Decision making

Merits and Demerits of Individual & Group Decision making

1. Decision Making Group Members : Ankur Chatterjee Amit Kumar Binit Jain Bengani Divyam Agrawal Kriti Verma Sandeep Kumar Bishesh K Sah

2. DECISION MAKING It is the process of identifying and selecting a course of action to solve a specific problem. As stated in Webster’s, it is “the act of determining in one’s own mind an opinion or course of action.” Problem –the discrepancy between ideal & actual situation. Managerial decisions are deliberate choices made from a range of alternatives. Before making the decision, the manager must evaluate each choice according to its projected outcomes in terms of the organization`s resources as well as the amount of information and time available.

3. Crucial Elements IN the process of decision making Time Connection between organization present circumstances to actions that will take the organization into future. Decisions are based on past experiences. Human relationships Decision making is a process that managers conduct in relationship with other decision makers. A wide network of relationship is always beneficial while deciding about business dealings.

4. The Nature of Managerial Decision Making It is a process of selecting the best from the alternatives. It is based on rational thinking. The purpose of decision making is to find out solution of some problem. It involves the evaluation of various available alternatives. Decision making is aimed at achieving organisational goals. It is both a managerial function and an organisational process. Decision starts action.

5. 8 . Decision making is an intellectual process. 9.All decisions involve future events, hence, decision makers must analyze the certainity , risk and uncertainity associated with alternative course of action. All managers have a shortage of knowledge, resources, and time. Working within these parameters, the management process culminates in decisions to implement various actions .

6. Types of decision making Strategic decisions - provides direction to an organization - high managerial competence is required - full of risk and uncertainty - taken by top management level Tactical decisions - support and implement strategic decisions - impact is medium with respect to time & significance - taken by middle management level

7. Operational decisions -Pre programmed, highly structured, routine decision to support tactical decision - required little effort - made by frontline management staff

8. Based on the nature of decision making, Herbert Simon has grouped the decision making into two categories- A) Programmed decisions B) Nonprogrammed decisions

9. PROGRAMMED DECISIONS Programmed decisions are made in accordance with written or unwritten policies, procedures or rules that simplify decision making in recurring situations by limiting or excluding alternatives. Programmed decisions are concerned with relatively routine and repetitive problems. Information on these problems is already available and can be processed in a pre-planned manner. Programmed decisions limit our freedom because the individual has less latitude in deciding what to do. Programmed decisions save time.

10. Nonprogrammmed decisions Non-programmed decisions deal with unique or unusual problems. Such novel or non-repetitive problems cannot be tackled in a predetermined manner . Ability to make nonprogrammed decisions become more important, as we move up in the organizational hierarchy. The ability to make good non-programmed decisions help to distinguish effective executives from non effective executives. More & more organizations have made their commitments to social responsibility a matter of policy involving the both.

11. Programmed Decisions(structured) Non programmed Decisions(unstructured) Types of problems Repetitive, routine, frequent; decisions made according to specific procedures Novel, complex, difficult, infrequent; decisions require original thinking Procedures Thinking Depend on policies and rules Require creativity, intuition, tolerance for ambiguity Examples Business firm :Periodic reorders of inventory Health care : Procedure for admitting patients Business firm : Diversification into new products and markets Health care : Purchase of experimental equipment

12. STRUCTURED UNSTRUCTURED Made under established situation i.e. definable, predictable & analyzable Made under emergent situation Called programmed decision making Called non-programmed decision making Routine problems Non-routine problems Application of rules/ procedures/ habits Application of skill/ experience/ common sense Lower management Top management Recurring Rare Low risk & uncertainty High risk & uncertainty High control Low control

13. Management level &decision making Upper-level Management Makes decision Middle level Management Makes decision Lower level Management Makes decision narrow decision intermediate decision broad decision scope scope scope

14. Rational model of decision making It is a four step process that help managers weigh alternatives and choose the alternative with the best chance of success. Especially useful in making nonprogrammed decisions. Helps managers go beyond priori reasoning. It is an article of faith that we can trace to the managerial approaches of Henry Ford, Henri Fayol and Chester Barnard.

