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Principles and Practices of

Management
Lesson 05 42 Slides
Decision Making

Definition of Decision Making


Decision making is defined as selection of
a course of action from among
alternatives; it is at the core of planning. A
plan cannot be said to exist unless a
decision a commitment of resources,
direction or reputation has been made. A
manager has to ask such questions as
what is to be done, who is to do it, when,
where and how. # (Kiplings six honest men)

Koontz & Weihrich Ch. 6 and Stoner,


Freeman and Gilbert Ch. 9
Lesson 05
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The Importance and Limitations of


Rational Decision Making (1/4)

The Importance and Limitations of


Rational Decision Making (2/4)

Given an awareness of an opportunity and a


goal, the decision process is really at the core
of planning. Thus, the process leading to
making a decision might be thought of as :

Rationality in Decision Making: (1/2)


Decisions must operate for the future and
future, almost invariably involves uncertainties.
Effective decision making, therefore, requires:

1.
2.
3.
4.

Premising.
Identifying alternatives.
Evaluating alternatives in terms of the goal sought.
Choosing an alternative, that is, making a decision.
#

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1. Understanding of alternatives;
2. Information and ability to analyse and evaluate the
alternatives;
3. Desire to come to the best solution by selecting an
alternative that most effectively satisfies goal
achievement. #
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The Importance and Limitations of


Rational Decision Making (3/4)
Rationality in Decision Making: (2/2)
People seldom achieve complete
rationality because:
No one can make decisions affecting the
past and future is usually uncertain.
It is difficult to recognise all the alternatives
that must be followed to reach a goal.
Moreover, in most instances, not all
alternatives can be analysed even with the
newest analytical tool. #
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The Importance and Limitations of


Rational Decision Making (4/4)
Therefore, Limited or Bounded Rationality:
A manager, thus, must settle for limited or
bounded rationality because, limitations of
time, information and certainty limit rationality.
Since, managers cannot be fully rational all the
time, they often take recourse to a compromise
due to play it safe factor. Herbert A Simon**
called this satisficing (coined word has not been
admitted into the language; hence, do not use this in
normal course). #

** (American political scientist, economist, sociologist, psychologist,


and computer scientist He was a Nobel Laureate)

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Development of Alternatives and


The Limiting Factor (1/2)

Development of Alternatives and


The Limiting Factor (2/2)

A limiting factor is something that stands


in the way of accomplishing a desired
objective. Recognising the limiting factor in
a given situation makes it possible to
narrow the search for alternatives to those
that will overcome the limiting factors. #

For example, for turning around a


manufacturing organisation, the means
could be to acquire some capital
equipment. Then, limiting factor could be
cash and credit. Consequently, the
managers alternatives would be confined
to those, which would overcome these
limiting factors. #

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Evaluation of Alternatives Qualitative


and Quantitative Factors (1/2)

Evaluation of Alternatives Qualitative


and Quantitative Factors (2/2)

Quantitative translates to numbers.


Qualitative is mostly intangible. Can we
measure labour relations by number?
Qualitative factors are difficult to measure
numerically, but important nonetheless.
----------------------------------------------------------A good plan can be completely destroyed
for having failed to take note of qualitative
factors.

Therefore, a manager must :

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Selecting an Alternative Three


Approaches
Experience
Experimentation
Research and Analysis. #

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First, recognise these factors.


Then determine if reasonable quantitative
measures are possible.
If not, rate the various factors in terms of
importance. And,
Finally come to a logical judgement and
consequent decision. #
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Selecting an Alternative Three


Approaches Experience (1/2)
Experience is the best teacher.
But, the more a manager is experienced,
the more pronounced may be his
propensity to be dependent on experience.
It can be dangerous, because future
conditions may not be same as the past.
But, lessons distilled from experience is a
distinct asset. #

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Selecting an Alternative Three


Approaches Experience (2/2)

Selecting an Alternative Three


Approaches - Experimentation

Aldous Huxley:
Experience is not what happens to
you; experience is what you do with
what happens to you.

