Chapter 5 - Decision Making, learning, Creativity, and Entrepreneurship 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. 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 adversely affect organizational performance and managers search 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 make better decisions in order to improve organizational performance. Programmed decisionmaking is a routine, virtually automatic process. These decisions have been made so many times in the past that managers have developed rules or guidelines to be applied when certain situations inevitably occur. Most decisionmaking that relates to the daytoday running of an organization is programmed decision making. It occurs when managers have the information they need to create rules that will guide decisionmaking. Nonprogrammed decisionmaking is required for nonroutine decisions. Nonprogrammed decisions are decisions that are made in response to unusual or novel opportunities and threats. These occur when there are no readymade decision rules that managers can apply to a situation. 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 onthespot 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 time to carefully consider the issues involved, while in other cases, they do have the time available to make reasoned judgments. The classical model of decision making is prescriptive, that is, it 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 the information they need to make the optimum decision. It also assumes that managers can easily list and rank each alternative from least to most preferred to make the optimum decision. The administrative model of decision making 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. Information is incomplete because in most cases, the full range of decisionmaking 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. 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. Much of the information managers have at their disposal is ambiguous information, which can be interpreted in multiple and often conflicting ways. Due to time constraints and information costs, managers are unable to search for all possible alternatives and evaluate all the potential consequences. Due to 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 response to problems from a limited sample of all potential alternatives. This strategy is called satisficing. Using the work of March and Simon as a basis, researchers developed a stepbystep model of the decisionmaking 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 that a decision needs to be made. The stimuli may originate from the actions of managers inside an organization or from changes in the external environment. Be it proactive or reactive, it is imperative that managers recognize this need and respond in a timely and appropriate manner. 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 different alternatives can result in 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 midsets and develop new ones. Assess 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. Legality: Managers must ensure that a possible course of action is legal. Ethicalness: Managers must ensure that a possible course of action is ethical and will not unnecessarily harm any stakeholder group. Economic feasibility: Managers must decide whether the alternatives can be accomplished, given the organization's performance goals. Practicality: Managers must decide whether they have the capabilities and resources required to implement the alternative. 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 available is used. Sometimes managers have a tendency to ignore critical information, even when it is available. Implement the Chosen Alternative: Once a decision has been made, it must be implemented. Many managers make a decision and then fail to act on it. To ensure that implementation occurs, top managers must assign to middle managers the responsibility for making followup decisions, give them sufficient resources required achieve the goal, and hold them accountable for their performance. Learn 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; Compare what actually happened to what was expected to happen as a result of the decision, explore why any expectations for the decision were not met, and develop guidelines that will help in future decision making 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 decisionmaking allows managers to process more information and correct each other's errors. Managers included in the decisionmaking process will most likely cooperate with its implementation. When a group makes a decision, the likelihood of its successful implementation increases. The disadvantages of group decision making include the long time it often takes and the possibility of being undermined by biases. 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 collectively embark on a course of action without developing appropriate criteria to evaluate 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 effect of discouraging individuals from raising issues that counter the majority opinion. 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 decisionmaking 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. The purpose of devil's advocacy is to identify all the reasons that might make the preferred alternative unacceptable. Promoting diversity within decisionmaking groups 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. Diverse groups are less prone to groupthink because of the differences that already exist among them. The quality of managerial 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 thinking ability of groups and individuals and thus 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. When new and useful ideas are implemented, innovation takes place. Peter Senge developed five principles for creating a learning organization. Top managers must allow every person in the organization to develop a sense of personal mastery. Organizations need to encourage employees to develop and use complex mental models. Managers must do everything they can to promote group creativity and team learning. Managers must emphasis the importance of building a shared vision. Managers must encourage systems thinking. Research indicates that when certain conditions are met, managers are more likely to be creative. Employees must be provided the opportunity and freedom to generate new ideas. The employees have an opportunity to experiment, to take risks, and to make mistakes and learn from them. Employees must not fear that they will be penalized or looked down upon for ideas that at first seem outlandish. Individual creativity can be promoted by providing constructive feedback so that employees will know how they are doing and visibly rewarding creative employees. Brainstorming is a group problemsolving technique in which managers meet facetoface 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: One manager describes the problem in broad outline. Group members share their ideas and generate alternative courses of action. Group members are not allowed to criticize each alternative until all have been heard. 