Hr Decision Making

Decision Making Decision making is defined as selection of a course of action from among alternatives; it is at the core of planning. A plan cannot be said to exist unless a decision has been made. Managers some times see decision making as their central job because they must constantly choose what is to be done, who is to do it, and when, where, and occasionally even how it will be done. Decision making is, however, only a step in planning, even when it is done quickly and with little thought or when it influences action for only a few minutes. It is also part of everyone's daily living. A course of action can seldom be judged alone, because virtually every decision must geared to other plans. TYPES OF DECISIONS Decisions may be of different types. Some of the important types of managerial decisions are explained below. 1. programmed and non-programmed decisions 2. Major and minor decisions 3. Routine and strategic decisions 4. organizational and personal decisions 5. individual and group decisions 6. policy and operation decision PROGRAMMED AND NON PROGRAMMED DECISIONS Programmed decisions are made with some rules and procedures. Programmed decisions are of routine nature and are taken at lower level management. The decisions like making routine purchases, allowing trade discounts are programmed decisions. Non-repetitive decisions are on the other hand non programmed decisions. The need for such decisions arises due to specific circumstances. These decisions are taken at top level management. The opening a new branch, launching a new product, purchasing a new machinery are some of the examples of non programmed decisions. MAJOR AND MINOR DECISINS A decision to purchase new machinery costing several lakhs is a major decision and purchase of few reams of typing paper is a minor decision ROUTINE AND STRATEGIG DECISIONS Routine decisions are of repetitive nature, do not require much analysis and evaluation and can be made quickly at lower and middle level. Strategic decisions relate to policy matter, are taken at higher level. Examples are capital expenditure decisions, pricing decisions etc ORGANIZATIONAL AND PERSONAL DECISIONS A manager making a decision in the name of a company is an organizational decision and can be delegated and personal decision taken as an individual cannot be delegated. INDIVIDUAL AND GROUP DECISION Individual decisions are taken by a single individual in context of routine decisions where guidelines are already provided. Group decisions are taken by a

committee constituted for this specific purpose. Such decisions are very important for the organization

STEPS IN DECISION MAKING The following are the steps in the process of decision making 1. defining and analyzing the problem 2. developing alternative solution 3. selecting the best alternative 4. converting the decision into effective action 5. follow up

DEFINING & ANALYSING THE PROBLEM Before one starts the process of decision making he should clearly understand the problem for which a decision I needed. Only when the problem is analysed properly all the aspects of the problem can be understood. Thus a proper analysis and defining of the problem is the first step in decision making. It is also necessary to classify the problem in order to know who must take the decision, who must be consulted in making it and who must be informed. DEVELOPING ALTERNATIVE SOLUTION A problem can be solved in different ways. The decision taker has to search for and identify each possible solution or alternative. Otherwise he may be forced an alternative which may not be the most efficient or most profitable one. SELECTING THE BEST ALTERNATIVE Once the alternative solutions are identified the decision maker will evaluate each alternative. The merits and demerits of each alternative must be studied carefully. CONVERTING THE BEST ALTERNATIVE TO ACTION A mere decision will not be sufficient. The decision taker should see that it is implemented successfully. The decision should be taken should be effectively communicated to those persons who are to implement them. FOLLOW UP Follow up helps to evaluate the effectiveness of decision taken and implemented. This gives the decision taker a chance to revise the past decisions, if needed, or to make a better decision in the future.

Rationality in Decision Making It is frequently said that effective decision making must be rational. But what is rationality? When is a person thinking or deciding rationally? People acting or deciding rationally are attempting to reach some goal that cannot be attained without action. They must have a clear understanding of alternative courses by which a goal can be reached under existing circumstances and limitations. They also must have the information and the ability to analyze and evaluate alternatives in the light of the goal sought. Finally, they must have a desire to come to the best solution by selecting the alternative that most effectively satisfies goal achievement. People seldom achieve complete rationality, particularly in managing In the first place, since no one can make decisions affecting the past, decisions must operate for the future, and the future almost invariably involves uncertainties. In the second place, it is difficult to recognize all the alternatives that might be followed to reach a goal; this is particularly true when decision making involves opportunities to do something that has not been done before. Moreover, in most instances, not all alternatives can be analyzed, even with the newest available analytical techniques and computers. Limited or "Bounded" Rationality A manager must settle for limited rationality, or "bounded" rationality. In other words, limitations of information, time, and certainty limit rationality even though a manager tries earnestly to be completely rational. Since managers cannot be completely rational in practice, they sometimes allow their dislike of risk — the desire to "play it safe" — to interfere with their desire to reach the best solution under the circumstances. Herbert Simon has called this satisfying, that is, picking a course of action that is satisfactory or good enough under the circumstances. Although many managerial decisions are made with a desire to "get by" as safely as possible, most managers do attempt to make the best decisions they can within the limits of rationality and in the light of the size and nature of risks involved. The Principle of the Limiting Factor Assuming that we know what our goals are and agree on clear planning| premises, the first step of decision making is to develop alternatives. There an almost always alternatives to any course of action. indeed, if there seems to only one way of doing a thing, that way is probably wrong. If we can think 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 correctly from among them.. The manager needs help in this situation, and this he| as well as assistance in choosing the best alternative, is found in the concept the limiting or strategic factor. A limiting factor is something that stands in the way of accomplishing desired objective. Recognizing the limiting factors in a given situation make possible to narrow the search for alternatives to those that will overcome the limiting factors.

