Content context of mgmt dec

Decision Making
THE CONTENT AND CONTEXT OF
MANAGEMENT DECISIONS
PRESENTED BY: VIQAR A.USMANI 1

Decision making is the central management activity, but its importance cannot be
ascertained without pointing out the differences which individual managers face in
making decisions.
All management decisions are not the same.
We know that, in practice, those occupying different positions within the organization and
therefore performing a different set of management tasks, are confronted with very
different types of decision.
So we need some kind of classification of decision types, in order that we can
differentiate one decision from another.
PRENTED BY: VIQAR A.USMANI 2

TYPES OF MANAGEMENT DECISION
We might categorise decisions by ascertaining which part of the
organisation has responsibility for the decision.
This would develop a kind of “organisation tree” of decisions which would
correspond closely to the company’s organisational structure.
The problem with doing this is that it would involve us in the specific
management content,
for example, quality controllers, brand managers, personnel managers, and
so on.
We need to identify the general dimensions of decisions, which portray their
essential character without resort to their specific substance.

General Dimensions of Decisions
Three dimensions are particularly useful to differentiate management
decisions:
A. How much of the organisation the decision encompasses,
i.e. whether the decision is Strategic or Operational.
B. How well defined the decision is,
i.e. whether the decision is Unstructured or Structured.
C. How connected the decision is with others,
i.e. whether the decision is Dependent or Independent.

Strategic and Operational Decisions
A manager who is in charge of a small manufacturing
unit might, over a period of time, make several
decisions.
These will include such things as:
o Should a machine which is starting to give trouble be
replaced or should the maintenance people patch it
up?
o Should a further experienced worker be taken on or
should a younger person be hired to train up?
o Should order A or order B be given priority in this
week’s schedule?

The manager in the same organisation who has executive control
over the whole company might, over the same period of time, also
make many decisions.
For example:
o Should the company buy out one of its small raw materials
suppliers that is in financial difficulties?
o Should the company take on more long-term debt or raise
capital on the stock market?
o Should the company set up a manufacturing plant in Europe
rather than export its products?

The set of decisions made by the first manager are operational in nature.
None of them, if badly made, will drive the firm immediately out of business, their
consequences are immediate and relatively predictable.
Operational decisions are concerned with the process of turning given resource inputs
into required outputs.
In general, operational decisions are carried out mostly by managers in the lower and
middle reaches of the organisational hierarchy.
The second manager’s set of decisions are strategic in nature.
They involve the future of the whole organisation, are important, probably long term in
their effects, and cannot be made in a “routine” manner.
Strategic decisions are usually-one-offs, characterised by a high degree of risks
and/or uncertainty.
Strategic decisions differ from operational decisions in that they:
Relate the organisation to its environment. Involve a large part of the organisation

The term strategic then depends on how we choose to define “the organisation”.
The first manager in our example, who is in charge of the small manufacturing unit,
can make decisions which are strategic in terms of the unit, if not the whole
company.
If the manager decides to change the working pattern of the unit from a two shift to a
three shift day, then that decision is strategic for the unit.
It changes the unit’s position in its environment and affects the whole unit.
Some writers believe the strategic-operational dimension of management decision
making to be the most important in determining the character of a decision.
Anthony, develops a framework which includes the strategic and operational ends of
our dimension, but also includes an intermediate category.
His three categories are:
 strategic planning,
 management control, and
 operational control

Strategic Planning is defined as:
.. . the process of deciding on objectives of the organisation, on
changes in these objectives, on the resources to obtain these
objectives, and on the policies that are to govern the acquisition,
use, and disposition of these resources.
Management Control is defined as:
...the process by which managers assure that resources are
obtained and used effectively and efficiently in the accomplishment
of the organisation’s objectives.
Operational Control is defined as:
. .. the process of assuring that specific tasks are carried out
effectively and efficiently.

In Anthony’s framework the term “planning ‘is used to describe strategic
level decisions, whereas intermediate and operations level decisions are
termed control activities.
This implies that strategic decisions set the intended direction of the
organisation, are broad in scope, are relatively unconstrained, and occur
fairly infrequently.
Operational control decisions, on the other hand, are concerned with the
detailed implementation of higher level plans, the detection of any
deviation from these plans, and the relatively frequent readjustment of
resources.

