POM Unit II updated Useful for MBAs.ppt

senuaustin1 9 views 97 slides Sep 16, 2024
Slide 1
Slide 1 of 97
Slide 1
1
Slide 2
2
Slide 3
3
Slide 4
4
Slide 5
5
Slide 6
6
Slide 7
7
Slide 8
8
Slide 9
9
Slide 10
10
Slide 11
11
Slide 12
12
Slide 13
13
Slide 14
14
Slide 15
15
Slide 16
16
Slide 17
17
Slide 18
18
Slide 19
19
Slide 20
20
Slide 21
21
Slide 22
22
Slide 23
23
Slide 24
24
Slide 25
25
Slide 26
26
Slide 27
27
Slide 28
28
Slide 29
29
Slide 30
30
Slide 31
31
Slide 32
32
Slide 33
33
Slide 34
34
Slide 35
35
Slide 36
36
Slide 37
37
Slide 38
38
Slide 39
39
Slide 40
40
Slide 41
41
Slide 42
42
Slide 43
43
Slide 44
44
Slide 45
45
Slide 46
46
Slide 47
47
Slide 48
48
Slide 49
49
Slide 50
50
Slide 51
51
Slide 52
52
Slide 53
53
Slide 54
54
Slide 55
55
Slide 56
56
Slide 57
57
Slide 58
58
Slide 59
59
Slide 60
60
Slide 61
61
Slide 62
62
Slide 63
63
Slide 64
64
Slide 65
65
Slide 66
66
Slide 67
67
Slide 68
68
Slide 69
69
Slide 70
70
Slide 71
71
Slide 72
72
Slide 73
73
Slide 74
74
Slide 75
75
Slide 76
76
Slide 77
77
Slide 78
78
Slide 79
79
Slide 80
80
Slide 81
81
Slide 82
82
Slide 83
83
Slide 84
84
Slide 85
85
Slide 86
86
Slide 87
87
Slide 88
88
Slide 89
89
Slide 90
90
Slide 91
91
Slide 92
92
Slide 93
93
Slide 94
94
Slide 95
95
Slide 96
96
Slide 97
97

About This Presentation

Principles of Management


Slide Content

UNIT II - PLANNING
Nature and purpose of planning - Planning
process - Types of plans – Objectives -
Managing by objective (MBO) Strategies -
Types of strategies - Policies – Decision
Making - Types of decision - Decision Making
Process - Rational Decision Making Process -
Decision Making under different conditions.

Definition of Planning
According to Koontz & O’Donell, “Planning is deciding in
advance what to do, how to do and who is to do it. Planning
bridges the gap between where we are to, where we want to go. It
makes possible things to occur which would not otherwise occur
The
 process of setting goals, developing  strategies, and
outlining
 tasks and schedules to accomplish the goals.
It is concerned with ends (what is to be done) as well as with
means (how it is to be done)

Copyright © 2004 Prentice
Hall, Inc. All rights reserved.
3–4
Planning Defined
•Defining the organization’s objectives or goals
•Establishing an overall strategy for achieving
those goals
•Developing a comprehensive hierarchy of
plans to integrate and coordinate activities
Planning is concerned with ends (what is to be done) as well
as with means (how it is to be done).

3–5
Reasons for Planning

Types of planning
•Informal: not written down, short-term focus; specific
to an organizational unit
•Formal: written, specific, and long-term focus,
involves shared goals for the organization

SIGNIFICANCE / PURPOSE OF PLANNING
1.Minimizes uncertainty
2.Provides direction
3.Minimizes waste and redundancy
4.Emphasis on objectives
5.Promotes coordination
6.Facilitates control
7.Improves competitive strength
8.Economical operation
9.Encourages innovation
10.Tackling complexities of modern business

Copyright © 2004 Prentice
Hall, Inc. All rights reserved.
3–8
Types of Plans
EXHIBIT 3 .2
BREADTH TIME SPECIFICITY FREQUENCY
OF USE FRAME OF USE
Strategic Long term Directional Single use
Tactical Short term Specific Standing

Specific Vs. Directional Plans

Difference between strategic and tactical planning
Strategic planning Tactical planning
Decides the major goals & policies of
allocation of resources
Decides the detailed use of resources
Done at higher levels of managementLower levels of management
It is Long-term It is short-term
Based on long term forecasts about
technology, political environment etc
and is more uncertain
Based on past performances and is
less uncertain
Less detailed More detailed

