1

Management and Planning – lecture 1 - decision-making

Geoff Leese September 2008, revised August

2009

2

Decision-making

Integral part of management Occurs in every function and at

all levels Choosing necessary or

desirable outcomes Is an iterative process Needs flair, intuition, judgment

& creativity

3

H A Simon’s phases of decision-making (1) Intelligence

search the environment for conditions calling for decisions

Design Inventing, developing and

analysing possible courses of action. Understanding the problem, generating possible solutions and testing solutions for feasibility.

4

H A Simon’s phases of decision-making (2)

Choice Selecting an alternative or course

of action from those available. The choice is then implemented

Review Assessing past choices

5

Programmed(structured) decisions

Characteristics repetitive, routine, known rules or

procedures, often automated, involve “things” rather than people, can be fairly easily delegated, more likely at lower levels of management

Examples inventory control, machine loading,

scheduling

6

Non-programmed (unstructured) decisions Characteristics

novel, non-routine, decision rules unavailable or not known, high level of uncertainty, cannot be easily delegated, can involve things but always involve people, more likely at higher levels of management

Examples recruitment, employee appraisal,

mergers, launches of new products

7

Levels of decision-making (1)

Strategic

Decision characteristics Information characteristics

Long time horizons, large scale resources, creativity & judgment,usually unstructured, problems difficultto define, much uncertainty, infrequent

Largely external, informal, qualitativeinfo important, forward looking,precision unimportant, instant access not vital, wide ranging,incomplete.

Tactical

OperationalRepetitive, frequent, shorttimescale, small scale resources,clear objectives and rules, little or no discretion

Largely internal, mainlyhistorical, detailed, high precision,often quantitative, instant accessoften critical, narrow in scope butcomprehensive

Rational!

Heuristic!

8

Strategic decision-making

Examples mergers & takeovers, new product

planning, capital investment, financial structuring

information needs Market & economic forecasts,

political & social trends, legislative, environmental and technological constraints

9

Tactical decision-making

Examples Pricing, capacity planning,

preparation of budgets, purchasing contracts

Information needs Cost & sales analyses, performance

reports, summaries of operational/production activity, budget vs. actual comparisons

10

Operational decision-making

Examples production scheduling, maintenance,

re-ordering, credit approval Information needs

Sales orders, production requirements, performance measures, customer credit status, delivery records, despatch records etc

11

Certainty, Risk and Uncertainty Certainty

only one possible outcome for each alternative, complete and accurate knowledge of that outcome

Risk many possible outcomes for each alternative,

but a value and probability can be assigned to each one

Uncertainty number of possible outcomes, probability and

value is unknown

12

Decision models

Prescriptive (normative) automatically selects best option,

e.g. CVP analysis, linear programming, investment appraisal techniques

Descriptive try to explain decision-making

behaviour - are we always rational?

13

Single, unambiguous objective

Rational decision-makingStated in numerical or financial terms

All outcomesor alternativesknown

Alternativesexpressed asobjectives

Alternativesevaluated andranked

“Best”alternativechosen

Shouldn't be used uncritically - consider “softer” issues!

14

Risk assessment (expected value) Alternative A Alternative B Alternative C Probability Profit Probability Profit Probability Profit Optimistic 0.2 9000 0.3 9500 0.1 10000 Most Likely 0.6 7500 0.5 7000 0.7 6500 Pessimistic 0.2 5000 0.2 4000 0.2 3000

Expected valuesAlternative A - (0.2*9000)+(0.6*7500)+(0.2*5000) = 7300

Alternative B - (0.3*9500)+0.5*7000)+(0.2*4000) = 7150

Alternative C - (0.1*10000)+(0.7*6500)+(0.2*3000) = 6150

If objective is to maximise expected value, Alternative A is preferred.

15

Decision trees

D1

D2

D3

Action A1

Action A2Outcome Y1

Outcome Y2

Outcome X1

Outcome X3

Outcome X2

Action B1

Action C1

Decision node

Outcome node

16

Satisficing (1) Know all alternatives? Single, clear-

cut objective? Imperfect world! Limited search for a few

satisfactory alternatives Bounded rationality within

limitations of imperfect info and decision makers perceptions

Decision made which satisfies aspirations (that’s good enough!)

17

Satisficing (2)

Very, very common! Subjectivity, rule of thumb and

judgment often used instead of mechanistic decision rules

MIS needs to supply background info and ways of finding alternatives, not mechanical decision rules

18

Consensus decision-making

Most appropriate to small changes (conventional view)

Japanese think differently! What’s the question? Decision-making can be

protracted, but once taken implementation follows swiftly and effectively

19

“Quality” decisions? Consideration of full range of objectives Explicit statement of objective conflict Wide range of alternatives Careful evaluation of costs & risks All available sources of info used Expert opinion used Re-examination, iteration Detailed planning for implementation Review effectiveness of past decisions

20

Decision-making and MIS (1)

Supplies information, explores alternatives, provides support where manager makes the decision

or MIS takes the decision itself. Most

appropriate with routine operations where decision rules are known

21

Decision-making and MIS (2)

Stru

cture

dSem

i structu

red

Unstru

cture

d

Strategicmanagement

Tactical management

OperationalManagement

Executive info systems

Expert systems, DSS

Transaction processingADM, OR &Accounting models

22

Further Reading Cole G (1996) Management Theory and

Practice, DP publications Chapter 19 Elliot G & Starkings S (1998), Business

Information Technology (Prentice Hall) Chapters 2 and 7

Hannagan T(1998), Management Concepts and Practices, FT Pitman Chapter 13

Someone else's view! (follow the link)  Decision making tools (follow the link)