Thursday, 22 December 2011

03: Decision Making

Decision Making is defined as the selection of a course of action from amongst alternatives; it is at the core of the planning. A plan cannot be said to exist unless a decision a commitment of resources, direction, or reputation- has been made. Until the point, there are only planning studies and analysis.

The Importance & Limitations of Rational Decision Making

What is Rationality in Decision Making?

Rational decision making attempts to reach some goal that cannot be attained without an action. For rational decision making, we must have clear understanding of alternative courses by which a goal can be reached under existing circumstances and limitation. This needs information and the ability to analyze and evaluate alternatives in the light of the goal sought. Finally it requires having a desire to come to the best solution by selecting alternative that most effectively satisfies goal achievement.
It is seldom to achieve complete rationality, particularly in managing. As first, decisions must operate for the future, and the future almost invariably involves uncertainties. Second, it is difficult to recognize all the alternatives that might be followed to reach a goal.

Limited or “Bounded” Rationality

Limitation of information and time makes a manager to settle for limited rationality, or bounded rationality. Bounded Rationality, i.e. satisficing, is picking a course of action that is satisfactory or good enough under the circumstances.

Development of Alternatives and the Limiting Factor

If we can think of only one course of action, clearly we have not thought hard enough. The ability to develop alternatives is often as important as being able to select an alternative correctly. On the other hand ingenuity, research and common sense will often unearth so many choices that all of them cannon be adequately evaluated. A Limiting Factor is something that stands in the way of accomplishing a desired objective. Recognizing the limiting factors in a given situation makes it possible to narrow the search for alternatives to those that will overcome the limiting factors.
The principle of the limiting factor (or strategic factor) is: by recognizing and overcoming those factors that stand critically in the way of a goal, the best alternative course of action can be selected.

Evaluation of Alternatives

Decision making requires at various steps of planning – in selecting goals, in choosing critical premises and ultimate decision making is required in selecting alternatives.
  1. Quantitative and Qualitative Factors: Quantitative Factors are factors that can be measured in numerical terms, such as time or various fixed and operating costs. Qualitative or Intangible Factors are factors that are difficult to measure numerically, such as quality of labor relations, the risk of technological change. To evaluate and compare the intangible factors in a planning problem and make decisions, managers must first recognize these factors and then determine whether a reasonable quantitative measurement can be given to them.
  2. Marginal Analysis:Marginal Analysis to compare additional revenues arising from additional costs. If the additional revenues of a larger quantity are greater than its additional costs, more profits can be made by producing more. However, if the additional revenues of the larger quantity are less than its additional costs, a larger profit can be made by producing less. For the best output of a machine, input could be varied against outputs until the additional input equals the additional output. This would be the point of maximum efficiency or the machine.
  3. Cost Effectiveness Analysis: Cost effectiveness analysis seeks the best ratio of benefits and costs.
Selecting an Alternative

There are three basic approaches (1) Experience (2) Experimentation and (3) Research and analysis
  1. Experience: Reliance on past experience probably plays a larger part than it deserve in decision making. To some extent, experience is the best teacher, however, relying on past experience as a guide for future action can be dangerous. In the first place, underlying reasons for mistakes or failures are not recognized. In second place, lessons of experience may be entirely inapplicable to the new problems. Good decisions must be evaluated against future events, while experience belongs to the past. Careful analyzing of experience, rather than blindly following it, and studying fundamental reason for success or failure makes experience as a useful basis for decision making.
  2. Experimentation: Obvious way to decide among alternatives is to try one of them and see what happens. The experimental technique is likely to be the most expensive of all techniques, especially if a program requires heavy expenditures of capital and personnel. Also they may still be doubt about what it proved. Having said that, a firm may test a new product in certain market before expanding its sale nationwide.
  3. Research and Analysis: One of the most effective techniques for selecting from alternatives, when major decisions are involved, is research and analysis. This approach means solving a problem by first comprehending it. It thus involves a search for relationships among the more critical of the variables, constraints and premises that bear upon the goal sought. Solving a planning problem requires breaking it into its component parts and studying the various quantitative and qualitative factors. Study and analysis are likely to be far cheaper than experimentation.
Programmed and Non-Programmed Decisions

A programmed decision is applied to structured or routine problems. E.g. Lathe operators have specifications and rules that tell them whether the part they mad is acceptable, has to be discarded, or should be reworked. This kind of decision is used for routine and repetitive work. Non-Programmed decisions are used for unstructured, novel and ill-defined situations of a nonrecurring nature. Most decisions are neither completely programmed nor completely non-programmed they are combination of both. Most Non-Programmed decisions are made by upper-level managers; this is because upper-level managers have to deal with unstructured problems. Problems at lower levels of the organization are often routine and well structured, requiring less decision discretion by mangers and non-managers.

