This Document Contains Chapters 5 to 6 CHAPTER 5 MANAGERIAL PLANNING AND GOAL SETTING CHAPTER OUTLINE New Manager Self-Test: Does Goal Setting Fit Your Management Style? I. Goal-Setting and Planning Overview A. Levels of Goals and Plans B. The Organizational Planning Process II. Goal-Setting in Organizations A. Organizational Mission B. Goals and Plans III. Operational Planning A. Criteria for Effective Goals B. Management by Objectives (MBO) C. Single Use and Standing Plans IV. Benefits and Limitations of Planning V. Planning for a Turbulent Environment A. Contingency Planning B. Building Scenarios C. Crisis Planning VI. Innovative Approaches to Planning A. Set Stretch Goals for Excellence VII. Thinking Strategically New Manager Self-Test: What Is Your Strategy Strength? VIII. What Is Strategic Management? A. Purpose of Strategy B. SWOT Analysis IX. Formulating Business Level Strategy A. The BCG Matrix B. The Competitive Environment C. Porter’s Competitive Strategies ANNOTATED LEARNING OUTCOMES After studying this chapter, students should be able to: 1. Define goals and plans and explain the relationship between them. Answer: A goal is a desired future state that the organization attempts to realize. A plan is a blueprint for goal achievement and specifies the necessary resource allocations, schedules, tasks, and other actions. The term planning usually incorporates both ideas and means determining the organization’s goals and defining the means for achieving them. 2. Explain the concept of organizational mission and how it influences goal setting and planning. Answer: The overall planning process begins with a mission statement, which describes the organization’s reason for existence. The mission describes the organization’s values, aspirations and reason for being. A well-defined mission is the basis for development of all subsequent goals and plans. Without a clear mission, goals and plans may be developed haphazardly and not take the organization in the direction it needs to go. Because of mission statements, employees, customers, suppliers, and stockholders know the company’s stated purpose and values. 3. Define the characteristics of effective goals. Answer: Organizational goals at the strategic, tactical, and operational levels should: be specific and measurable; cover key result areas; be challenging but realistic; include a defined time period; and be linked to rewards. 4. Describe and explain the importance of contingency planning, scenario building, and crisis planning for today’s managers. Answer: Contingency plans define company responses to be taken in the case of emergencies, setbacks, or unexpected conditions. Contingency planning enables managers to identify important factors in the environment and develop plans. They respond quickly to be somewhat proactive, even in an uncertain and dynamic environment, rather than simply being buffeted about by events. Scenario building involves looking at current trends and discontinuities and visualizing future possibilities. Managers use historical data to develop reasonable expectations for the future and to mentally rehearse different potential future scenarios based on anticipating varied changes that could affect the organization. Crisis planning includes two essential stages: crisis prevention and crisis preparation. The crisis prevention stage involves activities of managers to prevent crises and detect warning signs of potential crises. The crisis preparation stage includes all the detailed planning to handle a crisis when it occurs, and appointing a crisis management team and spokesperson. The team should be able to immediately implement the crisis management plan, so training and practice are important. At this point it becomes critical for the organization to speak with one voice so that employees, customers, and the public do not get conflicting stories about what happened and what the organization is doing about it. After ensuring the physical safety of people, the next focus should be on responding to the emotional needs of employees, customers, and the public. Organizations should also strive to give people a sense of security and belonging. 5. Identify innovative planning approaches that managers use in a fast-changing environment. Answer: • Set stretch goals for excellence. Stretch goals get people to think in new ways that can lead to bold, innovative breakthroughs. • Use performance dashboards. Performance dashboards help executives keep track of key performance metrics, and help all employees track progress toward goals, see when things are falling short, and find innovative ways to get back on course toward reaching specified targets. • Deploy intelligence teams. An intelligence team is a cross-functional group of managers and employees, usually led by a competitive intelligence professional, who work together to gain a deep understanding of specific business issue, with the aim of presenting insights, possibilities, and recommendations about goals and plans related to that issue. Intelligence teams are useful when the organization confronts a major intelligence challenge. 6. Define the components of strategic management and discuss the levels of strategy. Answer: Strategic management is the set of decisions and actions used to formulate and implement strategies that will provide a competitively superior fit between the organization and its environment so as to achieve organizational goals. A strategy consists of target customers, a core competence, synergy, and value creation. Corporate level strategy asks the question, “What business are we in?” It pertains to the organization as a whole and the combination of business units and product lines that make up the corporate entity. Business level strategy asks the question, “How do we compete?” It pertains to each business unit or product line within the organization. Functional level strategy asks the question, “How do we support the business level strategy?” It pertains to the major functional departments within the business unit. 7. Describe the strategic management process and SWOT analysis. Answer: The strategic management process begins when executives evaluate their current position with respect to mission, goals, and strategies. Managers then scan the organization’s internal and external environments and identify strategic issues that may require change. Internal or external events may indicate a need to redefine the mission or goals or to formulate a new strategy at the corporate, business, or functional level. The final stage in the strategic management process is execution of the new strategy. The SWOT analysis reviews the strengths (S), weaknesses (W), opportunities (O), and threats (T) that affect organizational performance. 