The principle of the limiting factor is as follows: By recognizing and over coming those factors that stand critically in the way of a goal, the best alternative course of action can be selected. EVALUATION OF ALTERNATIVES Once appropriate alternatives have 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, although decisions must also be made in the other steps of planning in selecting goals, in choosing critical premises, and even in selecting alternatives. Quantitative(tangible) and Qualitative(intangible) Factors In comparing alternative plans for achieving an objective, people are likely to think exclusively of quantitative factors. These are factors that can be measured in numerical terms, such as time or various fixed and operating costs. No one would question the importance of this type of analysis, but the success of the venture would be endangered if intangible, or qualitative, factors were ignored. Qualitative, or intangible, factors are those that are difficult to measure numerically, such as the quality of labor relations, the risk of technological change, or the international political climate. There are all too many instances in which an excellent quantitative plan was destroyed by an unforeseen war, a fine marketing plan was made inoperable by a long transportation strike, or a rational borrowing plan was hampered by an economic recession. These illustrations point out the importance of giving attention to both quantitative and qualitative factors when comparing alternatives. To evaluate and compare the intangible factors in a planning problem and make decisions, a manager must first recognize these factors and then determine whether a reasonable quantitative measurement can be given them. If not, he or she should find out as much as possible about the factors, perhaps rate them in terms of their importance, compare their probable influence on the outcome with that of the quantitative factors, and then come to a decision. This decision may give predominant weight to a single intangible. Such a procedure allows the manager to make decisions on the basis of the weight of the total evidence. It does involve fallible personal judgments; however, few managerial decisions can be so accurately quantified that judgment is unnecessary. Decision making is seldom simple. It is not without justification that the successful executive has been cynically described as a person who guesses right.

Marginal Analysis Evaluating alternatives may involve utilizing the techniques of marginal

analysis to compare additional revenues arising from additional costs. Where the objective is to maximize profits, this goal will be reached, as elementary economics teaches, when the additional revenues and additional costs are equal. In other words, 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. SELECTING AN ALTERNATIVE: THREE APPROACHES When selecting from among alternatives, managers can use three basic approaches: (1) experience (2) experimentation (3) research and analysis. Experience Reliance on past experience probably plays a larger part than it deserves in decision making. Experienced managers usually believe, often without realizing it, that the things they have successfully accomplished and the mistakes they have made furnish almost guides to the future. To some extent, experience is the best teacher. The very fact that managers have reached their position appears to justify their past decisions. Moreover, the process of thinking problems through, making decisions, and seeing programs succeed or fail does make for a degree of good judgment. Many people, however, do not profit by their errors, and there are managers who seem never to gain the seasoned judgment required by modern enterprise. Relying on past experience as a guide for future action can be dangerous, however. In the first place, most people do not recognize the underlying reasons for their mistakes or failures. In the second place, the lessons of experience may be entirely inapplicable to new problems. Good decisions must be evaluated against future events, while experience belongs to the past. Experimentation An 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 in capital and personnel and if the firm cannot afford to vigorously attempt several alternatives. Besides, after an experiment has been tried, there may still be doubt about what it proved, since the future may not duplicate the present. This technique, therefore, should be used only after considering other alternatives. 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. It is the pencil-and-paper (or, better, the computer-andprintout) approach to decision making. 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. Hours of time and reams of paper used for analyses usually cost much less than trying the various alternatives

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. There are certain risks involved in making decisions. Decision making is classified as 1. under certainty 2. under uncertainty 3. under risk DECISION MAKING CONDITIONS Decision making involves selection of alternatives out of several available. The alternative is put into action which will take place in future period. Thus, the decision maker is making the decision for the future,