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. 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 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: One manager outlines the problem to be addressed and group members write down ideas and solutions. Managers read their suggestions to the group. Criticism is not allowed until all the alternatives have been read. The alternatives are discussed, and group members can critique to identify its pros and cons. Each member ranks all the alternatives, and the highestranking alternative is selected. The Delphi Technique: The Delphi Technique is a written approach to creative problem solving. It works as follows: The group leader writers 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. 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. Social entrepreneurs are individuals who pursue initiatives and opportunities to address social problems and needs in order to improve society and wellbeing. 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 neither to support nor to fund their new product ideas and development efforts and, as a result, sometimes decide to leave their employer to start their own organization. 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. They are likely to have a high level of selfesteem, a high need for achievement, and a strong desire to perform challenging tasks and meet high personal standards of excellence. One way people become involved in entrepreneurial ventures is to start a business from scratch. When people who start solo ventures succeed, they frequently need to hire other people to help them run the business. Entrepreneurship is noticing the opportunity to satisfy a customer need and deciding how to use the resources to make a product that satisfies the need. Some entrepreneurs find it hard to delegate authority. As a result they become overloaded, and the quality of their decision making declines. Others lack the detailed knowledge necessary to establish stateoftheart information systems and technology or to create the operations management procedures that are critical to increasing organizational efficiency. Thus, to succeed, it is 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. 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 the level of learning and innovation. The ways to increase intrapreneurship within an organization are: Product Champions: A product champion is a manager who takes \"ownership\" of a project and provides the leadership and vision that takes a product from the idea stage to the final customer. 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 final product is 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 refer to it as \"the skunkworks.\" 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 their products sell. In addition to money, they often receive promotion to the ranks of top management. Organizations must reward intrapreneurs equitably if they wish to prevent them from leaving to become outside entrepreneurs who might form a competitive new venture. Chapter 6 - Planning, Strategy, and Competitive Advantage Planning is a process managers use to identify and select appropriate goals and courses of action for an organization. The organizational plan that results from the planning process details how managers intend to attain those goals. The cluster of managerial decisions and actions to help an organization attain its goals is its strategy. The first step of planning is determining the organization's mission and goals. A mission statement is a broad declaration of an organization's purpose that identifies the importance of the organization's products to its employees and customers and distinguishes the organization from its competitors. The second step is formulating strategy and the third step is implementing strategy. To perform the planning task, managers: Establish and discover where an organization is at the present time. Determine where it should be in the future. Decide how to move it forward to reach that future state. Planning is important because it is necessary to give the organization a sense of direction and purpose, it is a useful way of getting managers to participate in decision making about the appropriate goals and strategies for an organization, it helps coordinate managers of the different functions and divisions of an organization to ensure that they all pull in the same direction and work to achieve its desired future state, and it can be used as a device for controlling managers within an organization. Henri Fayol said that effective plans should have four qualities: Unity means that at any time only one central plan is put into operation. Continuity means that planning is an ongoing process. Accuracy means that managers should attempt to collect and use all available information. The planning process should have enough flexibility so that the plans can be altered and changed if the situation changes. In large organizations, planning usually takes place at three levels of management: corporate, business or division, and department or functional. At the corporate level are the CEO, other top managers, and their support staff. At the business level are the different divisions or business units that compete in distinct industries of the company, usually led by a divisional manager. Each division has its own set of functions or departments, such as manufacturing, marketing, R&D, human resources, etc. The