Planning in the Hierarchy of Organizations
Top
Executives
Middle-Level
Managers
First-Level
Managers
Strategic
Planning
Operational
Planning

Process / Steps in Planning
FORMULATING
SUPPORTING
PLANS
CHOOSING AN
ALTERNATIVE
COMPARING
ALTERNATIVES
IN LIGHT OF
GOALS SOUGHT
NUMBERIZING
PLANS
BY MAKING
BUDGETS
IDENTIFYING
ALTERNATIVES
BEING AWARE OF
OPPORTUNITY
SETTING
OBJECTIVES
OR GOALS
CONSIDERING
PLANNING
PREMISES

Process / Steps in Planning
1. BEING AWARE
OF
OPPORTUNITY
2. SETTING
OBJECTIVES
OR GOALS
3. CONSIDERING
PLANNING
PREMISES
In the Light of,
The Market
Competition
What customers want
Our strengths
Our weaknesses
Where we want to be and
what we want to accomplish
and when
In what environment,
- Internal or external
- will our plans
operate/

4. IDENTIFYING
ALTERNATIVES
5. COMPARING
ALTERNATIVES
IN LIGHT OF
GOALS SOUGHT
6. CHOOSING AN
ALTERNATIVE
What are the most
promising alternatives
to accomplishing our
objectives
Which alternative will
give us the best
chance of meeting our
goals at the lowest
cost and highest profit
Selecting the course
of action we will
pursue

7. FORMULATING
SUPPORTING PLANS
Such as plans to :
•Buy equipment
•Buy materials
•Hire and train workers
•Develop a new product
8. NUMBERIZING
PLANS
BY MAKING
BUDGETS
Develop such budgets as :
• Volume and price of sales
• Operating expenses
necessary for plans
• Expenditure for capital
equipment

Copyright © 2004 Prentice
Hall, Inc. All rights reserved.
3–23
Management by Objectives
•Management by Objectives (MBO)
–A system in which specific performance objectives are
jointly determined by subordinates and their supervisors,
progress toward objectives is periodically reviewed, and
rewards are allocated on the basis of that progress.
–Links individual and unit performance objectives at all
levels with overall organizational objectives
–Focuses operational efforts on organizationally important
results.
–Motivates rather than controls

Copyright © 2004 Prentice
Hall, Inc. All rights reserved.
3–24
Elements of MBO
•Goal specificity
•Participative decision making
•Explicit time period for performance
•Performance feedback

Copyright © 2004 Prentice
Hall, Inc. All rights reserved.
3–25
Cascading of Objectives
EXHIBIT 3.4

Process of MBO
Organizational Purpose
&Objectives
Superior’s Objectives
Subordinate agreed objectives
Superiors
Recommendation for
Subordinates objective
Key Result Areas (KRA)
Planning Premises
Subordinates
statement of
Objectives
Periodic Review and Appraisal
Subordinates performance
Matching
Resources

Copyright © 2004 Prentice
Hall, Inc. All rights reserved.
3–27
Setting Employee Objectives
•Identify an employee’s key job tasks.
•Establish specific and challenging goals for
each key task.
•Allow the employee to actively participate.
•Prioritize goals.
•Build in feedback mechanisms to assess goal
progress.
•Link rewards to goal attainment.

•Strategy
Strategy is a course of action through which an
organization relates itself with environment so as to
achieve its objectives
•Strategic Management
The set of managerial decisions and actions that
determines the long-run performance of an
organization

Copyright © 2004 Prentice
Hall, Inc. All rights reserved.
3–29
Strategic Management
•Strategic Management Process
–A nine-step process that involves strategic planning,
implementation, and evaluation
•The organization’s current identity
–Mission statement
•Defines the purpose of the organization
–Objectives
–Strategic plan
•A document that explains the business founders vision and
describes the strategy and operations of that business.

