Decision Making, Planning, and Strategy PDF

Decision Making, Planning, and Strategy CHAPTER 7 Decision Making, Learning, Creativity, and Entrepreneurship Page 184 Klaus Vedfelt/Digital Vision/Getty Images Learning Objectives After studying this chapter, you should be able to: LO7-1 Understand the nature of managerial decision making, d...

Decision Making, Planning, and Strategy CHAPTER 7 Decision Making, Learning, Creativity, and Entrepreneurship Page 184 Klaus Vedfelt/Digital Vision/Getty Images Learning Objectives After studying this chapter, you should be able to: LO7-1 Understand the nature of managerial decision making, differentiate between programmed and nonprogrammed decisions, and explain why nonprogrammed decision making is a complex, uncertain process. LO7-2 Describe the six steps managers should take to make the best decisions, and explain how cognitive biases can lead managers to make poor decisions.  LO7-3 Identify the advantages and disadvantages of group decision making, and describe techniques that can improve it. LO7-4 Explain the role that organizational learning and creativity play in helping managers to improve their decisions. LO7-5 Describe how managers can encourage and promote entrepreneurship to create a learning organization. Page 185 A MANAGER'S CHALLENGE Karen Lynch's Bold Decisions at CVS Health How do managers make decisions that add value? Decision making doesn't faze Karen Lynch, chief executive of CVS Health. In an interview with The New York Times, she described herself as decisive and explained why. When she was growing up, her aunt (who raised Lynch following her mother's premature death) taught her to think of decisions as a given, along with accepting the outcomes. Lynch told the reporter, "When you make decisions as often as I do, you're going to make a bad call. You just have to readjust."1 Putting decision making in perspective shapes Lynch's approach to her work. As the CEO of the fourth-largest U.S. company with almost 10,000 stores, Lynch applies her decision-making skills to corporate strategy. In 2018, CVS, which operates a drugstore chain, acquired Aetna, a provider of health insurance, as part of a strategy to offer health care services. When Lynch became CEO three years later, she had already embraced the strategy and opted to address it boldly. She decided to expand services from vaccinations, testing, and pharmacy to setting up offices for primary care and mental health care, which require hiring physicians and mental health professionals. The goal is not merely a new income stream; Lynch defines it as making health care more widely available---and less costly, which would benefit its Aetna insurance business.2 CVS Health CEO Karen Lynch (pictured here in the center of a group discussion at Forbes Women's Summit) believes decision-making skills are critical to successful corporate strategies. Gary Gershoff/WireImage/Getty Images A bricks-and-mortar retailer also needs to make decisions about store locations and types, and Lynch has embraced those decisions too. With an eye on her broader strategy, she identifies three types of stores. First, CVS is investing for the fastest growth in the conversion of stores into physician-staffed primary-care clinics, especially in areas with large Medicare-eligible populations.3 The second priority is the recently built HealthHUBs, which combine services such as screenings, tests, and other preventive services along with the sale of health care products. And CVS plans to maintain some traditional drugstores with pharmacies and the usual product lines plus a small MinuteClinic.4 Lynch decided on a career in a health care--related field because the early deaths of her mother and aunt brought home the importance of access to basic care. She worked for several insurance companies, including Aetna, actively seeking a diversity of experiences and profit-and-loss responsibility. When CVS acquired Aetna, it promoted her to run that business. When the COVID-19 pandemic began, she co-led the response with the company's chief medical officer. Her success led to her appointment as CEO following the retirement of her predecessor.5 Lynch's decision-making skill is especially evident in her transition to the CEO role in February 2021---not only in the midst of the pandemic, but just as vaccines were to become widely available. Lynch immediately identified and seized the most significant way to fulfill the company's mission: to be a community source of vaccines and COVID tests while looking out for the well-being of the employees tasked with working on the front lines. Of course, these activities also supported the company's strategy: As new customers came in for tests or shots, they discovered CVS's other offerings. But Lynch was not merely concerned about the bottom line. She says the company immediately made employees' health and safety the top priority: "employees first, customers second."6 CVS arranged for 90,000 headquarters employees to work from home and ensured that the essential workers in the stores had personal protective equipment. Lynch and her executive team also visited stores during this period, where they acted as greeters so they could see and hear employees' and customers' concerns. In this way, they learned that the pharmacists and pharmacy technicians were already overwhelmed, so the stores set up separately staffed in-store clinics to handle the vaccination traffic.7 For the second year in a row, Lynch ranked number 1 on Fortune's list of the 50 Most Powerful Women in 2022.8 The Nature of Managerial Decision Making Every time managers plan, organize, direct, or control organizational activities, they make a stream of decisions. In opening a new restaurant, for example, managers have to decide where to locate it, what kinds of food to provide, which people to employ, and so on. Decision making is a basic part of every task managers perform. In this chapter, we study how these decisions are made. As we discussed in the last three chapters, one of the main tasks facing a manager is to manage the organizational environment. Forces in the external environment give rise to many opportunities and threats for managers and their organizations. In addition, inside an organization, managers must address many opportunities and threats that may arise as organizational resources are used. To deal with these opportunities and threats, managers must make decisions---that is, they must select one solution from a set of alternatives. Decision making is the process by which managers respond to opportunities and threats by analyzing the options and making determinations, or decisions, about specific organizational goals and courses of action. Good decisions result in the selection of appropriate goals and courses of action that increase organizational performance; bad decisions lower performance. Page 187 Decision making in response to opportunities occurs when managers search for ways to improve organizational performance to benefit customers, employees, and other stakeholder groups. As described in "A Manager's Challenge," Karen Lynch seized the opportunity to develop new services that capitalize on CVS Health's strengths. Decision making in response to threats occurs when events inside or outside the organization adversely affect organizational performance and managers search for ways to increase performance.9 Lynch responded to the impact of the COVID-19 pandemic by making sure CVS Health became a community source for vaccines and testing, while at the same time ensuring the well-being of employees who were on the front lines of the fight against the spread of the virus. Decision making is central to being a manager, and whenever managers engage