Decision making

LEARNING OBJECTIVES:
How is information used for decision-making?
The need for a decision arises in business because a manager is faced with a
problem and alternative courses of action are available. In deciding which option
to choose he will need all the information which is relevant to his decision; and
he must have some criterion on the basis of which he can choose the best
alternative. Some of the factors affecting the decision may not be expressed in
monetary value. Hence, the manager will have to make 'qualitative' judgements,
e.g. in deciding which of two personnel should be promoted to a managerial
position. A 'quantitative' decision, on the other hand, is possible when the
various factors, and relationships between them, are measurable. This chapter
will concentrate on quantitative decisions based on data expressed in monetary
value and relating to costs and revenues as measured by the management
accountant.

Management functions POLC

Planning, Organizing, Leading, and Controlling
(Manager as Information processing centre. Management functions POLC.
Programmed/non-programmed decisions. Decision conditions.
Systematic/intuitive decisions).
A managers primary challenge is to solve problems creatively. While drawing
from a variety of academic disciplines, and to help managers respond to the
challenge of creative problem solving, principles of management have long been
categorized into the four major functions of planning, organizing, leading, and
controlling (the P-O-L-C framework). The four functions, summarized in the P-O-LC figure, are actually highly integrated when carried out in the day-to-day
realities of running an organization. Therefore, you should not get caught up in
trying to analyse and understand a complete, clear rationale for categorizing
skills and practices that compose the whole of the P-O-L-C framework. It is
important to note that this framework is not without criticism. Specifically, these
criticisms stem from the observation that the P-O-L-C functions might be ideal
but that they do not accurately depict the day-to-day actions of actual managers

Planning:
Planning is the function of management that involves setting objectives and
determining a course of action for achieving those objectives. Planning requires
that managers be aware of environmental conditions facing their organization
and forecast future conditions. It also requires that managers be good decision
makers.
The process begins with environmental scanning the act of analysing the critical
external contingencies facing an organization in terms of economic conditions,
competitors, and customers. Which simply means that planners must be aware

of the critical contingencies facing their organization in terms of economic

conditions, their competitors, and their customers. Planners must then attempt
to forecast future conditions.
These forecasts form the basis for planning. Planners must establish objectives,
which are statements of what needs to be achieved and when. Planners must
then identify alternative courses of action for achieving objectives.
After evaluating the various alternatives, planners must make decisions about
the best courses of action for achieving objectives. They must then formulate
necessary steps and ensure effective implementation of plans. Finally, planners
must constantly evaluate the success of their plans and take corrective action
when necessary. There are many different types of plans and planning. Strategic
planning the process of analysing competitive opportunities and threats, as well
as the strengths and weaknesses of the organization.

Organizing:
Organizing is the function of management that involves developing an
organizational structure and allocating human resources to ensure the
accomplishment of objectives. The structure of the organization is the framework
within which effort is coordinated. The structure is usually represented by an
organization chart, which provides a graphic representation of the chain of
command within an organization. Decisions made about the structure of an
organization are generally referred to as organizational design the matching of
organizational form, such as structure, reporting relationships, and information
technology, with the organizations strategy. Decisions. Organizing also involves
the design of individual jobs within the organization. Decisions must be made
about the duties and responsibilities of individual jobs, as well as the manner in
which the duties should be carried out.
Organizing at the level of the organization involves deciding how best to
departmentalize, or cluster, jobs into departments to coordinate effort effectively.
There are many different ways to departmentalize, including organizing by
function, product, geography, or customer. Many larger organizations use
multiple methods of departmentalization. Organizing at the level of a particular
job involves how best to design individual jobs to most effectively use human
resources.

Leading:
Leading involves the social and informal sources of influence that you use to
inspire action taken by others. If managers are effective leaders, their
subordinates will be enthusiastic about exerting effort to attain organizational
objectives. The behavioural sciences have made many contributions to
understanding this function of management. Personality research and studies of
job attitudes provide important information as to how managers can most
effectively lead subordinates. For example, this research tells us that to become
effective at leading, managers must first understand their subordinates
personalities, values, attitudes, and emotions. Studies of motivation and

motivation theory provide important information about the ways in which

workers can be energized to put forth productive effort. Studies of
communication provide direction as to how managers can effectively and
persuasively communicate.

