decision making

Decision MakingProblem Solving and Problem Solving and Decision MakingDecision Making

• Problem

• Problem Solving

• Decision Making


• Problem

• A discrepancy (difference) between an existing and desired state of affairs.

• Characteristics of Problems

* A problem becomes a problem when a manager becomes aware of it.

* there is a pressure to solve the problem.

* the manager must have the authority, information, or resources needed to solve the problem.


• Problem– Exists whenever objectives are not being met.– What is happening vs. what is wanted to happen

• Problem Solving– The process of taking corrective action to meet

objectives.

• Decision Making– The process of selecting an alternative course of

action that will solve a problem.

– First decision is whether to take corrective action.


• Decision making Basics

• Characteristics of Effective Decision Making

• Benefits of Effective Decision making

Decision MakingDecision Making Basics Decision Making Basics

“ the process of responding to a problem by searching for and selecting a solution or course of action that will create value for organisational stakeholders”.

The word decision is defined as:

“A choice between two or more alternatives”.

Thus decision-making can be defined as:

“the selection of a course of action from among alternatives ”.

Decision MakingDecision Making Basics Decision Making Basics

The decision-making process involves The decision-making process involves

identifying alternatives,identifying alternatives,

analyzing their consequences and the analyzing their consequences and the outcomes you wantoutcomes you want

and making the best choiceand making the best choice

Decision MakingDecision-making Basics Decision-making Basics Decisions are made:Decisions are made:

to solve problemsto solve problems – If several alternative remedies are available, – If several alternative remedies are available, you have to choose the best. you have to choose the best.

to move organizations forwardto move organizations forward – These decisions are frequently – These decisions are frequently complex and difficult, so it's important you have effective complex and difficult, so it's important you have effective decision-making skills. decision-making skills.

to cover up mistakesto cover up mistakes – This can have negative consequences – This can have negative consequences because decisions aren't made for the good of other people or the because decisions aren't made for the good of other people or the organization. organization.

to improve one's standingto improve one's standing – A desire to gain prestige or impress – A desire to gain prestige or impress others isn't a good reason to make a decision. others isn't a good reason to make a decision.

to facilitate fitting into a peer groupto facilitate fitting into a peer group – Sometimes people make – Sometimes people make popular or unpopular decisions because they think they will help popular or unpopular decisions because they think they will help them fit in or further their careers. them fit in or further their careers.

Decision Making

Characteristics of Characteristics of Effective Decision-making Effective Decision-making

• 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 straight-forward, reliable, easy to use, and flexible.

Decision MakingBenefits of Effective Benefits of Effective Decision-makingDecision-making

Effective decision making is important for personal Effective decision making is important for personal and professional success. and professional success.

Good decision making is also essential for career Good decision making is also essential for career advancement. advancement.

Good decisions move teams and organizations Good decisions move teams and organizations forward, give them competitive advantage, and forward, give them competitive advantage, and help them achieve their goals. help them achieve their goals.

An effective decision maker is more confident An effective decision maker is more confident about the outcome of his decisions. This is because about the outcome of his decisions. This is because he have carefully analyzed the potential he have carefully analyzed the potential consequences of your actions. consequences of your actions.

Decision Making

Decision MakingDecision Making• Structures

• Conditions

• Models

• Approaches• Styles

• Characteristics of Decision maker

Decision Making Decision Decision Structures/TypesStructures/Types

• Programmed Decisions– Recurring or routine situations in which the

decision maker should use decision rules or organizational policies and procedures to make the decision.

• Non-programmed Decisions– Significant and nonrecurring and non-

routine situations in which the decision maker should use the decision-making model.

Decision Making Decision Making Decision Making ContinuumContinuum

Non-programmed Decision:Significant, nonrecurring, and non-routine(Longer period of time to make decisions)

Non-programmed Decision:Significant, nonrecurring, and non-routine(Longer period of time to make decisions)

Programmed Decision:Non-significant, recurring, and routine

(Shorter period of time to make decisions)

Programmed Decision:Non-significant, recurring, and routine

(Shorter period of time to make decisions)

Programmed Decisions

A decision that is repetitive and routine

A definite method for its solution can be established

Does not have to be treated a new each time it occurs

Procedures are often already laid out

Examples: pricing standard customer orders, determining billing dates, recording office supplies etc.

Non-programmed Decisions

A decision that is novel (new or unique) or Ill structured

No established methods exist, because it has never occurred before or because

It is too complex


Organizational Levels

Nature ofProblems

Nature ofDecision-making


Are “tough” decisions that involve risk and uncertainty and

call for entrepreneurial abilities

Such decisions draw heavily on the analytical abilities of the manager

Examples: Moving into a new market, investing in a new unproven technology, changing strategic direction

Decision Making Decision making Decision making ConditionsConditions

• Certainty– Each alternative’s outcome is known in

advance.

