CHAPTER 6Planning, Strategy, and Competitive Advantage.docx

CHAPTER 6
Planning, Strategy, and Competitive Advantage
Learning Objectives
6-1. Identify the three main steps of the planning process and
explain the relationship between planning and strategy.
6-2. Differentiate between the main types of strategies and
explain how they give an organization a competitive advantage
that may lead to superior performance.
6-3. Differentiate between the main types of corporate-level
strategies and explain how they are used to strengthen a
company’s business-level strategy and competitive advantage.
6-4. Describe the vital role managers play in implementing
strategies to achieve an organization’s mission and goals.
©McGraw-Hill Education.
2
Planning and Strategy (1 of 2)
Planning
Identifying and selecting appropriate goals and courses of
action for an organization
Strategy
A cluster of decisions about what goals to pursue, what actions
to take, and how to use resources to achieve goals

3
An organizational plan, resulting from the planning process,
includes the goals of the organization and the specific strategies
managers will implement to attain those goals.
Planning and Strategy (2 of 2)
Mission Statement
A broad declaration of an organization’s purpose that identifies
the organization’s products and customers and distinguishes the
organization from its competitors
4
The mission statement also identifies what is unique or
important about its products to its employees and customers and
it distinguishes or differentiates the organization in some ways
from its competitors.
Three Steps in Planning
Figure 6.1
Jump to Appendix 1 for long image description.
The Nature of the Planning Process
Establish and discover where an organization is at the present
time.

Determine where it should be in the future, its desired future
state.
Decide how to move it forward to reach that future state.
In order to decide what to do now, a manager must forecast into
the future. A good prediction will mean effective strategies to
take advantage of opportunities that arise and to counter
emerging competition.
6
Topics for Discussion (1 of 4)
Describe the three steps of planning. Explain how they are
related. [LO 6-1]
The first step in planning involves determining the
organization’s mission and goals. The second step is
formulating strategy in which managers analyze the
organization’s current situation and then conceive and develop
the strategies necessary to attain the organization’s mission and
goals. The third step is strategy implementation, in which
managers decide how to allocate the resources and
responsibilities required to put those strategies into action so
that change will occur within the organization. The first step,
determining the organization’s mission and goals, guides the
following two steps in the planning process by defining which
strategies are appropriate and which are inappropriate.
7
Why Planning Is Important (1 of 2)

Planning is necessary to give the organization a sense of
direction and purpose.
Planning is a useful way of getting managers to participate in
decision making about the appropriate goals and strategies for
an organization.
Copyright Ryan McVay/Getty Images
Without the sense of direction and purpose that a formal plan
provides, managers may interpret their own specific tasks and
jobs in ways that best suit themselves. The result will be an
organization that is pursuing multiple and often conflicting
goals and a set of managers who do not cooperate and work well
together. The text gives the example of Intel, where top
managers, as part of their annual planning process, regularly
request input from lower-level managers to determine what the
organization’s goals and strategies should be.
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Why Planning Is Important (2 of 2)
A plan helps coordinate managers of the different functions and
divisions of an organization to ensure that they all pull in the
same direction and work to achieve its desired future state.
A plan can be used as a device for controlling managers within
an organization.
A good plan will also specify who will bear the responsibility of
implementing the strategies, as well as detailing the strategies

and naming the goals.
9
Levels of Planning at General Electric
Figure 6.2
Levels and Types of Planning (1 of 4)
Corporate-Level Plan
Top management’s decisions pertaining to the organization’s
mission, overall strategy, and structure
Corporate-Level Strategy
A plan that indicates in which industries and national markets
an organization intends to compete
11
The text cites GE when discussing corporate-level plans and
strategies: One of the goals in GE’s corporate-level plan is that
the company should be a leader in market share in every
industry in which it competes. A division that cannot attain this
goal may be sold to other companies. For example, GE sold off
the majority of its GE Capital financial services arm in 2015.
Another GE goal is to acquire other companies that can help a
business unit build market share to reach its corporate goal of
being a market leader in a particular industry.