Unstructured and Structured Decisions
Some decisions are clear, well defined, distinct, and unambiguous.
Other decisions are ill-understood, fuzzy, and difficult to tackle.
These are the differences between structured and unstructured decisions.
From the purely practical viewpoint the dimension is perhaps the most
important in determining the ease with which a decision can be made.
Consider the statements in next slides from two managers who describe a particular
decision to be taken.

Decision 1.
I have to choose a new packaging machine for our existing products.
There are only two types of machine in the market, both of which are fairly similar to
our existing machine, which can no longer keep up with production requirements.
Both types have been on the market for some years and are considered reliable by
the industry. I will choose the machine which gives the best after-tax discounted
return, calculated over a five year period. This will involve collecting details of each
machine, such as purchase price and running costs, from the manufacturers, and
using this information in a predetermined formula which our accounts department
issues for all such decisions. I will then place an order for the chosen machine and
inform the departmental foreman as to when it should arrive.

Decision 2.
I need to decide what our product range should look like in two years’ time. The
reports coming back from our salespeople indicate, that some of the products are
beginning to be less attractive than our competitors’ products. Whether we can
merely update some of our existing products, or alternatively go for a totally new
product range, I do not know. Since the decision will affect several other areas of the
company, I will have to consult and take advice from managers in other functional
areas. I suppose that any decision will have to be broadly in line with what they feel is
feasible. The new product range will have to provide the basis for the long term
security of the company, without requiring a level of immediate funding which will
threaten the company’s short term survival.

The first decision is structured.
It is structured in the sense that it is well defined.
The decision maker knows the extent of the decision, and the options
between which a choice has to be made are clear.
Neither is the decision novel.
Evaluation criteria have been previously thought through and are explicit
and unambiguous.
A decision maker, therefore, has a well understood and agreed procedure
to follow in order to reach a choice.
In other words, the decision is “programmable”.

The second decision is unstructured.
The decision body is not clearly defined, either in terms of who is
Involved in the decision or what their objectives might be.
The options to be considered are not immediately apparent, because
the decision is unlikely to have occurred before in this form, or under
these exact circumstances.
Also, because of the novelty of the decision, the decision maker does
not have a clear view of how to tackle the decision.

Dependent and Independent Decisions
The third important way to categorise decisions is in terms of their degree of dependency
on other decisions.
The degree of dependency of a decision can be measured on two scales;
• a scale representing influence of past and possible future decisions, and
• a scale representing the degree of influence across other areas of the organisation.

The first scale concerns past and future decisions.
Many decisions are influenced by other decisions that have been taken in the
past. Sometimes past decisions have determined the resource constraints
within which we can work on the present decision.
Sometimes past decisions have contributed to a slowly developing set of
policies which in effect constrain what is considered to be appropriate and
feasible.
Sometimes the degree of previous support for a decision can be such that any
change can prove embarrassing.
For example, the decision on when to call a halt to a project which is not
proving particularly successful, but which has consumed large amounts of
resources, can be very difficult.
A decision can also be affected by considerations of future decisions.

Decision Types and Decision Elements
Each of our three dimensions represents a continuum rather than a
straightforward dichotomy, and decisions may be placed anywhere on each
continuum.
This means that there are, theoretically, an infinite number of decision types.
However, in order to examine the way in which the elements of decisions vary
with decision type, we can make a generalisation which greatly simplifies the
task.
This is that strategic decisions tend to be unstructured and dependent,
whereas operational decisions tend to be structured and independent.
This crude generalisation is borne out 'when we see the characteristics of each
decision element for the two categories of decision as shown in Figure in next slide.

Interpreting this figure needs some care.
We are not trying to say that all operational decisions are also structured
and independent, and all strategic decisions are also unstructured and
dependent, but there does tend to be some connection between the three
dimensions.
There are, for example, far more strategic decisions which are dependent
than there are strategic decisions which are independent.
There are more unstructured strategic decisions than structured strategic
decisions, and so on.
So, for instance, while the decision options of a strategic decision are
less likely to be immediately apparent than in an operational decision, a
decision which is strategic and unstructured and dependent is very
unlikely to have decision options which are immediately apparent.