8. Discuss organizational dimensions that managers use to execute strategy. Answer: The final step in the strategic management process is execution, which is how strategy is put into action. Strategy execution is the most difficult and important part of strategic management. Execution requires changes in the organization’s behavior. These changes can be implemented by changes in leadership, candid communication, clear roles and accountability, and human resources. LECTURE OUTLINE NEW MANAGER SELF-TEST: DOES GOAL SETTING FIT YOUR MANAGEMENT STYLE? Most organizations have goal setting and review systems that new managers use. Not everyone thrives under a disciplined goal-setting system, but setting goals and assessing results are tools that can enhance a new manager’s impact. This exercise helps students determine the extent to which they have already adopted the disciplined use of goals in their lives and in their work. I. GOAL-SETTING AND PLANNING OVERVIEW A goal is defined as a desired future state that the organization attempts to realize. Goals are important because they define the purpose of an organization. A plan is a blueprint for goal achievement and specifies the necessary resource allocations, schedules, tasks, and other actions. Goals specify future ends; plans specify today’s means. The word planning usually incorporates both ideas; it means determining the organization’s goals and defining the means for achieving them. A. Levels of Goals and Plans Top managers are responsible for establishing strategic goals and plans that reflect a commitment to both organizational efficiency and effectiveness. Tactical goals and plans are the responsibility of middle managers. Operational plans identify the specific procedures or processes needed at lower levels of the organization. Frontline managers and supervisors develop operational plans that focus on specific tasks and processes and that help meet tactical and strategic goals. Planning at each level supports the other levels. Discussion Question #3: A new business venture must develop a comprehensive business plan to borrow money to get started. Companies such as FedEx and Nike say they did not follow the original plan closely. Does that mean that developing the plan was a waste of time for these eventually successful companies? NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ B. The Organizational Planning Process Exhibit 5.1 The overall planning process prevents managers from thinking merely in terms of day-to-day activities. The planning process includes five steps: 1) develop the plan; 2) translate the plan into action; 3) lay out operational factors needed to achieve goals; 4) execute the plan; and 5) monitor and review plans to learn from results and shift plans as needed. II. GOAL-SETTING IN ORGANIZATIONS A. Organizational Mission Exhibit 5.2 At the top of the goal hierarchy is the mission—the organization’s reason for existence—that describes the organization’s values, aspirations, and reason for being. The formal mission statement is a broadly stated definition of purpose that distinguishes the organization from others of a similar type. The content often focuses on the market and customers, and identifies desired fields of endeavor. Some mission statements describe company characteristics such as corporate values, product quality, location of facilities, and attitude toward employees. B. Goals and Plans 1. Strategic goals are broad statements describing where the organization wants to be in the future. Sometimes called official goals, they pertain to the entire organization rather than to specific divisions or departments. Strategic plans define the action steps by which the company intends to attain strategic goals. A strategic plan is a blueprint that defines organizational activities and resource allocations. Strategic planning tends to be long term. 2. Tactical goals are the results that major divisions and departments within the organization intend to achieve. Tactical goals apply to middle management and describe what major subunits must do for the organization to achieve its overall goals. Tactical plans define what major departments and organizational subunits will do to implement the organization’s strategic plan. They tend to be for a shorter time period. 3. Operational goals are the specific results expected from departments, work groups, and individuals. Operational plans are developed at the lower levels of the organization to specify action plans toward achieving operational goals and to support tactical plans. III. OPERATIONAL PLANNING A. Criteria for Effective Goals Exhibit 5.3 1. Specific and measurable. When possible, goals should be expressed in quantitative terms. Vague goals tend not to motivate employees. 2. Defined time period. Goals should specify the time period over which they will be achieved. A time period is a deadline on which goal attainment will be measured. 3. Cover key result areas. Key result areas are those items that contribute most to company’s performance. Key result areas should include both internal and external customers. 4. Choice and clarity. A few carefully chosen, clear, and direct goals can focus organizational attention, energy, and resources more powerfully. 5. Challenging but realistic. The best quality programs start with extremely ambitious goals that challenge employees to meet high standards. When goals are unrealistic, they set employees up for failure and lead to decreasing employee morale. If goals are too easy, employees may not feel motivated. Stretch goals are extremely ambitious but realistic goals that challenge employees to meet high standards. 6. Linked to rewards. The impact of goals depends on the extent to which salary increases, promotions, and other rewards are based on goal achievement. People who attain goals should be rewarded. B. Management by Objectives (MBO) Exhibit 5.4, Exhibit 5.5 1. Management by objectives (MBO) is a method whereby managers and employees define objectives for every department, project, and person and use them to monitor subsequent performance. Four major activities must occur in order for MBO to be successful. a. Set goals. Setting goals is the most difficult step in MBO and should involve employees at all levels. A good goal should be concrete and realistic, provide a specific target and time frame, and assign responsibility. Mutual agreement between employee and supervisor creates the strongest commitment to achieving goals. b. Develop action plans. An action plan defines the course of action needed to achieve the stated goals. Action plans are made for both individuals and departments. c. Review progress. A periodic progress review is important to ensure that action plans are working. This review allows managers and employees to see if they are on target and if corrective action is needed. d. Appraise overall performance. The final step in MBO is to evaluate whether annual goals have been achieved for both individuals and departments. Success or failure to achieve goals can be part of the performance appraisal system and the designation of salary increases and other rewards. 2. The benefits of the MBO process can be many. Corporate goals are more likely to be achieved when they focus on manager and employee efforts. Problems with MBO occur when the company faces rapid change. The environment and internal activities must have some stability for performance to be measured against goals. 3. In contrast to MBO which focuses on objectives, management by means (MBM) is a new systematic approach that focuses on the methods and processes used to achieve those objectives. MBM is based on the idea that when managers pursue their activities in the right way, positive outcomes will result. C. Single Use and Standing Plans 1. Single use plans are developed to achieve objectives that are not likely to be repeated in the future. Single use plans include both programs and projects. 