Decision Making

Defining 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 rocess.

!t is a human process involving to a great e"tent the application of !ntellectual abilities. !t is a process of choosing a course of action from among the alternative courses of action. !t is an end process preceded by deliberation and reasoning. !t is always related to a situation. !nvolves a certain commitment of the #rgani$ation for adopting a specific course of action. Decision Making in business is always related to its #b%ectives. &elp in solving problems' resolving crisis and tackling various situations.

!nterdisciplinary (ramework of Decision Making

)ehavioral disciplines *uantitative disciplines )ehavioral+,uantitative fusion

The Interdisciplinary Framework of Decision Making

Philosophy Values and ethics Utility and probability Economics Statistics

Psychology

Individual behavior

The decisionmaking process

roup behavior

Sociology Social psychology

Models and simulation Mathematics

Environment !a" #nthropology Political science

Decision-making Conditions

The decision maker faces conditions of

Certainty

Risk

Uncertainty

Lower

Moderate

Higher

-evel of ambiguity and chances of marking bad decision

Certainty decision making condition in which managers have accurate ' measurable and reliable information about the outcome of various alternatives under consideration. !isk decision making condition in which managers know the probability a given alternative will lead to a desired goal or outcome. "ncertainty decision making condition in which managers face unpredictable e"ternal condition or lack the information needed to establish the probability of certain events. #mbiguity by far the most difficult decision situation goals to be achieved or the problem to be solved is unclear alternatives are difficult to define information about outcomes is unavailable

Decision making under certainty

.hen managers know with reasonable certainty what their alternatives are and what conditions are associated with each alternative' a state of certainty e"ists. !n organi$ational settings' few decisions are made under conditions of true certainty. /he comple"ity and turbulence of the contemporary business world make such situations rare. 0ven the airplane purchase decision we %ust considered is not completely realistic.

Decision Making 1nder 2isk

1nder a state of risk, the availability of each alternative and its potential payoffs and costs are all associated with probability estimates.

Decision Making 1nder 1ncertainty

!n the state of uncertainty the decision maker does not know all the alternatives' the risks associated with each' or the conse,uences each alternative is likely to have. /his uncertainty stems from the comple"ity and dynamism of contemporary organi$ations and their environments. /he key to effective decision making in these circumstances is to ac,uire as much relevant information as possible and to approach the situation from a logical and rational perspective. !ntuition' %udgment' and e"perience always play ma%or roles in the decision-making process under conditions of uncertainty. 0ven so' this condition is the most ambiguous for managers and the one most prone to error.

"nusual and ambiguous

!nnovative Decisions

(roblem Types

Adaptive Decisions

2outine Decisions

n o C

on i t di

d un

h w r

d h ic

n o i cis

re a s

de a m

1ncertainty

Certainty

2isk

Known and well defined

$olution Types %#lternati&e $olutions'

"ntried and ambiguous

3electing a Decision Making Model

Depends on the manager4s personal preference .hether the decision is programmed or nonprogrammed 0"tent to which the decision is characteri$ed by risk' uncertainty' or ambiguity

Primary Decision-Making Model Criterion Ingredients

Key Assumptions

Key

Rational Maximized Objectives; specific states of nature; subjective Fixed objectives; unlimited information; no cog(classical) outcome probabilities; quantified utilities (pa offs); -nitive limitations; no time and cost constraints; ex!austive alternatives; disregard of environment; quantifiable and transitive alternatives; controlled computational decision-ma"ing strateg ; s!ortvariables; closed s stem; quantitativel limited term !orizon; !ig!l structured process outcomes Organizational #atisficing Objectives; general states of nature; limited $ttainable objectives; limited information; cogni(neoclassical) outcome subjective probabilities; partiall quantified tive limitations; time and cost constraints; parutilities (pa offs); no ex!austive alternatives; tiall quantifiable and intransitive alternatives; sensitive environment; judgmental decisionopen s stem; qualitativel -- and quantitativel -ma"ing strateg ; s!ort-term !orizon; moderatel limited outcomes structured process%

Decision-Making Models

2ational model 5classical6 #rgani$ational model 5neoclassical6 olitical model 5adaptive6 rocess model 5managerial6

)ounded rationality suggests that decision makers are limited by their values and unconscious refle"es' skills' and habits. /hey are also limited by information and knowledge that are less than complete. $atisficing suggests that rather than conducting an e"haustive 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 beca se it is concerned !ith !hat a decision maker sho ld do rather !hat he act ally does in reaching his concl sion.
"ecision making is characterized by the follo!ing feat res #
# # # The decision making is completely rational in the means ends sense. To ma$imize some desired val e Economic man orders his vario s preferences according to his hierarchy of val es. There is complete a!areness of vario s alternatives and o tcome of each alternative can be identified

%dministrative Man Model

%dministrative Man Model is descriptive model of decision making. It describes the behavior of decision maker in the conte$t of !hat he act ally does in reaching his concl sion. It provides a more valid prediction of the o t come to be e$pected from a manager&s effort to decide pon a co rse of action.
%ccording to Herbert Alexander Simon decision makers do not have f ll kno!ledge of all alternatives and their conse' ences. There is a certain amo nt of limit on rationality that is (bounded rationality&.

