decision making - engineering economics and financial accounting
DESCRIPTION
BE.CS FINAL YEAR & IT THIRD YEAR, ANNA UNIVERSITY, CHENNAITRANSCRIPT
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