Decision Making

Introduction
The life of manager is filled with making decision after decisions. Managers see decision making as their central job because they constantly choose what is to be done, who has to do, when, where, and how to do. Decision making is at the core of planning because it is the planning where major decisions are made. Which set the organizational tone. Decision making is both managerial function and organizational process

Decisions in Management functions

1. In planning: What are the organizations long term objectives. What strategies will best in achieving these objectives. What should the organizations short-term objectives. 2. In organizing : How many subordinates should report directly to me. How much centralization should be their in organization. How should jobs to be designed

3. In Leading: How to handle employees who appear to be low in motivation What is the most effective leadership style in a given situation. How will a specific change affect worker productivity 4. In Controlling: What activities in the organization need to be controlled How should these activities be controlled What type of MIS should the organization have

Definitions
Decision making is a conscious and human process. Involving both individual and social phenomena. Based upon factual and value premises which concludes with a choice of one behavioral activity from among one or more alternatives with the intention of moving towards some desired state of affairs. Decision making is act of choosing one alternative among a set of alternatives.

Thus decision making is act of projecting one's own mind upon an opinion or course of action and these three aspects of human behavior are involved in decision making 1. Cognitive activities of the mind associated with knowledge. 2. Conative the action of the mind implied by such words as willing, desire aversion. 3. Affective the aspect of mind associated with emotion, feelings, mood and temperament

Steps in decision making process

Steps Details Examples A plant manager sees that employee turnover has increased by 5 percent The plat manager can increase wages, increase benefits, or changes hiring standards Increasing benefits may not be feasible, increasing wages and changing hiring standards may satisfy all conditions 1. Recognizing and Some stimulus indicates defining the that a decision must be situation made. The stimulus may be positive or negative 2. Identifying alternatives Both obvious and creative alternatives are desired. In general, the more alternatives should be generated Each alternatives is evaluated to determine its feasibility, its satisfactoriness, and its consequences.

3. Evaluating alternatives

4. Selecting the best alternative

Consider all situational factor, and choose the alternative that best fits the managers situation.
The chosen alternative is implemented into the organizational system

Changing hiring standards will take an extended period of time to cut turnover, so increase wages.
The plant manager may need permission of corporate headquarters. The human resource department establish a new wage structure. The plant manager notes that six months later, turnover dropped to its previous level

5. Implementing the chosen alternative

6. Follow-up and evaluation

At some time in the future, the manager should ascertain the extent to which the alternative chosen in step 4 and implemented in step 5 is worked

Decision making styles

As a manager how would you tackle problems that arise? Thus every managers have different style when it comes to decision making and solving problems. According to one view there are three different ways managers approach problems in the workplace. Problem avoider: an approach to problems in which the person avoids or ignores information that points to a problem. Problem solver: an approach to problems in which the person tries to solve problems as they come up. Problem seeker: an approach to problems in which the person actively seeks out problems to solve or new opportunities to pursue.

Another perspective on decision making style proposes that people differ along two dimensions. 1. The way we thinking of individuals: some of us tend to be more rational and logical in the way we think or process information. 2. Individuals tolerance for ambiguity: some of us have low tolerance for ambiguity and can process many thoughts at the same time
High Analytic Tolerance of ambiguity Conceptual

Low

Directive

Behavioral

Rational

Intuitive

Way of thinking

Directive style: Make fast decisions and focus on the short run. Making decisions with minimal information and with assessing few information Analytic style: They want more information before making decision and consider more alternative Careful decision makers with the ability to adopt or cope with unique situations Conceptual style: Broad in their outlook and will look at many alternatives. They focus on long run and are very good at finding creative solutions to problems. Behavioral style: Behavioral style decision makers work well with others. Concerned about the achievement of subordinated and receptive to suggestions from others. Try to avoid conflicts. Most of the managers may have characteristics of more than one style

Types of Decisions
Chart describes relationships of types of problems, types of decisions and level of organization. Ill-structured Non programmed decisions Type of problem Programmed decisions Lower Well-structured Top

Level in organization

Well Structured problems: Are straightforward easily defined problems. Ill structured problems: New problems in which information is ambiguous or incomplete. 1. Programmed decisions: Solution to routine problems made in accordance with written or unwritten policies, procedures or rules, that simplify decision making in recurring situations by limiting or excluding alternatives. Or programmed decision is one that is fairly structured or recurs with some frequency. Examples: managers rarely have to worry about the salary range for newly hired employees bcoz organizations generally have scale for all positions. Managers of a distribution centers knows from experience that she needs to keep a thirty days supply of a particular iteam on hand. She can then established a system where by the appropriate quality is automatically recorded when ever the inventory drops below the thirty day requirement.

 To some extent programmed decisions limits our freedom. Bcoz the individual has less latitude in deciding what to do. However programmed decisions are actually intended to be liberating. The policies, rules or procedures by which we make programmed decisions and it saves time. It allows us to devote attention to other more important activities. Example: deciding how to handle customer complaint on an individual basis would be time consuming and costly, but organization had a policy stating that exchanges will be permitted on all purchases with in 14 days simplifies matters considerably.

2. Non programmed decisions: Non programmed decisions are relatively unstructured and occurs much less often. Decision about new product, mergers,acquisitions etc., Managers who faced with such decisions must treat each one as unique, invest enormous amount of time, energy and resource into exploring the situation from all perspectives intuition and experience are major factors in non programming decision. Non programmed decisions deal with unusual or exceptional problems. If a problem has not come up often enough to be covered by a policy or is so important that is deserve special treatment and it must be handled as non programmed decisions. Non programmed decisions are special solutions created through an unstructured process to deal with non routine, problems. Problems such as how to allocate an organizations resources, what to do about a failing product line, how community relationship should be improved most of the significant problems managers will face usually require non programmed decisions.

Decision making conditions

in many decisions all managers must weigh alternatives, many of which involves future events that are difficult to predict. Certainty(highly predictable) risk and uncertainty (highly unpredictable)

The decision maker faces conditions of

Certainity
Lower

Risk
Moderate

Uncertainty
Higher

Level of ambiguity and chances of making a bad decision

Decision making under state of certainty:

A condition in which the decision maker knows with reasonable certainty what the alternatives are and what the alternatives are and what conditions are associated with each alternative. Example:
Selecting of distribution network: Alternative action Low Centralized distribution Decentralized distribution Rs. 30 cr. Rs. 10 cr. Moderate Rs. 15 cr. Rs. 15 cr. High Rs. 20 cr. Rs. 35 cr.

Under the situation of certainty, manager sure about the demand thus he can select decentralized distribution which gives maximum revenue of Rs. 35 cr.

Decision making under state of Risk: A condition in which the availability of each alternative and its potential payoffs and costs are all associated with probability estimates.

Alternative action Centralized distribution Decentralized distribution

Low Rs. 30 cr. Rs. 10 cr.

Moderate Rs. 15 cr. Rs. 15 cr.

High Rs. 20 cr. Rs. 35 cr.

Table for decision (risk condition)

Alternative action Centralized distribution
Decentralized distribution

Low (0.2)

MEDIUM (0.5)

HIGH (0.3)

TOTAL

Rs.6 cr. Rs. 2 cr.

Rs. 7.5cr. Rs. 7 cr.

Rs. 6 cr. Rs. 10.5 cr

Rs. 19.5cr. Rs. 20 cr.

According to table the revenue is more when you opt for decentralized distribution i.e. 20cr

Decision making under state of Uncertainty: A condition in which the decision maker does not know all the alternatives, the risks associated with each, or the consequences each alternative is likely to have. Maximax criteria: the manager using the maximax criterion will list the most favorable payoff for each alternative.
Centralization: Rs. 30cr. Decentralization: Rs. 35cr.

 Maximizing the minimum possible pay off:maximin criterion Centralization : Rs.15 cr Decentralization: Rs. 10cr. Decision would be centralization of distribution bcoz maximizes the minimum payoff.

 Minimizing the maximum possible payoff to the decision maker.

Alternatives
Centralized distribution Decentralized distribution

Low
0 Rs. 20 cr

Moderate
0 0

High
Rs. 15 cr 0

In case of high demand he choose the alternative of centralized distribution . In case of low demand he chooses decentralized distribution

Assuming equally likely probabilities for the occurrence of each possible stat of nature Payoff matrix: Centralization: Rs. 21.67cr [Rs.30+Rs. 10+Rs.20\3] Decentralization: 20cr [Rs. 10+ Rs. 15+ Rs. 35\3] Thus centralized gives better payoff it will be chosen.

Rational perspectives on decision making

The classical model of decision making: a prescriptive approach to decision making that tells managers how they should make decisions. It assumes that managers are logical and rational and that their decisions will be in the best interests of the organization

When faced with a decision situation, managers should..

Obtain complete and perfect information Eliminate uncertainty Evaluate everything rationally logically

And end up with a decision the best serves the interests of the organization.

Rational perspectives on decision making

1. Perfect Rationality: Managers make consistent, value-maximizing choices within specified constraints. He or she would define a problem carefully and would have a clear and specific goal. Assumptions of rationality: The problem is clear and unambiguous. A single, well defined goal is to be achieved All alternatives and consequences are known Preference are clear Preferences are constant and stable No time or cost constraints exist Final choice will maximize economic payoff.

Limitations of Rationality
There are limits to an individual's information processing capacity Perceptual biases can distort problem identification Many decision makers select information more for its accessibility than for its quality Organizations place time and cost constraints on decision makers.

Administrative model
A decision-making model that argues that decision makers Have incomplete and imperfect information. Bounded rationality;and Tend to satisfice when making making decision.

When faced with a decision situation, managers actually..

Use incomplete and imperfect information Are constrained by bounded rationality Tend to satisfice.

And end up with a decision that may or may not serves the interests of the organization.

2. Bounded Rationality: Bounded rationality: a concept suggesting that decision makers are limited by their values and unconscious reflexes, skills, and habits. In bounded rationality managers construct simplified models that extract the essential features from problems with out capturing all their complexity. Then, given information-processing limitations and constraints imposed by the organization, managers attempt to behave rationally within the parameters of the simple model. The result is a satisficing decision rater than maximizing one; Satisficing: The tendency to search for alternatives only until one is found that meets some minimum standards of sufficient. that is a decision in which the solution is satisfactory or good enough Heuristic principles: a method of decision making that proceeds along empirical lines, using rule of thumb to find solutions or answers.

Two views of the decision making process

Decision-making Perfect rationality step
1.Problem formulation An important and relevant organization problem is identified

Bounded rationality
A visible problem that reflects the manager's interest and background is identified A limited set of criteria are identified Simple model is constructed to evaluate and rate the criteria; the decision maker's selfinterest strongly influences the ratings

2.Identification of All criteria are identified decision criteria 3.Allocation of All criteria are evaluated weights to criteria and rated in terms of their importance to the organization's goal

4.Development of A comprehensive list of alternatives all alternatives is developed creatively

A limited set of similar alternatives is identified

5.Analysis of alternatives

All alternatives are assessed against the decision criteria and weights; the consequences for each alternative are known Maximizing decision: the one with the highest economic outcome(in terms of the organization's goal)is chosen. Since the decision maximizes the single, welldefined goal, all organizational members will embrace the solution

Beginning with a favored solution, alternatives are assessed one at a time, against the decision criteria Satisficing decision:the search continues until a solution is founded that satisfactory and sufficient, at which time the search stops. Politics and power considerations will influence the acceptance of, and commitment to, the decision

6.Selection of an alternative

7.Implementation of alternative

8.Evaluatio The decision's n outcome is objectively evaluated against the original problem.

Measurement of the decision's results are rarely so objective as to eliminate self interests so objective as to eliminate selfinterest of the evaluator: possible escalation of resources to prior commitments in spite of both previous failures and strong evidence that allocation of additional resources is warranted.

Group Decision Making

In more and more organizations today, important decisions are made by groups than by individuals. Refers to two or more (usually up to about twentyfive) individuals whose mission is to perform some task and who act as one unit Can be permanent or temporary In one location or in several locations Can meet concurrently or at different time

Benefits of Groups

better than individuals at understanding problems people are accountable for decisions that they participate in better at catching errors has more information (knowledge) than any one member
more alternatives ==> better solutions

synergy may be produced working in group may stimulate the participants and the process committed to the implementation

Problems with Groups

groupthink -- social pressures to conform people begin to think alike and new ideas are not tolerated time-consuming, slow process problems in coordination/poor planning group dynamics free-riders fear to speak domination compromised solutions of poor quality nonproductive time socializing waiting for people

 tendency to repeat what already was said cost (time, money, energy)

make riskier decisions than they should/more extreme (one way or the other) incomplete or inappropriate use of information

Decision-Making Tools Managers can also use a number of tools relate more specifically to decision making than to planning. 1. Payoff Matrices:- A decision-making tool that specifies the probable value of different alternatives depending on different possible outcomes associated with each. Probability: The likelihood, expressed as a percentage, that a particular event will or will not occur. Expected value: when applied to alternative courses of action, the sum of all possible values of outcomes from the action multiplied by their respective probability.

Payoff matrix
High inflation Low inflation Probability of .30 Probability of .70 -$ 10,000 $ 90,000 $ 50,000 $ 15,000

Investment alternatives Product A Product B

Product C

$ 30,000

$ 25,000

 The expected value of investing in product A: EV= .30[-10,000]+.70[50,000] EV=-3,000+35,000 $32,000 For Product B: EV=.30[90,000]+.70[-15,000] EV=-27,000+-10,000 $16,500 For Product C: EV= .30[30,000]+.70[25,000] EV=-9,000+17,500 $26,000 Investing in product A it has a highest expected value

Decision Tree
A planning tool that extends the concept of a payoff matrix through a sequence of decisions Decision tree is like payoff matrices in that they enhance managers ability to evaluate alternatives by making use of expected values. However, they are most appropriate when there are number of decisions to be made in sequence.

Example: A firm wants to begin exporting its products to foreign markets, but limited capacity restrict to only one market at first. Managers believe that either France or China. Would be the best alternative to start with, whichever alternative is selected sales for the product in that country may turn out to be high or low. In France the chance of high sales is .80 and the chance of low sales is .20. The anticipated payoff in these situations are predicted to be $20 million and $ 3million respectively. In China the probability of high versus low sales are .60 and .40 respectively. And the associated payoffs are presumed to be $ 25million and 6 million. The expected value of shipping to France is $16,600,000 where as the expected value of shipping to China is $ 17,400,000.

Decision tree
Decision 1 alternatives Events and probabilities Anticipated payoff Decision 2 alternatives

Ship to France

High sales $20 million in France (.80)

2 2

Expected value: $20,000,000 .80 = $16,000,000 $3,000,000 .20 = 600,000 EV = $16,600,000

1
Ship to China

Low sales in France (.20)

$3 million

Expected value: $6,000,000 .40 = $2,400,000 $25,000,000 .60 = 25,000,000 EV = $17,400,000

Low sales in China (.40)

2
$6 million
Increase shipments to china

2
High sales in China(.60) $25 million

Build plant close to chine

Begin shipping to china

Other Techniques Inventory model: A technique that helps managers decide how much inventory to maintain. Just-in-time : an inventory management technique in which materials are scheduled to arrive in small batches as they are needed, eliminating the need for resources such as big reserves and warehouse space. Queuing model: a model used to optimize waiting lines in organizations Distribution model: a model used to determine optimal pattern of distribution across different carriers and routes. Game theory: predict how competitors will respond to different actions the organization might take.