DECISION MAKING - ENGINEERING ECONOMICS AND FINANCIAL ACCOUNTING

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BE.CS FINAL YEAR & IT THIRD YEAR, ANNA UNIVERSITY, CHENNAI

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DECISION MAKING - ENGINEERING ECONOMICS AND FINANCIAL ACCOUNTING

  1. 1. Dr.K.Baranidharan Present by…
  2. 2. Engineering Economics & Financial Accountingment EE&f 2July 13, 2013
  3. 3. ManagErial DEcision Making SRISAIRAM INFORTION TECHNOLOGY
  4. 4. Managerial Decision Making  Decision making is not easy  It must be done amid  ever-changing factors  unclear information  conflicting points of view 4
  5. 5. Decisions and Decision Making Decision = choice made from available alternatives Decision Making = process of identifying problems and opportunities and resolving them 5
  6. 6. characteristics  1.decision making is a goal-oriented process.  2.it aims at achieveing certain specifies goals of the organisation  3.selection of process in which best alternativescourses of action is chosen from amongst alternative courses of action.  4,is a continue process because the manager is required to takedecisions continuously for different activities.  5.consider is both science and art  6.responsibilities of manager at different levels of management 6
  7. 7. 7.decision making involves deep and careful thinking and hence it is a mental process. 8.decision making can be both postive or negative 9.Decision are made for further course of action based on the past experiences and present conditions. 7
  8. 8. Impotance DM is an important aspect of planning Without D nothing can be done Performing various aspect of management function like.. Planning, organising, contro etc., Its helps to set objectives, prepare plans of action, introduce innovation, determine organisational structure of the concern. 8
  9. 9. types of Decisions  Programmed Decisions  Situations occurred often enough to enable decision rules to be developed and applied in the future  Made in response to recurring organizational problems  Nonprogrammed Decisions – in response to unique, poorly defined and largely unstructured, and have important consequences to the organization 9
  10. 10.  Basic decision:  Basic decision involved lomg range commitment and larhe funds.  Decisipon with regard to selection of a lication, selection of a product line, merger of the business are known as Basic decision.  Routine decision:  Decision that are taken to carry out the day-to-day activities are called Routine decision. 10
  11. 11. Group decision: Group decisions are taken by a group of persons. Individual decision: The decision is taken by one person, it is called individual decision. example: decision taken by the Board of Director and the chief executive in the interest of the organisation as whole is known GD, 11
  12. 12. Policy decision: Policy decision are made at top management levels. These decision are taken to determine the basic polices and goals of the organisation. Operating decision: Operating decision are taken to executive the policy decisions. This decision are taken at middle and lower management levels and are related to routine activities of business. 12
  13. 13.  Organisational decision:  Organisational decision are made by the executive in his capacity as managger in order to acheive the best interest of the organisation.  This decision can be delegated other members in the organisation,  Example: adoption of strategies, framing on objectives etc.,  Personal decision:  By the manager personal capacity  This decision are not delegated. Exwcutive personal work  Example: leave, medical, surrender etc., 13
  14. 14. Major decision: The decision with regard to the quality of the product, price of the product, developing a new product…. Minor or supplementary decision: Courses of conversion of major decision into action Example: implementing the major decision developing a new product, some minor decision as regard to the colour, size, packing 14
  15. 15. Decisions and Decision Making Many decisions that managers deal with every day involve at least some degree of uncertainty and require nonprogrammed decision making  May be difficult to make  Made amid changing factors  Information may be unclear  May have to deal with conflicting points of view 15
  16. 16. Certainty, Risk, Uncertainty, Ambiguity ● Certainty ● all the information the decision maker needs is fully available ● Risk ● decision has clear-cut goals ● good information is available ● future outcomes associated with each alternative are subject to chance ● Uncertainty ● managers know which goals they wish to achieve ● information about alternatives and future events is incomplete ● managers may have to come up with creative approaches to alternatives ● 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 ● information about outcomes is unavailable 16
  17. 17. Process 1.identifying the problem:- recognizing problem-formulating the problem-clear and completely. 2.analysing the problem:- collection and classification 3.developing alternative solution for the problem:- sound decision-identify limted factors- 4.evaluting the alternative:- choose the best one - 17
  18. 18. 5.deciding the best course of action:- manager take into account the economy, risk factor, the limitation of resource, feasibility of its implementation etc., past experience…experimentation…research and analysis 6.conversion of decision into action:- comverted action, implement, communication, develop procedure. 7.control;- once the decision implementation next step contolling, comparing actual with expected performance 18
  19. 19. 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 risk, uncertainty, or ambiguity 19
  20. 20. Three Decision-Making Models 20  Classical Model  Administrative Model  Political Model
  21. 21. Classical Model Assumptions  Decision maker operates to accomplish goals that are known and agreed upon  Decision maker strives for condition of certainty – gathers complete information  Criteria for evaluating alternatives are known  Decision maker is rational and uses logic Normative = describes how a manager should and provides guidelines for reaching an ideal decision 21 Logical decision in the organization’s best economic interests
  22. 22. Administrative Model  Two concepts are instrumental in shaping the administrative model ● Bounded rationality: people have limits or boundaries on how rational they can be ● Satisficing: means that decision makers choose the first solution alternative that satisfies minimal decision criteria 22 Herbert A. Simon How nonprogrammed decisions are made--uncertainty/ambiguity
