Problem Identification and Formulation

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Decision Making, Planning, and Strategy

CHAPTER 7 Decision Making, Learning, Creativity, and Entrepreneurship

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, and differentiate between entrepreneurs and intrapreneurs.

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A MANAGER'S CHALLENGE

Decision Making and Learning at 1-800-Flowers.com

Why are decision making and learning the keys to entrepreneurial success? All managers must make decisions day in and day out under considerable uncertainty. And sometimes those decisions come back to haunt them if they turn out poorly. Sometimes even highly effective managers make bad decisions. And factors beyond a manager's control, such as unforeseen changes in the environment, can cause a good decision to result in unexpected negative consequences. Effective managers recognize the critical importance of making decisions on an ongoing basis as well as learning from prior decisions.

Decision making and learning have been key to Jim McCann's success in building a small florist shop into a global business with $1 billion in 2013 revenues headquartered in Carle Place, New York.1 In fact, learning and decision making have been mainstays for McCann throughout his life and career. As a child growing up in Queens, New York, McCann learned about plumbing, electrical work, and woodworking from his father, who had a small painting business. While he was bartending at night and going to college in the day, a friend let him know about an opportunity to work evenings in a group home for teenage boys. McCann decided to seize this opportunity, and while continuing to go to college in the day, he worked and slept (in his own room) in the St. John's Home for Boys in Queens. McCann was a psychology major and learned a lot from working and living with 10 teenage boys.2 When he graduated, he continued to work at the home in administration for 14 years.3

McCann continued to bartend at night to make some extra money for his family, and one of his customers told him that he was planning on selling a small flower shop.4 McCann thought he might like to learn that business and buy the shop, so he asked the customer if he could work in the shop a couple of weekends to see what it was like.5 McCann ending up buying the store for $10,000, continued to work at the home for boys, and learned the flower business—and the rest has made history.6

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When he bought the store, he decided he wanted to somehow turn it into a larger organization.7 So he kept looking for additional opportunities to buy or open up flower shops. Ten years later he had over 20 flower stores and quit his job at the home for boys to work full-time on his flower shop business (by now his siblings were also working in the business).8

In the late 1980s McCann happened to hear a commercial on the radio for 1-800-Flowers, the first company that enabled customers to call a toll-free number to order flowers.9 McCann decided to see if he could be a distributor for this company, called them, and became the florist for New York; this helped expand his business. However, over time, McCann stopped getting orders from this source of customers. McCann went to Dallas where the company was based and found out that although its owners had raised about $10 million in funding, they had ceased operating because of a lack of business.10

McCann decided to try to buy the business with his savings from his own business, while saving money by not involving lawyers, accountants, or bankers in the transaction.11 He offered the owners $2 million for their 800 flower business and they accepted. Soon after, McCann discovered that in buying the business, he had become responsible for the $7 million in debt that the business had accrued and that his decision to buy 1-800-Flowers amounted to a big mistake.12

Determined to turn around this mistake, McCann turned his store in Queens into a telemarketing firm for flowers, but business was lackluster.13 He tried to assuage his debtors while figuring out how to turn the business around. While on a trip to Dallas, he seized an opportunity to expand his business presented to him by Larry Zarin, who was marketing Kellogg's Nutri-Grain.14 Zarin and McCann agreed that they would put advertisements on boxes of Nutri-Grain indicating that if customers bought the cereal, they could buy a dozen roses from 1-800-Flowers for $14.99. To their amazement, they received 30,000 orders for flowers, didn't have the floral capacity across the United States to fill them, and so created a box to ship flowers overnight via FedEx. And the rest has been history. A similar promotion worked with Zales jewelry stores, helping make the company known across the country (its network of florists is called BloomNet).15

In the early 1990s McCann and his brother and partner, Chris, decided they wanted to put their business online.16 They met with Steve Case, one of the cofounders of AOL, and Ted Leonsis, and they were the first organization to have an online transaction over AOL. In the early days on the Internet, 1-800-Flowers.com had considerable competition. The company went public in 1999 and raised funds to create a better technological platform. By 2013 revenues had grown to $1 billion (including $200 million from franchises).17

Jim and Chris McCann and other managers at 1-800-Flowers.com continue to make decisions and learn to this day. 1-800-Flowers.com has become active in the social-mobile-local retail space and sells gifts for all occasions as well as flowers.18 For example, 1-800-Flowers.com was the first organization to sell gifts on Facebook beginning at $5.19 Clearly, learning and decision making have been crucial ingredients for the entrepreneurial success story behind 1-800-Flowers.com.20

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Overview 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.

“A Manager's Challenge” illustrates how decision making and learning are an ongoing challenge for managers that can profoundly influence organizational effectiveness. McCann's decision to seize an opportunity and buy a small flower shop and his subsequent decisions along the way have had a dramatic effect on his business.21 The decisions managers make at all levels in companies large and small can change the growth and prosperity of these companies and the well-being of their employees, customers, and other stakeholders. Yet such decisions can be difficult to make because they are fraught with uncertainty.

In this chapter we examine how managers make decisions, and we explore how individual, group, and organizational factors affect the quality of the decisions they make and ultimately determine organizational performance. We discuss the nature of managerial decision making and examine some models of the decision- making process that help reveal the complexities of successful decision making. Then we outline the main steps of the decision-making process; in addition, we explore the biases that may cause capable managers to make poor decisions both as individuals and as members of a group. Next we examine how managers can promote organizational learning and creativity and improve the quality of decision making throughout an organization. Finally we discuss the important role of entrepreneurship in promoting organizational creativity, and we differentiate between entrepreneurs and intrapreneurs. By the end of this chapter you will appreciate the critical role of management decision making in creating a high-performing organization.

The Nature of Managerial Decision Making Every time managers act to 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.

decision making The process by which managers respond to opportunities and threats by analyzing options and making determinations about specific organizational goals and courses of action.

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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.

Decision making in response to opportunities occurs when managers search for ways to improve organizational performance to benefit customers, employees, and other stakeholder groups. In “A Manager's Challenge,” Jim McCann seized the opportunities to buy a flower shop and expand his business in multiple ways including going online. 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.22 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.23 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.

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Programmed and Nonprogrammed Decision Making Regardless of the specific decisions a manager makes, the decision-making process is either programmed or nonprogrammed.24

programmed decision making Routine, virtually automatic decision making that follows established rules or guidelines.

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 percent; 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.