THE DECISION ENVIRONMENT
Core and Boundary Decisions
Some management decisions are located deep inside the organisation.
Inputs to the decision come from within the organisation, and any outputs go back into it.
They tend not to be affected, except in the long term, by changes in the environment of
the organisation.
Even then, any change tends to be through a process of adaptation, rather than
innovation.
We shall call these decisions core decisions.
Core decisions can be taken at all levels throughout the organisation, their very nature
means that core decisions are operational rather than strategic, and most are carried out
lower down the hierarchy.
All core decisions are operational - not all operational decisions are core
PRENTED BY: VIQAR A.USMANI
21

Other management decisions, far from being core, are located at the boundaries of the
organisation.
In a world of corporate refocusing, down sizing, and outsourcing, a critical strategic
decision that many senior managers make is determining their firm's boundary.
"Which business activities should be brought within the boundary of the firm?" and
"Which business activities should be outsourced?"
These are essential strategic questions in determining a firm's boundary.
Firms that bring the wrong business activities within their boundaries risk losing
strategic focus and becoming bloated and bureaucratic.
Firms that fail to bring the right business activities within !heir boundaries risk losing their
competitive advantages and becoming "hollow corporations”.
Fortunately, a well-developed approach exists for determining a firm's boundary Called
transactions costs economics, this approach specifies the conditions under which firms
should manage a particular economic exchange within their organizational boundary as
well as the conditions under which it should be outsourced.

Not only is this approach well developed, it is remarkably simple, and many of its
prediction. and prescriptions have received empirical support.'
Indeed in its most popular version this approach requires managers to consider only
a single characteristic of an economic exchange .
The level of transaction specific investment, in order to decide.

Those managers involved with boundary decisions are concerned to manage the
interface between the organisation and its environment.
And this relationship might be at a strategic or at an operational level.
For example, the personnel manager with a recruitment problem might be making
operational-boundary decisions, bringing in recruits on a regular basis to meet the
ongoing needs of the organisation.
If, on the other hand, the decision involves the recruitment of a new Managing Director,
then it might well become a strategic boundary one.
Characteristically, boundary decisions carry a higher degree of uncertainty than core
decisions.

Functional Area and Boundary Decisions
Every functional area of an organisation is likely to be concerned both with core and
boundary decisions, but some functional areas will lay stress on one particular type.
For example, since the role of the marketing function is concerned with the market
for its products or services, it tends to be concerned with boundary more than core
decisions. Some of these are operational, such as sales force organisation.
Others are strategic, deciding product mix for example.
Yet the crucial and obvious importance of product and market policy for the health of
any organisation often means that the marketing function is especially influential in
the strategic area.
Thus the emphasis on the marketing function tends to be on strategic/boundary
decisions.
The operations function, as its name implies, is generally associated with decisions
which are at the operational level.
The scheduling and control of production for example.
Because of its responsibility for the day-to-day tasks of the organisation, its
emphasis is largely operational.

The Decision Environment
The intention in identifying the distinction between core and boundary decisions is
to illustrate how much decision making is at the boundary of the organisation and
therefore must be concerned with its environment.
Yet concern with the environment in which organisations operate is a relatively
recent phenomenon.
Classical ideas about organisations tended to look inwards, focusing on the search
for the “perfect organisation” where successful operation is achieved through good
organisation and proper work methods;
where “efficiency” of internal operation is seen as the way to overall effectiveness.
If the correct principles of management are adhered to, then the organisation will
always gain best advantage, whatever is going on in the outside world.
More modern views would see the organisation as an “open system”, taking
resources from and giving products and services' back to the wider environment,
adapting and reacting to changing opportunities, threats and challenges in that
environment.

Some of the changes that have faced business enterprises in recent years
include:
 Loss of control over energy sources, and the use of energy as a political
and economic weapon, such as the oil embargo of the early 1970s.
 The increasing rate of technological development, as in micro-processor
developments, causing rapid diminution of product life-times.
 An increasingly critical focus on the social responsibilities of the business
organisation in such areas as safety and pollution.
 Political influence over international trading relationships, such as
membership of the European Economic Community or East-West trade
embargoes.
 The changing role of government in the affairs and activities of work
organisations.

Environment
An organization's environment is to think of it as being the totality of circumstances
(of whatever kind) under which the organisation operates.
Everything outside of the boundary of that organisation is part of its environment.
Whilst some environmental factors will have a major role to play in creating and
shaping any particular decision, much of the total potential environment can often
be regarded as being effectively inactive.
So in order to understand the nature of the organisation-environment relationship
better, we need to distinguish between:
 the “specific” environment.
 the “general” environment.

