Organization and Management

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Planning and Decision Making 2

Planning and Decision Making 2

In today's business world is quiet tough as trends and preferences of

customers are constantly changing. In addition, rapidly growing of
technology have greatest impact to changes aligning of the business
strategies. An underlying theme of discussing strategic management or the
tools and techniques of business planning can lead to high organizational
performance.
Topic Outline:
1. Strategic Management
2. Planning techniques and tools
3. Application of tools and techniques
4. Decision making

Strategic Management
Strategic Management
− is the process through which managers formulate and implement
strategies geared to optimizing goal achievement, given available
environmental and internal conditions.
− set of managerial decisions and actions that determines the long-run
performance of an organization. It entails all of the basic management
function-planning, organizing, leading, and controlling.
Purpose of Strategic management
 exploit and create new and different opportunities for tomorrow;
 long-range planning, in contrast, tries to optimize for tomorrow the
trends of today.
Strategic Management is important to organizations because it
1. helps organizations identify and develop a competitive advantage, a
significant edge over the competition in dealing with competitive
forces.
2. Provides a sense of direction so that organization members know
where to expend their efforts.
Strategy
The determination of the mission or purpose and the basic long-term
objectives of an enterprise, followed by the adoption of courses of action and
allocation of resources necessary to achieve these aims.

Course Module
Strategic Planning Process
Stages in planning process:
1. Strategy Formulation
2. Strategy implementation
3. Strategy evaluation
Strategy Formulation includes:
 developing a vision and mission,
 identifying an organization's external opportunities and threats,
 determining internal strengths and weaknesses,
 establishing long-term objectives,
 generating alternative strengths,
 choosing particular strategies to pursue.
Strategy Implementation requires the firm to establish annual objectives,
devise policies, motivate employees, and allocate resources so that
formulated strategies can be executed. These are:
 developing a strategy-supportive culture,
 creating an effective organizational structure
 redirecting marketing efforts,
 preparing budgets,
 developing and utilizing information systems,
 linking employee compensation to organizational performance.
Strategy Evaluation is the final stage in strategic planning. Managers need
to know when particular strategies are not working well, strategy evaluation
is the primary means for obtaining this information.
Three fundamental strategy evaluation activities are constantly changing:
1. reviewing external and internal factors that the bases for current
strategies,
2. measuring performance;
3. taking corrective actions.
Strategy evaluation is needed because success today is no guarantee of
success tomorrow.
Strategic planning is a process undertaken by an organization to develop a
plan for achievement of its overall long-term organizational goal.
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Planning and Decision Making 2

Mission & Objectives

Environmental Scanning

Strategy Formulation

Strategy Implementation

Evaluation & control

A. Mission and Objectives

 Every organization needs a mission, which defines the purpose of the
organization. What is the organization's reason for being in business?
 It's also important to identify the organization's current objectives
and strategies, as well.
B. Environmental Scanning
 It is important to analyze the environment because, it defines
management's strategic option.
 The environmental scanning includes the following components:
o Internal analysis of the firm
o Analysis of the firm's industry (task environment)
o External macro environment (PEST analysis)
C. Strategy Formulation
 Given from the environmental scan, the firm should match its
strengths to the opportunities that it has identified, while addressing
it weaknesses and external threats.
 To attain superior profitability, the firm seeks to develop a
competitive advantage over its rivals.
 A competitive advantage can be based on cost or differentiation (or
formulating strategy such as (Michael Porter's Strategy)
D. Strategy Implementation
 The selected strategy is implemented by means of programs, budgets,
and procedures.
 Implementation involves organization of the firms' resources and
motivation of the staff to achieve objectives.
E. Evaluation & Control

