CHAPTER FIVE
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OVERVIEW OF THE CHAPTER
This chapter examines how managers make decisions and explores the complexities inherent
in doing so. The six steps of the decision-making process are outlined and the advantages and
disadvantages of group decision making are discussed. Also, how managers can promote
organizational learning and creativity to improve the quality of decision making throughout
an organization is explored. Finally, the role of both the entrepreneur and the intrapreneur are
examined.
LEARNING OBJECTIVES
1. Differentiate between programmed and nonprogrammed decisions, and explain why
nonprogrammed decision-making is a complex, uncertain process. (LO1)
2. Describe the six steps that managers should take to make the best decisions. (LO2)
3. Identify the advantages and disadvantages of group decision-making, and describe
techniques that can improve it. (LO3)
4. Explain the role that organizational learning and creativity play in helping managers to
improve their decisions. (LO4)
5. Describe how managers can encourage and promote entrepreneurship to create a learning
organization and differentiate between entrepreneurs and intrapreneurs. (LO5)
MANAGEMENT SNAPSHOT: DECISION MAKING AND LEARNING ARE THE KEY
TO ENTREPRENEURIAL PROCESS
Marc Shuman is the founder and president of GarageTek, a company that designs and installs
custom garage systems to organize and maximize storage capacity in home garages. Decision
making has been an ongoing challenge for him. Favorable environmental conditions led him
to believe that consumer demand existed for his product. He later decided to franchise his idea
and within three years, GarageTek had 57 franchises in 33 states. However, Shuman faced
another tough decision when he realized that some of the franchises were failing. Although
his franchise agreement gave him the right to close them, he decided to give the troubled
franchisees six months to get back on their feet. Shuman learned from this experience and
now has tougher criteria in place for accepting new franchisees. He also decided to track
franchise performance more closely so that potential problems can be quickly identified and
solved.
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LECTURE OUTLINE
I. THE NATURE OF MANAGERIAL DECISION MAKING (LO1)
Decision making is 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.

A good decision results in the selection of appropriate goals and courses of action that
increase organizational performance. Bad decisions result in lower performance.

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.

Decision making is central to being a manager, and whenever managers engage in
planning, organizing, leading, and controlling, they are constantly making decisions.

Managers are always searching for ways to improve their decision making in order to
improve organizational performance.
Programmed and Nonprogrammed Decision Making
All decisions made by managers are programmed or nonprogrammed.

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.

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 decisionmaking.

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.
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
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.

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 nonprogrammed decision
making than in programmed decision making.

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.
The Manager as a Person: Curbing Overconfidence
Decades of research indicates that managers tend to be overconfident in the decisions that
they make, and with overconfidence comes the failure to evaluate and rethink the wisdom of
those decisions and learn from one’s mistakes. A distinction is made by researchers between
the decision making skills of true experts who have extensive experience and managers who
have some expertise. It is the managers who have some experience in their content area but
are not true experts that tend to be overly confident in their intuition and their reasoned
judgments, often do not learn from their mistakes, and are overconfident in their abilities and
their influence over unpredictable events While the intuition of experts can also be faulty, it is
less likely to be.
To avoid the perils of overconfidence, managers can critically evaluate their decisions and
outcomes. They should also admit when they have made a mistake, learn from their mistakes,
and be leery of too much agreement at the top, according to Professor Jeffery Pfeffer at
Stanford University.
The Classical Model
 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.
 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.
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The Administrative Model
The administrative model explains why decision-making is always inherently risky and
uncertain. It is based upon three important concepts: bounded rationality, incomplete
information, and satisficing.

Bounded rationality describes the situation in which the number of alternatives a
manager must identify is so great and the amount of information so vast that it is
difficult to evaluate it all.

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.
1. Risk is present when managers know the possible outcomes of a particular
course of action and can assign probabilities to them. Uncertainty exists when
the probabilities of alternative outcomes cannot be determined, and future
outcomes are unknown.
2. Much of the information that managers have at their disposal is ambiguous,
and therefore can be interpreted in multiple and often confusing ways.
3. Because of time constraints and information costs, managers are unable
search for all possible alternatives and evaluate all the potential consequences.

