Management and Planning – lecture 1 - decision-making

1. Management and Planning – lecture 1 - decision-making Geoff Leese September 2008, revised August 2009

2. Decision-making • Integral part of management • Occurs in every function and at all levels • Choosing necessary or desirable outcomes • Is an iterative process • Needs flair, intuition, judgment & creativity

3. H A Simon’s phases of decision-making (1) • Intelligence • search the environment for conditions calling for decisions • Design • Inventing, developing and analysing possible courses of action. Understanding the problem, generating possible solutions and testing solutions for feasibility.

4. H A Simon’s phases of decision-making (2) • Choice • Selecting an alternative or course of action from those available. The choice is then implemented • Review • Assessing past choices

5. Programmed(structured) decisions • Characteristics • repetitive, routine, known rules or procedures, often automated, involve “things” rather than people, can be fairly easily delegated, more likely at lower levels of management • Examples • inventory control, machine loading, scheduling

6. Non-programmed (unstructured) decisions • Characteristics • novel, non-routine, decision rules unavailable or not known, high level of uncertainty, cannot be easily delegated, can involve things but always involve people, more likely at higher levels of management • Examples • recruitment, employee appraisal, mergers, launches of new products

7. Levels of decision-making (1) Decision characteristics Information characteristics Largely external, informal, qualitative info important, forward looking, precision unimportant, instant access not vital, wide ranging, incomplete. Long time horizons, large scale resources, creativity & judgment, usually unstructured, problems difficult to define, much uncertainty, infrequent Strategic Heuristic! Tactical Rational! Largely internal, mainly historical, detailed, high precision, often quantitative, instant access often critical, narrow in scope but comprehensive Repetitive, frequent, short timescale, small scale resources, clear objectives and rules, little or no discretion Operational

8. Strategic decision-making • Examples • mergers & takeovers, new product planning, capital investment, financial structuring • information needs • Market & economic forecasts, political & social trends, legislative, environmental and technological constraints

9. Tactical decision-making • Examples • Pricing, capacity planning, preparation of budgets, purchasing contracts • Information needs • Cost & sales analyses, performance reports, summaries of operational/production activity, budget vs. actual comparisons

10. Operational decision-making • Examples • production scheduling, maintenance, re-ordering, credit approval • Information needs • Sales orders, production requirements, performance measures, customer credit status, delivery records, despatch records etc

11. Certainty, Risk and Uncertainty • Certainty • only one possible outcome for each alternative, complete and accurate knowledge of that outcome • Risk • many possible outcomes for each alternative, but a value and probability can be assigned to each one • Uncertainty • number of possible outcomes, probability and value is unknown

12. Decision models • Prescriptive (normative) • automatically selects best option, e.g. CVP analysis, linear programming, investment appraisal techniques • Descriptive • try to explain decision-making behaviour - are we always rational?

13. Rational decision-making Single, unambiguous objective Stated in numerical or financial terms All outcomes or alternatives known “Best” alternative chosen Alternatives expressed as objectives Alternatives evaluated and ranked Shouldn't be used uncritically - consider “softer” issues!

14. Risk assessment (expected value) Expected values Alternative A - (0.2*9000)+(0.6*7500)+(0.2*5000) = 7300 Alternative B - (0.3*9500)+0.5*7000)+(0.2*4000) = 7150 Alternative C - (0.1*10000)+(0.7*6500)+(0.2*3000) = 6150 If objective is to maximise expected value, Alternative A is preferred.

15. Decision trees Action B1 Decision node Outcome X1 D2 Outcome X2 Outcome X3 Action A1 D1 Outcome Y1 Action A2 Action C1 Outcome Y2 Outcome node D3

16. Satisficing (1) • Know all alternatives? Single, clear-cut objective? Imperfect world! • Limited search for a few satisfactory alternatives • Bounded rationality within limitations of imperfect info and decision makers perceptions • Decision made which satisfies aspirations (that’s good enough!)

17. Satisficing (2) • Very, very common! • Subjectivity, rule of thumb and judgment often used instead of mechanistic decision rules • MIS needs to supply background info and ways of finding alternatives, not mechanical decision rules

18. Consensus decision-making • Most appropriate to small changes (conventional view) • Japanese think differently! • What’s the question? • Decision-making can be protracted, but once taken implementation follows swiftly and effectively

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

20. Decision-making and MIS (1) • Supplies information, explores alternatives, provides support where manager makes the decision or • MIS takes the decision itself. Most appropriate with routine operations where decision rules are known

21. Decision-making and MIS (2) Executive info systems Strategic management Expert systems, DSS Unstructured Semi structured Tactical management Structured Transaction processing ADM, OR & Accounting models Operational Management

22. Further Reading • Cole G (1996) Management Theory and Practice, DP publications Chapter 19 • Elliot G & Starkings S (1998), Business Information Technology (Prentice Hall) Chapters 2 and 7 • Hannagan T(1998), Management Concepts and Practices, FT Pitman Chapter 13 • Someone else's view! (follow the link) • Decision making tools (follow the link)