In science, experimentation is common.


Experimentations are expensive and time
consuming affair. Yet, experimentation is
an important element in decision making.
In marketing and advertising test
marketing and customer tests are usual.
Aircraft prototypes are first tested before
final production run. #

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Selecting an Alternative Three


Approaches Research and Analysis

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Programmed and Nonprogrammed Decisions

Most effective when major decisions are


involved.
In major engineering and product
developments it is the most important
decision making step.
Engineering and mathematical tools
available like simulators and Operations
Research. #

A programmed decision is applied to structured


or routine problems.
Non-programmed decisions are used for
unstructured, novel and ill-defined situations of a
nonrecurring nature. Many product introduction
decisions and advertising campaigns fall under
non-programmed decision making process.
At higher levels most decisions are of nonprogrammed variety. #

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Organisational
Levels

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Nature of
Problems

Non-programmed Decisions

Programmed Decisions

Unstructured

Structured

Nature of Problems and DecisionMaking in an Organisation

Nature of Decision
Making

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Decision Making Under Certainty,


Uncertainty, and Risk
Virtually all decisions are made under
some degree of uncertainty. Higher the
uncertainty, higher is the risk.
External factors are most uncertain.
Under uncertainty conditions where risk is
higher, both subjective probability based
on experience and objective probability
based on mathematical tools are used. #
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Modern Approaches to Decision


Making Under Uncertainty

Risk Analysis
Decision Trees go / no-go
Preference Theory
Attitudes towards Risk #

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Modern Approaches to Decision Making


Under Uncertainty Risk Analysis
All decision makers dealing with
uncertainty like to know the size and
nature of the risk they are taking in
choosing a course of action.
Usually, specialists come up with the best
estimates.#

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Modern Approaches to Decision Making


Under Uncertainty Decision Trees (1/2)

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Modern Approaches to Decision Making


Under Uncertainty Decision Trees (2/2)
Decision
Point

One of the best ways to analyse a


decision is to use so-called decision trees.
The decision tree approach makes it
possible to see, at least, the major
alternatives and the facts that subsequent
decisions may depend upon events in the
future. #

Chance
events

Product succeeds = gain $1,000,000


per year for five years

Permanent
tooling =
$2,000,000

Product sales slow = gain $ 200,000


per year for five years
Product fails = loss $ 2,000,000

Product succeeds = gain $ 200,000


per year

Temporary
tooling =
$100,000

Product sales slow = gain $ 50,000 per


year

Product fails = loss $ 100,000

Decision Tree Without Probabilities


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Modern Approaches to Decision Making


Under Uncertainty Preference Theory

1.0

Personal
curve

.80

.60

Risk averters
curve
Statistical
probability curve

.40
.20

Gamblers
curve
Low

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Personal Risk or Preference Curves.

Statistical Probabilities

Preference theory or utility theory is based


on the notion that individual attitudes
towards risk vary: some individuals are
willing to take only smaller risks than those
indicated by probabilities and others are
willing to take greater risk.#

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Size of Commitment
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High

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Creativity and Innovation (1/14)


An important factor in managing people is
creativity. A distinction can be made between
creativity and innovation.
The term creativity usually refers to the ability
and power to develop new ideas.
Innovation, on the other hand, usually means
the use of these ideas. In an organisation this
can mean a new product, a new service and the
like.
Organisations not only generate new ideas but
also translate them into practical ideas. #

Creativity and Innovation

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Creativity and Innovation (2/14)

The following four aspects of creativity


need to be considered:
1.
2.
3.
4.