Figure 6.3
Business-Level Plan
Divisional managers’ decisions pertaining to a division’s long-
term goals, overall strategy, and structure
Business-Level Strategy
Outlines the specific methods a division, business unit, or
organization will use to compete effectively against its rivals in
an industry
13
The primary responsibility of top managers is corporate-level
planning and. For example, the corporate-level goal of GE is to
be the first or second leading company in every industry in
which it competes. Jeffrey Immelt and his top management team
decide which industries GE should compete in to achieve this
goal. The corporate-level plan provides the framework within
which divisional managers create their business-level plans.
Functional-Level Plan
Functional managers’ decisions pertaining to the goals that they
propose to pursue to help the division attain its business-level
goals

Functional-Level Strategy
A plan of action to improve the ability of each of an
organization’s functions in order to perform its task-specific
activities in ways that add value to an organization’s goods and
services
14
Consistent with GE’s lighting division’s strategy of driving
down costs, its manufacturing function might adopt the goal “To
reduce production costs by 20% over the next three years,” and
functional strategies to achieve this goal might include:
(1) investing in state-of-the-art European production facilities
and
(2) developing an electronic global business-to-business
network to reduce the costs of inputs and inventory holding.
What is the relationship among corporate-, business-, and
functional-level strategies, and how do they create value for an
organization? [LO 6-2, 6-3]
A corporate-level strategy is a plan that indicates in which
industries and national markets an organization intends to
compete. A business-level strategy indicates how a division
intends to compete against its rivals in an industry. A
functional-level strategy is a plan of action that managers of

individual functions can follow to improve the ability of each
function to perform its task-specific activities. In a planning
process, it is important that there is a consistency in planning
across the three divisions. When consistency is achieved, the
organization operates with increasing efficiency and
effectiveness.
15
Time Horizons of Plans
Time Horizon
The intended duration of a plan
Long-term plans are usually 5 years or more.
Intermediate-term plans are 1 to 5 years.
Short-term plans are less than 1 year.
16
Corporate and business-level goals and strategies require long-
and intermediate-term plans.
Functional plans focus on short-to intermediate-term plans
Most organizations have a rolling planning cycle to amend plans
constantly.
Types of Plans
Standing Plans
Use in programmed decision situations
Single-Use Plans
Developed for a one-time, nonprogrammed issue

17
When the same situations occur repeatedly, managers develop
policies, rules, and standard operating procedures (SOPs) to
control the way employees perform their tasks.
An example of a single-use plan: NASA is working on a major
program to launch a rover in 2020 to investigate a specific
environment on the surface of Mars. One project in this program
is to develop the scientific instruments to bring samples back
from Mars.
Standing Plans
Policies
General guides to action
Rules
Formal written specific guides to action
Standard Operating Procedures (SOP)
Specify an exact series of actions to follow
Managers create standing and single-use plans to help achieve
an organization’s specific goals.
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Single-Use Plans
Programs
Integrated plans achieving specific goals

Project
Specific action plans to complete programs
A standing plan might lay out ethical behavior, including a
policy that requires any employee who receives from a supplier
or customer a gift worth more than $50 to report the gift; and an
SOP that obliges the recipient of the gift to make the disclosure
in writing within 30 days.
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Three Mission Statements
Figure 6.4COMPANYMISSION STATEMENTLinkedInOur
mission is simple: Connect the world’s professionals to make
them more productive and successful.TwitterOur mission: To
give everyone the power to create and share ideas and
information instantly, without barriers.FacebookFacebook’s
mission is to give people the power to share and make the world
more open and connected.
Sources: Company website, “Mission,” www.linkedin.com,
accessed March 23, 2015: company website, “About,”
https://about.twitter.com, accessed March 23, 2005, company
website, “Our Mission,” www.facebook.com, accessed
September 1, 2015.
Determining the Organization’s Mission and Goals (1 of 3)
Defining the Business
Who are our customers?
What customer needs are being satisfied?
How are we satisfying customer needs?

21
These questions are used to identify customer needs and how to
satisfy those needs. The answers will provide not only the needs
that are being satisfied, but guides for how to satisfy future
needs, as well as identifying competitors.
Establishing Major Goals
Goals provide the organization with a sense of direction.
Goals stretch the organization to higher levels of performance.
Goals must be challenging but realistic with a definite period in
which they are to be achieved.
Organizations need goals to have a sense of direction, and top
management articulates these goals. The text names GE CEO
Immelt and discusses his goal of being one of the two best
performers in every industry in which the company competes, a
highly challenging set of goals.
22
Strategic Leadership
The ability of the CEO and top managers to convey a
compelling vision to their subordinates of what they want the
organization to achieve

