Decision Making

By: Dr. Mohammad Bashaar Ulfat

MD, MBA

Q1.What is the process of decision making? Discuss how does decision making fit
into managerial activity?

Decision-making is a process of choosing among alternative courses of action in

order to attain goals and objectives. Nobel laureate Herbert Simon wrote that the
whole process of managerial decision-making is synonymous with the practice of
management.1 Decision-making is at the core of all managerial functions. Planning,
for example, involves deciding what should be done? When? How? Where? and By whom?
Other managerial functions, such as organizing, implementing, and controlling rely
heavily on decision-making.
Today’s fast changing and global environment dictates that a successful enterprise
has a rich decision-making process. This means not only gathering and processing
data, but also making decisions with the support of state-of-the-art decision
methods. Decision-making is the very foundation of an enterprise, and sound
decision-making is absolutely necessary for gaining and maintaining a competitive
advantage.
In many enterprises the decision process entails great time and effort in
gathering and analyzing information. Much less time and effort go into evaluating
alternative courses of action. The results of the analyses (there are often many,
for example financial, marketing, operations, and so on) are intuitively
synthesized to reach a decision. Research has shown that although the vast
majority of everyday decisions made intuitively are adequate, perception alone is
not sufficient for making complex, crucial decisions. Organizations that use
modern decision support methods can gain and maintain a competitive edge in
leading and managing global business relationships that are influenced by fast
changing technologies and complicated by complex interrelationships between
business and governments.

An individual can solve problems more realistically when he/she uses a decision-
making process. This process, when understood and applied, can assist you in
making study and vocational decision(s) and future decisions, about your life.
One thing to remember is that you are in charge of any decisions to be made. You
may seek help and advice from other people and other sources, but the final
decision must be made by you.

There are several steps involved in the decision-making process:

1. Reaching a decision-point (Defining the problem)

2. Exploration of the problem (Gathering information)
3. Evaluation of information (Weighing the evidence)
4. Choice of a plan of action (Choosing possible alternatives)
5. Taking action on your plan
6. Clarification and review of plans (Outgoing - Ongoing)

1. Reaching a Decision Point (Defining the Problem)

A decision point is reached when you become aware of a specific problem and see
the need to make a decision. Before you can solve a problem however, you have to
know what the problem is. You must be able to interpret the entire picture so
that the problem is clearly understood. For example, if you want to plan and
establish an educational plan to reach a career goal you might work toward
arriving at well-considered answers to the following questions:

1. For what kind of career am I best suited?

2. For what kind of an alternative career am I best suited?
3. For what kind of education and training am I best suited?
4. For what kind of alternative education or training am I best suited?

2. Exploration of the Problem (Gathering Information)

This is the initial activity of decision-making in which you think about all of
the possibilities related to the problem and the decision. You must look for all
the alternatives open to you before you make a decision. This is done by
collecting relevant information. Some areas important to vocational decision-
making which should be investigated are:

1. Physical attributes and health

2. Leisure experiences
3. Work experiences
4. Opinions of parents and others
5. Values and standards
6. Study - the amount of time and efficiency of your studying
7. Marital plans
8. Financial needs
9. Social status needs
10. Academic ability and achievement
11. Personality traits
12. Interests
13. Occupational and education facts (information about occupation, requirements
of different kinds of jobs, educational level necessary, etc.)

3. Evaluation of Information (Weighing the Evidence)

You should consider all of the alternatives open and how they are related to you.
This step is the one in which each bit of information gathered is considered
separately and then as a whole. You should be able to evaluate where you stand
concerning the above individual areas and to the total picture.

4. Choice of Plan of Action (Choosing Possible Alternatives)

In this step you choose between the alternatives open to you, remembering that
the information you gathered will vary in importance to you. In this step you
should be able to answer the following questions:
1. What is the best vocational choice you can make?
2. What is the second best choice?
3. What is the best educational course to follow?