• Risk– Probabilities can be assigned to each

outcome.

• Uncertainty– Lack of information or knowledge makes the

outcome of each alternative unpredictable such that no probabilities can be determined.

Decision Making Decision Making Decision Making Conditions ContinuumConditions Continuum

Decision Making

Decision Making ModelsDecision Making Models

Model

“A simplified representation or description of a system or complex entity”

Examples

A model of a building

A globe (Earth model)

Decision Making

Decision Making ModelsDecision Making Models• Are less expensive and disruptive than

experimenting with the real world system• Allow operations managers to ask “What if” types of

questions• Are built for management problems and encourage

management input• Force a consistent and systematic approach to the

analysis of problems• Require managers to be specific about constraints

and goals relating to a problem• Help reduce the time needed in decision making

Decision Making

Decision Making ModelsDecision Making Models

• Rational Model (Classical Model)– The decision maker attempts to use

optimizing, selecting the best possible alternative.

• The Bounded Rationality Model– The decision maker uses satisficing,

selecting the first alternative that meets the minimal criteria for solving the problem.

Decision Making

Decision making is grouped into two broad Decision making is grouped into two broad categories.categories.

Authoritative style Authoritative style - similar to the authority or - similar to the authority or expert style expert style

DemocraticDemocratic - The remaining three styles – - The remaining three styles – consultative, traditional majority or voting, and consultative, traditional majority or voting, and consensus consensus

The Decision Making Approaches

Decision Making

The four decision-making styles The four decision-making styles

the authority or expert style the authority or expert style the consultative style the consultative style the traditional majority or voting style, and the traditional majority or voting style, and the consensus style the consensus style

The Decision Making Styles

Decision Making

The authority or expert style The authority or expert style

The authority or expert style is used most in a The authority or expert style is used most in a business environment. business environment.

If you use the authority or expert style of decision If you use the authority or expert style of decision making, you should discuss the decision you make making, you should discuss the decision you make with those affected by it. with those affected by it.

Advantage of the authority or expert style is that a Advantage of the authority or expert style is that a decision can be made quickly,decision can be made quickly,

A disadvantage is that others aren't involved. A disadvantage is that others aren't involved.

The quality of the decision that's made depends solely The quality of the decision that's made depends solely on the knowledge and expertise of one person. on the knowledge and expertise of one person.


Decision MakingTypes of Decision Makers* Directive # Use minimal information and consider few alternatives.

* Analytic # Make careful decisions in unique situations.

* Conceptual # Maintain a broad outlook and consider many alternatives in making decisions.

* Behavioral # Avoid conflict by working well with others and being receptive to suggestions.

Decision Styles: Directive

Directive

Represents low tolerance for ambiguity and uncertainty

Reflects rational thinking of the manager

Such decision styles are more suitable for routine procedural tasks

Decision Styles: Analytic

Analytic

Analytical style is also a rational style of thinking

Involves a very high tolerance for ambiguity and uncertainty

Such managers generally seek detailed information before making a decision

Decision Styles: Conceptual

Conceptual

Conceptual style also reflects a creative and intuitive way of thinking

Conceptual style managers have a very broad vision and generally look at numerous alternatives for decision-making

Focused on the long run and often result in creative outcomes or alternatives

Decision Styles: Behavioural

Behavioural

Represents a creative way of thinking

Involves a low tolerance for ambiguity or uncertainty

Managers with a behavioural style introduce “new” ways of doing things

Decision Making

The consultative style The consultative style

The consultative style involves The consultative style involves incorporating input from others in the incorporating input from others in the decision you make. decision you make.

The consultative approach to decision The consultative approach to decision making takes longer than the authority or making takes longer than the authority or expert style but generally results in better, expert style but generally results in better, more informed decisions being made. more informed decisions being made.

It also leads to a greater sense of trust It also leads to a greater sense of trust because others feel that they've been part because others feel that they've been part of the decision-making process. of the decision-making process.


Decision Making

The consensus style The consensus style

The consensus style is a "we all decide" The consensus style is a "we all decide" approach. It involves including all affected approach. It involves including all affected parties in the decision-making process and parties in the decision-making process and adopting a final decision only when adopting a final decision only when everyone agrees that it's the best one. everyone agrees that it's the best one.

The consensus style incorporates the The consensus style incorporates the different opinions and perspectives of all different opinions and perspectives of all individuals. individuals.

