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Decision Making
7 Cs of Decision Making Model
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Decision Making
Management is the practice of consciously and continually
shaping formal organizations, and the art of decision making iscentral to doing that.
It involves identifying and selecting a course of action to deal with
a specific problem (when the actual state of affairs differs from
the normal course) or take advantage of the opportunityis animportant part of managers job.
Problems and opportunities are generally intertwined and can be
clarified as something that problemendangers organizations
ability toreachits objectives while opportunity offers a chanceto exceedthe objectives
Peter Drucker makes it clear that opportunities rather than
problems are key to the success of an organization
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The problem and its threshold finding
Problem finding is not always easy and straightforward. The
three main categories of pitfalls are (a) false association ofevents, (b) false expectation of events and (c) false self
perception and self image (the case of mainframe computers and
evolution of laptops).
How big is the gap between the actual and the desired state ofaffairs (for this the managers need to be always updated with
reliable information). The value base and the backgrounds of the
managers influence the magnitude and the type of problems
(economic, environmental, political - or a source of personaladvancement)
Alert managers often sense problems early
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Decisions in Management Functions
Decision making, therefore, is the study of identifying and
choosing alternatives based on the values and preferences
(goals, desires, lifestyle) of the decision maker.
Planning: Long-term / short term objectives, strategies to meet
the objectives and fixing individual goals and targets.
Organizing: Organization structure and line of command,
decentralization / delegation , job definition, change
management
Leading: Motivation, conflict resolution, leadership style,
efficiency booster
Controlling: How and what activities need to be controlled,
setting performance deviation tolerance limit, use of
communication network and up-gradation
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Decision Environment
Every decision is made within a decision making environment,
defined as collection of information, alternatives, values and
preferences available at the time of decision making. Both
information and alternatives are constrained by time and effort.
Since the decisions are to be made within the constrainedenvironment, the major challenge of decision making is the
uncertainty and the major goal is to reduce the uncertainty
Time (past experiences, future projections / implications) and
human relationships (one does not take decision in isolation) arecritical to the process of decision making.
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Delaying a decision
Since the environment continues to expand with time, itis advisable to put off decision making close to thedeadline. Armed with the new information andalternatives, hind-sighters can look back many times andmake better decisions
Delaying a decision has the following benefits:1. There is time for more thoughtful and extended analysis
2. New alternatives might be recognized or created
3. The decision makers preference might change
4. With greater maturity, may be in a position to make amore pragmatic choice.
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Decision making is a Recursive Process
Decision making is a nonlinear, recursive process. Most
decisions are made by moving back and forth between the
choice of criteria (characteristics we want our choice to
meet) and the identification of the alternatives (the
possibilities we can choose from among).
decision whether select criteria identify alternatives
make a choice
Example: Should I get married?
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The Nature of Decision Making
Business is a series of decision linked by implementation
and follow-up.It sets the pace and direction Decision making is process driven. Being smart and hard
working does not ensure the quality of output. When the
process is right, quality will improve. Different type of
problems require different types of decision making;programmed (solutions to routine problems determined
by rule, procedure or habit) and non-programmed
decision (specific solutions created through an
unstructured process to deal with non routine problems).
As one moves up the ladder, the ability to make non
programmed decisions becomes more important.
Training will improve the output.
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Programmed decision
Non programmed
decision
Well Structured
Ill Structured
Problem type Level inOrganization
Lower
Top
Problems / Decisions /Levels
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Kinds of Decisions
Simple straight forward decision having short termrepercussion(assigning work or space to a subordinate)
Complex decision having long term connotations(changing the quality of the material used and change ofsupplier)
Decisions whether: This is Yes / No. Made be weighing
pros and cons. Should I buy a new TV ? Should I take aholiday?
Decisions which: Involve a choice of one or morealternatives from amongst a set of possibilities. Eatvegetarian / non vegetarian food.
Contingent Decisions: Decisions that have already beenmade but put on hold until some conditions are met. Shallbuy a car if the price is right.