The Bounded Rational Decision Making Model: a realistic approach

&ere the assumption is to operate with bounded rationality rather than perfect rationality. 1nder 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. Characteri$ed by71se of procedures and rule of thumb 5 &euristics6- /hese are cognitive guides that people use intuitively. 3ub optimi$ing- knowingly accepting less than the best outcome. 3atisficing -e"amining alternatives only until a solution that meets minimal re,uirements is found and then ceasing to look for more.

Decision making process

Decision Making 3teps

3tep 8 - 2ecogni$e /he 9eed (or A Decision Managers must first reali$e that a decision must be made. : 3parked by an event such as environmental changes 3tep ; - <enerate Alternatives Managers must develop feasible alternative courses of action. : !f good alternatives are missed' the resulting decision is poor. : !t is hard to develop creative alternatives' so managers need to look for new ideas. : 3ome choice must e"ist in order to make effective decisions. .hen there is no choice' there really is no decision to be made

3tep = - 0valuate the Alternatives7 what are the advantages and disadvantages of each alternative>
:

!n most decisions' a manager will want to achieve several ob%ectives or satisfy several criteria : 0"amples of criteria for buying a car7 price' manufacturer' model' warranty' service' reliability' repair record' trade-in allowance : Measure alternatives against previously determined and weighted criteria : !nvolves being able to forecast future events : 1nder perfectly rational conditions' a rational decision maker could carefully assess potential conse,uences of each alternative

3tep ? - Choose Among Alternatives7 managers rank alternatives and decide. : .hen ranking' all information needs to be considered : 1nder perfect conditions - would be straightforward 3tep @ - !mplement the Chosen Alternative7 managers must now carry out the alternative 3tep A - 0valuate the Decision 5-earn from (eedback67 managers should consider what went right and wrong with the decision and learn for the future : .ithout feedback' managers never learn from e"perience and make the same mistake over

ersonal Decision (ramework

$ituation B rogrammed+nonprogrammed B Classical' administrative' political B Decision steps

(ersonal Decision $tyle BDirective BAnalytical BConceptual B)ehavioral

Decision Choice B)est 3olution to roblem

!ntuition
An unconscious process of making decisions on basis of e*perience and +udgment the

!nvolves May /he

gut feeling

also have rational basis

feeling arises from past e"perience and knowledge ,uicker response

!nvolves Does

not involve systematic analysis

/ypes of decisions
3trategic and /actical Decisions. rogrammed and 9on rogrammed.

3trategic decisions

3trategic decisions is the ma%or choice of actions concerning allocation of resources and contribution to the achievement of organi$ational ob%ectives. !t may involve ma%or departure from earlier ones concerning some organi$ational practices. (or 0"ample7 change in product mi"' e"pansion of business' change in personnel policies etc. !t is normally a non programmed decision made under the condition of partial ignorance.

/actical decisions

/actical decisions are derived out of statistical decision that relates to day to day working of organi$ation. !t has to be taken very fre,uently. /he decision is most repetitive. (or 0"ample7 purchase of raw material' assigning duties to employees etc. !t is mostly a programmed one and its outcome is short term nature.

rogrammed and 9on-programmed decision

2#<2AMM0D D0C!3!#9 : A programmed decision is one that is fairly structured or recurs with some fre,uency. 9#9 2#<2AMM0D D0C!3!#93 : 9on-programmed decisions are relatively unstructured and may occur much less often ./hey are made in response to situations that are uni,ue ' are poorly defined and largely unstructured.

Decisions types in #rgani$ation structure

Organizational
Levels

Nature o !roblems

Nature o Decision"making

rogrammed vs. 9on-programmed Decisions

Characteristics /ype of problem Managerial level (re,uency !nformation /ime frame for solution 3olution relies on rogrammed decisions
)tr ct red *o!er level Repetitive Readily available )hort -roced res,r les, and policies

9on-programmed decisions
Unstr ct red Upper level +e!, n s al %mbig o s or incomplete Relatively long . dgment and creativity

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. !n general' the circumstances that e"ist for the decision maker are conditions of certainty' risk' or uncertainty.

Decision Making 3tyles

Different people take decisions differently with respect to how they perceive problems they face. 9ot all managers make decisions the same way 7 Directive style Analytical style Conceptual style )ehavioral style

Directive style

eople who prefer simple' clear-cut solutions to problems Make decisions ,uickly May consider only one or two alternatives 0fficient and rational refer rules or procedures

Analytical 3tyle

Comple" solutions based on as much data as they can gather Carefully consider alternatives )ase decision on ob%ective' rational data from management control systems and other sources 3earch for best possible decision based on information available

Conceptual 3tyle
Consider a broad amount of information More socially oriented than analytical style -ike to talk to others about the problem and possible solutions Consider many broad alternatives 2elay on information from people and systems 3olve problems creatively

)ehavioral 3tyle

&ave a deep concern for others as individuals -ike to talk to people one-on-one 1nderstand 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 goals

