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Principles of Management
UNIT II Planning
Planning in organizations andpublic policy is both the organizational process of
creating and maintaining a plan; and the psychological process of thinking about the
activities required to create a desired goal on some scale. As such, it is a fundamentalproperty of intelligent behavior. This thought process is essential to the creation and
refinement of a plan, or integration of it with other plans, that is, it combines forecasting of
developments with the preparation of scenarios of how to react to them.
The term is also used to describe the formal procedures used in such an endeavor,such as the creation of documents diagrams, or meetings to discuss the important issues to
be addressed, the objectives to be met, and the strategy to be followed. Beyond this,
planning has a different meaning depending on the political or economic context in whichit is used.
Two attitudes to planning need to be held in tension: on the one hand we need to be
prepared for what may lie ahead, which may mean contingencies and flexible processes.On the other hand, our future is shaped by consequences of our own planning and actions.
Overview
Planning is a process for accomplishing purpose. It is blue print of business growthand a road map of development. It helps in deciding objectives both in quantitative and
qualitative terms. It is setting of goals on the basis of objectives and keeping in view the
resources.
What should a plan be?
A plan should be a realistic view of the expectations. Depending upon the activities,
a plan can be long range, intermediate range or short range. It is the framework within
which it must operate. For management seeking external support, the plan is the most
important document and key to growth. Preparation of a comprehensive plan will notguarantee success, but lack of a sound plan will almost certainly ensure failure.
Importance of the planning Process
A plan can play a vital role in helping to avoid mistakes or recognize hidden
opportunities. Preparing a satisfactory plan of the organization is essential. The planningprocess enables management to understand more clearly what they want to achieve, and
how and when they can do it.
A well-prepared business plan demonstrates that the managers know the business
and that they have thought through its development in terms of products, management,finances, and most importantly, markets and competition.
Planning helps in forecasting the future, makes the future visible to some extent. It
bridges between where we are and where we want to go. Planning is looking ahead.
By N. Pradeesh KumarFor Dept. of Bio- Medical-NIU
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1. Primacy of Planning
Planning preceds all other managerial functions. Although all the functions
intermesh in practice as a system of action, planing is unique in that it establishes the
objectives necessary for all group effort.
2. To offset Uncertanity and ChangeThere is continuous change in the environment and the organization has to
work in accelerating change. Planning does not stop changes in the environment
but gears the organization to take suitable actions so that it is sucessful in
achievingit objectives
3. To focus Attention on Objectves
Planning focuses on organization onjectives ad direction of action for achieving
thes objectives
4. To help in Coordination
Though all managerial functions leads to coordination in the organization, realbeginning is made at the level of planning stage.
5.To help in Control
Control involves the measurement of acomplishment of events against plans and
the correction of deviations to assure the achievements of objectives as set by te
plans.
6.To increase Organizational Effectiveness
The concept of effectiveness is that the organization is able to achieve its
objectives within the given resources. Planning states the objectives of the
organization in the context of given resources.
It is also necessary to plan due to following reasons
To achieve Objectives
To cope with uncertanity and change
To facilitate control
To helpin coordination
To increase organizational effectiveness
To guide decision Making
Nature of Planning
It is a primary function It is a dynamic Process
It is based on Objectives ad Policies
It is a selective Process
Pervasive in Nature
An intellectual Process
It is direct towards efficiency
It focuses with future activities
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It is Flexible
It is based on Facts
Purpose of Plan
Just as no two organizations are alike, so also their plans. It is therefore important
to prepare a plan keeping in view the necessities of the enterprise. A plan is an important
aspect of business. It serves the following three critical functions:
Helps management to clarify, focus, and research their business's or project's
development and prospects.
Provides a considered and logical framework within which a business can
develop and pursue business strategies over the next three to five years.
Offers a benchmark against which actual performance can be measured and
reviewed.
SHAPE \* MERGEFORMAT
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Steps involved in Planning
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Establishing a Sequence of Activites
Developing Planning Premises
Establishment of Objectives
Identification of Opportunities
Identification of Alternatives
Evaluation of Alternatives
Selecting an Alternative
Formulating Dervative Plans
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Types of plans or planning
The are, Architectural planning, Business plan, Comprehensive planning,
Enterprise Architecture Planning, Event Planning and Production, Family planning,Financial planning, Infrastructure planning, Land use planning, Life planning, Marketingplan,Network resource planning,Strategic planning, and Urban planning
Advantages of Planning
Helps in acheving objective
Better Utilization of resources
Economy in Operation
Reduces Uncertanity and Risk
Improves competitive Strength
Effective control
Coordination
Encourages Motivation
Guides in decision making
Provides decentralization
Limitations of Planning
Lackof accurate Information
Time and cost
Inflexibiltiy
Delay during Emergency Periods
False sense of Security
By N. Pradeesh KumarFor Dept. of Bio- Medical-NIU
http://en.wikipedia.org/wiki/Architectural_planninghttp://en.wikipedia.org/wiki/Business_planhttp://en.wikipedia.org/wiki/Comprehensive_planninghttp://en.wikipedia.org/wiki/Enterprise_Architecture_Planninghttp://en.wikipedia.org/wiki/Event_Planning_and_Productionhttp://en.wikipedia.org/wiki/Family_planninghttp://en.wikipedia.org/wiki/Financial_planninghttp://en.wikipedia.org/w/index.php?title=Infrastructure_planning&action=edit&redlink=1http://en.wikipedia.org/wiki/Land_use_planninghttp://en.wikipedia.org/wiki/Life_planninghttp://en.wikipedia.org/wiki/Marketing_planhttp://en.wikipedia.org/wiki/Marketing_planhttp://en.wikipedia.org/wiki/Network_resource_planninghttp://en.wikipedia.org/wiki/Strategic_planninghttp://en.wikipedia.org/wiki/Urban_planninghttp://en.wikipedia.org/wiki/Architectural_planninghttp://en.wikipedia.org/wiki/Business_planhttp://en.wikipedia.org/wiki/Comprehensive_planninghttp://en.wikipedia.org/wiki/Enterprise_Architecture_Planninghttp://en.wikipedia.org/wiki/Event_Planning_and_Productionhttp://en.wikipedia.org/wiki/Family_planninghttp://en.wikipedia.org/wiki/Financial_planninghttp://en.wikipedia.org/w/index.php?title=Infrastructure_planning&action=edit&redlink=1http://en.wikipedia.org/wiki/Land_use_planninghttp://en.wikipedia.org/wiki/Life_planninghttp://en.wikipedia.org/wiki/Marketing_planhttp://en.wikipedia.org/wiki/Marketing_planhttp://en.wikipedia.org/wiki/Network_resource_planninghttp://en.wikipedia.org/wiki/Strategic_planninghttp://en.wikipedia.org/wiki/Urban_planning7/31/2019 Material Fr Bio Med Engineers 02
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Improves Efficency
Anticipation of Crisis
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Objectives
The objectives are general parts of the planning process. They are the end-results
towards which all business activities are directed. They are needed in every aspect whereperformance and result directly and vitally affect the survival and success of the firm. In
other words, the objective of the firm justifies its existence. According to Robert C.
Appley, "Objectives are goals; they are aims which management and administration wishthe organization to achieve." In other words, goals, aims and purposes are also used tosignify objectives. Newman and Summerstated, "For managerial purposes, it is useful to
think of objectives as the results we want to achieve. Objective covers firm's long-range
plans specific departmental goals and short-term individual assignment also."
Features of Objectives
Each organization or group of individuals has some objectives
Objectives may be broad or they maybe specifically mentioned.