15. Four stages of rational decision making 1. INVESTIGATE THE SITUATION 2. DEVELOP ALTERNATIVES 3. EVALUATE ALTERNATIVES AND SELECT THE BEST ONE AVAILABLE 4. IMPLEMENT AND MONITOR

16. STAGE 1: INVESTIGATE THE SITUATION A thorough investigation has three aspects: Problem Definition Diagnosis Identification of Objectives

17. DEFINE THE PROBLEM Defining the problem in terms of the organizational objectives that are being blocked helps to avoid confusing symptoms with problems. Example: An upsurge in employee resignations, is not a problem unless it interferes with the organizational objectives. DIAGNOSE THE CAUSES To diagnose the causes of the problem, managers need to ask a number of diagnostic questions. Different individuals may perceive very different causes for the problem, it is up to the manager to put all the pieces together and come up with as clear picture as possible.

18. IDENTIFY THE DECISION OBJECTIVES The focus is on to decide what would constitute an effective solution. A solution is an effective one if - it enables managers to achieve organizational goals. - it has more ambitious objectives rather than merely restoring the organizational performance. The immediate problem may be an indicator of future difficulties, and the solution thus could be an opportunity to improve. Thus all three aspects of problem investigation, is the importance of manager’s education and his or her futuristic imagination.

19. Stage 2: Develop alternatives It is a difficult process for complex nonprogrammed decisions and especially if there are time constraints. The temptation to accept the first feasible alternative prevents managers from finding the best solution for their problem. To prevent this some managers turn to individual or group brainstorming. Brainstorming: Decision making and problem solving technique in which individual or group members try to improve creativity by spontaneously proposing alternatives without concern for reality or tradition.

20. Stage 3: Evaluate alternatives and select the best one available After developing a set of alternatives, managers must evaluate each one on the basis of three key questions - IS THE ALTERNATIVE FEASIBLE? - IS THE ALTERNATIVE A SATISFACTORY SOLUTION? -WHAT ARE THE POSSIBLE CONSEQUENCES FOR THE REST OF THE ORGANIZATION?

21. YY STEP 3: EVALUATING ALTERNATIVES NO YES Is the alternative feasible 2. Is the alternative satisfactory? NO YES 3. Will the alternative have positive or neutral consequences? NO YES DROP THE ALTERNATIVE DROP THE ALTERNATIVE DROP THE ALTERNATIVE CONDUCT FURTHER EVALUATION

22. IS THE ALTERNATIVE FEASIBLE ? Does the organization have the money and other resources needed to carry out this alternative? Does the alternative meet all the organization’s legal and ethical obligations? Is the alternative a reasonable one given the organization’s strategy and internal politics? What would happen if employees fail to support and implement it whole heartedly?

23. IS THE ALTERNATIVE A SATISFACTORY SOLUTION ? This can be answered by the following two questions. Does the alternative meet the decision objectives? Does the alternative have an acceptable chance of succeeding? WHAT ARE THE POSSIBLE CONSEQUENCES FOR THE REST OF THE ORGANIZATION? An organization is a system of interrelated parts and exists among other systems, managers must try to anticipate how a change in one area will affect both areas- both now and in the future.

24. STAGE 4: IMPLEMENT AND MONITOR THE DECISION Implementing the decision involves more than giving appropriate orders. - Resources must be acquired and allocated as necessary. -Set up budgets and schedules for the actions. -Assign responsibility for the assigned tasks. -Set up a procedure for progress reports and prepare to make corrections if new problems arise. Actions taken to implement a decision must be monitored. Decision making is a continual process for managers – and a continual challenge of dealing with other human beings over time.

25. Analysis of rational model Simon conducted pioneering analysis of rational model. The limit on calculation is in a certain sense an insuperable obstacle. This brings with it a important implication: if economic subjects are unable to explore all the consequences of their actions, they are likewise unable to assess them; and this introduces an intrinsically uncertain element into human action.

26. LIMITATIONS FOR THE RATIONAL DECISION MAKING There are two types of factor which puts limits on rationality in decision making. Decision making mechanism Human factor in decision making

27. Decision making mechanism limitation It requires a great deal of time. It requires great deal of information. It assumes rational, measurable criteria are available and agreed upon. It assumes a rational, reasonable, non-political world.

