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Discuss how does decision making fit into managerial activity? Decision-making is a process of choosing among alternative courses of action in order to attain goals and objectives. Nobel laureate Herbert Simon wrote that the whole process of managerial decision-making is synonymous with the practice of management.1 Decision-making is at the core of all managerial functions. Planning, for example, involves deciding what should be done? When? How? Where? and By whom? Other managerial functions, such as organizing, implementing, and controlling rely heavily on decision-making. Today’s fast changing and global environment dictates that a successful enterprise has a rich decision-making process. This means not only gathering and processing data, but also making decisions with the support of state-of-the-art decision methods. Decision-making is the very foundation of an enterprise, and sound decision-making is absolutely necessary for gaining and maintaining a competitive advantage. In many enterprises the decision process entails great time and effort in gathering and analyzing information. Much less time and effort go into evaluating alternative courses of action. The results of the analyses (there are often many, for example financial, marketing, operations, and so on) are intuitively synthesized to reach a decision. Research has shown that although the vast majority of everyday decisions made intuitively are adequate, perception alone is not sufficient for making complex, crucial decisions. Organizations that use modern decision support methods can gain and maintain a competitive edge in leading and managing global business relationships that are influenced by fast changing technologies and complicated by complex interrelationships between business and governments. An individual can solve problems more realistically when he/she uses a decisionmaking process. This process, when understood and applied, can assist you in making study and vocational decision(s) and future decisions, about your life. One thing to remember is that you are in charge of any decisions to be made. You may seek help and advice from other people and other sources, but the final decision must be made by you.
There are several steps involved in the decision-making process: 1. 2. 3. 4. 5. 6. Reaching a decision-point (Defining the problem) Exploration of the problem (Gathering information) Evaluation of information (Weighing the evidence) Choice of a plan of action (Choosing possible alternatives) Taking action on your plan Clarification and review of plans (Outgoing - Ongoing)
1. Reaching a Decision Point (Defining the Problem) A decision point is reached when you become aware of a specific problem and see the need to make a decision. Before you can solve a problem however, you have to know what the problem is. You must be able to interpret the entire picture so that the problem is clearly understood. For example, if you want to plan and
establish an educational plan to reach a career goal you might work toward arriving at well-considered answers to the following questions: 1. 2. 3. 4. For For For For what what what what kind kind kind kind of of of of career am I best suited? an alternative career am I best suited? education and training am I best suited? alternative education or training am I best suited?
2. Exploration of the Problem (Gathering Information) This is the initial activity of decision-making in which you think about all of the possibilities related to the problem and the decision. You must look for all the alternatives open to you before you make a decision. This is done by collecting relevant information. Some areas important to vocational decisionmaking which should be investigated are: 1. Physical attributes and health 2. Leisure experiences 3. Work experiences 4. Opinions of parents and others 5. Values and standards 6. Study - the amount of time and efficiency of your studying 7. Marital plans 8. Financial needs 9. Social status needs 10. Academic ability and achievement 11. Personality traits 12. Interests 13. Occupational and education facts (information about occupation, requirements of different kinds of jobs, educational level necessary, etc.) 3. Evaluation of Information (Weighing the Evidence) You should consider all of the alternatives open and how they are related to you. This step is the one in which each bit of information gathered is considered separately and then as a whole. You should be able to evaluate where you stand concerning the above individual areas and to the total picture. 4. Choice of Plan of Action (Choosing Possible Alternatives) In this step you choose between the alternatives open to you, remembering that the information you gathered will vary in importance to you. In this step you should be able to answer the following questions: 1. What is the best vocational choice you can make? 2. What is the second best choice? 3. What is the best educational course to follow? 5. Taking Action In this step you take action on the plans you made in step number 4. implement these plans (educationally, training, etc.)? 6. Clarification and Review of Plans In this step you make periodic examinations of your choice and plans. You should continually check to make sure your decision is the best one possible at the time. You may have to review your decision due to new information and new experiences. Therefore, at times, you may see the need to alter your plans. Also, reviewing How can you
will help you see that the decision-making process leads to sound plans and you will have logical reasons why you decided upon the educational and career objectives that you did.
The Need for Better Decision-making: Few people today would doubt the importance of relevant information when making vital decisions. Yet many people are unaware of the need for a logical approach to the decision itself. They consider it sufficient to collect data, analyze the data, and then simply “think hard” in order to arrive at a good decision. They use seat of the pants approaches or simplistic strategies for analyzing their decisions. In his book, Crucial Decisions, Irving Janis provided evidence that “A poor-quality decision-making process (which characterizes simplistic strategies) is more likely than a high-quality process to lead to undesirable outcomes (including disastrous fiascoes).” He asserted “When all vital decisions are made on the basis of a simplistic strategy, the gross misperceptions and miscalculations that remain uncorrected are likely to lead to disaster sooner or later — usually sooner rather than later.”3 There are some who have already recognized the need for what Janis called vigilant decision-making. Janis stated: “When executives are asked how they go about making the most consequential decisions, some of them acknowledge that when they believe the stakes are really very high, they do not stick to the seat-of-the pants approach that they ordinarily use in daily decision-making. In fact, their accounts of what they do in such circumstances are not very different from the analytic problem-solving approach recommended in most standard textbooks in management sciences.” One of the difficulties in using the analytical problem solving approaches found in management science textbooks, however, is that they are predominantly quantitative approaches — incapable of incorporating the qualitative factors so important in vital decisions. We will, in this book, look at and resolve the quandary posed by the need to synthesize quantitative and qualitative factors in a decision process. Decision-making is undoubtedly the most difficult and most essential task a manager performs4. Executives rate decision-making ability as the most important business skill, but few people have the training they need to make good decisions consistently. Some of these techniques are counter intuitive and therefore extremely difficult to learn by trial and error. Experienced golfers love to watch athletic baseball players’ step up to the tee and swing as hard as they can, only to miss the ball completely. A golf instructor can quickly teach the athletic baseball player what is not intuitive — that the left arm (for a right-hander) should be kept almost straight, unlike during a baseball swing, and that swinging easier will usually make the golf ball go further. Techniques like ‘keeping your head down’ (or ‘eyes on the ball’), work well in several sports, like golf, tennis and baseball. But someone who has not played any of these sports will intuitively ‘lift’ their head to see where the ball is going before the swing is completed. Every decision making process produces a final choice. It can be an action or an opinion. It begins when we need to do something but we do not know what. Therefore, decision making is a reasoning process which can be rational or irrational, and can be based on explicit assumptions or tacit assumptions. Common examples include shopping, deciding what to eat, when to sleep, and deciding whom or what to vote for in an election or referendum. Decision making is said to be a psychological construct. This means that although we can never "see" a decision, we can infer from observable behaviour that a decision has been made. Therefore, we conclude that a psychological event that we call "decision making" has occurred. It is a construction that imputes commitment to action. That is, based on observable actions, we assume that people have made a commitment to affect the action.
Structured rational decision making is an important part of all science-based professions, where specialists apply their knowledge in a given area to making informed decisions. For example, medical decision making often involves making a diagnosis and selecting an appropriate treatment. Some research using naturalistic methods shows, however, that in situations with higher time pressure, higher stakes, or increased ambiguities, experts use intuitive decision making rather than structured approaches, following a recognition primed decision approach to fit a set of indicators into the expert's experience and immediately arrive at a satisfactory course of action without weighing alternatives. Due to the large number of considerations involved in many decisions, computerbased decision support systems have been developed to assist decision makers in considering the implications of various courses of thinking. They can help reduce the risk of human errors. The systems which try to realize some human/cognitive decision making functions are called Intelligent Decision Support Systems (IDSS), see for ex. "An Approach to the Intelligent Decision Advisor (IDA) for Emergency Managers, 1999". Decision-making process: 1. Define and clarify the issue - does it warrant action? If so, now? Is the matter urgent, important or both. See the Pareto Principle. 2. Gather all the facts and understand their causes. 3. Think about or brainstorm possible options and solutions. (See brainstorming process) 4. Consider and compare the pros and cons of each option - consult if necessary - it probably will be. 5. Select the best option - avoid vagueness or 'foot in both camps' compromise. 6. Explain your decision to those involved and affected, and follow up to ensure proper and effective implementation. Decision-making maxims will help to reinforce the above decision-making process whether related to problem-solving or not, for example: "In any moment of decision the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing
Decision making style According to behavior list, a person's decision making process depends to a significant degree on their cognitive style. Starting from the work of Carl Jung, Myers developed a set of four bi-polar dimensions, called the Myers-Briggs Type Indicator (MBTI). The terminal points on these dimensions are: thinking and feeling; extroversion and introversion; judgment and perception; and sensing and intuition. She claimed that a person's decision making style is based largely on how they score on these four dimensions. For example, someone that scored near the thinking, extroversion, sensing, and judgment ends of the dimensions would tend to have a logical, analytical, objective, critical and empirical decision making style. Every day we make decisions. A number of them are little one but others are significant. How to know that we have made a right decision? One way could be this to wait until the outcome of decision declares, if the results are good we would say that it was a good decision if the results were bad we might say that, if we would choose another course of action the results would be better then now.
The other way to judge good and bad decision is to see the process of decision making. Before we start elaborating the steps involve in decision making first we should mention that the definition of decision making is not restrict to the moment of choice itself, but decision making is process which take a period of time to take place. The decision making has number of steps which take place in order. Following are the steps in decision making: The process of decision making can be sighted as a sequence of steps. All models of these steps may not necessarily reflect how decisions are actually make in practice, but can indicate a rational procedure. In the total problem solving/decision making sequence a problem is first observed, after which it is formally recognized. Some interpretation or diagnosis is made, from which a decision is defined. The objectives of the decision are set, the options which form potential solutions to the problem are formulated, and their worth evaluated. One option is then selected and implemented. This implemented solution can be monitored and, if it proves derisory, the process starts over again. In practice, decision making will probably not follow quite such an orderly process. Steps may be missed and decision makers may jump backwards and forwards, one or two steps. Now I will go in a detail of the process of decision making: since one criterion of a good decision is the way it is made, we should examine the process in some detail. Decision making or problem solving Supervisors constantly make decisions that affect the work of others. Day-to-day situations involving supervisory decisions include employee morale, the allocation of effort, the materials used on the job, and the coordination of schedules and work areas. The supervisor must recognize problems, make a decision, initiate an action, and evaluate the results. In order to make decisions that are consistent with the overall goals of the organization, supervisors use guidelines set by top management. Thus, it is difficult for supervisors to make good decisions without good planning. An objective becomes a criterion by which decisions are made. A decision is a solution chosen from among alternatives. Decisions must be made when the supervisor is faced with a problem. The first decision is whether or not to take corrective action. A simple solution might be to change the objective. Yet, the job of the supervisor is to achieve objectives. Thus, supervisors will attempt to solve most problems. A problem exists whenever there is a difference between what actually happens and what the supervisor wants to have happen. Some of the problems faced by the supervisor may occur frequently. The solutions to these problems may be systematized by establishing policies that will provide a ready solution to them. In these repetitive situations, the problem solving process is used once and then the solution (decision) can be used again in similar situations. Exceptions to established routines or policies become the more difficult decisions that supervisors must make. When no previous policy exists, the supervisor must invent a solution. Problem solving is the process of taking corrective action in order to meet objectives. Some of the more effective decisions involve creativity. To get better ideas, the supervisor follows the steps in the problem solving process. The steps are built on a logical analysis. The supervisor can think through all aspects of the problem by answering the following questions. What seems to be the trouble? Why is it causing the trouble? What are the causal factors? What can be done in all possibilities? Are all these possibilities workable? What are the probabilities of success for each of the solutions? What are the appropriate alternatives? What is the correct choice? Have I logically eliminated the other choices? When and how can the solution be implemented? What is the best way to implement the solution? Has the solution
solved the original problem? Have I planned, organized, and provided for the control of actions leading to solutions? The steps in the problem solving process are (1) define the problem, (2) identify decision criteria, (3) develop alternatives, (4) decide, (5) implement the decision, and (6) evaluate the decision. Step 1: Define the problem. The problem solving/decision-making process begins when the supervisor recognizes the problem, experiences pressure to act on it, and has the resources to do something about it. This means that the supervisor must correctly define the problem. Problem identification is not easy. The problem statement can be too broad or too narrow. Supervisors are easily swayed by a solution orientation that allows them to gloss over this first and most important step. Or, what is perceived, as the cause of a problem may actually be a symptom. The supervisor must solve the right problem. In order to define the problem, the supervisor must describe the factors that are causing the problem. These are the symptoms, visible as circumstances or conditions that indicate the existence of the problem -- the difference between what is desired and what exists. By not clearly defining the problem, ineffective action will be taken. Step 2: Identify decision criteria. The supervisor determines what is relevant in making a decision by isolating the facts pertinent to the problem. Since there is no single best criterion for decision making where a perfect knowledge of all the facts is present, a set of criteria must be used for the problem at hand. These decision criteria identify what will guide the decision-making process. They are the important facts relevant to the problem as defined. It is important that decision criteria be established early in the problem solving process because if the criteria are developed as analysis of data is taking place, the chances are good that the data will determine the criteria. Thus, setting the criteria early introduces objectivity. These facts can be tangible as well as intangible. Tangible facts might include the work assignments, the work schedules, or work orders. Intangible facts could include morale, motivation, and personal feelings and perceptions. This process is somewhat subjective, because what serves as important criteria for one supervisor may be less important for another. For instance, the decisionmaking criteria used to hire employees differs across departments; the sales department uses the number of new store openings in different geographic areas, while the manufacturing department uses how many units of the product needs to be produced and how quickly. Key uncertainties, the variables that result from simple chance, must be identified. Regardless of the solution chosen, key uncertainties are important because they can be plusses or minuses. What are the chance variables? Which way would these variables fall, relative to each of the workable solutions? Not all criteria have the same importance. (Criteria weights can vary among different supervisors as well.) Assigning weights indicates the importance a supervisor places on each criterion for resolving the problem and helps establish priorities. Criteria that are extremely important can be given more weight, while those that are least important can be given less weight. Step 3: Develop alternatives. The supervisor must identify all workable alternative solutions for resolving the problem. The term workable prevents alternative solutions that are too expensive, too time-consuming, or too elaborate. The best approach in determining workable solutions is to state all possible alternatives, without evaluating any of the options. This helps to ensure that a thorough list of possibilities is created. Generating alternative solutions requires divergent thinking (deviating from traditional.) Groups can be used to generate alternative solutions. Brainstorming is the process of suggesting as many alternatives as possible without evaluation. The group is presented with a problem and asked to develop as many solutions as possible. When brainstorming, employees should be encouraged to make wild, extreme suggestions. They build on suggestions made by others. None of the alternatives