Controlling:
Controlling involves ensuring that performance does not deviate from standards.
Controlling consists of three steps, which include (1) establishing performance
standards, (2) comparing actual performance against standards, and (3) taking
corrective action when necessary. Performance standards are often stated in
monetary terms such as revenue, costs, or profits but may also be stated in
other terms, such as units produced, number of defective products, or levels of
quality or customer service. The measurement of performance can be done in
several ways, depending on the performance standards, including financial
statements, sales reports, production results, customer satisfaction, and formal
performance appraisals. Managers at all levels engage in the managerial
function of controlling to some degree. The managerial function of controlling
should not be confused with control in the behavioural or manipulative sense.
This function does not imply that managers should attempt to control or to
manipulate the personalities, values, attitudes, or emotions of their subordinates.
Instead, this function of management concerns the managers role in taking
necessary actions to ensure that the work-related activities of subordinates are
consistent with and contributing toward the accomplishment of organizational
and departmental objectives. Effective controlling requires the existence of
plans, since planning provides the necessary performance standards or
objectives. Controlling also requires a clear understanding of where responsibility
for deviations from standards lies. Two traditional control techniques are budget
and performance audits. An audit involves an examination and verification of
records and supporting documents. A budget audit provides information about
where the organization is with respect to what was planned or budgeted for,
whereas a performance audit might try to determine whether the figures
reported are a reflection of actual performance.

Programmed & UN programmed Decisions

Programmed Decisions
Programmed decisions are those that a manager has encountered and made in
the past. The decision the manager made was correct because she used the
assistance of company policies, computations or a set of decision-making
guidelines. In addition to being well structured with predetermined rules
regarding the decision-making process, programmed decisions may also be
repetitive or routine as their outcome was successful in the past. It generally
does not take a manager as long to come to a conclusion when faced with a
business-related programmed decision because the challenge faced is not new.
As a result, programmed decisions allow a manager to make streamlined and
consistently effective choices.

Examples of Programmed Decisions

Individuals naturally make programmed decisions on a daily basis. For example,
in an emergency, most people automatically decide to call 9-1-1. From a
business perspective, a company may create a standard routine for handling
technical issues, customer service problems or disciplinary matters. An
employees duties may become routine with repetition, like the process a
mechanic uses to troubleshoot problems with a customers car.

UnProgrammed Decisions
Unprogrammed decisions involve scenarios that are new or novel and for which
there are no proven answers to use as a guide. In such a case, a manager must
make a decision that is unique to the situation and results in a tailored solution.
Unprogrammed decisions generally take longer to make because of all the
variables an individual must weigh; and the fact that the information available is
incomplete, so a manager cannot easily anticipate the outcome of his decision.
Examples of Unprogrammed Decisions
An individual may make an unprogrammed decision when she visits a new
restaurant, is unfamiliar with the menu and the menu is in a language she does
not understand. In the business world, the makers of the earliest personal
computers had to make unprogrammed decisions regarding the type of
marketing to use to attract customers who possibly had never used a computer
in the past. Fast-food companies also had to make an unprogrammed decision
regarding consumer concerns about high fat contents and lack of healthy menu
options.

Decision conditions: Systematic/intuitive decisions

Intuition and Decision Making
The need to make a decision is really not easy In fact, many people find it their
ultimate weakness in which case they are called as indecisive or fickle-minded.
Individuals who cannot make up their minds effortlessly are considered poor
decision makers.
Usually, they are dependent on others for a decision. Yet, there are also people
who make decisions based on instincts or gut feeling and in the category of
decision makers, they are considered to be intuitive. A lot of individuals actually
prefer their personal intuitions when it comes to reaching a decision because
according to many, instincts are rarely wrong.
If that is the case, intuition and decision making have something in relevance
then. Intuitive decision making, as they call it, is a method of making decisions
based on what an individual believes to be true. On the contrary, those who
follow a logical and reasonable manner of decision making take a rational

approach. This article will discuss the concept of intuition and the differences
between intuitive and rational decision making.

Basic Understanding of Intuition

Intuition is another term for instincts or gut feeling, the feeling that would tell
you if something is right or not. In the context of decision making, intuition is
characterized by three distinct features.