The consensus style is often the best style The consensus style is often the best style to use if you really want all individuals to use if you really want all individuals concerned to be involved. concerned to be involved.


Decision Making

When you use the consensus style, it's not When you use the consensus style, it's not necessary that everyone agrees completely. necessary that everyone agrees completely. However, once a decision is made, everyone must However, once a decision is made, everyone must be able to answer yes to two important questions: be able to answer yes to two important questions:

"Am I able to live with the decision made?”"Am I able to live with the decision made?”

"Will I be able to support the decision that's "Will I be able to support the decision that's made?“ made?“


Decision-making Process

Identifying a problem

Identifying decision criteria

Allocating weights to criteria

Developing alternatives

Analyzing alternatives

Selecting an alternative

Implementing the alternative

Evaluation (of decision effectiveness)

Problem Definition

Problem is a discrepancy (difference) between an existing and a desired state.

Example:

“The manager has resigned, and we need another manager”

Here the phrase “manager has resigned” reflects the current state while “need another manager” represents a desired state.

Identifying Decision Criteria

The word criteria, is defined as “a standard by which something can be judged”.

A decision criteria therefore, is the basis of a decision, which outlines the relevant and important factors for a decision. And implicitly, it also defines what is not important.

Decision Criteria: Example

In the above-cited scenario, the decision criteria may include the following factors:

Relevant qualifications

Leadership skills

Communication skills

Planning and analytical skills

Professional experience

Allocating Weights to Criteria

The next step in the decision making process is prioritization.

Prioritization is achieved by assigning quantitative weights to each criteria element.

The weightage defines the relative significance of each element.

Developing Alternatives

Involves defining the possible alternatives (or choices) that would resolve the problem.

In our case, the alternatives would be a list of candidates or job applicants.

Analyzing Alternatives

Alternatives are rated and analyzed on the basis of the criteria

The rating can be based on a specified scale, say 1 – 5 etc.

Rating may be subjective in nature and thus,may depend on the judgment of the individual(s)

Selecting an alternative

Involves choosing the best alternative, based on the above rating and analysis

Generally implies selecting the alternative with the highest score.

Implementing the Alternative

Putting the decision into action

Involves clear communication of the decision to all concerned and obtaining their commitment

Evaluation

Evaluation forms an integral part of any process

Involves evaluation of the outcome based on the desired goal and criteria

Involves assessing the effectiveness and efficiency of the outcome (or the entire process)

In case of any undesired results, each step of the process is carefully reviewed to trace the root causes

Decision MakingThe Decision Making The Decision Making Process Process

A basic decision-making model includes five A basic decision-making model includes five sequential steps: sequential steps:

1.1.establishing a context for successestablishing a context for success

2. framing the issue properly2. framing the issue properly

3. generating alternatives3. generating alternatives

4. evaluating alternatives4. evaluating alternatives

5. choosing the best alternative5. choosing the best alternative


A basic decision-making model includes five A basic decision-making model includes five sequential steps: sequential steps:

1.1.establishing a context for successestablishing a context for success – – Establish a context in which to address the Establish a context in which to address the problem effectively. problem effectively.

– involve the right peopleinvolve the right people– keep the decision group small, keep the decision group small, – encourage participation, encourage participation, – choose diverse settings for meetingschoose diverse settings for meetings– avoid advocacy. avoid advocacy.


2. framing the issue properly2. framing the issue properly

To avoid misframing question initial perceptions. To avoid misframing question initial perceptions. Try to pinpoint your and others' biases. Try to pinpoint your and others' biases. Seek out the perspectives of other team members Seek out the perspectives of other team members and and try to approach the issue from several angles. try to approach the issue from several angles.


3. Generating alternatives3. Generating alternatives

Try to come up with as many ways of Try to come up with as many ways of understanding the situation as you can.understanding the situation as you can.

Brainstorm - write down as many possible Brainstorm - write down as many possible

alternatives as you can, without criticizing or alternatives as you can, without criticizing or judging them. judging them.

Involve creative peopleInvolve creative people

Your list should include as many alternatives as Your list should include as many alternatives as possible, but it shouldn't be overwhelming. possible, but it shouldn't be overwhelming.


4. evaluating alternatives4. evaluating alternatives

You now need to evaluate your You now need to evaluate your alternatives. alternatives.

This involves determining how well each This involves determining how well each meets your objective. meets your objective.

Several tools enable you to reach informed Several tools enable you to reach informed decisions, including a decisions, including a prioritization matrixprioritization matrix, , a a trade-off tabletrade-off table, a , a decision treedecision tree, and , and software programssoftware programs. .