are evaluated until all possibilities are exhausted. The supervisor must judge what would happen with each alternative and its effect on the problem. The strengths and weaknesses of each alternative are critically analyzed by comparing the weights assigned and then eliminating the alternatives that are not workable. Probability factors -- such as risk, uncertainty, and ignorance - must be considered. Risk is a state of imperfect knowledge in which the decision-maker judges the different possible outcomes of each alternative and can determine the probabilities of success for each. Uncertainty is a state in which the decision-maker judges the different possible outcomes of each alternative but lacks any feeling for their probabilities of success. Ignorance is a state in which the decision-maker cannot judge the different possible outcomes of each alternative, let alone their probabilities. Investigating all the possible alternatives helps to prevent eliminating the most appropriate one, because a decision is only as good as the best alternative evaluated. Step 4: Decide. The supervisor must make a choice among the alternatives. The alternative that rates the highest score should be the preferred solution. The decision can be assisted by the supervisor's experience, past judgment, advice from others, or even a hunch. Timing impacts the decision. The probable outcome and its advantages versus its disadvantages are affected at any given time. Which alternative is most appropriate at a given time? Decisions are made by consensus when solutions are acceptable to everyone in the group, not just a majority. Everyone is included, and the decision is a win-win situation. Consensus does not include voting, averaging, compromising, negotiating, or trading (win-lose situations). Every member accepts the solution, even though some members may not be convinced that it is the best solution. The "right" decision is the best collective judgment of the group as a whole. Consensus gives every person a chance to be heard and have their input weighed equally. All members accept responsibility for both listening and contributing. Disagreements are viewed as helpful rather than hindrances in reaching consensus. Each member monitors the decision-making process and initiates discussions about the process if it becomes ineffective. The smallest minority has a chance to change the collective mind if their input is keener. Group members do not give in just to reach an agreement. They support only those solutions that they can truthfully accept. If people exercise this power to go against the majority, they must have listened to the collective wisdom in good conscience. A block should not be used to place an individual's will above the group's. Consensus works in an environment of trust, where everyone suffers or gains alike from the decision. Everyone must listen, participate, get informed, be rational, and be part of the process from the beginning. Thus, consensus can be time consuming long and exhausting to the participants. Yet, consensus will result in synergism. Synergy is the combined action of the group, greater in total effect than the sum of their effects. The combined problem solving/decision making abilities of the group members produce a better decision than that of the individual member. Taking action requires self-confidence or courage. Only a person who is willing to take risks is able to assume responsibility for a decision involving action. The fact remains that the supervisor is held accountable for the outcome of the decision. Thus, he or she must be confident that the right problem has been defined and the most workable solution has been chosen. Self-confidence is the best element for a supervisor to possess at this stage. Step 5: Implement the decision. Once the solution is chosen, the decision is shared with those whose work will be affected. Ultimately, human beings will determine whether or not a decision is effectively implemented. If this fact is neglected, the solution will fail. Thus, implementation is a crucial part of the decision-making process. Including employees who are directly involved in the implementation of a decision, or who are indirectly affected by that decision,
will help foster their commitment. Without their commitment, gaining support and achieving outcomes becomes increasingly difficult. With this commitment, the supervisor has a reasonable degree of assurance that the decision will be accepted and has the necessary support. In order to implement the decision, the supervisor must have a plan for communicating it to those directly and indirectly affected. Employees must understand how the decision will affect them. Communication is most effective when it precedes action and events. In this way, events conform to plans and events happen when, and in the way, they should happen. Thus, the supervisor should answer the vital questions before they are asked. Communicating answers to these questions can overcome much of the resistance that otherwise might be encountered. Step 6: Evaluate the decision. The supervisor must follow up and appraise the outcomes from the decision to determine if desired results were achieved. If not, then the process needs to be reviewed from the beginning to determine where errors may have been made. Evaluation can take many forms, depending on the type of decision, the environment, working conditions, needs of managers and employees, and technical problems. Generally, feedback and reports are necessary to learn of the decision's outcome. Sometimes, corrections can be introduced for different steps. Other times, the entire decision-making process needs to start over. The main function of the follow up is to determine whether or not the problem has been resolved. Usually follow up requires a supervisory visit to the work area affected by the decision. The supervisor may have to repeat the entire decision process if a new problem has been generated by the solution. It is better to discover this failure during the follow up period rather than remain unaware of a new problem provoked by the implemented solution. Step of Decision Making Process Observe Observe is the first step of decision making process. The observe stage is not evidenced and much obvious and it starts with an individual manager feel that things are not correct, something is wrong and amiss. Although there is very little evidence in this stage but manger feels that some thing is wrong and need to be investigated. Very less action is seen in this step my decision makers. Following the observation there is another step which we call the reflection, gestation or incubation period. According to Lyles it is “a period of waiting and interrelating diverse pieces of information, but usually little overt action is taken by the individual during this phase. Sometimes it can be characterized by minor activity, possibly in an attempt to make the problem go away.” Formal Recognition After the incubation period the manager can not avoid the problem and formally recognize that there is need for a decision. In this stage the evidence are clearly demonstrable in type of deviation from standards or not achieving the desired state of work. According to Lyles this stage is called the triggering which means that the problem can not be ignored. Interpretation/Diagnosis This step is critical important in the decision making process. If this stage goes wrong a whole process of the decision making will go wrong. As the wrong answer for the right problem is less valuable same the right answer to the wrong problem is less valuable. In this stage the problem is understood and determined. The nature of the problem is studied. If the decision is structured and well understood, the diagnosis is straightforward and simple. If the decision is unstructured and ill-understood the diagnosis is difficult. Many problems are seen by different people in different ways, and this means that reaching agreement over the nature of the problem itself can become a decision process. When this type of situation arises, different
perceptions and models are presented by the participants and thus through negotiation and dialog decision body can reach to a conclusion. Definition After the problem is diagnosed it is necessary to give definition to the problem and for the first time formal request for decision is made in this step. The important feature of this step is that the boundaries of the decision are identified. The scope of the decision is defined and the attention of the decision makers is focused toward important aspects of the decision. Set Objectives In this step we set objectives for the decision. In simple words what we desire to achieve through decision is called the objectives of the decision. Such goals are best described in terms of the behavior of whatever part of the organization prompted an awareness of the problem in the first place. In many cases one decision serves for several objectives in this type of cases we have to give importance relatively to each other. The objectives are normally concerned with filling gaps between what has been observe and the desired state of the problem. The desired state of a problem is always seen in the light of overall goals of the organization. Determine the Options In this step we propose alternative courses of actions through which we will achieve objectives of our decision. This step is closely related to the earlier steps of the decision process. If the boundaries of the decision is defined narrowly then the options might be given (for example should do this thing or not.) If the boundaries of the decision is defined wide then many alternative options can be proposed. This step in the decision process is difficult to distinguish sometimes from the following step (evaluation) because many times we do some screening while selecting the option to apart the poor options. Evaluation Option This is also very important stage of the decision process. In this step we determine that into what extent a given alternative can meet the objectives of the decision. The result of each option is described in details. Decision models can be used in this stage. Select Option This stage is the heart of the decision process. All other stages which we studied above are devised to select the best option among alternatives which can meet the objectives of the decision into high degree. The procedure for selection will depend largely on the size and constitution of the decision making body. If there is one person in decision making body, so the selection will depend on his/her own wish. If there are more than one person in decision making body then other mechanisms can be used for example through political, debate, consultation, delegation and other, the option can be selected. Implementation In this stage we implement the decision, and if any change require we bring. The successful implementation of a decision largely depends on the skills of the person who is in-charged for the implementation and to the degree of implementability of the option itself. To study the implement-ability of the decision we have to study different attributes and features of an option. Monitor This is the last step in the process of decision making. If the decision is
implemented successfully and achieve its objectives then this step ends the decision making process. If a decision do not achieve the objectives, then we switch to the first step (observe) How does decision making fit into managerial activity The issues can be extracted from the two following headings; Managers and decision making: As the beginning of this chapter we posed the question of how central decision making is in management activity. This truth may well be, that we still now know very little of the answers to this question. Although a great deal has been written on the role of the manager, very little of it has examined what managers actually do in practice. In common with most writing on management authors concerned with managerial jobs tend to offer ideas about what managers ought to do, rather than describe what actually happens. Consideration of what ought to be is a very necessary process, especially if we are interested in improving management skills. The key thought, in coming to understand the part that decision making plays in a manager’s job, is to examine closely what it is that managers do in reality, and exactly how they spend their time. And the first thing we must do to achieve this, is to decide exactly what we mean by the term “manager”. And will be explained momentarily as follow: What is a manager? The idea of “managing” can be used in at least two very different ways. When we ask someone “How are you managing?” we usually mean it in the sense of “Can you cope?” or “Are you keeping your head above water?” used in this way, the notion of managing has almost a defensive quality about it. The accent is on mere survival, on riding out the storm and keeping losses, damage or injury to a minimum. There is certainly an element of this kind of management in almost all organizational activity, especially in harsh economic climates. But when we talk about management in organizational terms, we mean something rather more than this. For example, consider the following quotations: in general, our understanding of modern management is enhanced if we remember the fundamental managing process: “managers” perform basic “management functions” (of planning, organizing, staffing, influencing and controlling), which are facilitated by the fundamental “thinking processes” of decision making and communicating, to achieve the basic managerial purpose of organizational effectiveness. This statement of what managers do (or at least ought to do) contains no suggestion of defensiveness. On the contrary, the impression is one of very positive activity. A range of managerial functions is identified, given means, and an end. So, by identifying these roles within the organization where such functions are located, we can determine who, by this definition, are actually managers, as distinct from those who carry the title of manager Rosemary Stewart uses “manager” in the hierarchical sense, to mean all those above the level of foreman on the production side, and above first level supervisor in commercial and administrative work. Whilst this usage obviously includes many of those who can genuinely be said to be managers in the sense of the previous statement, it also includes some who are not. Furthermore, it clearly excludes some people who carry out managerial functions, even though they are not given the organizational status of managers. For example, the print room foreman at a local newspaper and printing company, quotes for and takes on work, schedules and products, makes decisions and communicate to his operatives, even though there is a well defined management structure above him. Many such first line supervisors are “manager” although they do not carry the little. What do managers do?
One of the most important studies, focusing on what managers actually do, was that carried out by Rosemary Stewart. One hundred and sixty senior and middle managers kept diaries recording their work activities for a four week period. Her study focused on such factors as hours worked, location, time spent alone and with other people, rather than investigating work content. So, for example, while the time spent in discussions with another person was recorded, little attempt was made to find out what the discussion involved, aside from logging the functional area concerned. For our purposes, perhaps the most useful outcome of the study is the identification of five management job profiles, on the basis of characteristic work patterns. These are: • The emissaries: spending much of their time away form their own organization, dealing and talking with people from outside. They tend to have more time to themselves than other managers, working longer hours in a less fragmented pattern. This group includes Sales managers, and those who are required to work on behalf of their company in public relations and promotional activities. • The writers: such managers spend a large proportion of their time by themselves writing, reading, and working on figures and other data. Much of their contact with other people is on a one-to-one basis, rather than in groups. They tend to be more specialized than other managers, spending much of their time in their own function. The group might typically include computer specialists, some kinds of accountants, and administrators whose main preoccupation is with paperwork. • The discussers: a way variety of managers fit into this group. They spend a considerable amount of time with other people, particularly with colleagues. Managers in this group come form a wide range of functions. • The trouble shooters: these managers have the most fragmented work pattern. They spend a lot of their time on problems needing a quick solution. Much time is spent with subordinates, rather than with colleague. Relative to other managers, trouble shooters spend a high proportion of their time on inspection tasks. Most managers in this group are responsible for a physical area or process. Production and factory managers are typical trouble shooters. • The committeeman: managers in this group tend to have a wide range of contacts within the organization, and spend a great deal of their time in committee and group discussions. The come exclusively from large companies. Identification of the five job profiles suggests very clearly that we are not likely to come up with a simple answer to the question “what do managers do?” it may be that all managers do undertake activities from the same common range. The proportion of time, effort and energy devoted to each activity will vary considerably from profile to profile. The Managerial role and decision making To study the managers’ activities and decision making it is good to consider the Mintzberg’s approach to classifying the managerial activities. This classification has then roles for mangers. These ten roles are clubbed in three categories: 123the interpersonal roles the informational roles the decisional roles
Interpersonal roles When a person is selected as a manager, he is given power, authority and prestige and status which give birth to interpersonal role of a manager. Three roles are classified in interpersonal roles. Figurehead: Leaders, particularly high-ranking managers, spend some part of their time engaging in ceremonial activities, or acting as a figurehead.