corporatelevel plan contains top management's decisions pertaining to the organization's mission and goals, overall strategy, and structure. Corporatelevel strategy indicates in which industries and national markets an organization intends to compete and why. At the business level, the managers of each division create a businesslevel plan detailing longterm divisional goals that will allow the division to meet corporate goals and the division's businesslevel strategy and structure. Businesslevel strategy states the methods a division or business intends to use to compete against its rivals in an industry. A functionallevel plan states the goals that the managers of each function will pursue to help the division attain its businesslevel goals. Functionallevel strategy is a plan of action to improve the ability of each of an organization's functions to perform its taskspecific activities in ways that add value to an organization's goods and services. Plans differ in their time horizon, the periods of time over which they are intended to apply. Longterm plans have a horizon of five years or more, intermediateterm plans have a horizon between one and five years, and shortterm plans have a horizon of one year or less. A corporatelevel or businesslevel plan that extends over several years is typically treated as a rolling plan, a plan that is updated and amended every year to take account of changing conditions in the external environment. Standing plans are used in situations in which programmed decision making is appropriate. Standing plans include a policy, a rule, and a standard operating procedure. Singleuse plans are developed to handle nonprogrammed decision making. They could include programs, which are integrated sets of plans for achieving certain goals and projects, which are specific action plans created to complete various aspects of a program, The first step of planning is to determine the organization's mission and goals: Defining the Business: To determine an organization's mission, managers must first define its business by asking three questions: Who are our customers, what customer needs are being satisfied, and how are we satisfying customer needs? Establishing Major Goals: Once the business is defined, managers must then establish a set of primary goals to which the organization is committed. These goals give the organization a sense of direction or purpose. Strategic leadership is the ability of the CEO and top managers to convey a compelling vision of what they want the organization to achieve to their subordinates. Goals typically possess the following characteristics: They are ambitious, that is, they stretch the organization, and require managers to improve its performance capabilities. They are realistica goal that is impossible to attain may prompt managers to give up. The time period in which a goal is expected to be achieved should be stated. This injects a sense of urgency and acts as a motivator. In strategy formulation, managers work to develop the set of strategies that will allow an organization to accomplish its mission and achieve its goals. A SWOT analysis is a planning exercise in which managers identify internal organizational strengths, weaknesses, opportunities, and threats. Based on a SWOT analysis, managers at each level of the organization identify strategies that will best position the organization to achieve its mission and goals. The first step in SWOT analysis is to identify an organization's strengths and weaknesses that characterize the present state of the organization. The next step requires managers to identify potential opportunities and threats in the environment that affect the organization in the present or may affect it in the future. On completion of the SWOT analysis, managers can begin developing strategies that allow the organization to attain its goals by taking advantage of opportunities, countering threats, building strengths, and correcting organizational weaknesses. Michael Porter's five forces model is another wellknown model that helps managers focus on the most important competitive forces, or potential threats, in the external environment. They are: The level of rivalry among organizations within an industry. The potential for entry into an industry. The power of large suppliers. The power of large customers. The threat of substitute products. The term hypercompetition applies to industries that are characterized by permanent, ongoing, intense competition brought about by advancing technology or changing customer tastes, fads and fashions. Michael Porter formulated a theory of how managers can select a businesslevel strategy to give them a competitive advantage in a particular market or industry. According to Porter, to obtain higher profits, managers must choose between two basic ways of increasing the value of an organization's products: Differentiating the product to increase its value or lowering the costs of making the product. Porter also argues that managers must choose between serving the whole market and serving just one segment. With a lowcost strategy, managers try to gain a competitive advantage by focusing the energy of all the organization's departments on driving the organization's costs down. Organizations pursuing a lowcost strategy can sell a product for less than their rivals, and still make a good profit. With a differentiation strategy, managers try to gain a competitive advantage by focusing all the energies of the organization's departments on distinguishing the organization's products from those of competitors. As the process of making products unique and different is expensive, organizations that successfully pursue a differentiation strategy often charge a premium price for their products. According to Porter, a company cannot pursue a lowcost and differentiation strategy simultaneously. He refers to managers and organizations that have not selected between the two as being \"stuck in the middle.