Decision Making Final PPT(2)

Decision

Making

“ Decision-making is the process of identifying problems and opportunities and selecting a course of action to deal with a specific problem or take advantage of an opportunity.”

A Decision represents a course of action chosen from a number of possible alternatives.

As per Kreitner, Decision making is a process of identifying and choosing alternative courses of action in a manner appropriate to the demand of situation.

Characteristics of Decision Making

Process.

 It is a human process involving to a great extent the application

of Intellectual abilities.

 It is a process of choosing a course of action from among the

alternative courses of action.

 It is an end process preceded by deliberation and reasoning.  It is always related to a situation.

 Involves a certain commitment of the Organization for adopting

a specific course of action.

 Decision Making in business is always related to its Objectives.  Help in solving problems, resolving crisis and tackling various

Interdisciplinary Framework

of Decision Making

 Behavioral disciplines  Quantitative disciplines

The Interdisciplinary Framework of Decision Making

The decision-making process • Philosophy • Psychology • Mathematics • Sociology • Social psychology • Economics • Statistics Values and

ethics Utility and probability

Individual

behavior _behaviorGroup

Models and

simulation Environment

• Law

• Anthropology • Political science

Decision-making Conditions

The decision maker faces conditions of …

Lower Moderate Higher

Uncertainty

Certainty Risk

 Certainty: decision making condition in which managers

have accurate , measurable and reliable information about the outcome of various alternatives under consideration.

 Risk: decision making condition in which managers know

the probability a given alternative will lead to a desired goal or outcome.

 Uncertainty: decision making condition in which managers

face unpredictable external condition or lack the information needed to establish the probability of certain events.

 Ambiguity

• by far the most difficult decision situation

• goals to be achieved or the problem to be solved is unclear

• alternatives are difficult to define

Decision making under certainty

 When managers know with reasonable certainty

what their alternatives are and what conditions are associated with each alternative, a state of

certainty exists.

 In organizational settings, few decisions are made

under conditions of true certainty. The complexity and turbulence of the contemporary business world make such situations rare. Even the airplane

purchase decision we just considered is not completely realistic.

 Under a state of risk, the availability of each

alternative and its potential payoffs and costs are all associated with probability estimates.

 In the state of uncertainty the decision maker does not know all

the alternatives, the risks associated with each, or the

consequences each alternative is likely to have. This uncertainty stems from the complexity and dynamism of contemporary

organizations and their environments.

 The key to effective decision making in these circumstances is

to acquire as much relevant information as possible and to approach the situation from a logical and rational perspective. Intuition, judgment, and experience always play major roles in the decision-making process under conditions of uncertainty. Even so, this condition is the most ambiguous for managers and the one most prone to error.

Unusual and ambiguous Known and well defined Untried and ambiguous Innovative Decisions Adaptive Decisions Routine Decisions Cond itions unde r whic h deci sions are m ade U nc er ta in ty C er ta in ty R isk Solution Types (Alternative Solutions) P ro b lem T yp es

Selecting a Decision Making Model

 Depends on the manager’s personal preference  Whether the decision is programmed or

non-programmed

 Extent to which the decision is characterized by

Primary

Decision-Making

Model Criterion Key Ingredients Key Assumptions

Rational Maximized Objectives; specific states of nature; subjective Fixed objectives; unlimited information; no

cog-(classical) outcome probabilities; quantified utilities (payoffs); -nitive limitations; no time and cost constraints;

exhaustive alternatives; disregard of environment; quantifiable and transitive alternatives; controlled

computational decision-making strategy; short- variables; closed system; quantitatively limited

term horizon; highly structured process outcomes

Organizational Satisficing Objectives; general states of nature; limited Attainable objectives; limited information;

cogni-(neoclassical) outcome subjective probabilities; partially quantified tive limitations; time and cost constraints;

par-utilities (payoffs); no exhaustive alternatives; tially quantifiable and intransitive alternatives;

sensitive environment; judgmental decision- open system; qualitatively and quantitatively

--making strategy; short-term horizon; moderately limited outcomes structured process0

Decision-Making Models

 Rational model (classical)

 Organizational model (neoclassical)  Political model (adaptive)

 Bounded rationality suggests that decision makers are

limited by their values and unconscious reflexes, skills, and habits. They are also limited by information and knowledge that are less than complete.

 Satisficing suggests that rather than conducting an

exhaustive search for the best possible alternative, decision makers tend to search only until they identify an alternative that meets some minimum standard of sufficiency.

Economic Man Model

 The Economic Man Theory is closely related to the concept of

organizational rationality. It is a normative theory rather than a descriptive theory because it is concerned with what a

decision maker should do rather what he actually does in reaching his conclusion.

Decision making is characterized by the following features –

– The decision making is completely rational in the means ends sense.

– To maximize some desired value Economic man orders his various preferences according to his hierarchy of values.

– There is complete awareness of various alternatives and outcome of each alternative can be identified

Administrative Man Model

 Administrative Man Model is descriptive model of

decision making. It describes the behavior of

decision maker in the context of what he actually does in reaching his conclusion. It provides a

more valid prediction of the out come to be

expected from a manager’s effort to decide upon a course of action.