Four specific behaviors fit the figurehead role of a manager. a. Entering clients or customers as an official representative of the organization. b. Making on self available to outsiders as a representative of the organization. c. Serving as an official representative of the organization at gatherings outside the organization. d. Escorting official visitors. Leader: the manager provides direction, guidance and motivation to team members. Good managers train and develop their subordinates and make them able to lead. Leadership is the most acknowledged character of a manager. Liaison: the liaison role is concern with establishing linkages within organization and outside the organization. This role of manager links the organization or a part of an organization to its environment. Informational Roles Managers are in a good position in an organization. They have access to information. The managers perform two activities concerning the information 1) collector 2) disseminator; the manager collect information form inside the organization and outside of the organization and transfer it to his subordinates and same they spread information to environment and other part of the organization. Monitor This is an important role of a manager to collect information about the external and internal environment, raise his awareness about the opportunities and threats. So the monitoring role is very necessary to see what is going on around. Disseminator The manager plays a role of disseminator. It means that the manager transfer information to his group members which he get from outside and those which are generated inside the organization. Spoke-person As we discussed above that it is a manager’s role to disseminate information same the manager transfer the information to outside of organization. For example a public speech about the progress a new product etc. this role is concern to tell about the organization to public. Decisional Roles The remaining four roles of managers are categorized as decisional roles. These are the most crucial and important roles mentioned below. Entrepreneur In this role the manager bring positive changes in the organization. The manager does creativity and innovation. The entrepreneur role is concern to find new business and strategies. This role is also heavily depended on strong monitoring of inside and outside the organization. Disturbance Handler Many problems occur in the daily work routine which can drive out the company from business. The manager plays a role of disturbance handler to deal which problems and trouble which can affect the normal work flow. Some trouble may be occurred suddenly and unforeseen which are out of control of managers. Unexpected disturbances may occur where, although the change is planned, the full consequences may not be known. They can of course also occur as a result
of bad management through insensitive handling of the interpersonal and informational roles. In this type of the situation the manager calls for the coping mechanism. Resource Allocator Managers have to allocate resource to different projects and programs. This authority is given to manager by his/her position and status. Playing role of resources allocator the manager know better that what activities are completed need to be completed and what the top priorities. Negotiator To organize, utilize and disposition the resource the managers have to negotiate. With three different parties the mangers have to negotiate. 1) Their supervisor for more resources funds and equipments. 2) 2) With their colleges for organization of resource and common benefiting of them. 3) With suppliers for receiving the required resource on time and according to schedule Specialization and management activity In medium and large organizations, management structure usually involves some separation or delegation of function. Managers are appointed to deal with a particular process or range of operations. Many managers find themselves with responsibility for a sub-unit within the overall framework of the larger organization. For example, we often find a specialist manager in charge of production. Under him there may be shift managers, quality control managers, and a number of other specialist management positions. The same process of specialization occurs in other functional areas such as sales and finance. The result is an increase in the number of levels in the management hierarchy, and a widening of the differences between managements jobs within the organization. Faced with the problem of coordinating the activities of specialized subunits, those running large organizations need to develop structures or mechanisms which will allow those units to operate effectively, and in the interests of the organization as a whole. So we find specialist management roles which are concerned with monitoring, evaluating, and coordinating and those which exist to provide specialist services and support both to line and senior management. Management level In the same way that the importance of work roles varies with management function, we might expect variation according to the level which managers occupy in the organizational hierarchy. However, Mint berg holds that there is essentially no difference in kind between the jobs of top managers and of those at lower levels. He argues that the real difference is in orientation, and in the ends to which managerial activities are directed. Lower level managers are likely to be concerned more with maintaining a steady work flow within the unit or area for which they are held to be responsible. Work in likely to be focused around current issues and immediate problems. In addition, managers at lower levels in the organization are likely to be more specialized; that is, to be concerned with a much narrower range of issues than managers higher up in the organization. Given such an immediate emphasis on daily promotion and work flow, then the two decision roles of disturbance handler and negotiator are going to be particularly important. Senior managers, on the other hand, are likely to spend proportionately more of their time on strategic issues that relate the organization to its environment. They will be concerned with the longer term, rather than the day-today issues of the operational manager. As a result, senior managers and executives will play more of an entrepreneurial role than managers at lower levels. In some organization; the question of management level is not as relevant. Many small
companies, for instance, have only one person, often the owner, who might be considered to be a manager. Indeed, the range of the differences between management jobs within any organization is determined largely by its size. Managerial activity and discretion: Any formal statement of a manager’s functional responsibility will not alone determine the total range of activities which constitute the job. Take two individuals and place them in exactly the same managerial job, and they are likely to spend their time doing different things. There must be few, if any, management jobs, where some degree of discretion does not exist, either in what work is done, or how it is done. Stewart describes this discretion as choices- being “the activities which a jobholder can do but does not have to do. They are the opportunities for one jobholder to do different work from mother, and do it in different ways. Constraints Constraint
The demands, constraints, choices model Jobs which have wide ranging demands but are highly constrained will have less discretion than jobs where demands are relatively few and constraints relaxed. So, for, example, a line production manager in a food processing plant might be required to be physically present, supervising the operations of the plant, for a large part of the working day. The place of decision making in management: we can see then, that the work content of any manager’s job can vary according to such factors as size of organization, level in the hierarchy, and the particular job function. Whilst all managers may indeed carry out all ten of Mintzberg’s work roles, some of those roles will be very much more important than others for any individual manager. Equally, the type and nature of decision made will vary according to the position of the decision maker within his or her organization. Nonetheless, decision making is a key activity for management. Time spent in making decisions: an assessment of how much time managers spend on decision making will depend on how wide our view of decision making is. When managers choose or select one particular option, they “make a decision”. Whilst the time taken to make that act of choice may well vary according to the method used, relatively speaking, it is not a lengthy actively. After all, in common usage, “decisiveness” carries with it the implication of speed. When used in this very structured way, we might even suggest that managers spend hardly any time at all in making decision. Choice may only take up a small proportion of managerial time, but all the activities which go together to make up the total decision making/problem solving process can take up a great deal. As we described earlier, the total process includes all the stages of • Observing,
• • • • • • • • •
Recognizing Interpreting diagnosing Defining Objective setting Determining options Evaluating Choosing Implementing and Monitoring.
The following figure illustrates the way in which several of Mintzberg’s managerial roles might contribute to the decision making/problem solving process. tags in decision making/problem solving process major appropriate managerial roles Recognizing the need for a decision (Observe, recognize) Entrepreneur Liaison Monitor Defining the Problem (Interpret/Diagnose, Define, Objective Setting)Leader Liaison Monitor Disseminator Determining the Options Disseminator Leader Negotiator Evaluation Liaison Disseminator Making the choice Leader Leader Resource Allocator Disturbance Handler Spokesman Implementation and Monitoring Resource Allocator Monitor Leader Spokesman Not all aspects of each of the roles referred to in the illustration above relate directly to managerial decision making. The leadership role for example, includes most of a manager’s activities which relate to subordinates much of which has little to do with making decision. Nonetheless, when we regard decision making in its wider sense, it become s clear that a great deal of management effort throughout the organization is directly concerned with decision making. In addition, we should include the time that managers spend in monitoring the effects of decisions taken previously. This monitoring activity can go on for a considerable length of time before the effects of a decision are regarded as steady stable. Q2. Management decision may be regarded as being a continuum ranging from strategic and operational, where strategic decision which relate the organization to its environment and involve a large part of the organization. Discuss and
explain the term used? In order to better understand the decision making management it is critical to study the elements of a decision, which are the: 1) Decision body 2) Options 3) Uncontrollable factors 4) Consequences and the different types of the decision. The decision body is referred to individual or a group who will take the final decision. The simple and straightforward decision making body is one person decision making body. When there is more than one person involve in decision making process then we say multiple decision makers decision body. Options are the available alternative courses of action which are used to achieve the objectives of the decision. The number of options is between two and infinite. The simple and easy decisions are those, which have just two options “(to do something or not to do something). For example should we buy new machine? Or not. Uncontrollable factors are those which can affect the result of the decision but are out of the control of the decision maker. For example the demand, this can not be controlled by the decision maker but can affect a decision while allocating the production capacity for a new product. For each combination of a decision option and the state of nature, there will be a consequence. The Strategic Decisions Many people still remain in the bondage of self-incurred tutelage. Tutelage is a person's inability to make his/her own decisions. Self-incurred is this tutelage when its cause lies not in lack of reason but in lack of resolution and courage to use it without wishing to have been told what to do by something or somebody else. Eventually human beings gained their natural freedom to think for themselves. However, this has been too heavy a responsibility for many people to carry. There has been an excess of failure. They easily give up their natural freedom to any cult in exchange for an easy life. The difficulty in life is the choice. They do not even have the courage to repeat the very phrases which our founding fathers used in the struggle for independence. What an ironic phenomenon it is that you can get men to die for the liberty of the world who will not make the little sacrifice that it takes to free themselves from their own individual bondage. Good decision-making brings about a better life. It gives you some control over your life. In fact, many frustrations with oneself are caused by not being able to use one's own mind to understand the decision problem, and the courage to act upon it. A bad decision may force you to make another one, as Harry Truman said, "Whenever I make a bum decision, I go out and make another one." Remember, if the first button of one's coat is wrongly buttoned, all the rest will be crooked. A good decision is never an accident; it is always the result of high intention, sincere effort, intelligent direction and skillful execution; it represents the wise choice of many alternatives. One must appreciate the difference between a decision and an objective. A good decision is the process of optimally achieving a given objective. When decision making is too complex or the interests at stake are too important, quite often we do not know nor are not sure what to decide. In many instances, we resort to informal decision support techniques such as tossing a coin, asking an oracle, visiting an astrologer, etc. However formal decision support from an expert has many advantages. The rationalist decision-making model is based on several assumptions. First, a set of possible outcomes is known and their expected optimal outcome can be known to a high degree of confidence. Next, calculations are based on similar past actions, assuming what affected past performance will similarly affect future performance. Traditional models are based on history. Feedback causes corrections
within the model for deviations to the plan. It is assumed that proliferation of information (input data) will lead to greater convergence. In other words, greater information lowers ambiguity and uncertainty can be reduced by gathering necessary information. This model relies greatly on the reliability of information gathered. Rationality also assumes a common experience base among those participating in the decision-making process. Finally, this model presumes to be objective. Criteria are established and weighted mathematically, and the factors are added up, thus reducing the chance for subjectivity to drive the decision Rational decisions are often made unwillingly, perhaps unconsciously. We may start the process of consideration. It is best to learn the decision-making process for complex, important and critical decisions. Critical decisions are those that cannot and must not be wrong. Ask yourself the objective: What is the most important thing that I am trying to achieve here? The decision-maker's style and characteristics can be classified as: The thinker, the cowboy (snap and uncompromising), Machiavellian (ends justifies the means), the historian (how others did it), the cautious (even nervous), etc. For example, political thinking consists in deciding upon the conclusion first and then finding good arguments for it. On a daily basis a manager has to make many decisions. Some of these decisions are routine and inconsequential, while others have drastic impacts on the operations of the firm for which he/she works. Some of these decisions could involve large sums of money being gained or lost, or could involve whether or not the firm accomplishes its mission and its goals. In our increasingly complex world, the tasks of decision-makers are becoming more challenging with each passing day. The decision-maker (i.e., the responsible manager) must respond quickly to events that seem to take place at an ever-increasing pace. In addition, a decision-maker must incorporate a sometimes-bewildering array of choices and consequences into his or her decision. Routine decisions are often made quickly, perhaps unconsciously without the need for a detailed process of consideration. However, for complex, critical or important managerial decisions it is necessary to take time to decide systematically. Being a manager means making critical decisions that cannot and must not be wrong or fail. One must trust one's judgments and accept responsibility. There is a tendency to look for scapegoats or to shift responsibility. Decisions are at the heart of any organization. At times there are critical moments when these decisions can be difficult, perplexing and nerve-wracking. Making decisions can be hard for a variety of structural, emotional, and organizational reasons. Doubling the difficulties are factors such as uncertainties, having multiple objectives, interactive complexity, and anxiety. Strategic decisions are purposeful actions. The future of your organization and the progress of your career might be profoundly affected by what you decide. Good decisions are made with less stress, and it is easier to explain the reasons for the decision that was made. Decisions should be made strategically. That is, one should make decisions skillfully in a way that is adapted to the end one wishes to achieve. To make strategic decisions requires that one takes a structured approach following a formal decision making process. Otherwise, it will be difficult to be sure that one has considered all the key aspects of the decision. Making good strategic decisions is learnable and teachable through an effective, efficient, and systematic process known as the decision-making process. This structured and well-focused approach to decision-making is achieved by the modeling process, which helps in reflecting on the decisions before taking any actions. Remember that: one must not only be conscious of his/her purposeful decisions, one must also find out the causes for which they are made. There is no such thing as "free-will". Those who believe in their free wills are in fact ignorant to the causes that impel them to their decisions. There is no such thing as arbitrary in any activity of man, least of all in his decision-making. Just as he has learned to be guided by objective criteria in making his physical tools, so
he is guided by unconscious objective criteria in forming his decision in most cases. In an organization the manager of a small manufacturing unit might make the following decision in a period of the time; 1) Should we buy a new machine or repair the current one 2) Should we hire new young staff and train them or we hire the experienced staff 3) Should be give priority to product A this week or to product B If we see the above mentioned decisions and the like, are taken in a situation where the daily work follow of the organization is concerned. If these decisions are not taken on time the organization immediately gets out of the business. These are called the operational decisions. The operational decisions are made in a routine manner and are repetitive decision thus we can make a common rule, how to deal with such kind of problem if occurs in future. Normally the low management level is involved in such type of the decision. The manager of the manufacturing unit may be involved in strategic decision but the unit level. Let’s consider the following example. In the same organization the CEO of the organization might be involved in the following type of the decisions. 1) Do we have to relay on export to Europe or we should open a manufacturing unit. 2) Should we work in the centralized management system or we should move to decentralized management system. 3) Should we introduce high quality expensive goods production lines or we have to relay on the currently inexpensive massive goods products line. If we see the decisions which are taken by the CEO are important for the future of the whole organization. These are called strategic decisions which involve a big part of the organization; these are not repetitive and can not be done on routine manner. As we know that organization are facing a lot of challenges due to advancement of the technology, unstable environment increasing competition, and often changing ways of business. These challenges have made the strategic decisions vulnerable to risk and uncertainty. The strategic decisions can be differentiating from operational in that they a) b) relate the organization to its environment involve a large part of the organization
