managament chapter 6

8/6/2019 managament Chapter 6

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Decision Making

Decision Making a choice from two or more alternatives.1. Top Managers make the decisions about the

organizational goals, where to locate theresources, what products and services to offer.

2. Middle and lower level managers make thedecisions about production schedule, problems,pay rises, disciplining the employees.

3. Decisions are made by individuals and groups ateach level in the organization.


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The Decision-Making Process

Identifying a problem and decisioncriteria and allocating weights to thecriteria (first three steps)Developing, analyzing, and selecting

an alternative that can resolve theproblem (Next three steps)Implementing the selected alternative

Evaluating the decisionseffectiveness


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THE DECISION MAKING PROCESS

IDENTIFICATION OF

A PROBLEM

ALLOCATION OFWEIGHT

CRITERIA

ANALYSIS OF

ALTERNATIVES

DEVELOPMENT OF

ALTERNATIVE

IDENTFICATION OF A

DECISION CRITERIA

IMPLEMENTATION

OF

THE ALTERNATIVE

SELCTION OF AN

ALTERNATIVE

EVALUATION OF

DECISION

EFFECTIVENESS


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Step 1: Identifying the Problem

Problem

A discrepancy or disparity between an existingand desired state of affairs.

All the problems are not obvious and themanagers must be skillful enough to identify theproblems from the symptoms.

For example a decrease of 25% in the sales may

be a symptom of a true problem such assubstandard products, poor advertising or highprices.


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Characteristics of Problems

The Managers can be better at the identification if they can

understand three major characteristics of problems.

A problem becomes a problem when a manager

becomes aware of it. (Proper MIS)

There is pressure to solve the problem. (Customer

complaints, Management financial targets,

competitors actions etc)

The manager must have the authority, information, or

resources needed to solve the problem. (Areas ofinfluence and Areas of Concern)


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Step 2: Identifying Decision Criteria

Decision criteria are factors that areimportant (relevant) to resolving theproblem.

Costs that will be incurred (investmentsrequired and the available resources).

Risks likely to be encountered (chance

of failure).Outcomes that are desired (growth

potential of the firm).


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Step 3: Allocating Weights to the Criteria

Decision criteria are not of equal importance

Assigning a weight to each item places

the items in the correct priority order of

their importance in the decision makingprocess.

The simple approach is to give the most

important criterion a weight of 10 and toassign weights to the rest against that

standard.


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IDENTIFICATION OF DECISION CRITERIA AND ALLOCATION OF

WEIGHTS (DECISION FOR FRANCHISE)

1. * START UP COSTS

1. * FINANCING AVAILABILITY

1. * FAILURE RATE

1. * GROWTH POTENTIAL

2. * OPEN GEORAPHICALLOCATION

1. * FRANCHISOR HISTORY

1. * FINANCIALQUALIFICATION

* FRANCHISOR SUPPORT

START UP COSTS 10

FRANCHISE SUPPORT 08 FINANCIAL

QUALIFICATION 06

OPENGEOGRAPHICALLOCATION 04

FRANCHISORHISTORY 03


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Step 4: Developing Alternatives

Identifying viable alternatives

Alternatives are listed (without

evaluation) that can resolve t

heproblem. (McDonald, KFC, AFC, Fri

Chick etc)


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Step 5: Analyzing Alternatives

Appraising each alternatives strengths

and weaknesses

An alternatives appraisal is based on its

ability to resolve the issues identified insteps 2 and 3. (Identifying the decisioncriteria and allocating weight to decisioncriteria).

Weights are assigned to each alternativeupon the basis of decision criteria.


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Step 6: Selecting an Alternative Choosing the best alternative

The alternative with the highest total weight ischosen.

Step 7: Implementing the Decision

Putting the c

hosen alternative into action

The decision is conveyed to those who will

implement the decision and getting their

commitment.

If the people who carry out the decision areinvolved in decision making will more likely to

support the outcome than if they are told

what to do.


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Step 8: Evaluating the Decisions

Effectiveness

The soundness of the decision is judged by itsoutcomes How effectively was the problem resolved by outcomes

resulting from the chosen alternatives?

If the problem was not resolved, what went wrong?

Was the problem incorrectly identified? Whether there wasmistake in identifying the alternatives? Whether the right

alternative was selected and implemented?

Answers of these question take the managers tothe earlier steps.


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THE MANAGERS AS DECISIONS MAKER

MAKING DECISIONS IS SYNONYMOUS WITHMANAGING. DECISIONS ARE MADE IN THE EACHMANAGEMENT FUNCTIONS.

PLANNING: Organizational long term and short

term objectives, Strategies, The individual goalsORGANIZING: Job Designing, Degree of

Centralization, and structure

LEADING: Motivation, Leadership style

CONTROLLING: What activities should becontrolled and how. MIS system, Significance ofdeviation


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Making Decisions: How decisions are made

RationalityManagers make consistent, value-maximizing choices

with specified constraints.

Assumptions are that decision makers

Are perfectly rational, fully objective, and logical.

Have carefully defined the problem and identifiedall viable alternatives.

Have a clear and specific goal.

Will select the alternative that maximizes outcomesin the organizations interests rather than in theirpersonal interests.


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Making Decisions (contd)

Bounded RationalityManagers make decisions rationally, but are limited

(bounded) by their ability to process information.

Because they can not analyze all information on all

alternative, they satisfice (Accepting the solution thatis good enough) rather maximize.

