Chapter- 3

Planning and
Decision Making

© 2005 Prentice Hall Inc. All rights reserved. 1–1

OBJECTIVES
After studying this chapter, you should be able to:

1. What Is Planning?
2. How Do Managers Plan?
3. Establishing Goals and Developing Plans
4. Contemporary Issues in Planning
LEARNING

5. Define decision and decision-making process.

6. Describe the eight steps in the decision-making process.
7. Discuss the assumptions of rational decision making.
8. Contrast programmed and nonprogrammed decisions.
9. Contrast the three decision-making conditions.
10. Describe the four decision making styles.
11. Explain the managerial decision-making model.

© 2005 Prentice Hall Inc. All rights reserved. 6–2

 What Is Planning?
 Planning involves defining the organization’s goals,
establishing an overall strategy for achieving these
goals, and developing a comprehensive set of plans
to integrate and coordinate organizational work.
 Planning
– A primary managerial activity that involves:
• Defining the organization’s goals
• Establishing an overall strategy for achieving
those goals
• Developing plans for organizational work
activities.

© 2007 Prentice Hall, Inc. All rights reserved. 7–3

 Why Do Managers Plan?
 Purposes of Planning
Planning is important and serves many significant purposes.
1. Planning gives direction to the organization.
2. Planning reduces the impact of change.
3. Planning establishes a coordinated effort.
4. Planning reduces uncertainty.
5. Planning reduces overlapping and wasteful activities.
6. Planning establishes objectives or standards that are used in
controlling.

© 2007 Prentice Hall, Inc. All rights reserved. 7–4

 Planning and Performance
 The Relationship Between Planning And
Performance
– Formal planning is associated with:
• Higher profits and returns on assets.
• Positive financial results.
– The quality of planning and implementation affects
performance more than the extent of planning.
– The external environment can reduce the impact of
planning on performance,
– Formal planning must be used for several years before
planning begins to affect performance.

© 2007 Prentice Hall, Inc. All rights reserved. 7–5

 How Do Managers Plan?/Planning process
 Planning is often called the primary management function
because it establishes the basis for all other functions.
Planning is a two-part function—setting goals and
determining how to try to achieve the goals.
 Planning involves two important elements: goals and plans.
 Elements of Planning
 Goals (also Objectives)
o Desired outcomes for individuals, groups, or entire organizations.
o Provide direction and evaluation performance criteria.
 Plans
o Documents that outline how goals are to be accomplished.
o Describe how resources are to be allocated and establish activity
schedules.

© 2007 Prentice Hall, Inc. All rights reserved. 7–6

 Types of Goals
 Financial Goals
– Are related to the expected internal financial
performance of the organization.
 Strategic Goals
– Are related to the performance of the firm relative to
factors in its external environment (e.g., competitors).
 Stated Goals versus Real Goals
– Broadly-worded official statements of the organization
(intended for stakeholders to believe, its goals are.)
that may be irrelevant to its real goals (what actually
goes on in the organization).

© 2007 Prentice Hall, Inc. All rights reserved. 7–7

 Stated Goals of Large Global Companies

Execute strategic roadmap—“Plan to Win.”

Grow the business profitably.
Identify and develop diverse talent.
Promote balanced, active lifestyles.
(McDonald’s Corporation)
Continue to win market share globally.
Focus on higher-value products.
Reduce production costs.
Lower purchasing costs.
Integrate diversity.
Gain ISO 14001 certification for all factories.
(L'Oréal)
Respect the environment.
Respect and support family unity and national traditions.
Promote community welfare.
Continue implementing quality systems.
Continue to be a strong cash generator.
. (Grupo Bimbo)
© 2007 Prentice Hall, Inc. All rights reserved. 7–8
Types of Plans

© 2007 Prentice Hall, Inc. All rights reserved. 7–9

 Types of Plans
 Strategic Plans
– Apply to the entire organization.
– Establish the organization’s overall goals.
– Seek to position the organization in terms of its environment.
– Cover extended periods of time.
 Operational Plans
– Specify the details of how the overall goals are to be achieved.
– Cover short time period.
 Long-Term Plans
– Plans with time frames extending beyond three years
 Short-Term Plans
– Plans with time frames on one year or less