in planning, organizing, leading, and controlling---their four principal tasks---they are constantly making decisions. Managers are always searching for ways to make better decisions to improve organizational performance. At the same time, they do their best to avoid costly mistakes that will hurt organizational performance. Examples of spectacularly good decisions include Martin Cooper's decision to develop the first cell phone at Motorola and Apple's decision to develop the iPod.10 Examples of spectacularly bad decisions include the decision by managers at NASA and Morton Thiokol to launch the Challenger space shuttle---a decision that killed six astronauts in 1986---and the decision by NASA to launch the Columbia space shuttle in 2003, which killed seven astronauts. Programmed and Nonprogrammed Decision Making Regardless of the specific decisions a manager makes, the decision-making process is either programmed or nonprogrammed.11 PROGRAMMED DECISION MAKING Programmed decision making is a routine, virtually automatic process. Programmed decisions are decisions that have been made so many times in the past that managers have developed rules or guidelines to be applied when certain situations inevitably occur. Programmed decision making takes place when a school principal asks the school board to hire a new teacher whenever student enrollment increases by 40 students; when a manufacturing supervisor hires new workers whenever existing workers' overtime increases by more than 10%; and when an office manager orders basic office supplies, such as paper and pens, whenever the inventory of supplies drops below a certain level. Furthermore, in the last example, the office manager probably orders the same amount of supplies each time. This decision making is called programmed because office managers, for example, do not need to repeatedly make new judgments about what should be done. They can rely on long-established decision rules such as these: Rule 1: When the storage shelves are three-quarters empty, order more copy paper. Rule 2: When ordering paper, order enough to fill the shelves. Managers can develop rules and guidelines to regulate all routine organizational activities. For example, rules can specify how a worker should perform a certain task, and rules can specify the quality standards that raw materials must meet to be acceptable. Most decision making that relates to the day-to-day running of an organization is programmed decision making. Examples include deciding how much inventory to hold, when to pay bills, when to bill customers, and when to order materials and supplies. Programmed decision making occurs when managers have the information they need to create rules that will guide decision making. There is little ambiguity involved in assessing when the stockroom is empty or counting the number of new students in class. NONPROGRAMMED DECISION MAKING Suppose, however, that managers are not certain that a course of action will lead to a desired outcome. Or in even more ambiguous terms, suppose managers are not even sure what they are trying to achieve. Obviously, rules cannot be developed to predict uncertain events. Page 188 Nonprogrammed decision making is required for these nonroutine decisions. Nonprogrammed decisions are made in response to unusual or novel opportunities and threats. Nonprogrammed decision making occurs when there are no ready-made decision rules that managers can apply to a situation. Rules do not exist because the situation is unexpected or uncertain and managers lack the information they would need to develop rules to cover it. Examples of nonprogrammed decision making include decisions to invest in a new technology, develop a new kind of product, launch a new promotional campaign, enter a new market, expand internationally, or start a new business, like Karen Lynch and CVS Health did with their HealthHUBs, as discussed in the chapter's opening story. How do managers make decisions in the absence of decision rules? They may rely on their intuition---feelings, beliefs, and hunches that come readily to mind, require little effort and information gathering, and result in on-the-spot decisions.12 Or they may make reasoned judgments---decisions that require time and effort and result from careful information gathering, generation of alternatives, and evaluation of alternatives. "Exercising" one's judgment is a more rational process than "going with" one's intuition. For reasons that we examine later in this chapter, both intuition and judgment often are 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.13 In the remainder of this chapter, when we talk about decision making, we are referring to nonprogrammed decision making because it causes the most problems for managers and is inherently challenging. Sometimes managers have to make rapid decisions and don't have time to carefully consider the issues involved. They must rely on their intuition to respond quickly to a pressing concern. For example, when fire chiefs, captains, and lieutenants manage firefighters battling dangerous, out-of-control fires, they often need to rely on their expert intuition to make on-the-spot decisions that will protect the lives of the firefighters and save the lives of others, contain the fires, and preserve property---decisions made in emergency situations entailing high uncertainty, high risk, and rapidly changing conditions.14 In other cases, managers do have time to make reasoned judgments, but there are no established rules to guide their decisions, such as when deciding whether to proceed with a proposed merger or how to take a start-up business to a new level. Nonprogrammed decision making covers areas with no previous benchmarks or rubrics, such as making expert chess moves. Blend Images/Shutterstock Regardless of the circumstances, making nonprogrammed decisions can result in effective or ineffective decision making. Managers have to be on their guard to avoid being overconfident in decisions that result from either intuition or reasoned judgment. The classical and administrative decision-making models reveal many of the assumptions, complexities, and pitfalls that affect decision making. These models help reveal the factors that managers and other decision makers must be aware of to improve the quality of their decision making. Keep in mind, however, that the classical and administrative models are just guides that can help managers understand the decision-making process. In real life, the process is typically not cut-and-dried, but these models can help guide a manager through it. The Classical Model One of the earliest models of decision making, the classical model, is prescriptive, which means it specifies how decisions should be made. Managers using the classical model make a series of simplifying assumptions about the nature of the decision-making process (see Figure 7.1). The premise of the classical model 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 and make the best choice. In other words, the classical model assumes managers have access to all the information they need to make the optimum decision, which is the most appropriate decision possible in light of what they believe to be the most desirable consequences for the organization. Furthermore, the classical model assumes managers can easily list their own preferences for each alternative and rank them from least to most preferred to make the optimum decision. Steps in the Decision-Making Process LO7-2 Describe the six steps managers should take to make the best decisions, and explain how cognitive biases can lead managers to make poor decisions. Using the work of March and Simon as a basis, researchers have developed a step-by-step