Objecitves may be clearly defined or these may not be clear and have to be interpreted
by the behaviour of orgainzational members, particularlly those at top level Objectives have hierarchy. At the top level, it may be broad organiational purpose
which can be broken into specific objectives at te departmental level.
Organizational objectives have socail sanction, that is they ae created within the socialnorms.
An organizationa may have multiple objectives.
Organizational objectives can be changed, old objectives maybe replaced by new ones.
Role of Objectives
1. Defining an Organization
2. Directions for Decision Making
3. Performance Standards
4. Basis for Decntralization
5. Integrating Organization, Group and Individual.
Characteristics of Objectives
Objectives have a Hierarchy
By N. Pradeesh KumarFor Dept. of Bio- Medical-NIU
http://en.wikipedia.org/w/index.php?title=Robert_C._Appley&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Robert_C._Appley&action=edit&redlink=1http://en.wikipedia.org/wiki/Newmanhttp://en.wikipedia.org/wiki/Summerhttp://en.wikipedia.org/w/index.php?title=Robert_C._Appley&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Robert_C._Appley&action=edit&redlink=1http://en.wikipedia.org/wiki/Newmanhttp://en.wikipedia.org/wiki/Summer7/31/2019 Material Fr Bio Med Engineers 02
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Objectives form a Network
Multiplicity of Objectives
Objectives have a Time Span
Objectives may be Tngible or Intangible
Objectives have a social Sanction since organiations are socal units .
Guidelines for Objectives
By N. Pradeesh KumarFor Dept. of Bio- Medical-NIU
3. Overall Objecives of th
Organization (long-range,
Strategic)
2. Mission
1. Socio-Economic Purpose
4. More Specific and Overall
Objectives
(e.g.Key Result Areas)
5. Division Objectives
6. Department and Unit Objectives
7. Individual Objectives
PerformancePersonal Development Obbjectuives
LowLevel
MiddleLevel
Manage-
ment
Top Level
Management
Board Of
Directors
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1. Objectives must be clearly specified
2. Objectives must be set taking into account the various factors affecting their
acheivement
3. Objectives should be consistent with organiational mission
4. Objectives should be rational and realistic rather than idealistic.
5. Objectives should be achievable. But must provide challenge to those responsible
for achievement.
6. It should yeild specific result when achieved
7. Objectives should be consistent over theperiod oftime
8. Objectives should be periodically reviewed
9. Objectives should start with the word to and by followed by an action verb.
10. It should be desireable for those responsible for achievement
Advantages of Objectives
The following are some of the major function and contribution of objectives:
Unified Planning
Defining an Organization
Direction
Individual Motivation
Basisiof Decentralization
Basis of Control
Coordination
SMART
SMART / SMARTERis a mnemonic used inproject management at the project
objective setting stage. It is a way of evaluating the objectives or goals for an individual
project. The term is also in common usage in performance management, whereby goals andtargets set for employees must fulfill the criteria.
The first known uses of the term occur in the November 1981 issue of Management
Review by George Doran, Arthur Miller, and James Cunningham.
In recent years the terms 'SMART' (see below) and, less commonly, 'DUMB'(doable, understandable, manageable & beneficial) have been used beyond the original
context ofproject management.
By N. Pradeesh KumarFor Dept. of Bio- Medical-NIU
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Terms behind the letters
There is no clear consensus about precisely what the five + two keywords mean, or even
what they are in any given situation. Typically accepted values are:
LetterMajor
TermMinor Terms
S Specific Significant,Stretching, Simple
M Measurable Meaningful, Motivational, Manageable
A Attainable Appropriate, Achievable, Agreed,
Assignable,
Actionable,
Action-oriented,Ambitious
R RelevantRealistic, Results/Results-focused/Results-oriented, Resourced,
Rewarding
T Time-boundTime-oriented, Time framed, Timed, Time-based, Timeboxed, Timely,Time-Specific, Timetabled, Time limited, Trackable, Tangible
E Evaluate Excitable, Ethical
R Reevaluate Rewarded, Reassess, Revisit, Recorded
Choosing certain combinations of these labels can cause duplication; such asselecting Attainable and Realistic; or can cause significant overlapping as in combining
Measurable and Results; Appropriate and Relevant etc. Agreed is often used in
management situations where buy-in from stakeholders is desirable (eg appraisalsituations).
Management by objectives
By N. Pradeesh KumarFor Dept. of Bio- Medical-NIU
S.
S.M.
M.
A.
A.RR..TT..
SpecificSpecific
MeasurableMeasurable
AttainableAttainable
RealisticRealistic
TimelyTimely
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Management by Objectives (MBO) is a process of agreeing upon objectives
within an organization so that management and employees agree to the objectives and
understand what they are in the organization.The term "management by objectives" was first popularized by Peter Druckerin his
1954 book 'The Practice of Management'.
The essence of MBO is participative goal setting, choosing course of actions anddecision making. An important part of the MBO is the measurement and the comparison of
the employees actual performance with the standards set. Ideally, when employees
themselves have been involved with the goal setting and the choosing the course of actionto be followed by them, they are more likely to fulfill their responsibilities.
Processof MBO
MBO is a system for achieving organizational objectives, enhancement of
employee commitment and participation.
Organizational Purpose and Objectives
Areas
ordinate GoalsResources with Objectives
Features and Advantages
Unique features and advantage of the MBO process
The principle behind Management by Objectives (MBO) is to create empoweredemployees who have clarity of the roles and responsibilities expected from them,
understand their objectives to be achieved and thus help in the achievement of
organizational as well as personal goals.Some of the important features and advantages of MBO are:
1. Clarity of goals
2. Clarity in Organizational actions
3. Personnel satisfaction4. Basis of Organizational Change
5. Motivation Involving employees in the whole process of goal setting and
increasing employee empowerment increases employee job satisfaction andcommitment.
6. Better communication and Coordination Frequent reviews and interactions
between superiors and subordinates helps to maintain harmonious relationships
within the enterprise and also solve many problems faced during the period.well to be supposed if yet this management by objectives has certain advantages as well
as disadvantages, it is a virtual technique for effective management and it takes around 5
years to get mbo yielding results.
Domains and levels
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Objectives can be set in all domains of activities (production, services, sales, R&D,
human resources, finance, information systems etc.). Some objectives are collective, for a
whole department or the whole company, others can be individualized.
Practice
Objectives need quantifying and monitoring. Reliable management informationsystems are needed to establish relevant objectives and monitor their "reach ratio" in an
objective way. Pay incentives (bonuses) are often linked to results in reaching the
objectives
Limitations
There are several limitations to the assumptive base underlying the impact of managingby objectives, including:
1. Time and Cost
2. Fuilure to teach MBO
3. Problems in Objecive Setting4. Emphasis on Short term Goals
5. Inlexibility6. It over-emphasizes the setting of goals over the working of a plan as a driver of
outcomes.
7. It underemphasizes the importance of the environment or context in which the goalsare set. That context includes everything from the availability and quality of
resources, to relative buy-in by leadership and stake-holders. As an example of the
influence of management buy-in as a contextual influencer, in a 1991
comprehensive review of thirty years of research on the impact of Management byObjectives, Robert Rodgers and John Hunter concluded that companies whose
CEOs demonstrated high commitment to MBO showed, on average, a 56% gain in
productivity. Companies with CEOs who showed low commitment only saw a 6%gain in productivity.
8. Companies evaluated their employees by comparing them with the "ideal"
employee. Trait appraisal only looks at what employees should be, not at what theyshould do.
9. It did not address the importance of successfully responding to obstacles and
constraints as essential to reaching a goal. The model didnt adequately cope with
the obstacles of:a. Defects in resources, planning and methodology,
b. The increasing burden of managing the information organization challenge,
c. The impact of a rapidly changing environment, which could alter thelandscape enough to make yesterdays goals and action plans irrelevant to
the present.