 According to Herbert Alexander Simon decision

makers do not have full knowledge of all alternatives and their consequences. There is a certain amount of limit on rationality that is ‘bounded rationality’.

The Bounded Rational Decision Making Model: a realistic approach

 _{Here the assumption is to operate with bounded rationality rather than perfect}

rationality.

 _{Under bounded rationality, individuals seek the best solution to a problem, the}

demands of processing all the information, generating all possible solutions and choosing best alternative are beyond human capability.

 _{Characterized}

by:- Use of procedures and rule of thumb ( Heuristics)- These are cognitive guides that

people use intuitively.

 Sub optimizing- knowingly accepting less than the best outcome.

 Satisficing -examining alternatives only until a solution that meets minimal

Decision making process

Decision Making Steps

Step 1 - Recognize The Need For A Decision

Managers must first realize that a decision must be made. – Sparked by an event such as environmental changes

Step 2 - Generate Alternatives

Managers must develop feasible alternative courses of action. – If good alternatives are missed, the resulting decision is poor.

– It is hard to develop creative alternatives, so managers need to look for new ideas.

– Some choice must exist in order to make effective decisions. When there is no choice, there really is no decision to be made

Step 3 - Evaluate the Alternatives:

what are the advantages and disadvantages of each alternative?

– _{In most decisions, a manager will want to achieve several objectives}

or satisfy several criteria

– Examples of criteria for buying a car: price, manufacturer, model, warranty, service, reliability, repair record, trade-in allowance

– Measure alternatives against previously determined and weighted criteria

– Involves being able to forecast future events

– Under perfectly rational conditions, a rational decision maker could carefully assess potential consequences of each alternative

Step 4 - Choose Among Alternatives:

managers rank alternatives and decide.

– When ranking, all information needs to be considered – Under perfect conditions - would be straightforward

Step 5 - Implement the Chosen Alternative:

managers must now carry out the alternative

Step 6 - Evaluate the Decision (Learn from Feedback):

managers should consider what went right and wrong with the decision and learn for the future

– Without feedback, managers never learn from experience and make the same mistake over

Personal Decision Framework

Personal Decision Style: ·Directive ·Analytical ·Conceptual ·Behavioral Situation: · Programmed/non-programmed · Classical, administrative, political · Decision steps Decision Choice: ·Best Solution to Problem

Intuition

An unconscious process of making decisions on the basis of experience and judgment

Involves gut feeling

May also have rational basis

The “feeling” arises from past experience and knowledge Involves quicker response

Types of decisions

 Strategic and Tactical Decisions.

Strategic decisions

 Strategic decisions is the major choice of actions

concerning allocation of resources and contribution to the achievement of organizational objectives.

 It may involve major departure from earlier ones

concerning some organizational practices. For Example: change in product mix, expansion of business, change in personnel policies etc.

 It is normally a non programmed decision made under

Tactical decisions

 Tactical decisions are derived out of statistical decision

that relates to day to day working of organization.

 It has to be taken very frequently. The decision is most

repetitive. For Example: purchase of raw material, assigning duties to employees etc.

 It is mostly a programmed one and its outcome is short

Programmed and Non-programmed

decision

PROGRAMMED DECISION –

A programmed decision is one that is fairly structured or recurs with some frequency.

NONPROGRAMMED DECISIONS –

Non-programmed decisions are relatively

unstructured and may occur much less often .They are made in response to situations that are unique , are poorly defined and largely unstructured.

Decisions types in Organization structure

Organizational

Programmed vs. Non-programmed

Decisions

Characteristics Programmed

decisions Non-programmed decisions

Type of problem Structured Unstructured

Managerial level Lower level Upper level

Frequency Repetitive New,unusual

Information Readily available Ambiguous or

incomplete Time frame for

solution

Short Relatively long

Solution relies on Procedures,rules,

Decision-making Conditions

 Managers sometimes have an almost perfect

understanding of conditions surrounding a decision, but at other times they have few clues about those conditions.

 In general, the circumstances that exist for the

decision maker are conditions of certainty, risk, or uncertainty.

Decision Making Styles

 Different people take decisions differently with

respect to how they perceive problems they face.

 Not all managers make decisions the same way :

• Directive style

• Analytical style

• Conceptual style

Directive style

 People who prefer simple, clear-cut solutions to

problems

 Make decisions quickly

 May consider only one or two alternatives  Efficient and rational

Analytical Style

 Complex solutions based on as much data as they

can gather

 Carefully consider alternatives

 Base decision on objective, rational data from

management control systems and other sources

 Search for best possible decision based on

Conceptual Style

 Consider a broad amount of information  More socially oriented than analytical style  Like to talk to others about the problem and

possible solutions

 Consider many broad alternatives

 Relay on information from people and systems  Solve problems creatively

Behavioral Style

 Have a deep concern for others as individuals  Like to talk to people one-on-one

 Understand their feelings about the problem and

the effect of a given decision upon them

 Concerned with the personal development of

others

 May make decisions to help others achieve their

Situational Factors for Individual

Decision-making

 Short time

 Unimportant to group

 Manager can take decision  Dominate the decision  Destructive conflict  Members hesitant  Confidential data