As profiled in the accompanying “Focus on Diversity” feature, effectively training new employees is essential to reap the benefits of programmed decision making.

Focus on Diversity

Programmed Decision Making at UPS

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UPS is unrivaled in its use of programmed decision making. Practically all the motions, behaviors, and actions that its drivers perform each day have been carefully honed to maximize efficiency and minimize strain and injuries while delivering high-quality customer service. For example, a 12-step process prescribes how drivers should park their trucks, locate the package they are about to deliver, and step off the truck in 15.5 seconds (a process called “selection” at UPS).25 Rules and routines such as these are carefully detailed in UPS's “340 Methods” manual (UPS actually has far more than 340 methods). Programmed decision making dictates where drivers should stop to get gas, how they should hold their keys in their hands, and how to lift and lower packages.26

When programmed decision making is so heavily relied on, ensuring that new employees learn tried-and- true routines is essential. UPS has traditionally taught new employees with a two-week period of lectures followed by practice.27 In the 2000s, however, managers began to wonder if they needed to alter their training methods to suit their new Generation Y trainees (Generation Y typically refers to people born after 1980), who were not so keen on memorization and drills.28 Generation Y trainees seemed to require more training time to become effective drivers (90–180 days compared to a typical average of 30–45 days), and quit rates for new drivers had increased.29

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Given the fundamental importance of performance programs for UPS operations, managers decided to try to alter the training new hires receive so it would be better received by Generation Y trainees. In the late 2000s, UPS opened an innovative Landover, Maryland, training center called UPS Integrad, which has over 11,000 square feet and cost over $30 million to build and equip. Integrad was developed over a three-year period through a collaborative effort of over 170 people, including UPS top managers (many of whom started their careers with UPS as drivers), teams from Virginia Tech and MIT, animators from the Indian company Brainvisa, and forecasters from the Institute for the Future with the support of a grant from the Department of Labor for $1.8 million.30 Results thus far suggest that Integrad training results in greater driver proficiency and fewer first-year accidents and injuries.31

Training at Integrad emphasizes hands-on learning.32 For example, at Integrad a UPS truck with transparent sides is used to teach trainees selection so they can actually see the instructor performing the steps and then practice the steps themselves rather than trying to absorb the material in a lecture. Trainees can try different movements and see, with the help of computer diagrams and simulations, how following UPS routines will help protect them from injury and how debilitating work as a driver can be if they do not follow routines. Video recorders track and document what trainees do correctly and incorrectly so they can see it for themselves rather than relying on feedback from an instructor, which they might question. As Stephen Jones, Director of International Training & Development at UPS,33 indicates, “Tell them what they did incorrectly, and they'll tell you, ‘I didn't do that. You saw wrong.’ This way we've got it on tape and they can see it for themselves.”34

At Integrad, trainees get practice driving in a pseudo town that has been constructed in a parking lot.35 They also watch animated demonstrations on computer screens, participate in simulations, take electronic quizzes, and receive scores on various components that are retained in a database to track learning and performance. Recognizing that Generation Y trainees have a lot of respect for expertise and reputation, older employees also are brought in to facilitate learning at Integrad. For example, long-time UPS employee Don Petersik, who has since retired from UPS,36 trained facilitators at Integrad and shared stories with them to reinforce the UPS culture—such as the time he was just starting out as a preloader and, unknown to him, the founder of UPS, Jim Casey, approached him and said, “Hi, I'm Jim. I work for UPS.”37 As Petersik indicated, “What's new about the company now is that our teaching style matches your learning styles.”38 Clearly, when learning programmed decision making is of utmost importance, as it is at UPS, it is essential to take into account diversity in learning styles and approaches.

NONPROGRAMMED DECISION MAKING Suppose, however, 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.

nonprogrammed decision making Nonroutine decision making that occurs in response to unusual, unpredictable opportunities and threats.

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 as did Jim McCann in “A Manager's Challenge.”

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

reasoned judgment A decision that requires time and effort and results from careful information gathering, generation of alternatives, and evaluation of alternatives.

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.39 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.40 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.

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Nonprogrammed decision making covers areas with no previous benchmarks or rubrics, such as seen in this photo.

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 quickly respond 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.41 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.

Regardless of the circumstances, making nonprogrammed decisions can result in effective or ineffective decision making. As indicated in the accompanying “Manager as a Person” feature, managers have to be on their guard to avoid being overconfident in decisions that result from either intuition or reasoned judgment.

Manager as a Person

Curbing Overconfidence Should managers be confident in their intuition and reasoned judgments?42 Decades of research by Nobel Prize winner Daniel Kahneman, his longtime collaborator the late Amos Tversky, and other researchers suggests that managers (like all people) tend to be overconfident in the decisions they make, whether based on intuition or reasoned judgment.43 And with overconfidence comes failure to evaluate and rethink the wisdom of the decisions one makes and failure to learn from mistakes.44

Kahneman distinguishes between the intuition of managers who are truly expert in the content domain of a decision and the intuition of managers who have some knowledge and experience but are not true experts.45

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Although the intuition of both types can be faulty, that of experts is less likely to be flawed. This is why fire captains can make good decisions and why expert chess players can make good moves, in both cases without spending much time or deliberating carefully on what, for nonexperts, is a complicated set of circumstances. What distinguishes expert managers from those with limited expertise is that the experts have extensive experience under conditions in which they receive quick and clear feedback about the outcomes of their decisions.46

Unfortunately managers who have some experience in a content area but are not true experts tend to be overly confident in their intuition and their judgments.47 As Kahneman puts it, “People jump to statistical conclusions on the basis of very weak evidence. We form powerful intuitions about trends and about the replicability of results on the basis of information that is truly inadequate.”48 Not only do managers, and all people, tend to be overconfident about their intuition and judgments, but they also tend not to learn from mistakes. Compounding this undue optimism is the human tendency to be overconfident in one's own abilities and influence over unpredictable

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events. Surveys have found that the majority of people think they are above average, make better decisions, and are less prone to making bad decisions than others (of course it is impossible for most people to be above average on any dimension).49

