Chapters 8 and 9 Fundamentals of Decision Making & Planning and Decision Aids

OVERVIEW CHAPTER 8 What is Decision Making Conditions that affect decision making The Differences between decision types Understanding how goals relate to decision making Understanding the three models of decision making

What is Decision Making The process of defining problems, gathering information, making sense of that information, generating alternatives, and choosing a course of action.

Conditions Under Which Decisions Are Made Certainty vs. Uncertainty Risk Objective Probability vs. Subjective Probability

Certainty vs. Uncertainty The condition under which individuals are fully informed about a problem, alternative solutions are obvious, and the possible results of each solution are clear. Uncertainty The condition under which an individual does not have the necessary information to assign probabilities to the outcome of alternative solutions.

Risk The condition under which individuals can define a problem, specify the probability of certain events, identify alternative solutions, and state the probability of each solution leading to the desired results Generally a risk falls somewhere between the extremes of certainty and uncertainty.

Objective vs Subjective Probability Objective Probability Determines the likelihood that a specific outcome will occur based on hard facts and numbers. Example: examining past records Subjective Probability Determines the likelihood that a specific outcome will occur, based on personal judgments and beliefs This varies between individuals based on expertise, intuition, etc.

Types of Decisions to be Made Routine Decisions: choices made in response to relatively well-defined and common problems and alternative solutions. Adaptive Decisions: choices made in response to a combination of moderately unusual and only partially known problems and alternative solutions Continuous improvement: streams of adaptive decisions made over time in an organization that result in a large number of small, incremental improvements year after year. Innovative decisions: choices based on the discovery, identification, and diagnosis of unusual and ambiguous problems and the development of unique or creative alternative solutions.

Goals affect decision making Goals are results to be attained Therefore, giving direction to decisions and actions. When a goal is changed or modified, the individual is engaging in the decision making process.

General and Operational Goals General Goals: provide broad direction for decision making in qualitative terms. Operational goals state what is to be achieved in quantitative terms, for whom, and within what time period.

How do Stakeholders Affect Goal Setting? Shape demands, contraints, and choices of alternatives that managers and employees face when setting goals.

Decision-Making Models Rational Bounded Rational Political

Rational Model A series of steps that individuals or teams should follow to increase the likelihood that their decisions will be logical and well founded Permits maximum achievement of goals w/in limitations of the situation Routine decisions or situations involving conditions of low risk

Rational Decision Making Model As A Seven Step Process Define & diagnose the problem Set goals Search for Alternative Solutions Compare & Evaluate Alternative Solutions Choose among alternative solutions Implement the solution selected Follow up and control

Bounded Rationality Model An individual’s tendency… To select less than the best goal or alternative solution To engage in a limited search for alternative solutions To have inadequate information & control over external and internal environmental forces influencing the outcomes of decisions

Information Processing Biases Availability Bias Selective Perception Bias Concrete Information Bias Law of Small Numbers Bias Gambler’s Fallacy Bias

Political Model A description of the decision-making process in terms of the particular interests and goals of powerful external and internal stakeholders Power – the ability to influence or control Scapegoating – Casting blame for problems on innocent Co-optation – means of averting threats

CHAPTER 9 OUTLINE Forecasting 3 Forecasting Aids: Scenario, Delphi, and Simulation Brainstorming Cause and Effect Relationships TQM topics Pert Network

FORECASTING Is the projecting, predicting, or estimating future events or conditions in an organization’s environment. Forecasting deals with conditions or external events beyond the organization’s control that are important to its survival. EXAMPLES ????

Extrapolation: uses both the past and present to predict the future.

FOUR FORCASTING PITFALLS 1) Listening to the media. 2) Assuming things are going to return to the way they used to be. 3) Hearsay 4) Tunnel Vision

First forecasting aid: SCENARIO Written description of a possible future. 3 scenarios are usually given for companies and they are for the best case, worst case, and most likely to occur. Scenarios provide possibilities of what could happen and the business can plan strategies. They give companies a broad vision of possible events. Companies can identify patterns, interrelationships, and generalizations that help plan for the future.

Second forecasting aid: DELPHI TECHNIQUE Based on a consensus of a group of experts. This technique relies on opinions, so it is not foolproof, but it is usually more accurate than an opinion from one expert.