. Because of the limitations mentioned above, managers do not attempt to discover
every alternative in an attempt to reach the optimum decision. Instead, they search for
and choose an acceptable or satisfactory solution from a limited sample of potential
alternatives. This strategy is called satisficing.
II. STEPS IN THE DECISION-MAKING PROCESS (LO2)
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.
 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
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 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.
 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 and cons
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.
1. Legality: Managers must ensure that a possible course of action is legal.
2. Ethicalness: Managers must ensure that a possible course of action is ethical and that
it will not unnecessarily harm any stakeholder group.
3. 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.
4. Practicality: Managers must decide whether they have the capabilities and resources
required to implement the alternative.
Ethics in Action: NASA’s Focus on Changing Culture
Seventeen years after the Challenger disaster, history repeated itself on February 1, 2003,
when Columbia broke up over Texas on the final day of its mission, killing all seven
astronauts on board. Both accidents are partially the result of a flawed organizational culture
at NASA where concerns with budgets and schedules were emphasized at the expense of
safety.
In both cases, top decision makers seemed to ignore or downplay input from those with
technical expertise, and speaking up was discouraged. For instance, the day before the
Columbia launch, when presented with data indicating that a crucial ring failed to meet
strength requirements, a manager waived the requirements instead of postponing the launch to
address this problem.
Bill Parsons, who now heads the troubled shuttle program is committed to changing the
culture so that safety is a top priority, technical expertise is respected, and shuttles are not
launched until all known problems are addressed.
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 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 information that is available is used. Sometimes
managers have a tendency to ignore critical information, even when it is available.
 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 subsequent decisions are necessary to
implement a course of action. To ensure that implementation occurs, top managers must
assign to middle managers the responsibility for making follow-up decisions, give them the
sufficient resources required to achieve the goal, and hold them accountable for their
performance.
 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:
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. Develop guidelines that will help in future decision making.
III. GROUP DECISION MAKING (LO3)
 Many important decisions are made by groups or teams of managers instead of
individuals. When managers work as a team, their choices of alternatives are less
likely to suffer from biases.

They are able to draw on the group’s combined skills and accumulated knowledge.

Group decision-making allows managers to process more information and correct each
other’s errors.

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.

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.
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The Perils of Groupthink
 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.

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 action without evaluating its merits.

Pressures for harmony and agreement have the unintended impact of discouraging
individuals from raising dissenting opinions.
Devil's Advocacy

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.
Diversity among Decision Makers
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
they generate, assess, and choose among alternatives. Groups containing members from
diverse backgrounds are less prone to groupthink because of the differences that exist.
IV. ORGANIZATIONAL LEARNING AND CREATIVITY (LO4)
The quality of organizational decision making ultimately depends on innovative responses to
opportunities and threats. Organizational learning is the process through which managers
seek to improve employees’ desire and ability to understand and manage the organization. A
learning organization is one in which managers do everything possible to maximize the
potential for organizational learning to take place. 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.
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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.
Building a learning organization is neither a quick or easy process. It requires managers to
change their management assumptions radically.
Promoting Individual Creativity
 Research indicates that when certain conditions are met, managers are more likely to
be creative. They include providing employees the opportunity and freedom to
generate new ideas and allowing them an opportunity to experiment, to take risks, and
to make mistakes and learn from them. Also employees must not fear that they will be
penalized or looked down upon for ideas that at first seem outlandish.

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.
Promoting Group Creativity
Brainstorming, nominal group technique and the Delphi technique are used to encourage
creativity at the group level.

Brainstorming is a group problem solving technique in which managers meet face-toface to generate and debate a wide variety of alternatives from which to make a
decision. This technique is very useful in some situations but at other times can result
in a loss of productivity due to production blocking. A brainstorming session is
conducted as follows:
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1.
2.
3.
4.
One manager describes the problem in broad outline.
Group members share their ideas and generate courses of action.
Group members are not allowed to criticize each alternative until all have been heard.
Group members are encouraged to be as creative as possible. Anything goes, and the
greater the number of ideas put forth, the better.
5. When all alternatives have been generated, the group members debate the pros and
cons of each and develop a list of the best alternatives.
 The Nominal Group Technique
The nominal group technique is more structured way of generating alternatives. It avoids
production blocking and is especially useful when an issue is controversial. A nominal
group technique session is conducted as follows:
1. One manager outlines the problem to be addressed and group members write down
ideas and solutions.
2. Managers read their suggestions to the group with no criticism allowed.
3. The alternatives are discussed, and group members can critique or ask for clarification.
4. Each member ranks all the alternatives, and the highest-ranking one is selected.
 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:
1. The group leader writers a statement of the problem and a series of questions
to which participating managers are to respond.
2. 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.
3. 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.
4. The process is repeated until a consensus is reached and the most suitable
course of action is apparent.
 Promoting Creativity at the Global Level
Organizations are under increasing pressure to reduce costs and develop global products. To
do so, they typically centralize their R&D expertise to bring R&D managers together from
different countries. Because this can pose some unique problems, managers must take special
steps to encourage creativity among people from different countries who work together.
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V. ENTREPRENEURSHIP AND CREATIVITY (LO5)
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.




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.
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.
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.
Characteristics of Entrepreneurs
 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.

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.
Entrepreneurship and Management
 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.

Some entrepreneurs often have difficulty managing the organization as it grows, since
entrepreneurship and management is not the same thing. Frequently, a founding
entrepreneur lacks the skills, patience, and experience to engage in the work of
management.
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
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.

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.
Intapreneurship 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.
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. Product champions become responsible for developing a business plan
for the product. If the plan is accepted, the production champion assumes responsibility for
product development.
Skunkworks: A skunkworks is a group of intrapreneurs who are deliberately separated from
the normal operation of an organization. By being isolated, these employees become intensely
involved in the project. Development time is shortened and the quality of the product
enhanced.

