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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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Decision-Making Biases and Errors
(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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Decision-Making Biases and Errors
(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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Decision-Making Biases and Errors
(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.