The process of intuitive decision making is predominantly manifested in

the subconscious, even if the conscious mind rationalizes the final
decision.

The manner of processing information is parallel instead of sequential,

which means that a situation is perceived as a whole, or things are seen in
a bigger picture more than itemizing it.

Intuitive decision making uses more of feelings and emotions rather than
facts and details.

From the features mentioned above, a decision made through mere intuition
does not follow a systematic process. Although it takes the first step of
identifying the problem or the cause for a decision, alternatives are not really
developed and evaluated. Options may not be needed. Whatever one feels would
be right and appropriate is what is being decided upon.

When and How to Do Intuitive Decision Making

It is important to know that intuitions are not right all the time. A more objective
approach is lot more reliable when it comes to making a decision. The following
are certain instances when intuitive approach can be most useful:

Quick decisions are needed in a situation, leaving the decision maker very
limited time to sort through details and rational analysis.

Practical and realistic situations that require more of sensibility and honest
approach to reality.

A quick and fast-changing environment

A poorly structured issue or problem

The need to deal with vague and confusing information

A situation poses no precedent or guide on what to do

Because intuitions are not based on details, here are some tips on how to
effectively use your instinctive approach in making decisions:

Even if it is intuition, gathering sufficient information about the problem or

issue at hand still helps a lot.

Focus on your emotional condition. Instincts are stronger with a clear and
uncluttered mind.

A little bit of analytical approach and rational thinking actually helps in

making the intuition more believable. Some gathered facts can prove the
intuition to be right, and then move on to making the decision.

Comparison of Intuitive and Rational Decision

Intuition largely uses the individuals subconscious mind and feeds more on
feelings for a decision to be made. For instance, when working on a project, you
feel that you will impress people with the kind of approach you will use for the
project, so you go for it.
On the other hand, rational decision is grounded on logic and quantitative
approach which mainly happens in the conscious mind of the person. You are
fully aware of the options available while analysing them. The typical decision
making process is normally followed with a rational approach. Criteria are set for
the final decision and its outcomes.
Rational decision making is very useful and essential in situations such as in the
workplace, business, and other aspects that require quantitative data. When the
decision involves money, for example, intuition is not the best tool to use. In
business, rational decisions are more practical and unbiased as compared to the
intuitive way.

How do managers make decisions (Five steps in Decision

Making.
Classical, behavioural, judgemental heuristics.
Individual/group
decision making )
Making good decisions is a method that must be learned. It is not something with
which we are innately born, but merely a step by step process that is usually
ascertained from life experience. Most adults know that experience can be a
costly, ineffective teacher that teaches more bad habits than good; and because
decisions can vary so obviously from one situation to the next, the experience
gained from making one important decision is often times of little or no use when
another decision-making problem arises.
When decision making, there are many steps that can be taken; but when
making good decisions there are really only five steps that need to be
considered. These steps are as follows:

Defining the Problem

The first step is to define the problem, or we could say, 'What are we trying to
fix?' For our purposes, we will use someone who wants to purchase their first

home, a pretty big step in a person's life and something that we have to give a
lot of thought to in order to make sure we pick the right house.
Just wanting to purchase your first home is not really a problem; thus, the
problem needs to be defined more. So, in this case, the problem is we are tired of
renting an apartment and want a place of our own so we can get some equity
and not just pay rent each month and get nothing from it.

Identifying Limiting Factors

Next we have to identify limiting factors. For this step, we need to review all
the factors that could stop us from actually solving the problem - basically, things
that would get in our way to stop us from fixing the issue that we want to fix.
It is important to understand that, at times, we come across a limiting factor that
stops our process dead in its tracks. For example, if you had no money to put
down on a house as a down payment, then you would not be able to move
forward, as you have to put something down in order to purchase the house. For
our purposes, we will assume you have the money to put down and are ready to
become a homeowner.
Now, let's say we have the following limiting factors:

You can only afford $600.00 a month for a mortgage payment.

You do not own a car and have to take the bus to work, so the house
needs to be near a bus station.

You need three bedrooms and two bathrooms.