3 BASIC STEPS OF THE DELPHI TECHNIQUE STEP 1: Questionnaire is sent to a group of experts. STEP 2: Summary of the first round is prepared. STEP 3: Summary of the second round is prepared.

Third forecasting aid: SIMULATION A representation of a real system. Effects of environmental changes and internal management decisions can be forecasted by simulation. The simulation goal is to test reality without actually experiencing it. Downfalls: impossible to apply all aspects and it is expensive.

VIRTUAL REALITY Simulation by computer systems. The user can “enter”, move around, and interact with objects. Flight Simulators

BRAINSTORMING Flow of ideas without restrictions or judgments.

4 BASIC RULES OF BRAINSTORMING Criticism is ruled out. Freewheeling is welcomed. Quantity is wanted. Combination and improvement are sought.

Cause and Effect A then B, therefore A causes B But what about C, D, E, F?? Cause and effect Diagram- helps back track a problem to its roots Also known as fishbone diagrams

General Framework of Cause and Effect (Fishbone) Diagram 9.6 General Framework of Cause and Effect (Fishbone) Diagram People Materials Effect (or Problem Statement) Equipment Methods Adapted from Figure 9.1

Cause and Effect Diagram The cause and effect diagram helps team members display, categorize, and evaluate all the possible causes of an effect, which is generally expressed as a problem.

Cause and effect steps Step 1: the team needs to agree on the effect, which should be stated in terms of the problem Step 2: the team identifies all the general factors of categories that contribute to the problem, which will help the team organize the specific causes Step 3: the team may also use brainstorming or other techniques to generate all the possible causes that contribute to the problem (or effect) in that category Step 4: Involves reaching agreement on the top 3-5 root causes in each major category

TQM Topics Benchmarking- comparing self to the best in terms of: *process, strategies, products, and performance Steps: Define domain Determine what is best Collect information to create performance gap

The Benchmarking Process 1. Define the issue 2. Identify the best performers 3. Collect and analyze data to identify gaps 4. Set improvement goals 5. Develop and implement plans 6. Evaluate results 7. Repeat evaluation

Deming Cycle Developed by W. Edwards Demming Also called the PDCA cycle: Planning: goals, what to change, how to know Doing: Pilot-testing Check: look at results Act: implement and perform * Continuously repeated for improvement

Pareto Principle States that a small number of causes (usually 20%) accounts for most of the impacts of the problems (80%) aka the 80-20 rule Pareto analysis separates the vital few from the trivial many, thus improving the analysts chances of getting the greatest results for the least amount of time and effort

Pareto Diagram: Data Categorized by Shift 9.10 Pareto Diagram: Data Categorized by Shift 35 Source: Adapted from E. S. Fine. Pareto diagrams get to the root of process problems. Quality, October 1996, available at www.qualitymag.com/1096ql (January 16, 1998). 9 Frequency 7 7 6 3 2 5 4 Mon Tue Mon Wed Thu Wed Tue Fri Thu Fri 1 2 2 1 1 2 1 1 2 2 Defect Adapted from Figure 9.6

Pareto Diagram A chart used to determine the relative priorities of issues, defects, or problems. They are arranged in descending order of magnitude of importance, indicating which problems to address first Can also be used to compare before and after results of projects by comparing diagrams

PERT Program Evaluation and Review Technique - Method of sequencing activities and estimating cost and time for project completion First use: 1958 – Polaris missile program

Commonly used for: One-of-a-kind projects – Disney World Projects involving new production processes – robotic automobile plant Projects with multiple/interlocking building processes – apartment complexes

PERT Network Diagram showing the sequence and relationships of activities and events to finish a project Critical Path – the path which takes the longest time to complete

A Basic PERT Network Event 3 Event 1 Event 4 Event 2 Activity B 9.12 A Basic PERT Network Activity B Activity E Event 3 (8 weeks) (6 weeks) Activity C Event 1 Event 4 (15 weeks) Activity A Activity D Event 2 (8 weeks) (12 weeks) Adapted from Figure 9.8

Resources, Time, and Money Resource availability influences time and cost for completion Cost estimates must be provided Time estimates must be provided * “most likely time” * “optimistic time” * “pessimistic time” * “expected time”

Purpose Used as a control mechanism that allows project managers to monitor differences in actual and projected estimates, resulting in more efficient completion.

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