Decisionmaking in Management

HBL

Presented By: Viqar A. Usmani

Recommended Book:

Making Management Decisionsby Steve Cooke ,Nigel Slack


Please write a one sentence definition of decision making.

The process of examining your possibilities options, comparing them, and choosing a course of action.


The word decision has been derived from the Latin word

"decidere" which means "cutting off".

Thus, decision involves cutting off of alternatives between those

that are desirable and those that are not desirable.

In the words of George R. Terry,

"Decision-making is the selection based on some criteria from

two or more possible alternatives".


Characteristics of Decision Making• Decision making implies that there are various

alternatives and the most desirable alternative is chosen to

solve the problem or to arrive at expected results.• The decision-maker has freedom to choose an alternative.• Decision-making may not be completely rational but may bejudgmental and emotional.

• Decision-making is goal-oriented.• Decision-making is a mental or intellectual process because

the final decision is made by the decision-maker.

(Cont.)


• A decision may be expressed in words or may be implied frombehavior.

• Choosing from among the alternative courses of operation implies

uncertainty about the final result of each possible course of

operation.

• Decision making is rational.

It is taken only after a thorough analysis and reasoning and

weighing the consequences of the various alternatives.


Decision making: the process by which managers respond to opportunities and threats by analyzing options, and making decisions about goals and courses of action.

Decisions in response to opportunities:managers respond to ways to improve organizational performance.

Decisions in response to threats: occurs when managers are impacted by adverse events to the organization.


Programmed Decisions: routine, almost automatic process. Managers have made decision many times before. There are rules or guidelines to follow.

Programmed decisions are routine and repetitive and are made within the

framework of organizational policies and rules.

These policies and rules are established well in advance to solve

recurring problems in the organization.

Programmed decisions have short-run impact.

Example: Deciding to reorder office supplies.Presented By: Viqar A. Usmani


Non-programmed Decisions:unusual situations that have not been often addressed.No rules to follow since the decision is new.These decisions are made based on information, and a manger’s intuition, and judgment.Non-programmed decisions are decisions taken to meet non-repetitive

problems.

Non-programmed decisions are relevant for solving unique/ unusual

problems in which various alternatives cannot be decided in advance.

A common feature of non-programmed decisions is that they are novel and non-

recurring and therefore, readymade solutions are not available.

Example: Should the firm invest in a new technology?

Classical model of decision making:a prescriptive model that tells how the decision should be made.

Assumes managers have access to all the information needed to reach a decision.

Managers can then make the optimum decision by easily ranking their own preferences among alternatives.

Unfortunately, mangers often do not have all (or even most) required information.


Rank each alternative from low to high

Select bestalternative

List alternatives & consequences

Assumes all informationis available to manager

Assumes manager canprocess information

Assumes manager knowsthe best future course of

the organization


Administrative Model of decision making:Challenges the classical assumptions that managers have and process all the information. As a result, decision making is risky.

Bounded rationality: There is a large number of alternatives and information is vast so that managers cannot consider it all. Decisions are limited by people’s cognitive abilities.

Incomplete information:most managers do not see all alternatives and decide based on incomplete information.


Uncertainty& risk

AmbiguousInformation

Time constraints &information costs

IncompleteInformation


Recognize need for a decision

Frame the problem

Generate & assess alternatives

Choose among alternatives

Implement chosenalternative

Learn from feedback


1. Recognize need for a decision: Managers must first realize the need for which a decision must be made.


A problem is a felt need, a question which needs a solution. In the words

of Joseph L Massie

"A good decision is dependent upon the recognition of the right

problem".

The objective of problem identification is that if the problem is

precisely and specifically identifies, it will provide a clue in finding

a possible solution. A problem can be identified clearly, if managers

go through diagnosis and analysis of the problem.


Frame the problem




Learn from feedback


2. Frame the problem:managers must frame problem for whichdecision is to be made.


Diagnosing the real problem implies knowing the gapbetween what is and what ought to be,

Diagnosis gives rise to analysis. Analysis of a problem requires:

• Who would make decision?

• What information would be needed?

• From where the information is available?



Frame the problem

Generate & assess alternativesChoose among alternatives

Learn from feedback


3. Generate alternatives: managers must develop feasiblealternative courses of action.

▪ If good alternatives are missed, the resultingdecision is poor.

▪ It is hard to develop creative alternatives, somanagers need to look for new ideas.

Evaluate alternatives: what are the advantages and disadvantages of each alternative?

▪ Managers should specify criteria, then evaluate.Presented By: Viqar A. Usmani


Frame the problem




Learn from feedback


4. Choose among alternatives: managers rank alternatives and decide.

▪ While ranking, all information needs to be considered.


The decision maker must check proposed alternatives against limits,

and if an alternative does not meet them, he can discard it.

Having narrowed down the alternatives which require serious

consideration The decision maker will go for evaluating how each

alternative may contribute towards the objective supposed to be

achieved by implementing the decision


A decision maker can use several sources for identifying

alternatives:

• His own past experiences• Practices followed by others and• Using creative techniques.