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.
Rewards for Innovation
 To encourage managers to bear risk and uncertainty, it is necessary to link
performance to rewards. 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. In addition to money, they often
receive promotion to the ranks of top management.
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
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.
VI. SUMMARY AND REVIEW
LECTURE ENHANCERS
Lecturer Enhancer 5.1
WORLD-CLASS BAD DECISIONS
In the Decision Making Hall of Fame, one room should be reserved for truly bad decisions.
One of the classics was Hewlett-Packard’s decision not to develop a product created by an
employee. Steve Wozniak went off with his device to co-found Apple Computer.
Some rejected ideas have involved whole industries. When Alexander Graham Bell invented
the telephone in 1876, he had a hard time attracting backers. President Rutherford B. Hayes
used a prototype telephone and remarked, “That’s an amazing invention, but who would ever
want to use one of them?” Bell approached Western Union Telegraph Company and offered
to sell them the patents. Their decision: they had no use for an electrical toy.
A young inventor, Chester Carlson, took his idea to twenty corporations, all of whom turned
him down. He finally got a small New York company named Haloid Co. to purchase the
rights to his electrostatic paper-copying process. Haloid became Xerox Corporation, and
Carlson’s process made both Xerox and Carlson very rich.
In 1962 four musicians played for executives of Decca Recording Company. One executive
later explained that they just didn’t like the group’s sound, noting that guitar groups were on
their way out. Four other record companies turned them down. The Decision Making Hall of
Fame will have a special place for Decca, who turned down the Beatles.
Lecture Enhancer 5.2
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TEACHING CREATIVITY TO BUSINESS STUDENTS
Jeff Skoll, a vice president of eBay whose net worth is $2.16 billion, says one of the most
valuable courses he took at Stanford’s Graduate School of Business was Dr. Michael L. Ray’s
“Personal Creativity in Business”. Dr. Ray has been teaching this course for 21 years, and
although it is unlike anything else the business school offers, it fills up quickly each quarter.
It would be unimaginable in most other business schools, yet it has inspired numerous
Stanford graduates to become Internet entrepreneurs.
“The course enabled me to step back and look at what I wanted to accomplish in my life”.
says Skoll, who received his MBA in 1995 and became eBay’s first president the following
year. He is now vice president for strategic planning at the online auction site.
Dr. Ray began teaching the course after a trip to India, where he discovered that everyone,
even the shopkeepers, seemed motivated by a higher purpose and often starting their workday
with prayer. The goal of the course, he says, is to motivate business students to look inside
themselves, trust their intuition, and silence the annoying voice that discourages them from
taking chances. “This kind of creativity is in all of us but we don’t always see it”, says the
professor. “It’s often covered by the fear of judgment and the chattering mind”.
Some of the techniques he uses to unleash the creative powers of students seem out of place in
a business school. The course is built around nine assignments, in which students choose a
specific strategy for coping with contemporary challenges, such as “destroy judgment, create
curiosity”, “live with it”, “do what is easy, effortless, and enjoyable”, or “ask dumb
questions”. Each strategy relates to five challenges: purpose and career, time and stress,
relationships, balance, and finding true prosperity. Students choose a form of creative
expression, such as dance or poetry reading, and to loosen their inhibitions, they may meditate
in the dark or create “mood doodles’ with crayons in their journals. To deal with stress, they
might record their anxieties in journals or limit their fretting to a designated ‘worry time’.
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Another one of Dr. Ray’s successful alums is Jim Collins, an educator, business consultant,
and author of two best-selling management books, Good to Great and Built to Last:
Successful Habits of Visionary Companies. “I almost dropped the course after the first few
weeks. It was just too weird”, says Collins. “The last thing I expected when I entered
business school was to be sitting on the floor in the dark, listening to a tape of an Indian
spiritual leader and chanting ‘Om’”. In retrospect, however, Collins realizes that the course
had a profound impact upon his life. He says it was this creativity class that propelled him
into a career as both an entrepreneurship professor and author.
What stimulated Dr. Ray, who holds a doctorate in social psychology, to teach a course in
creativity to soon-to-be corporate executives and entrepreneurs? Ray says, “People were
coming here and getting technologically trained but nowhere did they stop and ask, “Who am
I, at essence, and why as I here? What is the purpose of all of this? People need to take the
risk of being vulnerable, and when they do, they are not only accepted, but applauded”.
Taken from “Michael Ray: Teaching Entrepreneurs How to Cut Loose”, by Katherine Mangan, published in The Chronicle
of Higher Education, October 20, 2000.
Lecture Enhancer 5.3
BUREAUCRACY STRANGLES INTRAPRENEURSHIP
In the 1980s “intrapreneurship” became a buzzword among managers who wanted to
introduce small-business fervor into lumbering corporations. The idea was that the parent
company would provide seed money to employees, who would gain the satisfaction of
running their own shop while producing products that benefited their corporate sponsor.
The ventures did produce some successes. IBM developed its IBM Personal Computer
through such a venture. At Xerox Corporation about half dozen successful companies have
been created. Most, though, have fallen flat. Companies like Control Data Corporation and
Northwestern Bell Telephone Co. have ended their programs. So did IBM, which says the
program was unnecessary after the company decentralized. Of the fourteen ventures Eastman
Kodak created, six have been shut down, three have been sold, four have been merged into the
company, and only one still operates independently. One of Kodak’s projects was canceled
because the company didn’t like the unit’s logo, a Cheshire cat, considering it too frivolous