The Specific Environment:
We can separate from the total environmental picture those elements with which the
organisation relates directly and on a more or less regular basis.
These elements can be called the specific environment.
For example, a large supermarket has daily contact with such elements of its
environment as its customers, its suppliers, and the security company who guards the
takings.
The General Environment:
Any one organisation will operate with a particular specific environment, and, as a
consequence, face up to a unique set of pressures.
Many underlying environmental features, however, must of necessity be common to a
large number of organisations at the same time.
Economic recession, for example, can paint the backcloth for the activities of whole
industries and, for that matter, whole economic systems.
These common features form a general environment within which organisations and,
therefore managers, have to operate.

Hall has categorized the seven major areas of this general environment as:
1. Technical
2. Legal
3. Political
4. Economic
5. Demographic
6. Ecological
7. Cultural
Considerable change and movement has occurred in all of these areas in the past,
and clearly will continue to do so in the future.
Unfortunately, such changes are sometimes seen by managers as being less
relevant and certainly less significant than those short-term problems deriving from
the specific environment.
There are a number of reasons for this discussed in the next slide.

 Short-term problems have to be dealt with in the short term, and may absorb
so much energy that little is left for longer term issues. We naturally tend to
link immediacy with importance.
 Trends in the general environment are difficult to identify and to isolate. They
are less “solid” and tangible than issues in the specific environment.
 Many organisations, particularly small ones, may not have the resources to
channel into monitoring the general environment, even when the need to do
so is recognized.

Complexity, Change and Perceived Uncertainty:
Two further aspects of an organization's decision environment which affect the
context of a decision are:
(a) whether the environment is simple or complex and
(b) whether the environment is static or dynamic.
 Simple environments are those which have relatively few elements and those
which do exist are probably similar to each other and well understood.
 A complex environment has a large number of factors all of which may be quite
different from one another, and their interrelationship difficult to comprehend.
 A static environment is one that is stable and unchanging over time
 A dynamic environment is subject to a certain amount of change which possibly
may be difficult to forecast.
These dimensions of the environment can make considerable differences to the
perceived uncertainty of any organisation.

The Extent of Information Available
The way in which uncertainty might manifest itself in a decision is usually as a lack
of information.
In some decisions there is an abundance of information.
All the possible options can be fully described, the uncontrollable factors have a
history which enables the decision maker to predict their probability of occurrence
with reasonable confidence, and the various attributes of all the possible
consequences can be documented.
On the other hand, some decisions may take place in circumstances where very
little is known about the options, possible states of nature, or resultant
consequences.
Thus the extent of information available can be regarded as an important aspect of
a decision’s context.
The extent of information may depend on the time available to collect it.
Time, effort and money can sometimes change a situation of little information into
one where the information is regarded as adequate.

The Time Available
The time available to collect information will itself be determined by the context of a
decision.
And here the time available to make a decision is the gap between when it
becomes clear that a decision must be made, and the time when the decision
needs to be made.
For Example,If a sealed tender to contract is required by a particular date, then, if
management do not make a decision by that date, their opportunity to choose
effectively disappears, and the decision is made by default.
At other times, the due date of the decision is less clear.
For example, suppose a retail chain store is buying a new outlet.
There might be several possible sites currently available.
As time passes without a decision being made, some of these sites could be sold
to other buyers and become unavailable.
At the same time other sites could become available which were not options at the
beginning of the decision process.

In some decisions the timing of the decision, and therefore the time avail-
able, can be a decision in itself.
Many decisions have a timing element to them.
A manager wishing to introduce a new payment scheme, for example, has
to decide not only which payment scheme to introduce, but also when to
introduce it.
A company wishing to expand its production capacity has to decide both
who is promoted, and when it is an expedient time to make the
announcement.
Thus, in many decisions, the time available to make the decision and the
decision itself are interrelated.

