Unit 3 Decision Making, Planning & Strategy PDF

3 The Manager as a Decision Maker Managerial Decision Making Decision making: the process by which managers respond to opportunities and threats by analyzing options, and making decisions about goals and courses of action. Decisions in response to opportunities: manag...

3 The Manager as a Decision Maker Managerial Decision Making Decision making: the process by which 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 Decisions: routine, almost automatic process. Managers have made decision many times before. There are rules or guidelines to follow. Example: Deciding to reorder office supplies. Non-programmed Decisions: unusual situations that have not been often addressed. No rules to follow since the decision is new. These decisions are made based on information, and a manger’s intuition, and judgment. Example: Should the firm invest in a new technology? The Classical Model Classical model of decision making: a prescriptive model that tells how the decision should be made. Assumes managers have access to all the information needed to reach a decision. Managers can then make the optimum decision by easily ranking their own preferences among alternatives. Unfortunately, mangers often do not have all (or even most) required information. The Classical Model Figure 6.1 List alternatives Assumes all information & consequences is available to manager Rank each alternative Assumes manager can from low to high process information Assumes manager knows Select best alternative the best future course of the organization The Administrative Model Administrative Model of decision making: Challenged the classical assumptions that managers have and process all the information. As a result, decision making is risky. Bounded rationality: There is a large number of alternatives and information is vast so that managers cannot consider it all. Decisions are limited by people’s cognitive abilities. Incomplete information: most managers do not see all alternatives and decide based on incomplete information.  Why Information is Incomplete Figure 6.2 Uncertainty Ambiguous & risk Information Incomplete Information Time constraints & information costs Incomplete Information Factors Incomplete information exists due to many issues: Risk: managers know a given outcome can fail or succeed and probabilities can be assigned. Uncertainty: probabilities cannot be given for outcomes and the future is unknown. Many decision outcomes are not known such as a new product introduction. Ambiguous information: information whose meaning is not clear. Information can be interpreted in different ways.  Incomplete Information Factors Time constraints and Information costs: Managers do not have the time or money to search for all alternatives. This leads the manager to again decide based on incomplete information. Satisficing: Managers explore a limited number of options and choose an acceptable decision rather than the optimum decision. This is the response of managers when dealing with incomplete information. Managers assume that the limited options they examine represent all options.  Decision Making Steps Figure 6.4 Recognize need for a decision Frame the problem Generate & assess alternatives Choose among alternatives Implement chosen alternative Learn from feedback  Decision Making Steps 1. Recognize need for a decision: Managers must first realize that a decision must be made. Sparked by an event such as environment changes. 2. Generate alternatives: managers must develop feasible alternative courses 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. 3. Evaluate alternatives: what are the advantages and disadvantages of each alternative? Managers should specify criteria, then evaluate.  Decision Making Steps 4. Choose among alternatives: managers rank alternatives and decide. When ranking, all information needs to be considered. 5. Implement choose alternative: managers must now carry out the 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 make the same mistake over. Exhibit 6–1 The Decision-Making Process  Evaluating Alternatives Figure 6.5 Is the possible course of action: Legal? Ethical Economical? Practical? Evaluating Alternatives 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 Suggests decision makers use heuristics to deal with bounded rationality. A heuristic is a rule of thumb to deal with complex situations. If the heuristic is wrong, however, then poor decisions result from its use. 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 Figure 6.6 Prior Hypothesis Representativeness Cognitive Biases Illusion of Control Escalating Commitment Types of Cognitive Biases 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 feedback indicates problems. Group Decision Making Many decisions are made in a group setting. Groups tend to reduce cognitive biases and can call on combined skills, and abilities. There are some disadvantages with groups: Group think: biased decision making resulting from group members striving for agreement. Usually occurs when group members rally around a central manger’s idea (CEO), and become blindly committed without considering alternatives. The group tends to convince each member that the idea must go forward.  Improved Group Decision Making Devil’s Advocacy: one member of the group acts as the devil’s advocate and critiques the way the group identified alternatives. Points out problems with the alternative selection. Dialectical inquiry: two different groups are assigned to the problem and each group evaluates the other group’s alternatives. Top managers then hear each group present their alternatives and each group can critique the other. Promote diversity: by increasing the diversity in a group, a wider set of alternatives may be considered. Devil’s Advocacy v. Dialectic Inquiry Figure 6.7 Devil’s Advocacy Dialectic Inquiry Presentation of Alter. 1 Alter. 