Paper-2 Management (Code:17)
Unit -1
Topic: Decision Making – Concept, Process, Techniques and
Tools
Decision
Making: Decision making is the act of choosing one alternative
from among a set of alternatives. Decision making process includes recognizing
and defining the nature of a decision situation, identifying alternatives,
choosing the best alternative, and putting it into practice.
Types
of Decisions:
Programmed decisions
– Relatively structured or recur with some frequency or both. They are made in
accordance with some policy, rule or procedure so that they do not have to be
handled each time they occur.
Non-Programmed decisions –
Relatively unstructured and occur much less often that programmed decisions. These
are new and complex decision decisions that require creative solutions
(non-repetitive).
Gresham’s Law
of decision making: There is a general tendency for
programmed decisions to overshadow non-programmed decisions.
Routine decisions
- Supportive to company’s operations and require little deliberation and
money. Relates to lower level of
management
Strategic decisions
– Central to company’s operations and require lengthy deliberation and large
funds. Relates to higher level of management
Individual decisions –
When the problem is of routine nature, analysis of variable is simple and
definite procedures to deal the problem already exist
Group decisions
– Important and strategic decisions are discussed in group
Simple and Complex decisions-
Based on the type of complexity and degree of certainty
Major and minor decisions
– Depends on :
·
Degree of futurity of decision
·
Impact of the decision on other
functional areas
·
Qualitative factors that enter the decision
·
Recurrence of decisions
Decision
– Making Conditions:
Decision making under certainty: When
the decision maker knows with reasonable certainty what the alternatives are
and what conditions are associated with each alternative, a state of certainty
exists. Decision making under risk:
Under a state of risk, the availability of each alternative and its potential
payoffs and costs are all associated with probability estimates. Decision making under uncertainty:
When the decision maker does not know all the alternatives, the risks
associated with each, or the likely consequences of each alternative, the
decision is made under a state of uncertainty.
Models of Decision Making:
« The Classical Model of Decision Making
- Rational model:
The classical decision model is a prescriptive approach
that tells managers how they should make decisions. This model is based on the
following assumptions:
Decision makers have complete
information about the decision situation and the possible alternatives
They can effectively eliminate
uncertainty to achieve a decision condition of certainty
They evaluate all aspects of the
decision situation logically and rationally
They make decisions that are in the
organization’s best interests
« Evidence-based Decision making model - Jeffrey Pfeffer and
Bob Sutton:
A renewed reliance on
rationality in managerial decision making—an approach called evidence-based
management (EBM) in which management decisions, should be based on the best evidence,
managers should systematically learn from experience, and organizational
practices should reflect sound principles of thought and analysis. They define
evidence-based management as “a commitment to finding and using the best theory
and data available at the time to make decisions. Following are the five
principles of Evidence Based Management:
Face the hard facts
and build a culture in which people are encouraged to tell the truth, even if
it’s unpleasant.
Be committed to
“fact-based” decision making—which means being committed to getting the best
evidence and using it to guide actions.
Treat your
organization as an unfinished prototype—encourage experimentation and learning
by doing.
Look for the risks and
drawbacks in what people recommend.
Avoid basing decisions
on untested but strongly held beliefs, what you have done in the past, or
uncritical “benchmarking” of what winners do.
« Administrative
Man Model - Herbert A. Simon:
This model describes how decisions often actually
are made. The model holds that decision makers
Use incomplete and
imperfect information,
Are constrained by
bounded rationality, and
Tend to satisfice when
making decisions.
Bounded rationality suggests that decision makers
are limited by their values and unconscious reflexes, skills, and habits. They
are also limited by less-than-complete information and knowledge. The situation
they find themselves in is highly uncertain, and the probability of success is
not known.
« Z Problem Solving Model
–Briggs Myers:
By using this problem
solving model, managers can use both their preferences and non- preferences to
make decisions more effectively. According to this model, good problem solving
has four steps:
Examine the facts and
details - Sensing
Generate alternatives - Intuition
Analyze the
alternatives objectively - Thinking
Weigh the impact - Feeling
« Social Man Model:
This model believes
that a manager, being subject to social pressures and influences, does not
always base his decisions on rational, material and economic criteria, but on
the irrational bases of showing off, gaining prestige, family considerations
and so on.