Course Module
 The implementation of the strategy must be monitored and adjustments
made as needed. Evaluation and Control consists of the following steps:
Evaluation and control consists of the following steps:
1. Define parameters to be measured
2. Define target values for those parameters
3. Perform measurements
4. Compare measured results to the pre-defined standard
5. Make necessary changes.
Major Planning Tools and Techniques
The planning tools and techniques that managers use are identified and
described below:
A. FORECASTING: is the process of developing assumptions about the future
that relevant to the predicted level of certain planning variables (i.e.,
company future sales).
 Qualitative forecasting uses expert opinions.
 Quantitative forecasting uses mathematical and statistical analysis.
 All forecast rely on judgment.
 Planning involves deciding on how to deal with the implications of
a forecast.
B. CONTINGENCY PLANNING: involves identifying alternative courses of
action that can be implemented, if and when an original plan proves
inadequate because of changing circumstances.
 Contingency plans anticipate changing conditions.
 Contingency plans contains trigger points.
C. SCENARIO PLANNING: is a long-term version of contingency planning
that involves identifying several alternative future scenarios or states of
affairs that may occur, and then making plans to deal with each scenario
should it actually occur.
 Plans made for each future scenario. Increases organization’s
flexibility and preparation for future shocks.
D. BENCHMARKING: is a technique that makes use of internal and external
comparisons to better evaluate current performance and identify possible
actions to improve the future. Adopting best practices of other
organizations that achieve superior performance.
E. BRAK-EVEN ANALYSIS: this is one of the most widely used planning tools
in business. The technique can be used for analyzing the effect on profits
of different pricing strategies or different alternatives in incurring costs.
F. LINEAR PROGRAMMING: is a quantitative tools for determining the
optimal combination of resources and activities. it can be used for
production scheduling, allocation of marketing personnel to territories or
allocation of production inputs to produce an item at minimum cost.
G. SIMULATION MODEL: are mathematical representations of some aspect
of a business operation. Simulation models are used when the planning
variables, as well as their interrelationships, are so numerous and
complex that it is difficult to analytically assess the net effect of a change
in one or a number of the variables involved.
Simulation is useful in complex situations such as predicting product
demand considering the effect of changes in the pricing policies of
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Planning and Decision Making 2

competitors, or the effect of a change in foreign exchange rate on

company profits considering changes in minimum wage and inflation
rates.
H. STAFF PLANNERS: are persons who take responsibility for leading and
coordinating the planning function for the total organization or one of its
major components.
Staff planners responsibilities include:
 – Assisting line managers in preparing plans.
 – Developing special plans.
 – Gathering and maintaining planning information.
 – Assisting in communicating plans.
 – Monitoring plans in progress and suggesting changes.

Participation and Involvement

Participatory planning requires that the planning process include people
who will be affected by the plans and/or will help implement them.
Benefits of participation and involvement:
 Promotes creativity in planning.
 Increases available information.
 Fosters understanding, acceptance, and commitment to the final plan.

Management by Objectives (MBO)

 MBO was first described by Peter Drucker and consists of four
elements:
o Goal specify
o Participative decision making
o Explicit time period
o Performance feedback
 MBO makes objectives operational through the process by which they
cascade down through the organization

Strengths of MBO
1. Aids coordination of goals and plans
2. Helps clarify priorities and expectations
3. Facilitates vertical and horizontal communications
4. Fosters employee motivation
Weaknesses of MBO
1. Tends to falter without strong continual commitment from top
management.
2. Necessities considerable training of managers
3. Can be misused as a punitive device.
4. May cause overemphasis of quantitative goals.

Course Module
MBO Process
1. Superior communicate to subordinate the higher organizational goals
and the expected subordinate accomplishments;
2. Superiors discuss with subordinate
3. Subordinates goals and both parties should agree on a set of
objectives.
4. Resources required to attain goals
5. Periodic reviews should be conducted to monitor performance and to
discuss reasons for deviations of actual performance from targets.
6. Manager or superior discusses evaluation of subordinate the reward
given or punishment.

Decision making
The selection of a course of action from among alternatives.
• Decision making is the core of planning. A plan cannot be said to exist
unless a decision-a commitment of resources, direction, or reputation-
has been made.
• In decision making process managers respond to opportunities and
threats by analyzing options, and making decisions about goals and
courses of action.
Decisions in response to opportunities:
Managers respond to ways to improve organizational performance.
Decisions in response to threats:
Occurs when managers are impacted by adverse events to the organization.