Examples of managerial overconfidence abound. Research has consistently found that mergers tend to turn out poorly—postmerger profitability declines, stock prices drop, and so forth. For example, Chrysler had the biggest profits of the three largest automakers in the United States when it merged with Daimler; the merger was a failure and both Chrysler and Daimler would have been better off if it never had happened.50 One would imagine that top executives and boards of directors would learn from this research and from articles in the business press about the woes of merged companies (such as the AOL–Time Warner merger and the Hewlett-Packard–Compaq merger).51 Evidently not. Top managers seem to overconfidently believe that they can succeed where others have failed.52 Similarly, whereas fewer than 35 percent of new small ventures succeed as viable businesses for more than five years, entrepreneurs, on average, tend to think that they have a 6 out of 10 chance of being successful.53

Jeffrey Pfeffer, a professor at Stanford University's Graduate School of Business, suggests that managers can avoid the perils of overconfidence by critically evaluating the decisions they have made and the outcomes of those decisions. They should admit to themselves when they have made a mistake and really learn from their mistakes (rather than dismissing them as flukes or situations out of their control). In addition, managers should be leery of too much agreement at the top. As Pfeffer puts it, “If two people agree all the time, one of them is redundant.”54

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 classical decision-making model A prescriptive approach to decision making based on the assumption that the decision maker can identify and evaluate all possible alternatives and their consequences and rationally choose the most appropriate course of action.

optimum decision The most appropriate decision in light of what managers believe to be the most desirable consequences for the organization.

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

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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.

The Administrative Model administrative model An approach to decision making that explains why decision making is inherently uncertain and risky and why managers usually make satisfactory rather than optimum decisions.

James March and Herbert Simon disagreed with the underlying assumptions of the classical model of decision making. In contrast, they proposed that managers in the real world do not have access to all the information they need to make a decision. Moreover, they pointed out that even if all information were readily available, many managers would lack the mental or psychological ability to absorb and evaluate it correctly. As a result, March and Simon developed the administrative model of decision making to explain why decision making is always an inherently uncertain and risky process—and why managers can rarely make decisions in the manner prescribed by the classical model. The administrative model is based on three important concepts: bounded rationality, incomplete information, and satisficing.

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Figure 7.1 The Classical Model of Decision Making

bounded rationality Cognitive limitations that constrain one's ability to interpret, process, and act on information.

BOUNDED RATIONALITY March and Simon pointed out that human decision-making capabilities are bounded by people's cognitive limitations—that is, limitations in their ability to interpret, process, and act on information.55 They argued that the limitations of human intelligence constrain the ability of decision makers to determine the optimum decision. March and Simon coined the term bounded rationality to describe 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 for the manager to even come close to evaluating it all before making a decision.56

INCOMPLETE INFORMATION Even if managers had unlimited ability to evaluate information, they still would not be able to arrive at the optimum decision because they would have incomplete information. Information is incomplete because the full range of decision-making alternatives is unknowable in most situations, and the consequences associated with known alternatives are uncertain.57 In other words, information is incomplete because of risk and uncertainty, ambiguity, and time constraints (see Figure 7.2).

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

RISK AND UNCERTAINTY As we saw in Chapter 6, forces in the organizational environment are constantly changing. Risk is present when managers know the possible outcomes of a particular course of action and can assign probabilities to them. For example, managers in the biotechnology industry know that new drugs have a 10 percent probability of successfully passing advanced clinical trials and a 90 percent probability of failing. These probabilities reflect the experiences of thousands of drugs that have gone through advanced clinical trials. Thus when managers in the biotechnology industry decide to submit a drug for testing, they know that there is only a 10 percent chance that the drug will succeed, but at least they have some information on which to base their decision.

Figure 7.2 Why Information Is Incomplete

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uncertainty Unpredictability.

When uncertainty exists, the probabilities of alternative outcomes cannot be determined and future outcomes are unknown. Managers are working blind. Because the probability of a given outcome occurring is not known, managers have little information to use in making a decision. For example, in 1993, when Apple Computer introduced the Newton, its personal digital assistant (PDA), managers had no idea what the probability of a successful product launch for a PDA might be. Because Apple was the first to market this totally new product, there was no body of well-known data that Apple's managers could draw on to calculate the probability of a successful launch. Uncertainty plagues most managerial decision making.58 Although Apple's initial launch of its PDA was a disaster due to technical problems, an improved version was more successful.

ambiguous information Information that can be interpreted in multiple and often conflicting ways.

AMBIGUOUS INFORMATION A second reason why information is incomplete is that much of the information managers have at their disposal is ambiguous information. Its meaning is not clear—it can be interpreted in multiple and often conflicting ways.59 Take a look at Figure 7.3. Do you see a young woman or an old woman? In a similar fashion, managers often interpret the same piece of information differently and make decisions based on their own interpretations.

TIME CONSTRAINTS AND INFORMATION COSTS The third reason why information is incomplete is that managers have neither the time nor the money to search for all possible alternative solutions and evaluate all the potential consequences of those alternatives. Consider the situation confronting a Ford Motor Company purchasing manager who has one month to choose a supplier for a small engine part. There are 20,000 potential suppliers for this part in the United States alone. Given the time available, the purchasing manager cannot contact all potential suppliers and ask each for its terms (price, delivery schedules, and so on). Moreover, even if the time were available, the costs of obtaining the information, including the manager's own time, would be prohibitive.

satisficing Searching for and choosing an acceptable, or satisfactory, response to problems and opportunities, rather than trying to make the best decision.

SATISFICING March and Simon argued that managers do not attempt to discover every alternative when faced with bounded rationality, an uncertain future, unquantifiable risks, considerable ambiguity, time constraints, and high information costs. Rather, they use a strategy known as satisficing, which is exploring a limited sample of all potential alternatives.60 When managers satisfice, they search for and choose acceptable, or satisfactory, ways to respond to problems and opportunities rather than trying to make the optimal decision.61 In the case of the Ford purchasing manager's search, for example, satisficing may involve asking a limited number of suppliers for their terms, trusting that they are representative of suppliers in general, and making a choice from that set. Although this course of action is reasonable from the perspective of the purchasing manager, it may mean that a potentially superior supplier is overlooked.

Figure 7.3 Ambiguous Information: Young Woman or Old Woman?

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March and Simon pointed out that managerial decision making is often more art than science. In the real world, managers must rely on their intuition and judgment to make what seems to them to be the best decision in the face of uncertainty and ambiguity.62 Moreover, managerial decision making is often fast-paced; managers use their experience and judgment to make crucial decisions under conditions of incomplete information. Although there is nothing wrong with this approach, decision makers should be aware that human judgment is often flawed. As a result, even the best managers sometimes make poor decisions.63

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’ history. McNealy was a founder of Sun Microsystems and was the chairman of the board of directors until Sun was acquired by Oracle in 2010.64

In early August 1985, Scott McNealy, then CEO of Sun Microsystems65 (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 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.66 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.67 Rumors were circulating in the industry that Apollo would be launching a new machine of its own 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.