Copyright © 2005 Prentice
Hall, Inc. All rights reserved.
3–30
Strategic Management
•Strategic Management Process
–A nine-step process that involves strategic
planning, implementation, and evaluation
Exhibit 3.5

•The Strategic management Process
Identify the
organization’s
current
mission,
objectives
and
strategies
Analyze the
organization's
resource
Analyze the
environment
Reassess the
organization's
mission and
objectives
Identify
strengths
and
weakness
Identify
opportunitie
s and
threats
Formulate
strategies
Evaluate
result
Implement
strategies
1
9
8
7
6
3
5
4
2

Copyright © 2005 Prentice
Hall, Inc. All rights reserved.
3–32
The Organization’s Current Identity
•Mission statement
–Defines the present purpose of the organization.
•Objectives
–Specific measures (milestones) for achievement,
progress, and performance.
•Strategic plan
–A document that explains the business founders’
vision and describes the strategy and operations
of that business.

Copyright © 2005 Prentice
Hall, Inc. All rights reserved.
3–33
SWOT: Identifying
Organizational
Opportunities
SWOT analysis
Analysis of an organization’s strengths,
weaknesses, opportunities, and threats in
order to identify a strategic niche that the
organization can exploit
Exhibit 3.6

Copyright © 2005 Prentice
Hall, Inc. All rights reserved.
3–34
SWOT Analysis
•Strengths (strategic)
–Internal resources that are available or things that an organization does
well.
•Core competency: a unique skill or resource that represents a
competitive edge.
•Weaknesses
–Resources that an organization lacks or activities that it does not do
well.
•Opportunities (strategic)
–Positive external environmental factors.
•Threats
–Negative external environmental factors.

SWOT analysis of strengths, weaknesses,
opportunities, and threats.

SS
TT
OO
WW
Strengths
• Technological skills
•Leading brands
•Distribution channels
•Customer loyalty
•Production quality
•Scale
•Management
Weaknesses
•Absence of important skills
•Weak brands
•Poor access to distribution
•Low customer retention
•Sub-scale
•Management
Opportunity
•Changing Customer
Tastes
•Technological Advances
•Change in population age
•Change in government
politics
•New distribution Channels
Threats
•Closing of geographic
markets
•Tax increases
•Change in government
politics
•New distribution Channels
INTERNAL FACTORS
EXTERNAL FACTORS
N
E
G
A
T
I
V
E
SWOT
ANALYSIS

Copyright © 2005 Prentice
Hall, Inc. All rights reserved.
3–37
Evaluating Strategy
StrategyStrategy
FormulationFormulation
EvaluationEvaluation
ImplementationImplementation
and Executionand Execution

Three levels of strategy in organizations—corporate,
business, and functional strategies.

Reliance Industries
•EXPLORATION & PRODUCTION - Reliance's oil and gas
•PETROLEUM REFINING & MARKETING
•PETROCHEMICALS
•TEXTILES
•RETAIL
•COMMUNICATIONS
•INFRASTRUCTURE
•JIO - broadband and digital services

TYPES OF STRATEGIES
Grand strategies
1. GROWTH
1.Merger
2.Acquisition
2. STABILITY
3. RETRENCHMENT
Or
Defensive
4. COMBINATION

TYPES OF GROWTH STRATEGIES

HORIZONTAL and Vertical Integration

2. Intensive Strategies

PRODUCTS
NEWEXISTING
N
E
W
E
X
I
S
T
I
N
G

Copyright © 2005 Prentice
Hall, Inc. All rights reserved.
3–49
Grand Strategies ( four primary strategies )
•Growth strategy
–A strategy in which an organization attempts to increase the level of
its operations.
•Stability strategy
–A strategy that is characterized by an absence of significant change.
•Retrenchment strategy
–A strategy characteristic of a company that is reducing its size, usually
in an environment of decline.
•Combination strategy
–The simultaneous pursuit by an organization of two or more of
growth, stability, and retrenchment strategies.

Copyright © 2005 Prentice
Hall, Inc. All rights reserved.
3–50
Growth Strategies – increase the level of
its operations (sales, emp, mkt share)
•Direct Expansion
–Involves increasing a company’s size, revenues, operation,
or workforce.
•Merger
–Occurs when two companies, usually of similar size,
combine their resources to form a new company.
•Acquisition
–Occurs when a larger company
buys a smaller one and incorporates
the acquired company’s operations
into its own.