5. Taking Action

In this step you take action on the plans you made in step number 4. How can you
implement these plans (educationally, training, etc.)?

6. Clarification and Review of Plans

In this step you make periodic examinations of your choice and plans. You should
continually check to make sure your decision is the best one possible at the time.
You may have to review your decision due to new information and new experiences.
Therefore, at times, you may see the need to alter your plans. Also, reviewing
will help you see that the decision-making process leads to sound plans and you
will have logical reasons why you decided upon the educational and career
objectives that you did.

The Need for Better Decision-making:

Few people today would doubt the importance of relevant information when making
vital decisions. Yet many people are unaware of the need for a logical approach to
the decision itself. They consider it sufficient to collect data, analyze the
data, and then simply “think hard” in order to arrive at a good decision. They use
seat of the pants approaches or simplistic strategies for analyzing their
decisions. In his book, Crucial Decisions, Irving Janis provided evidence that “A
poor-quality decision-making process (which characterizes simplistic strategies)
is more likely than a high-quality process to lead to undesirable outcomes
(including disastrous fiascoes).” He asserted “When all vital decisions are made
on the basis of a simplistic strategy, the gross misperceptions and
miscalculations that remain uncorrected are likely to lead to disaster sooner or
later — usually sooner rather than later.”3 There are some who have already
recognized the need for what Janis called vigilant decision-making. Janis stated:
“When executives are asked how they go about making the most consequential
decisions, some of them acknowledge that when they believe the stakes are really
very high, they do not stick to the seat-of-the pants approach that they
ordinarily use in daily decision-making. In fact, their accounts of what they do
in such circumstances are not very different from the analytic problem-solving
approach recommended in most standard textbooks in management sciences.” One of
the difficulties in using the analytical problem solving approaches found in
management science textbooks, however, is that they are predominantly quantitative
approaches — incapable of incorporating the qualitative factors so important in
vital decisions. We will, in this book, look at and resolve the quandary posed by
the need to synthesize quantitative and qualitative factors in a decision process.

Decision-making is undoubtedly the most difficult and most essential task a

manager performs4. Executives rate decision-making ability as the most important
business skill, but few people have the training they need to make good decisions
consistently.
Some of these techniques are counter intuitive and therefore extremely difficult
to learn by trial and error. Experienced golfers love to watch athletic baseball
players’ step up to the tee and swing as hard as they can, only to miss the ball
completely. A golf instructor can quickly teach the athletic baseball player what
is not intuitive — that the left arm (for a right-hander) should be kept almost
straight, unlike during a baseball swing, and that swinging easier will usually
make the golf ball go further. Techniques like ‘keeping your head down’ (or ‘eyes
on the ball’), work well in several sports, like golf, tennis and baseball. But
someone who has not played any of these sports will intuitively ‘lift’ their head
to see where the ball is going before the swing is completed.
Every decision making process produces a final choice. It can be an action or an
opinion. It begins when we need to do something but we do not know what.
Therefore, decision making is a reasoning process which can be rational or
irrational, and can be based on explicit assumptions or tacit assumptions.
Common examples include shopping, deciding what to eat, when to sleep, and
deciding whom or what to vote for in an election or referendum.
Decision making is said to be a psychological construct. This means that although
we can never "see" a decision, we can infer from observable behaviour that a
decision has been made. Therefore, we conclude that a psychological event that we
call "decision making" has occurred. It is a construction that imputes commitment
to action. That is, based on observable actions, we assume that people have made a
commitment to affect the action.
Structured rational decision making is an important part of all science-based
professions, where specialists apply their knowledge in a given area to making
informed decisions. For example, medical decision making often involves making a
diagnosis and selecting an appropriate treatment. Some research using naturalistic
methods shows, however, that in situations with higher time pressure, higher
stakes, or increased ambiguities, experts use intuitive decision making rather
than structured approaches, following a recognition primed decision approach to
fit a set of indicators into the expert's experience and immediately arrive at a
satisfactory course of action without weighing alternatives.
Due to the large number of considerations involved in many decisions, computer-
based decision support systems have been developed to assist decision makers in
considering the implications of various courses of thinking. They can help reduce
the risk of human errors. The systems which try to realize some human/cognitive
decision making functions are called Intelligent Decision Support Systems (IDSS),
see for ex. "An Approach to the Intelligent Decision Advisor (IDA) for Emergency
Managers, 1999".
Decision-making process:
1. Define and clarify the issue - does it warrant action? If so, now? Is the
matter urgent, important or both. See the Pareto Principle.
2. Gather all the facts and understand their causes.
3. Think about or brainstorm possible options and solutions. (See brainstorming
process)
4. Consider and compare the pros and cons of each option - consult if necessary
- it probably will be.
5. Select the best option - avoid vagueness or 'foot in both camps' compromise.