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Group versus individual decisions Positives of group decisions
pooling of resources
specialization of labor
usually results in greater acceptance
Negatives of group decisions
potential to waste time
group conflict
intimidation by leaders or assertive members
Not a good option when dealing with crisis
(Time taken = Decision making + Explaining + Acceptance)
Groups are superior to even the best individuals.However,during CRISIS it has to be leader driven
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Decision Making Models
A model is a simplified description of a process, relationship, or
other phenomenon and focuses on a few key features of aproblem to examine carefully how they work while ignoring
other complicating and less important factors The kind of
predictive models are as varied as the decision problems to
which they are applied. Many rest on economic relationship,
some on engineering, statistical, legal, biological and scientific
relationships
Organizational level decisions involve several managers. Problem
identification and solution involve many departments, multiple
view points and even organizations which are beyond the scope
of an individual manager.
1. Management science approach / model, 2. Carnegie model, 3.
Incremental decision process model, 4. Garbage can model
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Management Science Approach
This model is analog to the rational approach by individual
decision maker and came into being during the WW II.
Mathematical and statistical techniques were applied to large
scale military problems that were beyond the ability of
individual decision makers. This system is applied to
problems that are analyzable, measurable, and can bestructured in a logical way.
Amongst is limitations, it can not sense qualitative date like
competitor reactions, customer taste, product warmth
etc that can not be incorporated in any mathematical model.
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Carnegie Model
Organization level decision making involve many managers
and that final choice is based on a coalition among themanagers, rather than by the one at the top based on
information fed to them. A coalition is an alliance among
several managers and stakeholders (managers from line depts,
staff specialists, powerful customers, union leaders, bankers,external groups etc) who agree about the organizational goals
and priorities. Two reasons why coalitions are made
1. Organizational goals are often ambiguous and operative
goals of the departments are inconsistent
2. Managers do not have time, resources and mental capacity
to identify all dimensions and process all information for
decision making.
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Carnegie Model Contd.
Under this model the decisions are made to satisfice rather
than optimize problem solutions. The coalition will accept asolution that is perceived as satisfactory to all coalition
members
Managers are concerned with immediate problems and their
immediate solutions. They dont expect a perfect solution in aconflict laden and ill defined situation
One of the best and most visible coalition builders of recent
times was George W Bush who sought a broad based coalition
before the start of the war in Iraq to gain agreement for hisvision of a new world order
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Uncertainty
Information is limitedManagers have many
constraints
ConflictManagers have
diverse goals, opinions,
values, experience
Coalition formation
Hold joint discussions
and interpret goals and
problems
Share opinion
Establish problem
prioritiesObtain support for
problem solution
Search
Conduct a simple
local searchUse established
procedure if
Appropriate
Create solutions if
needed.
