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Decision making (Principles of Management)


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Decision making (Principles of Management)

  1. 1. Making Decision Group 2 MM 105 Source: SAMUEL CERTO
  2. 2. Objectives To help build our decision-making skill, when studying this chapter, we will attempt to acquire: 1. A fundamental understanding of the term decision. 2. An understanding of each element of the decision situation. 3. An ability to use the decision-making process 4. An appreciation for the various situations in which decisions are made. 5. An understanding of probability theory and decision trees as decision making tools.
  3. 3. Fundamentals of Decisions Definition of decision Types of decision 1. Programmed Decisions 2. Non-programmed Decisions
  4. 4. Decision defined • Decision is a choice made between two or more available alternatives. • Decision making is the process of choosing the best alternative for reaching objectives.
  5. 5. Types of Decisions Programmed Decisions Non-programmed Decisions • These are routine and are repetitive. • It requires less time. • These are typically one- shot decisions that are usually less structured than programmed. • And unlike programmed decisions, these are mostly long-term.
  6. 6. The Responsibility for Making Organizational Decisions •Scope of the decision •Levels of Management
  7. 7. The responsibility for Making Organizational Decisions Many different kinds of decisions must be made within an organization such as how to manufacture a product, how to maintain machines, how to ensure product quality, and how to establish advantageous relationships with customers. Because organizational decisions are so varies, some type of rational must be developed to stipulate who within the organization has the responsibility for making which decisions
  8. 8. One such rational is based primarily on two factors: • The scope of the decision is the proportion, the broader the scope of the decision is said to be. • Levels of management are simply lower-level management, middle-level management and upper-level management. The rationale for designating who makes which decisions is that the broader the scope of a decision, the higher the level of manager responsible for making that decision.
  9. 9. Consensus is one method a manager can use in getting a group to arrive at a particular decision. It is an agreement on a decision by all the individuals involved in making that decision. It usually occurs after lengthy deliberation and discussion by members of the decision group, who maybe either all managers or a mixture of managers and subordinates.
  10. 10. Elements of Decision Situation 1. Decision Makers 2. Goals to be served 3. Relevant Alternatives 4. Ordering of Alternatives 5. Choice of Alternatives
  11. 11. Decision Makers They are the individuals or groups that actually make the choice among alternatives. Weak decision makers usually have one of the following orientations: 1. Receptive 2. Exploitive 3. Hoarding 4. Marketing-Oriented
  12. 12. Goals to be served The goals that decision makers seek to attain. These should often be organizational objectives.
  13. 13. Relevant Alternatives A relevant alternative is one that is considered feasible for solving an existing problem and for implementation.
  14. 14. Ordering of Alternatives The decision situation requires a process or mechanism for ranking alternatives from most desirable to least desirable.
  15. 15. Choice of Alternatives This is the actual choice between available alternatives. This choice establishes what we call decisions.
  16. 16. Decision-Making Conditions •Risk •Uncertainty
  17. 17. Decision-Making Conditions: Risk and Uncertainty Risks Uncertainty • A probability or threat of a damage, injury, liability, loss, or other negative occurrence that is caused by external or internal vulnerabilities and that may be neutralized through preemptive action. • Situation where the current state of knowledge is such that: 1. the order or nature of things is unknown, 2. the consequences, extent, or magnitude of circumstances, conditions, or events is unpredictable, and 3. credible probabilities to possible outcomes cannot be assigned. Although too much uncertainty is undesirable, manageable uncertainty provides the freedom to make creative decisions.
  18. 18. Decision-Making Conditions: Risk and Uncertainty Risk Uncertainty • Refers to situations in which statistical probabilities can be attributed to alternative potential outcomes. • Refers to situations where the probability that a particular outcome will occur is not known in advance.
  19. 19. Decision-Making Conditions: Risk and Uncertainty Risk Uncertainty • Risk means danger or threat one might feel in doing some work. • Risk can be related to occurrences with low probability. • Uncertainty means hesitation or ambiguity about certain thing. • Uncertainty can be touched with 100% confidence.
  20. 20. Decision-Making process •Define the problem •Identify limiting factors •Develop potential alternatives •Analyze the alternatives •Select the best alternative •Implement the decision •Establish a control and evaluation system
  21. 21. The Rational Decision-Making Process Define the problem Identify limiting factors Develop potential alternatives Analyze the alternatives Select the best alternative Implement the decision Establish a control and evaluation system
  22. 22. Define the problem The decision-making process begins when a manager identifies the real problem. The accurate definition of the problem affects all the steps that follow; if the problem is inaccurately defined, every step in the decision-making process will be based on an incorrect starting point. One way that a manager can help determine the true problem in a situation is by identifying the problem separately from its symptoms.