model of the decision-making process and the issues and problems that managers confront at each step. Perhaps the best way to introduce this model is to examine the real-world nonprogrammed decision making of Scott McNealy at a crucial point in Sun Microsystems's history. McNealy was a founder of Sun Microsystems and was the chairman of the board of directors until Sun was acquired by Oracle in 2010.27 In early August 1985, Scott McNealy, then CEO of Sun Microsystems (a hardware and software computer workstation manufacturer focused on network solutions), had to decide whether to go ahead with the launch of the new Carrera workstation computer, scheduled for September 10. Sun's managers had chosen the date nine months earlier when the development plan for the Carrera was first proposed. McNealy knew it would take at least a month to prepare for the September 10 launch, and the decision could not be put off. Customers were waiting for the new machine, and McNealy wanted to be the first to provide a workstation that took advantage of Motorola's then-powerful 16-megahertz 68020 microprocessor. Capitalizing on this opportunity would give Sun a significant edge over Apollo, its main competitor in the workstation market. McNealy knew, however, that committing to the September 10 launch date was risky. Motorola was having production problems with the 16-megahertz 68020 microprocessor and could not guarantee Sun a steady supply of these chips. Moreover, the operating system software was not completely free of bugs. If Sun launched the Carrera on September 10, the company might have to ship some machines with software that was not fully operational, was likely to crash the system, and utilized Motorola's less powerful 12-megahertz 68020 microprocessor instead of the 16-megahertz version.28 Of course, Sun could later upgrade the microprocessor and operating system software in any machines purchased by early customers, but the company's reputation would suffer. If Sun did not go ahead with the September launch, the company would miss an important opportunity.29 Rumors were circulating in the industry that Apollo would be launching a new machine of its own that same year in December. McNealy clearly had a difficult decision to make. He had to decide quickly whether to launch the Carrera, but he did not have all the facts. He did not know, for example, whether the microprocessor or operating system problems could be resolved by September 10; nor did he know whether Apollo was going to launch a competing machine in December. But he could not wait to find these things out---he had to make a decision. We'll see what he decided later in the chapter. Many managers who must make important decisions with incomplete information face dilemmas similar to McNealy's. Managers should consciously follow six steps to make a good decision (see Figure 7.4).30 We review these steps in the remainder of this section. As you read about the steps, keep in mind that, in practice, decision makers may circle back and repeat some steps as conditions change. Different needs may arise, new alternatives may emerge, and the implementation of a decision may uncover issues the decision makers overlooked. The "Management Insight" feature describes this flexible approach to decision making in the rapidly changing conditions associated with workers returning to the office during the COVID-19 pandemic. Page 193 Figure 7.4 Six Steps in Decision Making MANAGEMENT INSIGHT Making "Back to Work" Work at Molson Coors When Molson Coors sent office employees home to work at the start of the COVID-19 pandemic in March 2020, executives already knew they would have to decide when to return, but the decision making would be more complex than expected. They hoped for a few months of remote work, followed by a return to focusing on the big challenges facing Molson, the world's fifth-largest brewing company. CEO Gavin Hattersley's vision to offer a wide variety of beverages was a bold strategy, given that his experience was in the beer industry, whose sales had been declining even before the pandemic shut down bars and restaurants.31 The planning to return finally began in early 2021. By then, employees were accustomed to remote work, which raised a new question: Must they be in the office five days a week? Hattersley had assumed they would, but Molson investigated. In surveys, employee forums, and virtual chats with the CEO, employees indicated they were eager to get back, but many said they liked the flexibility of working at home. Some had health concerns, and some worried about child care---common sentiments expressed by employees across the globe about returning to work.32 Molson's leadership team therefore weighed options of five, four, or three days a week in the office. To enable in-person collaboration, they selected a schedule of three mandatory in-office days: Monday, Tuesday, and Thursday. Employees could choose where to work on the other two days. The team also selected September 7, 2021, as the office-reopening date.33 Molson Coors's leadership team worked diligently to ensure that their decision to bring back employees to the office as the pandemic waned worked well for everyone. Luis Alvarez/Getty Images Implementation began in April, when Molson announced the in-office schedule, giving employees a few months to plan child care, transportation, and other needs. Employees received memos detailing the reopening plans, tips on hybrid working, and guides to offices (for the hundreds of employees who had not yet worked at the office). Safety concerns persisted, so Hattersley made what he calls his most difficult decision: requiring that employees be vaccinated. He worried that many would quit, but less than 1% did, citing either the mandate or a preference for remote work. Hattersley's decision led the team to rethink the timeline. To give employees time to get vaccinated, they pushed the opening back to October 2021.34 On the day of the return, Molson gave employees welcome packets and, in at least one department, color-coded wristbands they could wear to signal whether they wanted to be greeted with a hug, elbow bump, or just a wave. Executives consider the transition a success. Employees expressed satisfaction, although some were surprised at their need to remember basics such as allowing time between in-person meetings. And during it all, Molson stayed on track with deals supporting its diversification strategy.35 Page 194 Recognize the Need for a Decision The first step in the decision-making process is to recognize the need for a decision. Scott McNealy recognized this need, and he realized a decision had to be made quickly. Some stimuli usually spark the realization that a decision must be made. These stimuli often become apparent because changes in the organizational environment result in new kinds of opportunities and threats. This happened at Sun Microsystems. The September 10 launch date had been set when it seemed that Motorola chips would be readily available. Later, with the supply of chips in doubt and bugs remaining in the system software, Sun was in danger of failing to meet its launch date. The stimuli that spark decision making are as likely to result from the actions of managers inside an organization as they are from changes in the external environment.36 An organization possesses a set of skills, competencies, and resources in its employees and in departments such as marketing, manufacturing, and research and development. Managers who actively pursue opportunities to use these competencies create the need to make decisions. Managers thus can be proactive or reactive in recognizing the need to make a decision, but the important issue is that they must