Introduction to Decision Making Preamble to the Planning Process

Classical Decision Theory The Rational-Economic Model Basic principles: humans are rational we seek to optimize our outcomes The classical model suggests that decisions are made in a logical series of steps

Steps in Classical Decision Theory 1. Opportunity or problem of situation exists 2. Opportunity is recognized to exist 3. Opportunity is defined 4. Alternatives are generated 5. Information is gathered 6. Alternatives are evaluated 7. One alternative is selected 8. Alternative is implemented and evaluated in terms of effectiveness

Problems with the Model The assumptions are flawed humans are not perfectly rational information is not costless or complete Assumes that all alternatives will be considered Assumes that the consequences of each alternative will be explored Assumes that we can cognitively cope with all this information

Behavioral or Administrative Model Acknowledges the real-world limitations on manager’s decision making Managers in this model operate with bounded rationality in making decisions Recognizes that: All possible alternatives and their associated consequences cannot be generated

Obstacles to Effective Decision- Making Most common obstacles: Escalation of commitment Willingness of groups to take risks

The Planning Process

Planning as a Crucial Management Function planning attempts to define the organization’s future, and influence that future in ways that the managers wish managers must cope with and adapt to change and uncertainty

What is Planning? Centralized planning a system in which responsibility for planning lies with the organization’s highest level, or top management Decentralized planning a system in which responsibility for planning lies with employees at certain levels of the organization and participation in the planning process is widespread

many companies have found that moving from centralized to decentralized planning can improve quality, productivity, and competitiveness governments have downsized and undergone devolution

Planning, Managers, and Organizations Planning is a prerequisite for the successful performance of the other managerial functions Planning occurs in the present, but is oriented toward the future Planning focuses on the means used to achieve an organization’s ends Planning may be formal or informal

Planning...cont’d Planning is an ongoing process Planning does not imply inflexibility Planning is an analytical process Planning involves scanning both internal and external environment Planning helps an organization cope with environmental change and uncertainty Planning does not guarantee success

Managers and Planning Typical manager’s day is characterized by different activities, frequent interruption, and a need to cope with unexpected problems that demand immediate solutions Managers plan implicate, rather than explicitly Planning is crucial for managerial success

Benefits of Planning Coordination of Effort specify goals and objectives both for the total organization and for each of its parts Preparation for Change include contingency plans that permit flexibility to adapt to unforeseen changes in the environment

Development of Performance Standards levels of behaviour or output that are defined by plans standards and benchmarks for evaluating performance definition of competencies for each job

Development of Managers managers must be prepared to act on a variety of scenarios - “what if?” managers must be proactive - make things happen, not wait for them to happen managers must be constantly trained, motivated, and enthusiastic

Mission GoalsPlans Goal Achievement efficiency and effectiveness TM Planning Hierarchy

Planning at Different Management Levels Top Managers Develop organizational objectives Spend large amount of time on planning function Focus on external, internal factors Lower-Level Mangers Develop plans that fit overall objectives Spend small amount of time on planning function Focus largely on internal organizational factors when planning

Benefits of Planning Helps identify opportunities for the organization Helps identify possible problems Forces managers to set objectives Forces managers to set standards Coordinates organizational activity

Problems in Planning Lack of support from top management Poor information Resistance to change Over- or under commitment to plans Managers not involved in planning process Managers are too busy to plan Lack of competence in planning

Planning and Organizational Performance Companies with formal planning procedure do perform better than those without formal procedures They typically find that they improve on their own past performance Some unexpected short run events can lead to lowered performance

Planning Process The Organization’s Mission Purpose Premises Values Directions The Organization’s Mission Purpose Premises Values Directions Strategic goals Tactical goals Operational goals Operational plans Tactical plans Strategic plans Operational plans The Environmental Context

The Planning Process 1.Set Organizational Objectives 2.Determine Gap Between Actual and Desired Position 3.Develop Plans to Achieve Objectives 4.Implement Plans 5.Evaluate Planning Effectiveness

Set Organizational Objectives Objectives: are the results that the organization wants to achieve Objectives focus employee attention on tasks that are consistent with the organizations mission Goal setting is used to focus employee activity on goals that are critical for success Strategic goals, tactical goals, operational goals

Types of Goals Mission – a statement of an organization’s fundamental purpose Strategic goal – a goal set by & for top management of the organization Tactical goal – a goal set by & for middle managers of the organization Operational goal – a goal set by & for first-line managers of the organization

