Making DecisionGroup 2MM 105Source: SAMUEL CERTO

ObjectivesTo 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 process4. An appreciation for the various situations in which

decisions are made.5. An understanding of probability theory and

decision trees as decision making tools.

Fundamentals of DecisionsDefinition of decisionTypes of decision1. Programmed Decisions

2. Non-programmed Decisions

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.

Types of DecisionsProgrammed 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.

The Responsibility for Making Organizational Decisions•Scope of the decision•Levels of Management

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

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.

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.

Elements of Decision Situation1. Decision Makers2. Goals to be served3. Relevant Alternatives4. Ordering of Alternatives5. Choice of Alternatives

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. Exploitive3. Hoarding4. Marketing-Oriented

Goals to be served

The goals that decision makers seek to attain. These should often be organizational objectives.

Relevant Alternatives

A relevant alternative is one that is considered feasible for solving an existing problem and for implementation.

Ordering of Alternatives

The decision situation requires a process or mechanism for ranking alternatives from most desirable to least desirable.

Choice of Alternatives

This is the actual choice between available alternatives. This choice establishes what we call decisions.

Decision-Making Conditions•Risk•Uncertainty

Decision-Making Conditions: Risk and UncertaintyRisks 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.

Decision-Making Conditions: Risk and UncertaintyRisk 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.

Decision-Making Conditions: Risk and UncertaintyRisk 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.

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

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

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.

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.

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.

BrainstormingIn 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. 

Analyze the alternativesEvaluating 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.

A manager needs to evaluate each alternative in terms of its:

•Feasibility•Effectiveness•Consequences

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.

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.

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.

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?

Decision-Making Tools•Probability Theory•Decision Trees

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.

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

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

I P EV

Decision Trees

It is a graphic decision-making tool typically used to evaluate decisions involving a series of steps.

John F. Magee

Developed a classic illustration that outlines how decision trees can be applied to a production decision.

Decision point

Chance event

Decision Point 1

2 Years

High Average Demand

Decision Point 2

High Initial Low Subsequent Demand

Low Average DemandA. Expand Plant

High Average Demand

Low Average Demand

Low Average Demand

High Average Demand

B. No Change in PlantInitially

Low Demand

Initially High Demand

B. Build Small Plant

A. Build Big Plant

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.