Chapter four Planning

Requirements for this chapter Define decision and the decision-making process. Discuss the assumptions of rational decision making. Describe the four decision-making styles. Discuss the twelve decision-making biases managers may exhibit and the way to solve. Define planning. Describe different types of plans.

Requirements for this chapter Explain how to establishing goals and developing plans List different techniques for planning. Define strengths, weaknesses, opportunities, and threats. Describe what strategies each level of management is typically responsible for. Explain the rule of three and its significance to strategic management.

Content of the chapter ★ Decision making ★ Foundation of planning ★ Strategic management

Decision-making controlling leading planning organizing

Planning is a very important part of management Decision-making Well begun is half done! Planning is a very important part of management

Minimizing waste and redundancy Establishing standards for controlling Decision-making Why planning is so important? Providing direction Minimizing waste and redundancy Establishing standards for controlling Reducing uncertainty

Decision-making

Decision making Decision: Making a choice from two or more alternatives. planning organizing leading controlling Making decision

Nobel Prize Winner in Economics Decision making Management is making decision Nobel Prize Winner in Economics Herbert Alexander Simon 1916- 2001

Types of decision decision Types of decision of decision of decision Top management decision Types of decision Levels of decision Middle-management decision First-line management decision Programmed decision Whether decision is repeated Nonprogrammed decision Strategic decision Types of decision Importance of decision Tactic decision Certainty decision Certainty of decision Decision with single goal Risk decision Uncertainty decision Decision with multi-goals Who to decide Individual decision Number of decision goals Group decision

Decision making Structured Problems Involve goals that are clear Involve goals that are familiar (have occurred before) Involve goals that are easily and completely defined—information about the problem is available and complete Unstructured Problems Problems that are new or unusual and for which information is ambiguous or incomplete. Problems that will require custom-made solutions.

Decision making Programmed Decision A repetitive decision that can be handled by a routine approach. Nonprogrammed Decisions Decisions that are unique and nonrecurring. Decisions that generate unique responses.

Decision making Types of Programmed Decisions A Procedure: A series of interrelated steps that a manager can use to respond (applying a policy) to a structured problem. A Rule: An explicit statement that limits what a manager or employee can or cannot do in carrying out the steps involved in a procedure. A Policy: A general guideline for making a decision about a structured problem.

Decision making Nonprogrammed decisions Programmed decisions unstructured top Nonprogrammed decisions Type of problem Level in organization Programmed decisions structured lower

Decision making Decision-Making Conditions Certainty: A ideal situation in which a manager can make an accurate decision because the outcome of every alternative choice is known. Risk: A situation in which the manager is able to estimate the likelihood (probability) of outcomes that result from the choice of particular alternatives.

Decision making Uncertainty: Limited or information prevents estimation of outcome probabilities for alternatives associated with the problem and may force managers to rely on intuition, hunches, and “gut feelings”. Maximax: the optimistic manager’s choice to maximize the maximum payoff Maximin: the pessimistic manager’s choice to maximize the minimum payoff Minimax: the manager’s choice to minimize his maximum regret.

The decision-making process Identification of a problem Identification of decision criteria Allocation of weights to criteria Development of alternatives Analysis of alternatives Selection of an alternative Implementation of the alternative Evaluation of decision effectiveness

The decision-making process Identification of a problem Identification of decision criteria Allocation of weights to criteria Development of alternatives Analysis of alternatives Selection of an alternative Implementation of the alternative Evaluation of decision effectiveness

Decision-making Criteria development Future conditions Own Interest Salary Criteria conditions Own Interest

The decision-making process Identification of a problem Identification of decision criteria Allocation of weights to criteria Development of alternatives Analysis of alternatives Selection of an alternative Implementation of the alternative Evaluation of decision effectiveness

Decision-making Example Criteria Weight 1 Salary 10 2 Interest 9 3 Future development 7 4 Own conditions 5

The decision-making process Identification of a problem Identification of decision criteria Allocation of weights to criteria Development of alternatives Analysis of alternatives Selection of an alternative Implementation of the alternative Evaluation of decision effectiveness

Decision-making Bank managers Researchers Enterprise managers Civil servants Teachers Entrepreneurs

The decision-making process Identification of a problem Identification of decision criteria Allocation of weights to criteria Development of alternatives Analysis of alternatives Selection of an alternative Implementation of the alternative Evaluation of decision effectiveness

Decision-making Salary Interest Future development Own conditions Bank managers 8 Researchers 6 Enterprise managers 7 Civil servants 4 Teachers 5 Entrepreneurs 10

The decision-making process Identification of a problem Identification of decision criteria Allocation of weights to criteria Development of alternatives Analysis of alternatives Selection of an alternative Implementation of the alternative Evaluation of decision effectiveness

The decision-making process Identification of a problem Identification of decision criteria Allocation of weights to criteria Development of alternatives Analysis of alternatives Selection of an alternative Implementation of the alternative Evaluation of decision effectiveness

The decision-making process Identification of a problem Identification of decision criteria Allocation of weights to criteria Development of alternatives Analysis of alternatives Selection of an alternative Implementation of the alternative Evaluation of decision effectiveness

Decision making The manager as decision maker Making decisions: rationality, bounded rationality, and intuition Rationality: Managers make consistent, value-maximizing choices with specified constraints. Assumptions are that decision makers: Are perfectly rational, fully objective, and logical. Have carefully defined the problem and identified all viable alternatives. Have a clear and specific goal Will select the alternative that maximizes outcomes in the organization’s interests rather than in their personal interests.