2. Standing plans are used to provide guidance for tasks performed repeatedly within the organization. The primary standing plans are organizational policies, rules, and procedures. Many companies are discovering a need to develop standing plans regarding the use of social media. IV. BENEFITS AND LIMITATIONS OF PLANNING A. Benefits of Planning 1. Goals and plans provide a source of motivation and commitment. Planning can reduce uncertainty for employees and clarify what they should accomplish. 2. Goals and plans guide resource allocation. Planning helps managers decide where they need to allocate resources, such as employees, money, and equipment. 3. Goals and plans are a guide to action. Planning focuses attention on specific targets and directs employee efforts toward important outcomes. 4. Goals and plans set a standard of performance. Because planning and goal setting define desired outcomes, they also establish performance criteria so managers can measure whether things are on or off track. B. Limitations of Planning 1. Goals and plans can create a false sense of certainty. Having a plan can give managers a false sense that they know what the future will be like. 2. Goals and plans may cause rigidity in a turbulent environment. A related problem is that planning can lock the organization into specific goals, plans, and time frames, which may no longer be appropriate. 3. Goals and plans can get in the way of intuition and creativity. Success often comes from creativity and intuition, which can be hampered by too much routine planning. V. PLANNING FOR A TURBULENT ENVIRONMENT A. Contingency Planning Contingency plans define company responses to be taken in the case of emergencies or setbacks. Contingency plans cover such situations as catastrophic decreases in sales or prices, and loss of important managers. Discussion Question #4 Assume that Southern University decides to (1) raise its admission standards and (2) initiate a business fair to which local townspeople will be invited. What types of plans might it use to carry out these two activities? NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ B. Building Scenarios 1. Scenario building involves looking at current trends and discontinuities and imagining possible alternative futures to build a framework with which unexpected future events can be managed. 2. With scenario building, a broad base of managers mentally rehearses different scenarios based on anticipating the varied changes that could impact the organization. Scenarios are like stories that offer alternative vivid pictures of what the future will look like and how managers will respond. Typically, two to five scenarios are developed for each set of factors, ranging from the most optimistic to the most pessimistic view. C. Crisis Planning Exhibit 5.6 1. Crisis Prevention Although unexpected events and disasters will happen, managers should do everything they can to prevent crises. A critical part of the prevention stage is building trusting relationships with key stakeholders such as employees, customers, suppliers, governments, unions, and the community. By developing favorable relationships, managers can often prevent crises from happening and respond more effectively to those that cannot be avoided. Good communication helps managers identify problems early so they do not turn into major issues. 2. Crisis Preparation a. Preparation includes designating a crisis management team and spokesperson, creating a detailed crisis management plan, and setting up an effective communications system. Some companies are setting up crisis management offices, with high-level leaders who report direction to the CEO. b. The crisis management team is a cross-functional group of people who are designated to swing into action if a crisis occurs. They are closely involved in creating the crisis management plan they will implement if a crisis occurs. A spokesperson should be designated. c. The crisis management plan is a detailed written plan that specifies the steps to be taken, and by whom, if a crisis occurs. The plan should include the steps for dealing with various types of crises, such as natural disasters like fires or earthquakes, normal accidents like economic crises or industrial accidents, and abnormal events such as product tampering or acts of terrorism. The plan should be a living, changing document that is regularly reviewed, practiced, and updated as needed. VI. INNOVATIVE APPROACHES TO PLANNING A. Set Stretch Goals for Excellence 1. Stretch goals are reasonable yet highly ambitious goals that are so clear, compelling, and imaginative that they fire up employees and engender excellence. They are typically so far beyond the current levels that people have to be innovative to find ways to reach them. 2. An extension of the stretch goal is the big hairy audacious goal or BHAG. A BHAG is any goal that is so big, inspiring, and outside the prevailing paradigm that it hits people in the gut and shifts their thinking. VII. THINKING STRATEGICALLY Strategic planning in for-profit organizations pertains to competitive actions in the marketplace. In nonprofit organizations, strategic planning pertains to events in the external environment. Strategic thinking means to take the long-term view and to see the big picture of the organization and its environment to achieve organizational goals. Understanding the strategy concept, the levels of strategy, and strategy formulation versus implementation is an important start toward strategic thinking. NEW MANAGER SELF-TEST: WHAT IS YOUR STRATEGY STRENGTH? Strategic management largely determines which organizations succeed and which ones struggle. This exercise helps students identify their strengths concerning strategy formulation and implementation. VIII. WHAT IS STRATEGIC MANAGEMENT? Exhibit 5.7 Strategic management is the set of decisions and actions used to formulate and implement strategies that provide a superior fit between the organization and its environment to achieve organizational goals. It helps managers answer questions such as: What changes and trends are occurring in the competitive environment? What products or services should we offer? How can we offer those products and services most efficiently? Answers to these questions help managers make choices about how to position their organization in the environment with respect to rival companies. A. Purpose of Strategy 1. Strategy is the plan of action that describes resource allocation and activities for dealing with the environment, achieving a competitive advantage, and attaining the organization’s goals. 