Satisficing decision behavior
Adopt the first alternative
That is acceptable to the
coalition
Choice Process In Carnegie Model
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Incremental Decision Process Model
Most of the organization choices are a series of small choices
(series of nibbles) that combine to produce major decisions (bigbite). They move through several decision points and may hitbarriers (decision interrupts). Case of firing of a TV / Radioannouncer. Three major stages have been identified
1. Identification phase (problem flagged by complaints from
viewers, advertisers, colleagues)2. Development stage (what the organization had done last time or
what is done by other similar organizations)
3. Selection phase (make a choice from available options; in case of
difference of opinion bargaining takes place and may have totake recourse to Carnegie model)
Finally the decision needs to be authorized by the competentauthority
(The case of evolution of Mach III Turbo blades by Gillette)
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Garbage Can ModelIt deals with the pattern or flow of multiple decisions within the
organization that experience extremely high uncertainty about
growth and change. Such a state is called Organized Anarchyand are not guided by the vertical hierarchy but by the followingfactors:
1.Problem preferences (goals, problems, alternatives and ambiguity
at every stage)2.Unclear or poorly understood technology (explicit database that
facilitates decision making not available)
3.Turnover (experiences high attrition and the past experiencebrought on the table is fluid)
The unique characteristic of this model is that the decisionprocess is not seen as a sequence of events that begins with aproblem and ends with a solution (problem identification,potential solutions, participants and menu of options for decisionmaking
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Consequences of GCM of decision making
1. Solutions may be proposed even when problems do not exist
(an employee may be sold on to some idea may try to sellthis to others eg introduction of computers)
2. Choices are made without solving the problems (peopledecide to quit, organization budget is slashed, new policy isissued; these may be oriented towards a problem but do not
necessarily solve them)
3. Problems may persist without solving them (organizationparticipants get used to certain kind of problems and give uptrying to solve them or may not have the technology or
wherewithal to solve them)4. A few problems are solved (the process works in aggregate,
not all problems are solved but the organization moves in thedirection of problem reductioncase of the filmCassablanca)
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Rationality in Decision Making
Managerial decisions are assumed to be rational (consistent, value
maximizing choices within the specified limits, fully objectiveand logical). Moreover, the steps in the decision making processwould consistently lead towards selecting the alternative thatmaximizes the goal. The factors contributing are:
Problem clarity : Clear and unambiguous
Goal Orientation: Single, well defined goal; no conflict
Known options: Creative, aware of all viable options and therelevant criteria.
Clear Preferences: Ranked according to importance
Constant Preferences: Specific decision criteria are constant andthe weights assigned are stable over time
No time or cost constraints
Maximum payoffs
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Rationality Flowchart
The problem is clear and unambiguous A single well
defined goal All alternatives and consequences are
known Preferences are clear Preferences are stable
and constant No time or cost constraintsFinal choice will maximize economic payoff
Lead To
Rational Decision Making
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Bounded Rationality
In reality the problems seeking decisions are complex and the
decision making do not meet all these tests. Research suggest
that the decision making usually isnt the logical, consistent and
systematic process that the rationality implies
Bounded rationality is a behavior that is rational within the
parameters of a simplified model that captures the essential
features of a problem. This theory points out that decision
makers must cope with inadequate information about the nature
of the problem and its possible solutions, lack of time and
money to compile more complete information, inability toremember large volumes of information and limits to their own
intelligence.
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Factors Limiting Rationality
1. Limits to individual capacity to information processing
2. Decision makers tend to intermix solutions with problems3. Perpetual biases can distort problem identification (managers sometime
do not see what they believe cant be there)
4. Selective information gathering based on accessibility than quality
5. Commit themselves prematurely to a specific alternative early in the
decision making process
6. Evidence of fallibility of previous solution does not always result in
search for new alternatives (Challenger episode)
7. Prior decision precedents constrain current choices
8. Divergent interest groups make it difficult to have a common goal
9. Time and cost constraints
10. Despite the potential for diversity, a strong bias exists in most
organizational culture; they reinforce status quo, discourages risk taking
and innovation
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Decision Making Strategies --1
There are many solutions to a given problem and thedecision makers task is to choose one of them. There are
several strategies for choosing; some of them are:
Optimizing: Choose from the best possible solution to the
problem. Optimizing may be dependent on
Importance of the problem
Time available for solving it
Cost involved with alternative solutions
Availability of resources, expertise\Personal psychology,values
Full realization of all the parameters are seldom possible,
hence limitations are placed on the alternatives
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Strategies -- 2
Satisficing: In this strategy (satisfactory and sufficient),
the first satisfactory alternative is chosen rather than the
best alternative. In many small decisions, such as where topark, what to drink, which pen to use, which tie to wear
and so on, staistificing strategy is normally used.
Example: Kaun banega krorepati
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Strategy -- 3
Maximax:This stands for maximizing the maximums.
This strategy focuses on evaluating and then choosing the
alternatives based on maximum possible pay off. This is
sometimes described the policy of the optimist, because offavorable outcomes and high potentials are the areas of
concern. This is a good strategy for use when risk taking is
most acceptable, when the go for broke philosophy is
reigning freely.