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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).68 We review these steps in the remainder of this section.

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Figure 7.4 Six Steps in Decision Making

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.69 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.70

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 why managers sometimes make bad decisions.71 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 percent 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

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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.72 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.

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The importance of getting managers to set aside their mental models of the world and generate creative alternatives is reflected in the growth of interest in the work of authors such as Peter Senge and Edward de Bono, who have popularized techniques for stimulating problem solving and creative thinking among managers.73 Later in this chapter, we discuss the important issues of organizational learning and creativity in detail.

Assess Alternatives Once managers have generated a set of alternatives, they must evaluate the advantages and disadvantages of each one.74 The key to a good assessment of the alternatives is to define the opportunity or threat exactly and then specify the criteria that should influence the selection of alternatives for responding to the problem or opportunity. One reason for bad decisions is that managers often fail to specify the criteria that are important in reaching a decision.75 In general, successful managers use four criteria to evaluate the pros and cons of alternative courses of action (see Figure 7.5):

1. Legality: Managers must ensure that a possible course of action will not violate any domestic or international laws or government regulations.

2. Ethicalness: Managers must ensure that a possible course of action is ethical and will not unnecessarily harm any stakeholder group. Many decisions managers make may help some organizational stakeholders and harm others (see Chapter 4). When examining alternative courses of action, managers need to be clear about the potential effects of their decisions.

3. Economic feasibility: Managers must decide whether the alternatives are economically feasible—that is, whether they can be accomplished given the organization's performance goals. Typically managers perform a cost–benefit analysis of the various alternatives to determine which one will have the best net financial payoff.

4. Practicality: Managers must decide whether they have the capabilities and resources required to implement the alternative, and they must be sure the alternative will not threaten the attainment of other organizational goals. At first glance an alternative might seem economically superior to other alternatives; but if managers realize it is likely to threaten other important projects, they might decide it is not practical after all.

Figure 7.5 General Criteria for Evaluating Possible Courses of Action

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Often a manager must consider these four criteria simultaneously. Scott McNealy framed the problem at hand at Sun Microsystems quite well. The key question was whether to go ahead with the September 10 launch date. Two main criteria were influencing McNealy's choice: the need to ship a machine that was as “complete” as possible (the practicality criterion) and the need to beat Apollo to market with a new workstation (the economic feasibility criterion). These two criteria conflicted. The first suggested that the launch should be delayed; the second, that the launch should go ahead. McNealy's actual choice was based on the relative importance that he assigned to these two criteria. In fact, Sun Microsystems went ahead with the September 10 launch, which suggests that McNealy thought the need to beat Apollo to market was the more important criterion.

Some of the worst managerial decisions can be traced to poor assessment of the alternatives, such as the decision to launch the Challenger space shuttle, mentioned earlier. In that case, the desire of NASA and Morton Thiokol managers to demonstrate to the public the success of the U.S. space program in order to ensure future funding (economic feasibility) conflicted with the need to ensure the safety of the astronauts (ethicalness). Managers deemed the economic criterion more important and decided to launch the space shuttle even though there were unanswered questions about safety. Tragically, some of the same decision-making problems that resulted in the Challenger tragedy led to the demise of the Columbia space shuttle 17 years later, killing all seven astronauts on board.76 In both the Challenger and the Columbia disasters, safety questions were raised before the shuttles were launched; safety concerns took second place to budgets, economic feasibility, and schedules; top decision makers seemed to ignore or downplay the inputs of those with relevant technical expertise; and speaking up was discouraged.77 Rather than making safety a top priority, decision makers seemed overly concerned with keeping on schedule and within budget.78

As indicated in the accompanying “Ethics in Action” feature, to help ensure that decisions meet the ethicalness criteria, some organizations have created the position of chief sustainability officer.

Ethics in Action

Helping to Ensure Decisions Contribute to Sustainability Some large organizations have added the position of chief sustainability officer to their ranks of top managers reporting to the chief executive officer or chief operating officer. Chief sustainability officers are typically concerned with helping to ensure that decisions that are made in organizations conserve energy and protect the environment.79 For example, Scott Wicker is the first chief sustainability officer for UPS.80 Wicker leads a team that presides over a sustainability directors committee and a sustainability working committee focused on developing performance indicators and goals pertaining to sustainability to guide decision making.81

Linda Fisher is the vice president of DuPont Safety, Health & Environment and chief sustainability officer at DuPont. Before she joined DuPont, she held a variety of positions related to sustainability, including the position of deputy administrator of the Environmental Protection Agency.82 Fisher leads efforts at DuPont to make decisions that help to reduce energy consumption, toxins and carcinogens in the air, and greenhouse gas emissions and help DuPont's customers reduce their environmental footprints. Protecting both the environment and human safety is a priority for Fisher and DuPont.83

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Beatriz Perez is the chief sustainability officer for Coca-Cola, leading a global office of sustainability.84 While Coca-Cola has over 500 different brands yielding over 3,500 products, sustainability is a companywide initiative centered around major goals and initiatives.85 These goals include water conservation and returning to the environment the water that Coca-Cola consumes in making its products,

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reducing packaging waste and increasing recycling, and protecting the environment from pollution by, for example, using hybrid trucks, having energy-efficient manufacturing facilities, and improving the sustainability of refrigeration methods.86 Clearly, ensuring that decisions contribute to sustainability means much more than simply complying with legal requirements. Having chief sustainability officers with dedicated teams and offices focused on sustainability might be a step in the right direction.

Choose among Alternatives Once the set of alternative solutions has been carefully evaluated, the next task is to rank the various alternatives (using the criteria discussed in the previous section) and make a decision. When ranking alternatives, managers must be sure all the information available is brought to bear on the problem or issue at hand. As the Sun Microsystems case indicates, however, identifying all relevant information for a decision does not mean the manager has complete information; in most instances, information is incomplete.

Perhaps more serious than the existence of incomplete information is the often-documented tendency of managers to ignore critical information, even when it is available. We discuss this tendency in detail later when we examine the operation of cognitive biases and groupthink.