Copyright © 2005 Prentice
Hall, Inc. All rights reserved.
3–51
Competitive Strategies
•Strategies that position an organization in such a
way that it will have a distinct advantage over its
competition:
–Cost-leadership strategy
•Becoming the lowest-cost producer in an industry.
–Differentiation strategy
•Attempting to be unique in an industry within a broad
market.
–Focus strategy
•Attempting to establish an advantage (such as cost or
differentiation) in a narrow market segment.

•Porter has outlined three generic strategies that
can be used to gain competitive advantage over other
firms operating in the same industry. They are cost
leadership, differentiation and focus.

Cost Leadership
1. Wal-Mart
•Wal-Mart Stores Inc. has been successful using its strategy of
everyday low prices to attract customers. The idea of everyday low
prices is to offer products at a cheaper rate than competitors on a
consistent basis, rather than relying on sales.
•Wal-Mart is able to achieve this due to its large scale and efficient
supply chain. They source products from cheap domestic suppliers
and from low-wage foreign markets. This allows the company to sell
their items at low prices and to profit off thin margins at a high
volume.
2. Reliance Industries
•has become a global leader in various business activities based on
innovationand cost by achieving more efficient production arising
from experience and economies of scale, innovationin production
methods, and differential Low-Cost Access to Productive Inputs.

Example of Companies in India applying
differentiation strategy successfully
1. Titan Watches have made available to the Indian consumer products that
have an internationallook, carry the image of premium quality and
therefore are able to set their prices higher than their
 competitors in the
Indian watch market.
2. Timex Watches in India faced with the absolutely dominant position of
Titan Watches in the Indian watch market, launched a complete range of
Plastic watches that offered a refreshing product alternative to the market
particularly to the youth market ( 18 to 35 age group) and was able
to
 achieve a staggering sales volume of 2 million watches in just two
years,- a figure that the market leader took more than five years to
reach
 in considerably less competitive conditions

Examples of Companies in India applying focus
or strategy successfully
1. Ashok Leyland
•manufactured heavy duty vehicles almost exclusively in India
constituted a niche market segment and product group for the
company
2. Satyam Cinemas
•totally redefined the movie watching experience by focusing on
brand new infrastructure and introduced the concept of Dolby
Sound and multiplex in Tamilnadu. Satyam Cinemas are the best
theatres in Chennai for movies. They focused on movies segment
only and priced the tickets slightly higher to create a niche area
for themselves by redefining the movie experience. With cinema
halls centrally located within the city and excellent car parking
and online tickets and food booking facilities created one of
 the
best environment for moviegoers

Copyright © 2005 Prentice
Hall, Inc. All rights reserved.
3–57
Sustaining a Competitive Advantage
•Competitive advantage counts for little if it
cannot be sustained over the long-term.
–Factors reducing competitive advantage
•Evolutionary changes in the industry
•Technological changes
•Customer preferences
•Imitation by competitors
–Defending competitive advantage
•Patents, copyrights, trademarks, regulations, and tariffs
•Competing on price
•Long-term contracts with suppliers (and customers)

Tools used in Strategic Management
1.The TOWS Matrix
- A modern tool for analysis of the situation
2. The Portfolio Matrix (BCG Matrix)
- A tool for allocating resources

Internal
Factors
External
Factors
Internal Strengths (S)
E.g., Strengths in
Management, operations,
finance, Hr, engineering
Internal Weaknesses (W)
E.g., in areas shown in the
box of strengths
External Opportunities (O)
E.g., Current and future
economic conditions , political
and social changes, new
products, services and
technology
SO Strategy
(Maxi-Maxi)
Potentially the most
successful strategy,
utilizing the organization’s
strength to take advantage
of opportunities
WO Strategy (Mini-Maxi)
e.g., - developmental
strategy to overcome
weaknesses in order to take
advantage of opportunities
External Threats (T)
E.g., lack of energy,
competition, and areas similar to
those shown in the “
opportunities” box above
ST Strategy (maxi-mini)
e.g., use of strengths to
cope with threats or to
avoid threats
WT Strategy (Mini-Mini)
e.g., retrenchment,
liquidation, or joint venture
1. The TOWS Matrix for strategy formulation

Dynamics of the TOWS Matrix

•Strength: Internal characteristics that have the potential to
improve the organization's competitive situation. R&D,
technology, vast distribution network, geographic location. All
these, comprise of organizational strength.
• Weakness is an internal characteristic that leaves the
organization potentially vulnerable to strategic moves by its
competitors. Competition, government regulations etc. comprise
organization's weakness.
•Opportunity is an environmental condition, that offers
significant prospects for improving an organization's situation,
in relation to its competitors.
•Threat is an environmental condition that can undermine an
organization's competitive situation.