for a serious organization.
The problem, management experts say, is that a go-go small business culture can’t easily be
grafted onto a deliberate corporate giant. The practices that make corporations successful—
training procedures, personnel policies, hierarchical management structures—are
incompatible with risk-taking entrepreneurs. In addition, employees-turned-entrepreneurs are
often ill prepared for their new roles. Researchers, for example, who have spent their careers
in the lab are unfamiliar with the rigors of the marketplace.
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MANAGEMENT IN ACTION
Notes for Topics for Discussion and Action
Discussion
1.
What are the main differences between programmed decision making and
nonprogrammed decision making? (LO1)
Programmed decision making is a routine, almost automatic process. These decisions have
been made so many times that managers do not need to readdress all the alternatives every
time one of these decisions arises, but can use decision-making rules or guidelines that have
been developed for these situations. Managers typically have all the information they need to
create the rules necessary to make a decision. There is little ambiguity involved in these types
of decisions.
Nonprogrammed decision making is required when a situation arises that is not easily
resolved by a pre-existing rule or guideline. These decisions are non-routine, and require
managers to respond to uncertainty, since managers in these situations lack the information
that they need to develop rules that allow them to accurately predict the future.
2.
In what ways do the classical and administrative models of decision making help
managers appreciate the complexities involved in real- world decision making? (LO1)
The classical model’s main premise is that once managers recognize the need to make a
decision, they should be able to generate a complete list of all alternatives and consequences
from which the best choice can then be made. This premise assumes that managers will have
access to all the information that they need in order to make the optimum decision. This
model helps managers appreciate the complexities of decision making by requiring them to
consider all the information and then attempting to make decisions that will have the most
desirable consequences for their organization.
The administrative model proposes that although managers do not have access to all the
information, they still must make a decision. This model more fully exposes the complexities
involved of decision making by forcing us to consider the limitations we may face.
Proponents of this model assert that even if managers had access to all information needed,
they would lack the mental or psychological ability to absorb and correctly evaluate it. In
most situations, managers do not have access to complete information. Nor do they have
knowledge of all of the consequences of each alternative. This model is more realistic for
managers because it concedes that risk and uncertainty, ambiguity, and time constraints often
compound in ways that make nonprogrammed decision making difficult, even for the most
experienced managers.
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3.
Why do capable managers sometimes make bad decisions? What can individual
managers do to improve their decision making skills? (LO2)
Capable managers sometimes make bad decisions because the decision making process can
often be risky and uncertain. Failure to think creatively in order to generate a wide variety of
alternatives and failure to evaluate all relevant information available can lead to a bad
decision. Also, failure to consider the economic feasibility, legality, or ethicalness of decision
prior to its implementation can result in disastrous consequences.
Managers should identify their own personal style of decision making in order to recognize
inconsistencies that may prevent them from making good decisions. By reviewing two recent
decisions—one that turned out well and one that turned out poorly—and seeing how they
were made, a manager can gain insight into his or her decision making process. Another
technique that is useful is to list the criteria used to assess and evaluate alternatives. This can
help managers critically evaluate the effectiveness and the appropriateness of each criterion.
Working with others may be helpful as well, as it is often difficult to recognize our own
biases and weaknesses.
4.
In what kinds of groups is groupthink most likely to be a problem? When is it least
likely to be a problem? What steps can group members take to ward off groupthink? (LO3)
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 relevant to a decision. When this occurs, alternatives are not critically examined,
potentially leading to a poor decision. Emotion, rather than objective assessment, guides the
selection of the optimal course of action. This is most likely to be a problem in groups where
pressure toward agreement is seen as more important than finding a workable solution or
reaching an optimum decision. If the culture of the organization is not tolerant of criticism or
innovative thinking, groupthink is more likely to occur during the group decision making
process. If one person in a group is allowed to be highly vocal and controlling during the
decision making process, others may feel too intimidated to present their suggestions or
opinions.
Groupthink is least likely to be a problem when all the members of the group feel comfortable
making suggestions and offering radical alternatives. If the culture supports risk-taking and
innovative thinking, group members will not feel pressure to conform to the feeling of the
majority. Also, if the contribution of the group is emphasized, rather than individual
achievement, managers will see the opportunity to build upon the suggestions of others.
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Devil’s advocacy is a technique that can be used to reduce the probability of the occurrence of
groupthink. This technique involves the critical analysis of the preferred alternative and the
process that was used to select that alternative. Typically, one member of the group is selected
to play the role of the devil’s advocate by critiquing and challenging the way in which the
group evaluated each alternative and selected one over the others. The purpose is to identify
any reason that may make the selected alternative unacceptable after all.
5.
What is organizational learning and how can managers promote it? (LO4)