Types of Decision Making

Programmed (structured) Decision
• These decisions are made by operational managers.
• Used for structured or routine work.
• Managers have made decision many times before.
• There are rules or guidelines to follow.
• It involves operational issues and has a very short time effect.
Example: Deciding to reorder office supplies

Non-Programmed (Unstructured) Decision

• The decision are made by senior management.
• Used for unstructured, novel, and ill-defined situations of a nonrecurring
nature. It is a non routine type decision
• No rules to follow since the decision is new.
• These decisions are made based on information, and a manager’s
intuition, and judgment.
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• It includes strategic issues and long term effect of decision.

Example: should the firm invest in a new technology?

• Semi-Programmed (Semi-Structured) Decision

• Decisions are made by middle management.
• It is both routine and non routine type decisions.
• Usually it gives a clear cut solution of a problem.
• There is both structured and unstructured procedure for decision
making.
Example: Allocate resources to managers; develop a marketing plan.

Decision Making Process Steps

Recognize Generate &

Frame the
need for asses
problem
decision alternatives

Implement
Choose among Learn from
chosen
alternatives feedback
alternative

1. Recognize need for a decision:

Managers must first realize the need for which a decision must be made.
2. Frame the problem:
Managers must frame problem for which decision is to be made.
3. Generate & assess alternatives
Generate alternatives: managers must develop feasible alternative cours es of
action.
 If good alternatives are missed, the resulting decision is poor.
 It is hard to develop creative alternatives, so managers need to look
for new ideas.
Evaluate alternatives: what are the advantages and disadvantages of each
alternatives?
 Managers should specify criteria, then evaluate.
4. Choose among alternatives
Managers rank alternatives and decides.
While ranking, all information needs to be considered.
Course Module
5. Implement chosen alternative
Managers must now carry out alternative.
 Often a decision is made and not implemented.
6. Learn from feedback
Managers should consider what went right and wrong with the decision and
learn for the future.
 Without feedback, managers never learn from experience and might
repeat the same mistake.

Evaluating Alternatives

Legal?

Ethical?

Economical?

Practical?

Figure 5.3

Is it legal? Managers must first be sure that an alternative is legal both in

this country and abroad for exports.
Is it ethical? The alternative must be ethical and not hurt stakeholders
unnecessarily.
Is it economically feasible? Can our organization’s performance goals
sustain this alternative?
Is it practical? Does the management have the capabilities and resources to
do it?

Cognitive Biases
− Suggest decision makers use heuristics to deal with bounded
rationality.
 A heuristic is a rule o thumb to deal with complex situations.
 If the heuristic is wrong, however, then poor decisions result from its
use
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Sometimes when there seem to be too many alternatives to choose from,

managers rely on their own decision rules. These decision rules are called
heuristics, and they allow complex judgments to be made more simply.
Because of theses heuristics, decisions may vary with the characteristics or
biases of the decision maker. Individual biases are product of each decision
maker’s cognitive structures and are necessary to prevent decision makers
from becoming paralyzed when analyzing extensive data. The values and
cognitive biases of the organization’s top managers are seem in the
organization’s strategies and effectiveness.
Systematic errors can result from use of an incorrect heuristic.
 These errors will appear over and over since the rule used to make
decision is flawed.
Types of Cognitive Biases