The BCG matrix approach to corporate strategy
formulation.

a. Market Growth rate : The growth of FMCG
industry
b. Market Share: The share of Nestlé India
 in
FMCG Industry
Example : The top ten India FMCG brands are:
1.Hindustan Unilever Ltd.
 
2. ITC (Indian Tobacco Company)
 
3. Nestlé India
 
4. GCMMF (AMUL)
 
5. Dabur India
 
6. Asian Paints (India)
 
7. Cadbury India
 
8. Britannia Industries
 
9. Procter & Gamble Hygiene and Health Care
 
10. Marico Industries

2. The Portfolio Matrix (BCG Matrix)
High

© 2008 Weihrich and Cannice 65
Chapter 5. Strategies, Policies,
and Planning Premises
Business Portfolio Matrix
•Two dimensions
–Relative competitive position (market share)
–Business growth rate
•Four positions
–Question marks
–Stars
–Cash cows
–Dogs

BCG Matrix
•Developed by the Boston Consulting Group
•Considers market share and industry growth rate
•It is a widely used portfolio management method for
evaluating the performance of business units.
•There are four quadrants in a BCG matrix: question
marks, stars, cash cows and dogs.
•On the X axis, market growth is measured, which
indicates the level of market attractiveness
•On the Y axis, market share is measured, that serves as a
measure of the company's strength in the market

•Question marks: Question marks, are low-share business
units, in a high-growth market. They require a lot of cash,
for maintaining the market share. Any business has to think
between building a question mark into stars or whether they
have to be phased out.
•Stars: Stars are high-growth, high-share businesses. Very
often, they need heavy investment for financing their rapid
growth. Eventually, their growth slows down and they turn
into cash cows.
•Cash cows: Cash cows are low-growth and high-share
businesses. Such established and successful SBU's, require
less investment to maintain their market share. They generate
a lot of surplus that a company can use to pay its bills, or
invest in other businesses.
•Dogs: Dogs are low-growth and low-share businesses. They
may generate enough surplus to maintain themselves, but do
not hold out the promise to be a large source of cash.

Defensive strategy
Defensive strategy focuses on the desire or need to
reduce organizational operations, usually through cost
reductions (cutting on non-essential expenditure) and
asset reduction (disposing off equipment, selling land
etc.).
The most common forms of defensive strategies are harvest,
turnaround, divestiture, and bankruptcy.
• Harvest strategy: Harvest strategy entails minimum amount
of investment with maximum short-term profits.
• Turnaround strategy: Turnaround strategy is designed to
reverse the negative state of business.
• Divestiture strategy: If the company is not doing well, it can
sell or divest its business.
• Bankruptcy: A situation where the company is unable to pay
its debts, and seeks legal support. After it regains its
financial position, it can repay its debts.

Forces in an Industry Analysis
Substitutes
Buyers
Bargaining
Power of
Buyers
Threat of
Substitutes
Suppliers
Bargaining
Power of
Suppliers
New
Entrants
Threat of
New Entrants
Intensity of
Rivalry Among
Current
Competitors

Five Competitive Forces
•Threat of New Entrants
–The ease or difficulty with which new competitors can
enter an industry
•Threat of Substitutes
–The extent to which switching costs and brand loyalty
affect the likelihood of customers adopting substitute
products and services
•Bargaining Power of Buyers
–The degree to which buyers have the market strength to
hold sway over and influence competitors in an industry

Five Competitive Forces
•Bargaining Power of Suppliers
–The relative number of buyers to suppliers and
threats from substitutes and new entrants affect
the buyer-supplier relationship
•Current Rivalry
–Intensity among rivals increases when industry
growth rates slow, demand falls, and product
prices descend

POLICIES
A policy is general guideline for decision-making.
In the words of George. R. Terry, “Policy is a verbal, written or
implied overall guide, setting up boundaries that supply the
general limits and direction in which managerial action will
take place.”