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Strategy -- 4
Maximin:This stands for maximizing the minimums. In
this strategy, that of a pessimist, the worst possible
outcome of each decision is considered and the decision
with the highest minimum is chosen. The Maximinorientation is good when the consequences of a failed
decision are particularly harmful or undesirable. Maximin
concentrates on the salvage value of the decision, or
guaranteed return of the decision. It is the philosophybehind the saying a bird in hand is better than two in the
bushes
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Heuristics
Researchers have extended the concepts of Bounded
Rationality and demonstrated that people rely onheuristic principles (rule of thumb) to simplify decisionmaking. (Case of loan officers). Three heuristics arerecognized
1. Availability: Judge events likelihood by testing against
their memory
2. Representative -ness: Likelihood of an occurrence bytrying to match with preexisting category (Employeeethnic mix)
3. Anchoring and adjustment: People do not pull outdecision out of thin air. They start with some initialvalue (anchor). Case Salary hikes
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Deciding Adaptively
Rational decision making proceeds on the belief that
managers can transform a complicated web of facts,assumptions, objectives and educated guesses into a
clear decision that people in the organization can act on.
This has been now challenged. More and more adaptive
approach has emerged which stipulates that the result ofa decision action are jointly produced by what your
organization does and what other organizations are doing
at the same time (price war amongst airlines)
Two versions of adaptive approach are(a) Game theory
(b) Chaos theory
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The Two Theories
Game theory:Is thestudy of the people making
independent choices. The
perspective requires that we
view decision making as
interaction of processes of two
decision makers adapting toeach other at the same time.
(Driving on the highway). We
view decision making as a
process of two decision makers
adopting to each otherspresence simultaneously
Chaos theory:Is thestudy of the dynamic patterns in a
large social system.. It has three
states: equilibrium, disequilibria
and bounded instability. The
decision maker tries to keep the
organization in the third stage as itoffers maximum scope for
innovation. Decision making
becomes a continual process of
adaptation to forces largely beyond
the decision makers control. It islike surfing a huge wave off
Diamond Head, a wave that never
hits the shore
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5/3/2012
Leaders
Crisis Growth / opportunity
Others Relief
Shock
Denial / disbelief
Anger
Guilt / Remorse
Bargaining
Panic
Depression
Resignation to the situation
Acceptance of reality
Building
The Grieving Cycle
New direction
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General model of Decision-making Process
1. Identify the problemthis is the mostcritical step inorganizational decision-making.
2. Define objectivesestablishing the parameters (criteria) ofsuccess.
3. Make a pre-decision (allocating weights to the criteria)mostcritical in mitigating decision biases and errors.
4. Generate and select alternatives
5. Evaluate alternatives balanced view
6. Make a choice
7. Implement the chosen alternative
8. Follow-up; Evaluate decision effectiveness (case studycakemixture)
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Context refers to the environment of interpersonal
relationships and behaviors within which decisions are made.
The right context is critical to making successful choices
A healthy context includes the right people, puts them in an
appropriate physical setting, ensures that they agree how
decisions will be made and support diverse views and healthy
debate.
Group should include person / persons in authority to allocate
resources and make the decision stick.
Limit the number of people in the group (6 to 7)
The spectrum of decision making approaches include consensus,
qualified consensus, majority rule, and directive leadership.
Advocacy is antithetical to effective decision making; should
encourage rational and open minded inquiry
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Frame is a mental window through which we view a
particular problem, situation or opportunity.
Frames are prisms through we view the world . They
determine both what we see and how we interpret it (direct sales
or through vendors)
If the situation is framed incorrectly, it would lead to a bad
decision; correct would lead halfway to a good decision
Some people will try to frame the issues to suit their personal
agenda
Never be in a hurry to accept the initial frame; actively seek
alternates
Look for biases and false assumptions in all frames.
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Good decisions emerge from a set of feasible alternatives.