Representativeness Illusion control

Escalating
Prior hypothesis
commitment

Cognitive
biases

Figure 5.4
 Prior hypothesis bias: manager allows strong prior beliefs about
a relationship between variables and makes decisions based on
these beliefs even when evidence shows they are wrong.
 Representativeness: decision maker incorrectly generalizes a
decision from a small sample or one incident.
 Illusion of control: manager over-estimates their ability to
control events.
 Escalating commitment: manager has already committed
considerable resource to project and then commits more even
after indicates problems.
Course Module
Three Approaches for Selecting and Alternative
When selecting from among alternatives, managers can use three basic
approaches:
1. Experience
Reliance on past experience probably plays a larger part than it deserves in
decision making. Experienced managers usually believe, often without
realizing it, that the things they have successfully accomplished and the
mistakes they have made serve as almost infallible guides to the future. This
attitude is likely to be more pronounced the more experience a manager has
had and the higher he or she has risen in an organization.
Relying on past experience as a guide for future action can be dangerous. In
the first place, most people do not recognize the underlying reasons for their
mistakes or failures. In the second place, the lessons of experience may be
entirely inapplicable to new problems. Good decisions must be evaluated
against future events, while experience belongs to the past.
On the other hand, if a person carefully analyzes experience, rather than
blindly following it, and if he or she distills from experience the fundamental
reasons for success or failure, then experience can be useful as a basis for
decision analysis. A successful program, a well-managed company, a
profitable product promotion, or any other decision that turns out well may
furnish useful data for such distillation. Just as scientists do not hesitate to
build upon the research of others and would be foolish indeed merely to
duplicate it, managers can learn much from others.

2. Experimentation
An obvious way to decide among alternatives is to try one of them and see
what happens. Experimentation is often used in scientific inquiry. People
often argue that it should be employed more often in managing and that the
only way a manager can make sure some plans are right— especially in view
of the intangible factors—is to try the various alternatives and see which is
best.
The experimental technique is likely to be the most expensive of all
techniques, especially if a program requires heavy expenditures of
capital
and personnel and if the firm cannot afford to vigorously attempt
several alternatives. Besides, after an experiment has been tried, there may
still be doubt about what it proved, since the future may not duplicate
the present. This technique, therefore, should be used only after
considering other alternatives.
On the other hand, there are many decisions that cannot be made until
the best course of action can be ascertained by experiment. Even
reflections on experience or the most careful research may not assure
managers of correct decisions. This is nowhere better illustrated than in the
planning of a new airplane.
An airplane manufacturer may draw from personal experience and that
of other plane manufacturers and new plane users. Engineers and
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economists may make extensive studies of stress, vibration, fuel

consumption, speed, space allocation, and other factors. But all these studies
do not answer every question about the flight characteristics and
economics of a successful plane; therefore, some experimentation is
almost always involved in the process of selecting the right course to follow.
Ordinarily, a first-production, or prototype, airplane is constructed and
tested; and on the basis of these tests, production airplanes are made
according to a somewhat revised design.
Experimentation is used in other ways. A firm may test a new product in a
certain market before expanding its sale nationwide. Organizational
techniques are often tried in a branch office or plant before being applied
over an entire company. A candidate for a management job may be tested in
the job during the incumbent's vacation.

3. Research and analysis

One of the most effective techniques for selecting from alternatives when
major decisions are involved is research and analysis. This approach means
solving a problem by first comprehending it. It thus involves a search for
relationships among the more critical of the variables, constraints, and
premises that bear upon the goal sought. It is the pencil-and-paper (or,
better, the computer-and-printout) approach to decision making.
Solving a planning problem requires breaking it into its component parts and
studying the various quantitative and qualitative factors. Study and analysis
is likely to be far cheaper than experimentation. The hours of time and reams
of paper used for analyses usually cost much less than trying the various
alternatives. In manufacturing airplanes, for example, if careful research did
not precede the building and testing of the prototype airplane and its parts,
the resulting costs would be enormous.
A major step in the research-and-analysis approach is to develop a model
simulating the problem. Thus, architects often make models of buildings in
the form of extensive blueprints or three-dimensional renditions. Engineers
test models of airplane wings and missiles in a wind tunnel. But the most
useful simulation is likely to be a representation of the variables in a problem
situation by mathematical terms and relationships. Conceptualizing a
problem is a major step toward its solution. The physical sciences have long
relied on mathematical models to do this,
and it is encouraging to see this method being applied to managerial decision
making.
Decision Making Conditions
Decision Making under Certainty:
• Exact and complete information of the consequence of every decision
option.
Course Module
• Decision maker knows alternatives and their outcomes well.
Decision Making under Risk:
• Available alternatives and their consequences are known but risky.
• Alternatives are assessed by calculating the expected probability value of
their outcomes. The outcome with the maximum payoff is selected.
Decision Making under Uncertainty:
• Decision making is not aware of the risks or outcomes of the decision
alternatives.
• Decision making can use Max-Min or Max-Max criterion.
All intelligent decision makers dealing with uncertainty like to know the
degree and nature of the risk they are taking in choosing a course of action.
One of the deficiencies in using the traditional approaches of operations
research for problem solving is that many of the data used in a model are
merely estimates and others are based on probabilities. The ordinary
practice is to have staff specialists come up with "best estimates.“ Virtually
every decision is based on the interaction of a number of important variables,
many of which have an element of uncertainty but, perhaps, a fairly high
degree of probability. Thus, the wisdom of launching a new product might
depend on a number of critical variables: the cost of introducing the product,
the cost of producing it, the capital investment that will be required, the
price that can be set for the product, the size of the potential market, and the
share of the total market that it will represent.