When this approach is not properly set, agreed and managed by organizations, inself-centered thinking employees, it may trigger an unethical behavior of distorting the
system of results and financial figures to falsely achieve targets that were set in a short-
term, narrow, bottom-line fashion.
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The use of MBO needs to be carefully aligned with the culture of the organization.
While MBO is not as fashionable as it was before the 'empowerment' fad, it still has its
place in management today. The key difference is that rather than 'set' objectives from acascade process, objectives are discussed and agreed, based upon a more strategic picture
being available to employees. Engagement of employees in the objective setting process is
seen as a strategic advantage by manyA saying around MBO and CSF's -- "What gets measured gets done"- is perhaps the
most famous aphorism of performance measurement; therefore, to avoid potential problems
SMART and SMARTER objectives need to be agreed upon in the true sense rather thanset.
Arguments Against
MBO has its detractors, notably among them W. Edwards Deming, who argued thata lack of understanding of systems commonly results in the misapplication of objectives.
Point 7 of Deming's 14 Points encourages managers to abandon objectives in
favour of leadership because he felt that a leader with an understanding of systems was
more likely to guide workers to an appropriate solution than the incentive of an objective.Deming also pointed out that Drucker warned managers that a systemic view was required
and felt that Drucker's warning went largely unheeded by the practitioners of MBO.
Goal management in organizations
Organizationally, goal management consists of the process of recognizing orinferring goals of individual team-members, abandoning no longer relevant goals,
identifying and resolving conflicts among goals, and prioritizing goals consistently for
optimal team-collaboration and effective operations.For any successful commercial system, it means derivingprofits by making the best
quality ofgoods or the best quality ofservices available to the end-user (customer) at the
best possible cost. Goal management includes: Assessment and dissolution of non-rational blocks to success Time management
Frequent reconsideration (consistency checks)
Feasibility checks
Adjusting milestones and main-goal targets
Morten Lind and J.Rasmussen distinguish three fundamental categories of goalsrelated to technological system management:
1. Production goal
2. Safety goal
3. Economy goalAn organizational goal-management solution ensures that individual employee
goals and objectives align with the vision and strategic goals of the entire organization.
Goal-management provides organizations with a mechanism to effectively communicatecorporate goals and strategic objectives to each person across the entire organization. The
key consists of having it all emanate from a pivotal sourceand providing each person with
a clear, consistent organizational-goal message. With goal-management, every employeeunderstands how their efforts contribute to an enterprise's success.
By N. Pradeesh KumarFor Dept. of Bio- Medical-NIU
http://en.wikipedia.org/wiki/W._Edwards_Deminghttp://en.wikipedia.org/wiki/W._Edwards_Deming#Dr._W._Edward_Deming.27s_14_pointshttp://en.wikipedia.org/wiki/Commercehttp://en.wikipedia.org/wiki/Systemhttp://en.wikipedia.org/wiki/Profit_(economics)http://en.wikipedia.org/wiki/Good_(accounting)http://en.wikipedia.org/wiki/Service_(economics)http://en.wikipedia.org/wiki/Customerhttp://en.wikipedia.org/wiki/Costhttp://en.wikipedia.org/wiki/Time_managementhttp://en.wikipedia.org/wiki/Feasibilityhttp://en.wikipedia.org/wiki/Milestonehttp://en.wikipedia.org/wiki/W._Edwards_Deminghttp://en.wikipedia.org/wiki/W._Edwards_Deming#Dr._W._Edward_Deming.27s_14_pointshttp://en.wikipedia.org/wiki/Commercehttp://en.wikipedia.org/wiki/Systemhttp://en.wikipedia.org/wiki/Profit_(economics)http://en.wikipedia.org/wiki/Good_(accounting)http://en.wikipedia.org/wiki/Service_(economics)http://en.wikipedia.org/wiki/Customerhttp://en.wikipedia.org/wiki/Costhttp://en.wikipedia.org/wiki/Time_managementhttp://en.wikipedia.org/wiki/Feasibilityhttp://en.wikipedia.org/wiki/Milestone7/31/2019 Material Fr Bio Med Engineers 02
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An example of goal types in business management:
Consumer goals: this refers to supplying a product or service that the
market/consumer wants
Product goals: this refers to supplying a product outstanding compared to other
productsperhaps due to the likes of quality, design, reliability and novelty Operational goals: this refers to running the organization in such a way as to
make the best use of management skills, technology and resources
Secondary goals: this refers to goals which an organization does not regard aspriorities
The Process of MBO
MBO is a process that consists of the following steps:
Setting Preliminary Objectives
Fixing Key Result Areas
Setting Subordinates Objectives
Recycling ObjecivesMatching Resource with Objectives
Periodic Performance Reviews
Apprisal
Benefits of MBO
Improvement of Managing
Clarification of OrganizationPersonal Satisfaction
Team Work
Development of Effective Control
Fast decision
Weakness of MBO
Failure to teach philosophies of MBO
Failure to give Guidelines for good Goal SettingDifficulty in setting Goals
Emphasis on Short term goals
Danger of Inflexibility
TimeConsuming
Strategies
Strategy is defined as the determination of long term objectives of an organization.
Types of Strategy
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Strategies are broadly classified into two types
Grand Strategy
Global Strategy
Grand strategy
It is the action plan by which a firm intends to achieve it long term goals. GrandStrategy can be classified into three types:
Stability Strategy
If the organiationis stable and the organization is doing well, then it is better to make nochange in the organization.
Growth Strategy
Growth strategies involves forecasting and analysis of many factors that affect expansion
like resources availabilty and market availabiltyRetrenchment Strategy
Retrenchment Strategy means reduction in producs, servies and personnel. This strategy is
many times useful of tough competion, scarcity of resources.
Global strategyGlobal Strategy is classified into Globalization strategy, Multi Domestic stratgey and
Transactional strategy.
Strategic planning
Strategic planning is an organization's process of defining its strategy, or
direction, and making decisions on allocating its resources to pursue this strategy, includingits capital and people. Various business analysis techniques can be used in strategic
planning, including SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats ),
PEST analysis (Political, Economic, Social, and Technological), STEER analysis (Socio-
cultural, Technological, Economic, Ecological, and Regulatory factors), and EPISTEL(Environment, Political, Informatic, Social, Technological, Economic and Legal).
Strategic planning is the formal consideration of an organization's future course. All
strategic planning deals with at least one of three key questions:1. "What do we do?"
2. "For whom do we do it?"
3. "How do we excel?"In business strategic planning, the third question is better phrased "How can we
beat or avoid competition?". (Bradford and Duncan, page 1). In many organizations, this is
viewed as a process for determining where an organization is going over the next year or
more -typically 3 to 5 years, although some extend their vision to 20 years. In order todetermine where it is going, the organization needs to know exactly where it stands, then
determine where it wants to go and how it will get there. The resulting document is called
the "strategic plan." It is also true that strategic planning may be a tool for effectivelyplotting the direction of a company; however, strategic planning itself cannot foretell
exactly how the market will evolve and what issues will surface in the coming days in
order to plan your organizational strategy. Therefore, strategic innovation and tinkeringwith the 'strategic plan' have to be a cornerstone strategy for an organization to survive the
turbulent business climate.
Strategic Planning Process
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Strategic planning process consists of the following stages:
Step1: Develop Mission and Objectives
Mission is the organizations purpose and fundamental reason forexistence. Before formulating the strategy, the organization has to develop clear mission
and objectives
Step 2: Diagnise Internal and external EnvironmentIn this diagnosis. The external environment is scanned for technological
development and changes in market condition.