2. Competitive advantage refers to what sets the organization apart from others and provides it with a distinctive edge in the marketplace. The essence of formulating strategy is choosing how the organization will be different. To remain competitive, companies develop strategies that focus on targeting specific customers, core competencies, provide synergy, and create value for customers. a. Target Customers. An effective strategy defines the customers and their needs that are to be served by the company. Managers define target market geographically, demographically, or by other means. Some firms target people who purchase primarily over the Internet whereas others aim to serve people who like to shop. b. Exploit Core Competence. A company’s core competence is something the organization does especially well in comparison to its competitors. A core competence represents a competitive advantage because the company acquires expertise that competitors do not have. A core competence may be in the area of superior research and development, expert technological know-how, process efficiency, or exceptional customer service. B. SWOT Analysis Exhibit 5.8 1. SWOT analysis includes strengths, weaknesses, opportunities, and threats—that affect organizational performance. External information about opportunities is obtained from customers, government reports, professional journals, suppliers, bankers, friends, and consultants. Internal information comes from reports, budgets, financial ratios, surveys of employee attitudes, and meetings. a. Internal Strengths and Weaknesses Strengths are positive internal characteristics organizations can exploit to achieve strategic performance goals. Weaknesses are internal characteristics that may inhibit or restrict the organization’s performance. The information sought pertains to specific functions such as marketing, finance, production, or R&D. b. External Opportunities and Threats Opportunities are characteristics of the external environment that have the potential to help the organization achieve or exceed its strategic goals. Threats are characteristics of the external environment that may prevent the organization from achieving its strategic goals. The task environment sectors are the most relevant to strategic behavior and include the behavior of customers, competitors, suppliers, and the labor supply. The general environment includes technological developments, the economy, legal-political and international events, and sociocultural changes. Discussion Question #8: Perform a SWOT analysis for the school or university you attend. Do you think university administrators consider the same factors when devising their strategy? NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ VIII. FORMULATING BUSINESS LEVEL STRATEGY A. The BCG Matrix Exhibit 5.9 1. The BCG (Boston Consulting Group) matrix organizes businesses along two dimensions—business growth rate and market share. Business growth rate pertains to how rapidly the entire industry is growing. Market share defines whether a business unit has a larger or smaller market share than competitors. The combination of market share and business growth rate provides four categories to judge SBUs within a corporate portfolio. a. Star. The star has a large market share in a rapidly growing industry. The star is important because it has additional growth potential and profits should be reinvested for future growth and profits. It will generate a positive cash flow as industry matures and market growth slows. b. Cash Cow. The cash cow exists in a mature, slow-growth industry but has a large market share. The cash cow has a positive cash flow and can be milked to feed riskier businesses. c. Question Mark. The question mark exists in a new, rapidly growing industry but only has small market share. The question mark is risky. It could become a star or it could fail. d. Dog. The dog is a poor performer with small market share in a slow- growth industry. A dog provides little profit and may be targeted for divestment or liquidation. Discussion Question #11: Walt Disney Company has four major strategic business units: movies (including Miramax and Touchstone), theme parks, consumer products, and television (the ABC TV network and the Disney Channel cable network). Place each of these SBUs on the BCG matrix based on your knowledge of them. NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ B. The Competitive Environment The competitive environment is different for different kinds of businesses. Most large companies have separate business lines and do an industry analysis for each line of business or SBU. C. Porter’s Competitive Strategies Porter proposed that business-level strategies are the result of competitive forces in the company’s environment. To find a competitive edge within the specific environment, Porter suggests that a company can adopt one of three strategies. Exhibit 5.10 1. Differentiation. The differentiation strategy is an attempt to distinguish the firm’s products or services from others in the same industry. The organization may use advertising, distinctive product features, exceptional service, and new technology to achieve a product perceived as unique. The differentiation strategy can be profitable because customers are loyal and will pay high prices for the product. Companies that pursue differentiation need strong marketing abilities, a creative flair, and a reputation for leadership. This strategy can reduce rivalry with competitors if buyers are loyal. 2. Cost Leadership. With a cost leadership strategy, the organization seeks efficient facilities, pursues cost reductions, and uses tight cost controls to produce products more efficiently than competitors. A low cost position means the company can undercut competitors’ prices and still offer comparable quality and earn a reasonable profit. 3. Focus. With a focus strategy, the organization concentrates on a specific regional market or buyer group. The firm may use a differentiation or cost leadership approach but only for a narrow target market. Discussion Question #10: Using Porter’s competitive strategies, how would you describe the strategies of Wal-Mart, Macy’s, and Target? NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ CHAPTER 6 MANAGERIAL DECISION MAKING CHAPTER OUTLINE New Manager Self-Test: How Do You Make Decisions? I. Types of Decisions and Problems A. Programmed and Nonprogrammed Decisions B. Facing Certainty and Uncertainty New Manager Self-Test: Intolerance of Ambiguity II. Decision-Making Models A. The Ideal, Rational Model B. How Managers Actually Make Decisions C. The Political Model III. Decision-Making Steps A. Recognition of Decision Requirement B. Diagnosis and Analysis of Causes C. Development of Alternatives D. Selection of the Desired Alternative E. Implementation of the Chosen Alternative F. Evaluation and Feedback IV. Personal Decision Framework V. Why Do Managers Make Bad Decisions? VI. Innovative Decision Making A. Start with Brainstorming B. Use Hard Evidence C. Engage in Rigorous Debate D. Avoid Groupthink E. Know When to Bail F. Do a Postmortem ANNOTATED LEARNING OUTCOMES After studying this chapter, students should be able to: 1. Explain why decision making is an important component of good management. Answer: Every organization grows, prospers, or fails as a result of decisions made by its managers. Managers are often referred to as decision makers. Good decision making is a vital part of good management. Decisions determine how the organization solves its problems, allocates resources, and accomplishes its objectives. Decision making is not easy. It must be done amid ever changing factors, unclear information, and conflicting points of view. Plans and strategies are arrived at through decision making. The better the decision making, the better the strategic planning. 