Making Decision

Group 2
MM 105
Source: SAMUEL CERTO
Objectives
To help build our decision-making skill, when
studying this chapter, we will attempt to acquire:

1. A fundamental understanding of the term decision.

2. An understanding of each element of the decision
situation.
3. An ability to use the decision-making process
4. An appreciation for the various situations in which
decisions are made.
5. An understanding of probability theory and
decision trees as decision making tools.
Fundamentals of Decisions
Definition of decision
Types of decision
1. Programmed Decisions
2. Non-programmed
Decisions
Decision defined
• Decision is a choice made between two or more
available alternatives.

• Decision making is the process of choosing

the best alternative for reaching objectives.
Types of Decisions
Programmed Decisions Non-programmed Decisions

• These are routine and • These are typically one-

are repetitive. shot decisions that are
usually less structured
• It requires less time. than programmed.

• And unlike programmed

decisions, these are
mostly long-term.
The Responsibility for Making
Organizational Decisions
•Scope of the decision
•Levels of Management
The responsibility for Making
Organizational Decisions
Many different kinds of decisions must be made
within an organization such as how to
manufacture a product, how to maintain
machines, how to ensure product quality, and
how to establish advantageous relationships
with customers. Because organizational
decisions are so varies, some type of rational
must be developed to stipulate who within the
organization has the responsibility for making
which decisions
One such rational is based primarily on two
factors:

• The scope of the decision is the proportion, the

broader the scope of the decision is said to be.
• Levels of management are simply lower-level
management, middle-level management and
upper-level management.

The rationale for designating who makes which

decisions is that the broader the scope of a
decision, the higher the level of manager
responsible for making that decision.
Consensus is one method a manager can use in
getting a group to arrive at a particular decision.

It is an agreement on a decision by all the

individuals involved in making that decision. It
usually occurs after lengthy deliberation and
discussion by members of the decision group,
who maybe either all managers or a mixture of
managers and subordinates.
Elements of Decision Situation
1. Decision Makers
2. Goals to be served
3. Relevant Alternatives
4. Ordering of Alternatives
5. Choice of Alternatives
Decision Makers
They are the individuals or groups that actually
make the choice among alternatives.

Weak decision makers usually have one of the

following orientations:
1. Receptive
2. Exploitive
3. Hoarding
4. Marketing-Oriented
Goals to be served
The goals that decision makers seek to
attain. These should often be
organizational objectives.
Relevant Alternatives
A relevant alternative is one that is
considered feasible for solving an existing
problem and for implementation.
Ordering of Alternatives
The decision situation requires a process or
mechanism for ranking alternatives from
most desirable to least desirable.
Choice of Alternatives
This is the actual choice between available
alternatives. This choice establishes what
we call decisions.
Decision-Making Conditions
•Risk
•Uncertainty
Decision-Making Conditions: Risk and
Uncertainty
Risks Uncertainty
• A probability or threat of a • Situation where the current state of
knowledge is such that:
damage, injury, liability, loss,
or other negative occurrence 1. the order or nature of things is
that is caused by external or unknown,
2. the consequences, extent, or
internal vulnerabilities and magnitude of circumstances,
that may be neutralized conditions, or events is
unpredictable, and
through preemptive action. 3. credible probabilities to possible
outcomes cannot be assigned.
Although too much uncertainty is
undesirable, manageable
uncertainty provides the freedom
to make creative decisions.
Decision-Making Conditions: Risk and
Uncertainty
Risk Uncertainty
• Refers to situations in which • Refers to situations where the
statistical probabilities can be probability that a particular
attributed to alternative outcome will occur is not
potential outcomes. known in advance.
Decision-Making Conditions: Risk and
Uncertainty
Risk Uncertainty
• Risk means danger or threat • Uncertainty means hesitation
one might feel in doing some or ambiguity about certain
work. thing.

• Risk can be related to • Uncertainty can be touched

occurrences with low with 100% confidence.
probability.
Decision-Making process
•Define the problem
•Identify limiting factors
•Develop potential alternatives
•Analyze the alternatives
•Select the best alternative
•Implement the decision
•Establish a control and evaluation
system
The Rational Decision-Making Process
Define the Identify limiting Develop potential
problem factors alternatives