Step 3: Situation AnalysisInclude SWOT. The information required fopr conduting situational analysis ca n
be derived from a variety of sources such as government reports, journals. Customers,
suppliers, consultants and association meetings.
Step 4: Develop alternative StrategiesDevelop Alternative strategies considering external and internal environment,
diversification, joint ventures strategic alliance, globalization, retrenchment and liquidation
are some of the possible alternative strategies
Step 5: Formulate StrategiesThis step can further be categorised into three stages
(1) Formulate Corporate Level Strategy
(2) Formulate Business Level Strategy
(3) Formulate Fuctional Level Strategy
Step 6: Implementing StrategyStrategy implementaion is the process of translation of strategies and policies into
action through the development of programmes, budgets and procedures.
[Strategy may be implemented by Middle Level and Lower Level Management]
Mission, vision and values
Mission:
Defines the fundamental purpose of an organization or an enterprise, succinctly
describing why it exists and what it does to achieve its Vision. The mission could be eitherfor the long term or the short term. A corporate mission can last for many years, or for the
life of the organization or may change as the organization develops. It is not an objective
with a timeline, but rather the overall goal that is accomplished as organizational goals andobjectives are achieved.
Vision:
Defines the desired or intended future state of an organization or enterprise in terms
of its fundamental objective and/or strategic direction. Vision is a long term view,sometimes describing how the organization would like the world in which it operates to be.
For example a charity working with the poor might have a vision statement which read "A
world without poverty"It is sometimes used to set out a 'picture' of the organization in the future. A vision
statement provides inspiration, the basis for all the organization's planning. It could answer
the question: "Where do we want to go?"
Values:
Beliefs that are shared among thestakeholdersof an organization. Values drive an
organization's culture and priorities.
Strategy:
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Strategy narrowly defined, means "the art of the general" (from Greek stratcgos). A
combination of the ends (goals) for which the firm is striving and the means (policies)by
which it is seeking to get there.
Mission statements and vision statements
Organizations sometimes summarize goals and objectives into a mission statement
and/or a vision statement Others begin with a vision and mission and use them toformulate goals and objectives.
While the existence of a shared mission is extremely useful, many strategy
specialists question the requirement for a written mission statement. However, there aremany models of strategic planning that start with mission statements, so it is useful to
examine them here.
A Mission statement tells you the fundamental purpose of the organization. Itdefines the customer and the critical processes. It informs you of the desired level
of performance.
A Vision statementoutlines what the organization wants to be, or how it wants the
world in which it operates to be. It concentrates on the future. It is a source ofinspiration. It provides clear decision-making criteria.
An advantage of having a statement is that it creates value for those who get
exposed to the statement, and those prospects are managers, employees and sometimes
even customers. Statements create a sense of direction and opportunity. They both are anessential part of the strategy-making process.
Many people mistake vision statement for mission statement, and sometimes one is
simply used as a longer term version of the other. The Vision should describe why it is
important to achieve the Mission. A Vision statement defines the purpose or broader goal
for being in existence or in the business and can remain the same for decades if craftedwell. A Mission statement is more specific to what the enterprise can achieve itself. Vision
should describe what will be achieved in the wider sphere if the organization and others are
successful in achieving their individual missions.
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A mission statement can resemble a vision statement in a few companies, but that
can be a grave mistake. It can confuse people. The mission statement can galvanize the
people to achieve defined objectives, even if they are stretch objectives, provided it can beelucidated in SMART (Specific, Measurable, Achievable, Relevant and Time-bound)
terms. A mission statement provides a path to realize the vision in line with its values.
These statements have a direct bearing on the bottom line and success of the organization.Which comes first? The mission statement or the vision statement? That depends. If
you have a new start up business, new program or plan to re engineer your current services,
then the vision will guide the mission statement and the rest of the strategic plan. If youhave an established business where the mission is established, then many times, the
mission guides the vision statement and the rest of the strategic plan. Either way, you need
to know your fundamental purpose - the mission, your current situation in terms of internal
resources and capabilities (strengths and/or weaknesses) and external conditions(opportunities and/or threats), and where you want to go - the vision for the future. It's
important that you keep the end or desired result in sight from the start..
Features of an effective vision statement include:
Clarity and lack of ambiguity Vivid and clear picture
Description of a bright future
Memorable and engaging wording
Realistic aspirations
Alignment with organizational values and cultureTo become really effective, an organizational vision statement must (the theory
states) become assimilated into the organization's culture. Leaders have the responsibility
of communicating the vision regularly, creating narratives that illustrate the vision, acting
as role-models by embodying the vision, creating short-term objectives compatible with thevision, and encouraging others to craft their own personal vision compatible with the
organization's overall vision. In addition, mission statements need to be subjected to an
internal assessment and an external assessment. The internal assessment should focus onhow members inside the organization interpret their mission statement. The external
assessment which includes all of the businesses stakeholders is valuable since it
offers a different perspective. These discrepancies between these two assessments can giveinsight on the organization's mission statement effectiveness.
Another approach to defining Vision and Mission is to pose two questions. Firstly,
"What aspirations does the organization have for the world in which it operates and has
some influence over?", and following on from this, "What can (and /or does) theorganization do or contribute to fulfill those aspirations?". The succinct answer to the first
question provides the basis of the Vision Statement. The answer to the second question
determines the Mission Statement.
Methodologies
There are many approaches to strategic planning but typically a three-step process may
be used:
Situation - evaluate the current situation and how it came about.
Target - define goals and/or objectives (sometimes called ideal state)
Path - map a possible route to the goals/objectives
One alternative approach is calledDraw-See-Think
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Draw - what is the ideal image or the desired end state?
See - what is today's situation? What is the gap from ideal and why?
Think - what specific actions must be taken to close the gap between today'ssituation and the ideal state?
Plan - what resources are required to execute the activities?
An alternative to theDraw-See-Thinkapproach is called See-Think-Draw See - what is today's situation?
Think- define goals/objectives
Draw - map a route to achieving the goals/objectivesIn other terms strategic planning can be as follows:
Vision - Define the vision and set a mission statement with hierarchy of goals and
objectives
SWOT- Analysis conducted according to the desired goals Formulate - Formulate actions and processes to be taken to attain these goals
Implement - Implementation of the agreed upon processes
Control - Monitor and get feedback from implemented processes to fully control
the operation
Situational analysis
When developing strategies, analysis of the organization and its environment as it isat the moment and how it may develop in the future, is important. The analysis has to be
executed at an internal level as well as an external level to identify all opportunities andthreats of the external environment as well as the strengths and weaknesses of the
organizations.
There are several factors to assess in the external situation analysis:1. Markets (customers)
2. Competition
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3. Technology
4. Supplier markets
5. Labor markets6. The economy
7. The regulatory environment
It is rare to find all seven of these factors having critical importance. It is alsouncommon to find that the first two - markets and competition - are not of critical
importance. (Bradford "External Situation - What to Consider")
Analysis of the external environment normally focuses on the customer.Management should be visionary in formulating customer strategy, and should do so by
thinking about market environment shifts, how these could impact customer sets, and
whether those customer sets are the ones the company wishes to serve.
Analysis of the competitive environment is also performed, many times based onthe framework suggested by Michael Porter.
Goals, objectives and targets
Strategic planning is a very important business activity. It is also important in the
public sector areas such as education. It is practiced widely informally and formally.Strategic planning and decision processes should end with objectives and a roadmap of
ways to achieve those objectives.Most strategic plans address high level initiatives and over-arching goals, but dont
get articulated (translated) into day-to-day projects and tasks that will be required to
achieve the plan. Terminology or word choice, as well as the level a plan is written, areboth examples of easy ways to fail at translating your strategic plan in a way that makes
sense and is executable to others. Often, plans are filled with conceptual terms which dont
tie into day-to-day realities for the staff expected to carry out the plan.