Implement the Chosen Alternative Once a decision has been made and an alternative has been selected, it must be implemented, and many subsequent and related decisions must be made. After a course of action has been decided—say, to develop a new line of women's clothing—thousands of subsequent decisions are necessary to implement it. These decisions would involve recruiting dress designers, obtaining fabrics, finding high-quality manufacturers, and signing contracts with clothing stores to sell the new line.

Although the need to make subsequent decisions to implement the chosen course of action may seem obvious, many managers make a decision and then fail to act on it. This is the same as not making a decision at all. To ensure that a decision is implemented, top managers must assign to middle managers the responsibility for making the follow-up decisions necessary to achieve the goal. They must give middle managers sufficient resources to achieve the goal, and they must hold the middle managers accountable for their performance. If the middle managers succeed in implementing the decision, they should be rewarded; if they fail, they should be subject to sanctions.

Learn from Feedback The final step in the decision-making process is learning from feedback. Effective managers always conduct a retrospective analysis to see what they can learn from past successes or failures. Managers who do not evaluate the results of their decisions do not learn from experience; instead they stagnate and are likely to make the same mistakes again and again.87 To avoid this problem, managers must establish a formal procedure with which they can learn from the results of past decisions. The procedure should include these steps:

1. Compare what actually happened to what was expected to happen as a result of the decision. 2. Explore why any expectations for the decision were not met. 3. Derive guidelines that will help in future decision making.

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Managers who always strive to learn from past mistakes and successes are likely to continuously improve the decisions they make. A significant amount of learning can take

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place when the outcomes of decisions are evaluated, and this assessment can produce enormous benefits. Learning from feedback is particularly important for entrepreneurs who start their own businesses, as profiled in the accompanying “Management Insight” feature.

Management Insight

Decision Making and Learning from Feedback at GarageTek Decision making has been an ongoing challenge for Marc Shuman, founder and president of GarageTek, headquartered in Melville, New York.88 Since founding his company less than 15 years ago,89 he has met this challenge time and time again, recognizing when decisions need to be made and learning from feedback about prior decisions.

The interior of a garage showing a GarageTek custom system designed to organize storage capacity and uses for home garage space. The franchise has experienced its ups and downs, but, thanks to good management, business continues to grow.

Shuman was working with his father in a small business, designing and building interiors of department stores, when he created and installed a series of wall panels with flexible shelving for a store to display its merchandise. When he realized that some of his employees were using the same concept in their own homes to organize the clutter in their basements and garages, he recognized that he had a potential opportunity to start a new business, GarageTek, designing and installing custom garage systems to organize and maximize storage capacities and uses for home garage space.90 A strong housing market at the time, the popularity of closet organizing systems, and the recognition that many people's lives were getting busier and more complicated led him to believe that home owners would be glad to pay someone to design and install a system that would help them gain control over some of the clutter in their lives.91

Schuman decided to franchise his idea because he feared that other entrepreneurs were probably having similar thoughts and competition could be around the corner.92 Within three years GarageTek had 57 franchises in 33 states, contributing revenues to the home office of around $12 million. While this would seem to be an enviable track record of success, Shuman recognized that although many of the franchises

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were succeeding, some were having serious problems. With the help of a consulting company, Shuman and home office managers set about trying to figure out why some franchises were failing. They gathered detailed information about each franchise: the market served, pricing strategies, costs, managerial talent, and franchisee investment. From this information, Shuman learned that the struggling franchises tended either to have lower levels of capital investment behind them or to be managed by nonowners.93

Shuman learned from this experience. He now has improved decision criteria for accepting new franchisees to help ensure that their investments of time and money lead to a successful franchise.94 Shuman also decided to give new franchisees much more training and support than he had in the past. New franchisees now receive two weeks of training at the home office that culminates in their preparing a one- year marketing and business plan;95 on-site assistance in sales, marketing, and operations; a multivolume training manual; a sales and marketing kit; and access to databases and GarageTek's intranet. Franchisees learn from each other through monthly conference calls and regional and national meetings.96

By 2014 GarageTek had franchises covering 60 markets in the United States and also had expanded overseas into the United Kingdom, Australia, New Zealand, South Africa, and Russia.97 And Shuman continues to make decisions day in and day out; in his words, “We're not, by any stretch, done.”98

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Cognitive Biases and Decision Making heuristics Rules of thumb that simplify decision making.

systematic errors Errors that people make over and over and that result in poor 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 of thumb that simplify the process of making decisions.99 Kahneman and Tversky argued that rules of thumb 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.100 Four sources of bias that can adversely affect the way managers make decisions are prior hypotheses, representativeness, the illusion of control, and escalating commitment (see Figure 7.6).

Prior Hypothesis Bias prior hypothesis bias A cognitive bias resulting from the tendency to base decisions on strong prior beliefs even if evidence shows that those beliefs are wrong.

Decision makers who have strong prior beliefs about the relationship between two variables tend to make decisions based on those beliefs even when presented with evidence that their beliefs are wrong. In doing so, they fall victim to prior hypothesis bias. Moreover, decision makers tend to seek and use information that is consistent with their prior beliefs and to ignore information that contradicts those beliefs.

Representativeness Bias representativeness bias A cognitive bias resulting from the tendency to generalize inappropriately from a small sample or from a single vivid event or episode.

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 in the southeast United States 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

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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 manager with similar proposals for fund-raising and Book Days, the manager declined based on her initial bad experience. As a result, she lost real opportunities to expand sales and gain word-of-mouth advertising and publicity for her store; her initial bad experience was the result of an inadvertent scheduling snafu at the school, whereby a key lacrosse game was scheduled the same day as the Book Day.

Illusion of Control illusion of control A source of cognitive bias resulting from the tendency to overestimate one's own ability to control activities and events.

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.101 The illusion of control causes managers to overestimate the odds of a favorable outcome and, consequently, to make inappropriate decisions. As mentioned earlier, most mergers turn out unfavorably; yet time and time again, top managers overestimate their abilities to combine companies with vastly different cultures in a successful merger.102

Figure 7.6 Sources of Cognitive Bias at the Individual and Group Levels

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Escalating Commitment escalating commitment A source of cognitive bias resulting from the tendency to commit additional resources to a project even if evidence shows that the project is failing.

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.103 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 in the southwest United States. 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 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 work from and 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.104 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.105

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 (rules of thumb) they typically employ, their personal biases, and so on—and then critically evaluate the appropriateness of these different factors.