2. Discuss the difference between programmed and nonprogrammed decisions and the decision characteristics of certainty and uncertainty. Answer: Programmed decisions involve situations that have occurred often enough to enable decision rules to be developed and applied in the future. Once managers formulate decision rules, subordinates and others can make the decision, freeing managers for other tasks. Nonprogrammed decisions are made in response to situations that are unique, are poorly defined and largely unstructured, and have important consequences for the organization. Many nonprogrammed decisions involve strategic planning because uncertainty is great and decisions are complex. Every decision situation can be organized on a scale according to the availability of information and the possibility of failure. Certainty means that all the information the decision maker needs is fully available. However, few decisions are certain in the real world. Most contain some uncertainty. Uncertainty means that managers know which goals they wish to achieve, but information about alternatives and future events is incomplete. 3. Describe the ideal, rational model of decision making and the political model of decision making. Answer: The classical model of decision making is considered to be normative, which means it defines how a decision maker should make decisions. It is based on rational economic assumptions and manager beliefs about what ideal decision making should be. It does not describe how managers actually make decisions so much as it provides guidelines on how to reach an ideal outcome for the organization. The classical model is most valuable when applied to programmed decisions and to decisions characterized by certainty or risk because information is available and probabilities can be calculated. The classical model is often associated with high performance for organizations in stable environments. The political model of decision making is useful for making nonprogrammed decisions when conditions are uncertain, information is limited, and managers may disagree about what goals to pursue or what course of action to take. The political model closely resembles the real environment in which most managers and decision makers operate. Managers often engage in coalition building for making complex organizational decisions. Coalition building is the process of forming alliances among managers. The inability of managers to build coalitions often makes it difficult or impossible for managers to get their decisions implemented. This model is associated with high performance in unstable environments in which decisions must be made rapidly and under more difficult conditions. 4. Explain the process by which managers actually make decisions in the real world. Answer: The administrative model describes how managers actually make decisions such as those characterized by nonprogrammed decisions, uncertainty, and ambiguity. The administrative model is considered to be descriptive. It assumes that managers do not have the time or resources to make the optimal decision and therefore will be satisfied with the first decision that meets the minimal criteria. Intuition based on past practice and experience is often used in this model to make decisions. The application of the administrative model has been associated with high performance in unstable environments in which decisions must be made rapidly and under more difficult conditions. 5. Identify the six steps used in managerial decision making. Answer: Whether a decision is programmed or nonprogrammed, and regardless the manager follows the classical, political, or administrative model of decision making, six steps typically are associated with effective decision-making processes. These six steps are: • recognition of decision requirement; • diagnosis and analysis of causes; • development of alternatives; • selection of desired alternative; • implementation of chosen alternative; and • evaluation and feedback. 6. Describe four personal decision styles used by managers, and explain the biases that frequently cause managers to make bad decisions. Answer: The directive style is used by people who prefer simple, clear-cut solutions to problems. Managers with an analytical style like to consider complex solutions based on as much data as they can gather. People who tend toward a conceptual style also like to consider a broad amount of information. The behavioral style is characterized by having a deep concern for others as individuals. Most bad decisions are errors in judgment that originate in the human mind’s limited capacity and in the natural biases managers display during decision making. Awareness of the following six biases can help managers make more enlightened choices: Being influenced by initial impressions. The mind often gives disproportionate weight to the first information it receives when considering decisions. These initial impressions act as an anchor to subsequent thoughts and judgments. Past events and trends also act as anchors. Giving too much weight to the past can lead to poor forecasts and misguided decisions. Justifying past decisions. People don’t like to make mistakes, so they continue to support a flawed decision in an effort to justify or correct the past. Seeing what you want to see. People frequently look for information that supports their existing instinct or point of view and avoid information that contradicts it, affecting where they look for information as well as how they interpret the information they find. Perpetuating the status quo. Managers may base decisions on what has worked in the past and fail to explore new options, dig for additional information, or investigate new technologies. Being influenced by emotions. Managers make better decision when—to the extent possible—they take emotions out of the decision-making process. Overconfidence. Most people overestimate their ability to predict uncertain outcomes. Before making a decision, managers have unrealistic expectations of their ability to understand the risk and make the right choice. 7. Identify and explain innovative techniques for decision making, including brainstorming, evidence-based management, and after-action reviews. Answer: One of the best known techniques for rapidly generating creative alternatives is brainstorming. Brainstorming uses a face-to-face interactive group to spontaneously suggest a broad range of alternatives for decision making. The keys to effective brainstorming are that people can build on one another’s ideas, all ideas are acceptable no matter how crazy they seem, and criticism and evaluation are not allowed. The goal is to generate as many ideas as possible. Evidence-based decision making is founded on a commitment to examining potential biases, seeking and examining evidence with rigor, and making informed and intelligent decisions based on the best available facts and evidence. An important key to better decision making under conditions of uncertainty is to encourage a rigorous debate of the issue at hand. Good managers recognize that constructive conflict based on different points of view can focus a problem, clarify ideas, and stimulate creative thinking. It can also create a broader understanding of issues and alternatives, and improve broader decision quality. Two common ways to accomplish this are having a devil’s advocate to challenge the group’s assumptions and assertions, and engaging in point-counterpoint by giving two subgroups competing responsibilities. Avoiding groupthink helps groups make better decisions. Groupthink refers to the tendency of people in groups to suppress contrary opinions. When people slip into groupthink, the desire for harmony