The following terms have been used in strategic planning: desired end states, plans,policies, goals, objectives, strategies, tactics and actions. Definitions vary, overlap and fail
to achieve clarity. The most common of these concepts are specific, time bound statements
of intended future results and general and continuing statements of intended future results,which most models refer to as either goals or objectives (sometimes interchangeably).
One model of organizing objectives uses hierarchies. The items listed above may be
organized in a hierarchy of means and ends and numbered as follows: Top Rank Objective(TRO), Second Rank Objective, Third Rank Objective, etc. From any rank, the objective in
a lower rank answers to the question "How?" and the objective in a higher rank answers to
the question "Why?" The exception is the Top Rank Objective (TRO): there is no answer to
the "Why?" question. That is how the TRO is defined.People typically have several goals at the same time. "Goal congruency" refers to
how well the goals combine with each other. Does goal A appear compatible with goal B?
Do they fit together to form a unified strategy? "Goal hierarchy" consists of the nesting ofone or more goals within other goal(s).
One approach recommends having short-term goals, medium-term goals, and long-
term goals. In this model, one can expect to attain short-term goals fairly easily: they standjust slightly above one's reach. At the other extreme, long-term goals appear very difficult,
almost impossible to attain. Strategic management jargon sometimes refers to "Big Hairy
Audacious Goals" (BHAGs) in this context. Using one goal as a stepping-stone to the next
involves goal sequencing. A person or group starts by attaining the easy short-term goals,
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then steps up to the medium-term, then to the long-term goals. Goal sequencing can create
a "goal stairway". In an organizational setting, the organization may co-ordinate goals so
that they do not conflict with each other. The goals of one part of the organization shouldmesh compatibly with those of other parts of the organization.
Policy
Policy is the statement or general understanding which provides guidelies in decsionmaking
Features
A policy provides guidelines to the membrs of the organization for deciding a course ofaction and thus restricts their freedom of action.
Policy limits an area with in which a decision is to be made and assures that the decisions
contribute to the objective
Policies are generally expressed in qualitative conditional or general way.Policy formulation is a function of all managers in the organization because some form of
guidelines for future course of ation is required at every level
Characteristics
Relationship to orgainzational objectivesPlanned formulation
Fair aountof ClarityConsistency
The Policy in each area are connected with other area so the inconsistent area will affect
other areas and leadto inefficencyBalanced
A Sound policy maintains balance between stability and flexibilty
Written
A written policy is easier to communicate through the organizational manualsCommunication
A Sound Policy should be communicated to the persons concerned.
Formulation of Strategies and Policies
Corporate Mission and Objectives
Organizational Mission and objectives are the starting point of strategy and policy
formulation
Environmental Analysis
Corporate Analysis
SWOT analysis
Identification of Alternatives
Choice of stratgey and Policy
Choice of deciding the acceptable alternative among the several others
Implementation
Institutionalisation of Strategy
Putting the strategy into opertion
Setting Proper Organizational Climate
Developin Appropriate Operating Plans
In budgeting more resources will be alloted on those factors which are critical to the sucess
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Developing Appropriate Orgainzation Structure
According to the nees of strategy
Periodic Review of Strategy
To find out whether the given strategy is relavant
Planning PremisesIt involves various assumptions on which plans are formulated
Types of Planning Premises
External Premises
To identify opportunites or threats
Environmental changesCustomer Preferences
Internal Premises
Not only external but onstead factors are also considered for the plan formulation. i.e.,organization stucture and Mnaagement System
Strength - Strategic Advantage
Weakness - Limitationsand ConstraintsTangible Premises
Tangible premises can be expressed in quantitative terms like monetary unit, unit of
products, labour hours , etc..
Intangible Premises
Intangible premises are of qualitative nature and cannot be translated into quantitiy
Controllable Premises
Those which can be controlled by organiations actions policies
Uncontrollable Premises
They are controlled by external Environment Policy of the Govt., rate of Economic
Growth
Forecasting
Forecasting is the process of making statements about events whose actualoutcomes (typically) have not yet been observed. A commonplace example might be
estimation of the expected value for some variable of interest at some specified future date.
Prediction is a similar, but more general term. Both might refer to formal statistical
methods employing time series, cross-sectional orlongitudinal data, or alternatively to lessformal judgemental methods. Usage can differ between areas of application: for example in
hydrology, the terms "forecast" and "forecasting" are sometimes reserved for estimates of
values at certain specific future times, while the term "prediction" is used for more generalestimates, such as the number of times floods will occur over a long period.
Risk and uncertainty are central to forecasting and prediction; it is generallyconsidered good practice to indicate the degree of uncertainty attaching to forecasts.Forecasting is used in the practice of Customer Demand Planning in every day business
forecasting for manufacturing companies. The discipline of demand planning, also
sometimes referred to as supply chain forecasting, embraces both statistical forecasting and
a consensus process. An important, albeit often ignored aspect of forecasting, is therelationship it holds withplanning.
Features
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Relates to future Events
Defines the probability of happening of future events
Analysing Past and Present events which are relevant
Use of various statistical tools and techniques
Importance of Forecasting Promotion of Organization
Key to Planning
Co-ordination and control
o The managers know their weakness
Success in Organization
o Risk in Minimum
Forecasting can be described as predicting what the future willlook like, whereasplanning predicts what the future should look like. There is no single right forecasting
method to use. Selection of a method should be based on your objectives and your
conditions (data etc.). A good place to find a method, is by visiting a selection tree. An
example of a selection tress can be found here Categories of forecasting methods
Historical Analogy Method
Forecast in regards to a particular phenomenon is based on some
analogous(comparable) condtions elsewhere in the past.
Survey Method
Field Surveys can be conducted to gather information on the intentions of the
concerned people
Opinion Poll
Opinion poll is conducted to assess the opinion of the kowledgeable persons
and experts in the field whoes views carry a lot of weightage.
Business Barometers
In physical science, a barometer is used to measure the atmospheric pressure.
In the same way, index numbers are used to measure the state to measure the state od
economy between two or more periods.
Regression Analysis
Is meant to dosclose the relative movements of two or more interrelated series
Input - Output Analysis
A forecast of output is based on the given input if relationship between input
and outputis known
Time series methods
Time series methods use historical data as the basis of estimating future outcomes.
Rolling forecast is a projection into the future based on past performances,routinely updated on a regular schedule to incorporate data.[1]
Moving average
weighted moving average
Exponential smoothing
Extrapolation
Linear prediction
Trend estimation
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Growth curve
Topics
Causal / econometric methods
Some forecasting methods use the assumption that it is possible to identify the
underlying factors that might influence the variable that is being forecast. For example,
sales of umbrellas might be associated with weather conditions. If the causes are
understood, projections of the influencing variables can be made and used in the forecast.
Regression analysis using linear regression ornon-linear regression
Autoregressive moving average (ARMA)
Autoregressive integrated moving average (ARIMA)
e.g. Box-Jenkins Econometrics
Judgmental methods
Judgmental forecasting methods incorporate intuitive judgements, opinions and
subjective probability estimates.
Composite forecasts
Surveys
Delphi method
Scenario building
Technology forecasting
Forecast by analogy
Artificial intelligence methods
Artificial neural networks
Support vector machines
Forecasting accuracy
The forecast error is the difference between the actual value and the forecast value
for the corresponding period.
where E is the forecast error at period t, Y is the actual value at period t, and F is
the forecast for period t.
