managers who can create an operating system that will let
the new venture survive and prosper.

C. Intrapreneurship and Organizational Learning: The intensity of competition today

has made it increasingly important to promote intrapreneurship to raise the level of
innovation and organizational learning. The higher the level of intrapreneurship, the
higher will be level of learning and innovation.

Below are ways to increase intrapreneurship within an organization.

1. Product Champions: A product champion is a manager who takes ownership of a
project and provides the leadership and vision that is needed to take a product from
the idea stage to market introduction.

a. Product champions become responsible for developing a business plan for the
product.

b. If the plan is accepted, the production champion assumes responsibility for

product development.

2. Skunkworks: A skunkworks is a group of intrapreneurs who are deliberately

separated from the normal operation of an organization.

a. By being isolated, these employees become intensely involved in the project.

b. Development time is shortened and the quality of the product enhanced.

c. The term skunkworks was coined at the Lockheed Corporation, which formed a
team of design engineers to develop special aircraft, such as the U2 spy plane. The
secrecy of this unit and the speculation about its goals led others to give it this name.

3. Rewards for Innovation: To encourage managers to bear risk and uncertainty, it is

necessary to link performance to rewards.

a. Increasingly, companies are rewarding intrapreneurs on the basis of the outcome

of the product development process by granting them large bonuses and stock
options if the product sells.

b. In addition to money, they often receive promotion to the ranks of top

management.

c. Organizations must reward intrapreneurs equitably if they wish to prevent them

from leaving to become outside entrepreneurs who might compete against
them,Nevertheless, they frequently do.Learning Objectives
-1. Understand the nature of managerial decision making, differentiate
betweenprogrammed andnon-programmed decisions, and explain why
nonprogrammed decision making is a complex, uncertain process.

-2. Describe the six steps that managers should take to make the best decisions, and
explain how cognitive biases can lead managers to make poor decisions.

-3. Identify the advantages and disadvantages of group decision making, and
describe techniques thatcan improve it.

-4: Explain the role that organizational learning and creativity play in helping
managers to improve their decisions.

5: Describe how managers can encourage and promote entrepreneurship to create a

learning organization, and differentiate between entrepreneurs and intrapreneurs.

Key Definitions/Terms

Administrative model: 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.

Ambiguous information:Information that can be interpreted in multiple and

often conflicting ways. bounded rationality Cognitive limitations that constrain one’s
ability to interpret, process, and act on information.

classical decision-making model: A prescriptive approach to decision making

based on the assumption thatthe decision maker can identify and evaluate all
possible alternatives and their consequences andrationally choose the most
appropriate course of action.

creativity: A decision maker’s ability to discover original and novel ideas that lead
to feasible alternativecourses of action.
decision making: The process by which managers respond to opportunities and
threats by analyzing optionsand making determinations about specific
organizational goals and courses of action.

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.

devil’s advocacy: Critical analysis of a preferred alternative, made in response to

challenges raised by a group member who, playing the role of devil’s advocate,
defends unpopular or opposing alternatives for the sake of argument.

dialectical inquiry: Critical analysis of two preferred alternatives in order to find

an even better alternative for the organization to adopt.

entrepreneur: An individual who notices opportunities and decides how to

mobilize the resources necessary to produce new and improved goods and services.

entrepreneurship: The mobilization of resources to take advantage of an

opportunity to provide customers with new or improved goods and services.

escalating commitment: A source of cognitive bias resulting from the tendency to

commit additionalresources to a project even if evidence shows that the project is
failing.

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.

heuristics: Rules of thumb that simplify decision making.

illusion of control: A source of cognitive bias resulting from the tendency to

overestimate one’s own ability tocontrol activities and events.
intrapreneur: A manager, scientist, or researcher who works inside an
organization and notices opportunitiesto develop new or improved products and
better ways to make them.

intuition: Feelings, beliefs, and hunches that come readily to mind, require little
effort and informationgathering, and result in on-the-spot decisions.

learning organization: An organization in which managers try to maximize the

ability of individuals andgroups to think and behave creatively and thus maximize
the potential for organizational learning to takeplace.

nominal group technique: A decision-making technique in which group

members write down ideas andsolutions, read their suggestions to the whole group,
and discuss and then rank the alternatives.

nonprogrammed decision making: Nonroutine decision making that occurs in

response to unusual,unpredictable opportunities and threats.

optimum decision: The most appropriate decision in light of what managers

believe to be the most desirablefuture consequences for the organization.

organizational learning: The process through which managers seek to improve

employees’ desire and abilityto understand and manage the organization and its
task environment.

prior-hypothesis bias: A cognitive bias resulting from the tendency to base

decisions on strong prior beliefs even if evidence shows that those beliefs are wrong.

product champion: A manager who takes “ownership” of a project and provides

the leadership and vision thattake a product from the idea stage to the final
customer.Production blocking: A loss of productivity in brainstorming sessions
due to the unstructured nature of brainstorming.
Programmed decision making: Routine, virtually automatic decision making
that follows established rules or guidelines.

Reasoned judgment: A decision that takes time and effort to make and results
from careful information gathering, generation of alternatives, and evaluation of
alternatives.

Representativeness bias: A cognitive bias resulting from the tendency to

generalize inappropriately from asmall sample or from a single vivid event or
episode.

risk: The degree of probability that the possible outcomes of a particular course of
action will occur.

Satisficing: Searching for and choosing an acceptable, or satisfactory, response to

problems and opportunities, rather than trying to make the best decision.

Skunkworks:A group of intrapreneurs who are deliberately separated from the

normal operation of an organization to encourage them to devote all their attention
to developing new products.

Socialentrepreneur: An individual who pursues initiatives and opportunities and

mobilizes resources to address social problems and needs in order to improve
society and well-being through creative solutions.

systematic errors: Errors that people make over and over and that result in poor
decision making.

Uncertainty: Unpredictability.