Analyze the Select the best Implement the

alternatives alternative decision

Establish a
control and
evaluation
system
Define the problem
The decision-making process begins when a
manager identifies the real problem. The
accurate definition of the problem affects all the
steps that follow; if the problem is inaccurately
defined, every step in the decision-making
process will be based on an incorrect starting
point. One way that a manager can help
determine the true problem in a situation is by
identifying the problem separately from its
symptoms.
Identify limiting factors
All managers want to make the best decisions. To do
so, managers need to have the ideal resources —
information, time, personnel, equipment, and
supplies — and identify any limiting factors.
Realistically, managers operate in an environment
that normally doesn't provide ideal resources. For
example, they may lack the proper budget or may
not have the most accurate information or any extra
time. So, they must choose to satisfy — to make the
best decision possible with the information,
resources, and time available.
Develop potential alternatives
Time pressures frequently cause a manager to
move forward after considering only the first or
most obvious answers. However, successful
problem solving requires thorough examination
of the challenge, and a quick answer may not
result in a permanent solution. Thus, a manager
should think through and investigate several
alternative solutions to a single problem before
making a quick decision.
Brainstorming
In this act, a group works together to generate ideas and alternative
solutions. The assumption behind brainstorming is that the group
dynamic stimulates thinking — one person's ideas, no matter how
outrageous, can generate ideas from the others in the group.

Brainstorming usually requires 30 minutes to an hour. The following

specific rules should be followed during brainstorming sessions:

1. Concentrate on the problem at hand.

2. Entertain all ideas.
3. Refrain from allowing members to evaluate others' ideas on the
spot.
4. Nominal group technique.
5. Delphi technique.
Analyze the alternatives
Evaluating the alternatives can be done in numerous
ways. Here are a few possibilities:

• Determine the pros and cons of each alternative.

• Perform a cost-benefit analysis for each alternative.
• Weight each factor important in the decision,
ranking each alternative relative to its ability to meet
each factor, and then multiply by a probability factor
to provide a final value for each alternative.
A manager needs to evaluate each alternative in
terms of its:

• Feasibility
• Effectiveness
• Consequences
Selecting the best alternative
After a manager has analyzed all the alternatives,
she must decide on the best one. The best
alternative is the one that produces the most
advantages and the fewest serious
disadvantages. Sometimes, the selection process
can be fairly straightforward, such as the
alternative with the most pros and fewest cons.
Other times, the optimal solution is a
combination of several alternatives.
Implementing the Chosen Alternative
Managers are paid to make decisions, but they are
also paid to get results from these decisions.
Positive results must follow decisions. Everyone
involved with the decision must know his or her
role in ensuring a successful outcome. To make
certain that employees understand their roles,
managers must thoughtfully devise programs,
procedures, rules, or policies to help aid them in
the problem-solving process.
Establish a control and evaluation
system
An evaluation system should provide feedback on
how well the decision is being implemented,
what the results are, and what adjustments are
necessary to get the results that were intended
when the solution was chosen. And in order for a
manager to evaluate his decision, he needs to
gather information to determine its
effectiveness.
If a manager's plan hasn't resolved the problem,
he needs to figure out what went wrong. A
manager may accomplish this by asking the
following questions:

• Was the wrong alternative selected?

• Was the correct alternative selected, but
implemented improperly?
• Was the original problem identified incorrectly?
• Has the implemented alternative been given
enough time to be successful?
Decision-Making Tools
•Probability Theory
•Decision Trees
Probability Theory
It is a decision-making tool used in risk situations-
situations in which decision makers are not
completely sure of the outcome of an
implemented alternative.
Probability
It refers to the likelihood that an event or outcome
will actually occur. It is estimated by calculating
an expected value for each alternative
considered. Specifically, the expected value (EV)
for an alternative is the income (I) that
alternative would produce, multiplied by its
probability of producing that income (P).

In formula form: EV=IP

Alternative Potential Probability of Expected Value
(locations) Income Income of Alternatives
A 90,000 20% 18,000
B 75,000 40% 30,000
C 60,000 80% 48,000
Decision Trees
It is a graphic decision-making tool typically used
to evaluate decisions involving a series of steps.
John F. Magee
Developed a classic illustration that outlines how
decision trees can be applied to a production
decision.

Decision point

Chance event
 Decision Point 1 Decision Point 2
2 Years
High Average Demand

A. Build High Initial Low Subsequent Demand

Big
Plant
Low Average Demand
A. Expand High Average Demand
Plant

Low Average Demand

Initially High
Demand
High Average Demand

B. Build B. No
Change in Low Average Demand
Small
Initially Plant
Plant
Low
1. Study estimates of investment amounts
necessary for building a large plant, for
building a small plant, and for expanding a
small plant.

2. Weigh the probabilities of facing different

product demand levels for various decision
alternatives.

3. Consider projected income yields for each

decision alternative.