Decision Making under Certainty, Uncertainty and Risk

Virtually all decisions are made in an environment of at least some uncertainty. However, the degree will vary from relative certainty to great uncertainty.
In situation involving certainty, we are reasonably sure about what will happen when they make a decision. The information is available and considered to be reliable, and the cause and effect relationships are known.
In a situation of uncertainty, on the other hand, we have only a meager (thin) database, we do not know whether or not the data are reliable, and we are very unsure about whether or not the situation may change. Moreover, we cannot evaluate the interactions of the different variables.
To improve decision making, one may estimate the objective probabilities of outcome by using a mathematical models. On the other hand, subjective probability, based on judgment and experience, may be used. All intelligent decision makers dealing with uncertainty like to know the size and nature of the risk they are taking in choosing a course of actions.
Virtually every decision is based on the interaction of number of important variables, many of which have an element of uncertainty but, perhaps, a fairly high degree of probability. Thus, wisdom of launching a new product might depend a number of critical variables: the cost of introducing the product, the cost of producing it, the capital investment that will be required, the price that can be set for the product, the size of the potential market, and the share of the total market that it will represent.

Creativity and Innovation

An important factor in managing people is creativity. A distinction can be made between creativity and innovation. The term creativity usually refers to the ability and power to develop new ideas. Innovation, on the other hand, usually means the use of these ideas.

The Creative Process

The creative process is seldom simple and liner. Instead, it generally consists of four overlapping and interacting phases:unconscious scanning, intuitioninsight and logical formulation.
The first phase, unconscious scanning, is difficult to explain because it is beyond consciousness. This scanning usually requires absorption in the problem which may be vague in the mind.
The second phase, intuition, connects the unconscious with the conscious. This stage may involve a combination of factors that may seem contradictory at first. Intuition needs time to work. It requires that people find new combinations and integrate diverse concepts and ideas. Intuitive thinking is promoted by several techniques such as brainstorming.
Insight, the third phase of the creative process, is mostly the result of hard work. For example, many ideas are needed in the development of a usable product, a new service or a new process. Few insights may last for only a few minutes, and effective managers may benefit from having paper and pencil ready to make note of their creative ideas.
The Last phase in the creative process is logical formulation orverification. Insight needs to be tested through logic or experiment.


Creativity can be taught. Creative thoughts are often the fruits of extensive efforts. Some techniques focus on group interactions; others focus on individual actions. The purpose of the brainstorming is to improve problem solving by finding new and unusual solutions. In the brainstorming session, a multiplication of ideas is sought. The rules are as follows.
1. No ideas are ever criticized.
2. The more radical the ideas are the better.
3. The quantity of idea production is stressed.
4. The improvement of ideas by others is encouraged.
Brainstorming emphasizes group thinking which may work well, in case when the information is distributed among various people. Otherwise individuals could develop better ideas working by themselves than they could work in group.
Limitation of traditional Group Discussion is, experts on a topic may not be willing to express their ideas in a group for fear of being ridiculed.

The creative Manager

In appropriate environment virtually all people are capable of being creative, even though the degree of creativity varies considerably among individuals. It is beyond question that creative people can make great contribution to an enterprise. At the same time, however, they may also cause difficulties in organizations. Change -- as many manger knows-- is not always popular. Creative individuals may be disruptive by ignoring established polices, rules and regulation. Creative people should have enough freedom to purse their ideas, but not too much so that they waste their time or do not find enough time to collaborate with others for working towards common goals. Having said this creativity is not a substitute for managerial judgment. It is manager who must determined and weigh the risks involved in pursuing unusual ideas and translating them into innovative practices.

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