© 2007 Prentice Hall, Inc. All rights reserved. 7–10

 Types of Plans (cont’d)
 Specific Plans
– Plans that are clearly defined and leave no room for interpretation
 Directional Plans
– Flexible plans that set out general guidelines, provide focus, yet
allow discretion in implementation.
 Single-Use Plan
– A one-time plan specifically designed to meet the need of a unique
situation.
– A program is a comprehensive plan that coordinates a complex set
of activities related to a major non-recurring goal.
 Standing Plans
– Ongoing plans that provide guidance for activities performed
repeatedly.
– A policy is a general guide that specifies the broad parameters
within which organization members are expected to operate in
pursuit of organizational goals.

© 2007 Prentice Hall, Inc. All rights reserved. 7–11

 Establishing Goals and Developing Plans
 Traditional Goal Setting
– Broad/wide-ranging goals are set at the top of the
organization.
– Goals are then broken into subgoals/specific for
each organizational level.
– Assumes that top management knows best
because they can see the “big picture.”
– Goals are intended to direct, guide, and
constrain/compel from above.
– Goals lose clarity and focus as lower-level
managers attempt to interpret and define the goals
for their areas of responsibility.

© 2007 Prentice Hall, Inc. All rights reserved. 7–12

The Downside /weakness of Traditional Goal Setting

© 2007 Prentice Hall, Inc. All rights reserved. 7–13

Establishing Goals and Developing Plans (cont’d)
 Maintaining the Hierarchy of Goals
– Means–Ends Chain
The integrated network of goals that results from establishing
a clearly-defined hierarchy of organizational goals.
Achievement of lower-level goals is the means by which to
reach higher-level goals (ends).
The three levels of goals within an organization form a
hierarchy of goals, with lower-level goals forming a mean-end
chain with the next level of goals.
[Link] goals are broadly defined targets or future end
results set by top management.
2. Tactical goals are the targets or future end results usually set
by middle management for specific departments or units.
3. Operational goals are those targets or future end results set
by lower management that address specific, measurable
outcomes required from the lower levels.
© 2007 Prentice Hall, Inc. All rights reserved. 7–14
Characteristics of Well-Designed Goals

• Written in terms of • Challenging yet

outcomes, not actions attainable
 Focuses on the ends, not  Low goals do not
the means. motivate.
• Measurable and  High goals motivate if
quantifiable they can be achieved.
 Specifically defines how • Written down
the outcome is to be  Focuses, defines, and
measured and how much makes goals visible.
is expected. • Communicated to all
• Clear as to time frame necessary
 How long before organizational members
measuring  Puts everybody “on the
accomplishment. same page.”
© 2007 Prentice Hall, Inc. All rights reserved. 7–15
 Steps in Goal Setting
1. Review the organization’s mission statement.
Do goals reflect the mission?
2. Evaluate available resources.
Are resources sufficient to accomplish the mission?
3. Determine goals individually or with others.
Are goals specific, measurable, and timely?
4. Write down the goals and communicate them.
Is everybody on the same page?
5. Review results and whether goals are being met.
What changes are needed in mission, resources, or
goals?