Many individual 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.

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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 are able to 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

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managers), the probability that the decision will be implemented successfully increases. (We discuss how to encourage employee participation in decision making in Chapter 14.)

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 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.

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.106 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 dialectic inquiry (see Figure 7.7).107

devil's advocacy Critical analysis of a preferred alternative, made in response to challenges raised by a group member who, playing the role of devil's advocate, defends unpopular or opposing alternatives for the sake of argument.

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Devil's advocacy is a critical analysis of a preferred alternative to ascertain its strengths and weaknesses before it is implemented.108 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.

Figure 7.7 Devil's Advocacy and Dialectical Inquiry

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dialectical inquiry Critical analysis of two preferred alternatives in order to find an even better alternative for the organization to adopt.

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.109 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.110 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 LO7-4 Explain the role that organizational learning and creativity play in helping managers to improve their decisions.

Another way to improve group decision making is to promote diversity in decision-making groups (see Chapter 5).111 Bringing together managers of both genders 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 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.112

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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.

organizational learning The process through which managers seek to improve employees’ desire and ability to understand and manage the organization and its task environment.

learning organization An organization in which managers try to maximize the ability of individuals and groups to think and behave creatively and thus maximize the potential for organizational learning to take place.

creativity A decision maker's ability to discover original and novel ideas that lead to feasible alternative courses of action.

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.113 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.

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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):114

1. For organizational learning to occur, top managers must allow every person in the organization to develop a sense of personal mastery. Managers must empower employees and allow them to experiment, create, and explore what they want.

2. As part of attaining personal mastery, organizations need to encourage employees to develop and use complex mental models—sophisticated ways of thinking that challenge them to find new or better ways of performing a task—to deepen their understanding of what is involved in a particular activity. Here Senge argued that managers must encourage employees to develop a taste for experimenting and risk taking.115

3. Managers must do everything they can to promote group creativity. Senge thought that team learning (learning that takes place in a group or team) is more important than individual learning in increasing organizational learning. He pointed out that most important decisions are made in subunits such as groups, functions, and divisions.

4. Managers must emphasize the importance of building a shared vision—a common mental model that all organizational members use to frame problems or opportunities.

5. Managers must encourage systems thinking (a concept drawn from systems theory, discussed in Chapter 2). Senge emphasized that to create a learning organization, managers must recognize the effects of one level of learning on another. Thus, for example, there is little point in creating teams to facilitate team learning if managers do not also take steps to give employees the freedom to develop a sense of personal mastery.

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.

Increasingly, managers are being called on to promote global organizational learning. For example, 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.

When purchasing and operating a chain of stores in another country, such as the British ASDA chain, Walmart now strives to retain what customers value in the local market while taking advantage of its own accumulated organizational learning. For example, Walmart improved ASDA's information technology used for inventory and sales tracking in stores and enrolled ASDA in Walmart's global purchasing operations, which has enabled the chain to pay less for certain products, sell them for less, and, overall, significantly increase sales. At the same time Walmart empowered local ASDA managers to run the stores; as the president of ASDA indicates, “This is still essentially a British business in the way it's run day to day.”116 Clearly global organizational learning is essential for companies such as Walmart that have significant operations in multiple countries.

Figure 7.8 Senge's Principles for Creating a Learning Organization

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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.117 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.118 Highly innovative companies such as Google, Apple, and Facebook are well known for the wide degree of freedom they give their managers and employees to experiment and develop innovative goods and services.119

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.120

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 contests and rewards.121 Contests and rewards signal the importance of coming up with creative ideas and encourage employees to share them. Examples of companies that have benefited from contests and rewards for creativity include Hammond's Candies in Denver, Colorado; Borrego Solar Systems in San Diego, California; and Infosurv in Atlanta, Georgia.

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.122 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.

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When all alternatives have been generated, group members debate the pros and cons of each and develop a short list of the best alternatives.

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production blocking A loss of productivity in brainstorming sessions due to the unstructured nature of brainstorming.

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.123

nominal group technique A decision-making technique in which group members write down ideas and solutions, read their suggestions to the whole group, and discuss and then rank the alternatives.

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.124

delphi technique A decision- making technique in which group members do not meet face-to-face but respond in writing to questions posed by the group leader.

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.125 The Delphi technique works like this:

LO7-5 Describe how managers can encourage and promote entrepreneurship to create a learning organization, and differentiate

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between entrepreneurs and intrapreneurs.

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 entrepreneur An individual who notices opportunities and decides how to mobilize the resources necessary to produce new and improved goods and services.

Entrepreneurs are individuals who notice opportunities and decide how to mobilize the resources necessary to produce new and improved goods and services. Entrepreneurs make all of the planning, organizing, leading, and controlling decisions necessary to start new business ventures. Thus entrepreneurs are an important source of creativity in the organizational world. These people, such as David Filo and Jerry Yang (founders of Yahoo!), make vast fortunes when their businesses succeed. Or they are among the millions of people who start new business ventures only to lose their money when they fail. Despite the fact that many small businesses fail in the first three to five years, many men and women in today's workforce want to start their own companies.126

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social entrepreneur An individual who pursues initiatives and opportunities and mobilizes resources to address social problems and needs in order to improve society and well-being through creative solutions.

Social entrepreneurs are individuals who pursue initiatives and opportunities to address social problems and needs to improve society and well-being, such as reducing poverty, increasing literacy, protecting the natural environment, or reducing substance abuse.127 Social entrepreneurs seek to mobilize resources to solve social problems through creative solutions.128

intrapreneur A manager, scientist, or researcher who works inside an organization and notices opportunities to develop new or improved products and better ways to make them.

Many managers, scientists, and researchers employed by companies engage in entrepreneurial activity, and they are an important source of organizational creativity. They are involved in innovation, developing new and improved products and ways to make them, which we describe in detail in Chapter 9. Such employees notice opportunities for either quantum or incremental product improvements and are responsible for managing the product development process. These individuals are known as intrapreneurs to distinguish them from entrepreneurs who start their own businesses. But in general, entrepreneurship involves creative decision making that gives customers new or improved goods and services.