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Measures of aggregate error:
Mean Absolute Error (MAE)
Mean Absolute Percentage Error(MAPE)
Percent Mean Absolute Deviation (PMAD)
Mean squared error(MSE)
Root Mean squared error (RMSE)
Forecast skill (SS)
Please note that business forecasters and practitioners sometimes use differentterminology in the industry. They refer to the PMAD as the MAPE, although they compute
this volume weighted MAPE. For more information see Calculating Demand Forecast
Accuracy
Applications of forecasting
Forecasting has application in many situations:
Supply chain management - Forecasting can be used in Supply Chain Management
to make sure that the right product is at the right place at the right time. Accurate
forecasting will help retailers reduce excess inventory and therefore increase profit
margin. Accurate forecasting will also help them meet consumer demand. Weather forecasting, Flood forecasting and Meteorology
Transport planning and Transportation forecasting
Economic forecasting
Technology forecasting
Earthquake prediction
Land use forecasting
Product forecasting
Player and team performance in sports
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Telecommunications forecasting
Political Forecasting
Sales Forecasting
Strategic foresight
Strategic foresight is a fairly recent attempt to differentiate "futurology" from
"futures studies". It arises from the premise that: The future is not predictable;
The future is not predetermined; and
Future outcomes can be influenced by our choices in the present (Amara(1981)).
Strategic foresight can also be practiced at three different levels:
1. Pragmatic foresight - "Carrying out tomorrows' business better" (Hamel &
Prahalad, 2004);2. Progressive foresight - "Going beyond conventional thinking and practices and
reformulating processes, products, and services using quite different
assumptions"(Slaughter (2004) p .217);
3. Civilisational foresight - "Seeks to understand the aspects of the next civilisation -the one that lies beyond the current impasse, the prevailing hegemony of
techno/industrial/capitalist interests"(ibid.).Two approaches to futures studies that are especially focussed at those last two
levels of strategic foresight are Critical futures and Integral futures.
Strategic Foresight Group defines foresight as a combination of forecasting withinsight. While forecasting requires methodologies, generated by computers or otherwise,
insight requires deep understanding of the subject concerned. Foresight is developed by
applying forecasting methodology to the insight. Strategic Foresight relates to foresight of
strategic issues. Thus, strategic foresight can be developed by scientific study. It is notabout intuition or guess work. The difference between strategic foresight and futurology is
that strategic foresight provides alternative scenarios for the future. Futurology attempts to
provide a definitive picture of the future.
Quotes
Strategic Foresight is the ability to create and maintain a high-quality, coherent
and functional forward view, and to use the insights arising in usefulorganisational ways. For example to detect adverse conditions, guide policy, shape
strategy, and to explore new markets, products and services. It represents a fusion
of futures methods with those of strategic management(Slaughter (1999), p.287).
Take hold of your future or the future will take hold of you (Patrick DixonFuturewisepubl 2005)
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Decision making
Decision making can be regarded as an outcome of mental processes (cognitive
process) leading to the selection of a course of action among several alternatives. Every
decision making process produces a final choice. The output can be an action or an opinionof choice.
Overview
Human performance in decision making terms has been the subject of active
research from several perspectives. From a psychological perspective, it is necessary toexamine individual decisions in the context of a set of needs, preferences an individual has
and values they seek. From a cognitive perspective, the decision making process must be
By N. Pradeesh KumarFor Dept. of Bio- Medical-NIU
http://en.wikipedia.org/wiki/Cognitionhttp://en.wikipedia.org/wiki/Cognitionhttp://en.wikipedia.org/wiki/Choicehttp://en.wikipedia.org/wiki/Cognitivehttp://en.wikipedia.org/wiki/Cognitionhttp://en.wikipedia.org/wiki/Cognitionhttp://en.wikipedia.org/wiki/Choicehttp://en.wikipedia.org/wiki/Cognitive7/31/2019 Material Fr Bio Med Engineers 02
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regarded as a continuous process integrated in the interaction with the environment. From a
normative perspective, the analysis of individual decisions is concerned with the logic of
decision making and rationality and the invariant choice it leads to.Yet, at another level, it might be regarded as a problem solving activity which is
terminated when a satisfactory solution is found. Therefore, decision making is a reasoning
or emotional process which can be rational or irrational, can be based on explicitassumptions ortacit assumptions.
Logical decision making is an important part of all science-based professions,
where specialists apply theirknowledge in a given area to making informed decisions. Forexample, medical decision making often involves making a diagnosis and selecting an
appropriate treatment.
Some research using naturalistic methods shows, however, that in situations with
higher time pressure, higher stakes, or increased ambiguities, experts use intuitive decisionmaking rather than structured approaches, following a recognition primed decision
approach to fit a set of indicators into the expert's experience and immediately arrive at a
satisfactory course of action without weighing alternatives.
Recent robust decision efforts have formally integrated uncertainty into the decisionmaking process. However, Decision Analysis, recognized and included uncertainties with a
structured and rationally justifiable method of decision making since its conception in1964.
Fig Represents - Rational Decision Making
Problem Analysis vs. Decision Making
It's important to differentiate between problem analysis and decision making. The
concepts are completely separate of one another. Problem analysis must be done first, thenthe information gathered in that process may be used towards decision making.
Problem Analysis
Analyze performance, what should the results be against what they actually are
Problems are merely deviations from performance standards
Problem must be precisely identified and described
Problems are caused by some change from a distinctive feature
By N. Pradeesh KumarFor Dept. of Bio- Medical-NIU
http://en.wikipedia.org/wiki/Normativehttp://en.wikipedia.org/wiki/Rationalityhttp://en.wikipedia.org/wiki/Irrationalityhttp://en.wikipedia.org/wiki/Tacit_assumptionshttp://en.wikipedia.org/wiki/Tacit_assumptionshttp://en.wikipedia.org/wiki/Knowledgehttp://en.wikipedia.org/wiki/Medical_diagnosishttp://en.wikipedia.org/wiki/Naturalistic_decision_makinghttp://en.wikipedia.org/wiki/Recognition_primed_decisionhttp://en.wikipedia.org/wiki/Robust_decisionhttp://en.wikipedia.org/wiki/Uncertaintyhttp://en.wikipedia.org/wiki/Decision_Analysishttp://en.wikipedia.org/wiki/Normativehttp://en.wikipedia.org/wiki/Rationalityhttp://en.wikipedia.org/wiki/Irrationalityhttp://en.wikipedia.org/wiki/Tacit_assumptionshttp://en.wikipedia.org/wiki/Knowledgehttp://en.wikipedia.org/wiki/Medical_diagnosishttp://en.wikipedia.org/wiki/Naturalistic_decision_makinghttp://en.wikipedia.org/wiki/Recognition_primed_decisionhttp://en.wikipedia.org/wiki/Robust_decisionhttp://en.wikipedia.org/wiki/Uncertaintyhttp://en.wikipedia.org/wiki/Decision_Analysis7/31/2019 Material Fr Bio Med Engineers 02
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Something can always be used to distinguish between what has and hasn't been
effected by a cause
Causes to problems can be deducted from relevant changes found in analyzing theproblem
Most likely cause to a problem is the one that exactly explains all the facts
Decision Making
Objectives must first be established
Objectives must be classified and placed in order of importance
Alternative actions must be developed