Organizational learning is the process through which managers seek to improve organization
members’ desire and ability to understand and manage the organization and its environment,
so that they can make decisions that continuously raise organizational effectiveness. A
learning organization is one that promotes creativity, or the ability of a decision maker to
discover original and novel ideas that lead to feasible alternative courses of action. Creativity
is at the heart of organizational learning, and managers can promote both by adopting Peter
Senge’s five principles for creating a learning organization. If every employee is allowed to
develop a sense of personal mastery, employees will be able to experiment and create and
explore what they want. Employees must also be encouraged to develop complex mental
models that challenge them to find new and better ways of doing things. Promoting group
creativity is also essential, since groups, rather than individuals make most important
decisions. Building a shared vision among employees requires managers to build a common
mental model that all organizational members use to frame threats and opportunities. Finally,
systems thinking is required for organizational learning. Learning at each level affects
learning on other levels, and this must be understood for organizational learning to increase
efficiency and effectiveness in the organization.
6.
What is the difference between entrepreneurship and intrapreneurship? (LO5)
Employees of existing organizations who notice opportunities for either quantum or
incremental product improvements and are responsible for managing the product development
process within their employer’s organization are called intrapreneurs. Entrepreneurs are
persons who undertake the risk of starting and managing their own business.
Action
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7.
Ask a manager to recall the best and the worst decision he or she has ever made. Try
to determine why these decisions were so good or so bad. (LO1, 2)
Leslie Fox is the manager at a commercial bank. She described her worst managerial decision
as the one to establish a teller of the month program at her branch. This well-intentioned effort
to motivate her employees led to competition and resentment when only one employee was
recognized each month. There was no recognition given if someone improved his or her
performance, only recognition for the best performer in the branch. Also, no teller could be
named “teller of the month” more than once, and tellers began to see the program as a turntaking operation that did not necessarily reward the consistently superior employees.
Leslie’s best management decision was to establish a “Teller’s Wall of Fame”. Any teller who
met the standards that were set for service and quality of work was eligible for the Wall. This
allowed more than one person to be recognized, as soon as they were eligible, rather than only
once a month. Members of the Wall of Fame were recognized in the company newsletter, and
were given special incentives, such as time off with pay, or monetary compensation. This
program made it possible to reward improvement and cooperation among tellers.
Leslie believes that the two decisions had different outcomes because the decision to
implement the first program was more of a programmed decision than a nonprogrammed
decision. She had gotten the idea from seeing its application in other organizations, and she
did not consider the alternatives to this kind of program, or the possible consequences of it.
She believes that she should have asked managers at other branches for suggestions for a
recognition program before she decided on one. She also should have evaluated the program’s
success in other organizations before implementing it in her own. Also, if she would have
received immediate feedback, or feedback on the idea before implementation, her tellers
might have suggested better ways of recognizing employees.
8. Think about an organization in your local community, university, or an organization’s that
you are familiar with that is doing poorly. Now come up with questions managers in this
organization should ask stakeholders to help them devise creative ideas for turning around
this organization’s fortunes. (LO4)
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A local university is phasing out its hotel and hospitality management (HHM) program
because of low enrollment. University officials would like to continue the program but can no
longer justify the operational inefficiencies that result from doing so. Stakeholders include
students, faculty, university administrators, the Board of Regents that governs the university,
and the local community. To save this program, which is one of several offered by the
university’s College of Commerce, faculty and university administrators must identify the
reasons behind low enrollment.
Potential students could be asked: If you were to major in HHM, tell me how you envision
your career ten years from now? Next, tell me how you envision your future if enrolled in one
of the more traditional areas of business, such as marketing or finance.
Comparison of responses to these two questions should reveal any positive and negative
perceptions that students have about career opportunities in HHM. This is important
information, since many business students select their major based upon perceived career
opportunities in that field. It could be that students are unaware of the great career
opportunities in HHM, or worse yet, have incorrect perceptions of those career opportunities.
Residents of the local community could be asked: What can the HHM department do to make
a contribution to this community? By making a positive contribution to the community, the
department’s visibility is heightened, which will in turn, attract interest and increase the
number of applications received. Community contributions might include offering a seminar
series for local restaurant owners, offering cooking classes for kids, etc.
Faculty members could be asked: Which part of your HHM classes do students find most
boring? This question should stimulate faculty to think about new approaches that allow
classroom material to be presented in more creative and dynamic ways, thereby peaking the
interest of students considering the HHM as a major.
AACSB standards: 1, 3, 9, 10
Notes for Building Management Skills (LO1, 2)
Pick a decision that you have made recently that has had important consequences for you.
This decision may be concern which college to attend, which major to select, which part time
