Managerial Decision Making

• Decision Making:-1. “decision making is a process involving information ,choice

of alternative action ,implementation,& evaluation that is directed to the achievement of certain stated goals”

2. “decision making is the selection based on some criteria from two or more possible alternatives.”

3. Decision making is the process of choosing the best among the alternative solution under a given set of certain circumstances

Decision Making Process

1. Identification of a problem2. Diagnosing the problem

– Identify the problem from its sign & symptoms– Symptoms is condition or set of condition that indicate existence of problem

3. Collect & analysis the relevant information4. Discovery of alternative course of action5. Evaluation of alternatives

– Find degree of risk of each alternative– Economy of effort-cost , time , effort involved in each alternative

6. Selection of best alternative– Experience:-While selecting alternative manager will use his past experience– Experimentation:- each alternative put into the practice results are observed

7. Implementation8. Verifying the decision

Principle Of decision Making

A quality decision taken by the manger if he adopts certain principle1. Marginal theory of decision making:-

– Every business started for to earn profit , a manager should take decision which results in maximum profit

2. Mathematical theory:- – mathematical theory gives a scientific approach to the manager while

taking decision. Ex use of game theory , probability theory

3. psychological theory:-– Manager should take decision on the basis of his aspiration ,technological

skill , personality , social status & orgenisational status

4. Principle of alternatives:-– All alternative are evaluated & screened in order to their usefulness &

select the best

5. principle of participation:-– employee participation in the decision making process is necessary

Characteristics of good decision

1. Action orientation:-decision are action oriented & are directed towards relevant & controllable aspect of the environment.

2. Goal direction:-decision making should be goal directed to enable the organisation to meets its objectives.

3. Efficiency in implementation:- an effective decision should provide the way in which it can be implemented.

Types of decision1. Programmed decision:-

– these decision are taken frequently and they are repetitive in nature made under framework of organizational policies & rules.

– Decision taken accordance with some policies & rules are established in advance– Ex-if the stock level is an item is 200 numbers then decision to raise a purchase request for 400

numbers

2. Non-programmed:-– this decision relevant to for solving unique /unusual problem in which various alternative

cannot be decided in advances– The situation is not well structured & outcome of various alternative can not be arranged in

advance.– Readymade solution are not available – These decision has long-term impact

3. Strategic Decision:- – Strategic decision is major choice of action concerning allocation of resources & contribution to

the achievement of organisational objectives.– The decision is major which affects the orgenisational as whole

4. Tactical /Operational Decision– tactical decision relates to day-to-day working of the organization.– This decision are programmed one.– They are short-term of nature.– Tactical decision taken by the lower-level manager

5. structured decision– the decision are made under the established situation.– these programmable decision & they are preplanned.– Decision are made in the situation which are fully understood.– Decision made for routine task

6. unstructured decision– This decision are not taken within the framework of organizational structure .– These decision are creative & they are not preplanned.– The situation are doubtful .

7. Departmental decision:-8. Personal decision9. Group decision 10. Research decision 11. Certainty decision

– The term certainty refers to accurate knowledge of outcome from each choice. 12. Uncertainty decision

– The decision maker has incomplete knowledge he does not know the consequences .

Types of decision making system1. Closed System:-

– If the manager operates in a known environment then it is a closed decision making system. The conditions of the closed decision making system are:

1) The manager has a known set of decision alternatives and knows their outcomes fully in terms of value, if implemented.

2) The manager has a model, a method or a rule whereby the decision alternatives can be generated, tested, and ranked.

3) The manager can choose one of them, based on some goal or objective.

Examples :• an examination system to declare pass or fail

• Open System:-– If the manager operates in an environment not known to him, then the

decision making system is termed as an open decision making system. The conditions of this system are:

1) The manager does not know all the decision alternatives.

2) The outcome of the decision is also not known fully. The knowledge of the outcome may be a probabilistic one.

3) No method, rule or model is available to study and finalize one decision among the set of decision alternatives.

