Dr.K.

Baranidharan
Present by

Engineering Economics & Financial Accountingment

Ee&fa
13 July 2013 2

Managerial Decision Making

SRI SAIRAM INFORTION TECHNOLOGY

Managerial Decision Making

Decision It

making is not easy

must be done amid

ever-changing factors unclear information conflicting points of view

Decisions and Decision Making

Decision = choice made from available alternatives

Decision Making = process of identifying problems and opportunities and resolving them

characteristics
1.decision

making is a goal-oriented process. 2.it aims at achieveing certain specifies goals of the organisation 3.selection of process in which best alternativescourses of action is chosen from amongst alternative courses of action. 4,is a continue process because the manager is required to takedecisions continuously for different activities. 5.consider is both science and art 6.responsibilities of manager at different levels of management

7.decision

making involves deep and careful thinking and hence it is a mental process. 8.decision making can be both postive or negative 9.Decision are made for further course of action based on the past experiences and present conditions.

Impotance
DM

is an important aspect of planning Without D nothing can be done Performing various aspect of management function like.. Planning, organising, contro etc., Its helps to set objectives, prepare plans of action, introduce innovation, determine organisational structure of the concern.

types of Decisions
Programmed

Decisions

Situations occurred often enough to enable decision rules to be developed and applied in the future Made in response to recurring organizational problems

Nonprogrammed

Decisions in response to unique, poorly defined and largely unstructured, and have important consequences to the organization

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Basic

decision: Basic decision involved lomg range commitment and larhe funds. Decisipon with regard to selection of a lication, selection of a product line, merger of the business are known as Basic decision. Routine decision: Decision that are taken to carry out the day-to-day activities are called Routine decision.

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Group

decision: Group decisions are taken by a group of persons. Individual decision: The decision is taken by one person, it is called individual decision. example: decision taken by the Board of Director and the chief executive in the interest of the organisation as whole is known GD,

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Policy

decision: Policy decision are made at top management levels. These decision are taken to determine the basic polices and goals of the organisation. Operating decision: Operating decision are taken to executive the policy decisions. This decision are taken at middle and lower management levels and are related to routine activities of business.

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Organisational

decision: Organisational decision are made by the executive in his capacity as managger in order to acheive the best interest of the organisation. This decision can be delegated other members in the organisation, Example: adoption of strategies, framing on objectives etc., Personal decision: By the manager personal capacity This decision are not delegated. Exwcutive personal work Example: leave, medical, surrender etc.,

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Major

decision: The decision with regard to the quality of the product, price of the product, developing a new product. Minor or supplementary decision: Courses of conversion of major decision into action Example: implementing the major decision developing a new product, some minor decision as regard to the colour, size, packing

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Decisions and Decision Making

Many

decisions that managers deal with every day involve at least some degree of uncertainty and require nonprogrammed decision making

May be difficult to make Made amid changing factors Information may be unclear May have to deal with conflicting points of view

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Certainty, Risk, Uncertainty, Ambiguity

Certainty Risk

all the information the decision maker needs is fully available decision has clear-cut goals good information is available future outcomes associated with each alternative are subject to chance managers know which goals they wish to achieve information about alternatives and future events is incomplete managers may have to come up with creative approaches to alternatives by far the most difficult decision situation goals to be achieved or the problem to be solved is unclear alternatives are difficult to define information about outcomes is unavailable

Uncertainty

Ambiguity

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Process

1.identifying

the problem:- recognizing problem-formulating the problem-clear and completely. 2.analysing the problem:- collection and classification 3.developing alternative solution for the problem:- sound decision-identify limted factors 4.evaluting the alternative:- choose the best one -

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5.deciding

the best course of action:manager take into account the economy, risk factor, the limitation of resource, feasibility of its implementation etc., past experienceexperimentationresearch and analysis 6.conversion of decision into action:comverted action, implement, communication, develop procedure. 7.control;once the decision implementation next step contolling, comparing actual with expected performance

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Selecting a Decision Making Model

Depends on the managers personal preference Whether the decision is programmed or nonprogrammed Extent to which the decision is characterized by risk, uncertainty, or ambiguity

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Three Decision-Making Models

Classical Model Administrative Model Political Model

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Classical Model
Logical decision in the organizations best economic interests

Assumptions Decision maker operates to accomplish goals that are known and agreed upon Decision maker strives for condition of certainty gathers complete information Criteria for evaluating alternatives are known Decision maker is rational and uses logic Normative = describes how a manager should and provides guidelines for reaching an ideal decision

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Administrative Model

Herbert A. Simon

How nonprogrammed decisions are made--uncertainty/ambiguity

Two concepts are instrumental in shaping the administrative model

Bounded rationality: people have limits or boundaries on how rational they can be Satisficing: means that decision makers choose the first solution alternative that satisfies minimal decision criteria

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Administrative Model
How nonprogrammed decisions are made--uncertainty/ambiguity

Managers actually make decisions in difficult situations characterized by non-programmed decisions, uncertainty, and ambiguity Decision goals often are vague, conflicting and lack consensus among managers; Rational procedures are not always used Managers searches for alternatives are limited Managers settle for a satisficing rather than a maximizing solution intuition, looks to past experience