The first manager in our example can also make the strategic decisions for his/her working unit. For example if the manger change the two shifts to three shifts, it will change the position of the manufacturing unit in its environment (the organization is the environment for the manufacturing Unit.) although this decision is strategic for the manufacturing unit but still it is operational one for the organization. Strategic Planning he defines are: … The process of deciding on objectives of the organization, on changes in these objectives, on the resources to obtain these objectives, and on the policies that are to govern the acquisition, use, and disposition of these resources Management Control is defined as: …. The process by which the mangers assure that the resources are obtained and used effectively and efficiently in the accomplishment of the organization’s
objectives. Operational Control is defined as: …. The process of assuring that tasks are carried out effectively and efficiently If we study the Antony’s framework the term strategic planning is used for strategic decisions while the operation and management is seen as control activities. This means that strategic decisions set the intended directions for the organization and the operational control decisions are dealing with detailed implementation plan. The operational decisions and Strategic decisions express a continuum than a straightforward dichotomy, a decision may be placed anywhere on each continuum of decision types. This means that theoretically there is infinite number of the decisions between these to ends of the continuum (operational end and strategic end). However, in order to examine the way in which the elements of decisions vary with decision type, we can make a generalization which greatly simplifies the task. This is that strategic decisions tend to be unstructured and dependent, whereas operational decisions tend to be structured and independent. This crude generalization is borne out when we see the characteristics of each decision element for the two categories of decision. This generalization does not mean that all strategic decisions are unstructured and dependent and all operation decisions are independent and structured. But we can say that most strategic decisions are unstructured and dependent and most operational decisions are structured and independent. The conclusion is, management decision may be regarded as being a continuum ranging from strategic to operational, where strategic decisions both relate the organization to its environment and involve a large part of the organization. They may also be classified as structured or unstructured, where structured means clear and unambiguous, and unstructured means ill-understood and difficult to tackle. Finally, decisions may be classed as being either dependent or independent. Decisions with a high degree of dependency will have to take account of past or possible future decisions in the same part of the organization, or decisions which have, or could, take place in other areas of the organization. Where any decision lies within these three dimensions will influence its decision elements. Decision which are strategic, unstructured and dependent will tend to have multi-person decision bodies, options which are not immediately apparent, uncontrollable factors which are both numerous and unpredictable, and multi-attribute consequences. Conversely, decisions which are operational, structured and independent can have single decision makers, apparent options, relatively few uncontrollable factors, and predictable consequences. The environment of a decision is particularly important when the decision concerns a task on the boundary of the organization. The state of the decision environment determines the perceived uncertainty surrounding the decision, and the amount or type of information available to the decision body. It can also determine the amount of time available in which to make the decision and hence the perceived stimulus of the decision. Q3. A model provides us with an abstraction of a more complex reality and managers communicate by means of models and use them in decision process. What are the different dimensions on which such models can be placed? Explain. Alternative to traditional mathematical models are provided by heuristic models which use “common sense” rules of thumb in a logical manner, and give good suboptimal solutions, or simulation models which follow procedures that describe the
underlying logic of a decision area. One particular class of simulation model is the corporate model which simulates financial systems over the long term. Finally, there are five dimensions on which models can be placed are proposed, these dimensions are: • Optimizing-satisfying: models are used for evaluation both directly and indirectly. Direct evaluation requires the model to identify the single best option or alternatively identify an option that will prove satisfactory to the decision maker. Here they distinguished between the normative concept of man as the rational maximizing decision maker, and the descriptive view of limited rationality and satisfying behavior. The necessary operating conditions for the former, those of perfect knowledge and perfect judgment, are rendered unlikely in the light of: o The selective nature of the perceptual process which imposes limitations on the relationship between the decision maker and the decision situation. o The central position of values and value systems in the determination of human behavior and their effect on the decision making process. In real life, many decisions are made in circumstances where outcomes are uncertain and the manager must make a judgment in respect of probability without the aid of objective measures or statistical data. The combination of subjective probability with an assessment of utility for each outcome is suggested as forming the basis of individual decision making behavior under conditions of uncertainty. To this may be added the notion that risk taking itself has different utility or worth for different decision makers. Within the work organization, a significant feature of the decision environment for the manager is the presence of others. The strength of social pressure is felt by decision makers both as normative and informational influence and will vary according to perceptions of the role, status and significance of others within the work organization. The combination of imperfect knowledge and judgment, together with the desire to accommodate the needs of others around us points firmly to the notion of individual decision behavior as a satisfying process. • Concrete-abstract: Closely associated with the iconic-analogue-symbolic classification used earlier, this scale refers to the degree of correspondence with reality that a model possesses. Similar scales have been developed. The following one is more differentiated, with five levels of abstraction based on the number of elements produced in the model, their faithfulness of reproduction and explicability o Level 0 the process, activity or situation on which the model is based o Level 1 A replication of the initial process or situation; examples of this are controlled “run” industry maneuvers in the area of military science, and drama (a model of a real or hypothetically real is situation). o Level 2 A controlled, laboratory-type models, capable of repetition; laboratory models of industrial processes, war games, and the cinema (as opposed to live drama) are examples of this. o Level 3 A completely synthetic extractions of essential elements of the initial situation; for example, computer models of industrial or military situations or play-script. o Level 4 A closed analytical models. Models at the “concrete” end of the scale can be useful as a first step towards more abstract models, as communication vehicles, or to stimulate creativity and insight, but they lack the power inherent in the more tractable abstractions of mathematical modeling. • Normative-descriptive:
Normative models are those which are prescriptive in the sense that they contain within their structure the means to say what ought to be done. Normative models attempt to impose on the decision maker the values reflected in the assumptions of the model. Inevitably, they are more dominant in the “decision maker model” relationship than purely descriptive models, since they assume responsibility for the direct evaluation of feasible solutions. Not that all such models are designed to choose the best of all the possible solutions. In other words, normative models do not necessarily optimize. Heuristic models, for example, are clearly normative in as much as they prescribe what ought to be done; but their evaluation mechanism adopts a satisfying criterion for doing so. Descriptive models, on the other hand, tend to be more modest in their aspirations if not their complexity. They make no direct attempt to evaluate alternative decision solutions, they merely describe them. This does not mean that descriptive models lack value. On the contrary, as we have seen, they can aid understanding and predict future behavior. Furthermore, descriptive models can perform the first steps in the evaluative process by stating different feasible decision solutions in common units-for example, predicting the effect of all decision alternatives on a Company’s total cost. However, nothing is descriptive in a totally objective way. A photograph may seem to be truthful and an objective representation. But it is an old argument in the communications business that by pointing a camera at one thing you are deliberately excluding everything else, and hence the photographer is adding an element of his own judgment. The camera cannot lie, but it cannot avoid selecting. Likewise, as discussed previously, a descriptive model will almost certainly contain some normative bias, since it is formed through the unique perception of the model builder. • Static-dynamic:
One of the difficult challenges when discussing the productivity of dynamic languages is to make any sort of proof about said productivity. I believe this is because it's one of those synergistic, emergent systems, where everything taken together produces a surprising or unexpected result. But this makes it hard to come up with any kind of proof, and as a result we have a bunch of people who are primarily just speaking about their personal experiences trying to convince people who haven't had such experiences that it's a Good Thing One aspect of reality which the decision maker might choose to exclude or to simplify is time. This can be done in two broad ways. Time can be momentarily halted and a model constructed to describe the situation at that point in time in the same way as a photograph captures an instantaneous image. Alternatively, the model can describe the situation in terms of average or total values over a stated period of time. The balance sheet and the profit and loss account are two conveniently related examples of descriptive models using these two approaches. Models which do not include time as a variable are termed static models. Dynamic models, on the other hand, use time as a major element and whatever phenomena are examined are studied in relation to preceding and succeeding events. Thus, in a dynamic model, the values of endogenous variables in one time period can become the values of exogenous variables in the next. However, it is not always necessary to use dynamic models to represent a decision situation which is clearly time-related or on-going, provided it is operating at a steady state. That is, there are no major long term disturbances to the behavior or the decision situation which cause transient conditions to predominate. However, if it is specifically desired to examine non-steady state behavior or explore the response to external stimuli then any model used must be dynamic. • Deterministic-stochastic:
Deterministic models use single estimates to represent the value of each variable
in the decision, whereas stochastic models use probability distributions, histograms, or some other description of the range of values which a variable can take. Stochastic models describe decisions in terms of the uncertainty inherent in them. Viewed in one way, of course, there is nothing certain in life but death and taxes, and as everything in life is uncertain to some extent, all models ought to be stochastic. However, this denies the modeler the normal license in modeling to simplify elements of what he observes, so as to present reality in a convenient and useful form. The “decision approaches” explained before can mean that deterministic models exclude the undoubted uncertainty present in everyday life for the sake of conveniences, clarity or tractability. Here we must distinguish between two types of stochastic model. First, those which model systems having elements which take different values according to an assumed or historically derived pattern and which predict a system’s behavior, the prime determinant of which is the variability itself. Second, those models which use probability to describe the modeler’s ignorance of future occurrence in a more fundamentally way, where the nature of uncertainty is described much more tentatively. The two key dimensions: two questions are of particular importance when choosing decision models which relate directly to two of the scales discussed. • Should an optimizing or a satisfying model be chosen? • Do we want to treat the decision variables as being known with certainty or being best described as probabilities? The following figure classifies some of the types of models.
Optimizing -linear programming - decision trees Satisficing -most “corporate modeling - CRAFT facilities layout technique - many heuristic models - queuing theory - stochastic simulations Such as the stock control simulation described -risk analysis
The fact that we select a model which optimize does not necessarily mean that we are trying to optimize in the real decision. We could obtain an “optimal” solution from the model, and then deliberately adapt that solution to fit the needs of reality- after all, a model does not optimize reality, it optimize its simplified version of reality. So using an “optimizing” model could be a perfectly legitimate tactical ploy in the search for a satisfactory solution. Likewise, deterministic models can provide valuable assistance to the decision makers, even though their reality is stochastic. We have used the term model to describe any explicit statement we make about our perception of reality. The concept of “the model” and “modeling” is particularly important in decision making, because the mental model we have of the decision represents our understanding of it, and therefore any move to make that understanding explicit will aid the decision maker in three waysnamely: 1. 2. 3. by enhancing understanding by simulating creativity By aiding the evaluation of possible solutions.
Building a symbolic model of the decision area involves three steps; • Listing the input or exogenous variables to the decision, some of which are controllable and some uncontrollable, and listing the relevant endogenous variables that will be used to evaluate the decision. • Indicating the existence of relationships between variables by means of a cause-effect model. • Describing the form of those relationships in mathematical terms. Q4. Draw a decision matrix, highlighting its various components. Explain with the help of an example the following decision rules: For better understanding we will discuss the question in three parts: 1. First we will draw the decision matrix and then we will high lights its various components in details. Second, 2. We will study a practical example. Third, 3. With the help of an examples, we will explain the following decision rules: a. The optimistic decision rule b. The pessimistic decision rule c. The regret decision rule d. The expected value decision rules First let’s draw the decision matrix and highlight its various components; the following illustration is the decision matrix with its various components
The decision matrix The decision matrix is a method of modeling relatively straightforward decisions under uncertainty in such a way as to make explicit the options open to the decision taker, the states of nature pertinent to the decision, and the decision rule used to choose between options. The optimistic decision rule: The optimist criterion attempts to describe the decision-making behavior of people who are overly optimistic in their expectations. An optimistic decision maker is attracted by large rewards and is willing to risk high losses in order to obtain them. It is possible to model the optimist profile with the MAXIMAX decision rule (when the payoffs are positive-flow rewards, such as profits or income. When payoffs are given as negative-flow rewards, such as costs or losses, the optimist decision rule is MINIMIM. Note that negative-flow rewards are expressed with positive
numbers.) Let's assume that ACME's managers are thoroughly optimistic. We would suppose they would therefore go for a large manufacturing facility in hopes of attaining the maximum profit. The psychological processes leading to such behavior can be captured by the two-step logic of the Maximax rule. Maximax decision rule 1. For each action alternative (matrix row) determine the maximum payoff possible. 2. From these maxima, select the maximum payoff. The action alternative leading to this payoff is the chosen decision. Using ACME's decision matrix defined previously: S A H M W Row Max Maximax Decision L 15 3 -6 15 15 L JR 9 4 -2 9 S 3 2 1 3 "Maximax" is shorthand for "Maximum of the (row) maxima." By convention, only one additional column is appended to the original matrix. The decision is shown by highlighting the maximax value, thus indicating the row of the chosen action alternative: S A H M W Maximax L 15 3 -6 15 b denotes decision is L JR 9 4 -2 9 S 3 2 1 3 The Minimim decision rule applies when the payoff matrix consists of negative-flow rewards, such as costs or losses. An optimistic decision maker would be attracted by lower costs. Critique of Maximax / Minimim Maximax / Minimim is not a rationally acceptable decision rule because it excludes most of the information available in the payoff matrix. Notice that the Maximax column above shows only three numbers (15, 9, 3) from which to select the course of action. Six payoffs were excluded from consideration in the choice. This means that ~67% of the data for the problem were neglected. Neglecting available information in a decision problem is not rational. Decide for yourself Consider the following situation: Would you risk getting nothing for a chance to obtain an extra $1 over a sure $99? Most people wouldn't. S1 S2 Maximax A1 0 100 100 A2 99 99 99 This approach to selecting the preferred option is to consider all possible circumstances and choose that option which yields the best possible outcome. For Tailed, the best unit cost is $2000. This occurs when method 1 is used and the annual sales volume is 3000 units. So the total optimist would choose method 1, because it provides the opportunity so achieve the best outcome. In detail, this decision rule involves examining each option, selecting the minimum cost outcome, and choosing the option which provides the lowest minimum cost. For this reason the rule is sometimes called the minimum cost rule (if we were dealing with revenues it would be the maximize revenue rule).