recognize this need and respond in a timely and appropriate way.37 Generate Alternatives Having recognized the need to make a decision, a manager must generate a set of feasible alternative courses of action to take in response to the opportunity or threat. Management experts cite failure to properly generate and consider different alternatives as one reason that managers sometimes make bad decisions.38 In the Sun Microsystems decision, the alternatives seemed clear: go ahead with the September 10 launch or delay the launch until the Carrera was 100% ready for market introduction. Often, however, the alternatives are not so obvious or so clearly specified. One major problem is that managers may find it difficult to come up with creative alternative solutions to specific problems. Perhaps some of them are used to seeing the world from a single perspective---they have a certain "managerial mind-set." Many managers find it difficult to view problems from a fresh perspective. According to best-selling management author Peter Senge, we all are trapped within our personal mental models of the world---our ideas about what is important and how the world works.39 Generating creative alternatives to solve problems and take advantage of opportunities may require that we abandon our existing mind-sets and develop new ones---something that usually is difficult to do. Cognitive Biases and Decision Making In the 1970s, psychologists Daniel Kahneman and the late Amos Tversky suggested that because all decision makers are subject to bounded rationality, they tend to use heuristics, which are rules based on an individual's experience that simplify the process of making decisions.50 Kahneman and Tversky argued that these rules are often useful because they help decision makers make sense of complex, uncertain, and ambiguous information. Sometimes, however, the use of heuristics can lead to systematic errors in the way decision makers process information about alternatives and make decisions. 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.51 Four sources of bias that can adversely affect the way managers make decisions are confirmation, representativeness, the illusion of control, and escalating commitment (see Figure 7.6). Figure 7.6 Sources of Cognitive Bias at the Individual and Group Levels Confirmation Bias Decision makers who have strong existing beliefs about the relationship between two variables tend to make decisions based on those beliefs even when presented with evidence that those initial beliefs may be wrong. In doing so, they fall victim to confirmation bias.52 In addition, decision makers tend to seek and use information consistent with those existing beliefs and to ignore information that contradicts those beliefs. Research suggests that confirmation bias is particularly strong when information is presented sequentially and the person is asked to revisit their decision in light of new information.53 Representativeness Bias Many decision makers inappropriately generalize from a small sample or even from a single vivid case or episode; these are instances of the representativeness bias. Consider the case of a bookstore manager who decided to partner with a local independent school for a "Book Day": Students and parents from the school would be encouraged to buy books at the bookstore as a fund-raiser for the school, and the bookstore would share a small portion of proceeds from these sales with the school. After quite a bit of planning, the Book Day generated lackluster sales and publicity for the store. When other public and independent schools approached the bookstore manager with similar proposals for fund-raising and Book Days, the manager declined based on their initial bad experience. As a result, the manager lost opportunities to expand sales and gain word-of-mouth advertising and publicity for the bookstore. The manager's initial bad experience was the result of a scheduling snafu at the school---an important lacrosse game was scheduled the same day as the Book Day. Illusion of Control Other errors in decision making result from the illusion of control, which is the tendency of decision makers to overestimate their ability to control activities and events. Top managers seem particularly prone to this bias. Having worked their way to the top of an organization, they tend to have an exaggerated sense of their own worth and are overconfident about their ability to succeed and to control events.54 The illusion of control causes managers to overestimate the odds of a favorable outcome and, consequently, to make inappropriate decisions. According to most studies, 70--90% of mergers and acquisitions fail, yet time and time again, top managers overestimate their abilities to combine companies with vastly different cultures in a successful merger.55 Page 199 Escalating Commitment Having already committed significant resources to a course of action, some managers commit more resources to the project even if they receive feedback that the project is failing.56 Feelings of personal responsibility for a project apparently bias the analysis of decision makers and lead to this escalating commitment. The managers decide to increase their investment of time and money in a course of action and even ignore evidence that it is illegal, unethical, uneconomical, or impractical (see Figure 7.5). Often the more appropriate decision would be to cut their losses and run. Consider the case of Mark Gracin, who owns a landscape company. Gracin had a profitable business doing general landscape work (such as mowing grass, picking up leaves, and fertilizing) for home owners in a large city. To expand his business into landscape design, he hired a landscape designer, advertised landscape design services in local newspapers and on social media, and gave his existing customers free design proposals for their front and back yards. After a few months, Gracin had no landscape design customers. Still convinced that landscape design was a great way to expand his business despite this negative feedback, he decided he needed to do more. He rented a small office for his landscape designer (who used to work from her own home office) to meet with clients, hired an assistant for the designer, had a public relations firm create promotional materials, and started advertising on local TV. These efforts also did not generate sufficient interest in his landscape design services to offset their costs. Yet Gracin's escalating commitment caused him to continue to pour money into trying to drum up business in landscape design. In fact, Gracin reluctantly decided to abandon his landscape design services only when he realized he could no longer afford their mounting costs. Be Aware of Your Biases How can managers avoid the negative effects of cognitive biases and improve their decision-making and problem-solving abilities? Managers must become aware of biases and their effects, and they must identify their own personal style of making decisions. One useful way for managers to analyze their decision-making style is to review two decisions that they made recently---one decision that turned out well and one that turned out poorly. Problem-solving experts recommend that managers start by determining how much time to spend on each of the decision-making steps, such as gathering information to identify the pros and cons of alternatives or ranking the alternatives, to make sure they spend sufficient time on each step.57 Another recommended technique for examining decision-making style is for managers to list the criteria they typically use to assess and evaluate alternatives---the heuristics they typically employ, their personal biases, and so on---and then critically evaluate