© 2007 Prentice Hall, Inc. All rights reserved. 7–16

 Cont’d
 An organization’s mission is the organization’s purpose or
fundamental reason for existence. The mission statement typically
defines the organization in terms of the important attributes of the
organization.
1. Customers: Who are the organization’s customers?
2. Products or services: What are the organization’s major products or
services?
3. Location: Where does the organization compete?
4. Technology: What is the firms’ basic technology?
5. Philosophy: What are the basic beliefs, values, aspirations, and
philosophical priorities of the organization?
6. Self-concept: What are the organization’s major strengths and
competitive advantages?
7. Concern for public image: what are the organization’s public
responsibilities and what image is desired?
8. Concern for employees: What is the organization’s attitude toward its
employees?
© 2005 Prentice Hall Inc. All rights reserved. 8–17
 How Goals Facilitate Performance
 The content of goals should meet six criteria.
1. Challenging goals usually lead to higher performance
from individuals and groups.
2. Attainable goals, not impossible demands, are more likely
to improve performance.
3. Specific and measurable goals are needed so that it is
clear when they have been achieved.
4. Time-limited goals give them meaning.
5. Relevant goals enable employees to see the purpose of
the goals and to devise ways of meeting them.
6. Measurable means the performance and targets can be
measured after an interval of time.
© 2005 Prentice Hall Inc. All rights reserved. 8–18
 Developing Plans
 Contingency/possibility Factors in A Manager’s
Planning
– Manager’s level in the organization
• Strategic plans at higher levels
• Operational plans at lower levels
– Degree of environmental uncertainty
• Stable environment: specific plans
• Dynamic environment: specific but flexible plans
– Length of future commitments
• Commitment Concept: current plans affecting future
commitments must be sufficiently long-term to meet those
commitments.

© 2007 Prentice Hall, Inc. All rights reserved. 7–19

Planning in the Hierarchy of Organizations

© 2007 Prentice Hall, Inc. All rights reserved. 7–20

 Approaches to Planning
 Establishing a formal planning department
– A group of planning specialists who help managers
write organizational plans.
– Planning is a function of management; it should never
become the sole responsibility of planners.
 Involving organizational members in the process
– Plans are developed by members of organizational
units at various levels and then coordinated with other
units across the organization.

© 2007 Prentice Hall, Inc. All rights reserved. 7–21

 Contemporary Issues in Planning
 Criticisms of Planning
– Planning may create rigidity.
– Plans cannot be developed for dynamic
environments.
– Formal plans cannot replace intuition and
creativity.
– Planning focuses managers’ attention on today’s
competition not tomorrow’s survival.
– Formal planning reinforces today’s success, which
may lead to tomorrow’s failure.

© 2007 Prentice Hall, Inc. All rights reserved. 7–22

 Contemporary Issues in Planning (cont’d)

 Effective Planning in Dynamic Environments

– Develop plans that are specific but flexible.
– Understand that planning is an ongoing process.
– Change plans when conditions warrant.
– Persistence in planning eventually pay off.
– Flatten the organizational hierarchy to foster the
development of planning skills at all organizational
levels.

© 2007 Prentice Hall, Inc. All rights reserved. 7–23

 Decision Making
 Decision
 Making a choice from two or more alternatives.
 Managerial decision making is the process of making a
conscious choice between two or more rational alternatives in
order to select the one that will produce the most desirable
consequences (benefits) relative to unwanted consequences
(costs).
 The process of choosing a solution from
available alternatives.
 The Process of identifying problems and opportunities and
resolving them.
 Making good decisions is something that every manager strives
to do because the overall quality of managerial decisions has a
major influence on organizational success or failure.
 Decision making is part of all four managerial functions. In
performing these functions, managers are often called decision
© 2007makers.
Prentice Hall, Inc. All rights reserved. 6–24
 Importance of Decision making
 Decision-making plays a vital role in management. ... It
plays the most important role in the planning process.
When the managers plan, they decide on many matters
as what goals their organization will pursue, what
resources they will use, and who will perform each
required task.
 The importance of decision making lies in the way it
helps you in choosing between various options.
Before making a decision, there is a need to gather all
available information and to weigh its pros and cons. It
is crucial to focus on steps that can help in taking the
right decisions.

© 2005 Prentice Hall Inc. All rights reserved. 8–25

 The Decision-Making Process
 The Decision-Making Process
 A systematic process of defining problems,
evaluating alternatives, and choosing optimal
solutions.
 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.