Creativity and Innovation

• Creativity refers to the ability and power to develop new ideas.
• Innovation, on the other hand, usually means the use of these ideas.
An important factor in managing people is creativity. A distinction can be
made between creativity and innovation. The term creativity usually refers to
the ability and power to develop new ideas.
Innovation, on the other hand, usually means the use of these ideas. In an
organization, this can mean a new product, a new service, or a new way of
doing things.
Although this discussion centers on the creative process, it is implied that
organizations not only generate new ideas but also translate them into
practical applications.

The Creative Process

The creative process is seldom simple and linear. Instead, generally it
consists of four overlapping and interacting phases:
(1) unconscious scanning,
The first phase, unconscious scanning is difficult to explain because it is
beyond consciousness. This scanning usually requires an absorption in
the problem, which may be vague in the mind. Yet managers working
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under time constraints often make decisions prematurely rather than

dealing thoroughly with ambiguous, ill-defined problems.

(2) intuition,
The second phase, intuition, connects the unconscious with the conscious.
This stage may involve a combination of factors that may seem
contradictory at first. Intuition needs time to work. It requires that people
find new combinations and integrate diverse concepts and ideas. Thus,
one must think through the problem. Intuitive thinking is promoted by
several techniques, such as brainstorming.

(3) insight, and

Insight, the third phase of the creative process, is mostly the result of
hard work. For example, many ideas are needed in the development of a
usable product, a new service, or a new process. What is interesting is
that insight may come at times when the thoughts are not directly
focused on the problem at hand. Moreover, new insights may last for only
a few minutes, and effective managers may benefit from having paper and
pencil ready to make notes of their creative ideas.

(4) logical formulation.

, The last phase in the creative process is logical formulation or verification.
Insight needs to be tested through logic or experiment. This may be
accomplished by continuing to work on an idea or by inviting critiques from
others. Brown and Sloan's idea of decentralization, for example, needed to be
tested against organizational reality.

Building Group Creativity

There are different techniques for building group creativity:
Brainstorming: managers must face-to-face to generate and debate many
alternatives.
• Group members are not allowed to evaluate alternatives until all
alternatives are listed.
• Be creative and radical in stating alternatives.
• When all are listed, then the pros and cons of each are discussed and a
short list created.
Production blocking: is a potential problem with brainstorming.

Course Module
 • Members cannot absorb all information being presented during the
session and can forget their own alternatives.
Nominal group technique: provides a more structured way to generate
alternatives in writing.
• Avoids the production blocking problem.
• Similar to brainstorming except that each member is given time to first
write down all alternatives he or she would suggest.
• Alternatives are then read aloud without discussion until all have been
listed.
• Then discussion occurs and alternatives are ranked.
Delphi technique: provides for a written format without having all
managers meet face-to-face.
• Problem is distributed in written form to managers who then generate
written alternatives.
• Responses are received and summarized by top managers.
• These results are sent back to participants for feedback, and ranking.
• The process continues until consensus is reached.
Delphi technique allow distant managers to participate.

References:
Rodriguez, R.A., "Fundamentals of Management"
Wiehrich, H., Cannice, M.V., Koontz, H., "Management, A Global and Entrepreneurial
Perspective, 13th Ed."
John Schermerhorn's. Management 11th edition, (2010), John Wiley & Sons ISBN: