Group Members:Ankur ChatterjeeAmit KumarBinit Jain BenganiDivyam AgrawalKriti VermaSandeep KumarBishesh K Sah
DECISION MAKINGIt is the process of identifying and selecting a course of action tosolve a specific problem.As stated in Webster’s, it is “the act of determining in one’s ownmind an opinion or course of action.”Problem –the discrepancy between ideal & actual situation.Managerial decisions are deliberate choices made from a range ofalternatives. Before making the decision, the manager must evaluateeach choice according to its projected outcomes in terms of theorganization`s resources as well as the amount of information andtime available.
Crucial Elements IN the process of decision making Time •Connection between organization present circumstances to actions that will take the organization into future. •Decisions are based on past experiences.Human relationships •Decision making is a process that managers conduct in relationship with other decision makers. •A wide network of relationship is always beneficial while deciding about business dealings.
The Nature of Managerial Decision Making1. It is a process of selecting the best from the alternatives.2. It is based on rational thinking.3. The purpose of decision making is to find out solution of some problem.4. It involves the evaluation of various available alternatives.5. Decision making is aimed at achieving organisational goals.6. It is both a managerial function and an organisational process.7. Decision starts action.
8. Decision making is an intellectual process.9.All decisions involve future events, hence, decision makers mustanalyze the certainity, risk and uncertainity associated withalternative course of action.All managers have a shortage ofknowledge, resources, and time.Working within theseparameters, the managementprocess culminates in decisions toimplement various actions.
Types of decision makingStrategic decisions -provides direction to an organization - high managerial competence is required - full of risk and uncertainty - taken by top management levelTactical decisions - support and implement strategic decisions - impact is medium with respect to time & significance - taken by middle management level
Operational decisions -Pre programmed, highly structured, routine decision to support tactical decision - required little effort - made by frontline management staff
Based on the nature of decision making,Herbert Simon hasgrouped the decision making into two categories- A) Programmed decisions B) Nonprogrammed decisions
PROGRAMMED DECISIONSProgrammed decisions are made in accordance with writtenor unwritten policies, procedures or rules that simplify decisionmaking in recurring situations by limiting or excludingalternatives.Programmed decisions are concerned with relatively routineand repetitive problems. Information on these problems isalready available and can be processed in a pre-plannedmanner.Programmed decisions limit our freedom because theindividual has less latitude in deciding what to do.Programmed decisions save time.
Nonprogrammmed decisions Non-programmed decisions deal with unique or unusual problems. Such novel or non-repetitive problems cannot be tackled in a predetermined manner. Ability to make nonprogrammed decisions become more important, as we move up in the organizational hierarchy. The ability to make good non-programmed decisions help to distinguish effective executives from non effective executives. More & more organizations have made their commitments to social responsibility a matter of policy involving the both.
Programmed Non programmed Decisions(structured) Decisions(unstructured)Types of problems Repetitive, routine, frequent; Novel, complex, difficult, decisions made according to infrequent; decisions specific procedures require original thinkingProcedures Thinking Depend on policies and Require creativity, intuition, rules tolerance for ambiguityExamples Business firm :Periodic reorders Business firm: of inventory Diversification into new Health care: Procedure for products and markets admitting patients Health care: Purchase of experimental equipment
STRUCTURED UNSTRUCTUREDMade under established situation i.e. Made under emergent situationdefinable, predictable & analyzableCalled programmed decision making Called non-programmed decision makingRoutine problems Non-routine problemsApplication of rules/ procedures/ habits Application of skill/ experience/ common senseLower management Top managementRecurring RareLow risk & uncertainty High risk & uncertaintyHigh control Low control
Rational model of decision makingIt is a four step process that help managers weigh alternativesand choose the alternative with the best chance of success.•Especially useful in making nonprogrammed decisions.•Helps managers go beyond priori reasoning.•It is an article of faith that we can trace to the managerialapproaches of Henry Ford, Henri Fayol and Chester Barnard.
Four stages of rational decisionmaking 1. INVESTIGATE 2. DEVELOP THE SITUATION ALTERNATIVES 3. EVALUATE ALTERNATIVES 4. IMPLEMENT AND AND SELECT THE BEST ONE MONITOR AVAILABLE
STAGE 1: INVESTIGATE THE SITUATIONA thorough investigation has three aspects: •Problem Definition •Diagnosis •Identification of Objectives
•DEFINE THE PROBLEMDefining the problem in terms of the organizational objectivesthat are being blocked helps to avoid confusing symptoms withproblems.Example: An upsurge in employee resignations, is not a problemunless it interferes with the organizational objectives.•DIAGNOSE THE CAUSESTo diagnose the causes of the problem, managers need to ask anumber of diagnostic questions.Different individuals may perceive very different causes for theproblem, it is up to the manager to put all the pieces together andcome up with as clear picture as possible.
•IDENTIFY THE DECISION OBJECTIVESThe focus is on to decide what would constitute an effective solution.A solution is an effective one if - it enables managers to achieve organizational goals. - it has more ambitious objectives rather than merelyrestoring the organizational performance.The immediate problem may be an indicator of futuredifficulties, and the solution thus could be an opportunity to improve.Thus all three aspects of problem investigation, is the importance ofmanager’s education and his or her futuristic imagination.
Stage 2: Develop alternativesIt is a difficult process for complex nonprogrammed decisions andespecially if there are time constraints.The temptation to accept the first feasible alternative preventsmanagers from finding the best solution for their problem.To prevent this some managers turn to individual or groupbrainstorming.Brainstorming: Decision making and problem solving techniquein which individual or group members try to improve creativity byspontaneously proposing alternatives without concern for realityor tradition.
Stage 3: Evaluate alternativesand select the best one availableAfter developing a set of alternatives, managers must evaluate eachone on the basis of three key questions -IS THE ALTERNATIVE FEASIBLE? - IS THE ALTERNATIVE A SATISFACTORY SOLUTION? -WHAT ARE THE POSSIBLE CONSEQUENCES FORTHE REST OF THE ORGANIZATION?
STEP 3: EVALUATING ALTERNATIVES DROP THE ALTERNATIVE NO DROP THE ALTERNATIVE NO DROP THE ALTERNATIVE YES NO1. Is the alternative CONDUCT feasible 2. Is the YES FURTHER alternative EVALUATION satisfactory? 3. Will the YY YES alternative have positive or neutral consequences?
•IS THE ALTERNATIVE FEASIBLE?Does the organization have the money and other resources needed tocarry out this alternative?Does the alternative meet all the organization’s legal and ethicalobligations?Is the alternative a reasonable one given the organization’s strategyand internal politics?What would happen if employees fail to support and implement itwhole heartedly?
IS THE ALTERNATIVE A SATISFACTORY SOLUTION?This can be answered by the following two questions.I. Does the alternative meet the decision objectives?II. Does the alternative have an acceptable chance of succeeding?WHAT ARE THE POSSIBLE CONSEQUENCES FOR THE REST OF THE ORGANIZATION? An organization is a system of interrelated parts and exists among other systems, managers must try to anticipate how a change in one area will affect both areas- both now and in the future.
STAGE 4: IMPLEMENT AND MONITOR THE DECISIONImplementing the decision involves more than giving appropriateorders. - Resources must be acquired and allocated as necessary. -Set up budgets and schedules for the actions. -Assign responsibility for the assigned tasks. -Set up a procedure for progress reports and prepare to makecorrections if new problems arise.Actions taken to implement a decision must be monitored.Decision making is a continual process for managers – and acontinual challenge of dealing with other human beings over time.
Analysis of rational model• Simon conducted pioneering analysis of rational model.• The limit on calculation is in a certain sense an insuperable obstacle.• This brings with it a important implication: if economic subjects are unable to explore all the consequences of their actions, they are likewise unable to assess them; and this introduces an intrinsically uncertain element into human action.
LIMITATIONS FOR THE RATIONAL DECISION MAKINGThere are two types of factor which puts limitson rationality in decision making.• Decision making mechanism• Human factor in decision making
Decision making mechanism limitation• It requires a great deal of time.• It requires great deal of information.• It assumes rational, measurable criteria are available and agreed upon.• It assumes a rational, reasonable, non-political world.
Limitations due to Human factor in decision making In its standard version, the theory ofrationality rests on the following conception ofhuman behavior:• Individuals possess a mental order of preferences concerning all the possible consequences of their actions, which is not true practically.• They therefore make their choice coherently with their preferences and with the constraints upon them.
ASSUMPTION OF THE MODEL• Problem clarity• Known options• Clear preferences• Constant preferences• No time or cost constraints
A different solution• However, in those years a different solution of the dilemma was proposed by Milton Friedman , a solution that was very successful.• According to Friedman, although individuals do not possess the formal tools with which to calculate the optimum adequately, they behaved as if they do.
• According to Simon ,people have only a limited, simplified view of problems confronting them because of certain reasons:• They do not have full information about the problems.• They do not possess knowledge of all the possible alternative solutions to the problems and their consequences.• They do not have abilities to process competitive environmental and technical information.• They do not have time and resources.
Factors Leading To Bounded Rationality And Satisficing Decisions Information Process External Time and abilities factors cost limits Decision Organizational maker Personal objectives factors Satisficing Decision
BOUNDED RATIONALITY AND SATISFICING DECISIONS• Bounded Rationality- the concept that the managers make the most logical decisions they can make within the constraints of limited information and ability.• Satisfice- Decision making technique in which managers accept the first satisfactory decision they uncover.
The Concept of Satisficing Behavior• A satisficing decision maker is one who is simply concerned with attaining a sought objective.• Satisficing behavior acknowledges limitations.• Decision maker searches for alternatives until one is found that meets the objective and a choice is made and implemented.• Satisficing behavior is open to environment.
The Case for Satisficing Behavior1. The case for satisficing behavior is centered in the concept of bounded rationality.2. Given bounded rationality, the best that a rational decision maker can get is a satisficing choice .
The Case for Satisficing Behavior (cont’d)The components of bounded rationality are: 1. Rational decision maker 2. Managerial objectives 3. External environment 4.Time and cost constraints 5.Cognitive limitations
The Case Against Satisficing Behavior1. Limitations on decision maker’s aspirations.2. The need to specify objectives in advance.3. Complexity of the choice may impose cognitive strain on the decision maker.4. Focus on short-term results.
The Case Against SatiSficing Behavior (cont’d)1. May choose the first alternative too rapidly.2. Belief that a satisficing choice is a “second- best” decision.3. Focus on the behavioral aspects of decision making.
Heuristics or Judgment Shortcuts• Framing – The selective use of perspective.• Availability Heuristic – The tendency of people to base their judgments on information readily available to them.
Heuristics or Judgment Shortcuts• Representative Heuristic – The tendency to assess the likelihood of an occurrence by trying to match it with a pre-existing category.• Ignoring the Base Rate – Ignoring the statistical likelihood of an event when making a decision.• Escalation of Commitment – An increased commitment to a previous decision in spite of negative information.
Heuristics or Judgment Shortcuts• Overconfidence Bias – Overestimating the accuracy of our predictions.• Anchoring bias – A tendency to fixate on initial information as a starting point.
Decision Making Conditions: In making decisions, all managers must weigh alternatives, many such alternatives involve future events that are difficult to predict like: Competitor’s reaction to a new price list Interest rates in next few years Reliability of a new supplier
Continuum of Decision Making Conditions:1) CERTAINTY (Highly Predictable)2) RISK3) UNCERTAINTY (Highly Unpredictable) CERTAINTY RISK UNCERTAINTY MANAGERIAL HIGH LOW CONTROL
Certainty: Decision making condition in which managers have accurate, measurable, and reliable information about the outcome of various alternatives under consideration. Here the cause and effect relationships are known to managers. Example: Suppose a director is ordering programs for a storytelling festival. She knows the objective- get programs printed- and can easily compare representative samples from local printers and the prices they quote for printing varying quantities of program.
Risk: It occurs whenever we cannot predict an alternative’s outcome with certainty, but we do have enough information to predict the probability it will lead to the desired state. To improve decision making, we may estimate the objective probabilities of an outcome by using Mathematical models. We can also use subjective probability based on judgment and experience. Example: Merger of Bank of America and Security Pacific in 1992.
Uncertainty: Decision making condition in which managers face unpredictable external conditions or lack the information needed to establish the probability of certain events. Example: A Corporation that decides to expand it’s operation in a new country may know little about the country’s culture, laws, economics, environment and politics. The political situation may be so volatile that even the experts cannot predict a possible change in Government.
Modern Approaches to Decision Making Under Uncertainty:1) Risk Analysis2) Decision Trees1) Preference or Utility Theory
Risk Analysis:Every decision is based on the interaction of anumber of important variables, many of whichhave an element of uncertainty but, perhaps, afairly high degree of probability.Example: The wisdom of launching a new product might depend on a number of critical variables: the cost of introducing the product, the cost of producing it, the capital investment that will be required, the price that can be set for the product, the size of the potential market and the share of the total market that it will represent.
Let us see the prospective for investment in a new product :Rate of Return 0 10 15 20 25 30 35 40%Probability of .90 .80 .70 .65 .60 .50 .40 .30achieving at leastthis rate
Decision Trees: Decision Trees depict, in the form of a tree, the decision points, chance events and probabilities involved in various courses that might be undertaken.Eg:-A common problem occurs in business when a new product is introduced. Managers must decide whether to install expensive permanent equipment to ensure production at the lowest possible cost or to undertake cheaper temporary tooling that will involve higher manufacturing cost but lower capital investments and will result in smaller losses if the product does not sell as well as estimated.
Utility Theory:Preference or utility theory is based on the notion thatindividual attitudes toward risk will vary: someindividuals are willing to take only smaller risks thanthose indicated by probabilities, while others are willingto take greater risks. Purely statistical probabilities, asapplied to decision making, rest on the assumption thatdecision makers will follow them.It might seem reasonable that if there were a 60%chance of a decision’s being the right one, a personwould take it. This is not necessarily true since the riskof wrong is 40%.Example: Managers avoid risk, particularly if penaltyfor being wrong is severe, whether it be in terms ofmonetary loss, reputation or job security.
Violations of the expected utility theory:Lotteries and Gambling If by paying a small amount, one has a chance of winning a large amount, individuals often ignore the negative expected payoff, as the loss is small. BUT If potential loss is larger, the same individual may choose very differently preference reversal in decision making
I ndi vi dual D si on M ng eci aki• Based on one’s ow n exper i ence, know edge and i nt ui t i on. l• D si on m ng w t hout a gr oup’s eci aki i i nput .
Advant ages:• Pr om deci si ons pt• Account abl e f or t he ef f ect s of deci si ons• Saves t i m m e, oney and ener gy• M e f ocused and r at i onal deci si ons or
D sadvant ages i• Less i nf or m i on f or t he deci si on. at• Based on ow i nt ui t i on and vi ew n s.• I nef f ect i ve deci si ons.• D si ons m ght not ser ve t he eci i i nt er est s of al l .
Group Decision Making• D si on m ng by t aki ng t he i nput s eci aki of gr oup m ber s. em• Based on consul t at i on or consensus of t he gr oup.
Advant ages• Pool i ng of know edge & i nf or m i on l at• Sat i sf act i on & C m t m om i ent• Per sonnel Devel opment• M e R sk t aki ng or i
D sadvant ages i• Ti me-consum ng & C l y i ost• I ndi vi dual dom nat i on i• Pr obl em of r esponsi bi l i t y• G oupt hi nk r
I ndi vi dual vs. G oup deci si on m ng r aki “Too many cooks spoil the broth” VS. “Two heads are better than one head”
Analysis of Situation for individual and group decisions making• Nature of Problem If the policy guidelines regarding the decision for the problem at hand are provided , individual decision making will result in greater creativity as well as efficiency .Where the problem requires a variety of expertise , group decision making is suitable• Time Availability Group decision making is a time – consuming process and therefore , when time at disposal is sufficient , group decision making can be preferred• Quality of Decision Group decision making generally leads to a higher quality solution unless an individual has expertise in the decision area and this has been identified in advance• Climate of Decision making Supportive climate encourages group decision making whereas competitive climate stimulates individual decision making• Legal requirement Legal requirement may be prescribed by government’s legal framework or by organisational policy ,rules ,etc .For eg : many decisions have to be compulsorily made by board of directors ( group ) or committee in companies
Techniques for Improving Group Decision Making• Brainstorming• Nominal Group Technique• Delphi Technique
Brainstorming•Topic•Take turns sharing ideas•Record each idea•No comments/criticisms•Keep the tempo moving•One idea per turn•Members may pass•Keep going until ideas are exhausted
Nominal Group Technique A generic name for face-to-face group techniques in which instructions are given to group members not to interact with each other except at specific steps in the process.•Silent idea generations,•Round-robin sharing of ideas,•Feedback to the group,•Explanatory group discussion,•Individual re-assessment, and•Mathematical aggregation of revised judgements.
Delphi Technique•Problem stated•Questionnaires•Anonymous & Independent•Compile results•Distribute copies of results•New round begins•Does not require physicalpresence•Time consuming