the appropriateness of these different factors. Many managers are likely to have difficulty identifying their own biases, so it is often advisable for managers to scrutinize their own assumptions by working with other managers to help expose weaknesses in their decision-making style. In this context, the issue of group decision making becomes important. Group Decision Making LO7-3 Identify the advantages and disadvantages of group decision making, and describe techniques that can improve it. Many (or perhaps most) important organizational decisions are made by groups or teams of managers rather than by individuals. Group decision making is superior to individual decision making in several respects. When managers work as a team to make decisions and solve problems, their choices of alternatives are less likely to fall victim to the biases and errors discussed previously. They can draw on the combined skills, competencies, and accumulated knowledge of group members and thereby improve their ability to generate feasible alternatives and make good decisions. Group decision making also allows managers to process more information and to correct one another's errors. And in the implementation phase, all managers affected by the decisions agree to cooperate. When a group of managers makes a decision (as opposed to one top manager making a decision and imposing it on subordinate managers), the probability that the decision will be implemented successfully increases. (We discuss how to encourage employee participation in decision making in Chapter 14.) Page 200 Some potential disadvantages are associated with group decision making. Groups often take much longer than individuals to make decisions. Getting two or more managers to agree to the same solution can be difficult because managers' interests and preferences are often different. In addition, just like decision making by individual managers, group decision making can be undermined by biases. A major source of group bias is groupthink. The Perils of Groupthink 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.58 When managers are subject to groupthink, they collectively embark on a course of action without developing appropriate criteria to evaluate alternatives. Typically, a group rallies around one central manager, such as the CEO, and the course of action that manager supports. Group members become blindly committed to that course of action without evaluating its merits. Commitment is often based on an emotional, rather than an objective, assessment of the optimal course of action. The decision President Kennedy and his advisers made to launch the unfortunate Bay of Pigs invasion in Cuba in 1962, the decisions made by President Johnson and his advisers from 1964 to 1967 to escalate the war in Vietnam, the decision made by President Nixon and his advisers in 1972 to cover up the Watergate break-in, and the decision made by NASA and Morton Thiokol in 1986 to launch the ill-fated Challenger shuttle---all were likely influenced by groupthink. After the fact, decision makers such as these who may fall victim to groupthink are often surprised that their decision-making process and outcomes were so flawed. When groupthink occurs, pressures for agreement and harmony within a group have the unintended effect of discouraging individuals from raising issues that run counter to majority opinion. For example, when managers at NASA and Morton Thiokol fell victim to groupthink, they convinced each other that all was well and that there was no need to delay the launch of the Challenger space shuttle. Devil's Advocacy and Dialectical Inquiry The existence of cognitive biases and groupthink raises the question of how to improve the quality of group and individual decision making so managers make decisions that are realistic and are based on thorough evaluation of alternatives. Two techniques known to counteract groupthink and cognitive biases are devil's advocacy and dialectical inquiry (see Figure 7.7).59 Figure 7.7 Devil's Advocacy and Dialectical Inquiry Page 201 Devil's advocacy is a critical analysis of a preferred alternative to ascertain its strengths and weaknesses before it is implemented.60 Typically, one member of the decision-making group plays the role of devil's advocate. The devil's advocate critiques and challenges the way the group evaluated alternatives and chose one over the others. The purpose of devil's advocacy is to identify all the reasons that might make the preferred alternative unacceptable. In this way, decision makers can be made aware of the possible perils of recommended courses of action. Dialectical inquiry goes one step further. Two groups of managers are assigned to a problem, and each group is responsible for evaluating alternatives and selecting one of them.61 Top managers hear each group present its preferred alternative, and then each group critiques the other's position. During this debate, top managers challenge both groups' positions to uncover potential problems and perils associated with their solutions. The goal is to find an even better alternative course of action for the organization to adopt. Both devil's advocacy and dialectical inquiry can help counter the effects of cognitive biases and groupthink.62 In practice, devil's advocacy is probably easier to implement because it involves less managerial time and effort than does dialectical inquiry. Diversity among Decision Makers Another way to improve group decision making is to promote diversity in decision-making groups (see Chapter 5).63 Bringing together managers from various ethnic, national, and functional backgrounds broadens the range of life experiences and opinions that group members can draw on as they generate, assess, and choose among alternatives. Moreover, diverse groups are sometimes less prone to groupthink because group members already differ from each other and thus are less subject to pressures for uniformity. Organizational Learning and Creativity LO7-4 Explain the role that organizational learning and creativity play in helping managers to improve their decisions. The quality of managerial decision making ultimately depends on innovative responses to opportunities and threats. How can managers increase their ability to make nonprogrammed decisions that will allow them to adapt to, modify, and even drastically alter their task environments so they can continually increase organizational performance? The answer is by encouraging organizational learning.64 Organizational learning is the process through which managers seek to improve employees' desire and ability to understand and manage the organization and its task environment so employees can make decisions that continuously increase organizational effectiveness.65 A learning organization is one in which managers do everything possible to maximize the ability of individuals and groups to think and behave creatively and thus maximize the potential for organizational learning to take place. At the heart of organizational learning is creativity, which is the ability of a decision maker to discover original and novel ideas that lead to feasible alternative courses of action. Encouraging creativity among managers is such a pressing organizational concern that many organizations hire outside experts to help them develop programs to train their managers in the art of creative thinking and problem solving. Get off email and lose the desk! Giving yourself and your employees the time and space to know that contributions off the beaten track are valued increases the ability to think outside the box. D. Hurst/Alamy Stock Photo Page 202 Creating a Learning Organization How can managers foster a learning organization? Learning theorist