The Decision Stimulus
The time available also determines what is perceived to be the stimulus to the
decision. In decisions where, little time is available, pressure on the decision maker
will gradually build until the point where a decision has to be taken.
Decisions with no time pressures can be taken according to the will of the decision
maker.
Here, although there are no pressures forcing a decision, the decision maker decides
that it is expedient to do so.
These two ends of the spectrum, of forced -decisions and decisions at will, are called
crisis and opportunity decisions by Mintzberg et al.
Decision in between the two ends of the spectrum they term problem decisions.
OPPORTUNITY PROBLEM CRISIS
DECISIONS. DECISIONS DECISIONS.
Decisions Occurs
Because of
“Managerial Will”
Alone.
External
Stimulus forces
a decision

THE APPROACH TO DECISION MAKING
The decision which a manager sees, and the decision which is formalized
as something to be solved, are not necessarily the same thing.
Managers have discretion as to how a decision is set up as the “decision
for solution".
The way in which discretion is used is either by changing the boundary of
the decision or changing the way in which elements within-the decision
are treated.
Boundary discretion concerns what, or how many, decision elements to
include in the analysis, whereas treatment discretion concerns the way
the decision, elements are treated. Some of these areas of discretion are
listed in next slide.

Boundary Discretion:
 Is it assumed that a single decision maker will make the choice, or will the views of
several decision makers have to be taken into account?
 Will it be assumed that the decision makers have objectives which are simple and
can be represented by a single measure, or each have several objectives needing
different measures?
 Will the range of decision options be limited to those which arc immediately
discernible, or shall the range of options be widened following a comprehensive
search for new options?
 Shall we include every uncontrollable factor which we think has any influence on
the outcome of the decision, or shall we confine our consideration to the single
most important uncontrollable factor?
 Shall we assume that the consequences of the decision can be described ade-
quately by a single attribute, or shall we include all attributes?

Treatment Discretion
 Shall we describe the uncontrollable factors by taking their most likely values
as “single point” estimates, or shall we use a probability distribution to
describe the range of values which the factor could take?
 Do we treat factors as uncontrollable which are partly within our control?
 Do we assume that each possible consequence within a decision situation is
known with certainty, or do we assume that each combination of decision
option and state of nature could produce a range of possible consequences?
Approaching the decision in different ways affects where a decision is placed on
our three dimensions of decisions;
• strategic-operational,
• unstructured-structured,
• interdependent-independent

As a further example of the use of the decision approach, consider a Head
Office manager deciding on the future shape of the company’s distribution
system.
The manager knows that the new distribution service needs to ship' the
goods at a low unit cost while maintaining, and preferably improving on, the
present level of customer service.
At the same time, any new system must be broadly acceptable to all the
present regional managers, who do not want to see too much disruption to
their present networks.
In this decision, the decision body consists of the Head Office staff and the
regional managers.
The decision options are numerous;
some of them are not immediately apparent.
The consequences of the decision will have several attributes under the
broad headings of set up costs, operational costs, likely customer service
level, and degree of disruption to the present system.

Faced with this decision the manager might very well review it in the following
terms.
“The whole decision is vastly complex and I am not sure where to begin, unless I make some
simplifying assumptions.
I shall assume that all the present regional distribution centers are to remain, and base my new
distribution network on those centers.
Furthermore, I shall look at only two attributes of the consequences of any decision, namely Unit
operational costs and customer service.
When I have decided on a satisfactory network using the above assumptions, I shall check it out
against other criteria and consult with the regional managers.
If my decision then proves unsatisfactory, I suppose I will have to relax some of the assumptions I
made originally.”
The important point is that managers should not regard a decision as immutable.
No matter how the decision is originally presented, they have the discretion, and
should have the ability, to change their view of the decision, perhaps temporarily,
so as either to increase the usefulness of any solution, or to aid the decision
making process itself.

SUMMARY
Management decisions may be regarded as being a continuum ranging
from strategic to operational, where strategic decisions both relate the
organization to its environment and involve a large part of the
organization.
They may also be classified as structured or unstructured, where
structured means clear and unambiguous, and unstructured means ill-
understood and difficult to tackle.
Finally decisions may be classed as being either dependent or
independent.
Decisions with a high degree of dependency will have to take account of past
or possible future decisions in the same part of the organisation, or decisions
which have, or could, take place in other areas of the organisation.

SUMMARY (contd.)
Where any decision lies within these three dimensions will influence its
decision elements.
Decisions which are strategic, unstructured and dependent will tend to
have multi-person decision bodies, options which are not immediately
apparent, uncontrollable factors which are both numerous and
unpredictable, and multi-attribute consequences.
Conversely, decisions which are operational, structured and
independent can have single decision makers, apparent options,
relatively few uncontrollable factors, and predictable consequences.
Finally, the decision approach refers to the way in which the decision
maker uses his or her discretion as to how the decision should be
presented as an issue to be solved.

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