28. Limitations due to Human factor in decision making In its standard version, the theory of rationality rests on the following conception of human behavior: Individuals possess a mental order of preferences concerning all the possible consequences of their actions, which is not true practically. They therefore make their choice coherently with their preferences and with the constraints upon them.

29. ASSUMPTION OF THE MODEL Problem clarity Known options Clear preferences Constant preferences No time or cost constraints

30. A different solution However, in those years a different solution of the dilemma was proposed by Milton Friedman , a solution that was very successful. According to Friedman, although individuals do not possess the formal tools with which to calculate the optimum adequately, they behaved as if they do.

31. According to Simon ,people have only a limited, simplified view of problems confronting them because of certain reasons: They do not have full information about the problems. They do not possess knowledge of all the possible alternative solutions to the problems and their consequences. They do not have abilities to process competitive environmental and technical information. They do not have time and resources.

32. Information Process abilities External factors Time and cost limits Decision maker Organizational objectives Personal factors Satisficing Decision Factors Leading To Bounded Rationality And Satisficing Decisions

33. BOUNDED RATIONALITY AND SATISFICING DECISIONS Bounded Rationality- the concept that the managers make the most logical decisions they can make within the constraints of limited information and ability. Satisfice- Decision making technique in which managers accept the first satisfactory decision they uncover.

34. The Concept of Satisficing Behavior A satisficing decision maker is one who is simply concerned with attaining a sought objective. Satisficing behavior acknowledges limitations. Decision maker searches for alternatives until one is found that meets the objective and a choice is made and implemented. Satisficing behavior is open to environment.

35. The Case for Satisficing Behavior The case for satisficing behavior is centered in the concept of bounded rationality. Given bounded rationality, the best that a rational decision maker can get is a satisficing choice .

36. The Case for Satisficing Behavior (cont’d) The components of bounded rationality are: 1 . Rational decision maker 2. Managerial objectives 3. E xternal environment 4.Time and cost constraints 5.Cognitive limitations

37. The Case Against Satisficing Behavior Limitations on decision maker’s aspirations. The need to specify objectives in advance. Complexity of the choice may impose cognitive strain on the decision maker. Focus on short-term results.

38. The Case Against Satisficing Behavior (cont’d) May choose the first alternative too rapidly. Belief that a satisficing choice is a “second-best” decision. Focus on the behavioral aspects of decision making.

39. Heuristics or Judgment Shortcuts Framing The selective use of perspective. Availability Heuristic The tendency of people to base their judgments on information readily available to them .

40. Heuristics or Judgment Shortcuts Representative Heuristic The tendency to assess the likelihood of an occurrence by trying to match it with a pre-existing category. Ignoring the Base Rate Ignoring the statistical likelihood of an event when making a decision. Escalation of Commitment An increased commitment to a previous decision in spite of negative information.

41. Heuristics or Judgment Shortcuts Overconfidence Bias Overestimating the accuracy of our predictions. Anchoring bias A tendency to fixate on initial information as a starting point.

42. Decision Making Conditions: In making decisions, all managers must weigh alternatives, m any such alternatives involve future events that are difficult to predict like: Competitor’s reaction to a new price list Interest rates in next few years Reliability of a new supplier

43. Continuum of Decision Making Conditions: CERTAINTY (Highly Predictable) RISK UNCERTAINTY (Highly Unpredictable) CERTAINTY RISK UNCERTAINTY MANAGERIAL CONTROL LOW HIGH

44. Certainty: Decision making condition in which managers have accurate, measurable, and reliable information about the outcome of various alternatives under consideration. Here the cause and effect relationships are known to managers. Example: Suppose a director is ordering programs for a storytelling festival. She knows the objective- get programs printed- and can easily compare representative samples from local printers and the prices they quote for printing varying quantities of program.

45. Risk: It occurs whenever we cannot predict an alternative’s outcome with certainty, but we do have enough information to predict the probability it will lead to the desired state. To improve decision making, we may estimate the objective probabilities of an outcome by using Mathematical models. We can also use subjective probability based on judgment and experience. Example: Merger of Bank of America and Security Pacific in 1992.

46. Uncertainty: Decision making condition in which managers face unpredictable external conditions or lack the information needed to establish the probability of certain events. Example: A Corporation that decides to expand it’s operation in a new country may know little about the country’s culture, laws, economics, environment and politics. The political situation may be so volatile that even the experts cannot predict a possible change in Government.