There is an interesting relationship between entrepreneurs and intrapreneurs. Many managers with intrapreneurial talents become dissatisfied if their superiors decide neither to support nor to fund new product ideas and development efforts that the managers think will succeed. What do intrapreneurial managers who feel they are getting nowhere do? Often they decide to leave their current organizations and start their own companies to take advantage of their new product ideas! In other words, intrapreneurs become entrepreneurs and found companies that often compete with the companies they left. To avoid losing these individuals, top managers must find ways to facilitate the entrepreneurial spirit of their most creative employees. In the remainder of this section we consider issues involved in promoting successful entrepreneurship in both new and existing organizations.

Entrepreneurship and New Ventures The fact that a significant number of entrepreneurs were frustrated intrapreneurs provides a clue about the personal characteristics of people who are likely to start a new venture and bear all the uncertainty and risk associated with being an entrepreneur.

CHARACTERISTICS OF ENTREPRENEURS Entrepreneurs are likely to possess a particular set of the personality characteristics we discussed in Chapter 3. First, they are likely to be high on the personality trait of openness to experience, meaning they are predisposed to be original, to be open to a wide range of stimuli, to be daring, and to take risks. Entrepreneurs also are likely to have an internal locus of control, believing that they are responsible for what happens to them and that their own actions determine important outcomes such as the success or failure of a new business. People with an external locus of control, in contrast, would be unlikely to leave a secure job in an organization and assume the risk associated with a new venture.

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Entrepreneurs are likely to have a high level of self-esteem and feel competent and capable of handling most situations—including the stress and uncertainty surrounding a plunge into a risky new venture. Entrepreneurs are also likely to have a high need for achievement and have a strong desire to perform challenging tasks and meet high personal standards of excellence.

ENTREPRENEURSHIP AND MANAGEMENT Given that entrepreneurs are predisposed to activities that are somewhat adventurous and risky, in what ways can people become involved in entrepreneurial ventures? One way is to start a business from scratch. Taking advantage of modern IT, some people start solo ventures or partnerships.

When people who go it alone succeed, they frequently need to hire other people to help them run the business. Michael Dell, for example, began his computer business as a college student and within weeks had hired several people to help him assemble computers from the components he bought from suppliers. From his solo venture grew Dell Computer.

entrepreneurship The mobilization of resources to take advantage of an opportunity to provide customers with new or improved goods and services.

Some entrepreneurs who start a new business have difficulty deciding how to manage the organization as it grows; entrepreneurship is not the same as management. Management encompasses all the decisions involved in planning, organizing, leading, and controlling resources. Entrepreneurship is noticing an opportunity to satisfy a customer need and then deciding how to find and use resources to make a product that satisfies that need. When an

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entrepreneur has produced something customers want, entrepreneurship gives way to management because the pressing need becomes providing the product both efficiently and effectively. Frequently a founding entrepreneur lacks the skills, patience, and experience to engage in the difficult and challenging work of management. Some entrepreneurs find it hard to delegate authority because they are afraid to risk their company by letting others manage it. As a result they become overloaded and the quality of their decision making declines. Other entrepreneurs lack the detailed knowledge necessary to establish state-of-the-art information systems and technology or to create the operations management procedures that are vital to increase the efficiency of their organizations’ production systems. 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 a new venture survive and prosper.

Intrapreneurship 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 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.

PRODUCT CHAMPIONS One way to promote intrapreneurship is to encourage individuals 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.

skunkworks A group of intrapreneurs who are deliberately separated from the normal operation of an organization to encourage them to devote all their attention to developing new products.

SKUNKWORKS The idea behind the product champion role is that employees who feel ownership for a project are inclined to act like 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. 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

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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.”

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. Nevertheless, intrapreneurs frequently do so.

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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; are able to 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 prior hypotheses, representativeness, 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 Entrepreneurship is the mobilization of resources to take advantage of an opportunity to provide customers with new or improved goods and services. Entrepreneurs start new ventures of their own. Intrapreneurs work inside organizations and manage the product development process. Organizations need to encourage intrapreneurship because it leads to organizational learning and innovation.

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Management in Action Topics for Discussion and Action

Discussion

1. What are the main differences between programmed decision making and nonprogrammed decision making? [LO7-1]

2. In what ways do the classical and administrative models of decision making help managers appreciate the complexities of real-world decision making? [LO7-1]

3. Why do capable managers sometimes make bad decisions? What can individual managers do to improve their decision-making skills? [LO7-1, 7-2]

4. In what kinds of groups is groupthink most likely to be a problem? When is it least likely to be a problem? What steps can group members take to ward off groupthink? [LO7-3]

5. What is organizational learning, and how can managers promote it? [LO7-4] 6. What is the difference between entrepreneurship and intrapreneurship? [LO7-5]

Action 7. Ask a manager to recall the best and the worst decisions he or she ever made. Try to determine why these

decisions were so good or so bad. [LO7-1, 7-2, 7-3] 8. Think about an organization in your local community or your university, or an organization that you are

familiar with, that is doing poorly. Now think of questions managers in the organization should ask stakeholders to elicit creative ideas for turning around the organization's fortunes. [LO7-4]

Building Management Skills How Do You Make Decisions? [LO7-1, 7-2, 7-4] Pick a decision you made recently that has had important consequences for you. It may be your decision about which college to attend, which major to select, whether to take a part-time job, or which part-time job to take. Using the material in this chapter, analyze how you made the decision:

1. Identify the criteria you used, either consciously or unconsciously, to guide your decision making. 2. List the alternatives you considered. Were they all possible alternatives? Did you unconsciously (or

consciously) ignore some important alternatives? 3. How much information did you have about each alternative? Were you making the decision on the basis of

complete or incomplete information? 4. Try to remember how you reached the decision. Did you sit down and consciously think through the

implications of each alternative, or did you make the decision on the basis of intuition? Did you use any rules of thumb to help you make the decision?

5. In retrospect, do you think your choice of alternative was shaped by any of the cognitive biases discussed in this chapter?

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S

6. Having answered the previous five questions, do you think in retrospect that you made a reasonable decision? What, if anything, might you do to improve your ability to make good decisions in the future?

Managing Ethically [LO7-3] ometimes groups make extreme decisions—decisions that are either more risky or more conservative than they would have been if individuals acting alone had made them. One explanation for the tendency of groups

to make extreme decisions is diffusion of responsibility. In a group, responsibility for the outcomes of a decision is spread among group members, so each person feels less than fully accountable. The group's decision is extreme because no individual has taken full responsibility for it.

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Y

G

Y

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Questions

1. Either alone or in a group, think about the ethical implications of extreme decision making by groups.

2. When group decision making takes place, should members of a group each feel fully accountable for outcomes of the decision? Why or why not?