Decision making may also be influenced bythe organizational culture, internal politics and

escalation of commitment. (an increasedcommitment to previous decisions)


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Bounded Rationality: Assumptions are that decisionmakers

Will not seek out orhave knowledge of all

alternatives.

Will satisficechoose the first alternative

encountered that satisfactorily solves theproblemrather than maximize the outcome of

their decision by considering all alternatives

and choosing the best.


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Influences on Decision Making

Escalation of Commitment Increasing or continuing a commitment to

previous decision despite mounting evidence thatthe decision may have been wrong.

The Role of Intuition

Intuitive decision makingMaking decisions on the basis of experience,

feelings, and accumulated judgment. Intuitional decision making complement with

the rational decision making. For example amanager who faces a similar type of problemhe has encountered before, he may make thedecision upon the basis of past experiencerather than making systematic analysis.


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Types of Problems and Decisions

Structured Problems

Involve goals that clear,

Are familiar (have occurred before),

Are easily and completely definedinformationabout the problem is available and complete,

(Purchase returns, supplies are late or studentdropping a class.)

Programmed DecisionA repetitive decision that can be handled by a

routine approach.


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Types of Programmed Decisions

A PolicyA general guideline for making a decision about a

structured problem.

A ProcedureA series of interrelated steps that a manager can

use to respond (applying a policy) to a structuredproblem.

A Rule

An explicit statement that limits what a manageror employee can or cannot do in carrying out thesteps involved in a procedure.


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Policy, Procedure and Rule Example

Policy

Accept all customer-returned merchandise.

Bank will pay all the liabilities of a deceased customer to hisor her heirs.

Procedure Follow all steps for completing merchandise return

documentation.

Follow the steps and complete required documentation.

Rules Managers must approve all refunds over $50.00.

No credit purchases are refunded for cash.

Manager can make the payment up to RS. 10,000/- only.


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Problems and Decisions (contd)

Unstructured Problems Problems that are new or unusual and for which information

is ambiguous or incomplete. Problems that will require custom-made solutions.

Nonprogrammed Decisions

Decisions that are unique and nonrecurring. Decisions that generate unique responses. Managers at lower level normally face usual, repetitive and

structured problems which are handled by routine decisionsas they move up in hierarchal level the nature of problemsbecome more unstructured which require custom made

solutions. This is also called integration between problems ,decisionsandorganizational level.


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Decision-Making Conditions

Certainty

A ideal situation in which a manager canmake an accurate decision because theoutcome of every alternative choice is known.

(Example Fix rate of return over deposits) RiskA situation in which the manager is able to

estimate the likelihood (probability) of outcomes

of a decision( result from the choice of particularalternatives. Production of large number of softdrinks expecting very hot summers)


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Decision-Making Conditions

Uncertainty

Limited or information prevents estimation ofoutcome probabilities for alternatives associatedwith the problem and may force managers to rely

on intuition, hunches, and gut feelings.Maximax: the optimistic managers choice to

maximize the maximum payoff

Maximin: the pessimistic managers choice to

maximize the minimum payoffMinimax: the managers choice to minimize his

maximum regret.


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Decision-Making Styles

Dimensions of Decision-Making Styles

Ways of thinking

Rational, orderly, and consistent

Intuitive, creative, and uniqueTolerance for ambiguity

Low tolerance: require consistency and order

High tolerance: multiple thoughts

simultaneously


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Decision-Making Styles (contd)

Types of Decision MakersDirective

Use minimal information and consider fewalternatives.

AnalyticMake careful decisions in unique situations.

ConceptualMaintain a broad outlook and consider many

alternatives in making long-term decisions.

BehavioralAvoid conflict by working well with others and

being receptive to suggestions.


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Decision-Making Biases and Errors

Heuristics

Using rules of thumb to simplify decisionmaking.

Overconfidence BiasHolding unrealistically positive views of ones self

and ones performance.

Immediate Gratification Bias

Choosing alternatives that offer immediaterewards and that to avoid immediate costs.


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(contd) Anchoring EffectFixating on initial information and ignoring

subsequent information.

Selective PerceptionSelecting organizing and interpreting events

based on the decision makers biasedperceptions.

Confirmation BiasSeeking out information that reaffirms past

choices and discounting contradictoryinformation.


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(contd) Framing BiasSelecting and highlighting certain aspects of a

situation while ignoring other aspects.

Availability BiasLosing decision-making objectivity by focusing

on the most recent events.

Representation Bias

Drawing analogies and seeing identical situationswhen none exist.

Randomness BiasCreating unfounded meaning out of random

events.


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(contd) Sunk Costs Errors

Forgetting that current actions cannot influencepast events and relate only to future

consequences.

Self-Serving Bias

Taking quick credit for successes and blamingoutside factors for failures.

Hindsight Bias

Mistakenly believing that an event could havebeen predicted once the actual outcome is known(after-the-fact).


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Decision Making for Todays World

Guidelines for making effective decisions

Know when its time to call it quits.

Practice the five whys.

Be an effective decision maker. Habits ofhighly reliable organizations (HROs)

Are not tricked by their success.

Defer to the experts on the front line.

Let unexpected circumstances provide the solution.Embrace complexity.

Anticipate, but also anticipate their limits.


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Characteristics of an Effective Decision-

Making Process It focuses on what is important.

It is logical and consistent.

It acknowledges both subjective and objective

thinking and blends analytical with intuitive thinking. It requires only as much information and analysis as

is necessary to resolve a particular dilemma.

It encourages and guides the gathering of relevant

information and informed opinion. It is straightforward, reliable, easy to use and

flexible.

managament chapter 6

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