\" Porter identified two other businesslevel strategies used by companies aiming to serve the needs of customers in one or a few segments of the market. A company pursuing a focused lowcost strategy serves one or a few segments of the market and aims to be the lowestcost company serving that segment. A company pursuing a focused differentiation strategy serves just one or a few segments of the market and aims to be the most differentiated company serving that segment. Corporatelevel strategy is a plan of action that determines the industries and countries an organization should invest its resources in to achieve its mission and goals. Concentration on a Single Industry: This is a corporatelevel strategy in which a company reinvests its profits to strengthen its competitive position in its current industry. It is an appropriate strategy when managers see the need to reduce the size of their organizations to increase performance. Vertical Integration: It is the corporatelevel strategy that involves a company expanding its business operations either backward into a new industry that produces inputs for the company's products (backward vertical integration) or forward into a new industry that uses, distributes, or sells the company's products (forward vertical integration). Managers pursue vertical integration because it allows them to either add value to their products by making them special or unique or to lower the costs of making and selling them. Although vertical integration can increase an organization's performance, it can also reduce an organization's flexibility to respond to changing environmental conditions. Vertical integration may sometimes reduce a company's ability to create value when the environment changes. Therefore, many companies outsource the production of component parts to other companies and exit the components industry-by vertically disintegrating backwards. Diversification: It is the strategy of expanding operations into a new business or industry in order to produce new goods or services. There are two main types of diversification: related and unrelated. Related Diversification is the strategy of entering a new business or industry to create a competitive advantage in one or more of an organization's existing divisions or businesses. Synergy is obtained when the value created by two divisions cooperating is greater than the value that would be created if the two divisions operated separately. To pursue related diversification successfully, managers seek new businesses in which existing skills and resources can be used to create synergies. Under Unrelated Diversification managers pursue unrelated diversification when they establish divisions or buy companies in new industries that are not related to their current businesses or industries. By pursuing unrelated diversification, managers can buy a poorly performing company and use their management skills to turn around its business, thereby increasing its performance. Unrelated diversification allows managers to engage in portfolio strategy, which is the practice of apportioning financial resources among divisions to increase financial returns and spread risks among different businesses. International Expansion: Corporatelevel managers must decide on the appropriate way to compete internationally. If an organization needs to sell its products abroad or compete in more than one national market, managers must ask themselves to what extent should their company customize its product's features and marketing campaign to suit differing national conditions. Global strategy is selling the same standardized product and using the same basic marketing approach in each national market. If managers decide to customize products and marketing strategies to specific national conditions, they adopt a multidomestic strategy. The major advantage of global strategy is the significant cost savings associated with not having to customize products and marketing approaches. The major disadvantage is that by ignoring national differences, managers are vulnerable to local competitors. The major advantage of multidomestic strategy is that by customizing product offerings and market approaches, managers are able to gain market share or charge higher prices. The major disadvantage is that customization raises production costs and puts the company at a price disadvantage. Before setting up foreign operations, managers must analyze the forces in the environment of a particular country and choose the best method to expand and respond to those forces in the most appropriate way: o Importing and Exporting: A company engaged in exporting makes products at home and sells them abroad. A company engaged in importing sells products at home that are made abroad (products it makes itself or buys from other companies). o Licensing and Franchising: In licensing, a company allows a foreign organization to take charge of both manufacturing and distributing one or more of its products in the licensee's country or region of the world in return for a negotiated fee. In franchising, a company sells to a foreign organization the rights to use its brand name and operating knowhow in return for a lump sum payment and a share of the franchiser's profits. o Strategic Alliances: In a strategic alliance, managers pool or share their organization's resources and knowhow with those of a foreign company, and the two organizations share the rewards or risks of starting a new venture in a foreign company. o A joint venture is a strategic alliance among two or more companies that agree to jointly establish and share the ownership of a new business. o o Risk is reduced and a capital investment is generally involved. Wholly Owned Foreign Subsidiaries: When managers decide to establish a wholly owned foreign subsidiary, they invest in establishing production operations in a foreign country, independent of any local direct involvement. This method is much more expensive than the others but also offers high potential returns. After identifying appropriate strategies, managers confront the challenge of putting those strategies into action. Strategy implementation is a fivestep process: Allocating responsibility for implementation to the appropriate individuals or groups. Drafting detailed action plans that specify how a strategy is to be implemented. Establishing a timetable for implementation that includes precise, measurable goals linked to the attainment of the action plan. Allocating appropriate resources to the responsible individuals or groups. Holding specific individuals or groups responsible for the attainment of corporate, divisional, and functional goals