Decision makers in these situations dont simply say yes or
no to a single choice
As a decision maker, your job is to identify a manageable set of good
alternatives.
Good alternatives are broadly constructed, genuine, feasible, and
sufficiently numerous to give decision makers a real set of choices. Brainstorming is a useful technique for generating alternatives and
problem solutions. However, it will work when the people feel
comfortable speaking their minds.
Hybrid alternatives are welcome which combines the best of two or
more alternatives. Get people on board with diverse skills and view points. This will
generate creative (positive) conflicts; your job is to turn this conflict
into a productive direction.
O th t f lt ti id tifi d th h t
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Once the set of alternatives are identified, they have to
be evaluated vis--vis the established objectives.
Ask the most respected and objective members to act as the devils
advocates; they may build a case why the preferred option shouldnot be accepted.
Acknowledge and discuss minority point of view; include morethan one person with a divergent view. A lone dissenter may bereluctant to speak up.
In business, uncertainty of outcome is synonymous with risk; thismust be factored in evaluation.
Strategic and capital budgeting decisions to be examined usingfinancial tools eg. NPV, IRR, break even analysis, sensitivity
analysis etc. A prioritization matrix, trade off table or a decision tree provides a
way to compare how each alternative achieves your objectives.
Specialized soft-wares have been developed to help decisionmakers handle huge volume of data
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Decision making is not an easy process; some could be
committed to one option, others may be blind to merit and
shortcomings of the alternatives. Some may disagree with the
basic assumptions while unresolved uncertainties may forceto dither
Proven management tools Catch-the-ball, Point-counter-Pointor the Intellectual Watchdog Technique may be used to arrive at
a decision. Avoid ending the deliberation too early or too late. Ending too
early may leave promising opportunities unexplored; prolongingmay fuddle the issues
After the decision is made, it needs to be communicated to the
concerned team members and other concerned persons. Whilecommunicating, show consideration for the views of others,explain the thinking behind the decision.
Implementation will be more effective if the people affected by it
view the decision process as fair.
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Promoting a Fair Process
Be a good listener; do not interrupt
Make eye contact with team members and actively participate in
the process
Take notes
Make clear that though not all of the groups suggestions will be
adopted, every one receive a fair consideration.
Promote understanding, foster debate, promote new ideas
Do not show preference to a segment of the members
If you are responsible for making the final decision, let the groupmembers know that their point of view affected the outcome and
explain why you preferred to differ.
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Decision Making Tools
Researchers have identified various decision making toolswhich can be utilized to proceed to decision making. Someof the important ones are:
Pareto Analysis
Grid Analysis
Paired Comparison Analysis
Decision Trees
PMI (Plus / Minus / Interesting)
Force Field Analysis
Six Thinking Hats
Cost Benefit Analysis
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Pareto Analysis
It uses the Pareto principlethe idea that by doing 20% of
the work you can generate 80% of the advantage of doing
the entire job. This is mostly used technique for finding the
changes that will give the maximum benefits.
Example: Rejuvenation of a failing service center.
This is a simple technique that helps identify the most
important problem to solve; also gives you a score
showing how severe the problem is.
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Grid Analysis
Also known as Decision Matrix Analysis is particularly
powerful where you have a number of good alternatives to
choose from and many different factors to take into
account.
Example: Deciding on the type of car to buy.
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Paired Comparison Analysis
Helps you work out the importance of the number of
options relative to each other. It is an ideal tool to
compare apples with oranges
Example: An entrepreneur is looking at expanding
his / her business. She has limited resources and the
following options
1. Expand into overseas market
2. Expand into home markets
3. Improve customer service
4. Improve quality
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Decision Trees
Decision trees are useful tools for helping you to choose
between several courses of action. They provide a highly
effective structure within which you can explore options,
and investigate the possible outcomes of those options.They also help you to form a balanced picture of the risks
and rewards associated with each possible course of action.
This makes them particularly useful for choosing between
different strategies, projects and investment opportunities,particularly when your resources are limited.