----------------------------------------------------------------------------------------------------------------------- condition conditions of conditions of complete of perfect certainty risk uncertainty (DECISION MAKING CONDITIONS) In such conditions, some of a decision differs. An outcome defines what will happen if a particular alternative or course of action is chosen. Knowledge of outcome is important when there are multiple alternatives. In the analysis of decision making, three types of knowledge with respect to outcomes are usually distinguished as shown in the following table

conditions Nature of outcomes certainty Complete and accurate knowledge of the outcome of each alternative as there is only one outcome of each alternative risk Multiple outcomes for each alternative can be identified & probability of occurrence can be attached to each outcome uncertaint Multiple outcomes for each alternative can be identified but there is y no knowledge Of the probability to be attached to each DECISION MAKING UNDER CERTAINTY When a manager knows exactly which state of nature will occur, a circumstance

of certainty exists. This means that the manager will be able to make perfectly accurate decision time after time. Such conditions exist when decision involves action for immediate future and the manager has made such a decision a number of times with the same result. Under such conditions, he can use a deterministic model, the one in which all factors are assumed to be exact with chance playing no role. Under such conditions, he does not need to analyze the chance element. This can be explained by an example of pay off table which indicates the outcomes of a decision under various conditions(table1) Alternative action

situation -

demand for product

Alternative action

low

moderate

high

Centralized distribution

30 rores

15 crores

20 crores

Decentralized distribution 10crores

15 crores

35 crores

The decision maker has two alternative actions and three states of nature of demand for product. The decision involves selecting action action in terms of distribution- centralized or decentralized. The demand for the product is considered under three situations-low, moderate ang high. Revenue to be earned under various conditions and particular action is given in terms of rupees (ten million). In reaching certainty decision, the manager would only have to utilize a part of table and would have to examine a number of alternatives, but only the pay offs related to the one state of nature will occur. Supposing the manager is sure about the demand, that is high demand, he can select decentralized distribution which gives maximum revenue of Rs 35 crores. In this condition, the manager is sure about the demand of the product. However, such conditions rarely exists because decision making requires more variables than presented here and all such factors may not behave the same way. Therefore, in many situations, the manager is forced to use probability about such happening, demand of product in this case. DECISION MAKING UNDER RISK Most of the major organizational decisions particularly involving investments are made under the conditions of risk in which some information is available but that is not sufficient to answer overall question about the outcome of decisions. In such a case, managers have to decide two things – amount of risk involved in a decision and the amount of risk that the organization is ready to assume. Amount of risk involved can be calculated by risk analysis. RISK ANALYSIS Decision making under risk refers to situations where there are number of states of nature(outcomes) and the manager knows the probability of

occurrence for each of these outcome.(based on past experience etc)

Alternate action

Situation: state demand of LOW(0.2)

MODERATE(0.5)

HIGH(0.3)

6 CRORES

7.5 CRORES

6 CRORES

DECENTRALISED 2 CRORES

7.5 CRORES

10.5 CRORES

CENTRALISED

PAY OFF TABLE FOR DECISION MAKING UNDER RISK Thus the expected values for centrlised distribution are 19.5 crores and for decentralized distribution are Rs 20 crores. The checking of pay off table shows that the expected values are greater for decentralized and the company should go for this alternative. DECISION MAKING UNDER UNCERTAINTY If a decision involves conditions about which the manager has no information, either about the outcome or the relative chances for any single outcome, he is said to be operating under conditions of uncertainty. He has no chance of predicting the events. Under such conditions, a number of different decision criteria have been proposed as possible bases for decision making as follows • MAXIMAX CRITERION (maximizing the maximum possible pay off) • MAXIMIN CRITERION (maximizing the minimum possible payoff) • MINMAX CRITERION (minimizing the maximum possible regret ) • LAPLACE CRITERION ( assuming equally likely probabilities for the occurrence of each possible state of nature) MAXIMAX CRITERION This decision is applied by the most optimistic decision maker when he thinks optimistically about the occurrence of events influencing a decision. If this philosophy is followed, a manager will select that alternative under which it is possible to receive the most favorable payoff.