A leader can impel employees to undertake the difficult tasks to
reach a goal by instilling in them their vision and by modeling
behavior.
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Formulating Strategy (1 of 2)
Figure 6.5
Formulating Strategy (2 of 2)
SWOT Analysis
A planning exercise in which managers identify internal
organizational strengths (S) and weaknesses (W) and external
environmental opportunities (O) and threats (T)
25
A SWOT analysis can assist managers in selecting strategies to
better position the organization toward its goals and mission.
The Five Forces Model (1 of 2)Competitive ForcesEffectsLevel
of RivalryIncreased competition results in lower
profits.Potential for EntryEasy entry leads to lower prices and
profits.Power of SuppliersIf there are only a few suppliers of

important items, supply costs rise.Power of Customers If there
are only a few large buyers, they can bargain down
prices.SubstitutesMore available substitutes tend to drive down
prices and profits.
Porter identified these five factors as major threats because they
affect how much profit organizations competing within the same
industry can expect to make.
26
The Five Forces Model (2 of 2)
Hypercompetition
Permanent, ongoing intense competition brought about in an
industry by advancing technology or changing customer tastes
27
The wireless mobile communication industry is an example.
Formulating Business-Level Strategies (1 of 3)
Low-Cost Strategy
Driving the organization’s total costs down below the total costs
of rivals
Differentiation
Distinguishing an organization’s products from the products of
competitors on dimensions, such as product design, quality, or
after-sales service

28
A low-cost strategy requires that manufacturing managers
search for new ways to reduce production costs, R&D managers
focus on developing new products that can be manufactured
more cheaply, and marketing managers find ways to lower the
costs of attracting customers. According to Porter, companies
pursuing a low-cost strategy can sell a product for less than
their rivals sell it and yet still make a good profit because of
their lower costs. A differentiation strategy frequently requires
that managers increase spending on product design or R&D to
differentiate products, and costs rise as a result.
“Stuck in the Middle”
Attempting to simultaneously pursue both a low-cost strategy
and a differentiation strategy
Difficult to achieve low cost with the added costs of
differentiation
29
Organizations stuck in the middle tend to have lower levels of
performance than do those that pursue a low-cost or a
differentiation strategy. To avoid being stuck in the middle, top
managers must instruct departmental managers to take actions
that will result in either low cost or differentiation.

Focused Low-Cost Strategy
Serving only one segment of the overall market and trying to be
the lowest-cost organization serving that segment
Focused Differentiation Strategy
Serving only one segment of the overall market and trying to be
the most differentiated organization serving that segment
30
The text gives the example of BMW and Toyota: BMW pursues
a focused differentiation strategy, producing cars exclusively
for higher-income customers. By contrast, Toyota pursues a
differentiation strategy and produces cars that appeal to
consumers in almost all segments of the car market, from basic
transportation (Toyota Corolla) through the middle of the
market (Toyota Camry) to the high-income end of the market
(Lexus).
Pick an industry and identify four companies in the industry
that pursue one of the four main business-level strategies (low-
cost, focused low-cost, etc.). [LO 6-1, 6-2]
Within the commercial airline industry, American Airlines
attempts to differentiate itself by maintaining a reputation of
providing superior service on a national level. Jet Blue pursues

a focused differentiation strategy, since it also attempts to
distinguish itself by providing superior service but only in
secondary hubs. Southwest has successfully executed a low cost
strategy for many years. Sprint Airlines is also pursuing a low
cost strategy, but like Jet Blue, is restricted to servicing only
secondary hubs.
31
Formulating Corporate-Level Strategies
Concentration on a Single Industry
Reinvesting a company’s profits to strengthen its competitive
position in its current industry
Copyright Bloomberg via Getty Images
The text gives two examples of companies that concentrated on
a single industry—Apple and McDonald’s. Apple continuously
introduces improved mobile wireless digital devices such as the
iPhone and iPad, whereas McDonald’s, which began as one
restaurant in California, focused all its efforts on using its
resources to quickly expand across the globe to become the
biggest and most profitable U.S. fast-food company.
32
Vertical Integration
Vertical Integration
Expanding a company’s operations either backward into an
industry that produces inputs for its products or forward into an
industry that uses, distributes, or sells its products

33
The text gives Tesla Motors as an example of vertical
integration: The company began to build it’s own batteries to
supply their cars in their pursuit of mass-producing an electric
car for $35,000.00. They now expect that battery company,
Gigafactory, to lower the cost of car batteries.
Stages in a Vertical Value Chain
Figure 6.6
Diversification (1 of 3)
Diversification
Expanding a company’s business operations into a new industry
in order to produce new kinds of valuable goods or services
Examples include PepsiCo’s diversification into the snack food
business with the purchase of Frito Lay, and Cisco’s
diversification into consumer electronics when it purchased
Linksys.
35

Related Diversification
Entering a new business or industry to create a competitive
advantage in one or more of an organization’s existing divisions
or businesses
Synergy
Performance gains that result when individuals and departments
coordinate their actions
Related diversification can add value to an organization’s
products if managers can find ways for its various divisions or
business units to share their valuable skills or resources so that
synergy is created. For example, suppose two or more divisions
of a diversified company can use the same manufacturing
facilities, distribution channels, or advertising campaigns—that
is, share functional activities. Each division has to invest fewer
resources in a shared functional activity than it would have to
invest if it performed the functional activity by itself.
36
Unrelated Diversification
Entering a new industry or buying a company in a new industry
that is not related in any way to an organization’s current
businesses or industries