Develop Potential Alternatives

Now that we have the limiting factors, we have to develop potential
alternatives. Here you will be looking at what alternatives are available to help
you get to your goal. Since we know our limiting factors, we can now develop
alternatives to help us address those factors and help us with our problem.
For example, we could review the following potential alternatives:

Stay where you are and not buy a home (though that's really not solving
the problem or dealing with alternatives).

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.

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.

Reduce your desire to only two bedrooms with the thought that a smaller
home will be less money.

Now you would use those criteria to look for homes that take into account your
limiting factors but also take into account the alternatives you've thought
through. You are weighing your limiting factors against your alternatives to see
how they blend together to get you the home you want the way you want it.

Analyse the Alternatives

Now you have to analyse the alternatives. You will take each alternative you
have and try to determine, in order, what is the most feasible to the least
feasible. Looking at these alternatives, there are none really that are dealbreakers. However, as I said, we need to be realistic about these. Thus:

You might not be able to find a roommate you can actually live with.

You might realize that two bedrooms is simply not going to work for the
space you need.

Cutting back on expenses is something you could do and work with while
you find ways to solve the other issues as time goes by.

Thus, if you start looking for homes and realize the one you want that fits all your
criteria except for monthly mortgage is higher than you would like, your best
alternative is to cut back on your expenses to afford the home. Thus, you
have selected the best alternative, or the alternative that best suits your
problem and helps you solve it.
Remember, this step requires some patience and it can also encourage
perseverance. Why? Because it may take some time to see the final outcome.
Recognizing that if the first decision is not working, you may have to go back to
step two and choose another option. Always looking for and anticipating
unexpected problems will help alleviate undue stress, if and when a problem
occurs.
When it comes to making decisions, one should always weigh the positive and
negative business consequences and should favour the positive outcomes.
This avoids the possible losses to the organization and keeps the company
running with a sustained growth. Sometimes, avoiding decision making seems
easier; especially, when you get into a lot of confrontation after making the
tough decision.
But, making the decisions and accepting its consequences is the only way to stay
in control of your corporate life and time.

How and why do managers plan (POLC, SMART)

The process of planning starts with the organization defining its objectives. The
process of strategic planning, goal setting, or visioning generates from its
process a set of objectives that the organization should strive to achieve. From
there it is up to the individual departments to form their objectives, most if not
all of which should align and support the organizational objectives. Individual
objectives are then established to support the departmental objectives.

Communicating the message

The manager needs to explain that the process is focused on helping team
members understand the individual roles they play and how their jobs contribute
to company success. By focusing on the message that is meant to help the
employee assess and prioritize efforts to make certain those efforts are focused
on the bottom line and organizational values. The process also helps your team
understand what the organization doesn't value and what it may not need to do
any more.
The so called "Activity Trap" is one where we get so busy doing things that we
forget to ask whether what we're doing are the right things. This is an important
concept for everyone in an organization to understand.

Setting S.M.A.R.T. objectives

The S.M.A.R.T. method is one way to help you remember how to walk through the
process of setting your first MBO objectives.

S for Specific: There are several key factors which should be present in the
objectives that are set in order for them to be effective. They should be
specific. In other words, they should describe specifically the result that is
desired. Instead of "better customer service score," the objective should
be "improve the customer service score by 12 points using the customer
service survey."

M for Measurable: The second example is much more specific and also
addresses the second factormeasurable. In order to be able to use the
objectives as a part of a review process it should be very clear whether the
person met the objective or not.

A for Achievable: The next important factor to setting objectives is that

they be achievable. For instance, an objective which states "100 percent
customer satisfaction" isn't realistically achievable. It's not possible to
expect that everyone must be 100 percent satisfied with their service. A
goal of "12 percent improvement in customer satisfaction" is betterbut
may still not be achievable if it's assigned to the database developer. They

aren't likely to have enough influence over the customer interaction

process to improve satisfaction by 12 percent.

R for Realistic: This leads into the next factorrealistic. Realistic objectives
are objectives that recognize factors which cannot be controlled. Said
another way, realistic goals are potentially challenging but not so
challenging that the chance of success is small. They can be accomplished
with the tools that the person has at their disposal.

T for Time-based: The final factor for a good objective is that it is timebased. In other words, it's not simply, "improve customer service by 12
percent," it's "improve customer service by 12 percent within the next 12
months." This is the final anchor in making the objective real and tangible.
This final factor is often implied in MBO setting. The implied date is the
date of the next review, when the employee will be held accountable for
the commitments that they've made through their objectives.