Peter Senge identified five principles for creating a learning organization (see Figure 7.8):66 For organizational learning to occur, top managers must allow every person in the organization to develop a sense of personal mastery, which is the process by which an individual develops the desire for personal learning that will continue throughout the person's life. Managers must understand this process and empower each employee to experiment, create, and explore their own ideas of personal learning, which can have a positive effect on the overall organization.67 As part of attaining personal mastery, people should think about some of the assumptions they have about how the world works and develop ideas about these so-called mental models. Often, however, individuals are unaware of the mental models or assumptions they hold and must look within to understand how they see the world. Once individuals gain perspective on how they view the world, they can use this information to expand their way of thinking not only on a personal level but also at work. Developing complex mental models---sophisticated ways of thinking that challenge them to find new or better ways of performing a task---can help workers and managers to expand the way an organization thinks about how they perform work. To expand thinking in this way requires experimentation, taking risks, and thinking outside the lines, which can help reshape how an organization performs at all levels.68 Managers must do everything they can to promote creativity within groups. Team members must be encouraged to learn together through exchanging ideas, listening to one another, and working together to solve problems. Ongoing dialog between group members is very important. Senge thought that team learning is more important than individual learning as a way to increase organizational learning. He pointed out that most important decisions are made within organization subunits such as groups, functions, and divisions. Managers must emphasize the importance of building a shared vision---meaning that employees share their vision for the future of the organization. Once this shared vision is identified, members of the organization can frame problems and opportunities with the shared vision in mind and work together to achieve common goals that correspond to the vision. Managers must encourage systems thinking (a concept drawn from systems theory discussed earlier in Chapter 2). This concept is a way of seeing the whole picture. It is a framework for seeing interrelationships and patterns rather than static "snapshots" within an organization. Systems thinking can be thought of as a conceptual cornerstone that pulls together the other four principles for creating a learning organization.69 Figure 7.8 Senge's Principles for Creating a Learning Organization Building a learning organization requires that managers change their management assumptions radically. Developing a learning organization is neither a quick nor an easy process. Senge worked with Ford Motor Company to help managers make Ford a learning organization. Why would Ford want this? Top management believed that to compete successfully Ford must improve its members' ability to be creative and make the right decisions. Page 203 Increasingly, managers are being called on to promote global organizational learning. The "Managing Globally" feature provides one example of such an effort. Likewise, managers at Walmart have used the lessons derived from its failures and successes in one country to promote global organizational learning across the many countries in which it now operates. When Walmart entered Malaysia, it was convinced customers there would respond to its one-stop shopping format. It found, however, that Malaysians enjoy the social experience of shopping in a lively market or bazaar and thus did not like the impersonal efficiency of the typical Walmart store. As a result, Walmart learned the importance of designing store layouts to appeal specifically to the customers of each country in which it operates. Clearly, global organizational learning is essential for companies such as Walmart that have significant operations in multiple countries. MANAGING GLOBALLY Western Union Continues to Learn Western Union (WU) offers a financial lifeline worldwide, sending 130 currencies to recipients in 200-plus countries. When a customer pays, a code is sent to the recipient, who presents it to an agent, who hands over cash minus a processing fee. WU later reimburses the agent. Currency transfers could include support from emigrants to family members back home, help to a stranded traveler overseas, or tuition payments for a child studying abroad. In a recent year, the company processed more than 800 million transactions for its consumer and business clients.70 WU outlasted competitors by learning to embrace industry transformations.71 It started as a telegraph operator, transmitting information to newspapers, banks, brokerages, and even betting parlors. After stumbling by turning down a chance to buy the patent for the telephone, WU learned it must commit to technological advances. It kept communication services up-to-date with teleprinters, faxes, and satellites until anyone could deliver messages from home or work. By then, however, the company had built its money transfer business. Profits accelerated along with immigration into the United States. Western Union's culture of continuous learning has helped the company and its employees outlast competitors in the global marketplace. wihtgod/123RF WU's next focus for learning will be technological, overseen by Harveer Singh, the company's chief data architect and global head of data engineering and architecture.72 Singh is leading the digital transformation of the company to help compete with more agile start-up businesses. Digital and mobile devices enable easy, low-cost methods of money transfer for Western Union and competitors, including several financial-tech (fintech) startups, which have made some progress in the market. But WU's size is an advantage because millions of daily digital transactions provide valuable data, which allow the company to understand who their customers are.73 When the COVID-19 pandemic took hold across the globe, Singh and other WU managers recognized that modernization of the company's processes needed to happen---and happen fast. For example, Western Union moved away from expensive and outdated data warehouses and moved quickly to take the entire data platform to the cloud in less than a year, which reduced the company's costs by 50%. In addition, the pandemic caused the company to refocus their energy on personalized marketing efforts based on the data it collected and to launch an artificial chatbot in many countries to reduce wait times for customers. Recently, Western Union launched a digital banking pilot in Germany and Romania, which offered a multi-currency account and debit card, allowing customers to load, transfer, and use funds in any of 16 currencies. This pilot demonstrated the potential of WU's new technology when the war in Ukraine occurred in early 2022: Although the conflict paralyzed traditional banking operations, customers were able to use the WU network to make money transfers to people in Ukraine without difficulty and without fees.74 In December 2021, Devin McGranahan joined Western Union as president and CEO, replacing Hikmet Ersek, who retired after 11 years in the company's top job. McGranahan has more than 25 years of business experience, including extensive work in digital merchant and enterprise platforms. Although financial results in 2022 were disappointing, McGranahan is optimistic that WU's digital bank and ecosystem in Europe