5. choosing the best alternative5. choosing the best alternative

Once you've considered the merits of each Once you've considered the merits of each alternative, you need to choose the best. alternative, you need to choose the best.

An important aspect of this is that you need to An important aspect of this is that you need to know when to end the deliberations. If you make know when to end the deliberations. If you make a decision too quickly, you might miss a better a decision too quickly, you might miss a better alternative. If you take too long, you might miss alternative. If you take too long, you might miss valuable opportunities. valuable opportunities.

You'll then need to turn the decision into action. You'll then need to turn the decision into action.

Decision Making

Influential factors in decision making Influential factors in decision making

The time that's availableThe time that's available The importance of a decisionThe importance of a decision Required levels of knowledgeRequired levels of knowledge Whether there's a need for buy-in fromWhether there's a need for buy-in from ExperienceExperience


Decision Making

Adapting your style Adapting your style

In each decision-making situation, you need to In each decision-making situation, you need to weigh up different factors and then decide which weigh up different factors and then decide which decision-making style best suits the situation.decision-making style best suits the situation.

The next time you're faced with a decision, The next time you're faced with a decision, consider factors such as the time constraints, the consider factors such as the time constraints, the experience and knowledge of those around you, experience and knowledge of those around you, the importance of the decision, and the level of the importance of the decision, and the level of buy-in required. Then use these factors to help buy-in required. Then use these factors to help you choose the decision-making style that is most you choose the decision-making style that is most appropriate. appropriate.


Decision Making

Decision Modeling and Decision Modeling and AnalysisAnalysis

represents a general approach represents a general approach to decision makingto decision making

suitable for a wide range of suitable for a wide range of operations management operations management decisionsdecisions– capacity planningcapacity planning– product and service designproduct and service design– equipment selection equipment selection – location planning location planning

Decision MakingElements for Decision Elements for Decision AnalysisAnalysis

1. There is a random variable with a set of 1. There is a random variable with a set of possible future conditions that will have apossible future conditions that will have abearing on the results of the decision.bearing on the results of the decision.

2. There is a decision with a list of 2. There is a decision with a list of alternatives for the manager to choose alternatives for the manager to choose from.from.

3. A known payoff for each alternative under 3. A known payoff for each alternative under each possible future condition.each possible future condition.

Decision MakingDecision Analysis ProcessDecision Analysis Process1.1. Identify the possible future conditionsIdentify the possible future conditions

These are called These are called states of naturestates of nature for the random for the random variable.variable.

– demand will be low, medium, or high;demand will be low, medium, or high;– the number of contracts awarded will be one, two, or three; the number of contracts awarded will be one, two, or three; – the competitor will or will not introduce a new productthe competitor will or will not introduce a new product

2. Develop a list of possible alternatives for the 2. Develop a list of possible alternatives for the decision one of which may be to do nothing.decision one of which may be to do nothing.

3. Determine or estimate the payoff associated 3. Determine or estimate the payoff associated with each alternative for every possible future with each alternative for every possible future condition.condition.

4. Estimate the likelihood of each possible future 4. Estimate the likelihood of each possible future condition.condition.

5. Evaluate alternatives according to some 5. Evaluate alternatives according to some decision criterion (e.g., maximize expected decision criterion (e.g., maximize expected profit), and select the best alternative.profit), and select the best alternative.

Decision MakingPayoff TablePayoff Table Contains the Contains the

summary of summary of information for a information for a decisiondecision

Shows the payoffs Shows the payoffs for each for each alternative under alternative under the various the various possible states of possible states of nature. nature.

Facilitates Facilitates comparison of comparison of alternatives.alternatives.

Places all Places all alternatives on a alternatives on a comparable basis.comparable basis.

Problem: Select one of the alternatives, taking the net present values into account.

Note: The states should be mutually exclusive andcollectively exhaustive, thus the probabilities must add to 1.00.

Decision MakingExpected Monetary Value Expected Monetary Value criterion (EMV)criterion (EMV)

The expected value is the sum of the payoffs The expected value is the sum of the payoffs times probabilities for an alternativetimes probabilities for an alternative

The probabilities for each state of nature must be The probabilities for each state of nature must be givengiven

The expected value is computed for each The expected value is computed for each alternative, and alternative, and

The one with the highest expected value is The one with the highest expected value is selected. selected.

Most appropriate when a decision maker is Most appropriate when a decision maker is neither risk averse nor risk seeking, but is risk neither risk averse nor risk seeking, but is risk neutral.neutral.