I

LLUSTRATION (TABLE1) Alternative action

situation -

demand for product

Alternative action

low

moderate

high

Centralized distribution

30 rores

15 crores

20 crores

Decentralized distribution

10crores

15 crores

35 crores

Referring to table No1, the manager using maximax criterion will select the most favorable pay off for each alternative as follows • Centralization Rs 30 crores

•

Decentralization

Rs 35 crores

If maximum monetary payoff is the objective, the decision maker will decentralize MAXIMIN CRITERION As against maximax criterion, maximin criterion is adopted by the most pessimistic decision maker. The manager believes that the worst possible may occur. This pessimism results in the selection of that alternative which maximizes the least favourable pay off. In table no1, the minimum pay off for each alternative is as follows • Centralization Rs 15 crores

•

Decentralization

Rs 10 crores

Accordingly, the decision would be to centralize the distribution because it maximizes the minimum payoff MINIMAX CRITERION This criterion leads to the minimization of regret. The managerial regret is defined as the pay off for each alternative under every state of nature of competitive action subtracted from the most favorable payoff that is possible with the occurrence of that particular event. If the manager selects an alternative and if a state of nature occurs that does not result in the most favorable pay off, regret occurs. The manager is regretful that alternative selected did not lead to the best pay off. Since the manager does not know the probability of happening, a particular event, he will choose an alternative which minimizes his regret. Referring to table 1, the pay off table using minimax criterion can be constructed as shown in table 2

Alternative action

situation -

demand for product

Alternative action

low

moderate

high

Centralized distribution

0 crores

0 crores

15 crores

Decentralized distribution Table no 2

20crores

0 crores

0 crores

The regret table shows in the case of high demand, the manager has a regret of 15 crores if he chooses centralized distribution. In case of low demand, he has a regret of Rs 20 crores if he chooses the alternative of decentralized distribution. Since he is interested in minimizing his regret, he will choose centralization. LAPLACE CRITERION The three preceeding decision criteria assume that without any previous experience it is not possible to assign any probability to the states of situation. In this criterion, since the probability cannot be assigned on any basis, equal probability is assigned to each event. Every event is treated equal . applying this criterion, in table No1, following payoffs will be expected from two alternative actions • Centralization 30+15+20 crores divided by 3=21.67 crores • Decentralization-10+15+35 crores devided bt 3=20 crores Since centralized distribution gives better payoff base on equal probabibility, it will be chosen MODERN APPROACHES TO DECISION MAKING UNDER UNCERTAINTY Decision Trees Decision tree is a geographical method for identifying alternative actions, estimating probabilities and indicating the resulting expected pay off. Some decisions involve a series of steps, the second step depending on the outcome of the first, the third depending on the outcome of the second, and so on. Uncertainty surrounds each step, so decision maker faces uncertainty piled on uncertainty. Decision trees are a model for solving such a problem CONSTRUCTION OF DECISION TREE 1ST STEP-DEFINITION OF ALTERNATIVES For example, if an organization wants to introduce a new product in the market, it has two alternatives available to it. Either to go for • permanent tooling • or temporary tooling each alternative will require different investment. And we have to find which decision will be successful 2nd ALTERNATIVE The second step involves the estimation of probabilities for various events.

There may be three alternative events so far the success or failure is concerned and they are • high success • moderate success • failure 3rd STEP The third step is the calculation of pay off from each alternative in various events. ILLUSTRATION 1. INITIAL INVESTMENT Permanent tooling -2 crores Temporary tooling -1 crore 2. PAY OFF FROM EACH INVESTMENT EVENTS PERMANENT TOOLING TEMP TOOLING PROBABILITY Product succeeds 1 crore 0.6 crore (0.5) Moderate success0.5 crore 0.3 crore (0.3) Failure 2 crores I crore (0.2) Now a decision tree can be constructed based on these factors as follows Expected pay off from permanent tooling =successful 1crx.5 =0.5 = moderate success 0.5 crx0.3 =0.15 = fail 2 crx.1 (minus) =0.2 total=0.45 ie Rs 45 lakhs Expected pay off from temp tooling =0.3

= successful 0.6x0.5 =moderate success0.3x0.3

=.0’09 fail I cr x 0.1

(minus)

=0.1 total=0.29 ie 29 lakhs therefore, in terms of total pay off, it is better to select permanent tooling. However, if return on investment is considered temporary tooling may be selected. USES OF DECISION TREE A decision tree is basically used to make decisions in complex situation particularly when outcome of a later situation is dependent on outcome of the former. It makes it possible for them to see at least the major alternatives open to them. Then by incorporating the probabilities of various events, it is possible to take a decision of desired result A basic value of decision tree lies in expressing all outcomes or events in quantitative terms .

LIMITATIONS The system is very complex that relationship between various events and alternatives cannot be established. OTHER FACTORS IN DECISION MAKING .Personal values and organization culture. However, values influence decision making at all organizational levels, managers and non managers alike. What is true for individuals is also pertinent to the organization as a whole. Thus, the pattern of behavior, shared beliefs, and values of members of an organization do influence decision making Group decision making. In modern organizations, decisions are often made by groups of individuals, such as committees or teams. Creativity and innovation. Effective decision making requires creativity and innovation.