2 alternative Critique of Debate the two alternative alternatives Reassess Reassess alternative alternatives accept, modify, reject accept 1 or 2, combine Organizational Learning & Creativity Organizational Learning: Managers seek to improve member’s ability to understand the organization and environment so as to raise effectiveness. The learning organization: managers try to improve the people’s ability to behave creatively to maximize organizational learning. Creativity: is the ability of the decision maker to discover novel ideas leading to a feasible course of action. A creative management staff and employees are the key to the learning organization.  Senge’s Learning Organization Principles Figure 6.8 Build complex, Develop Personal challenging Mastery mental models Encourage Systems Thinking Build Shared Promote Team Learning Vision  Creating a Learning Organization Senge suggests top managers follow several steps to build in learning: 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: a people share a common mental model of the firm to evaluate opportunities. Systems Thinking: know that actions in one area of the firm impacts all others. Individual Creativity Organizations can build an environment supportive of creativity. Many of these issues are the same as for the learning organization. Managers must provide employees with the ability to take risks. If people take risks, they will occasionally fail. Thus, to build creativity, periodic failures must be rewarded. This idea is hard to accept for some managers.  Building 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. 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. Members cannot absorb all information being presented during the session and can forget their own alternatives. Building Group Creativity 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. Building Group Creativity 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 allows distant managers to participate.  3a The Manager as a Planner and Strategist The Planning Process Planning is the process used by managers to identify and select goals and courses of action for the organization. The organizational plan that results from the planning process details the goals to be attained. The pattern of decisions managers take to reach these goals is the organization’s strategy. Three Stages of the Planning Process Figure 7.1 Determining the Organization’s mission and goals (Define the business) Strategy formulation (Analyze current situation & develop strategies) Strategy Implementation (Allocate resources & responsibilities to achieve strategies) Planning Process Stages Organizational mission: defined in the mission statement which is a broad declaration of the overriding purpose. The mission statement identifies product, customers and how the firm differs from competitors. Formulating strategy: managers analyze current situation and develop strategies needed to achieve the mission. Implementing strategy: managers must decide how to allocate resources between groups to ensure the strategy is achieved.  Levels of Planning Figure 7.2 Corporate- Business- Functional level Plan level Plan level Plan Corporate Divisional Functional Goal mission & goals goals goals Setting Corporate- Business- Functional- Strategy level strategy level strategy level strategy Formulation Design of Design of Design of Corporate Business-unit Functional Strategy Structure Structure Structure Implementation Control Control Control  Planning at General Electric Figure 7.3 CEO Corporate Level Corporate Office Business Level GE GE GE GE NBC Aircraft Lighting Motors Plastics Functional Level Manufacturing Accounting Marketing R&D Planning Levels Corporate-level: decisions by top managers. Considers on which businesses or markets to be in. Provides a framework for all other planning. Business-level: details divisional long-term goals and structure. Identifies how this business meets corporate goals. Shows how the business will compete in market. Functional-level: actions taken by managers in departments of manufacturing, marketing, etc. These plans state exactly how business-level strategies are accomplished. Characteristics of Plans Time horizon: refers to how far in the future the plan applies. Long-term plans are usually 5 years or more. Intermediate-term plans are 1 to 5 years. Corporate and business level plans specify long and intermediate term. Short-term plans are less than 1 year. Functional plans focus on short to intermediate term. Most firms have a rolling planning cycle to amend plans constantly. Types of Plans Standing plans: for programmed decisions. Managers develop policies, rules, and standard operating procedures (SOP). Policies are general guides to action. Rules are a specific guide to action. Single-use plans: developed for a one-time, nonprogrammed issue. Usually consist of programs and projects. Programs: integrated plans achieving specific goals. Project: specific action plans to complete programs. Who Plans? Corporate level planning is done by top managers. Also approve business and functional level plans. Top managers should seek input on corporate level issues from all management levels. Business and functional planning is done by divisional and functional managers. Both management levels should also seek information from other levels. Responsibility for specific planning may lie at a given level, but all managers should be involved. Why Planning is Important Planning determines where the organization is now and where it will be in the future. Good planning provides: Participation: all managers are involved in setting future goals. Sense of direction & purpose: Planning sets goals and strategies for all managers. Coordination: Plans provide all parts of the firm with understanding about how their systems fit with the whole. Control: Plans specify who is in charge of accomplishing a goal. Scenario Planning Scenario Planning: generates several forecasts of different future conditions and analyzes how to effectively respond to them. Planning seeks to prepare for the future, but the future is unknown. By generating multiple possible “futures” we can see how our plans might work in each. Allows the firm to prepare for possible surprises. Scenario planning is a learning tool to improve planning results.  