job to take, or even whether or not to take a part time job. Using the material in this chapter,
analyze the way in which you made the decision:
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1.
Identify the criteria you used, either consciously or unconsciously, to guide your
decision making.
John needed to decide if he should take a part-time job as a research assistant in the
management department his second year in college. John decided that he would take the
position because he thought it would be good experience and would allow him to earn some
extra spending money. He was excited about the prospect of working with faculty that he
liked and respected. When John was offered the position at the end of his freshman year, he
allowed himself the summer to think it over and decide. John decided that it would not be
unethical for him, a management and accounting major, to take the job since the job did not
require him to photocopy tests or handle any sensitive student information. John also decided
that the position was economically feasible since he would be making his own money and
would not need to rely on his parents for support. John also decided that it would be practical,
since the job was only ten hours a week; it would not interfere with his studies and his goal of
attaining a 3.5 grade point average.
2.
List the alternatives that you considered. Were these all the possible alternatives? Did
you unconsciously (or consciously) ignore some important alternatives?
John listed alternatives before he made his decision. He thought that he could:
 take the job in the management department.
 take a different part-time job somewhere else, either within the university or the
community.
 not accept the position nor seek other employment, in order to concentrate on his
classes.
John did not consider any other alternatives. It seemed to him that these were all the
alternatives that were possible. One alternative that John did not consider was the option of
taking out a student loan to cover expenses. John did not think he would be eligible for such a
loan, and it did not occur to him to go to the financial aid office and see if it was possible for
him to get a loan.
3.
How much information did you have about each alternative? Did you base the
decision on complete or incomplete information?
John had some information about the job in the management department, such as the hours he
would be required to work, his duties, and his pay rate. He did not know if he would like the
job, or if he would prefer to do something else with his time.
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John did not know if he would be able to get another job at the university, or if there were any
jobs in the community that would be practical for him to take.
John also did not know the amount of work he would need to do for his classes. He did not
know for sure how much studying and time he would need to devote to his classes in order to
achieve his goals.
John also did not have enough information about his financial status and was not aware of the
resources available through loans and scholarships.
John was making his decision on the basis of incomplete information.
4.
Try to remember how you reached a decision. Did you sit down and consciously think
through the implications of each alternative, or did you make a decision on the basis of
intuition? Did you use any rules of thumb to help you make the decision?
John sat down and consciously thought through the implications of each alternative. He
realized that working would interfere with doing other things, like socializing with friends or
playing on a sports team. He also realized that it would be a good experience and would look
impressive on his resume. John thought it might also allow him to make contacts that might
help him to find a job when he graduated. Also, the skills of time management and
organization that John would develop would be beneficial to everything else in his life. John’s
intuition also told him that he would be able to juggle the demands of his studies and with
those of his job because he had held a part-time job in high school and had managed to do
well in school.
5. In retrospect, do you think that your choice of alternative was shaped by any of the
cognitive biases discussed in this chapter?
Although John did not know how much time he needed to devote to his classes and studying,
his intuition told him that he could handle both work and school without a problem. This may
indicate that John had an illusion of control, since incomplete information prevented him from
knowing this for sure and he had not previous experience to base this assumption upon.
6.
Having answered those four questions, do you think in retrospect that you made a
reasonable decision? What, if anything, might you do to improve your ability to make good
decisions in the future?
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John made many contacts and gained valuable experience during his employment in the
management department. Through his job there, he was able to obtain an internship position
for the summers that further advanced his education and opportunities. John found that the
real world was not as easily arranged as his textbooks had led him to believe. He learned how
to get along with people and apply his academic knowledge to real situations.
John made a reasonable decision based on the outcomes but also on the process he used. He
consciously weighed the alternatives and obtained information before deciding.
John might have improved his decision making process by obtaining feedback from other
students who were working during the school year to see how they handled all their
responsibilities. He might have also talked to faculty or managers in the community about the
value of taking the position. Additionally, John could have spoken with his parents and the
financial aid office to determine if he was eligible for assistance.
AACSB standards: 1, 3, 6, 10
Managing Ethically (LO3)
1. Either alone or in a group, think about the ethical implications of extreme decisions in
groups.
Extreme decisions negatively impact others by unnecessarily placing them at excessive levels
of risk. Placing others in a precarious situation for no compelling reason is unethical.
2. When group decision making takes place, should members of a group each feel fully
accountable for outcomes of the decision? Why or why not?
If groupthink has occurred, some members may lack commitment to the group’s decision.
These members probably supported the group’s decision in order to conform, not because