TYPES OF POLICIES
Classification on the basis of sources
–Originated policies: These are policies which are usually
established formally and deliberately by top mangers for
the purpose of guiding the actions of their subordinates and
also their own.
–Appealed Policies: Appealed policies are those which arise
from the appeal made by a subordinate to his supervisor
regarding the manner of handling a given situation.
–Implied Policies: these are also policies which are stated
neither in writing nor verbally.
–Externally imposed policies: Policies are sometimes
imposed on the business by external agencies such as
government, trade associations and trade unions.

Copyright © 2005 Prentice
Hall, Inc. All rights reserved.
6–74
Decision Making
•Decision
–Making a choice from two or more alternatives.
•The Decision-Making Process
–Identifying a problem and decision criteria and
allocating weights to the criteria.
–Developing, analyzing, and selecting an alternative
that can resolve the problem.
–Implementing the selected alternative.
–Evaluating the decision’s effectiveness.

The Decision-Making Process
1.Problem - tired of renting an apartment and want To Buy a house
2. Decision criteria
a. You can only afford $600.00 a month for a mortgage payment.
b. You do not own a car and have to take the bus to work, so the house needs to be near a bus station.
c. You need three bedrooms and two bathrooms.
3. we could review the following potential alternatives:
a.If the house you really like is more money than you can afford, you can cut back on other expenses or
get a roommate to help pay the monthly mortgage.
b.You could purchase a bike and ride to the bus stop if it's not close enough and take your bike to work
with you if you find a home you like and can afford that is not near a bus stop.
c. Reduce your desire to only two bedrooms with the thought that a smaller home will be less money.

Copyright © 2005 Prentice
Hall, Inc. All rights reserved.
6–76
Step 1: Identifying the Problem
•Problem
–A discrepancy between an existing and desired state
of affairs.
•Characteristics of Problems
–A problem becomes a problem when a manager
becomes aware of it.
–There is pressure to solve the problem.
–The manager must have the authority, information, or
resources needed to solve the problem.

Copyright © 2005 Prentice
Hall, Inc. All rights reserved.
6–77
Step 2: Identifying Decision Criteria
•Decision criteria are factors that are important
(relevant) to resolving the problem.
–Costs that will be incurred (investments required)
–Risks likely to be encountered (chance of failure)
–Outcomes that are desired (growth of the firm)
Step 3: Allocating Weights to the Criteria
•Decision criteria are not of equal importance:
Assigning a weight to each item places the items in
the correct priority order of their importance in the
decision making process.

Copyright © 2005 Prentice
Hall, Inc. All rights reserved.
6–78
Step 4: Developing Alternatives
•Identifying viable alternatives
–Alternatives are listed (without evaluation) that can
resolve the problem.
Step 5: Analyzing Alternatives
•Appraising each alternative’s strengths and
weaknesses
An alternative’s appraisal is based on its ability to
resolve the issues identified in steps 2 and 3.

Copyright © 2005 Prentice
Hall, Inc. All rights reserved.
6–79
Step 6: Selecting an Alternative
•Choosing the best alternative
–The alternative with the highest total weight is
chosen.
Step 7: Implementing the Decision
•Putting the chosen alternative into action.
Conveying the decision to and gaining commitment
from those who will carry out the decision.

Copyright © 2005 Prentice
Hall, Inc. All rights reserved.
6–80
Step 8: Evaluating the Decision’s
Effectiveness
•The soundness of the decision is judged by its
outcomes.
–How effectively was the problem resolved by
outcomes resulting from the chosen alternatives?
–If the problem was not resolved, what went
wrong?

Copyright © 2005 Prentice
Hall, Inc. All rights reserved.
6–81
Making Decisions
•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.

Assumptions Of Rationality
Rational
Decision
Making
Problem is
clear and
unambiguous
Single, well-
defined goal
is to be achieved
All alternatives
and
consequences
are known
Preferences
are clear
Preferences
are constant
and stable
No time or cost
constraints exist
Final choice
will maximize
payoff
© Prentice Hall, 2002Robbins et al., Fundamentals of Management, 4th Canadian
Edition
©2005 Pearson Education Canada, Inc.
FOM 4.12

Copyright © 2005 Prentice
Hall, Inc. All rights reserved.
6–83
Making Decisions (cont’d)
•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.