will continue to drive growth and gain more digital customers, who tend to do 2.5 times the transactions undertaken by traditional consumers.75 Promoting Individual Creativity Research suggests that when certain conditions are met, managers are more likely to be creative. People must be given the opportunity and freedom to generate new ideas.76 Creativity declines when managers look over the shoulders of talented employees and try to "hurry up" a creative solution. How would you feel if your boss said you had one week to come up with a new product idea to beat the competition? Creativity results when employees have an opportunity to experiment, to take risks, and to make mistakes and learn from them. And employees must not fear that they will be looked down on or penalized for ideas that might at first seem outlandish; sometimes those ideas yield truly innovative products and services.77 Highly innovative companies such as Stripe, Microsoft, and SpaceX are well known for the wide degree of freedom they give their managers and employees to experiment and develop innovative goods and services.78 Once managers have generated alternatives, creativity can be fostered by giving them constructive feedback so they know how well they are doing. Ideas that seem to be going nowhere can be eliminated and creative energies refocused in other directions. Ideas that seem promising can be promoted, and help from other managers can be obtained.79 Top managers must stress the importance of looking for alternative solutions and should visibly reward employees who come up with creative ideas. Being creative can be demanding and stressful. Employees who believe they are working on important, vital issues are motivated to put forth the high levels of effort that creativity demands. Creative people like to receive the acclaim of others, and innovative organizations have many kinds of ceremonies and rewards to recognize creative employees. Employees on the front line are often in a good position to come up with creative ideas for improvements but may be reluctant to speak up or share their ideas. To encourage frontline employees to come up with creative ideas and share them, some managers have used various types of rewards.80 These rewards signal the importance of coming up with creative ideas and encouraging employees to share them. Promoting Group Creativity To encourage creativity at the group level, organizations can use group problem-solving techniques that promote creative ideas and innovative solutions. These techniques can also prevent groupthink and help managers uncover biases. Here we look at three group decision-making techniques: brainstorming, the nominal group technique, and the Delphi technique. BRAINSTORMING 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.81 Generally, from 5 to 15 managers meet in a closed-door session and proceed like this: One manager describes in broad outline the problem the group is to address. Group members share their ideas and generate alternative courses of action. As each alternative is described, group members are not allowed to criticize it; everyone withholds judgment until all alternatives have been heard. One member of the group records the alternatives on a flip chart. Group members are encouraged to be as innovative and radical as possible. Anything goes; and the greater the number of ideas put forth, the better. Moreover, group members are encouraged to "piggyback," or build on, each other's suggestions. When all alternatives have been generated, group members debate the pros and cons of each and develop a short list of the best alternatives. Page 205 Brainstorming is useful in some problem-solving situations---for example, when managers are trying to find a name for a new perfume or car model. But sometimes individuals working alone can generate more alternatives. The main reason for the loss of productivity in brainstorming appears to be 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.82 Brainstorming is one example of a group problem-solving technique that helps promote creative ideas and innovation solutions within an organization. Fizkes/Shutterstock NOMINAL GROUP TECHNIQUE To avoid production blocking, the nominal group technique is often used. It provides a more structured way of generating alternatives in writing and gives each manager more time and opportunity to come up with potential solutions. The nominal group technique is especially useful when an issue is controversial and when different managers might be expected to champion different courses of action. Generally, a small group of managers meets in a closed-door session and adopts the following procedures: One manager outlines the problem to be addressed, and 30 or 40 minutes are allocated for group members, working individually, to write down their ideas and solutions. Group members are encouraged to be innovative. Managers take turns reading their suggestions to the group. One manager writes all the alternatives on a flip chart. No criticism or evaluation of alternatives is allowed until all alternatives have been read. The alternatives are then discussed, one by one, in the sequence in which they were proposed. Group members can ask for clarifying information and critique each alternative to identify its pros and cons. When all alternatives have been discussed, each group member ranks all the alternatives from most preferred to least preferred, and the alternative that receives the highest ranking is chosen.83 DELPHI TECHNIQUE Both the nominal group technique and brainstorming require that managers meet to generate creative ideas and engage in joint problem solving. What happens if managers are in different cities or in different parts of the world and cannot meet face-to-face? Videoconferencing is one way to bring distant managers together to brainstorm. Another way is to use the Delphi technique, which is a written approach to creative problem solving.84 The Delphi technique works like this: The group leader writes a statement of the problem and a series of questions to which participating managers are to respond. 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. A team of top managers records and summarizes the responses. The results are then sent back to the participants, with additional questions to be answered before a decision can be made. The process is repeated until a consensus is reached and the most suitable course of action is apparent. Entrepreneurship and Creativity LO7-5 Describe how managers can encourage and promote entrepreneurship to create a learning organization. The importance of a learning environment within established organizations cannot be understated. In some instances, managers and other members develop a sense of entrepreneurship within the company that encourages learning and creativity. In a broad sense, entrepreneurship is the process of identifying opportunities to provide customers with new or improved goods and services. In a corporate setting, this process is called intrapreneurship, and, individuals who embrace the spirit of entrepreneurship in a corporate setting are known as intrapreneurs, or corporate entrepreneurs.85 In this section, we discuss how organizational members can use their creativity within a corporate structure to act as entrepreneurs, which is no easy feat given the existing organizational structure and culture already in place.86 Chapter 19 focuses on how people can become entrepreneurs and start their own businesses and the various requirements for ensuring the success of the new venture, including how managers can play a significant role in an entrepreneur's new business. Intrapreneurs and Organizational Learning The intensity of competition today, particularly from agile, small companies, has made it increasingly important for large, established organizations to promote and encourage intrapreneurship to raise their level of innovation and organizational learning. As we discussed earlier, a learning organization encourages all employees to identify opportunities and solve problems, thus enabling the organization to continuously experiment, improve, and increase its ability to provide customers with new and improved goods and services. The higher the level of intrapreneurship, the higher will be the level of learning and innovation. How can organizations promote organizational learning and intrapreneurship? PRODUCT CHAMPIONS One way to promote intrapreneurship is to encourage someone to assume the role of product champion, a manager who takes "ownership" of a project and provides the leadership and vision that take a product from the idea stage to the final customer. 