outweighs concerns over decision quality. Group members emphasize maintaining unity rather than realistically challenging problems and alternatives. Some disagreement and conflict is much healthier than blind agreement. Managers need to know when to bail; i.e., they must be able to discern when to pull the plug on something that isn’t working. Escalating commitment means that organizations often continue to invest time and money in a solution despite strong evidence that it is not appropriate to do so. Managers might block or distort negative information because they don’t want to be responsible for a bad decision, or might not accept that their decision is wrong. To improve decision making people review the results of their decisions, they learn valuable lessons for how to do things better in the future. A technique adopted from the U.S. Army, the after-action review is a disciplined procedure whereby managers review the results of decisions to evaluate what worked, what didn’t, and how to do things better. LECTURE OUTLINE NEW MANAGER SELF-TEST: HOW DO YOU MAKE DECISIONS? Most of us make decisions automatically and without realizing that people have diverse decision-making behaviors, which they bring to management positions. New managers typically use a different decision behavior than seasoned executives. They often start out with a more directive, decisive, command-oriented behavior and gradually move toward more openness, diversity of viewpoints, and interactions with others as they move up the hierarchy. This exercise helps students determine whether they typically make decisions more like new managers or more like senior managers. I. TYPES OF DECISIONS AND PROBLEMS A decision is a choice made from available alternatives. Decision making is the process of identifying problems and opportunities and then resolving them. Decision making involves effort both before and after the actual choice. A. Programmed and Nonprogrammed Decisions 1. Programmed decisions involve situations that have occurred often enough to enable decision rules to be developed and applied in the future. Once managers formulate decision rules, subordinates and others can make decisions freeing managers for other tasks. 2. Nonprogrammed decisions are made in response to situations that are unique, poorly defined, largely unstructured, and likely to have important consequences for the organization. Nonprogrammed decisions often involve strategic planning because uncertainty is great and decisions are complex. B. Facing Certainty and Uncertainty Exhibit 6.1 1. One difference between programmed and nonprogrammed decisions relates to the degree of certainty or uncertainty that managers deal with in making the decision. In a perfect world, managers have all the information necessary for making decisions. In reality, some things are unknowable and some decisions will fail. Every decision situation can be organized on a scale according to the availability of information and the possibility of failure. The four positions on the scale are certainty, risk, uncertainty, and ambiguity. a. Certainty means that all the information the decision maker needs is fully available. Few decisions are certain in the real world. Most contain risk or uncertainty. b. Risk means a decision has clear cut objectives and good information available. The future outcomes associated with each alternative are subject to failure; however, enough information is available to allow the probability of a successful outcome for each alternative to be estimated. c. Uncertainty means managers know which goals they wish to achieve, but information about alternatives and future outcomes is incomplete. Factors that may affect a decision, such as price, production costs, volume, or future interest rates, are difficult to analyze and predict. Managers may have to come up with creative approaches to alternatives and use personal judgment to determine which alternative is best. Many decisions made under uncertainty do not produce the desired results, but managers face uncertainty every day. d. Ambiguity means that the goals to be achieved or the problem to be solved is unclear, alternatives are difficult to define, and information about outcomes is unavailable. High ambiguous circumstances can create a wicked decision problem, with conflicts over goals and decision alternatives, rapidly changing circumstances, fuzzy information, and unclear linkages among decision elements. Managers have a difficult time coming to grips with the issues and must conjure up reasonable scenarios in the absence of clear information. Ambiguity is by far the most difficult decision situation. Discussion Question #3: Explain the difference between risk and ambiguity. How might decision making differ for a risky versus an ambiguous situation? NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ NEW MANAGER SELF-TEST: INTOLERANCE OF AMBIGUITY This exercise helps students to determine how comfortable they are when dealing with ambiguity. II. DECISION-MAKING MODELS Exhibit 6.2 Decisions are usually made using the classical, the administrative, or the political decision making model. The choice of model used depends on the manager’s personal preference, whether the decision is programmed or nonprogrammed, and the degree of uncertainty associated with the decision. A. The Ideal, Rational Model 1. The classical model of decision making is based on assumptions that managers should make logical decisions that will be in the organization’s best economic interests. The four assumptions include: a. The decision maker operates to accomplish goals that are known and agreed upon. b. The decision maker strives for conditions of certainty, gathering complete information. c. Criteria for evaluating alternatives are known. d. The decision maker is rational and uses logic to assign values, order preferences, evaluate alternatives, and make the decision to maximize goals. 2. The classical model is normative, defining how a decision maker should make decisions, and providing guidelines for reaching an ideal outcome for the organization. The value of the classical model has been to help decision makers be more rational. 3. The classical model represents an “ideal” model of decision making that is often unattainable by real people in real organizations. It works best when applied to programmed decisions and to decisions characterized by uncertainty or risk because relevant information is available and probabilities can be calculated. Discussion Question #8: List some possible advantages and disadvantages to using computer technology for managerial decision making. NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ B. How Managers Actually Make Decisions 1. Bounded Rationality and Satisficing a. The administrative model is considered to be descriptive, meaning that it describes how managers actually make decisions rather than how they should make them. Herbert A. Simon proposed two concepts instrumental in shaping the administrative model: bounded rationality and satisficing. b. Bounded rationality means people have limits, or boundaries, on the amount of information they can process in making a decision. Because managers do not have the time or cognitive ability to process complete information about complex decisions, they must satisfice. c. Satisficing means that decision makers choose the first solution alternative that satisfies minimal decision criteria. Rather than pursue all alternatives, managers will opt for the first solution that appears to solve the problem. The decision maker cannot justify the time and expense of obtaining complete information. d. According to the administrative model: • Decision goals often are vague, conflicting, and lack consensus among managers. • Rational procedures are not always used, and when they are, they are confined to a simplistic view of the problem that does not capture the complexity of real events. • Managers’ searches for alternatives are limited because of human, information, and resource constraints. • Most managers settle for a satisficing rather than a maximizing solution. 