© 2008 Prentice Hall, Inc. All
rights reserved.
4–84
Making Decisions: The Rational Model
•Certainty
–The implication that the outcome of every possible
alternative is known.
•Uncertainty
–A condition under which there is not full knowledge of
the problem and reasonable probabilities for
alternative outcomes cannot be determined.
•Risk
–The probability that a particular outcome will result
from a given decision.

© 2008 Prentice Hall, Inc. All
rights reserved.
4–85
Making Decisions: The Rational Model
•Rational
–Describes choices that are consistent and value-
maximizing within specified constraints.
•Bounded Rationality (Herbert Simon)
–Behavior that is rational within the parameters of a
simplified model that captures the essential features
of a problem.
•Satisfice
–Making a “good enough” decision: choosing the first-
identified alternative that satisfactorily and
sufficiently solves the problem.

Rational decision Making process
The Problem
Is Clear and
Unambiguous
A Single
Well-defined
Goal is to
Be achieved
All alternatives
And
Consequences
Are known
Preferences
Are
clear
Preferences
Are constant
And stable
No time or
Cost
Constraints
exist
Final
Choice
Will
Maximize
Economic
payoff
Lead To
Rational Decision Making

Copyright © 2005 Prentice
Hall, Inc. All rights reserved.
4–87
Programmed Decision-Making Aids
•Policy
–A general guide that establishes parameters for
making decisions about recurring problems.
•Procedure
–A series of interrelated sequential steps that can be
used to respond to a well-structured problem (policy
implementation).
•Rule
–An explicit statement that tells managers what they
ought or ought not to do (limits on procedural
actions).

Copyright © 2005 Prentice
Hall, Inc. All rights reserved.
4–88
Types of Problems, Types of
Decisions,
and Level in the Organization
Exhibit 4.8

•Nature of problems and decision making in the
organization
Unstructured
Structured
Highest Level
Lowest Level
O
rg
a
n
iz
a
tio
n
a
l h
ie
ra
rc
h
y
Programmed
Decisions
Non-
Programmed
Decisions
Organizational
Levels
Nature of
Problems
Nature of
Decision Making

© 2008 Prentice Hall, Inc. All
rights reserved.
4–90
Decision-Making Styles
Directive Conceptual
Styles of Decision
Making
Analytic Behavioral

Copyright © 2004 Prentice
Hall, Inc. All rights reserved.
4–91
Decision Making: Styles (cont’d)
•Conceptual style
–Individuals who tend to be very broad in outlook,
to look at many alternatives, and to focus on the
long run and often look for creative solutions.
•Behavioral style
–Individuals who think intuitively but have a low
tolerance for uncertainty; they work well with
others, are open to suggestions, and are
concerned about the individuals who work for
them.

Copyright © 2004 Prentice
Hall, Inc. All rights reserved.
4–92
Decision Making: Styles
•Directive style
–Characterizes the low tolerance for ambiguity and
a rational way of thinking of individuals who are
logical and efficient and typically make fast
decisions that focus on the short term.
•Analytic style
–Characterizes the high tolerance for ambiguity
combined with a rational way of thinking of
individuals who prefer to have complete
information before making a decision.

Copyright © 2004 Prentice
Hall, Inc. All rights reserved.
4–93
Decision-Making Styles
EXHIBIT 4.9

Copyright © 2004 Prentice
Hall, Inc. All rights reserved.
4–94
Group Decision Making
•Advantages
–Make more accurate
decisions
–Provides more complete
information
–Offers a greater diversity of
experiences and perspectives
–Generates more alternatives
–Increases acceptance of a
solution
–Increases the legitimacy of a
decision.
•Disadvantages
–Is more time-consuming and
less efficient
–Minority domination can
influence decision process
–Increased pressures to
conform to the group’s
mindset (groupthink)
–Ambiguous responsibility for
the outcomes of decisions

© 2008 Prentice Hall, Inc. All
rights reserved.
4–95
Improving Group Decision Making
Brainstorming
Electronic
Meeting
Making Group
Decision Making
More Creative
Nominal Group
Technique

Copyright © 2005 Prentice
Hall, Inc. All rights reserved.
4–96
Improving Group Decision Making
•Brainstorming
–An idea-generating process that encourages
alternatives while withholding criticism.
•Nominal group technique
–A decision-making technique in which group members
are physically present but operate independently.
•Electronic meeting
–A type of nominal group technique in which
participants are linked by computer.

Case study
Tags