The pessimistic decision rule: The pessimist criterion attempts to describe the decision-making behavior of people who are overly pessimistic in their expectations. A pessimistic decision maker is averse to large losses and is willing to forgo attractive gains in order to avoid a large risk. It is possible to model the pessimist profile with the MAXIMIN decision rule (when the payoffs are positive-flow rewards, such as profits or income. When payoffs are given as negative-flow rewards, such as costs or losses, the pessimist decision rule is MINIMAX.) Let's assume that ACME's managers are diehard pessimists. We would suppose they would therefore opt for a small manufacturing facility in hopes of securing a profit, even though it may be small. The psychological processes leading to such behavior can be captured by the two-step logic of the Maximin rule. Wald's Maximin decision rule 1. For each action alternative (matrix row) determine the minimum payoff possible. This represents the worst possible outcome if that decision alternative were chosen. 2. From these minima, select the maximum payoff. The person may be pessimistic but is not a dunderhead: from among the bad outcomes, choose the least bad. The action alternative leading to this payoff is the chosen decision. Using ACME's decision matrix defined previously: S A H M W Row Min Maximin Decision L 15 3 -6 -6 JR 9 4 -2 -2 S 3 2 1 1 1 S "Maximin" is shorthand for "Maximum of the (row) minima." By convention, only one additional column is required. The decision is shown by highlighting the maximin value, thus indicating the row of the chosen action alternative: S A H M W Maximin L 15 3 -6 -6 JR 9 4 -2 -2 S 3 2 1 1 b denotes decision is S The Minimax decision rule applies when the payoff matrix measures negative-flow rewards, such as costs. A pessimistic decision maker would tend to avoid higher costs. The minimax rule guarantees the lesser of possible worst evils. It portrays a very conservative approach to risk. Critique of Maximin / Minimax Maximin / Minimax is not a rationally acceptable decision rule because it excludes most of the information available in the payoff matrix. In this example, six payoffs were excluded from consideration in making the choice. Since ~67% of the data for the problem were neglected, the decision process was not rational. A decision maker who took the very opposite view to the one described above would follow the reverse procedure. Each option would be examined, and the worst possible outcome for that option identified. The option would be selected which provided the best of the worst outcomes. In the case of Trailaid, the worst outcome would be a unit cost of $3300, if we choose manufacturing method 1, whereas if we choose manufacturing method 2 the worst outcome would be a unit cost of $3100. The better of these two outcomes is the unit cost of $3100 associated
with method 2. Thus a pessimist would assume that the worst is going to happen, and because the worst outcome with method 2 is better than the worst outcome with method 1, would choose method 2. Because this decision rule involves choosing the option which has the minimum of the maximum cost, it is often called the minimize cost rule. The regret decision rule: The regret decision rule is based on a deceptively simple but extremely useful question. That is “if we decide on one particular option, then, with hindsight, how much would we regret not having chosen what turns out to be the best option for a particular set of circumstances?” For example, suppose we choose method 1. If sales are 1000 units per year, then we would have made the wrong decision. Method 2 would have given us a lower unit cost. A measure of how much we would regret having chosen method 1 is given by the difference in unit costs between the two manufacturing methods at that level of sales volume. The regret at having chosen method 1 would be $3300-$3100=$200. If we had chosen manufacturing method 2, we would regret nothing, since at this particular level of sales volume this is the best method. Thus the regret would be zero. At the 3000 annual sales volume level the position reverses. If we choose method 1, then we regret nothing because it is the lowest cost method at this level of sales. However, if we had chosen method 2, then we would regret that decision by the difference between the unit costs, i.e. $2400-$200=$400. The following figure shows the table for this decision; the regrets are shown in brackets. Annual Sales Volume Maximum Regret 1000 units 3000 units Method1 Method2 $3300 $3100 $2000 (0) $2400 (400) 200* 400
Regret Table If we choose method 1, we suffer a regret of wither $200 or zero and if we choose method 2, we suffer a regret zero or $400, depending on the level of sales. Thus the maximum regret we could suffer if we chose method 1 is $200, whereas the maximum regret we could suffer if we chose method 2 is $400. Under the regret decision rule we would choose the option which gave us the minimum of the maximum regrets-method 1. The regret decision rule is a powerful and intuitively attractive idea. In attempts to minimize the embarrassment we might feel at making the wrong decision. It is closely related to the economist’s traditional concept of the “opportunity cost” of a decision; that is, by choosing one alternative course of action? Unfortunately, as a decision rule the concept has a major disadvantage; if we are
choosing the alternative which will gave us the least cause for regret when compared with another alternative, and then the degree of regret will depend upon which other options are considered. This can cause problems of logical inconsistency. Suppose that while the two options open to Trailaid are being considered, the purchasing manager of the company suggests a third alternative. This is to subcontract virtually everything; a special modified shell assembly could be manufactured by the existing shell supplier and all the internal fittings could be specially ordered and bought out. All that would be left to do “in house” would be to assemble the trailer-a brief operation. This option would require practically no fixed costs and give a unit cost of about $2800, no matter what production levels were required. If the new option, let us call it method 3, is included in the decision process, then it should be included with the other two in the decision matrix. The following illustration shows all three options, their respective unit costs, and the regret values for each outcome. Annual Sales Volume Regret 1000 units 3000 units Method1 Method2 Method3 $3300 (500) $3100 (200) $2800 (0) $2000 (0) $2400 (400) $ 2800 (400) 500 400* 800 Maximum
Unit cost and regret tables with when the third option is included For the low demand level the option with the lowest unit cost is the new proposal, method 3. This has a regret value of zero. Should manufacturing method 2 have been chosen, then we would regret it by $300. Likewise, if manufacturing method 1 had been chosen, then the regret would be $500. If the demand is at the high level, then method 1 would have been the best decision, and so have a regret of zero. Method 2 is $400 and method 3 $800 more expensive than method 1. So, if method 1 is chosen we will regret the choice of either $500 or zero, if method 2 is chosen we will regret the choice by either $300 or $400, and if method 3 is chosen we will regret the choice by either zero or $800. Using the mimiax regret decision rule we could choose method 2, since this is the lowest of the maximum regrets. However, surely this is an inconsistency. By including the third option we have shifted our decision from method 1 to method 2. Yet, even when it is included, method 3 is not the preferred option by the regret decision rule! Herein lies the major problem with opportunity costing-against what other opportunity are you going to evaluate a particular option?
The expected value decision rule: The three criteria so far described may go some way towards clarifying the decision for us, but they do not use one of the potentially most useful factors within any management decision. That is our estimate of the likelihood of a particular situation occurring. The principle of expectation weights each outcome by the likelihood of it occurring. Suppose that, as yet, Trail aid are unwilling to put a definite figure on their chances of gaining the developing agency contract. They can still explore the decision further by calculating the expected unit costs associated with each method as the probability of gaining the contract varies. Let us call the probability of gaining the contract p, and then the probability of not gaining the contract will be 1-p. For method 1: expected unit cost + 3300 (1-p) +2000p For method 2: expected unit cost = 3100(1-p) + 2400p For method 3: expected unit cost = 2800(1-p) + 2800p=2800 Q5. Discuss the importance of objectives in decision making. What are the characteristics of decision objective? Unlike the strategies used in the previous section which tell you what to do, it is possible to learn how to make good decisions. It is possible to learn the process of making good strategic decisions by practiced deciding. This Web site is about practiced deciding, to which you must give enough thought. You will learn how to use your own abilities within a focused and structured decision process to actively and pro-actively make decisions. Active decision-making involves a responsible choice that you must make, while pro-active decision making is the practice of making decisions in advance just like "in the case of fire". Decision Problems or Decision Opportunities: At one time or another, organizations develop an over-abundance of decision problems. Sometimes they can be linked to organizational trauma, like down sizing, budget restraints or workload increases, but sometimes they evolve over time with no apparent triggering event. Increased complaining, a focus on reasons why things can't be done, and what seems to be a lack of active role characterize the "problem" organization. If the manager is walking negative and talking in a negative way, staff will follow. In many instances we forget to find positives. When an employee makes an impractical solution, we are quick to dismiss the idea. We should be identifying the effort while gently discussing the idea. Look for small victories, and talk about them. Turning a problem into an opportunity is a result of many little actions. Provide positive recognition as soon as you find out about good performance. Do not couple positive strokes with suggestions for improvement. Separate them. Combining them devalues the recognition for many people. It is easy to get caught in the general complaining and bitching, particularly in customers' complains. Decisions are an inevitable part of human activities. It requires the right attitude. Every problem, properly perceived, becomes an opportunity. In most situations the decision-maker must view the problems as opportunities rather than solving problems. For example, suppose you receive a serious complaint letter from a dissatisfied customer. You may turn this problem into an opportunity by finding out more about what is wrong with the product/service, learning from the customer's experience in order to improve the quality of your product/service. It all depends on the decision-maker's attitude. A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. Each problem has hidden in it an opportunity so powerful that it literally dwarfs the problem. The greatest success stories were created by people who recognized a problem and turned it into an opportunity.
A deliberate effort to broaden your experiences is the single most helpful effort in making good decisions. By exposing yourself to a variety of different experiences causes you to look at things from different perspectives. This provides you with extra mind-eyes to see problems and issues, and compare them to apparently unrelated situations and see new opportunities. Search process approach by diagramming: Most of your decisions can be made using your past experiences and some strategic thinking. You may encounter problems where one wrong decision could have adverse long-term effects and lead to severe mistakes and considerable failures. In many situations, small bad decisions turn out to have important consequences, as for example, in air traffic accidents. When things go wrong, one may try to discover the causes for it. In these types of decision problems that some historical knowledge and experience, the decisionmaker may apply a search process to find the main factor that cause the problem. This will enable the decision-maker to make the appropriate decisions and take the necessary steps to remedy the situation. From the start of human history, diagrams have been pervasive in communication. The role of diagrams and sketches in communication, cognition, creative thought, and decision-making is a growing field. Consider the question: "why has profit declined?" The following diagram contains a search process by diagramming for this decision problem: Subjective and Objective Decision-Making: Your decisions might be categorized in two groups with possible overlaps in some cases. One category is subjective decision-making which are private, such as how you want to live your life, or decide on something just because "It feels good". In subjective decisions you might also consider your strengths, weaknesses, opportunities and threats. The other group of decisions is objective, purely unemotional decision-makings, which are public, and require one to "Step outside one" so that you can discount your emotions. For example, a CIO deciding for the company must ask among other questions, "Can I convince the shareholders?" This group of decision-making involves responsibility, which requires rational, defensible and accountable decisions. Therefore, the first group consists of private decisions which might involve emotion, and the second is almost entirely based on rational decisionmaking. However, the really hard decisions involve a combination of both. The difficulty might arise from the fact that emotions and rational strategic thinking are on two different sides of the human brain, and in difficult decisions one must be able to use both sides simultaneously. The importance of the objectives In decision making: the importance of clear objectives in decision making lies in their ability to direct the decision making process in a purposeful way. Decision objectives form a hierarchy with primary objectives influencing strategic objectives, which in turn influence operational objectives. Primary objectives reflect the fundamental reason for the organization’s existence. Unless the objectives of a decision are clear and well understood, managers cannot possibly judge how far the preferred option will go towards achieving their objectives. Without an indication of the extent to which each option fulfils the objectives of the decision, the evaluation process cannot discriminate between options in any useful way. Therefore, the lack of clear, unambiguous and preferably explicit objectives takes a great deal of value away from the rest of the decision-making process, for in order to understand decision; we need to understand the direction in which the decision is supposed to be taking us. We must first of all distinguish between three types of objectives which may be found within a company, even though the boundaries between these three types of objectives can sometimes be unclear. These are: o Primary objectives: reflect the fundamental reason for the organization’s being. Objectives are likely to include, survival of the company, independence from outside control, profit, a desire to be big and important in the market place, and a desire for growth.
o Strategic objectives: strategic objectives guide the organization’s long term direction towards the achievement of primary objectives. Strategic objectives could include, for example, developing innovative products, keep a presence in a particular market, fund projects only from internally generated profits, and so on. o Operational objectives: interpret an organization’s strategic objectives into manageable terms for shorter term decision making. Operational objectives could include such things as controlling budgets tightly, giving good delivery, keeping unit costs low and so on. The most important attribute of strategic objectives is that they are appropriate for the organization’s primary objectives. Whereas operational objectives, above all else, need to be consistent with strategic objectives and each other. The characteristics of decision objective Strategic and operational objectives: Decision can be positions in a strategic operational continuum, and in the same way, so can their objectives. But strategic and operational objectives have different purposes and will be expressed in different ways. Nevertheless, the operational level objectives will have been shaped by whatever strategic objectives the firm has adopted. There must, therefore, be some link between strategic objectives and detailed operational objectives. In fact, there must be different layers of such objectives, which will start broad and become more specific as they approach the operational level. The following figure illustrates this hierarchical structure.
Strategic objectives need to be Appropriate to achieve primary Primary objectives, operational Objective need to be appropriate To the strategic objectives and Consistent with each other.