Key learning
Setting organized objectives to help team members make a greater positive
impact on the organization may seem daunting but is simply a matter of taking a
few forwards steps and following a simple recipe for success.

SMART goals make for smart organizations. In our experience, many supervisors
and managers neglect to work with their employees to set goals together. And in
the ones that do, goals are often unclear, ambiguous, unrealistic, unrelated to
the organization's vision, unmeasurable, and demotivating. By developing SMART
goals with your employees, you can avoid these traps while ensuring the
progress of your organization and its employees.

What types of plans do managers use? (Short

range/Long range,
Strategic /operational)
Business owners develop plans to reach their overall goals, and they usually find
it useful to separate planning into phases. This allows you to track immediate
improvements while evaluating progress toward eventual goals and targets. The
different time frames of the planning process place the focus on time-sensitive
aspects of the company's structure and environment. You can differentiate
planning based on the time frames of the inputs and expected outcomes.
Planning is the part of management concerned with creating procedures, rules
and guidelines for achieving a stated objective. Planning is carried out at both
the macro and micro level. Managers need to create broad objectives and
mission statements as well as look after the day to day running of the company.

Planning Characteristics
Many businesses develop strategic planning within a short-term, medium-term
and long-term framework. Short-term usually involves processes that show
results within a year. Companies aim medium-term plans at results that take
several years to achieve. Long-term plans include the overall goals of the
company set four or five years in the future and usually are based on reaching
the medium-term targets. Planning in this way helps you complete short-term
tasks while keeping longer-term goals in mind.

Short-Term
Short-term planning looks at the characteristics of the company in the present
and develops strategies for improving them. Examples are the skills of the
employees and their attitudes. The condition of production equipment or product
quality problems are also short-term concerns. To address these issues, you put
in place short-term solutions to address problems. Employee training courses,
equipment servicing and quality fixes are short-term solutions. These solutions
set the stage for addressing problems more comprehensively in the longer term.

Medium-Term
Medium-term planning applies more permanent solutions to short-term
problems. If training courses for employees solved problems in the short term,
companies schedule training programs for the medium term. If there are quality
issues, the medium-term response is to revise and strengthen the company's
quality control program. Where a short-term response to equipment failure is to
repair the machine, a medium-term solution is to arrange for a service contract.
Medium-term planning implements policies and procedures to ensure that shortterm problems don't recur.

Long-Term
In the long term, companies want to solve problems permanently and to reach
their overall targets. Long-term planning reacts to the competitive situation of
the company in its social, economic and political environment and develops
strategies for adapting and influencing its position to achieve long-term goals. It
examines major capital expenditures such as purchasing equipment and
facilities, and implements policies and procedures that shape the company's
profile to match top management's ideas. When short-term and medium-term
planning is successful, long-term planning builds on those achievements to
preserve accomplishments and ensure continued progress.

I. Strategic Plan
A strategic plan is a high-level overview of the entire business, its vision,
objectives, and value. This plan is the foundational basis of the organization
and will dictate decisions in the long-term. The scope of the plan can be two,
three, five, or even ten years.
Managers at every level will turn to the strategic plan to guide their decisions. It
will also influence the culture within an organization and how it interacts with
customers and the media. Thus, the strategic plan must be forward looking,
robust but flexible, with a keen focus on accommodating future growth.
The crucial components of a strategic plan are:

1. Vision
Where does the organization want to be five years from now? How does it want
to influence the world?

2. Mission
The mission statement is a more realistic overview of the companys aim and
ambitions. Why does the company exist? What does it aim to achieve through
its existence? A clothing company might want to bring high street fashion to
the masses, while a non-profit might want to eradicate polio.

3. Values
Inspire. Go above & beyond. Innovate. Exude passion. Stay humble. Make it
fun
II. Tactical Plan
The tactical plan describes the tactics the organization plans to use to achieve
the ambitions outlined in the strategic plan. It is a short range (i.e. with a scope
of less than one year), low-level document that breaks down the broader
mission statements into smaller, actionable chunks.
Creating tactical plans is usually handled by mid-level managers.
The tactical plan is a very flexible document; it can hold anything and
everything required to achieve the organizations goals. That said, there are
some components shared by most tactical plans:

1. Specific Goals with Fixed Deadlines

Suppose your organizations aim is to become the largest shoe retailer in the
city. The tactical plan will break down this broad ambition into smaller,
actionable goals. The goal(s) should be highly specific and have fixed deadlines
to spur action expand to two stores within three months, grow at 25% per
quarter, or increase revenues to $1mn within six months, and so on.