It provides an indication of the long-run, average It provides an indication of the long-run, average payoffpayoff

Decision MakingExpected Monetary Value Expected Monetary Value criterion (EMV)criterion (EMV)

Decision Making DECISION TREESDECISION TREES

A A decision tree decision tree is a schematic representation of is a schematic representation of the decision variables, random variables and the decision variables, random variables and their payoffs. their payoffs.

The term gets its name from the treelike The term gets its name from the treelike appearance of the diagram appearance of the diagram

Decision trees are particularly useful for Decision trees are particularly useful for analyzing situations that involve analyzing situations that involve sequential sequential decisions. decisions.

A decision tree is composed of a number of A decision tree is composed of a number of nodesnodes that have that have branchesbranches emanating from emanating from themthem

Decision Making DECISION TREESDECISION TREESNotationsNotations

Square nodesSquare nodes denote denote decision pointsdecision points Circular nodesCircular nodes denote denote chance eventschance events. .

Reading Decision TreesReading Decision Trees

Read the tree from left to rightRead the tree from left to right– Branches leaving square nodes represent alternatives; Branches leaving square nodes represent alternatives; – branches leaving circular nodes represent chance events (i.e., branches leaving circular nodes represent chance events (i.e.,

the states of nature).the states of nature).

After the tree has been drawn, it is analyzed from After the tree has been drawn, it is analyzed from right to leftright to left; ; that is, starting with the last decision that might be madethat is, starting with the last decision that might be made

For each decision, choose the alternative that will yield the For each decision, choose the alternative that will yield the greatest return (or the lowest cost). greatest return (or the lowest cost).

If chance events follow a decision, choose the alternative that If chance events follow a decision, choose the alternative that has the highest expected monetary value (or lowest expected has the highest expected monetary value (or lowest expected cost).cost).

Decision Making DECISION TREESDECISION TREESA manager must decide on the size of a video arcade to A manager must decide on the size of a video arcade to construct. The manager has narrowed the choices to two: large construct. The manager has narrowed the choices to two: large or small. Information has been collected on payoffs, and the or small. Information has been collected on payoffs, and the following decision tree has been constructed. Analyze the following decision tree has been constructed. Analyze the decision tree and determine which initial alternative (build decision tree and determine which initial alternative (build small or build large) should be chosen in order to maximize small or build large) should be chosen in order to maximize expected monetary value.expected monetary value.

Decision Making DECISION TREESDECISION TREES Analyze the decisions from right Analyze the decisions from right

to left:to left:

1.1. Determine which alternative Determine which alternative would be selected for each would be selected for each possible second decision. possible second decision.

2. Determine the product of the 2. Determine the product of the chance probabilities and their chance probabilities and their respective payoffs for the respective payoffs for the remaining branches:remaining branches:

3. Determine the expected value of each initial alternative:

Decision MakingInfluence DiagramsInfluence Diagrams InfluenceInfluence diagrams graphically diagrams graphically

represent complex situations with represent complex situations with many random variables (events) many random variables (events) and one or more decision variable. and one or more decision variable.

They are more concise than They are more concise than decision trees decision trees

They do not show the alternatives They do not show the alternatives at the decision nodes and states of at the decision nodes and states of nature at the chance events.nature at the chance events.

Constructing and validating the Constructing and validating the influence diagram improves influence diagram improves communication and consensus communication and consensus building at the beginning of the building at the beginning of the decision modeling process.decision modeling process.

The The circlescircles show the random show the random variables (chance events) and the variables (chance events) and the rounded squaresrounded squares show the payoff show the payoff or part of it.or part of it.

Decision Making

Expected value of perfect Expected value of perfect information (EVPI)information (EVPI)——

-the difference between the expected payoff with -the difference between the expected payoff with perfect information and the expected payoff under perfect information and the expected payoff under risk.risk.

To determine the EVPI, one can compute the To determine the EVPI, one can compute the expected payoff under certainty andexpected payoff under certainty and

subtract the expected payoff under risk. subtract the expected payoff under risk.

Decision Making

Sensitivity analysis Sensitivity analysis

Sensitivity analysis Sensitivity analysis provides a range of provides a range of probability over which the choice of alternativesprobability over which the choice of alternatives

would remain the samewould remain the same

Example:

Given the following payoff table, determine the range of probability for state of nature #2, that is, P(2), for which each alternative is optimal using the expected-value criteria.

Decision MakingSensitivity analysis Sensitivity analysis

decision making

Documents

decision making styles

decision making approaches

decision makingdecision

decision thats

decision makingthe authority

consultative style

expert style democratic

authoritative style