The alternative must be evaluated against all the objectives
The alternative that is able to achieve all the objectives is the tentative decision
The tentative decision is evaluated for more possible consequences
The decisive actions are taken, and additional actions are taken to prevent any
adverse consequences from becoming problems and starting both systems (problem
analysis and decision making) all over again
Everyday techniques
Some of the decision making techniques people use in everyday life include:
Listing the advantages and disadvantages of each option, popularized by Plato and
Benjamin Franklin
Choosing the alternative with the highest probability-weighted utility for each
alternative (seeDecision Analysis)
satisficing: Accepting the first option that seems like it might achieve the desiredresult
Acquiesce to a person in authority or an "expert",just following orders
flipism: Flipping a coin, cutting a deck of playing cards, and other random orcoincidence methods
Prayer, tarot cards, astrology,augurs, revelation, or other forms ofdivination
By N. Pradeesh KumarFor Dept. of Bio- Medical-NIU
http://en.wikipedia.org/wiki/Platohttp://en.wikipedia.org/wiki/Benjamin_Franklinhttp://en.wikipedia.org/wiki/Utilityhttp://en.wikipedia.org/wiki/Decision_Analysishttp://en.wikipedia.org/wiki/Decision_Analysishttp://en.wikipedia.org/wiki/Satisficinghttp://en.wikipedia.org/wiki/Experthttp://en.wikipedia.org/wiki/Just_following_ordershttp://en.wikipedia.org/wiki/Flipismhttp://en.wikipedia.org/wiki/Prayerhttp://en.wikipedia.org/wiki/Tarothttp://en.wikipedia.org/wiki/Astrologyhttp://en.wikipedia.org/wiki/Augurshttp://en.wikipedia.org/wiki/Augurshttp://en.wikipedia.org/wiki/Revelationhttp://en.wikipedia.org/wiki/Divinationhttp://en.wikipedia.org/wiki/Platohttp://en.wikipedia.org/wiki/Benjamin_Franklinhttp://en.wikipedia.org/wiki/Utilityhttp://en.wikipedia.org/wiki/Decision_Analysishttp://en.wikipedia.org/wiki/Satisficinghttp://en.wikipedia.org/wiki/Experthttp://en.wikipedia.org/wiki/Just_following_ordershttp://en.wikipedia.org/wiki/Flipismhttp://en.wikipedia.org/wiki/Prayerhttp://en.wikipedia.org/wiki/Tarothttp://en.wikipedia.org/wiki/Astrologyhttp://en.wikipedia.org/wiki/Augurshttp://en.wikipedia.org/wiki/Revelationhttp://en.wikipedia.org/wiki/Divination7/31/2019 Material Fr Bio Med Engineers 02
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SHAPE \* MERGEFORMAT
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Cognitive and personal biases
Biases can creep into our decision making processes. Many different people have
made a decision about the same question (e.g. "Should I have a doctor look at this troublingbreast cancer symptom I've discovered?" "Why did I ignore the evidence that the project
was going over budget?") and then craft potential cognitive interventions aimed at
improving decision making outcomes.Below is a list of some of the more commonly debated cognitive biases.
Selective search forevidence (a.k.a. Confirmation bias in psychology) (Scott Plous,
1993) We tend to be willing to gather facts that support certain conclusions butdisregard other facts that support different conclusions. Individuals who are highly
defensive in this manner show significantly greater left prefrontal cortex activity as
measured by EEG than do less defensive individuals.
Premature termination of search for evidence We tend to accept the firstalternative that looks like it might work.
Inertia Unwillingness to change thought patterns that we have used in the past in
the face of new circumstances.
Selective perception We actively screen-out information that we do not think isimportant. (See prejudice.) In one demonstration of this effect, discounting of
arguments with which one disagrees (by judging them as untrue or irrelevant) wasdecreased by selective activation of right prefrontal cortex.
Wishful thinking oroptimism bias We tend to want to see things in a positive
light and this can distort our perception and thinking.
Choice-supportive bias occurs when we distort our memories of chosen and
rejected options to make the chosen options seem more attractive.
Recency We tend to place more attention on more recent information and either
ignore or forget more distant information. (See semantic priming.) The oppositeeffect in the first set of data or other information is termed Primacy effect (Plous,
1993).
Repetition bias A willingness to believe what we have been told most often andby the greatest number of different of sources.
Anchoring and adjustment Decisions are unduly influenced by initial information
that shapes our view of subsequent information.
Group thinkPeer pressure to conform to the opinions held by the group.
Source credibility bias We reject something if we have a bias against the person,
organization, or group to which the person belongs: We are inclined to accept a
statement by someone we like. (See prejudice.)
Incremental decision making and escalating commitment We look at a decision as
a small step in a process and this tends to perpetuate a series of similar decisions.
This can be contrasted with zero-based decision making. (See slippery slope.)
Attribution asymmetry We tend to attribute our success to our abilities and
talents, but we attribute our failures to bad luck and external factors. We attribute
other's success to good luck, and their failures to their mistakes.
Role fulfillment (Self Fulfilling Prophecy) We conform to the decision making
expectations that others have of someone in our position.
Underestimating uncertainty and the illusion of control We tend to underestimate
future uncertainty because we tend to believe we have more control over events
By N. Pradeesh KumarFor Dept. of Bio- Medical-NIU
http://en.wikipedia.org/wiki/Biashttp://en.wikipedia.org/wiki/List_of_cognitive_biaseshttp://en.wikipedia.org/wiki/Evidencehttp://en.wikipedia.org/wiki/Confirmation_biashttp://en.wikipedia.org/wiki/Scott_Ploushttp://en.wikipedia.org/wiki/Cognitive_inertiahttp://en.wikipedia.org/wiki/Prejudicehttp://en.wikipedia.org/wiki/Wishful_thinkinghttp://en.wikipedia.org/wiki/Optimism_biashttp://en.wikipedia.org/wiki/Choice-supportive_biashttp://en.wikipedia.org/wiki/Semantic_priminghttp://en.wikipedia.org/wiki/Semantic_priminghttp://en.wikipedia.org/wiki/Primacy_effecthttp://en.wikipedia.org/wiki/Anchoring_and_adjustmenthttp://en.wikipedia.org/wiki/Group_thinkhttp://en.wikipedia.org/wiki/Peer_pressurehttp://en.wikipedia.org/wiki/Prejudicehttp://en.wikipedia.org/wiki/Slippery_slopehttp://en.wikipedia.org/wiki/Attribution_theoryhttp://en.wikipedia.org/wiki/Uncertaintyhttp://en.wikipedia.org/wiki/Uncertaintyhttp://en.wikipedia.org/wiki/Biashttp://en.wikipedia.org/wiki/List_of_cognitive_biaseshttp://en.wikipedia.org/wiki/Evidencehttp://en.wikipedia.org/wiki/Confirmation_biashttp://en.wikipedia.org/wiki/Scott_Ploushttp://en.wikipedia.org/wiki/Cognitive_inertiahttp://en.wikipedia.org/wiki/Prejudicehttp://en.wikipedia.org/wiki/Wishful_thinkinghttp://en.wikipedia.org/wiki/Optimism_biashttp://en.wikipedia.org/wiki/Choice-supportive_biashttp://en.wikipedia.org/wiki/Semantic_priminghttp://en.wikipedia.org/wiki/Primacy_effecthttp://en.wikipedia.org/wiki/Anchoring_and_adjustmenthttp://en.wikipedia.org/wiki/Group_thinkhttp://en.wikipedia.org/wiki/Peer_pressurehttp://en.wikipedia.org/wiki/Prejudicehttp://en.wikipedia.org/wiki/Slippery_slopehttp://en.wikipedia.org/wiki/Attribution_theoryhttp://en.wikipedia.org/wiki/Uncertaintyhttp://en.wikipedia.org/wiki/Uncertainty7/31/2019 Material Fr Bio Med Engineers 02
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than we really do. We believe we have control to minimize potential problems in
our decisions.
Decision theory
Normative and descriptive decision theory
Most of decision theory is normative orprescriptive, i.e., it is concerned with
identifying the best decision to take, assuming an ideal decision maker who is fullyinformed, able to compute with perfect accuracy, and fully rational. The practical
application of this prescriptive approach (how people actually make decisions) is called
decision analysis, and aimed at finding tools, methodologies and software to help peoplemake better decisions. The most systematic and comprehensive software tools developed in
this way are called decision support systems.