Frame the problem




Learn from feedback


5. Implement choose alternative: managers must now carry out the alternative.

▪ Often a decision is made and not implemented.


Once the alternative is selected, it is put into action.

The actual process of decision making ends with the choice of an

alternative through which the objectives can be achieved



Frame the problem




Learn from feedback


6. Learn from feedback: managers should consider what went right and wrong with the decision and learn for the future.

▪ Without feedback, managers never learn from experience and might repeat the same mistake.

When the decision is put into action, it brings certain results.These results must correspond with objectives, the starting point of

decision process, if good decision has been made and implemented

properly.

Thus, results provide indication whether decision making and its

implementation is proper.


Is the possible course of action:

Legal?

Ethical ?

Economical?

Practical?


Is it legal? Managers must first be sure that an alternative is legal both in this country and abroad for exports.

Is it ethical? The alternative must be ethical and not hurt stakeholders unnecessarily.

Is it economically feasible? Can our organization’s performance goals sustain this alternative?

Is it practical? Does the management have the capabilities and resources to do it?



So Far we have seen the decision making as a process, a series of linked activities, But it does not bring about the elements contained within a decision.Without these key elements it is difficult to understand a decision fully or to discriminate between the different types of management decision.


The key elements in a decision are: The decision body. Who is the person or group of people having authority to make the final decision? The decision options. What are the alternative courses of action between which a choice will be made? The uncontrollable factors.What are the factors which will affect the consequences of a decisionbut which cannot be controlled directly by the decision body? The consequences of each option.In what terms can the possible results of each of the alternative optionsbe described?


The Decision Body

By this rather formal term we simply mean the individual or set of individuals who make the decision. We assume that, since decision making involves some commitment to action, the decision body has a reasonable chance of taking the decision through to implementation.The most straightforward decision body to understand is the single decision maker. Where only one decision maker is involved it is that individual’s task to carry through the decision making process, to evaluate the information available and interpret the organization’s objective.When more than one decision maker carries responsibility for the decision, the decision is said to have a “multi-decision maker” decision body. The committee is a typical example of a multi-decision maker decision body.


The Decision Options

Decision options are the alternative courses of action between which the decision body must choose. Options lie at the heart of decision making because, unless there is more than one way to proceed, then there is no choice to be made and therefore no decision.The number of options in a decision can be anything between two and infinity. In this sense the simplest decision is that which involves taking a course of action or doing nothing–the Yes/No decision.options within a decision can turn out to be a mixture taken from a continuum which goes between “totally defined at the beginning of the decision process”, to “completely novel and developed specifically for the decision in question”


Uncontrollable Factors

The uncontrollable factors are those parts of the decision which, although having an influence on the final outcome, cannot be controlled directly by the decision body. For example, if we are deciding how much production capacity to allocate to a new product, one of the factors which will influence our decision is the likely demand for the new product.One way of coping with this is to treat demand as a “state of nature”, that is, a state in which the environment takes after, and independent of, the decision itself.When more than one uncontrollable factor is involved there could be a state of nature corresponding to every possible combination of the levels which the uncontrollable factors can take.


Consequences

For each combination of a decision option and the state of nature, there will be a consequence. Thus, if we have N alternative options and M mutually exclusive “states of nature” there will be N x M possible consequences.


Mack distinguishes between three levels of consequence.

Primary consequences, which are the straightforward statements of the operational results of an event.

Surrogate consequences,which are the interpretation of the event expressed in whatever measures we are using to describe the outcomes.

Evaluated consequences, which are a measure of the worth or utility of the outcome to the decision body. This latter set of consequences will be a reflection of the decision body’s preference or value structure.

DECISION MAKING UNDER VARIOUS CONDITIONS

The conditions for making decisions can be divided into three types.

Namely

a) Certainty

b) Uncertainty and

c) Risk

Virtually all decisions are made in an environment to at least some

uncertainty However;

the degree will vary from relative certainty to great uncertainty.

There are certain risks involved in making decisions.

Presented By: Viqar A.Usmani

a) Certainty:In a situation involving certainty, people are reasonably sure

about what will happen when they make a decision.

The information is available and is considered to be

reliable, and the cause and effect relationships are known.

b) UncertaintyIn a situation of uncertainty, on the other hand, people have only a

meager database, they do not know whether or not the data are

reliable, and they are very unsure about whether or not the situation

may change.Presented By: Viqar A.Usmani

Moreover, they cannot evaluate the interactions of the different

variables.

For example, a corporation that decides to expand its Operation to an

unfamiliar country may know little about

the country, culture, laws, economic environment, and politics.

The political situation may be volatile that even experts cannot predict

a possible change in government.c) RiskIn a situation with risks, factual information may exist, but it may be

incomplete.

To improve decision making One may estimate the objective probability of

an outcome by using, for example, mathematical models On the other hand,

subjective probability, based on judgment and experience may be usedPresented By: Viqar A.Usmani

All intelligent decision makers dealing with uncertainty

like to know the degree and nature of the risk they are

taking in choosing a course of action.

One of the deficiencies in using the traditional

approaches of operations research for problem solving

is that many of the data used in model are merely

estimates and others are based on probabilities.