  23. 23. Administrative Model ● Managers actually make decisions in difficult situations characterized by non-programmed decisions, uncertainty, and ambiguity ● Decision goals often are vague, conflicting and lack consensus among managers; ● Rational procedures are not always used ● Managers’ searches for alternatives are limited ● Managers settle for a satisficing rather than a maximizing solution ● intuition, looks to past experience ● Descriptive = how managers actually make decisions--not how they should 23 How nonprogrammed decisions are made--uncertainty/ambiguity
  24. 24. Political Model ● Closely resembles the real environment in which most managers and decision makers operate ● Useful in making non-programmed decisions ● Decisions are complex ● Disagreement and conflict over problems and solutions are normal ● Coalition = informal alliance among manages who support a specific goal 24 Closely resembles the real environment
  25. 25. Characteristics of Classical, Political, and Administrative Decision Making Models 25 Classical Model Administrative Model Political Model Clear-cut problem and goals Vague problem and goals Pluralistic; conflicting goals Condition of certainty Condition of uncertainty Condition of uncertainty/ambiguity Full information about Limited information about Inconsistent viewpoints; ambiguous alternatives and their outcomes Alternatives and their outcomes information Rational choice by individual Satisficing choice for resolving Bargaining and discussion among for maximizing outcomes problem using intuition coalition members
  26. 26. Decision Styles  Differences among people with respect to how they perceive problems and make decisions  Not all managers make decisions the same  Directive style  Analytical style  Conceptual style  Behavioral style 26
  27. 27. Directive Style  People who prefer simple, clear-cut solutions to problems  Make decisions quickly  May consider only one or two alternatives  Efficient and rational  Prefer rules or procedures 27
  28. 28. 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 information available 28
  29. 29. 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 29
  30. 30. 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 goals 30
  31. 31. DECISION ANALYSIS  DA is the art of science of formal DM.  DA is often employed in making business D and uses specific methods and tools to identify and access factors, risk and possiable outcome to reach 31
  32. 32. Definiation  DA is the discipline of evaluating complex alternatives in terms of values and uncertaintity. 32
  33. 33. Decision Analysis
  34. 34. Decision Analysis  Decision Analysis providers structure and guidance for thinking systematically about hard decisions.  To help a decision maker take action with confidence gained through a clear understanding of the problem.
  35. 35. Decision Analysis  Once a decision making problem is understood and defined it is time to analyze it.  You might wonder if the decisions you make are suitable for decision analysis. If you are looking for a way to structure your decisions to make them more organized and easier to explain to others, you definitely should consider using formal decision analysis.
  36. 36. Influence Diagrams  Influence diagrams present a decision in a simple, graphical form.  Decisions, chance events and payoffs (values) are drawn as shapes (called nodes) and are connected by arrows (called arcs) which define their relationship to each other.  In this way, a complex decision may be reduced to a few shapes and lines.  Influence diagrams are excellent for showing the relationship between events and the general structure of a decision clearly and concisely.
  37. 37. Influence Diagrams  The term influence refers to the dependency of a variable on the level of another variable.  The variables are connected by arrows which indicate the direction of influence. Rectangle: Decision Variable Circle: uncontrollable or intermediate variable Oval: result (outcome) variable, intermediate or final
  38. 38. Influence Diagrams The shape of arrow indicate the type of relationship:  Certainty  Uncertainty  Random (Risk variable)  Dereference (between outcome variables): Amount In CDs Interest Collected Price Sales ~ Demand Sales A double lined arrow
  39. 39. Example Consider the following profit model:  Profit = income – expenses  Income = unit sold x unit price ~ amount used in advertisement Units Sold Units Cost Fixed Cost Unit Price  Unit Sold = 0.5 x amount used in advertisement  Expenses = unit cost x units sold + fixed cost Income Expenses Profit
  40. 40. Example: An Influence Diagram for the Profit Model ~ Amount used in advertisement Profit Income Expense Unit Price Units Sold Unit Cost Fixed Cost
  41. 41. Decision Trees  Decision trees are a comprehensive tool for modeling all possible decision options.  While influence diagrams produce a compact summary of a problem, decision trees can show the problem in greater detail.  Decision trees describe events in chronological order but can be much larger than influence diagrams.
  42. 42. Decision Trees  It utilizes a network of two types of nodes: decision (choice) nodes, and states of nature (chance) nodes  Square represents decisions to be made.  Circles represents chance events. Chance nodes, are random variables and they represent uncertain quantities that are relevant to the decision problem.  Branches from a square correspond to the choices available to the decision maker.
  43. 43. Example  Venture capitalist's situation in decision weather to invest in a new business.  Objective: to make money. Do not Invest Typical Return Earned on Less Risky Investment Venture Succeeds Venture Fails Large Return On Investment Funds Lost Invest
  44. 44. Interpretation of Decision Trees The options represented by branches from a decision node must be such that the decision maker can choose only one option.  Each chance node must have branches that correspond to a set of mutually exclusive and collectively exclusive outcomes ( only one of them can happen, No other possibilities exit)  A Decision Tree must show all the possible paths that the decision maker might follow through time. Including all possible decision alternatives.  Some times the nodes might occur in a time sequence.  The sequence of decisions is shown in the tree from left to right.
  45. 45. Modeling Decisions  Given a complicated problem, how should we begin?  A critical first step is to identify elements of the situation:  Values and Objectives,  Decisions to make,  Uncertain events,  Consequences
  46. 46. Dr.K.Baranidharan thank you K YOU

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