DECISION MAKING

What Decision Making Is?  Decision making is the process of identifying problems and opportunities, developing alternative solutions, choosing the correct alternative and implementing.  It is only a step in planning.  Problem is the difference between the current and desired performance or situation.  Opportunity is an occasion that requires a decision to be made

Decision making process…… Identification of a problem Identification of decision criteria Allocation of weights To criteria Development of alternatives Analysis of alternatives Selection of an alternative Implementation of the alternative Evaluation of decision effectiveness

Rationality in decision making…. Effective decision making must be rational. The problem A single, All alternatives Preferences Preferences No time Final choice is clear and well-defined and are clear are constant or cost will maximize unambiguous goal is to consequences and stable constraints economic be achieved are known exist payoff Lead to Rational Decision Making

Identifying alternatives…..  Once the goals are clearly defined and planning premises identified, the first step of decision making is to identify and develop the alternatives

Evaluation of alternatives…..  Once appropriate alternative has been found, the next step in planning is to evaluate them and select the one that will best contribute to the goal…  This is the point of ultimate decision making.

Evaluation of alternatives…. Quantitative & qualitative factors  In comparing alternative plans for achieving an objective, Quantitative & qualitative factors are important….  Quantitative factors such as fixed and operating costs, and qualitative factors such as quality of labour relations, the risk of technological changes and the domestic or international political climate need to be taken into consideration.

Evaluation of alternatives….. Marginal & cost effectiveness analysis  Marginal analysis can be used by comparing factors other than costs and revenues.  Cost effectiveness analysis is a technique for choosing the best plan when the objectives are less specific than sales, costs or profits

Selecting an alternative.... Three basic approaches  Experience.  Experimentation.  Research and analysis.

Types of Decisions  Programmed decision is a repetitive decision that can be handle by a routine approach. (Procedure, rule, policy)  Non-programmed decision is a decision that must be custom-made to solve unique and non-recurring problems.

Decision-Making Environments  Decision making under uncertainty  Complete uncertainty as to which state of nature may occur  Decision making under risk  Several states of nature may occur  Each has a probability of occurring  Decision making under certainty  State of nature is known

Modern approaches to decision making under certainty  Risk analysis  Decision trees  Preference theory

Decision Trees  Information in decision tables can be displayed as decision trees  A decision tree is a graphic display of the decision process that indicates decision alternatives, states of nature and their respective probabilities, and payoffs for each combination of decision alternative and state of nature  Appropriate for showing sequential decisions

Decision Tree Example = (.5)($200,000) + (.5)(-$180,000) EMV for node 1 = $10,000 EMV for node 2 = $40,000 = (.5)($100,000) + (.5)(-$20,000) Payoffs$200,000 -$180,000 $100,000 -$20,000 $0 Construct large plant Construct small plant Do nothing Favorable market (.5) Unfavorable market (.5) 1 Favorable market (.5) Unfavorable market (.5) 2 Figure A.2

Other factors in decision making  Group decision making  Creativity and innovation  Personal values and organisation culture

Advantages of Group Decision Making  More complete information  More alternatives  Increasing acceptance of a solution  Increasing legitimacy and democracy

Disadvantages of Group Decision Making  Time-consuming  Minority domination  Pressures to conform (groupthink)  Ambiguous responsibility