3ituational (actors for !ndividual Decision-making

3hort time 1nimportant to group Manager can take decision Dominate the decision Destructive conflict Members hesitant Confidential data !ncapability of members Manager4s dominance !ndirect effect on group members

<roup Decision-making
/he factors re,uiring group decisions include7

!nvolving sensitive issues &igh cost alternatives !nvolving very high risk factor 3trategic impact

<roup Decisions7 Advantages

Acceptance of group members Coordination is easier Communication is easier 0"istence of large alternatives More information can be processed Diversity of e"perience and perspectives

<roup Decisions7 Disadvantages

/ake longer time <roup can be indecisive <roups can compromise <roups can be dominated <roups can play games Cictim to ,roupthink

3ituational (actors for <roup Decisionmaking

2isk taking solution needed )etter understanding .hole responsibility (eedback re,uired

!ndividual vs. <roup Decision Making

!n establishing objectives, groups are probably superior to individuals because of the greater amount of knowledge available to groups. !n identifying alternatives, the individual efforts of group members encourage a broad search in various functional areas of the organi$ation. !n evaluating alternatives, the collective judgment of the group' with its wider range of viewpoints' seems superior to that of the individual decision maker. !n 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 accomplished by individual managers.

Characteristics of an 0ffective DecisionMaking

!t focuses on what is important !t is logical and consistent. !t acknowledges both sub%ective and ob%ective thinking and blends analytical with intuitive thinking. !t re,uires only as much information and analysis as is necessary to resolve a particular dilemma. !t encourages and guides the gathering of relevant information and informed opinion. !t is straight forward' reliable' easy to use' and fle"ible.

Common decision-Making errors and )iases

-&erconfidence 0indsight $elf/ser&ing $unk costs !andomness representation #&ailabilit y Decision/Making .rrors 1 )iases Immediate ,ratification #nchoring .ffect $electi&e (erception Confirmation framing

/echni,ues for improving Decision Making

/raditional /echni,ues. Modern /echni,ues 7 : #2 /echni,ues. : Delphi /echni,ue : Decision /ree.

/raditional /echni,ues.

!n 1nprogrammed Decisions /raditionally managers bank on intuition' %udgment for making up such decisions. Dudgments are based on past e"perience and intuition about the future. !t is an 0conomic /echni,ue though the decisions taken may be wrong at times.

!n rogrammed Decisions 7 /hey are routine and repetitive in nature. 3tandard #perating rocedures and #rgani$ation 3tructure are used. 3# s are 2outine .ork rocedures already %otted down. Can be altered with due course of time. !n #rgani$ation 3tructure' 2esponsibility is assigned and ade,uate authority is delegated to each manager to carry out responsibilities. 9ecessary Managerial positions are created to solve problems of varying nature.

Modern /echni,ues of Decision Making

#perational 2esearch /echni,ues7 #2 is the application of 3cientific method' tools and techni,ues to #perations of system with #ptimum solution to the problem. !t forms an Analytical' #b%ective and *uantitative basis for arriving at a decision. !t 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.

-inear rogramming

!nvolves Minimi$ation and Ma"imi$ation of a -inear (unction of some rimary Cariable sub%ect to certain 2estrictions known as Constraints. - is applicable in problem areas as roduction' /ransportation' .arehouse -ocation' 1tili$ation of roduction 1nits.

*ueuing /heory

Applied to any situation that creates a need to balance the Cost of increasing 3ervices against the cost of letting the 1nits to wait. !n other words' we try to balance the cost of waiting lines as against the cost of preventing waiting lines by increased services. 0"ample 7 Additional line opened up to serve customers that should have been in ,ueue.

<ames /heory

Applied to situations where the 2ational #pponent is involved so that resulting effects are dependent on the specific strategies selected by Decision Maker and #pponent. .hile deciding the )usiness 3trategy' an attempt is made to Ma"imise rofit with Minimum -oss for 3elf and do other way round for #pponent.

2eplacement /heory

&elps in determination of the time when certain items of Machinery need to be replaced. 2eplacement involves !nvestment' but saves #perating Costs that might be high while using #ld Machinery. roblem is that when should be a machinery be replaced so that total costs are minimum.

9etwork Analysis

1sed for lanning and Controlling the ro%ect activities. ro%ect is broken down to small operations which are engaged in a logical cycle. 3e,uence of #perations 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. 0"amples 7 02/' C M

Delphi /echni,ue

<roup Decision /echni,ue and used in -ong or Medium 2ange (orecasting. 3teps 7 anel of 0"perts in drawn from within and outside #rgani$ation. 0ach 0"pert makes anonymous forecasts. 0ach 0"pert is provided Composite feedback about various 0"perts4 answers. 0ach 0"pert is free to change his opinion on basis of feed back. rocess is reached till Consensus is reached.

8. ;. =.

?. @.

Decision /ree

A <raphic method by which a decision maker can readily visuali$e alternatives together with 2isks' possible #utcomes and !nformation 9eeds involved in each Chance. 3ome decisions involve a series of steps' with each step depending upon the preceding step and so on. #ften 1ncertainty surrounds each step and so we face lot of 1ncertainty in totality.

&!at is our next step'