Small Group Breakout Exercise Brainstorming [LO7-3, 7-4] Form groups of three or four people, and appoint one member as the spokesperson who will communicate your findings to the class when called on by the instructor. Then discuss the following scenario:

ou and your partners are trying to decide which kind of restaurant to open in a centrally located shopping center that has just been built in your city. The problem confronting you is that the city already has many

restaurants that provide different kinds of food at all price ranges. You have the resources to open any type of restaurant. Your challenge is to decide which type is most likely to succeed.

Use brainstorming to decide which type of restaurant to open. Follow these steps:

1. As a group, spend 5–10 minutes generating ideas about the alternative restaurants that the members think will be most likely to succeed. Each group member should be as innovative and creative as possible, and no suggestions should be criticized.

2. Appoint one group member to write down the alternatives as they are identified. 3. Spend the next 10–15 minutes debating the pros and cons of the alternatives. As a group, try to reach a

consensus on which alternative is most likely to succeed.

After making your decision, discuss the pros and cons of the brainstorming method, and decide whether any production blocking occurred.

When called on by the instructor, the spokesperson should be prepared to share your group's decision with the class, as well as the reasons for the group's decision.

Exploring the World Wide Web [LO7-4] o to www.brainstorming.co.uk. This website contains “Training on Creative Techniques” and “Creativity Puzzles.” Spend at least 30 minutes on the training and/or puzzles. Think about what you have learned.

Come up with specific ways in which you can be more creative in your thinking and decision making based on what you have learned.

Be the Manager [LO7-1, 7-2, 7-3, 7-4, 7-5] ou are a top manager who was recently hired by an oil field services company in Oklahoma to help it respond more quickly and proactively to potential opportunities in its market. You report to the chief operating officer

(COO), who reports to the CEO, and you have been on the job for eight months. Thus far you have come up with

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three initiatives you carefully studied, thought were noteworthy, and proposed and justified to the COO. The COO seemed cautiously interested when you presented the proposals, and each time he indicated he would think about them and discuss them with the CEO because considerable resources were involved. Each time you never heard back from the COO, and after a few weeks elapsed, you casually asked the COO if there was any news on the proposal in question. For the first proposal, the COO said, “We think it's a good idea, but the timing is off. Let's shelve it for the time being and reconsider it next year.” For the second proposal, the COO said, “Mike [the CEO] reminded me that we tried that two years ago and it wasn't well received in the market. I am surprised I didn't remember it myself when you first described the proposal, but it came right back to me once Mike mentioned it.” For the third proposal, the COO simply said, “We're not convinced it will work.”

You believe your three proposed initiatives are viable ways to seize opportunities in the marketplace, yet you

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cannot proceed with any of them. Moreover, for each proposal, you invested considerable time and even worked to bring others on board to support the proposal, only to have it shot down by the CEO. When you interviewed for the position, both the COO and the CEO claimed they wanted “an outsider to help them step out of the box and innovate.” Yet your experience to date has been just the opposite. What are you going to do?

The New York Times Case in the News [LO7-1, 7-2, 7-4, 7-5]

For Many Older Americans, an Enterprising Path hen Marilyn Arnold was 9 years old, her mother, a skilled seamstress, patiently taught her to sew on a vintage Singer treadle sewing machine.

As her feet pumped away at the machine in her family's farmhouse near Paris, Missouri, she was smitten. “I was in love with sewing, even when I stuck my finger and it bled,” Arnold said.

Soon she was whirling the thread for crisp white blouses with bright red sailor collars, gathered skirts, and, in time, her entire school wardrobe. She even competed in sewing contests at the Missouri State Fair.

But she never dreamed that now, at the age of 66, she would be running her own small business, Marilyn Arnold Designs, in Lee's Summit, Missouri.

Her specialty is custom designing and sewing 18-inch square pillows, christening dresses, and blankets as mementos made from cherished wedding gowns that had been relegated to the back of a closet.

She also stitches quilts big enough for a queen-size bed assembled from beloved T-shirts, and patches together vests from timeworn scarves. “Everything I make is from repurposed materials,” she said.

The idea for her venture took root three years ago, shortly before she retired from her position as a managing partner at the New York Life Insurance Company, after 29 years in the insurance business.

That was when her accountant asked her what she planned to do in retirement. She acknowledged that she knew she had to do something, but had no idea what. The accountant asked a second question: “What did you want to do when you were a little girl?”

While her childhood dream was to become a dress designer, that endeavor seemed too lofty a goal at her age. The idea to design and sew custom pillows from a wedding dress was inspired by a friend's request.

That was the manageable beginning of a new career. Her start-up costs to buy equipment and supplies and to devise a marketing plan tallied $12,000, financed from personal savings, Arnold said.

First she sewed as a side job for several months before she retired to see if there was really enough interest to introduce a full-fledged business. In time she created a website, opened an online web storefront on Etsy, and began posting her designs on Pinterest.

Today she handles all the sewing duties herself, easily clocking 12-hour days. “My biggest challenge has been balancing my time in order to work on all aspects of my business,” Ms. Arnold said. “I have to guard against spending too much time working in my business and not enough time working on my business.”

Older American entrepreneurs like Arnold are on a roll. Kimberly Palmer, author of The Economy of You: Discover Your Inner Entrepreneur and Recession-Proof Your

Life, said she had noticed that the most eager audience for the book was often people approaching retirement or already in it. “They want to leverage their skills and experience into something entrepreneurial,” she said.

According to a recent study published by the Kauffman Foundation and Legal Zoom, in 2013 about 20 percent of all new businesses were started by entrepreneurs aged 50 to 59 years, and 15 percent were 60 and over.

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And in fact, over the last decade, the highest rate of entrepreneurial activity belongs to those in the 55–64 age group, according to the Kauffman Index of Entrepreneurial Activity.

A desire to work for oneself and create a business that is meaningful and has social impact at this stage of life, combined with a job market that makes it tough for workers over 50 to get hired, has clearly pushed more people to pursue the entrepreneurial path.

“For the longest time we've assumed that social entrepreneurship was the exclusive provenance of young people,” said Marc Freedman, founder and chief executive of Encore.org, the nonprofit research center dedicated to second acts for the greater good. “Now we're realizing an undiscovered continent of innovation in the growing population over 50.”

But it is not an easy road. Money is the biggest stumbling block. Most

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