  23. 23. Identify limiting factors All managers want to make the best decisions. To do so, managers need to have the ideal resources — information, time, personnel, equipment, and supplies — and identify any limiting factors. Realistically, managers operate in an environment that normally doesn't provide ideal resources. For example, they may lack the proper budget or may not have the most accurate information or any extra time. So, they must choose to satisfy — to make the best decision possible with the information, resources, and time available.
  24. 24. Develop potential alternatives Time pressures frequently cause a manager to move forward after considering only the first or most obvious answers. However, successful problem solving requires thorough examination of the challenge, and a quick answer may not result in a permanent solution. Thus, a manager should think through and investigate several alternative solutions to a single problem before making a quick decision.
  25. 25. Brainstorming In this act, a group works together to generate ideas and alternative solutions. The assumption behind brainstorming is that the group dynamic stimulates thinking — one person's ideas, no matter how outrageous, can generate ideas from the others in the group. Brainstorming usually requires 30 minutes to an hour. The following specific rules should be followed during brainstorming sessions: 1. Concentrate on the problem at hand. 2. Entertain all ideas. 3. Refrain from allowing members to evaluate others' ideas on the spot. 4. Nominal group technique. 5. Delphi technique.
  26. 26. Analyze the alternatives Evaluating the alternatives can be done in numerous ways. Here are a few possibilities: • Determine the pros and cons of each alternative. • Perform a cost-benefit analysis for each alternative. • Weight each factor important in the decision, ranking each alternative relative to its ability to meet each factor, and then multiply by a probability factor to provide a final value for each alternative.
  27. 27. A manager needs to evaluate each alternative in terms of its: • Feasibility • Effectiveness • Consequences
  28. 28. Selecting the best alternative After a manager has analyzed all the alternatives, she must decide on the best one. The best alternative is the one that produces the most advantages and the fewest serious disadvantages. Sometimes, the selection process can be fairly straightforward, such as the alternative with the most pros and fewest cons. Other times, the optimal solution is a combination of several alternatives.
  29. 29. Implementing the Chosen Alternative Managers are paid to make decisions, but they are also paid to get results from these decisions. Positive results must follow decisions. Everyone involved with the decision must know his or her role in ensuring a successful outcome. To make certain that employees understand their roles, managers must thoughtfully devise programs, procedures, rules, or policies to help aid them in the problem-solving process.
  30. 30. Establish a control and evaluation system An evaluation system should provide feedback on how well the decision is being implemented, what the results are, and what adjustments are necessary to get the results that were intended when the solution was chosen. And in order for a manager to evaluate his decision, he needs to gather information to determine its effectiveness.
  31. 31. If a manager's plan hasn't resolved the problem, he needs to figure out what went wrong. A manager may accomplish this by asking the following questions: • Was the wrong alternative selected? • Was the correct alternative selected, but implemented improperly? • Was the original problem identified incorrectly? • Has the implemented alternative been given enough time to be successful?
  32. 32. Decision-Making Tools •Probability Theory •Decision Trees
  33. 33. Probability Theory It is a decision-making tool used in risk situations- situations in which decision makers are not completely sure of the outcome of an implemented alternative.
  34. 34. Probability It refers to the likelihood that an event or outcome will actually occur. It is estimated by calculating an expected value for each alternative considered. Specifically, the expected value (EV) for an alternative is the income (I) that alternative would produce, multiplied by its probability of producing that income (P). In formula form: EV=IP
  35. 35. Alternative (locations) Potential Income Probability of Income Expected Value of Alternatives A 90,000 20% 18,000 B 75,000 40% 30,000 C 60,000 80% 48,000
  36. 36. Decision Trees It is a graphic decision-making tool typically used to evaluate decisions involving a series of steps.
  37. 37. John F. Magee Developed a classic illustration that outlines how decision trees can be applied to a production decision. Decision point Chance event
  38. 38. Decision Point 1 2 Years High Average Demand Decision Point 2 High Initial Low Subsequent Demand Low Average Demand A. Expand Plant High Average Demand Low Average Demand Low Average Demand High Average Demand B. No Change in PlantInitially Low Initially High Demand B. Build Small Plant A. Build Big Plant
  39. 39. 1. Study estimates of investment amounts necessary for building a large plant, for building a small plant, and for expanding a small plant. 2. Weigh the probabilities of facing different product demand levels for various decision alternatives. 3. Consider projected income yields for each decision alternative.