« Prospect Theory - Daniel Kahneman
and Amos Tversky:
- According to this theory, when evaluating the potential gains and losses associated with a course of action, people start by establishing a reference point or anchor.
- Explains how the cognitive biases arising from simple heuristics can influence managerial decision making.
- This theory has been used to explain the observation that people seem to make decisions that are inconsistent with the rational model.
- This theory suggests that individuals assign different subjective values to losses and gains of equal magnitude that result from a decision.
Behavioral Aspects of
Decision Making:
1. Political forces - Contributes to the behavioral nature of decision making.
A coalition is an informal alliance of individuals or groups formed to
achieve a common goal. The impact of coalitions can be either positive or
negative. They can help astute managers get their organization on a path toward
effectiveness and profitability, or they can strangle well-conceived strategies
and decisions.
2. Intuition - An innate belief about something without conscious
consideration. Managers sometimes decide to do something because it “feels
right” or they have a “hunch.”
3. Escalation of
Commitment -Decision makers sometimes make
decisions and then become so committed to the courses of action suggested by
those decisions that they stay with them, even when the decisions appear to
have been wrong.
4. Risk propensity - The extent to which a decision maker is willing to
gamble when making a decision.
Steps in Decision Making Process:
1.
Recognizing the
problem
2.
Deciding priorities
3.
Diagnosing the problem
4.
Developing alternative
solutions
5.
Measuring and
Comparing consequences
6.
Decision
Implementation
7.
Follow-up
Group Decision Making Process:
Managers use groups to make decisions for several
reasons as follows:
Synergy – A positive
force that occurs in groups when group members stimulate new solutions to
problems through the process of natural influence and encouragement within the
group. Increased acceptance
and Gain Commitment to a decision More knowledge and
experience to the problem solving situation through the pooling of group member
resources Greater understanding
of the decision
Disadvantages:
Pressure within the
group to conform and fit in
Domination of the
group by one forceful member or a dominant clique
The amount of time
required
Limits of Group Decision Making:
Group-think – A deterioration of mental efficiency, reality testing,
and moral judgment resulting from pressures within the group. Group Polarization – The tendency for group discussion to produce shifts
toward more extreme attitudes among members.
Decision Making
Techniques:
Brainstorming: A technique for
generating as many ideas as possible on a given subject, while suspending
evaluation until all the ideas has been suggested. Nominal Group
Technique: A structured approach to decision
making that focuses on generating alternatives and choosing one. It is a good
technique to use in a situation where group members fear criticism from others.
Delphi Technique: Group consists of physically dispersed members and are
anonymous to one another. There is a learning process as it receives new
information and there is no influence of group pressure or dominating
individual.
Devil’s advocacy: A technique for preventing group think in which a group or
individual is given the role of critic during decision making. Dialectical Inquiry: A time honored group decision making method which calls
for managers to foster a structured debate of opposing viewpoints prior to
making a decision. Quality Circles: A small group of employees who work voluntarily on company
time, typically one hour per week, to address work-related problems such as
quality control, cost reduction, production planning and techniques, and even
product design. Quality Team: A team that is part of an organization’s structure and is
empowered to act on its decisions regarding product and service quality.
Self Managed teams: Teams that make decisions that were once reserved for
managers.
Factors in selecting
appropriate technique:
|
Objectives
|
Techniques
|
|
Generation
of large number of alternatives
|
Brainstorming
|
|
Group members are
reluctant to contribute ideas
|
Nominal Group
Technique
|
|
Need
for expert input
|
Delphi Technique
|
|
Guard against group-think
|
Devil’s advocacy and
Dialectical Inquiry
|
|
Decisions
Related to quality or production
|
Quality circles and
Quality teams
|
|
To provide total
empowerment in decision making
|
Self Managed teams
|
Tools used in Decision- making
Process:
Decision Matrix
T charts
Decision Tree
Multi-voting
Pareto analysis (80-20
rule)
Cost benefit analysis
Conjoint analysis
SWOT Analysis
PEST Analysis
Difficulties in Decision-making
Process:
Non-actionable
information
Unsupporting
Environment
Non-Acceptance by
subordinates
Ineffective
communication
Incorrect timing