Determining Mission and Goals This is the first step of the planning process and is accomplished by: A. Define the business: seeks to identify our customer and the needs we can and should satisfy. This also pinpoints competitors. B. Establishing major goals: states who will compete in the business. Should stretch the organization to new heights. Goals must also be realistic and have a time period in which they are achieved. Mission Statements Figure 7.4 Company Mission Statement Compaq, along with our partners, will deliver compelling products and services of the Compaq highest quality that will transform computing into an intuitive experience that extends human capability on all planes -- communication, education, work, and play. We are dedicated to being the world’s best at AT&T bringing people together -- giving them easy access to each other and to the information and services they want and need -- anytime, anywhere. Strategy Formulation Managers analyze the current situation to develop strategies achieving the mission. SWOT analysis: a planning to identify: Organizational Strengths and Weaknesses. Strengths: manufacturing ability, marketing skills. Weaknesses: high labor turnover, weak financials. Environmental Opportunities and Threats. Opportunities: new markets. Threats: economic recession, competitors  Planning & Strategy Formulation Figure 7.5 Corporate-level strategy develop a plan of action maximizing long-run value SWOT analysis identifies strengths & Business-level strategy weaknesses inside the a plan of action to take firm and opportunities advantage of opportunities & threats in the and minimize threats environment. Functional-level strategy a plan of action improving department’s ability to create value The Five Forces Model Potential for Entry Power of Rivalry Power of Buyer Among Supplier Organizations Substitute Products The Five Forces 1. Level of Rivalry in an industry: how intense is the current competition with competitors? Increased competition results in lower profits. 2. Potential for entry: how easy is it for new firms to enter the industry? Easy entry leads to lower prices and profits. 3. Power of Suppliers: If there are only a few suppliers of important items, supply costs rise. 4. Power of Buyers: If there are only a few, large buyers, they can bargain down prices. 5. Substitutes: More available substitutes tend to drive down prices and profits. Corporate-Level Strategies Concentrate in single business: McDonalds focuses in the fast food business. Can become very strong, but can be risky. Diversification: Organization moves into new businesses and services. Related diversification: firm diversifies in similar areas to build upon existing divisions. Synergy: two divisions work together to obtain more than the sum of each separately. Unrelated diversification: buy business in new areas. Build a portfolio of unrelated firms to reduce risk or trouble in one industry. Very hard to manage. International Strategy To what extent do we customize products and marketing for different national conditions? Global strategy: a single, standard product and marketing approach is used in all countries. Standardization provides for lower cost. Ignore national differences that others can address. Mulitdomestic strategy: products and marketing are customized for each country of operation. Customization provides for higher costs. Embraces national differences and depends on them for success. Vertical Integration When the firm is doing well, managers can add more value by producing its own inputs or distributing its products. Backward vertical integration: the firm produces its own inputs. McDonalds grows its own potatoes. Can lower the cost of supplies. Backward vertical integration: the firm distributes its outputs or products. McDonalds owns the final restaurant. Firm can lower costs and ensure final quality.  Vertical Value Chain Figure 7.6 Raw Materials Intermediate Manufacturing Assembly Distribution Customer Backward Forward Business-level Strategies Table 7.2 market segments Many Low-Cost Differentiation Number of Few Focused Focused Low-Cost Differentiated Low Cost Differentiation Strategy Business Strategies Low-cost: gain a competitive advantage by driving down organizational costs. Managers manufacture at lower cost, reduce waste. Lower costs than competition mean lower prices. Differentiation: gain a competitive advantage by making your products different from competitors. Differentiation must be valued by the customer. Successful differentiation allows you to charge more for a product. Stuck in the middle: It is difficult to simultaneously become differentiated and low cost. Business Strategies Firms also choose to serve the entire market or focus on a few segments. Focused low-cost: try to serve one segment of the market but be the lowest cost in that segment. Cott Company seeks to achieve this in large retail chains. Focused differentiated: Firm again seeks to focus on one market segment but is the most differentiated in that segment. BMW provides a good example. Functional-level Strategies Seeks to have each department add value to a good or service. Marketing, service, production all add value to a good or service. Value is added in two ways: 1. lower the operational costs of providing the value in products. 2. add new value to the product by differentiating. Functional strategies must fit with business level strategies. Goals for successful functional strategies: 1. Attain superior efficiency: the measure of outputs for a given unit of input. 2. Attain superior quality: products that reliably do the job they were designed for. 3. Attain superior innovation: new, novel features about the product or process. 4. Attain superior responsiveness to customers: Know the customer needs and fill them. End of LU 3