Multiple objectives An organisation’s objectives are not always immediately apparent or clear to an outsider. Observing the organisation’s actions, it might seem that its goals are ambiguous or even contradictory. One reason for this is that most organizations have more than one objective. For example, a company might want to achieve a good return on investment and grow in the marketplace and design innovative and exciting new products and conduct polices which are socially responsible. Where multiple objectives are involved, they can either conflict or be compatible with each other. However, even if the objectives do not directly conflict, they can compete when resources are scarce. For example, a company might have the objectives of developing an up-to date product range and entering new export
markets for its products. In themselves, these two objectives do not conflict. But with limited cash available, the company might have insufficient cash both to invest in a new product Research and Development program and pay a heavy entry price into a new market. Even when an organization is conscious that a decision involves multiple objectives, it may choose not to make all of the objectives explicit. Sometimes are being “too aware” of all the competing and conflicting objectives in a decision can diffuse the decision making energies within a group. For example, an organization considering the introduction of Quality Circles on the shop floor might be fully aware that it is almost impossible for any group of people to consider quality as an issue independent of other production problems. When more than one objective is being pursued, priorities must be given to each. Sometimes objectives which are set as having a high priority take the form of constraints on lower level objectives. Suppose that a company wishes to develop products with a good return of investment and also wishes to develop products which fit into the company’s existing product range. If the degree of fit with the present product range is regarded as being more important than the return on investment of a proposed product, then the objective might be stated as follows: “develop any product which has a likely return on investment higher than 15% provided the product is compatible with the company’s existing range of products. Implicit and explicit objectives: Underlying all organizational decision behavior are the objectives of the organization. These objectives may form an “invisible hand” which shapes decisions towards ultimate goals in a quiet and non-obvious way. Alternatively, objectives can be clearly stated ‘signposts” which are seen by all decision makers, pointing the way in an unambiguous manner towards the company’s goals. Which of these two states is true is determined by how explicit the organization has made its objectives. Unless objectives are: • Clearly and unambiguously stated (preferably written down) • Fully understood by all decision makers within the organization They can be subject to a variety of interpretations by different decision makers at different points in time. This may cause a lack of cohesion and direction in decision making. Yet organizations often find it very difficult to agree on a set of unambiguous objectives. Sometimes it may be “politically” necessary to stop short of a totally explicit statement of objectives, and develop a vague statement which can be agreed by all members of the coalition of managers who form the decision body. More detailed operational objectives may then develop by political activity. But, where it possible, explicit objectives do provide a useful discipline for an organization’s top decision makers. If also acts as the focus for any debate about the appropriateness or consistency of the objectives. Although just because objectives are written down, it does not mean that they will necessarily be useful. The clichés frequently found in a company’s financial report would rarely make useful operational objectives for decision making. Some important points when making decision explicit are: 1. Do objectives state what the organization does not want to do?”.... The concept of goals implies aims forgone, as well as those which are sought; otherwise all that remains a set of Boy Scout maxims...” 2. Are the objectives a useful guide to action? Especially when guiding the evaluation of decision alternatives. The objective “to diversify” is less directive, therefore useful, than the objective “to diversify into complementary industries”. 3. Are the objectives reasonably comprehensive? Objectives should state the
implications for all stakeholders in the organization, shareholders, managers, workers, suppliers, etc. Efficiency and effectiveness Consider an organization as being represented very simply by a black box. One end takes in the resources which the organization needs for operation-people, materials and facilities- the other end puts out finished goods or services which are sold to customers. Within the black box the transformation of the resources into goods and services takes place. Many decisions taken within the box in one way or another concern the efficiency of this transformation process- where efficiency is measured as some function of output per unit of input resource. Measures which are used to describe transformation efficiency include: output per employee, facilities utilization, unit cost, stock turnover, etc. the following figure shows the input/output nature of efficiency objectives.
Operation efficiency For example, a regional sales manager, deciding how to deploy sales people, will be concerned to allocate areas so as to achieve coverage of the region as efficiently as possible with no overlaps, and using the minimum number of people. Similarly, a production manager, when designing a production system, will be concerned to ensure the best achievable labour productivity, machine utilization and raw materials scrap rates. In this way cost per unit of output is minimized. Although efficiency objectives are often important in decision making, they rarely reveal the complete picture. There is useful purpose served in covering a sales region efficiently, if the sales people are not effective in bringing in the orders. Likewise, no matter how efficiently the production manager products finished goods, the effectiveness of his production will depend on factors other than unit cost. In other words, an organization must do the right thing as well as do it well. Effectiveness objectives consider the characteristics of the output as well as the efficiency of its generation The next figure illustrates this: Input resources
The characteristics of an organization’s output which might be considered include such things as: • The specification of the product or service (What it contains and how it performs) • The quality of the product or service • The reliability of the goods or services • The flexibility which the organization has to change its activities. Wild calls these output characteristic objectives “customer service objectives” and the efficiency objectives “resource productivity” objectives. Often decisions involved trade-offs between elements within the resources productivity category or within the customer service category. Similarly, tradeoffs also occur between the two categories. For example, the manager of a city bus company has to decide how many maintenance crews to employ for the repair and overhaul of the company’s vehicles. If the number of crews is too low then, although they will be working a high proportion of their time, and therefore, suffers low vehicle productivity. If the number of maintenance crews hired is too high then, although the vehicles will be repaired promptly, giving high vehicle productivity, the maintenance crews will be under-utilized, meaning low labour productivity. Furthermore, as well as effecting organizational efficiency, facilities productivity influences vehicle availability and therefore customer service. A solution must be found which balances the cost needs of labour and vehicle utilization, and also provides a level of vehicle availability compatible with the company’s customer service objectives. Changing objectives: A company’s objectives are unlikely to remain constant in the long term. Even if the prime objective remains substantially unaltered, for example “to survive”, the means of achieving this, and therefore the other lower level objectives of the organization, will change over a period of time. The two major reasons for companies changing their objectives are: Changes occurring in the organization’s environment Changes occurring in the organization itself When changing their goals, companies rarely dismiss totally objectives which they previously held dear. A company which had “growth in market share” as one of its primary objectives, is unlikely to forget growth entirely if it becomes the market leader. Rather, its priorities within the mix of objectives will change. Maximizing productivity might also have been one of the company’s aims, but whereas hitherto it had been dominated by the growth objective, it now might become itself the dominating goal of the organization. Likewise, if industrial pollution control is a current social issue, “environmental responsibility” as an objective of the company will increase in importance within the total mix of objectives. When the objective is met, or the public interest in the issue declines, then it will itself decline in the importance rankings of the company’s objectives. The rate of change of an organization’s objectives depends partly on their level in the objective hierarch. Primary objectives, however, as the means of achieving the high level objectives, are more likely to be forced into adapting and changing under the forces of changing circumstances. Intrinsic and extrinsic objectives The decision objectives which managers talk about as applying to their decisions are usually extrinsic objectives. They exist because they are regarded as being efficient in achieving the next objective up in the objective hierarchy. The importance of the intrinsic worth of objectives should not be under-related. There are many examples of the direction of an organization being determined by its manager’s intrinsic objections. For example, the airline owner who sets his company’s objectives as “… to survive as a company, to return profits at a rate
comparable with other companies and to grow in the marketplace…” the owner fails to mention that these objectives must be achieved by owing an airline, not an engineering company or a newspaper. He enjoys the flying business and might resist a decision to move into say, the airport hotel business, even though it would be consistent with his long-term aims. It might have extrinsic worth but holds very little intrinsic worth for the owner. Another example, is the engineering company who decide to survive and give a good return to their investors by remaining in the high-quality, high-technology, one-off, specialist engineering field, rather than develop standardized products and sell in higher volume. It may make very good instrumental sense to stay in the market in which they have developed expertise and a good reputation, but in addition to the extrinsic worth of their chain of objectives could be the personal interest they get out of seeing each product as a new challenge to their engineering skills. Small retail owners have been found to continue business when, by normal financial criteria, they would have closed down, because being in business was an end in itself. The independence provided by being “one’s own boss” was an over-riding goal (or organizational mission as it is sometimes called). Often there has to be some compromise between the demands of extrinsic and intrinsic pulls on objectives formulation. The airline executive might not want to get into the hotel business, but what if he sees that it is the only way for the airline to compete with its rivals? The engineering company might get it sees this as the only way to avoid damaging fluctuation in the company’s order book? The following example will illustrate the conflict between implicit and explicit objectives. Example-the Earth wise collective: earth wise was a retail collective which sold whole-foods to the general public. As well as rice, beans, cereals, dried fruit, etc., they also retailed a limited variety of organically grown vegetables. The collective had been set up some seven years earlier by three students of the local university. They had set up the capital to start the business and were paid interest on the capital, but had no rights of ownership of the business. Decision making rights were shared by all members of the collective, which now numbered five. As to the objectives of the collective, one member described her perception as follows: the original three people, who set the shop up, saw it as a means of providing themselves with an occupation which would not be too taxing and socially useful at the same time. More importantly, though, it was a means of supporting themselves financially without having to work for an organization in an employer /employee relationship. I guess that we see the business in more or less the same way. It is a pleasant thing to do for a few years after you leave college, and it provides just enough money for us to live on. We all believe in eating the type of food we sell, and we know we are providing a service to other people who want to buy it. I guess there is something evangelical in the way we operate, but not to the point that we constantly preach at customers. Nevertheless, our beliefs do influence all the decisions we take about the business. The effect of the members’ intrinsic objectives can be illustrated by describing two of the business decisions taken since the founding of the shop. The location decision: four years after the founding of the business, the lease on the shop expired, and the members of the collective at the time had to decide on a suitable new location. Their four years’ experience had taught them that the location of a retail business is one of the major factors in determining its success. Ideally, all the members of the collective would have preferred a shop location in one of the poorer districts of the city-it was, after all, the poorer people who were most in need of wholesome basic foods which the shop could provide. If the business saw one of its objectives as educating people into a simpler but better diet, then surely it should go where it could do the most good. The members of the collective were aware, however, that the vast majority of their clientele was middle-class. it was the younger, educated, relatively more affluent citizens who were more attracted to the types of food the shop sold.
Here, then, was the dilemma. If the objective of the decision was “choose a location where there is the most need”, then one of the middle-class areas of the city would be selected. The “go to the greatest need” objective had far more intrinsic worth to the members of the collective than the “go to the greatest business” objective. However, in extrinsic, instrumental, terms the position was reversed. The decision was eventually taken to move into an area on the edge of an affluent part of the city where they could retain their old customers and attract new ones relatively easily. This was justified on the grounds that it was better to survive, and do some good, than fail gloriously! The pricing decision: for the first two years of the business, the prices of the goods sold in the shop had been determined by simple “cost plus” calculations. The selling prices were fixed at the percentage over cost which would more or less balance the business’s need for cash with its forecast revenue. Although the system worked well, the collective came to feel that they were missing an opportunity to reflect more accurately their philosophy in their pricing objectives. It was decided to vary the margin on different products. Margins were set on the basis of how “staple” the collective considered products. For example, some products which were considered to form a basic diet such as beans, lentils, rice, and whole meal flour had very low margins- sometimes zero. Other products which the collective considered something of a luxury, for example, dried fruit and some types of cooking oil, had margins which were considerably higher. Since the change, the system had been working very well. In fact, the collective found that the price changes had very little effect on total demand for the various products. Both objectives-prices in the most straightforward way and price to reflect the collective’s philosophy-had identical extrinsic worth, in so much as they both brought in the same amount of revenue. However, the latter objective had considerably more intrinsic worth to the organization, which derived considerable satisfaction form operating things in this manner. Q6. What is the key role of information in decision making? Also discuss the information needs in stable and uncertain conditions? The key role of information in decision making Perfect knowledge and, therefore, perfect information, has previously been identified as a necessary operating condition for rational decision making. Even if we accept that this condition is not likely to be achieved, it is clear that information will play a vital part in the quality of solution achieved. In addition information plays two other roles in the organizational context. • Managers need to gather and to collate information in order to decide whether or not a problem exists. • Information is needed after the implementation of the chosen solution in order to determine its effectiveness The first task therefore in establishing an information process for decision making is to identify and establish the nature of the information required and the sources from which it is likely to come. These will vary according to the nature of the task and problems being worked on. Weiland and uillrich identify three basic factors which will affect the complexity of the information process required. These are: Task uncertainty The greater the degree of novelty and uncertainty in the task or problem to be faced, the greater the amount of information that has to be processed and shared amongst those involved in the decision making. Companies and departments that work extensively on non-routine problems or one-offs, therefore, need to develop communication structures which allow such sharing of information. In network terms this would require the use of decentralized structures. On the other hand, where
the problems being worked on are relatively routine, much of the information needed will be known and information channels can then be set up. This allows the use of a centralized network with advantages of speed and initiation of action. The number of elements involved The decision situation is complicated by the size of the organization, the range of different activities involved in decision making, and the number of tasks or products undertaken at any one time. Each of these factors is likely to require an increase in the number and intensity of information flows. The interdependence of decisions In situations where are likely to be knock-on effects when decisions are made, and then there is a need for extensive communication of information between departments, project teams, and decision makers. A change in body styling for a motor car, for the suspension, which has to be re-designed. This in turn, may affect cost, or it may allow further possibilities for the designers which were not possible with the old suspension. The complexity and nature of the system for sharing and using information seems then to depend on the nature of the task. Managers working in organizations where tasks are relatively stable and routine, where there is little interdependence, need relatively simple systems for processing information. Those who have to cope with relatively high degrees of novelty and uncertainty in the problems they face need as much information as they can get, together with highly developed channels of communication, so as to make the best possible use of that information. In both situations, managers are faced with the problem of “what kind” of information is needed and “where” it might come form. Again this is likely to be related to the nature of the predominant or key tasks they face. Information needs in stable conditions: managers who operate in relatively stable product (market environments find most of their information needs concentrated in. the basic nature of the product or service is likely to be well established, and will vary only in limited and predictable ways. the problems that arise tend to be concerned with internal issues such as snags in production or processing or in the implementation of the decision, and in monitoring effectiveness. Changes in input conditions do not have a great impact, and therefore the amount of effort which is put into obtaining input information can be reduced. This situation is represented in the following figure. Information needs under stable conditions focus on ion Needs
The danger here, of course, is that companies whose operations and markets have been stable for some considerable time may neglect to monitor such outside conditions altogether. Then, when changes do occur, any response has to be reactive rather than proactive, with the corresponding loss of initiative and
advantage. Even in stable situations, therefore, it will necessary to gather information about one’s environment, in order to detect any movement away from that stability. The number of organizations and, for that matter, the number of managers who operate in an environment that can genuinely be said to be stable, must clearly be declining rapidly. The ever increasing rate of technological, economic and political change affects more and more organizations in industrial, commercial and service fields. Information sources and systems must be adapted to meet situations of instability and uncertainty. Information needs in condition of uncertainty: the more decision makers are faced with variety and variability in the problems they face, the more they require investing in gathering information in input conditions. These information needs are represented in the following figure:
increased information needs Needs
Information needs under