In pursuing unrelated diversification, management can obtain a
company that is doing poorly or failing, and then transfer their
management skills to the new company. Hopefully, this
produces a turnaround and increased performance.
37
What is the difference between vertical integration and related
diversification? [LO 6-3]
Related diversification is a strategy that entails entering a new
business or industry with the intention of creating a competitive
advantage by capitalizing on a current strength or core
competency. Related diversification adds values to the company
when managers can find ways for its various divisions or
business units to share their valuable skills or resources so that
synergy is created.
Vertical integration is a strategy that entails entering a new
business that either produces inputs for the company’s products
(backward vertical integration) or assists in the distribution or
selling of the company’s products (forward vertical integration).
38
International Expansion (1 of 6)
Global Strategy
Selling the same standardized product and using the same basic
marketing approach in each national market
Cost savings

Vulnerable to local competitors
39
A basic question confronts the managers of any organization
that needs to sell its products abroad and compete in more than
one national market: To what extent should the organization
customize features of its products and marketing campaign to
different national conditions?
Multi-Domestic Strategy
Customizing products and marketing strategies to specific
national conditions
Helps gain local market share
Raises production costs
40
The text discusses Unilever, the European food and household
products company and its multidomestic strategy. They employ
a different marketing approach in Germany than they do in the
United States.
Four Ways of Expanding Internationally
Figure 6.7

Exporting
Making products domestically and selling them abroad
Importing
Selling at home products that are made abroad
Because a company does not need to invest in manufacturing
facilities in another country, they experience fewer risks. If
they can have a local company in that new country distribute the
product, their investment is reduced.
42
Licensing
Allowing a foreign organization to take charge of manufacturing
and distributing a product in its country in return for a
negotiated fee
Franchising
Selling to a foreign organization the rights to use a brand name
and operating know-how in return for a lump-sum payment and
a share of the profits

The text mentions Hilton Hotels franchising in Chile. Of course,
there are many more examples of international franchising. One
of the advantages of franchising is that the company does not
have to expend development costs for the expansion.
43
Strategic Alliance
Managers pool their organization’s resources and know-how
with a foreign company.
Organizations agree to share risk and reward.
Joint Venture
Strategic alliance among two or more companies that agree to
jointly establish and share the ownership of a new business
The text discusses CPW (Cereal Partners Worldwide) and their
joint venture with General Mills and Nestlé. General Mills also
has a joint venture with Häagen-Dazs Japan. A Japanese ice
cream business, operating through a network of Häagen-Dazs
shops.
44
Wholly Owned Foreign Subsidiary
Managers invest in establishing production operations in a
foreign country independent of any local direct involvement.

When a company goes it alone in expanding to a foreign market,
they not only garner the rewards, but bear all the risks. It can be
more expensive and laden with more risks.
45
Planning and Implementing Strategy (1 of 2)
Allocate responsibility for implementation to appropriate
individuals or groups.
Draft detailed action plans that specify how a strategy is to be
implemented.
Establish a timetable for implementation that includes precise,
measurable goals linked to the attainment of the action plan.
The planning process goes beyond just identifying effective
strategies; it also includes plans to ensure that these strategies
are put into action.
46
Planning and Implementing Strategy (2 of 2)
Allocate appropriate resources to the responsible individuals or
groups.
Hold specific individuals or groups responsible for the
attainment of corporate, divisional, and functional goals.

Normally the plan for implementing a new strategy requires the
development of new functional strategies, the redesign of an
organization’s structure, and the development of new control
systems; it might also require a new program to change an
organization’s culture.
47
BE THE MANAGER
List the supermarket chains in your city, and identify their
strengths and weaknesses.
Answers to this question will vary, depending upon the area of
the country in which the students reside and the size of the local
shopping area. You could recommend using a SWOT approach
to compare the various each of the competitors in your specific
area. This industry has many different types of competitors,
ranging from mass merchandisers such as Meijers and Kmart to
small mom-and-pop grocers and farmers' markets. After
identifying all of the competitors, students can begin analysis of
each using the planning tools presented in the chapter.
48
APPENDICES
Long descriptions of images

49
Appendix 1: The Three Steps in Planning
The graphic shows the three steps in planning.
Determining the organization's mission and goals, includes
defining the business and establishing major goals.
Formulating the strategy means to analyze the current situation
and develop strategies.
Implementing the strategy is to allocate resources and
responsibilities to achieve the strategies.
Copyright McGraw-Hill Education. Permission required for
reproduction or display.
Return to slide.
Appendix 2: Levels of Planning at General Electric
The graphic shows the levels of planning at General Electric,
including the corporate level, the business or division level, and
the functional level.
At the corporate level are the C E O and the corporate office.
At the business or division level are global growth and
operations, aviation, energy management, oil and gas, power
and water, healthcare, lighting (other division sold),
transportation, and capital.
At the functional level are manufacturing, marketing,
accounting, and research and development.
Return to slide.