© 2005 Prentice Hall Inc. All rights reserved. 8–26

The Decision-Making Process (cont’d)

© 6–27
 Cont’d
Step 1: Identifying the Problem
 Problem- A discrepancy between an existing and desired state of affairs.
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.
Step 4: Developing Alternatives
Identifying viable alternatives
– Alternatives are listed (without evaluation) that can resolve the problem.
© 2005 Prentice Hall Inc. All rights reserved. 8–28
 Cont’d
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.
Step 6: Selecting an Alternative
Choosing the best alternative
– The alternative with the highest total weight is chosen.
Step 7: Implementing the Alternative
Putting the chosen alternative into action.
– Conveying the decision to and gaining commitment from those who
will carry out the decision.
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?
© 2005 Prentice Hall Inc. All rights reserved. 8–29
Decisions in the Management Functions

© 2007 Prentice Hall, Inc. All rights reserved. 6–30

 Making Decisions
 Rationality/Reasonableness
– 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.

© 2007 Prentice Hall, Inc. All rights reserved. 6–31

 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.

 Intuitive/untaught decision making

– Making decisions on the basis of experience, feelings,
and accumulated judgment.

© 2005 Prentice Hall Inc. All rights reserved. 8–32

 What is Intuition?

© 2007 Prentice Hall, Inc. All rights reserved. 6–33

 Types of Problems and Decisions
 Structured Problems
– Involve goals that clear.
– Are familiar (have occurred before).
– Are easily and completely defined—information about the problem is
available and complete.
1. Programmed Decision
– Programmed decisions are made in response to recurring
organizational problems. A repetitive decision that can be handled by a
routine approach.
 Types of Programmed Decisions
A. Policy- A general guideline for making a decision about a structured
problem.
B. Procedure- A series of interrelated steps that a manager can use to
respond (applying a policy) to a structured problem.
C. Rule- An explicit statement that limits what a manager or employee can or
cannot do. Hall, Inc. All rights reserved.
© 2007 Prentice 6–34
 Cont’d
 Unstructured Problems
– Problems that are new or unusual and for which
information is ambiguous or incomplete.
– Problems that will require custom-made solutions.
2. Nonprogrammed Decisions
– Decisions that are unique and nonrecurring.
– Decisions that generate unique responses.
 are made in response to situations that are unique, poorly
defined and largely unstructured, and have important
consequences for the organization. Many non-programmed
decisions involve strategic planning, because uncertainty is
great and decisions are complex.
© 2005 Prentice Hall Inc. All rights reserved. 8–35
 Programmed versus Nonprogrammed Decisions

© 2007 Prentice Hall, Inc. All rights reserved. 6–36

 Decision-Making Conditions/Situations
1. Certainty
A situation in which a manager can make an accurate
decision because the outcome of every alternative choice
is known.
2. Risk
A situation in which the manager is able to estimate the
likelihood (probability) of outcomes that result from the
choice of particular alternatives.
3. Uncertainty
Limited information prevents estimation of outcome
probabilities for alternatives associated with the problem
and may force managers to rely on “gut feelings”/state of
mind.
© 2007 Prentice Hall, Inc. All rights reserved. 6–37
 Decision-Making Styles
 Dimensions of Decision-Making Styles
– Ways of thinking
• Rational, orderly, and consistent
• Intuitive, creative, and unique
– Tolerance for ambiguity
• Low tolerance: require consistency and order
• High tolerance: multiple thoughts simultaneously
 Types of Decision Makers
 Directive- Use minimal information and consider few alternatives.
 Analytic- Make careful decisions in unique situations.
 Conceptual-- Maintain a broad outlook and consider many alternatives
in making decisions.
 Behavioral--Avoid conflict by working well with others and being
receptive to suggestions.
© 2007 Prentice Hall, Inc. All rights reserved. 6–38
 Cont’d
A. The directive style is one that’s characterized by
low tolerance for ambiguity and a rational way of
thinking.
B. The analytic style is one characterized by a high
tolerance for ambiguity and a rational way of
thinking.
C. The conceptual style is characterized by an
intuitive way of thinking and a high tolerance for
ambiguity.
D. The behavioral style is one characterized by a low
tolerance for ambiguity and an intuitive way of
thinking

© 2005 Prentice Hall Inc. All rights reserved. 8–39

 Decision-Making Matrix

© 6–40
Overview of Managerial Decision Making

© 2007 Prentice Hall, Inc. All rights reserved. 6–41