As well as this relocation of focus, uncertainty often means that “extra” resources have to be allocated to information gathering and evaluation. Firstly, this is because the lack of routine means that any information system has to be flexible enough to be able to draw information forms many outside information sources so as to meet the needs of a range of one-off decisions. Secondly, the task of monitoring implementation effectiveness and the achievement of objectives for a series of one-off decisions is made more difficult in such circumstances. Thirdly, the sheer amount of information that is available to be monitored and, in some cases, the highly technical nature and format of that information, can mean that the decision maker is highly dependent on other people in the organization for its supply and for its interpretation. The more complex organizations have become, the more they have developed specialist functions, recruiting employees with widely different skills and experience. For instance, a company may employ scientists, engineers and designers to keep abreast of developments in knowledge and applications, relying on their competence and judgments in assessing which of them might be of potential value and use to the company. The same company may rely heavily on its sales force in monitoring customer interests and market trends. As products and services become more sophisticated, the number of separate skills to be managed increases, and consequently the volume of information necessary for
their successful integration goes up. The argument here is not that increases in the volume of information are the “unfortunate consequences” of decision making in conditions of rapid change and of uncertainty. The establishment of adequate information sources and channels is seen as a “necessary precondition” for effective decision making in these conditions. There is a danger, though, that the cost of gathering information outweighs the benefits that are gained from it. Q7. Creativity is an inherent capability and can not be stimulated and improved. Discuss. What in your opinion should the creative management strategy be? Creative thinking plays a valuable role in management decision making. The creative management strategy: the turning of potential into actual behavior which is (relatively) highly creative is a central part of the manager’s task, especially in the decision making situation. Such situations provide an opportunity for the manager to create the kind of organizational climate in which creative behavior is encouraged, leading to creative and innovative decisions and solutions to problems. Such a climate would be characterized by: 1. 2. 3. the free flow of information and open access to it encouragement and reward for finding, using and sharing such information and rewards for the positive acceptance of change and risk taking
Using such ideas as a basis for the kind of climate which might encourage creative problem solving and decision making, we can identify a managerial strategy for its achievement or, at least, for its fostering and encouragement. Whilst the development of any particular climate is not entirely within the hands of the manager, he or she is obviously a key figure who’s actions can be particularly influential in “seeding” the process. Certainly, management style can be very effective in blocking or preventing creativity! Any successful strategy for “creativity management” must be tailored to suit particular circumstances, but it is possible to identify two key areas. These are: • the application of control and reward systems that emphasize creativity and associated captivities • the development of a supportive personal style on the part of the manager To summarize than the answer to this question will be as follow: The acts of recognizing and formulating the problem, and the generation of a range of possible solutions, require a creative approach which must somehow be brought together with the more analytical processes of definition and evaluation. Unfortunately, creativity is often diverted away form organizational goals and purposes by structural or personal blocks, including pressures for efficiency, the establishment of creative versus non-creative roles, variations in occupation and in status, the process of socialization into non-creative activity, and a lack of expectation of creativity form the majority of employees. Really creative and innovative organizations are those which are able to use the full creative talents of all of their employees, rather than relying on those of a few. Managers can do a lot to encourage the development of creative behavior by adopting a supportive personal style, and by developing reward and control systems which: • • • • Link rewards to task accomplishment Set high performance standards Reward cooperative activities Encourage adaptation and change
Reward risk taking
A number of operational techniques have been developed for use in short term problem solving and decision making. These rely heavily on the separation out of judgment and evaluation from idea generation and on giving equal consideration to all ideas that are generated. Q8. In evaluating decision options what are the factors that may generally by considered? Write a comprehensive note on two such factors. • General factors to be considered when evaluating decision: the precise set of attributes to be evaluated for each option should depend on the nature of the decision itself. There will almost certainly be several of them, since very few real decisions can be evaluated in terms of one attribute alone. Although there is no “all purpose” list of attributes to be evaluated, there are some factors which have a general importance and therefore need some further discussion. These factors are as follows: o The option’s “resource requirements” what resources would be needed to implement the option, and how does this requirement match up to individual capabilities? o The option’s “degree of fit” with other activities: how much congruence exists between an option and the other activities on which the organization is currently engaged? o The option’s “degree of risk” the likelihood and magnitude of any deviation form the expected set of consequences of an option o The option’s “financial consequences” the measurement and description of the option’s financial pay-offs. o The option’s affect on future “flexibility” the degree to which choosing an option constrains future decisions Of these factors, the first is different to the others, or at least will probably be used differently. Along with the evaluation of whatever other attributes are considered appropriate, the option’s “degree of fit” financial pay-offs, degree of risk, and affect on future flexibility will together determine its acceptability to the decision body. The option’s resource requirements, on the other hand, largely determine its feasibility. • Comprehensive note on two of such factors: the following two factors will be discussed comprehensively: o Resource requirements: when assessing resource requirements, the following question should be asked: What technical or human skills are required to implement the option? What are the capacity requirements over the evaluation period? What are the funding or cash requirements over the evaluation period? Skills requirements: every decision option will need a set of skills to be present within the organization, in order that it can be successfully implemented. If an option requires a course of action which is very similar to the usual activities of the organization, then it is likely that the necessary skills will already be present. If, however, the option involves the organization in a completely novel set of actions, then it is necessary to identify the required skills to match these against those existing in the organization. As an example, consider a small engineering design consultancy partnership which has hitherto specialized in designing port facilities for developing countries. They are approached by a national government, for whom they have worked before, to see whether the company would be interested in bidding for the contract for a large petrochemical plant and docks complex. The contract involves not only the engineering and design of the complex, but also managing the construction itself. The job would be by far the biggest the company had ever undertaken. It would
involve hiring more engineers, and designers, and also getting involved in project management for the first time. The first consideration the company will face is, do they have sufficient expertise within the company to cope with this kind of work? The first problem lies in identifying the type of skills necessary. As one of company’s managers puts it “…it’s not just a mater of hiring the expertise… it’s knowing what it is that you want to hire”. After consideration, the company decides to classify the expertise needed for the whole job by the skills necessary in the basic engineering, detailed design and project management of both petrochemical plant work and docks facility work. The following figure shows the results of their investigation into the existing skills within the company. It also illustrates that the company is short of skills in three areas: project management, both in docks and petrochemical plant construction and basic petrochemical plant engineering. The company must now decide how it fills these gaps in its expertise. Generally, an organization can either develop its existing personnel, or hire new people. In this case, as we shall see, the expansion in aggregate workforce, which would be necessary to accept the contract, probably means that hiring, rather than development, would be more appropriate. project management Docks Facilities Petrochemical plant Expertise requirements for petrochemical/docks complex Capacity requirements: Determining capacity requirements involves detailing the quantity of resourcespeople, facilities, space, materials, etc. - required for each option. The number of people required and facilities requirements will depend on the amount of work involved in implementing the option. Unfortunately, there is no convenient universal measure of work, so the time taken to do the work is often used as a proxy measure. Because of this, the preliminaries to establishing capacity requirements often involve estimating the time necessary to perform whatever tasks are involved in the option. In the case of the engineering consultancy company, their task is to assess the amount of work which is likely to be involved in the proposed project. They do this by asking their engineers to estimate the amount of basic engineering and detailed design work necessary for each part of the job. Work in this case is estimated in terms of “person/weeks” of effort. The company knows the date by which the total project would need to be finished, and so can superimpose the aggregate work load for the proposed project on to its existing work environment. Financial requirements: perhaps the most important resources requirement question is, “how much cash would the option require, and can we afford it?” for some operational decisions this could mean simply examining a one-off cost, such as the purchase price of a machine. Other, more strategic decisions may need an examination of the effect of each option on the case requirements of the whole organization. In this of decision, it is often worth simulating the organization’s cash flow over the period of time being considered. This can be done by computing the total inflow of cash over time as it occurs, and subtracting from it the total outflow of cash as it occurs. This then leaves the net funding requirements for the option. For example, the engineering consultants first of all find out the proposed Basic engineering detailed design
schedule of payments form the customers as the work proceeds. They then detail and cost the extra personnel, computing facilities, and office space as these costs occur over the project period. The degree of change in resource requirements: We have considered the resource requirements of a decision option in terms of the skills necessary, the aggregate level of operating capacity necessary, and the funding requirements. Any one of these could render and option infeasible. If an organization does not have the skills to implement an option, nor is it able to recruit such skills, then the option cannot be considered feasible. If the operating capacity required by an option exceeds available capacity, it is again infeasible. Similarly, if the funds required to implement the option exceed the borrowing capability of the organization, then we cannot pursue that particular option. However, even if all these resource requirements can quite feasibly be obtained individually by the organization, the degree of change in the total resource position of the company might itself be infeasible. So, in the example we have been using throughout, the engineering consultancy company might be able to obtain all the required resources individually. They believe that they can recruit the engineering and management expertise. They can also obtain this expertise in sufficient quantity from the labor market. Furthermore, they believe that they could fund the project until it broke even. Yet, the company may still regard the project as infeasible. It may decide that an expansion of its activities, which more than doubled in size in six months, would put too great a strain on its own capability of organizing itself. It may want to grow, but may not be able to manage growth at such a high rate. Thus, it is not the absolute level of resource requirements which has rendered the project infeasible. Rather, it is the rate of change in resource requirements which is regarded as infeasible. o Degree of risk: the degree of risk involved in any decision option must be evaluated. Risk can be satisfactorily measured by means of the coefficient of variation of the distribution of possible outcomes for each option. The risk of each option can then be compared both with each other, on a risk/return comparison, and with the organization’s existing portfolio of risk bearing activities. Evaluating risk: the risk inherent in any decision option can be as a result of the decision maker’s inability to product or estimate: The internal effects of an option within the organization, or The environmental conditions, prevailing after the decision is taken, or The reaction of other bodies within the environment to the decision. Whatever its source, risk is conveniently described by the range of possible outcomes. It is discussed that we use the “outcome balance” to illustrate risk where only a limited number of outcomes were possible, and a probability distribution to describe risk where outcomes were measured on a continuous scale. Yet, often these measures of risk are more sophisticated than crude preliminary evaluation warrants. If so, then perhaps the simplest, but the most powerful method of evaluating risk, is just to assess the worst possible outcome form the option. Then we can ask the question, “would we be prepared to accept such a consequence?” this is sometimes called assessing the “downside” risk of an option. So, if the outcomes of two options A and B are shown in the following figure, then even though option B might be preferred on the basis of expected payoff, its downside risk could be too great for the company to bear. Option A Option B
Worst Outcome Option B
worst outcome option A
expected outcome option A
expected outcome option B
Outcome distributions for two options Generally, though, the most useful measure of the risk of an option is the dispersion or spread of its possible outcomes, and the most convenient measure of dispersion is standard deviation. But this alone is inadequate for evaluation. To say that one option has a standard deviation of $100 and another one of $1000, means nothing without knowing each option’s expected outcome as well. The standard deviation of $100 could apply to an option which had an expected pay-off of $10, and was therefore a risky option, whereas the standard deviation of $1000 could apply to an option whose expected pay-off was $1million. The most satisfactory method of expressing the spread of consequences for evaluation purposes is as a proportion of the expected pay-off. The most common form of such a measure is the coefficient of variation (cover) of a distribution where, Standard deviation Cover = --------------------------Mean Any option involving risk can be evaluated in terms of its expected pay-off and its risk, represented by the cover of the distribution of its possible outcomes. The below figure shows four decision options, A, B, X, and Y, plotted on a graph with the coefficient of variation and the expected pay-off as the axes.
Expected payoff The efficient frontier for payoff and risk The top left-hand part of the graph represents the undesirable area where options have low expected pay-offs, yet run high risks. The bottom right-hand part of the
graph includes the extremely attractive options which give a high pay-off, but involve little risk. Somewhere, between these two extremes, will lie a line representing combinations of risk and pay-off which are the best that can be hoped for in a particular decision. Options X and Y are contained in this set- sometimes called the efficient frontier. Any option which is positioned on the line is said to dominate any other option which lies towards the top left-hand part of the graph. Os option X dominates option A (X gives a better pay-off for the same risk) and option Y dominates option B (Y has a lower risk for the name pay-off). The portfolio approach to risk: the above figure allows managers to asses the risks associated with an option, either in isolation, or by comparing its risk/return characteristics against other options. What it cannot do is indicate the combined risk/return position of a number of activities taken together. It follows, then, that neither can it indicate the influence of including a further option on the total risk/return position of the organization. Yet, evaluating risk in the context of the other activities of the organization is necessary, since it will often determine the company’s attitude to risk at any point in time. An organization which already has several high risk projects might not want to take on another. Conversely, another organization with safe but low return investments might look more favorably on the same risky investment. Expressed in the language of the financial investor, the basis of evaluation should be the total portfolio o fan organization’s investment. A portfolio used in this sense, consists of several activities projects, securities or investments for which expected returns and their associated risks may be estimated. The expected return from the portfolio is simply the sum of the expected returns from the individual activities. The total portfolio’s degree of risk, however, will depend on three factors: The degree of risk of each activity in the portfolio The amount invested in each activity The degree of correlation of connection between the activities The first two factors are intuitively obvious, but the third needs some explanation. Suppose two activities are subject in the same way to exactly the same set of uncontrollable factors. If the pay-off from one activity declines, then so will the pay-off from the other-both eggs will be in the same basket. But, if the uncontrollable factors in the decision influence the two activities in opposite directions, then a reduction in the pay-off from one activity will, be accompanied by an increase in the pay-off from the other. So the effect that any additional investment has on the hazard ness of the group of investment will depend on whether the risk derives from the same set of uncontrollable factors in the same way, that is, the extent to which the risks from investments are correlated. The nature of the correlation between two investments can range from: Perfect positive correlation-if the uncontrollable factors cause an increase in the pay-off from one investment, there will certainly be an increase from the pay-off of the other. Likewise, a decrease in the pay-off from one investment will mean a decrease in the pay-off from the other. Through Totally uncorrelated-increase or decrease in pay-off from one investment adds nothing to our knowledge as to whether the pay-off from the other will increase, decrease or remain unchanged. To Perfect negative correlation-if the uncontrollable factors cause an increase in the pay-off from one investment there will necessarily be a decrease in the pay-off from the other and vice-versa. Adding further investments which are strongly positively correlated to the existing group of activities will increase the risk of the total portfolio. But
including new investments which are negatively correlated will decrease the portfolio’s risk. For example, suppose a company is already investing heavily in railway transportation equipment. The company knows that the government is considering a large capital investment program in the rail network, but has not yet decided. The company is faced with deciding between two product development options. One involves developing a smaller engine which would power large freight trucks. The two options have identical risk return characteristics. That is, if they were both marked on the figure (efficient frontier for payoff and risk), they would occupy the same position on the graph. However, when added to the other activities of the company, they will have quite different effects on the hazard ness of the company’s activities, taken as a whole. The first option-developing the locomotive engine-is subject to very similar uncontrollable factors as the other activities of the company. If the governments not go ahead with the investment program, then all railway related work will flourish; if it does not, it will add to the hazard ness of the total portfolio. The second optiondeveloping the truck engine-is not subject to the same set of uncontrollable factors as the other activities of the company. Should the government not go ahead with the capital investment program, then the market for truck engines will not be adversely affected. It might even benefit, since freight will be diverted fro the railway to the trucking companies. Thus, adding the second option to the activities of the company would decrease the risk of the company’s total set of activities. Of course, there may be other considerations, such as having to set up a different set of marketing activities, if the second option is adopted. But the example does illustrate that risk can be more meaningfully assessed in the context of the other activities of the company. Q9. Develop a cause effect diagram for a stock control situation and solve the following problems using an appropriate mathematical model developed in chapter-6 of the Book by Cooke & Slack. Demand of a product for a firm is 1200 units per year. Find total ordering costs per year for the firm subject to the conditions that the company decides to place two orders of 600 units each in the year and that the cost of placing an order in Rs.25/• Cause effect diagram for a stock control situation: before developing the cause effect diagram let see the simplest method of indicating that some relationship exists between two factors within a decision is to show the direction of influence by arrows on a cause-effect diagram. If, for example, it is thought that price and promotion expenditure influence the total demand for a product, we could show this as in the following figure.