Appendix 3: Levels and Types of Planning
The graphic shows levels and types of planning.
Corporate mission and goals are under the corporate-level plan
and at the goal-setting level. Under the business-level plan at
the goal-setting level are divisional goals. The functional-level
plan at the goal-setting level are the functional goals.
At the strategy formulation level, are corporate-level strategy,
business-level strategy, and functional-level strategy.
At the strategy implementation level are the design of corporate
structure control, the design of business-unit structure control,
and the design of functional structure control.
Return to slide.
Appendix 4: Formulating Strategy
The graphic describes the three main strategies involved with a
S W O T Analysis: corporate-level strategy, business-level
strategy, and functional-level strategy.
S W O T Analysis is a planning exercise to identify strengths
and weaknesses inside an organization and opportunities and
threats in the environment.
Corporate-level strategy is a plan of action to manage the
growth and development of an organization so as to maximize
its long-run ability to create value.
Business-level strategy is a plan of action to take advantage of
favorable opportunities and find ways to counter threats so as to
compete effectively in an industry.
Functional-level strategy is a plan of action to improve the
ability of an organization's departments to create value.
Return to slide.

Appendix 5: Stages in a Vertical Value Chain
The flow chart shows the stages in a vertical value chain from
backward to forward for two types of companies. The first value
chain consists of raw materials to intermediate manufacturing to
assembly to distribution to customer. The second value chain
consists of raw materials to concentrate producers to bottlers to
retailers to customer. The following example is given: G.D
Searle to Coca-Cola to local bottler to supermarket chains to
customer.
Return to slide.
Appendix 6: Four Ways of Expanding Internationally
The graphic shows the four ways of expanding internationally.
From low to high: importing and exporting, licensing and
franchising, strategic alliances and or joint ventures, and
wholly owned foreign subsidiary at the high end.
The level of foreign involvement and investment and degree of
risk is lowest with importing and exporting and continues to get
higher continuing up to wholly owned foreign subsidiary.
Return to slide.

CHAPTER 5
Decision Making, Learning, Creativity,
and Entrepreneurship
1
Learning Objectives (1 of 2)
5-1. Understand the nature of managerial decision making,
differentiate between programmed and nonprogrammed
decisions, and explain why nonprogrammed decision making is
a complex, uncertain process.
5-2. Describe the six steps that managers should take to make
the best decisions.
5-3. Identify the advantages and disadvantages of group
decision making, and describe techniques that can improve it
Learning Objectives (2 of 2)
5-4. Explain the role that organizational learning and creativity
play in helping managers to improve their decisions.
5-5. Describe how managers can encourage and promote
entrepreneurship to create a learning organization, and
differentiate between entrepreneurs and intrapreneurs.

The Nature of Managerial Decision Making
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
4
Decisions in response to opportunities occurs when managers
respond to ways to improve organizational performance.
Decisions in response to threats occurs when managers are
impacted by adverse events to the organization.
Decision Making (1 of 3)
Programmed Decision Making
Routine, virtually automatic decision making that follows
established rules or guidelines
Managers have made the same decision many times before.
There are rules or guidelines to follow based on experience with
past decisions.
5
Programmed decision making occurs:
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
when an office manager orders basic office supplies, such as
paper and pens, whenever the inventory of supplies drops below

a certain level.
Nonprogrammed Decisions
Nonroutine decision making that occurs in response to unusual,
unpredictable opportunities and threats
Copyright Blend Images/ Shutterstock.com RF
6
When a situation occurs that is unexpected or has not occurred
before, lacking the information needed to address this uncertain
situation, a manager would make a nonprogrammed decision.
Examples: developing a new technology, starting a new
business, or entering a new market.
What are the main differences between programmed decision
making and nonprogrammed decision making? [LO5-1]
Programmed decision making is a routine, almost automatic
process. These decisions have been made so many times that
managers do not need to readdress all the alternatives every
time one of these decisions arises, but can use decision-making
rules or guidelines that have been developed for these