2. Intuition a. Intuition is another aspect of administrative decision making. Intuition represents a quick apprehension of a decision situation based on past experience but without conscious thought. Intuitive decision making is not arbitrary or irrational because it is based on years of practice and hands on experience. b. Intuition begins with recognition; when people build a depth of experience and knowledge in a particular area, the right decision often comes quickly and effortlessly. Research on the validity of intuition in decision making is inconclusive, suggesting that managers should take a cautious approach to it, applying intuition only under the right circumstances and in the right way. Discussion Question #9: Can intuition and evidence-based decision making coexist as valid approaches within an organization? How might managers combine their intuition with a rational, data-driven, evidence-based approach? NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ C. The Political Model 1. This model is for nonprogrammed decisions when conditions are uncertain, information is limited, and there is disagreement about the goals to pursue or the action to take. Managers often engage in coalition building for making complex organizational decisions. A coalition is an informal alliance among managers who support a specific goal. Coalition building is the process of forming alliances among managers. The inability of managers to build coalitions often makes it difficult or impossible for them to get their decisions implemented. The political model closely resembles the real environment in which most managers and decision makers operate. The political model begins with four basic assumptions. a. Organizations are made up of groups with diverse interests, goals, and values. b. Information is ambiguous and incomplete. c. Managers do not have time, resources, or mental capacity to identify all dimensions of the problem and process all relevant information. d. Managers engage in the push and pull of debate to decide goals and discuss alternatives. 2. Recent research has found rational, classical procedures to be associated with high performance for organizations in stable environments. Administrative and political decision-making procedures and intuition have been associated with high performance in unstable environments when decisions must be made rapidly. Discussion Question #4: Analyze three decisions you made over the past six months. Which of these were programmed and which were nonprogrammed? Which model—the classical, administrative, or political—best describes the approach you took to making each decision? NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ III. DECISION-MAKING STEPS Exhibit 6.3 Whether a decision is programmed or nonprogrammed, and regardless of whether the manager follows the classical, political or administrative model of decision making, six steps typically are associated with effective decision-making processes. These six steps are: A. Recognition of Decision Requirement 1. Managers confront a decision requirement in the form of either a problem or an opportunity. A problem occurs when organizational accomplishment is less than established goals. Some aspect of performance is unsatisfactory. An opportunity exists when managers see potential accomplishments that exceed current goals. 2. Awareness of a problem or opportunity is the first step in the decision-making sequence and requires surveillance of the internal and external environment for issues that merit executive attention. Recognizing decision requirements is difficult because it often means integrating information in novel ways. B. Diagnosis and Analysis of Causes 1. Diagnosis is the step in which managers analyze the underlying causal factors associated with the decision situation. Managers make a big mistake if they jump right into generating alternatives without first exploring the cause of the problem more deeply. Studies recommend that managers ask a series of questions to specify underlying causes, including: a. What is the state of disequilibrium affecting us? b. When did it occur? c. Where did it occur? d. How did it occur? e. To whom did it occur? f. What is the urgency of the situation? g. What is the interconnectedness of events? h. What result came from which activity? C. Development of Alternatives 1. Once the problem or opportunity has been recognized and analyzed, decision makers begin to consider taking action. The next step is to develop possible alternative solutions that will respond to the needs of the situation and correct the underlying causes. 2. For a programmed decision, feasible alternatives are often available within the organization’s rules and procedures. Nonprogrammed decisions require developing new courses of action that will meet the needs of the company. D. Selection of the Desired Alternative 1. The best alternative is one in which the solution best fits the firm’s overall goals and values and achieves the desired results using the fewest resources. The manager tries to select the choice with the least amount of risk and uncertainty. Making choices also depends on managers’ personality factors and willingness to accept risk and uncertainty. Risk propensity is the willingness to undertake risk with the opportunity of gaining an increased payoff. E. Implementation of Chosen Alternative Exhibit 6.4 1. The implementation stage involves the use of managerial, administrative, and persuasive abilities to ensure that the chosen alternative is carried out. The success of the chosen alternative depends on whether or not it is translated into action. Sometimes an alternative never becomes reality because managers lack resources or energy needed to make things happen. Communication, motivation, and leadership skills must be used to see that the decision is carried out. F. Evaluation and Feedback 1. In the evaluation step, decision makers gather information or feedback to determine how well the decision was implemented and whether it achieved its goals. Feedback is important because decision making is a continuous, never-ending process. Feedback provides decision makers with information that can start a new decision cycle. 