The ordinary practice is to have staff specialists coming

up with best estimates.Presented By: Viqar A.Usmani

Suggests decision makers use heuristics to deal with bounded rationality. A heuristic is a rule of thumb to deal with complex

situations. If the heuristic is wrong, however, then poor

decisions result from its use.Systematic errors can result from use of an incorrect heuristic. These errors will appear over and over since the

rule used to make decision is flawed.


Prior Hypothesis

Representativeness

Illusion of Control

Escalating Commitment

Cognitive Biases


Prior hypothesis bias: manager allows strong prior beliefs about a relationship between variables and makes decisions based on these beliefs even when evidence shows they are wrong.

Representativeness: decision maker incorrectly generalizes a decision from a small sample or one incident.

Illusion of control: manager over-estimates their ability to control events.

Escalating commitment: manager has already committed considerable resource to project and then commits more even after feedback indicates problems


Many decisions are made in a group setting. Groups tend to reduce cognitive biases and can call

on combined skills, and abilities.There are some disadvantages with groups:Group think: biased decision making resulting

from group members striving for agreement. Usually occurs when group members rally around

a central manger’s idea (CEO), and become blindly committed without considering alternatives.

The group tends to convince each member that the idea must go forward.


Devil’s Advocacy: one member of the group acts as the devil’s advocate and critiques the way the group identified alternatives. Points out problems with the alternative selection.

Dialectical inquiry: two different groups are assigned to the problem and each group evaluates the other group’s alternatives. Top managers then hear each group present their

alternatives and each group can critique the other. Promote diversity: by increasing the diversity in a

group, a wider set of alternatives may be considered.


Devil’s Advocacy

Presentation of alternative

Critique of alternative

Reassessalternative

accept, modify, reject

Dialectic Inquiry

Alter. 1

Debate the two alternatives

Reassessalternatives

accept 1 or 2, combine

Alter. 2


Organizational Learning: Managers seek to improve member’s ability to understand the organization and environment so as to raise effectiveness. The learning organization: managers try to improve the

people’s ability to behave creatively to maximize organizational learning .

Creativity: is the ability of the decision maker to discover novel ideas leading to a feasible course of action. A creative management staff and employees are the key to

the learning organization.Presented By: Viqar A. Usmani

Develop PersonalMastery

Build SharedVision

Build complex, challenging

mental models

Promote TeamLearning

EncourageSystems Thinking



Peter Senge’s vision of a learning organization is a group of people who are continually enhancing their capabilities to create what they want to create.

Peter M. Senge (1947- ) was named a ‘Strategist of the Century’ by the Journal of Business Strategy, one of 24 men and women who have ‘had the greatest impact on the way we conduct business today’

According to Peter Senge (1990: 3) learning organizations are:…organizations where people continually expand their capacity to create the results they truly desire, where new and expansive patterns of thinking are nurtured, where collective aspiration is set free, and where people are continually learning to see the whole together.

Senge suggests top managers follow several steps to build in learning: Personal Mastery: managers empower employees and

allow them to create and explore. Mental Models: challenge employees to find new, better

methods to perform a task. Team Learning: is more important than individual learning

since most decisions are made in groups. Build a Shared Vision: a people share a common mental

model of the firm to evaluate opportunities. Systems Thinking: know that actions in one area of the

firm impacts all others.


Organizations can build an environment supportive of creativity. Many of these issues are the same as for the learning organization.

Managers must provide employees with the ability to take risks.

If people take risks, they will occasionally fail. Thus, to build creativity, periodic failures must be rewarded. This idea is hard to accept for some managers.


Brainstorming: managers meet face-to-face to generate and debate many alternatives.

▪ Group members are not allowed to evaluate alternatives until all alternatives are listed.

▪ Be creative and radical in stating alternatives.▪ When all are listed, then the pros and cons of each

are discussed and a short list created. Production blocking is a potential problem

with brainstorming.▪ Members cannot absorb all information being

presented during the session and can forget their own alternatives.


Nominal Group Technique: Provides a more structured way to generate alternatives in writing.

▪ Avoids the production blocking problem.▪ Similar to brainstorming except that each member is

given time to first write down all alternatives he or she would suggest.

▪ Alternatives are then read aloud without discussion until all have been listed.

▪ Then discussion occurs and alternatives are ranked.


Delphi Technique: provides for a written format without having all managers meet face-to-face.

▪ Problem is distributed in written form to managers who then generate written alternatives.

▪ Responses are received and summarized by top managers.

▪ These results are sent back to participants for feedback, and ranking.

▪ The process continues until consensus is reached. Delphi allows distant managers to participate.



After going through the details lets answer the following question:How central decision making is in management activity?The truth may well be, that we still now know very little of the answers to this question. Although a great deal has been written on the role of the manager, very little of it has examined what managers actually do in practice.In most of the books and written material, authors tends to describe and stress in What managers Ought to do, instead, what managers actually do.We will study in detail, this phenomenon in coming lectures, but lets us have a picture of what is a Manager?


Documents

Decisionmaking in Management