situations. Managers typically have all the information they
need to create the rules necessary to make a decision. There is
little ambiguity involved in these types of decisions.
Nonprogrammed decision making is required when a situation
arises that is not easily resolved by a preexisting rule or
guideline. These decisions are nonroutine and require managers
to respond to uncertainty because managers in these situations
lack the information that they need to develop rules that allow
them to accurately predict the future.
7
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
Decisions that take time and effort to make and result from
careful information gathering, generation of alternatives, and
evaluation of alternatives
Although both intuition and judgment have their flaws,
nonprogrammed decisions are more likely to produce errors.
8
The Classical Model
Classical Decision-Making Model
A prescriptive model of decision making that assumes 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
9
There is an assumption in the classical model of decision
making that a manager can list preferences for each choice and
then rank them from least to most preferred, making the
optimum decision.
The Classical Model of Decision Making
Figure 5.1
Jump to Appendix 1 long image description.
The Administrative Model (1 of 2)
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
11

In what ways do the classical and administrative models of
decision making help managers appreciate the complexities
involved in real-world decision making? [LO5-1]
The classical model’s main premise is that once managers
recognize the need to make a decision, they should be able to
generate a complete list of all alternatives and consequences
from which the best choice can then be made. This premise
assumes that managers will have access to all the information
that they need in order to make the optimum decision. This
model helps managers appreciate the complexities of decision
making by requiring them to consider all the information and
then attempting to make decisions that will have the most
desirable consequences for their organization.
The administrative model proposes that although managers do
not have access to all the information, they still must make a
decision. This model more fully exposes the complexities
involved of decision making by forcing us to consider the
limitations we may face. Proponents of this model assert that
even if managers had access to all information needed, they
would lack the mental or psychological ability to absorb and
correctly evaluate it. In most situations, managers do not have
access to complete information. Nor do they have knowledge of
all of the consequences of each alternative. This model is more
realistic for managers because it concedes that risk and
uncertainty, ambiguity, and time constraints often compound in
ways that make nonprogrammed decision making difficult, even
for the most experienced managers.
12

The Administrative Model (2 of 2)
Bounded Rationality
Cognitive limitations that constrain one’s ability to interpret,
process, and act on information
Incomplete Information
Happens because the full range of decision-making alternative
is unknowable in most situations and the consequences are
uncertain
13
March and Simon’s bounded rationality says that a person has
cognitive limitations—not possessing the complete knowledge
(there might be vast quantities of options that are unknowable)
in order to make an optimal decision.
Why Information Is Incomplete
Figure 5.2
Causes of Incomplete Information (1 of 4)
Risk
The degree of probability that the possible outcomes of a
particular course of action will occur
Uncertainty
The probabilities of alternative outcomes cannot be determined
and future outcomes are unknown

15
Managers know enough about a given outcome to be able to
assign probabilities for the likelihood of its failure or success.
Many decision outcomes are not know—such as the success of a
new product introduction.
Figure 5.3
Young Woman or Old Woman?
Ambiguous Information
Information that can be interpreted in multiple and often
conflicting ways.
16
Managers often interpret the same piece of information
differently and make decisions based on their own
interpretations.
Time Constraints and Information Costs
Managers have neither the time nor money to search for all
possible alternatives and evaluate potential consequences

The text gives the example of the Ford Motor Company
purchasing manager. With the time constraint of a month to
choose a supplier for a small engine part and 20,000 potential
suppliers for this part in the United States alone, the manager
cannot contact all potential suppliers to gather the needed
information on the costs and terms.
17
Satisficing
Satisficing is a strategy of searching for and choosing an
acceptable, or satisfactory, response to problems and
opportunities, rather than trying to make the best decision.
Managers search for and choose acceptable, or satisfactory,
ways to respond to problems and opportunities rather than
trying to make the optimal decision.
18
Managers assume that the limited options they examine
represent all options. This is the typical response of managers
when dealing with incomplete information.
Why do capable managers sometimes make bad decisions? What
can individual managers do to improve their decision-making
skills?
[LO5-1, 5-2]

Capable managers sometimes make bad decisions because the
decision-making process can often be risky and uncertain.
Failure to think creatively in order to generate a wide variety of
alternatives and failure to evaluate all relevant information
available can lead to a bad decision. Also, failure to consider
the economic feasibility, legality, or ethicalness of decision
prior to its implementation can result in disastrous
consequences.
Managers should identify their own personal style of decision
making in order to recognize inconsistencies that may prevent
them from making good decisions. By reviewing two recent
decisions—one that turned out well and one that turned out
poorly—and seeing how they were made, a manager can gain
insight into his or her decision-making process. Another
technique that is useful is to list the criteria used to assess and
evaluate alternatives. This can help managers critically evaluate
the effectiveness and the appropriateness of each criterion.
Working with others may be helpful as well, as it is often
difficult to recognize our own biases and weaknesses.
19
Steps in the Decision-Making Process
Figure 5.4
Jump to Appendix 3 long image description.
General Criteria for Evaluating Possible Courses of Action
Figure 5.5