2. By learning from decision mistakes, managers can turn problems into opportunities. Discussion Question #1: You are a busy partner in a legal firm, and an experienced administrative assistant complains of continued headaches, drowsiness, dry throat, and occasional spells of fatigue and flu. She tells you she believes that the air quality in the building is bad and would like something to be done. How would you respond? NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ IV. PERSONAL DECISION FRAMEWORK Exhibit 6.5 Not all managers make decisions in the same way. These differences can be explained by the concept of personal decision styles. Personal decision style refers to differences between people with respect to how they perceive problems and make decisions. Research has identified four major decision styles. • The directive style is used by people who prefer simple, clear-cut solutions to problems. • With an analytical style, managers like to consider complex solutions based on as much data as they can gather. • People who tend toward a conceptual style also like to consider a broad amount of information. • The behavioral style is characterized by having a deep concern for others as individuals. Most managers have a dominant decision style. The most effective managers are able to shift among styles as needed to meet the situation. Discussion Question #10: What do you think is your dominant decision style? Is your style compatible with group techniques such as brainstorming and engaging in rigorous debate? Discuss. NOTES____________________________________________________________________________________________________________________________________________________________________________________________________________________________________ V. WHY DO MANAGERS MAKE BAD DECISIONS? Even the best manager will make mistakes, but managers can increase their percentage of good decisions by understanding some of the factors that cause people to make bad ones. Most bad decisions are errors in judgment that originate in the human mind’s limited capacity and in the natural biases managers display during decision making. Awareness of the following six biases can help managers make more enlightened choices: • Being influenced by initial impressions. The mind often gives disproportionate weight to the first information it receives when considering decisions. These initial impressions act as an anchor to subsequent thoughts and judgments. Past events and trends also act as anchors. Giving too much weight to the past can lead to poor forecasts and misguided decisions. • Justifying past decisions. People don’t like to make mistakes, so they continue to support a flawed decision in an effort to justify or correct the past. • Seeing what you want to see. People frequently look for information that supports their existing instinct or point of view and avoid information that contradicts it, affecting where they look for information as well as how they interpret the information they find. • Perpetuating the status quo. Managers may base decisions on what has worked in the past and fail to explore new options, dig for additional information, or investigate new technologies. • Being influenced by emotions. Managers make better decision when—to the extent possible—they take emotions out of the decision-making process. • Overconfidence. Most people overestimate their ability to predict uncertain outcomes. Before making a decision, managers have unrealistic expectations of their ability to understand the risk and make the right choice. VI. INNOVATIVE DECISION MAKING A. Start with Brainstorming 1. One of the best known techniques for rapidly generating creative alternatives is brainstorming. Brainstorming uses a face-to-face group to spontaneously suggest a broad range of alternatives for decision making. The keys to effective brainstorming are that people can build on one another’s ideas, all ideas are acceptable no matter how crazy they seem, and criticism and evaluation are not allowed. The goal is to generate as many ideas as possible. 2. Electronic brainstorming, called brainwriting, brings people together in an interactive group over a computer network. Recent studies show that electronic brainstorming generates about 40 percent more ideas than individual brainstorming alone and 25 to 200 percent more than groups. B. Use Hard Evidence 1. Using evidence can help take emotion out of decision-making process, preventing managers relying on faulty assumptions or point of view. 2. Evidence-based decision making means a commitment to make more informed and intelligent decisions based on the best available facts and evidence. Managers should be alert to potential biases, past assumptions, or intuitions and seek and exam the evidence with rigor, thus making careful and thoughtful decision. C. Engage in Rigorous Debate An important key to better decision making under conditions of uncertainty is to encourage a rigorous debate of the issue at hand. Good managers recognize that constructive conflict based on different points of view can focus a problem, clarify ideas, and stimulate creative thinking. It can also create a broader understanding of issues and alternatives, and improve broader decision quality. There are several ways to stimulate rigorous debate. a. One way is by ensuring diversity in terms of age and gender, functional area of expertise, hierarchical level, and experience with the business. b. Some groups assign a devil’s advocate, who has the role of challenging the assumptions and assertions made by the group. c. Another approach is to have group members develop as many alternatives as they can as quickly as they can. d. Another approach is technique called point-counterpoint, a technique in which two subgroups assigned competing points of view. The two groups then develop and exchange proposals and discuss the various options until they arrive at a common set of understandings and recommendations. D. Avoid Groupthink Avoiding groupthink helps groups make better decisions. Groupthink refers to the tendency of people in groups to suppress contrary opinions. When people slip into groupthink, the desire for harmony outweighs concerns over decision quality. Group members emphasize maintaining unity rather than realistically challenging problems and alternatives. Some disagreement and conflict is much healthier than blind agreement. E. Know When to Bail In a fast-paced environment, good manager encourages risk taking and learning from mistakes, it also teaches a person to know when to pull the plug on something that isn’t working. Escalating commitment means that organizations often continue to invest time and money in a solution despite strong evidence that it is not appropriate to do so. Managers might block or distort negative information because they don’t want to be responsible for a bad decision, or might not accept that their decision is wrong. F. Do a Postmortem To improve decision making, managers need to reflect and learn from every decision they make. 1. A technique many companies have adopted from the U.S. Army to encourage examination of the evidence and continuous learning is the after-action review, a disciplined procedure whereby managers invest time to review the results of decision on a regular basis and learn from them. After implementing the decision, managers meet to evaluate what worked, what didn’t, and how to do things better. Many problems are solved by trial and error. 2. A similar technique was applied by managers at Lenovo called fu pan, which means “replaying the chess board,’ reviewing every move to improve the next one. Instructor Manual for Understanding Management Dorothy Marcic, Richard L. Daft 9781285421230, 9781305313347
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