47. Modern Approaches to Decision Making Under Uncertainty: Risk Analysis Decision Trees Preference or Utility Theory

48. Risk Analysis: Every decision is based on the interaction of a number of important variables, many of which have an element of uncertainty but, perhaps, a fairly high degree of probability. Example: The wisdom of launching a new product might depend on a number of critical variables: the cost of introducing the product, the cost of producing it, the capital investment that will be required, the price that can be set for the product, the size of the potential market and the share of the total market that it will represent.

49. Let us see the prospective for investment in a new product : Rate of Return % 10 15 20 25 30 35 40 Probability of achieving at least this rate .90 .80 .70 .65 .60 .50 .40 .30

50. Decision Trees: Decision Trees depict, in the form of a tree, the decision points, chance events and probabilities involved in various courses that might be undertaken. Eg:-A common problem occurs in business when a new product is introduced. Managers must decide whether to install expensive permanent equipment to ensure production at the lowest possible cost or to undertake cheaper temporary tooling that will involve higher manufacturing cost but lower capital investments and will result in smaller losses if the product does not sell as well as estimated.

51. Utility Theory: Preference or utility theory is based on the notion that individual attitudes toward risk will vary: some individuals are willing to take only smaller risks than those indicated by probabilities, while others are willing to take greater risks. Purely statistical probabilities, as applied to decision making, rest on the assumption that decision makers will follow them. It might seem reasonable that if there were a 60% chance of a decision’s being the right one, a person would take it. This is not necessarily true since the risk of wrong is 40%. Example: Managers avoid risk, particularly if penalty for being wrong is severe, whether it be in terms of monetary loss, reputation or job security.

52. Violations of the expected utility theory : Lotteries and Gambling If by paying a small amount, one has a chance of winning a large amount, individuals often ignore the negative expected payoff, as the loss is small. BUT If potential loss is larger, the same individual may choose very differently  preference reversal in decision making

53. Individual Decision Making Based on one’s own experience, knowledge and intuition. Decision making without a group’s input.

54. Advantages: Prompt decisions Accountable for the effects of decisions Saves time, money and energy More focused and rational decisions

55. Disadvantages Less information for the decision. Based on own intuition and views. Ineffective decisions. Decisions might not serve the interests of all.

56. Group Decision Making Decision making by taking the inputs of group members. Based on consultation or consensus of the group.

57. Advantages Pooling of knowledge & information Satisfaction & Commitment Personnel Development More Risk taking

58. Disadvantages Time-consuming & Costly Individual domination Problem of responsibility Groupthink

59. Individual vs. Group decision making “Too many cooks spoil the broth” VS. “ Two heads are better than one head”

60. Analysis of Situation for individual and group decisions making Nature of Problem : If the policy guidelines regarding the decision for the problem at hand are provided , individual decision making will result in greater creativity as well as efficiency .Where the problem requires a variety of expertise , group decision making is suitable . Time Availability : Group decision making is a time – consuming process and therefore , when time at disposal is sufficient , group decision making can be preferred . Quality of Decision : Group decision making generally leads to a higher quality solution unless an individual has expertise in the decision area and this has been identified in advance . Climate of Decision making : Supportive climate encourages group decision making whereas competitive climate stimulates individual decision making . Legal requirement : Legal requirement may be prescribed by government’s legal framework or by organisational policy ,rules ,etc .For eg : many decisions have to be compulsorily made by board of directors ( group ) or committee in companies .

61. Techniques for Improving Group Decision Making Brainstorming Nominal Group Technique Delphi Technique

62. Brain s torming Topic Take turns sharing ideas Record each idea No comments/criticisms Keep the tempo moving One idea per turn Members may pass Keep going until ideas are exhausted

63. Nominal Group Technique A generic name for face-to-face group techniques in which instructions are given to group members not to interact with each other except at specific steps in the process. Silent idea generations, Round-robin sharing of ideas, Feedback to the group, Explanatory group discussion, Individual re-assessment, and Mathematical aggregation of revised judgements.

64. Delphi Technique Problem stated Questionnaires Anonymous & Independent Compile results Distribute copies of results New round begins Does not require physical presence Time consuming