Descriptive = how managers actually make decisions--not

how they should

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Political Model
Closely resembles the real environment

Closely resembles the real environment in which most managers and decision makers operate
Useful in making non-programmed decisions Decisions are complex Disagreement and conflict over problems and solutions are normal Coalition = informal alliance among manages who support a specific goal

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Characteristics of Classical, Political, and Administrative Decision Making Models

Classical Model
Clear-cut problem and goals Condition of certainty Full information about alternatives and their outcomes Rational choice by individual

Administrative Model
Vague problem and goals Condition of uncertainty Limited information about Alternatives and their outcomes Satisficing choice for resolving

Political Model
Pluralistic; conflicting goals Condition of uncertainty/ambiguity Inconsistent viewpoints; ambiguous information Bargaining and discussion among

for maximizing outcomes

problem using intuition

coalition members

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Decision Styles
Differences

among people with respect to how they perceive problems and make decisions all managers make decisions the same

Not

Directive style Analytical style Conceptual style Behavioral style

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Directive Style
People

who prefer simple, clear-cut solutions to problems Make decisions quickly May consider only one or two alternatives Efficient and rational Prefer rules or procedures

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Analytical Style
Complex

solutions based on as much data as they can gather Carefully consider alternatives Base decision on objective, rational data from management control systems and other sources Search for best possible decision based on information available

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Conceptual Style

Consider a broad amount of information More socially oriented than analytical style Like to talk to others about the problem and possible solutions Consider many broad alternatives Relay on information from people and systems Solve problems creatively

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Behavioral Style
Have

a deep concern for others as individuals

Like

to talk to people one-on-one

Understand

their feelings about the problem and the effect of a given decision upon them others

Concerned May

with the personal development of

make decisions to help others achieve their goals

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DECISION ANALYSIS
DA

is the art of science of formal DM. DA is often employed in making business D and uses specific methods and tools to identify and access factors, risk and possiable outcome to reach

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Definiation
DA

is the discipline of evaluating complex alternatives in terms of values and uncertaintity.

Decision Analysis

Decision Analysis
Decision

Analysis providers structure and guidance for thinking systematically about hard decisions. To help a decision maker take action with confidence gained through a clear understanding of the problem.

Decision Analysis
Once

a decision making problem is understood and defined it is time to analyze it. You might wonder if the decisions you make are suitable for decision analysis. If you are looking for a way to structure your decisions to make them more organized and easier to explain to others, you definitely should consider using formal decision analysis.

Influence Diagrams
Influence

diagrams present a decision in a simple, graphical form. Decisions, chance events and payoffs (values) are drawn as shapes (called nodes) and are connected by arrows (called arcs) which define their relationship to each other. In this way, a complex decision may be reduced to a few shapes and lines. Influence diagrams are excellent for showing the relationship between events and the general structure of a decision clearly and concisely.

 The

term influence refers to the dependency of a variable on the level of another variable.

Influence Diagrams
Rectangle: Decision Variable

The

variables are connected by arrows which indicate the direction of influence.

Circle: uncontrollable or intermediate variable

Oval: result (outcome) variable, intermediate or final

 The

Influence Diagrams shape of arrow indicate the type of relationship:

Amount In CDs Interest Collected

Certainty Uncertainty Random

Price

(Risk variable) Dereference (between outcome variables):

Sales ~ Demand Sales

A double lined arrow

Consider the following profit model: Profit = income expenses Income = unit sold x unit price
Unit Price

Example

Unit Sold = 0.5 x amount used in advertisement Expenses = unit cost x units sold + fixed cost

~ amount used in advertisement

Income

Units Sold

Profit

Units Cost

Expenses

Fixed Cost

Example: An Influence Diagram for the Profit Model

Unit Price Income ~ Amount used in advertisement Units Sold Profit

Expense Unit Cost

Fixed Cost

Decision Trees
Decision

trees are a comprehensive tool for modeling all possible decision options. While influence diagrams produce a compact summary of a problem, decision trees can show the problem in greater detail. Decision trees describe events in chronological order but can be much larger than influence diagrams.

Decision Trees
It

utilizes a network of two types of nodes: decision (choice) nodes, and states of nature (chance) nodes Square represents decisions to be made. Circles represents chance events. Chance nodes, are random variables and they represent uncertain quantities that are relevant to the decision problem. Branches from a square correspond to the choices available to the decision maker.

Example
Venture

capitalist's situation in decision weather to invest in a new business. Objective: to make money.
Venture Succeeds Large Return On Investment Invest Venture Fails Funds Lost

Typical Return Earned on Less Risky Investment

Do not Invest

Interpretation of Decision The options represented by branches from a Trees

decision node must be such that the decision maker can choose only one option. Each chance node must have branches that correspond to a set of mutually exclusive and collectively exclusive outcomes ( only one of them can happen, No other possibilities exit) A Decision Tree must show all the possible paths that the decision maker might follow through time. Including all possible decision alternatives. Some times the nodes might occur in a time sequence. The sequence of decisions is shown in the tree from left to right.

Modeling Decisions
Given

a complicated problem, how should we begin? A critical first step is to identify elements of the situation:

Values and Objectives, Decisions to make, Uncertain events, Consequences

Dr.K.Baranidharan thank you

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