The creative process


Brainstorming
Limitations of traditional group discussion
The creative manager who is he? #

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Creativity and Innovation (3/14)

The creative process is seldom simple


and linear. It generally consists of four
overlapping and interacting phases:
a)
b)
c)
d)

Unconscious scanning
Intuition
Insight
Logical formulation or verification #

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Creativity and Innovation (4/14)

Creativity and Innovation (5/14)

The first phase, unconscious scanning, is


difficult to explain because it is beyond
consciousness. This scanning usually
requires an absorption (= the act of
absorbing; entire occupation of mind) in the
problem, which may be vague in the mind.
Yet, managers working under time
constraint often make premature decision
with ambiguous ill-defined problems.

The second phase, intuition, connects the


unconscious with conscious. This stage may
involve combination of factors that may seem
contradictory at first.
Intuition needs time to work. It requires people to
find new combinations, and integrate diverse
concepts and ideas. Thus, one must think
through the problem. Intuitive thinking is
promoted by several techniques, such as
brainstorming and synectics.

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Creativity and Innovation (6/14)

Creativity and Innovation (7/14)

Insight, the third phase of the creative


process, is mostly the result of hard work.
For example, many ideas are needed for
development of a new product. Moreover,
insight may come when the thought is not
directly focussed on the problem at hand.
Hence, effective managers may write
down immediately if some new ideas have
emerged even when working on some
other problems.

The Last phase in creative process is


logical formulation or verification. Insight
needs to be tested. This may be
accomplished by continuing to work on the
idea or inviting critiques from others.#

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Creativity and Innovation (8/14)

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Creativity and Innovation (9/14)

Brain Storming:
Creativity can be taught. Creative
thoughts are results of extensive efforts,
individual or that of groups.
Brainstorming is a technique for
intuitive thinking in a group. In
brainstorming multiplication of ideas is
sought. The rules are as follows:

Brain Storming:

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Creativity and Innovation (10/14)

Limitations of traditional group


discussion: (1/2)

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No ideas are ever criticised


The more radical the ideas are, the better
The quantity of idea production is stressed
The improvement of ideas by others are
sought.

The limitations of brainstorming / group


discussion are as follows:
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Creativity and Innovation (11/14)

(1/7) While brainstorming may result in


creative ideas, it is incorrect to assume that
creativity flourishes only in groups.
(2/7) Usual group discussion can inhibit
creativity.
(3/6) In a group, getting along with others
may be stronger than the need to explore
unpopular but creative ideas. #

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Limitations of traditional group


discussion: (2/2)
(4/7) Experts may not express their ideas,
lest they be ridiculed.
(5/7) Lower level manager may feel inhibited
in front of senior managers.
(6/7) Pressure to conform may discourage
the expression of deviant ideas.

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Creativity and Innovation (12/14)

Limitations of traditional group


discussion: (2/2)
(7/7) Finally, because the group needs to
arrive at a decision, it may not make effort to
search for the data relevant to a decision. #

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The creative manager: (1/2)


The assumption that most people are noncreative is detrimental to creative thinking,
for under proper environment, virtually all
people are capable of being creative.
Creative people are inquisitive, and come up
with new and unusual ideas.
They are seldom satisfied with status quo.
They appear to be exited about solving a
problem. #

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Creativity and Innovation (14/14)

The creative manager: (2/2)


They object to conformity and see
themselves as different.
Creative people may cause difficulties in
organisations.
Change, is not always popular. Change
often has unexpected and undesirable side
effects.
Perhaps, creative people should have
enough freedom, but not too much to run
wild.

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The Rational Model of Decision


Making (1/2)
Stage 1: Investigate the situation:
Define the problem
Diagnose the causes
Identify the decision objective that is, what
would constitute an effective solution

Stage 2: Develop alternatives:

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The Rational Model of Decision


Making (2/2)
Stage 3: Evaluate alternatives and select
the best one available:
Is this alternative feasible?
Is the alternative a satisfactory solution?
What are the possible consequences for the
rest of the organisation?

Stage 4: Implement and monitor the


decision. ##

Group discussion
Brainstorming
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Making

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