4) It is difficult to decide an objective or a goal and, therefore, the manager resorts to that decision, where his aspiration or desires are met best

– Example:-pricing new product , plant location

Decision Making Environment/condition

1. Decision making under certainty:- – Complete & accurate knowledge of the outcome of each alternative – when manager knows exactly which state of nature will occur, a circumstance

of certainty exists . this mean the manager will be able to make perfectly accurate decision time after time.

– Such condition exist when decision involves action in immediate future.– Manager has made such decision a number of times . with same result.

2. Decision making under Risk:-– most of decision particularly involving investment are made under

the condition of risk in which some information is available but that is not sufficient to answer overall question about the outcome of decision.

– Multiple possible outcome for each alternative can be identified & probability of occurrence is attached to each outcome

– In situation with risk ,factual information may exist but it may be incomplete

– Ex- decision to introduce new product in the market has the risk of competition which manager predict before introduce product , however exact degree is not known .

– in such case manager have to decide two things-amount of risk involved in a decision & amount of risk that the orgenisation is ready to assume.

– Amount of risk involved can be calculated by risk analysis

• Risk analysis:- risk analysis attempts to develop probability for every critical variable in decision making. probability is statistical measure of the chance of occurring a certain event or outcome. Three methods of estimating probability.

1. A priori probability:- a priori probability is obtained through assumed condition.

2. Empirical probability:-It is based on recording actual experience over the period of time & computing the percentage of time each event has occurred.– Manager can calculate probability from historical data– Insurance companies compute probability of deaths on this basis.

3. Subjective probabilities:-when the manager does not have sufficient data to calculate either a priori or empirical probability .he may estimate probability on his own judgment.

• Decision making under uncertainty:-– if decision involves condition about which the manager has no

information ,either about the outcome or the relative chances for any single outcome.

– We feel uncertainty when we cant predict with complete confidence what the outcome of our action

– Different decision criteria has been proposed for this condition these are following

1. The maximax criteria(optimistic) Maximizing the maximum possible payoff

2. The maximin criteria(pessimistic) Maximising the minimal possible payoff

3. The minimax criterion(regret) Minimising the maximum possible regret to the decision maker

4. The insufficient criterion (insufficient reasoning) Assuming equally likely probabilities for the occurrence of each possible state of nature

1. Maximax criterion:-it is applied by the most optimist decision maker when he optimistically about the occurrence of events influencing a decision. Find the alternative that maximizes the maximum outcome for every

alternative Pick the outcome with the maximum number Highest possible gain This is viewed as an optimistic approach

2. Maximin criterion:- is adopted pessimistic decision maker. The manager believes that worst possible may occur Find the alternative that maximizes the minimum outcome for every alternative Pick the outcome with the minimum number Least possible loss This is viewed as a pessimistic approach

3. Minimax criterion:-– this criteria leads to the minimisation of regret.– He will chose alternative ,which minimizes the regret.

4. Equally likely/Insufficient reason criterion:-– in this criterion ,since the probabilities cannot be assigned on any basis,

equal probability is assigned to each event .every event is treated as equal

Find the alternative with the highest average outcome Pick the outcome with the maximum number Assumes each state of nature is equally likely to occur

Decision making model• Classical model/Economic man model:-

– Managers are logical & rational & that they make decision that are in the best interest in orgenisation

– Man is completely rational in his decision.– Many assumption about the capabilities of man are unrealistic– He select the alternative which given greatest advantage– Based on economic conditions – There is complete awareness of various alternatives & the outcome – It is normative theory– Accomplishes goals that are known and agreed upon.– Criteria for evaluating alternatives are known.– Decision maker is rational and uses logic.

• Limitation 1. The complete rationality is not possible , because the condition rarely

available .2. It difficult to apply ,because so many pressure from environmental forces.

• Administrative model:- The model describe the behaviour of decision maker It is descriptive model ,in that how decision are actually made How managers actually make decisions in situations characterized by non-

programmed decisions, uncertainty. Limited information about alternative & their outcome • Features In choosing alternative administrative man satisfy or look for the alternative

which satisfactory or good Focuses on organizational, rather than economic. Two concepts are instrumental in shaping the administrative model.