they agreed to it. They may think that their lack of commitment to and lack of endorsement
of the extreme decision relinquishes them from fully accountability for it. However, this is not
the case. Silence during group discussions is usually viewed as tacit agreement. Your physical
presence, along with your lack of verbal objection to the extreme decision implies that you
concur.
AACSB standards: 1, 2, 6, 9, 10
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NOTES FOR SMALL GROUP BREAKOUT EXERCISE (LO3)
Brainstorming
Form groups of three or four people and appoint one member as the spokesperson who will
communicate your findings to the whole class when called upon by the instructor. Then
discuss the following scenario:
You and your partners are trying to decide which kind of restaurant to open in a centrally
located shopping center that has just been built in your city. The problem confronting you is
that the city already has many restaurants that provide different kinds of food in all price
ranges. You have the resources to open any type of restaurant. Your problem is to decide
which type is most likely to succeed.
Use the brainstorming technique to decide which type of restaurant to open by following these
steps:
1.
As a group, spend 5 or 10 minutes generating ideas about the alternative kinds of
restaurants that you think will be most likely to succeed. Each group member should be as
innovative and creative as possible, and no suggestions should be criticized.
The following is a list of some alternative kinds of restaurants that students may suggest:
 a sports bar and grill
 a restaurant specializing in a certain type of ethnic food: Chinese, Indian, Italian,
Korean, Middle Eastern, or other ethnic theme
 a celebrity restaurant with memorabilia and entertainment
 a Western saloon restaurant
 a cartoon character theme restaurant
 a 50's diner theme restaurant
2.
Appoint one group member to write down the alternatives as they are identified.
3.
Spend the next 10 to 15 minutes debating the pros and cons of the alternatives. As a
group, try to reach a consensus on which alternative is most likely to succeed.
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While engaging in this exercise, students should consider the location of the restaurant, the
neighborhood that surrounds it, the availability of people to staff the operation, and other
practical issues, such as competition from other restaurants in the area. An attempt should be
made to collect all available information on these issues, though incomplete information is
likely going to be a factor. Devil’s advocacy should be used to objectively evaluate all the
alternatives and avoid problems of groupthink. Debate should be conducted in a way that
facilitates constructive criticism and innovation. Group members should feel comfortable
voicing their concerns and suggestions to the group.
4.
After making your decision, discuss the pros and cons of the brainstorming method
and decide whether any production blocking problems occurred in your group.
Pros of brainstorming include: creative and innovative suggestions from more than one person
who is contemplating the same problem; improved evaluation of suggestions from other
group members; opportunities to “piggyback”, or build on, others suggestions.
Cons of brainstorming include: sometimes one individual alone can generate more
alternatives; production blocking can occur in the group, a condition that results when group
members cannot absorb all the information about alternatives being generated. When this
occurs, group members are so busy trying to listen to all the alternatives, they frequently
forget their own.
When called upon by the instructor, the spokesperson should be prepared to share your
group’s decision with the class, as well as the reasons you made your decision.
AACSB standards: 1, 3, 9, 10
Notes for Be the Manager (LO4, 5)
The CEO and the COO do not seem to be risk takers and appear afraid to venture beyond the
status quo. You will have to convince them that your new ideas do not involve excessive
levels of risk because they have been thoroughly researched. To do so, consider requesting a
formal meeting with the CEO and COO at which the sole topic of discussion is your three
proposals. At the meeting, the practicality and economic feasibility of each idea must be
emphasized. Also, consider engaging in "devil’s advocacy" with the CEO and COO, which
would give them the opportunity to thoroughly critique each proposal and address areas of
uncertainty.
AACSB standards: 1, 3, 9, 10
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BUSINESS WEEK CASES FOR DISCUSSION
Case Synopsis: Outsourcing Heads to the Outskirts
GramIT is a recently formed Indian nonprofit whose goal is to transfer some its nation’s
high-tech outsourcing business to rural villages. Currently, companies providing such
services are all located in urban areas such as Bangalore. GramIT’s facilities are a 10 hour
train ride away from the closest city and are staffed by workers who formerly farmed rice
plots for a living. Although rural employees earn substantially less than their urban
counterparts, their economies are being transformed. Along with providing work for the
unemployed, this effort could also slow migration to crowded Indian cities. GramIT is funded
by the Byrraju Foundation, whose founder is also the chairman Satyam Corporation, Ltd., a
tech service provide and one of GramIt’s customers.
Questions:
1. Was GramIT’s decision to operate outsourcing activities in Indian villages a
programmed or nonprogrammed decision?
This was a nonroutine decision made by an entrepreneur responding to a novel opportunity,
hence a nonprogrammed decision.
2. To what extent were risk and uncertainty involved in this decision?
While detailed, careful business planning for a new venture can reduce the amount of
uncertainty faced, a sizable amount of risk will remain. Since GramIT was the first
organization of its type, the probability of alternative outcomes could not be precisely
determined.
3. What criteria did decision makers at GramIT likely utilize in making this decision?
Economic feasibility and practicality were the most important criteria to be considered when
deciding whether to go forward with this venture.
4. Was Satyam’s decision to sign on with Gram IT a programmed or nonprogrammed
decision? To what extent were risk and uncertainty involved in this decision? What
criteria did decision makers at Satyam likely utilize in making this decision?
