Decision making


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Decision making

  1. 1. Source: Management by Stephen Robbins and Mary Coulter, 10th Edition
  2. 2. The Decision Making Process  Decision making is the essence of management. Mangers, when they plan, organize, lead, and control, make decisions.  Decisions- a choice from two or more alternatives  To make a decision, a manager must follow a process to be more effective and efficient.
  3. 3. 8 Steps of Decision Making Process 1. Identification of a Problem  Problem- an obstacle that makes achieving a desired goal or purpose difficult  Gathering of information  Root cause analysis- separating the symptoms from the “real problem”
  4. 4. 8 Steps of Decision Making Process 2. Indentifying Decision Criteria- identifying possible resolution to the problem. Must consider the pros and cons of each criteria based on what is needed.
  5. 5. 8 Steps of Decision Making Process 3. Allocating Weights to the Criteria- each possible solution must have features or cons and pros. A manager should score the criteria according to the need of the situation.
  6. 6. 8 Steps of Decision Making Process 5. Developing Alternatives- as manager it is advised you select a viable alternative that could also resolve the problem. At this point we are just listing not evaluating the alternatives.
  7. 7. 8 Steps of Decision Making Process 6. Analyzing Alternatives- each alternative is evaluated by using the criteria created in step 2.
  8. 8. 8 Steps of Decision Making Process 7. Selecting an Alternative-choosing the best alternative or the one that scored the highest total in step 5.
  9. 9. 8 Steps of Decision Making Process 7. Implementing the Alternative- putting the decision into action by conveying into those affected and getting their commitment to it.
  10. 10. 8 Steps of Decision Making Process 8. Evaluating Decision Effectiveness- evaluating the outcome or result of the decision to see of the problem was resolved. If the problem still persists, the managers should re-assess the problem and start over again.
  11. 11. Making Decisions  Rational Decision Making – a type of decision making in which choices are logical and consistent and maximizes value. Mangers have to be objective as well.  Assumption of Rationality- the decision is made to the best interest of the organization. These decisions are not realistic.
  12. 12. Making Decisions  Bounded Rationality-decisions making that’s rational but limited (bounded) by an individuals ability to process information.  Satisfice- accept solution that is good enough.  Escalation of Commitment- an increase in commitment to the previous decision despite of high probability of failure or mistake.
  13. 13. Making Decisions  The Role of Intuition- managers use their intuition in making decisions. Most of this managers have long managerial experiences already.  Intuitive Decision Making- making decision on the basis of experience, feelings, and accumulated judgment.  Values/Ethics based -Experience Based  Affect initiated (Emotions) -Cognitive Based  Subconscious mental processing
  14. 14. Types of Decisions  Structured Problems and Programmed decisions- a straightforward, familiar, and easily defined problem that can be solved by a repetitive decision that can be handled by a routine approach  Procedure-a series of sequential steps used to respond to a well-structured problem.  Rule-an explicit statement that tells managers what can or can’t be done.  Policy-a guideline for making decisions.
  15. 15. Types of Decisions  Unstructured Problems and Non-Programmed decisions-a problem that is new or unusual and for which information is ambiguous or incomplete usually resolved by a unique and non recurring decision that requires customer made solution.
  16. 16. Decision Making Conditions  Certainty- a situation in which a decision maker can make accurate decision because all outcomes are known.  Risk-a situation in which the decision maker is able to estimate the likelihood of a certain outcome.  Uncertainty-a situation in which a decision maker has neither certainty nor reasonable probability estimates available
  17. 17. Uncertainty  Maximax- used by optimistic managers. Maximizing of maximum payoff  Maximin-somehow a pessimist manager. Maximizing the minimum payoff.  Minimax- minimize the maximum regret.
  18. 18. Decision Making Styles  Linear Thinking Style- a decision characterized by a person’s reference for using external data and facts and processing this information through rational and logical thinking.  Non-Linear Thinking Style- a decision style characterized by a person’s preference for the internal sources of information and processing this information with internal insights, feeling, and hunches.
  19. 19. Biases and Errors  Overconfidence Bias-too much confidence on oneself or knowledge and resources.  Immediate gratification-the want of immediate rewards  Anchoring Effect-fixate their decision on an initial information as a starting point.  Selective Perception Bias-selective organization and perception of events  Confirmation Bias-reaffirms their past choices and discount information that contradicts past judgment
  20. 20. Biases and Errors  Framing Bias- selecting and highlighting certain aspects of a situation while excluding others.  Availability bias-tend to remember events that are most recent and vivid in memory. Distorts ability to be objective.  Representation Bias-similarity to previous events  Randomness Bias-creation meaning out of random events.  Sunk Costs Errors-forgetting current choices can’t correct the past.  Self Serve Bias-credit self for success and blame others for failure  Hindsight Bias-false belief that they could have predicted the outcome
  21. 21. Quantitative Decision Making Aids  Pay off Matrix
  22. 22. Quantitative Decision Making Aids  Decision Tree-are a useful way to analyze hiring, marketing, investment, equipment purchase, pricing, and similar decisions that involve progression of decisions.
  23. 23. Quantitative Decision Making Aids  Break Evan Analysis – used to make profit projections
  24. 24. Quantitative Decision Making Aids
  25. 25. Quantitative Decision Making Aids  Ratio Analysis  Current Ratio- company’s current asset vs current liabilities. The answer should be =>2:1  Acid-Test Ration- same as current only that the inventory is reduced based on the dollar value. Ratio should be 1:1
  26. 26. Quantitative Decision Making Aids  Linear Programming- a mathematical technique used to resolve allocation problems. Maybe used in transportation, advertising budget, staffing, etc.  Queuing theory- a technique that balances the cost of having a waiting line against the cost of service to maintain that line.
  27. 27. Quantitative Decision Making Aids  Economic Order Quantity- is a technique used for lowbalancing purchase, ordering, carrying, stock out costs to derive the optimum quantity for a purchase order.