Dr.K.Baranidharan

Present by…

Engineering Economics &

Financial Accountingment

Ee&fa2April 11, 2023

Managerial Decision Making

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Managerial Decision Making Decision making is not easy

It must be done amid ever-changing factors unclear information conflicting points of view

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Decisions and Decision Making

Decision = choice made from available alternatives

Decision Making = process of identifying problems and opportunities and resolving them

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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

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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.

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Impotance DM is an important aspect of

planningWithout D nothing can be donePerforming 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.

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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

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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.

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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,

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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.

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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.,

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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 actionExample: implementing the major

decision developing a new product, some minor decision as regard to the colour, size, packing

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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

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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

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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 -

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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

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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

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Three Decision-Making Models

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Classical Model

Administrative Model

Political Model

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 logicNormative = describes how a manager should

and provides guidelines for reaching an ideal decision

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Logical decision in the organization’s best economic interests

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

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Herbert A. Simon

How nonprogrammed decisions are made--uncertainty/ambiguity

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

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How nonprogrammed decisions are made--uncertainty/ambiguity

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

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Closely resembles the real environment

Characteristics of Classical, Political, and Administrative Decision Making Models

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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

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

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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

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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

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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

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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

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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

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Definiation DA is the discipline of evaluating

complex alternatives in terms of values and uncertaintity.

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Decision Analysis

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.

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.

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.

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

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

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

UnitPrice

Unit Sold = 0.5 x amount used in advertisement Expenses = unit cost x units sold + fixed cost

Income

Expenses

Profit

Example: An Influence Diagram for the Profit Model

~Amount used in advertisement

Profit

Income

Expense

Unit Price

Units Sold

Unit Cost

Fixed Cost

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.

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.

Branches from a circle represent the possible outcome of a chance event.

The consequence is specified at the ends of the branches.

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 LostInvest

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.

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

Dr.K.Baranidharan

thank youK YOU