Group Decision Making (1 of 4)
Superior to individual making
Choices less likely to fall victim to bias
Able to draw on combined skills of group members
Improve ability to generate feasible alternatives
Allows managers to process more information
Managers affected by decisions agree to cooperate
Because a group of managers includes varied skills,
competencies, and knowledge, the decision of this group has a
higher likelihood of succeeding.
22
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
23
Groupthink can lead to a course of action that does not question
the decision nor develop the criteria to evaluate alternatives. A
group may follow the lead of the central manager and follow the
course of action blindly.

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? [LO5-3]
Groupthink is a pattern of faulty and biased decision making
that occurs in groups whose members strive for agreement
within the group at the expense of accurately assessing
information relevant to a decision. When this occurs,
alternatives are not critically examined, potentially leading to a
poor decision. Emotion, rather than objective assessment,
guides the selection of the optimal course of action. This is
most likely to be a problem in groups where pressure toward
agreement is seen as more important than finding a workable
solution or reaching an optimum decision. If the culture of the
organization is not tolerant of criticism or innovative thinking,
groupthink is more likely to occur during the group decision-
making process. If one person in a group is allowed to be highly
vocal and controlling during the decision- making process,
others may feel too intimidated to present their suggestions or
opinions.
Groupthink is least likely to be a problem when all the members
of the group feel comfortable making suggestions and offering
radical alternatives. If the culture supports risk-taking and
innovative thinking, group members will not feel pressure to
conform to the feeling of the majority. Also, if the contribution
of the group is emphasized, rather than individual achievement,
managers will see the opportunity to build upon the suggestions
of others.
Devil’s advocacy is a technique that can be used to reduce the

probability of the occurrence of groupthink. This technique
involves the critical analysis of the preferred alternative and the
process that was used to select that alternative. Typically, one
member of the group is selected to play the role of the devil’s
advocate by critiquing and challenging the way in which the
group evaluated each alternative and selected one over the
others. The purpose is to identify any reason that may make the
selected alternative unacceptable after all.
24
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
25
One member of a group is assigned the role of devil’s advocate.
That person then critiques and challenges decisions made, as
well as the decision-making process.
Diversity among Decision Makers
Diverse groups are often less prone to groupthink because group
members already differ from each other and thus are less
subject to pressures for uniformity
26
A diverse group that includes different genders, as well as

people from various backgrounds brings a range of life
experiences and opinions that inform the decision-making
process of the group.
Organizational Learning and Creativity (1 of 3)
Organizational Learning
The process through which managers seek to improve
employees’ desire and ability to understand and manage the
organization and its task environment
Copyright Morgan Lane Photography/Alamy RF
27
Example or organizational learning from text: 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.
What is organizational learning, and how can managers promote
it? [LO5-4]
Organizational learning is the process through which managers

seek to improve organization members’ desire and ability to
understand and manage the organization and its environment, so
that they can make decisions that continuously raise
organizational effectiveness. A learning organization is one that
promotes creativity, or the ability of a decision maker to
discover original and novel ideas that lead to feasible
alternative courses of action. Creativity is at the heart of
organizational learning, and managers can promote both by
adopting Peter Senge’s five principles for creating a learning
organization. If every employee is allowed to develop a sense of
personal mastery, employees will be able to experiment and
create and explore what they want. Employees must also be
encouraged to develop complex mental models that challenge
them to find new and better ways of doing things. Promoting
group creativity is also essential because groups, rather than
individuals, make most important decisions. Building a shared
vision among employees requires managers to build a common
mental model that all organizational members use to frame
threats and opportunities. Finally, systems thinking is required
for organizational learning. Learning at each level affects
learning on other levels, and this must be understood for
organizational learning to increase efficiency and effectiveness
in the organization.
28
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

29
A creative management team can improve the success of an
organization. See the example of the Ford Motor Company in
the text. Developing a learning organization is not quick nor is
it easy, but it could prove beneficial to a company.
Senge’s Principles for Creating a Learning Organization
Figure 5.6
Jump to long image description.
Personal Mastery
Managers empower employees and allow them to create and
explore.
Mental Models
Challenge employees to find new, better methods to perform a
task.
Team Learning
Is more important than individual learning since most decisions
are made in groups.
Build a Shared Vision
People share a common mental model of the firm to evaluate
opportunities.
Systems Thinking
Knowing and understanding how actions in one area of the firm
will impact other areas of the firm.
30
Creativity
A decision maker’s ability to discover original and novel ideas
that lead to feasible alternative courses of action