Simple cost effect relationship These diagrams can be drawn by working backwards from the endogenous factors, specifying the influencing factors, until the exogenous variables are reached. The next figure illustrates this process for one part of the stock control decision.
Cause-effect model describing influences on total ordering cost. The endogenous factor “total ordering cost” will be determined by the organizational cost of making an order together with “order frequency”. The order frequency is in its turn a function of “demand rate” and “order quantity”, both exogenous variables. Following this procedure of tracing the reverse influences, a model can gradually be built up of the interactions between the factors in a decision. The following figure shows a fuller model of stock control decision.
A cause-effect model of the stock control decision
As well as exogenous and endogenous variables, there are intermediate variables in this model, namely “order frequency”, “average stock level” and “maximum stock level”. These variables are influenced by the exogenous factors, and in turn influence the endogenous factors, but are internal to the model. They are sometimes referred to as state variables. Cause-effect models are a useful step in understanding a decision. Their major disadvantage is that they are not capable of describing the nature of the relationship between decision factors in any detailed manner. To do this, we need the more formal symbolic notation of mathematics. Cause-effect models, however, are often used as a preliminary step towards the development of more powerful symbolic models. • By use of appropriate mathematical model (developed in chapter-6 of the Book by Cooke and Slack) solution of the following problems Demand of a product for a firm is 1200 units per year. Find total ordering costs per year for the firm subject to the conditions that the company decides to place
two orders of 600 units each in the year and that the cost of placing an order in Rs.25/This is the mathematical model developed by Cooke and Slack; Tº = Cº R Q Now in the given question there is: T C R Q = = = = total ordering cost per year (to be found)? organizational cost of placing an order = Rs.25/ demand per time period = 1200 units quantity = 600units 50, so T = 50 X --------------
25X1200 T = ---------------- = 600
Q10. A firm is considering introducing a new product into the market. The company’s competitor is also considering doing so. The following matrix gives the cost increased by the firm in its sales promotion efforts:
Competitor action Company’s Strategy
s1= new product s2= no new product
Find the value of perfect information also convert the above matrix into a decision tree. Competitor action Company’s Strategy
s1= new product s2= no new product
Find the value of perfect information also convert the above matrix into a decision tree.
This question must have two parts.
• To find the value of perfect information and to convert the above matrix into a decision tree. A decision matrix is a method of meddling relatively straightforward decision under uncertainty in such way as to make explicit the option open to the decision taker, the states of the nature pertinent to the decision, and the decision rule used to choose between options. The following example will illustrate how such a matrix can be used. Option S1 S2 S3 I I I I Sm State of nature N1 N2 N3 ------------------------Nn O11 O12 O13 -----------------------------------O1n O21 O22 O23------------------------------------02n O31 032 033--------------------------------0m1 Om2 Om3 -----------------------Omn
For the questions:
Company’s Strategy s1= new product s2= no new product
Summary of Decision Making:A decision is an allocation of resources. It can be likened to writing a check and delivering it to the payee. It is irrevocable, except that a new decision may reverse it. In the same way that a check is signed by the account owner, a decision is made by the decision maker. The decision maker is one who has authority over the resources being allocated. Presumably, he (or she) makes the decision in order to further some objective, which is what he hopes to achieve by allocating the resources. Key distinction: decision vs. objective. Why decision is important: The decision might not succeed in achieving the objective. One might spend the funds and yet, for any number of reasons, achieve no acceleration at all. The decision maker will make decisions consistent with his values, which are those things that are important to him, especially those that are relevant to this decision. A common value is economic, according to which the decision maker will attempt to increase his wealth. Others might be personal, such as happiness or security, or social, such as fairness. The decision maker might set a goal for his decision, which is a specific degree
of satisfaction of a given objective. For example, the objective of the decision might be to increase wealth, and the goal might be to make a million dollars. A decision maker might employ decision analysis, which is a structured way of thinking about how the action taken in the current decision would lead to a result. In doing this, one distinguishes three features of the situation: the decision to be made, the chance and unknown events which can affect the result, and the result itself. Decision analysis then constructs models, logical and perhaps even mathematical representations of the relationships within and between these three features of the decision situation. The models then allow the decision maker to estimate the possible implications of each course of action that he might take, so that he can better understand the relationship between his actions and his objectives. The three features of a decision situation At the time of the decision, the decision maker has available to him at least two alternatives, which are the courses of action that he might take. When he chooses an alternative and commits to it, he has made the decision and then uncertainties come into play. These are those uncontrollable elements that we sometimes call luck. Different alternatives that the decision maker might choose might subject him to different uncertainties, but in every case the alternatives combine with the uncertainties to produce the outcome. The outcome is the result of the decision situation and is measured on the scale of the decision maker's values. Since the outcome is the result not only of the chosen alternative but also of the uncertainties, it is itself an uncertainty. For example, an objective might be to increase wealth, but any alternative intended to lead to that outcome might lead instead to poverty. Key distinction: good decision vs. good outcome Example: Someone who buys a lottery ticket and wins the lottery obtains a good outcome. Yet, the decision to buy the lottery ticket may or may not have been a good decision. Why it's important: A bad decision may lead to a good outcome and conversely a good decision may lead to a bad outcome. The quality of a decision must be evaluated on the basis of the decision maker's alternatives, information, values, and logic at the time the decision was made. Types of decisions A simple decision is one in which there is only one decision to be made, even though there might be many alternatives. An example of this is the very limited consideration of purchasing collision insurance for an automobile. The decision maker might be interested only in comparing three alternatives, such as no insurance, insurance with $100 deductible, or a policy with $500 deductible. If at the same time we attempt to add another decision, we have created a problem of strategy, which is a situation in which several decisions are to be made at the same time. Each of the decisions in the strategy will have different alternatives, and the decision maker will attempt to choose a coherent combination of alternatives. For example, if the decision maker is considering whether to buy a new car or keep his 10-year old one, and at the same time he is considering the insurance decision, he might compare only two candidate strategies: keep the old car and not buy collision insurance, or buy a new car and buy some level of collision insurance. Key distinction: strategy vs. goal Example: Launching two new products a year is a goal. Investing in additional personnel, while at the same time stopping the funding of some stalled projects, is a strategy intended to lead to that goal. Why it's important: Strategy describes a collection of actions that the decision maker takes. The outcome of the actions is uncertain, but one of the possible outcomes is attainment of that goal. An important special case of a strategy problem is the portfolio problem, in which the various decisions faced in the strategy are of a similar nature, and the
decision maker does not have sufficient resources for funding all combinations of alternatives. An example is an investment portfolio, in which the decision maker is aware of a good number of investments he would like to make, but is unable to afford all of them. Especially in situations like this example, people sometimes address the problem as one of performing a prioritization of the various opportunities. If one opportunity is prioritized higher than another, then, in the case of limited resources, the decision maker would prefer to invest in the former than in the latter. Key distinction: decision vs. prioritization Example: To assert that one would rather fund development project A than development project B, and project B than project C, is a prioritization. Actually funding project A is a decision. Why it's important: A prioritization might be an intermediate step en route to a decision, and one might even use a prioritization as a tool to aid in a decision. Some decisions offer the opportunity to adopt a particular type of alternative called an option. An option is an alternative that permits a future decision following revelation of information. All options are alternatives, but not all alternatives are options. Key distinction: alternative vs. option Example: To allocate the resources needed to drill an oil well is an alternative. To pay money now to reserve the right to drill after geological testing is done is an alternative that is also an option. Why it's important: Options, as an important type of alternatives, have the potential of adding value to a decision situation. A wise decision maker is alert to that possibility, and actively searches for valuable options. Uncertainties Decision making would be easy if we could predict reliably what outcome would follow from the selection of which alternative. To this end decision makers use forecasts, or predictions of the future, to guide their choice of alternatives. They attempt to predict the outcome, on all values of interest to the decision maker, associated with each alternative that might be chosen. For example, the decision maker may use forecasts of market size, market share, prices and production costs in order to predict the profits associated with a new product. When the quantities forecasted are uncertain, forecasters can describe their uncertainty about these uncertainties using a probability distribution. A probability distribution is a mathematical form for capturing what we know about uncertainties, and how confident we are of what we know. A probability distribution could record, for example, that the decision maker (or his designated expert) believes that there is a 30 percent chance of a product having less than 10 percent market share 2 years after its launch, and a 60 percent chance of the product having less than a 30 percent market share. After assigning probability distributions to each uncertainty, one can examine the uncertainty associated with the outcomes of the decision situation. For example, given probability distributions for price, market share, market size, cost, etc., one can determine a probability distribution for profits. Key distinction: sensitivity of the decision vs. sensitivity of the outcome Example: The profitability of the new product we are developing is sensitive to the market share we achieve. However it may be the case that, as long as we achieve a market share within the range of our 10-50-90s, we would still choose to develop the product. In this case, our development decision is not sensitive to market share. Why it's important: Everyone wants the outcome to be as good as possible, and in that sense might be interested in knowing to what uncertainties the outcome is sensitive. However, if one is interested in achieving clarity of action, as opposed to predicting the future, one need only be concerned about those uncertainties which would change the decision if we could know in advance how they will turn out. Outcomes and values
We consider decisions carefully because we care about the outcomes, whose goodness we measure against our values. The most commonly studied and discussed value is economic value, which we assume to be measured in dollars. Given a stream of cash flows over time, people often use the NPV (net present value) to describe the current value of future cash flows. The NPV is a calculation performed on cash flows over time, allowing one to condense that stream of cash flows into a single number. Decision makers often use the NPV of profits or cash flows as a measure of the value of a project. The NPV calculation makes use of the discount rate, which has several interpretations, but can be thought of as a factor applied to future income to reflect the fact that it is less valuable than income received now. It also reduces the impact of future costs, since costs that can be deferred into the future are preferable to those that must be paid now. In thinking about the value of a scenario, it is helpful to distinguish between direct and indirect values. Direct values are cash flows directly related to a project, for example, the profits resulting from the manufacture and sales of a new product. Indirect values are things that the decision maker values that are not likely to show up in accounting statements. For example, a decision maker may experience "pride" or "goodwill" in producing some products and value such an outcome beyond its direct economic value. These indirect values could include costs associated with, for example, laying off workers, or negative impacts on reputation. While some of these indirect values are intangible, others are tangible but difficult to put a number on. For example, increases in "goodwill" associated with one product may result in increased sales of other products though this effect may be hard to estimate. Key distinction: direct vs. indirect values Example: The direct value of a new product might be the current value of the future cash flow associated with the manufacture and sale of the product. The indirect value might include effects like increased goodwill or strategic advantage that come from having the product but are not directly associated with the manufacture and sale of the product. Why it's important: Typically, maximizing the NPV associated with a product is one of the decision maker's objectives. The decision maker might, however, assign value in excess of a cash flow based NPV, and that increment might be for what is sometimes termed "strategic value." These indirect sources of value must be included in the NPVs, if one is to think appropriately about values. It is better to put a rough value on these indirect sources (so it can be discussed and evaluated) than to assume they are worth precisely zero. Often the decision maker will have values other than economic, and in this case he will have to make trade-offs between values, which are judgments about how much he is willing to sacrifice on one value in order to receive more of another. For example, in a personal context, a decision maker may need to make a trade off between hours spent at work (something he may wish to minimize so as to maximize the time he spends with his family) and the amount of income he receives. Risk As decision makers consider the possible outcomes of their decisions they often think about risk, which is the possibility of an undesirable result. In discussing this, it is convenient to consider the notion of a risk-neutral decision maker. Someone who is risk neutral is willing to play the long-run odds when making decisions, and will evaluate alternatives according to their expected values. Decisions where risk aversion holds can be analyzed using a utility function, which encodes a decision maker's attitude toward risk taking in mathematical form by relating the decision maker's satisfaction with the outcome (or "utility" associated with the outcome) to the monetary value of the outcome itself. These utility functions can be indexed by their risk tolerance, which is a technical term describing the decision maker's attitude toward risk. The greater the decision maker's risk tolerance, the closer the certain equivalent of a gamble will be to its expected value. The risk tolerance is a mathematical quantity that describes the decision maker's attitude towards risk; it is not the maximum amount
that the decision maker can afford to lose, though generally decision makers with greater wealth will have larger risk tolerances. The decision maker needs to think about his risk tolerance only in cases where the stakes are large and he is not comfortable basing his decision on the expected monetary value. END
References: Community Decision Making for Social Welfare By Robert S. Magill Decision Making By Sarojini Balachandran Primer on Decision Making: How Decisions Happen By James G. March Winning Decisions: Getting It Right the First Time By J. Edward Russo Smart Choices: A Practical Guide to Making Better Decisions By John S. Hammond Thinking and Deciding -3rd Edition By Jonathan Baron Games, Strategies, and Managers: How Managers Can Use Game Theory to Make Better Business Decisions By John McMillan Judgment in Managerial Decision Making (5th Edition) By Max H. Bazerman Value-Focused Thinking: A Path to Creative Decision-making By Ralph L Dr M.Bashaar Ulfat
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