3M, a company well known for its attempts to promote intrapreneurship, encourages all its managers to become product champions and identify new product ideas. A product champion becomes responsible for developing a business plan for the product. Armed with this business plan, the champion appears before 3M's product development committee, a team of senior 3M managers who probe the strengths and weaknesses of the plan to decide whether it should be funded. If the plan is accepted, the product champion assumes responsibility for product development. 3M's Audrey Sherman holds the most patents by a female scientist in the organization, with 151, ranking sixth overall in the most patents held by 3M employees. She says the key to successful intrapreneurship is teamwork---collaborating with others who have a deep curiosity and are willing to make connections among concepts that don't seem to be connected. Sherman also suggests building interaction across the organization, bringing in fresh perspectives, and preparing your mind to recognize opportunities within your daily work activities that will help spark innovation and possibly new product ideas.87 SKUNKWORKS The idea behind the product champion role is that employees who feel ownership for a project are inclined to act as outside entrepreneurs and go to great lengths to make the project succeed. Using skunkworks and new venture divisions can also strengthen this feeling of ownership. (In Chapter 8, we discuss the "disruptive growth" team within General Mills, the division that also acts as the company's venture capital arm.) A skunkworks is a group of intrapreneurs who are deliberately separated from the normal operation of an organization---for example, from the normal chain of command---to encourage them to devote all their attention to developing new products. The idea is that if these people are isolated, they will become so intensely involved in a project that development time will be relatively brief and the quality of the final product will be 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 with which this unit functioned and speculation about its goals led others to refer to it as "the skunkworks."88 More recently, the Ford Motor Company created a small skunkworks group (called Team Edison) to develop the Mustang Mach-E electric vehicle, which made its debut in 2021 to rave reviews from environmentalists and car enthusiasts alike.89 Page 207 REWARDS FOR INNOVATION To encourage managers to bear the uncertainty and risk associated with the hard work of entrepreneurship, it is necessary to link performance to rewards. Increasingly, companies are rewarding intrapreneurs on the basis of the outcome of the product development process. Intrapreneurs are paid large bonuses if their projects succeed, or they are granted stock options that can make them millionaires if their products sell well. Both Microsoft and Google, for example, have made hundreds of their employees multimillionaires as a result of the stock options they were granted as part of their reward packages. In addition to receiving money, successful intrapreneurs can expect to receive promotion to the ranks of top management. Most of 3M's top managers, for example, reached the executive suite because they had a track record of successful intrapreneurship. Organizations must reward intrapreneurs equitably if they wish to prevent them from leaving and becoming outside entrepreneurs who might form a competitive new venture. Chapter 19 discusses some key strategies organizations can implement to help retain corporate entrepreneurs. Summary and Review LO7-1 THE NATURE OF MANAGERIAL DECISION MAKING Programmed decisions are routine decisions made so often that managers have developed decision rules to be followed automatically. Nonprogrammed decisions are made in response to situations that are unusual or novel; they are nonroutine decisions. The classical model of decision making assumes that decision makers have complete information; can process that information in an objective, rational manner; and make optimum decisions. March and Simon argued that managers exhibit bounded rationality, rarely have access to all the information they need to make optimum decisions, and consequently satisfice and rely on their intuition and judgment when making decisions. LO7-2 STEPS IN THE DECISION-MAKING PROCESS When making decisions, managers should take these six steps: recognize the need for a decision, generate alternatives, assess alternatives, choose among alternatives, implement the chosen alternative, and learn from feedback. LO7-2 COGNITIVE BIASES AND DECISION MAKING Most of the time, managers are fairly good decision makers. On occasion, however, problems can result because human judgment can be adversely affected by the operation of cognitive biases that result in poor decisions. Cognitive biases are caused by systematic errors in the way decision makers process information and make decisions. Sources of these errors include confirmation bias, representativeness bias, the illusion of control, and escalating commitment. Managers should undertake a personal decision audit to become aware of their biases and thus improve their decision making. LO7-3 GROUP DECISION MAKING Many advantages are associated with group decision making, but there are also several disadvantages. One major source of poor decision making is groupthink. Afflicted decision makers collectively embark on a dubious course of action without questioning the assumptions that underlie their decision. Managers can improve the quality of group decision making by using techniques such as devil's advocacy and dialectical inquiry and by increasing diversity in the decision-making group. LO7-4 ORGANIZATIONAL LEARNING AND CREATIVITY Organizational learning is the process through which managers seek to improve employees' desire and ability to understand and manage the organization and its task environment so employees can make decisions that continuously raise organizational effectiveness. Managers must take steps to promote organizational learning and creativity at the individual and group levels to improve the quality of decision making. LO7-5 ENTREPRENEURSHIP AND CREATIVITY The importance of a learning environment within established organizations cannot be understated. In some instances, managers and other members develop a sense of entrepreneurship within the company that encourages learning and creativity. In a broad sense, entrepreneurship is the process of identifying opportunities to provide customers with new or improved goods and services. In a corporate setting, this process is called intrapreneurship, and individuals who embrace the spirit of entrepreneurship in a corporate setting are known as intrapreneurs, or corporate entrepreneurs.