Problems in Goal Setting Managers should be wary of the following: Different real and stated objectives goals may be inconsistent with the goals it pursues Conflicting objectives employees put in position of achieving contradictory objectives Goal Distortion managers get sidetracked, and emphasize the achievement of objectives that are at odds with the organizations mission

Barriers to Goal Setting Inappropriate goals Improper reward system Complex environment Resistance to change Constraints Understand purpose of goals Planning communication & participation Consistency, revision & updating Effective reward systems Barriers Overcoming the Barriers

Strategic Goals Operational Goals Top Management Middle-level Management First-level Management Level Goals Are Set by Different Levels in an Organization

Types of Plans Strategic plan – plans developed to achieve strategic goals Tactical plan – plans developed to achieve tactical goals Operational plan – plans developed to achieve operational goals

Develop Plans to Achieve Objectives Strategic Plans Tactical Plans Operational Plans Single - Use - Plans Standing Plans Forecasting quantitative forecasting qualitative forecasting Contingency Planning

Strategic Planning Comprehensive, long-range planning, focusing on broad, enduring issues to increase the organization’s effectiveness Price Penetration Strategy the strategy of setting low prices to create a mass market rapidly requires high volumes

Operational Planning Short-term, focused, specific planning that provides direction for implementing the organization’s broad concepts in the strategic plan into clear objectives for operations

Tactical Planning more specific and for a shorter period than strategic planning, but less specific and for a longer period than operational planning

Time Frames for Planning 1 year or less 1 – 5 years 6 to 20 years Short –Range plans Intermediate plans Long–Range plans

Operational Plans Single-use plan Carry out course of action, not repeated in future Program Single use plan for larger set of activities Project Single use plan of less scope & complexity than that of a program Standing Plan For activities that recur regularly over a period of time Policy Organization’s general response to a designated problem or situation Standard Operating Procedure Standing plan outlining steps to followed in particular circumstances Rules & Regulations Standing plan describing exactly how specific activities are to be carried out

Implement Plans Introducing any change, including new plans, is likely to meet with resistance from employees A plan is effective if it helps an organization reach it’s objectives Evaluating the effectiveness of plans may be difficult Final step in the planning process must be an assessment of the effectiveness of plans

1. Develop organizational goals & plans 2. Collaborative goal setting & planning 3. Communicating goals & plans 4. Periodic Review 5. Evaluation Management by Objective

Management by Objectives MBO is a system in which managers and subordinates set mutually agreed upon goals MBO emphasizes the achievement of results Encouraging employee participation in goal setting will improve employee motivation and performance

MBO Process 1.Set Strategic Objectives 2.Set Departmental Objectives 3.Set Individual Objectives 4.Develop Action Plans 5.Implement Plans and Review Performance 6.Take Corrective Action

MBO Process cont’d.. Set Strategic Objectives-requires management to set the organization overall objectives Set Departmental Objectives-each of the departments must set more specific goals that will help achieve the overall goals Set Individual Objectives-managers and workers negotiate specific goals

MBO Process cont’d.. Develop Action Plans-detail the specific tasks that must be done in order to fulfill the objectives that have been set Implement Plans and Review Performance-manager and subordinate meet to review the subordinate’s performance Take Corrective Action-speaks for itself

Steps in the Planning Process Purposes may be summarized in two questions: What do we want the future to be? What must we do now to increase the chance that this desired future will be achieved?

Step 1: Assessing the Organization’s Environments internal strengths and weaknesses, external opportunities and threats SWOT analysis change is the only constant attention to technological innovation increasingly global and competitive political climate

Step 2: Deciding on a Mission Statement and Establishing Goals and Objectives A mission statement defines the organization’s purpose and intentions, its long-term vision, that distinguishes it from other organizations must be customer focused must state aspirations and be achievable must serve as a source of motivation for all levels must describe specific strategies

Step 3: Creating an Action Plan Forecasting a prediction of future events, based on experience, past and current, and expectations for the future Communicate the plan clearly and precisely to those who are expected to take actions, and to others who may be affected by those actions

Step 4: Allocating Resources Resources financial, physical, human, time, and other assets of an organization that can be used to fulfil its missions, goals and objectives Budget a document that both predicts future resources and allocates resources for various purposes within the organization

Step 5: Implementing the Plan Implementation putting a plan into action by assigning people and other resources to it, and by acting to achieve its design Authority decision making power that stems from a formal position in the hierarchy, as contrasted with persuasive power that stems from the personal attributes of the person holding the position