Decision making Bounded Rationality: Managers make decisions rationally, but are limited (bounded) by their ability to process information. Assumptions are that decision makers: Will not seek out or have knowledge of all alternatives Will satisfice—choose the first alternative encountered that satisfactorily solves the problem—rather than maximize the outcome of their decision by considering all alternatives and choosing the best.

Decision making The Role of Intuition Escalation of Commitment: Increasing or continuing a commitment to previous decision despite mounting evidence that the decision may have been wrong. Intuitive decision making: Making decisions on the basis of experience, feelings, and accumulated judgment.

Strategic management

Deciding what to do specifically Strategic management Setting goals Deciding what to do specifically

Establishing strategies Developing specific plans Strategic management As managers engage in planning, they define goals, establish strategies for achieving these goals, and develop plans to integrate and coordinate activities. Decision-making Defining goals Establishing strategies Strategic management Developing specific plans Planning techniques

Strategic management Strategic management is what managers do to develop an organization’s strategies

Strategic management B A C strategy D E Broad Applied to whole organization C Long-term strategy E Different from specific plans D Giving direction to organization

Types of organizational strategies Functional strategies Strategic management Types of organizational strategies Corporate strategies Business strategies Functional strategies

Strategic management Corporate strategies One specifies what businesses a company should be in or wants to be in Business strategies One determines how an organization should compete in each of its businesses

How to compete in the business How to compete in the business Corporate strategies Business 1 Business 2 Business 3 How to compete in the business Business strategy How to compete in the business Business strategy How to compete in the business Business strategy

SBU SBU SBU Corporate strategies Business strategies SBU is strategic business unit Single businesses of an organization in several different businesses that are independent and formulate their own strategies.

Functional strategies Strategic management Corporate strategies One specifies what businesses a company should be in or wants to be in Business strategies One determines how an organization should compete in each of its businesses Functional strategies One used by various functional departments to support the business strategy

Strategic management Corporate strategies Stability strategies Renewal strategies Corporate strategies Stability strategies Grow strategies

Horizontal integration Strategic management Concentration Grow strategy Vertical integration expanding the number of markets or products either through its current business or through new businesses Horizontal integration Diversification

Strategic management Concentration focusing on a primary line of business and increasing the number of products offered or markets served Concentration

Related Diversification Unrelated Diversification (expanding by merging with or acquiring firms in different, but related industries that are “strategic fits”) (growing by merging with or acquiring firms in unrelated industries where higher financial returns are possible)

Strategic management Vertical integration Suppliers Backward vertical Distribution channels Producers Suppliers Vertical integration Forward vertical integration

Strategic management Horizontal integration Combining operations with another competitor in the same industry to increase competitive advantages and lower competition among industry rivals Horizontal integration

Strategic management Stability strategy 1 environment is drastically changing and the future is uncertain Stability strategy 2 the industry is facing slow or no-growth opportunities continuing to do what it is currently doing 3 owners think the status quo is good enough

Strategic management Renewal strategy Retrenchment strategy declining performance! Renewal strategy Retrenchment strategy a short-run renewal strategy when performance problems are not serious Turnaround strategy a renewal strategy for situations in which the organization’s performance problems are more serious

what sets an organization apart or its distinct edge Strategic management Business strategy Competitive advantage Sustainable competitive advantage what sets an organization apart or its distinct edge enabling the organizations to keep its edge despite competitors’ actions

Strategic management Father of strategic management （Michael E. Porter，1947—） Father of strategic management

Strategic management Forces in the industry analysis New entrants Threat of new entrants Bargaining power of suppliers Suppliers Intensity of rivalry among current competitors Buyers Bargaining power of buyers Threat of substitutes Substitutes

Cost leadership strategy Strategic management seeking to attain the lowest total overall costs in its industry Cost leadership strategy

Differentiation strategy exceptionally high quality extraordinary service Differentiation strategy a strategy attempting to create a unique and distinctive product or service for its customers innovative design technological capability unusually positive brand image

Strategic management Strategic Management Process Identify the organization’s current mission, goals, and strategies

Strategic management Mission is a statement of the company’s purpose What business the company is in? Who are the customers? What are its values to the customers?

Strategic management Mission of Avon: to be the company that best understands and satisfies the product, service and self- fulfillment needs of women on a global level

The decision-making process Identification of a problem Identification of decision criteria Allocation of weights to criteria Development of alternatives Analysis of alternatives Selection of an alternative Implementation of the alternative Evaluation of decision effectiveness

Strategic management Strategic Management Process SWOT analysis Opportunities are the positive trends in external environmental factors External analysis opportunities threats Threats are the negative trends in external environmental factors SWOT analysis Identify the organization’s current mission, goals, and strategies Strengths are any activities the organization does well or any unique resources that it has Internal analysis strengths weaknesses Weaknesses are the activities the organization does not do well or resources it needs but does not possess

Strategic management Strategic Management Process SWOT analysis External analysis opportunities threats SWOT analysis Internal analysis strengths weaknesses take the advantage of the organization’s strengths Identify the organization’s current mission, goals, and strategies exploit environmental opportunities Formulate strategies correct the organization’s weaknesses buffer against threats

Strategic management Strategic Management Process SWOT analysis External analysis opportunities threats SWOT analysis Internal analysis strengths weaknesses Identify the organization’s current mission, goals, and strategies Formulate strategies Implement strategies Evaluate results