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Although guidelines for selecting a new supplier may have been in place at Satyam, the
decision to sign on with GramIT was a nonprogrammed one. Because GramIT was a new
venture based on a novel, untested business model, Satyam took a risk when they decided to
depend on them to supply vital services. Economic feasibility and practicality were the most
important criteria to be considered when evaluating of this alternative.
Case Synopsis: Hugging the Tree-Huggers
The relationship dynamics between major corporations and environmentalist groups appear to
be shifting from antagonistic and fractious to cooperative and accommodating. Companies
are increasingly seeking advice and suggestions from ‘green’ activists, and those activists are
displaying a willingness to work peaceably with companies once considered the enemy. For
example, KKB halted it plans to takeover Texas Pacific Group, which was planning to build
11 new power plants, until it got the support of two environmentalist groups. Similarly, WalMart turned to Conservation International to help shape ambitious goals to cut energy use and
switch to renewable power. Companies realize that alliances with environmentalists can help
both the bottom line and the public image. By developing and pushing for real solutions
instead of just pointing out problems, ‘green’ organizations believe they are moving closer to
the realization of their cause.
Questions:
1. Are the decisions companies like TXU Corporation make to cooperate with
environmentalists programmed or nonprogrammed decisions?
The decision by some corporations to work amenably with environmentalist groups and
seriously consider their suggestions was clearly a nonprogrammed one, since it
represented a reversal of their previous attitude.
2. To what extent are risk and uncertainty involved in these decisions?
When both groups agreed to hold discussions, there was not guarantee that the outcome would
be positive or beneficial, hence uncertainty. Both groups were risking the possibility of
wasting time, a very valuable resource.
3. What criteria did corporate decision makers likely utilize in making these decisions?
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The corporate executives who made the decision to meet with environmentalist groups
probably used the criteria of practicality, economic feasibility, and ethicality. They
understood that a perceived unwillingness to exhibit concern for the environment damaged
their reputation with stakeholders. At the same, they probably questioned the practicality of
engaging in negotiations with organizations whose values so radically differed from their
own. Also, when negotiations began, it was probably unclear if adhering to stricter
environmental standards would harm or benefit the bottom line.
4. When environmentalists decide to work collaboratively with businesses, what criteria do
they likely utilize in making these decisions?
Most likely, the environmentalists were also concerned about the practicality of engaging in
negotiations with organizations whose values so radically differed from their own. Also,
nonprofits must be very careful how they utilize donated funds. The economic feasibility of
devoting a substantial amount of their limited resources to such a radically different strategy
was probably a concern.
AACSB standards: 1, 3, 9, 13
Chapter 5 Video Case Teaching Note
In Depth: The Columbia Space Shuttle Disaster Forces a Hard Look at NASA
Teaching Objective: Help students to see the far reaching consequences of flawed decision
making within an organization. Also, underscore the benefits of a learning organization.
Video Summary: Part one of this news clip raises issues that have prompted some people to
question whether there’s still a good reason to send Americans into space. Research gathered
as part of the space program has not been very useful and constant budgetary pressures
continue to create strains. Part two presents former astronaut Sally Ride discussing NASA’s
management weaknesses and questions whether NASA learned from mistakes that led to the
Challenger disaster in 1986. Ride states that an attitude change, as well as strong managerial
leadership, is needed to correct management weaknesses.
Questions:
1. What has been NASA’s main problem? What types of errors have managers made? Was
overconfidence involved? Do you think groupthink accounted for some of NASA’s problems?
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NASA’s management processes, as well as its credibility, have been called into question. Its
mission and overall effectiveness are uncertain, and despite two disasters, the agency was
slow to change its culture to make safety the priority. Clearly, NASA suffered from a lack of
organizational learning, since the lessons from its previous mistakes seemed to have been lost.
In general, it appears that NASA’s managers do not make good decisions.
Illusion of control, escalating commitment, and/or groupthink easily could have played a role
in management’s faulty decision-making. Decades of research has revealed that managers
who have some experience in a content area but are not true experts tend to be overly
confident in their intuition and judgments. Since NASA’s managers do not possess the
technical expertise of its engineers, overconfidence, rooted in memories of NASA’s glorious
accomplishments during past decades, is certainly a possibility.
Groupthink is 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. According to Sally Ride, NASA officials have not
encouraged dissenting views, although they haven’t suppressed them. Groupthink could easily
exist in such a culture. The use of devil’s advocacy and or dialectical inquiry could prevent
such decision-making flaws.
2. What must NASA accomplish to ensure the vitality of the space program?
To ensure the vitality of the space program, Bill Parsons, head of the troubled shuttle
program, is committed to changing the organization’s culture. Among other things, he is
trying to improve communication, encourage all employees to speak up without fear of
retribution, make sure that all employees’ inputs are heard, ensure that technical expertise is
taken in account when making decisions, and above all, emphasize safety.
3. How could the steps in the decision-making process assist NASA in overcoming some
of its problems?
More time should be devoted to generating alternatives and evaluating alternatives, to help
ensure that the chosen alternative is indeed the best choice.
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