Since people usually do not behave in ways consistent with axiomatic rules, oftentheir own, leading to violations of optimality, there is a related area of study, called a
positive ordescriptive discipline, attempting to describe what people will actually do. Since
the normative, optimal decision often creates hypotheses for testing against actualbehaviour, the two fields are closely linked. Furthermore it is possible to relax the
assumptions of perfect information, rationality and so forth in various ways, and produce a
series of different prescriptions or predictions about behaviour, allowing for further tests of
the kind of decision-making that occurs in practice.
What kinds of decisions need a theory?
Choice under uncertainty
This area represents the heart of decision theory. The procedure now referred to as
expected value was known from the 17th century. Blaise Pascal invoked it in his famous
wager (see below), which is contained in his Penses, published in 1670. The idea ofexpected value is that, when faced with a number of actions, each of which could give rise
to more than one possible outcome with different probabilities, the rational procedure is to
identify all possible outcomes, determine their values (positive or negative) and the
By N. Pradeesh KumarFor Dept. of Bio- Medical-NIU
http://en.wikipedia.org/wiki/Norm_(philosophy)http://en.wikipedia.org/wiki/Prescriptivehttp://en.wikipedia.org/wiki/Rationalityhttp://en.wikipedia.org/wiki/Decision_analysishttp://en.wikipedia.org/wiki/Decision_support_systemhttp://en.wikipedia.org/wiki/Axiomatichttp://en.wikipedia.org/wiki/Positivehttp://en.wikipedia.org/wiki/Descriptivehttp://en.wikipedia.org/wiki/Expected_valuehttp://en.wikipedia.org/wiki/Blaise_Pascalhttp://en.wikipedia.org/wiki/Pens%C3%A9eshttp://en.wikipedia.org/wiki/Pens%C3%A9eshttp://en.wikipedia.org/wiki/Norm_(philosophy)http://en.wikipedia.org/wiki/Prescriptivehttp://en.wikipedia.org/wiki/Rationalityhttp://en.wikipedia.org/wiki/Decision_analysishttp://en.wikipedia.org/wiki/Decision_support_systemhttp://en.wikipedia.org/wiki/Axiomatichttp://en.wikipedia.org/wiki/Positivehttp://en.wikipedia.org/wiki/Descriptivehttp://en.wikipedia.org/wiki/Expected_valuehttp://en.wikipedia.org/wiki/Blaise_Pascalhttp://en.wikipedia.org/wiki/Pens%C3%A9es7/31/2019 Material Fr Bio Med Engineers 02
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probabilities that will result from each course of action, and multiply the two to give an
expected value.
The action to be chosen should be the one that gives rise to the highest totalexpected value. In 1738, Daniel Bernoulli published an influential paper entitled
Exposition of a New Theory on the Measurement of Risk, in which he uses the St.
Petersburg paradox to show that expected value theory must be normatively wrong. He alsogives an example in which a Dutch merchant is trying to decide whether to insure a cargo
being sent from Amsterdam to St Petersburg in winter, when it is known that there is a 5%
chance that the ship and cargo will be lost. In his solution, he defines a utility function andcomputes expected utility rather than expected financial value.
In the 20th century, interest was reignited by Abraham Wald's 1939 paper pointing
out that the two central concerns of orthodox statistical theory at that time, namely
statistical hypothesis testing and statistical estimation theory, could both be regarded asparticular special cases of the more general decision problem. This paper introduced much
of the mental landscape of modern decision theory, including loss functions, risk functions,
admissible decision rules, a priori distributions, Bayes decision rules, and minimax
decision rules. The phrase "decision theory" itself was first used in 1950 by E. L. Lehmann.The rise ofsubjective probability theory, from the work ofFrank Ramsey, Bruno de
Finetti, Leonard Savage and others, extended the scope of expected utility theory tosituations where only subjective probabilities are available. At this time it was generally
assumed in economics that people behave as rational agents and thus expected utility
theory also provided a theory of actual human decision-making behaviour under risk. Thework ofMaurice Allais and Daniel Ellsberg showed that this was clearly not so.
Theprospect theory ofDaniel Kahneman and Amos Tversky placed behavioural
economics on a more evidence-based footing. It emphasized that in actual human (as
opposed to normatively correct) decision-making "losses loom larger than gains", peopleare more focused on changes in their utility states than the states themselves and estimation
of subjective probabilities is severely biased by anchoring.
Castagnoli and LiCalzi (1996), Bordley and LiCalzi (2000) recently showed thatmaximizing expected utility is mathematically equivalent to maximizing the probability
that the uncertain consequences of a decision are preferable to an uncertain benchmark
(e.g., the probability that a mutual fund strategy outperforms the S&P 500 or that a firmoutperforms the uncertain future performance of a major competitor.). This reinterpretation
relates to psychological work suggesting that individuals have fuzzy aspiration levels
(Lopes & Oden), which may vary from choice context to choice context. Hence it shifts the
focus from utility to the individual's uncertain reference point.Pascal's Wageris a classic example of a choice under uncertainty. The uncertainty,
according to Pascal, is whether or not God exists. Belief or non-belief in God is the choice
to be made. However, the reward for belief in God if God actually does exist is infinite.Therefore, however small the probability of God's existence, the expected value of belief
exceeds that of non-belief, so it is better to believe in God. (There are several criticisms of
the argument.)
By N. Pradeesh KumarFor Dept. of Bio- Medical-NIU
http://en.wikipedia.org/wiki/Daniel_Bernoullihttp://en.wikipedia.org/wiki/St._Petersburg_paradoxhttp://en.wikipedia.org/wiki/St._Petersburg_paradoxhttp://en.wikipedia.org/wiki/Norm_(philosophy)http://en.wikipedia.org/wiki/Amsterdamhttp://en.wikipedia.org/wiki/St_Petersburghttp://en.wikipedia.org/wiki/Utility_functionhttp://en.wikipedia.org/wiki/Expected_utilityhttp://en.wikipedia.org/wiki/Abraham_Waldhttp://en.wikipedia.org/wiki/Orthodox_statisticshttp://en.wikipedia.org/wiki/Statistical_hypothesis_testinghttp://en.wikipedia.org/wiki/Estimation_theoryhttp://en.wikipedia.org/wiki/Loss_functionhttp://en.wikipedia.org/wiki/Risk_functionhttp://en.wikipedia.org/wiki/Admissible_decision_rulehttp://en.wikipedia.org/wiki/Prior_probabilityhttp://en.wikipedia.org/wiki/Admissible_decision_rule#Bayes_ruleshttp://en.wikipedia.org/wiki/Minimaxhttp://en.wikipedia.org/wiki/E._L._Lehmannhttp://en.wikipedia.org/wiki/Subjective_probabilityhttp://en.wikipedia.org/wiki/Frank_P._Ramseyhttp://en.wikipedia.org/wiki/Bruno_de_Finettihttp://en.wikipedia.org/wiki/Bruno_de_Finettihttp://en.wikipedia.org/wiki/L._J._Savagehttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Expected_utilityhttp://en.wikipedia.org/wiki/Maurice_Allaishttp://en.wikipedia.org/wiki/Daniel_Ellsberghttp://en.wikipedia.org/wiki/Prospect_theoryhttp://en.wikipedia.org/wiki/Daniel_Kahnemanhttp://en.wikipedia.org/wiki/Amos_Tverskyhttp://en.wikipedia.org/wiki/Behavioural_economicshttp://en.wikipedia.org/wiki/Behavioural