January 7, 2015

Decision Making - Review Notes

Introduction


Decision making is the actual selection from among alternatives of a course of action.

Decision making is involved in various functions of management. Hence, it is a step in planning. Planning occurs in managing organizations or in personal life whenever choices are made in order to gain a goal in the face of such limitations as time, money, and the desires of other people. The steps involved in planning are:

1. Being aware of opportunity
2. Establishing objectives
3. Premising
4. Determining alternative courses of action
5. Evaluating alternative courses
6. Selecting a course
7. Formulating derivative plans

Developing Alternatives


Planning comes into picture whenever a goal is to be attained. Choice of goal itself is a planning problem. If we assume that there is a goal to be achieved, the next step in the planning is to develop planning premises. Premises are planning assumptions, the future setting in which planning takes place. We can term them as the environment of plans in operation. Premises include forecast data of a factual nature, applicable basic policies, and existing company plans.

Developing alternative courses of action is taken as the first step in decision making. Managers have to develop alternative courses for any decision to be made. A sound adage for the manager is that, if there seems to be only one way of doing a thing, that way is probably wrong. More rationally, a planning principle called principle of alternatives can be specified. In every course of action, alternatives exist, and effective planning involves a search for the alternative representing the best path to a desired goal.

The ability to develop alternatives is often as important as making a right decision among alternatives. Ingenuity, research, and perspicacity are required to make sure that the best alternatives are considered before a course of action is selected.

Principle of Limiting Factor


Chester Barnard has written, "the analysis required for decision is in effect a search for the "strategic factors."

Strategic factors and limiting factors are synonyms but Barnard suggests that we use the term limiting factor for physical things and when personal or organizational action is the element, we should use the term strategic factor. When we want to achieve some goals of system, we examine its parts or factors. Strategic factors or limiting factors are those parts or factors which if changed would accomplish the desired purpose if other factors or parts remain unchanged. The principle of limiting factor says, if in developing alternatives, the more an individual can recognize and solve for those factors that are limiting or critical to the attainment of a desired goal, the more effectively and efficiently he can select the most favorable alternative.

Discovery of limiting factor lies at the basis of selection from alternatives and hence of planning.

Process of Evaluation

After a reasonable number of alternatives have been developed, the next step in decision making is evaluating these alternatives. In most decisions, there are certain tangible factors to be assessed in terms of dollars, man-hours, machines hours, units of output, rates of return on investment, or some other quantitative unit. There are other factors that can be hardly quantified. However, both the tangible and intangible factors must be weighed in deciding upon a course of action.

Basis for Selection Among Alternatives


Experience

Experience managers decide based on the things they have successfully accomplished and the mistakes made in unsuccessful projects. To some extent, experience is the best teacher.

If the manager, distills from experience the fundamental reasons for success for failure, then experience can be useful as a basis for decision analysis in case of complex problems in modern enterprises. Managers can also learn from the experience of others when fundamental reasons are provided by the experienced managers. It will be similar to the output of scientists

Business Research and Analysis

Research and analysis is used for major decisions. This approach demands that the problem is first understood. The variables, constraints and the premises are relevant to goal achievement are identified and documented. Then  a model can be developed to simulate the problem.Architects often make models of buildings in the form of drawings and also in three dimensional models. Similarly engineers make drawings. Models of airplane wings and missiles are made and tested in wind tunnels. Management models are amenable to research and analysis through models.

Operations Research

Operational research scholars and practitioners have developed number of models to help in decision making in certain management problems like transportation decisions, assignment decisions, inventory decisions, scheduling decisions, queueing line decisions etc.

Experimentation

Scientists use experiments to collect data as well as to test their theories. Managers can also use experiments to find the results of various alternative courses of action.  The emergence of intangible factors can be observed during experiments. It is expensive but useful as risk management device. Test marketing is one example where experiments are routinely used business decision making. In new product introductions prototypes are made to evaluate the technical working of the product.

Evaluating the Decision's Importance


Size or length of commitment: If a decision commits the enterprise to heavy expenditure of funds it should be subjected to suitable attention at top management level.

Flexibility:Decisions involving inflexible courses of action need attention.

Certainty of goals and premises: Production decisions based on order backlog are more routine in comparison to made to stock decisions.

Quantifiability of variables: If variable can be quantified decision making is more routine.

Human impact: Where the human impact of a decision is great, its importance is high.


Importance of experience, experimentation, research, analysis

Decision support systems

Systems approach

Creativity and Innovation


Developing alternatives and finding novel ways that are profitable alternatives requires creative thinking. Creative thinking refers to the ability and power to develop new ideas. Innovation means the use of ideas as new products, new service, or a new way doing things which enhances effectiveness or efficiency. Weihrich and Koontz explain creative thinking as four step process.

1. Unconscious scanning
Allowing the mind to think over the problem and do its process without a conscious effort.

2. Intuition
Intuition is an answer to the problem that is thrown up by the mind. This is the output of the unconscious scanning effort.

3. Insight
Insight also an idea that comes up during investigations to solve a problem. They are to be captured immediately on paper to make us of them later.

4. Logical formulation or verification
Intuition as well as insight is to be tested through logic or experiment. The logical verification is done first by the person himself and then by inviting critiques from others.

Developing Creativity in Individuals and Groups


Creative thoughts are often the fruits of extensive efforts. They are also the result of responding to feedback from others.Creativity can be taught. Some creativity techniques are focused on individuals and some are focused on group.

Creativity and Manager

The creativity of most individuals is probably underutilized in many cases, despite the fact that unusual innovations can be of greater benefit to the firm. Creativity of individuals and groups has to be subjected to managerial judgment. It is the manager who must weigh the risks involved in pursuing unusual ideas and translating them into innovations.



References

Joseph V. Anderson, "Weirder than Fiction: The Reality and Myths of Creativity," Academy of Management Executive, November 1992, pp. 40-47.

Erik Dane and Michael G. Pratt, "Exploring Intuition and its Role in Managerial Decision Making," The Academy of Management Review, January 2007, pp. 33-52.

Robert C. Litchfield, "Brainstorming: A Goal-Based View," The Academy of Management Review, July 2008, pp. 649-668

The planning principles involved in the topic


Principle of alternatives

Select the plan which is the most effective and the most efficient to the attainment of a desired goal.



Principle of limiting factor

Consider limiting factor in generating alternatives and selection from alternatives.

Updated 8 Jan 2015, 25 July 2014, 12 Dec 2011


MBA Core Management Knowledge - One Year Revision Schedule


Originally published as
http://knol.google.com/k/narayana-rao/decision-making/2utb2lsm2k7a/188#

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