31
Organizations often hire outside experts to help them develop
programs to train managers creative thinking and problem
solving.
Promoting Individual Creativity
Certain conditions enhance individual creativity
Opportunity and freedom to generate new ideas
Opportunity to experiment and learn from mistakes
No punishment for ideas that seem outlandish
Constructive feedback
32
Having an anxious manager hover over an employee, trying to
push a creative solution, may end up only stifling creativity.
Promoting Group Creativity
Brainstorming
Managers meet face-to-face to generate and debate many
alternatives.
Group members are not allowed to evaluate alternatives until all
alternatives are listed.
Group member are encouraged to be as innovative and radical as
possible.
When all alternatives are listed, the pros and cons of each are
discussed and a short list created.

33
Brainstorming can be used in groups, or individually. It’s
usefulness is many; for example, it may be a creative way to
come up with new branding or a new process within the
organization.
Building Group Creativity (1 of 2)
Production Blocking
Loss of productivity in brainstorming sessions due to the
unstructured nature of brainstorming
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
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.
34
Building Group Creativity (2 of 2)
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

35
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.
Entrepreneurship and Creativity (1 of 3)
Entrepreneur
An individual who notices opportunities and decides how to
mobilize the resources necessary to produce new and improved
goods and services
Social Entrepreneur
An individual who pursues initiatives and opportunities and
mobilizes resources to address social problems and needs in
order to improve society and wellbeing through creative
solutions
Entrepreneurs are an important source of creativity in the
organizational world. Mentioned in the text are David Filo and
Jerry Yang (founders of Yahoo!). One of the first to come to
mind would be Steve Jobs, but we can also look to the past for
successful entrepreneurs: Henry Ford, W.K. Kellogg, Ray Kroc.
And female entrepreneurs Estee Lauder, Ruth Fertel (Ruth’s
Chris Steak House), as well as Beyonce, Oprah Winfrey, and
Arianna Huffington in the entertainment and media industries.
36
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 with intrapreneurial talents have become
entrepreneurs when their superiors decide neither to support nor
to fund new product ideas and development efforts that the
managers think will succeed.
37
Entrepreneurship
Mobilization of resources to take advantage of an opportunity to
provide customers with new and improved goods and services
Downsides of entrepreneurship include the lack of the founder’s
patience to engage in the challenging work of management.
Some may find it difficult to delegate authority, or become
overloaded, making the quality of their decisions questionable.
38
What is the difference between entrepreneurship and
intrapreneurship? [LO5-5]
Employees of existing organizations who notice opportunities
for either quantum or incremental product improvements and are

responsible for managing the product development process
within their employer’s organization are called intrapreneurs.
Entrepreneurs are persons who undertake the risk of starting and
managing their own business.
39
Intrapreneurship and Organizational Learning
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
Skunkworks
A group that is deliberately separated from normal operations to
encourage members to devote all their attention to developing
new products
The text gives the example of 3M: 3M is 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.
40
BE THE MANAGER
What are you doing to do?

In this scenario, the CEO and the COO do not seem to be risk
takers and appear afraid to venture beyond the status quo. You
will have to convince them that your new ideas do not involve
excessive levels of risk because they have been thoroughly
researched. To do so, consider requesting a formal meeting with
the CEO and COO at which the sole topic of discussion is your
three proposals. At the meeting, the practicality and economic
feasibility of each idea must be emphasized. Also, consider
engaging in "devil’s advocacy" with the CEO and COO, which
would give them the opportunity to thoroughly critique each
proposal and address areas of uncertainty.
41
APPENDICES
Long descriptions of images
Appendix 1: The Classic Model of Decision Making
The following steps are presented in the graphic:
1. List all the alternative courses of action possible and the
consequences of the different alternatives, which assumes all
information about alternatives is available to managers.
2. Rank each alternative from least preferred to most preferred
according to personal preferences, which assumes managers
possess the mental facility to process this information.
3. Select the alternative that leads to desired future
consequences, which assumes that managers know when future
course of action is best for the organization.
Return to slide.

Appendix 2: Why Information Is Incomplete
The cluster diagram has "incomplete information" in the center.
Three factors are shown as causes for incomplete information.
They are uncertainty and risk, ambiguous information, and time
constraints and information costs.
Return to slide.
Appendix 3: Steps in the Decision-Making Process
The graphics shows steps in the decision-making process. 1.
recognize the need for a decision, 2. generate alternatives, 3.
assess alternatives, 4. choose among alternatives, 5. implement
the chosen alternative, and 6. learn from feedback.
Return to slide.

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