 Incapability of members  Manager’s dominance

Group Decision-making

The factors requiring group decisions include:

 Involving sensitive issues  High cost alternatives

 Involving very high risk factor  Strategic impact

Group Decisions: Advantages

 Acceptance of group members  Coordination is easier

 Communication is easier

 Existence of large alternatives

 More information can be processed

Group Decisions: Disadvantages

 Take longer time

 Group can be indecisive  Groups can compromise  Groups can be dominated  Groups can “play games”  Victim to Groupthink

Situational Factors for Group

Decision-making

 Risk taking solution needed  Better understanding

 Whole responsibility  Feedback required

Individual vs. Group Decision Making

 In establishing objectives, groups are probably superior to individuals because of

the greater amount of knowledge available to groups.

 In identifying alternatives, the individual efforts of group members encourage a

broad search in various functional areas of the organization.

 In evaluating alternatives, the collective judgment of the group, with its wider

range of viewpoints, seems superior to that of the individual decision maker.

 In choosing an alternative, group interaction and the achievement of consensus

usually result in the acceptance of more risk than would be accepted by an individual decision maker.

 Implementing a decision, whether or not it was made by a group, is usually

Characteristics of an Effective

Decision-Making

 It focuses on what is important  It is logical and consistent.

 It acknowledges both subjective and objective thinking and

blends analytical with intuitive thinking.

 It requires only as much information and analysis as is

necessary to resolve a particular dilemma.

 It encourages and guides the gathering of relevant

information and informed opinion.

Common decision-Making errors and Biases

Overconfidence Immediate Gratification Anchoring Effect Selective Perception Confirmation framing Availabilit y representation Randomness Sunk costs Self-serving Hindsight Decision-Making Errors & Biases

Techniques for improving Decision

Making

 Traditional Techniques.  Modern Techniques : – OR Techniques. – Delphi Technique – Decision Tree.

Traditional Techniques.

 In Unprogrammed Decisions :

Traditionally managers bank on intuition, judgment for making up such decisions. Judgments are based on past experience and intuition about the future.

It is an Economic Technique though the decisions taken may be wrong at times.

 In Programmed Decisions :

They are routine and repetitive in nature.

Standard Operating Procedures and Organization Structure are used.

SOPs are Routine Work Procedures already jotted down. Can be altered with due course of time.

In Organization Structure, Responsibility is assigned and adequate authority is delegated to each manager to carry out responsibilities. Necessary Managerial positions are created to solve problems of varying nature.

Modern Techniques of Decision Making

 Operational Research Techniques:

OR is the application of Scientific method, tools and techniques to Operations of system with Optimum solution to the problem.

It forms an Analytical, Objective and Quantitative basis for arriving at a decision.

It puts emphasis on defining the problem with compilation and evaluation of data, development and testing of hypothesis,

establishing relation between various data and taking measures to improve performance.

Linear Programming

 Involves Minimization and Maximization of a Linear

Function of some Primary Variable subject to certain Restrictions known as Constraints.

 LP is applicable in problem areas as Production,

Transportation, Warehouse Location, Utilization of Production Units.

Queuing Theory

 Applied to any situation that creates a need to balance the Cost

of increasing Services against the cost of letting the Units to wait.

 In other words, we try to balance the cost of waiting lines as

against the cost of preventing waiting lines by increased services.

 Example : Additional line opened up to serve customers that

Games Theory

 Applied to situations where the Rational Opponent is

involved so that resulting effects are dependent on the specific strategies selected by Decision Maker and Opponent.

 While deciding the Business Strategy, an attempt is made

to Maximise Profit with Minimum Loss for Self and do other way round for Opponent.

Replacement Theory

 Helps in determination of the time when certain

items of Machinery need to be replaced.

 Replacement involves Investment, but saves

Operating Costs that might be high while using Old Machinery.

 Problem is that when should be a machinery be

Network Analysis

 Used for Planning and Controlling the Project activities.  Project is broken down to small operations which are

engaged in a logical cycle.

 Sequence of Operations is drawn and we get a

relationship between various activities and it points out which activities should be completed before others are initiated or can some activities be carried out

simultaneously.

Delphi Technique

 Group Decision Technique and used in Long or Medium Range

Forecasting. Steps :

1. Panel of Experts in drawn from within and outside Organization. 2. Each Expert makes anonymous forecasts.

3. Each Expert is provided Composite feedback about various

Experts’ answers.

4. Each Expert is free to change his opinion on basis of feed back. 5. Process is reached till Consensus is reached.

Decision Tree

 A Graphic method by which a decision maker can readily

visualize alternatives together with Risks, possible Outcomes and Information Needs involved in each Chance.

 Some decisions involve a series of steps, with each step

depending upon the preceding step and so on. Often Uncertainty surrounds each step and so we face lot of Uncertainty in totality.

What is your

What is your

next step?