– bounded rationality: means that people are limited by available information ,available time & the information processing ability of the mind

– Administrative man believes in satisfying rather than maximizing– satisfying: means that decision makers choose the first solution alternative

that satisfies minimal decision criteria. Is considered to be descriptive. This model believes in satisfying rather than maximizing

• Decision making styles1. Autocratic:-– In an autocratic decision making style, the leader takes control of and responsibility for the

final decision. – The difference is that in an autocratic style, members of the organizations are not included and

the final outcome is the responsibility of the leader.– This is the best style to use in an emergency when an immediate decision is needed.

2. Participative:-– In a participative decision making style, the leader gives up complete ownership of the

decision and lets employees vote. – The majority vote wins. This causes a fast and effective decision to be made– no one takes responsibility for the decision and if something goes wrong, an employee can

simply state that they did not vote for it.3. Consultative:-

– Leader ask for advice & opinions from his subordinate & makes the decision himself.– If the subordinate have expertise or information that will help make more effective decision – The study has made in details & problems identified correctly to offer proper situation

4. Delegative: – As per the term, the leader passes on the responsibility of making decisions to one or more of

his subordinates.– This type of decision making is usually adopted by the leader when he is confident of the

capabilities of his subordinates.

5. Directive Style:– A person has this style if they have a low tolerance for ambiguity

and are efficient, rational, and logical in their way of thinking. They focus on the short term and are quick to make decisions, usually resulting in a decision that has been made with minimal information and not carefully analyzing other alternatives.

6. Analytic Style: – As opposed to the directive style, a person with an analytic

decision-making style has greater tolerance to ambiguity. They are careful decision makers that like to be well informed and thoroughly assess their options. They usually have the ability to adapt or cope with unique and challenging situations.

7. Conceptual Style: – Conceptual decision makers are generally very broad in their

approach and consider all available alternatives. They are long-term oriented and are usually capable of formulating creative solutions to problems.

Decision making tools/ techniques1. Pay off matrix– It is constructed where rows shows the alternative & column

shows the condition with probability of occurrence– Characteristics– it summarizing the various interaction of the various

alternative action & the various events– The probability is given for every action

2. Decision tree– It is graphical representation to identify alternative action ,estimating

probabilities & indicating the resulting expected payoff.– A decision tree is a decision support tool that uses a tree-like graph or

model of decisions and their possible consequences, including chance event outcomes, resource costs, and utility. It is one way to display an algorithm

1. First step is the definition of various alternative 2. Second step estimation of probabilities for various event 3. Third step calculation of pay-off each alternative in various alternative

• Limitation • Complex • Problem in assigning probability

3. Linear programming– Linear programming is mathematical technique for the purpose of

allocation of limited resources in an optimum manner – It is decision making techniques under given constraints based on the– It is technique of resource location that maximizes output or minimizes

coasts through optimum allocation of resources

4. queuing theory– Theory describe the feature of queuing situation where service is

provided to people or unit waiting in queue.

5. The Pareto Analysis – – It is based on the Pareto Principle whereby you must identify which

actions will let you get 80% of the possible positive results by doing only 20% of the work. It is known as the 80/20 rule.

6. Pros & Cons – – lists the advantages and disadvantages of each possible decision and

attempts to identify the best possible outcome whereby the advantages outnumber the disadvantages

Herbert Simon Model

• Herbert Simon’s Model stages:-1. Intelligence– Collecting , classification , processing & presentation of

data relating to the orgenisation

2. Design– Analysis of data ,information used by statistical models

to forecast possible outcome for each alternative – Each alternative examined by

technological ,behavioral& economic feasibility.

3. choice – Select the best alternative which will best contribute to

goal of the orgenistion

• Bounded rationality:-• Simons introduced “bounded rationality” according to him

managers are administrative men , they can select the best course of action.

• means that people are limited by available information ,available time & the information processing ability of the mind

• A decision maker is said to exhibit bounded rationality when they consider fewer option than are actually available or when they choose an option that is not?

• Bounded rationality assumes human rationality has its limits ,especially when operating in conditions of considerable uncertainty.