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PMI (Plus / Minus / Interesting)
It is a valuable improvement to the weighing pros and
cons technique used for centuries. PMI is a good way of
weighing the pros, cons and implications of a decision.
When you have taken a decision, PMI is a good techniqueto check its implication.
Example: A young professional is deciding where to live. The
question is, should she move to a big city?
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Force Field Analysis
This is a useful technique for looking at all the forces for
and against a decision. By carrying out the analysis one
can plan to strengthen the forces supporting the decision
and reduce the impact of opposition to it.
Example: Organizational up-gradation
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Six Thinking Hats
This is a powerful tool that helps you to look atimportant decisions from a number of differentperspectives. It helps you making better decisions bypushing you to move outside your habitual ways ofthinking. A such it helps you understand the full
complexity of a decision and spot issues andopportunities which you might not otherwise notice.
Successful people think positive and rational. Oftenthey may fail to look at problems from emotional,
intuitive, creative or negative view points. This canmean that they underestimate resistance to change, donot make creative leaps and fail to make essentialcontingency plans.
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Cost Benefit Analysis
You may have been intensely creative in generatingsolutions to a problem and rigorous in your selection
of the best. However, this solution still may not be
worthy implementing as the investment of time and
money may not be worth the effort.
Costs are either one off are ongoing. Benefits are for
most part received over a period of time. We build
this effect of time into our analysis by calculating apayback period.
Decision Making Process Two Views
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Decision Making ProcessTwo Views
Decision making step Perfect Rationality Bounded Rationality
Problem identification Problem identified Commensurate withmanagers background
Decision criteria Criteria identified Limited set of criteriaidentified
Criteria value Values assigned Managers trademarkmodel identified
Identify Alternatives Comprehensive list Limited set identified
Analyze alternatives Consequences of eachvariable known
Begins with favored
alternative
Alternatives Selection Maximizing decision Satisficing decision
Implementation High acceptability Politics and power comeinto play
Evaluation Objectively evaluated Rarely evaluatedobjectively
D i i M ki S l
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Decision Making StylesTwo differentperspectives
There are three different waysmanagers approach problems in
work place:
Problem avoider: Ignores
information that points to
problems Problem solver: Tries to solve
problems when they come up.
Problem seekers: Actively
seek out problems to solve or
new opportunities to pursue
The second perspective takesinto account the two dimensionsof human behavior viz the waythey think and their tolerancefor ambiguity leading to fourdifferent styles:
Directive: Make fast decisionsfocusing on the short run
Analytic: careful decisionmakers with ability to cope withunique situations
Conceptual: Very broad inoutlook; find creative solutions
Behavioral: Team players;sensitive to the feeling of others
Most managers have characteristics of more than one style
D i i M ki S l
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Analytic
Directive
Conceptual
Behavioral
Low
High
Rational Intuitive
Tolerance for
ambiguity
Way of thinking
Decision Making Style
Organi ational Traps
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Organizational Traps
We are social animals and our judgments are influenced by the
environment The judgment of some is influenced by (i) the desire to please
others, (ii) to avoid conflict, to be in step with others and avoidconflict or future criticism
Groupthink is a potential side effect of strong team identity. The
highlighting of similarities in thinking and suppression oravoidance of differences characterize groupthink.
Be wary of undue optimism. It must have a factual basis.
Groups generally make better decisions than individuals. Under
optimum conditions a diversity of opinion, the independence ofgroup members, decentralization and the presence of amechanism to convert individual judgment into decision helpsdoing this.
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Smart Decision
Improved decisions by the employees at every levelcan have a major impact on the value of the business.Even small improvements make a big difference
To improve decisions, adopt a rational decisionprocess, train personnel to use the process and thetools, and improve implementation of the processthrough repeated use.
When you introduce a new decision process, startsmall and expand the process as it demonstrates itsvalue. Enlist top management support, but localizecontrol and responsibility
Encourage improvement.
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QUESTIONS ?