2. Budgets
The tactical plan should list budgetary requirements to achieve the aims
specified in the strategic plan. This should include the budget for hiring
personnel, marketing, sourcing, manufacturing, and running the day-to-day
operations of the company. Listing the revenue outflow/inflow is also a
recommended practice.

3. Resources
The tactical plan should list all the resources you can muster to achieve the
organizations aims. This should include human resources, IP, cash resources,
etc. Again, being highly specific is encouraged.

4. Marketing, Funding, etc.

Finally, the tactical plan should list the organizations immediate marketing,
sourcing, funding, manufacturing, retailing, and PR strategy. Their scope should
be aligned with the goals outlined above.

III. Operational Plan

The operational plan describes the day to day running of the company. The
operational plan charts out a roadmap to achieve the tactical goals within a
realistic timeframe. This plan is highly specific with an emphasis on short-term
objectives. Increase sales to 150 units/day, or hire 50 new employees are
both examples of operational plan objectives.

Creating the operational plan is the responsibility of low-level managers and

supervisors.
Operational plans can be either single use, or ongoing, as described below:

1. Single Use Plans

These plans are created for events/activities with a single occurrence. This can
be a one-time sales program, a marketing campaign, a recruitment drive, etc.
Single use plans tend to be highly specific.

2. Ongoing Plans
These plans can be used in multiple settings on an ongoing basis. Ongoing
plans can be of different types, such as:

Policy: A policy is a general document that dictates how managers

should approach a problem. It influences decision making at the micro
level. Specific plans on hiring employees, terminating contractors, etc.
are examples of policies.

Rule: Rules are specific regulations according to which an organization

functions. The rules are meant to be hard coded and should be enforced
stringently. No smoking within premises, or Employees must report by
9 a.m., are two examples of rules.

Procedure: A procedure describes a step-by-step process to accomplish

a particular objective. For example: most organizations have detailed
guidelines on hiring and training employees, or sourcing raw materials.
These guidelines can be called procedures.

Ongoing plans are created on an ad-hoc basis but can be repeated and changed
as required.
Operational plans align the companys strategic plan with the actual day to day
running of the company. This is where the macro meets the micro. Running a
successful company requires paying an equal attention to now just the broad
objectives, but also how the objectives are being met on an everyday basis,
hence the need for such intricate planning.

Useful planning tools, techniques and processes?

(Forecasting/
contingency/scenario/benchmarking/MBO/participation)
.
Strategic Planning Tools
The most effective application of strategic planning tools is in the context of a
systematic strategic planning process. These planning tools can be used at each
stage of the corporate strategic planning process for gathering and interpreting
required data and information. They may also be used in structuring
conversations involved in deliberating on the data, and generating options to
address issues surfaced. They also may use as aids in deciding strategies to
address the most important strategic issues likely to impact performance of the
organization as a whole.
However, a common and unhelpful misconception about corporate strategic
planning is that it is highly sophisticated and complex. And so it requires many
correspondingly sophisticated and advanced strategic planning tools.

Forecasting Tools and Techniques

The more accurately you can forecast internal and external factors affecting your
small business, the better you can plan proactive strategies to grow your
business and increase your profits. Using a variety of tools and techniques, your
staff can create reports regarding their functions or departments that help you
budget time, people and resources to take advantage of opportunities or avoid
problems.

Industry Associations
Many industries and professions have trade associations that conduct research to
help spot industry trends and forecast potential happenings in areas such as
demand, prices and labor. These associations look at factors, such as consumer
behavior trends, new technologies, sales levels reported by retailers and
manufacturers, legislation, the state of the economy and business surveys, to
alert industry members as to what might be on the horizon. Joining and staying
active in local or national professional associations and using or purchasing
reports they produce can help you forecast trends that might affect your
business in the coming months or years.