6. Explain your decision to those involved and affected, and follow up to

ensure proper and effective implementation.
Decision-making maxims will help to reinforce the above decision-making process
whether related to problem-solving or not, for example:
"In any moment of decision the best thing you can do is the right thing, the next
best thing is the wrong thing, and the worst thing you can do is nothing

Decision making style

According to behavior list, a person's decision making process depends to a
significant degree on their cognitive style. Starting from the work of Carl Jung,
Myers developed a set of four bi-polar dimensions, called the Myers-Briggs Type
Indicator (MBTI). The terminal points on these dimensions are: thinking and
feeling; extroversion and introversion; judgment and perception; and sensing and
intuition. She claimed that a person's decision making style is based largely on
how they score on these four dimensions. For example, someone that scored near the
thinking, extroversion, sensing, and judgment ends of the dimensions would tend to
have a logical, analytical, objective, critical and empirical decision making
style.
Every day we make decisions. A number of them are little one but others are
significant. How to know that we have made a right decision? One way could be this
to wait until the outcome of decision declares, if the results are good we would
say that it was a good decision if the results were bad we might say that, if we
would choose another course of action the results would be better then now.
The other way to judge good and bad decision is to see the process of decision
making. Before we start elaborating the steps involve in decision making first we
should mention that the definition of decision making is not restrict to the
moment of choice itself, but decision making is process which take a period of
time to take place. The decision making has number of steps which take place in
order.
Following are the steps in decision making:

The process of decision making can be sighted as a sequence of steps. All models
of these steps may not necessarily reflect how decisions are actually make in
practice, but can indicate a rational procedure. In the total problem
solving/decision making sequence a problem is first observed, after which it is
formally recognized. Some interpretation or diagnosis is made, from which a
decision is defined. The objectives of the decision are set, the options which
form potential solutions to the problem are formulated, and their worth evaluated.
One option is then selected and implemented. This implemented solution can be
monitored and, if it proves derisory, the process starts over again. In practice,
decision making will probably not follow quite such an orderly process. Steps may
be missed and decision makers may jump backwards and forwards, one or two steps.
Now I will go in a detail of the process of decision making: since one criterion
of a good decision is the way it is made, we should examine the process in some
detail.

Decision making or problem solving

Supervisors constantly make decisions that affect the work of others. Day-to-day
situations involving supervisory decisions include employee morale, the allocation
of effort, the materials used on the job, and the coordination of schedules and
work areas. The supervisor must recognize problems, make a decision, initiate an
action, and evaluate the results. In order to make decisions that are consistent
with the overall goals of the organization, supervisors use guidelines set by top
management. Thus, it is difficult for supervisors to make good decisions without
good planning.
An objective becomes a criterion by which decisions are made. A decision is a
solution chosen from among alternatives. Decisions must be made when the
supervisor is faced with a problem. The first decision is whether or not to take
corrective action. A simple solution might be to change the objective. Yet, the
job of the supervisor is to achieve objectives. Thus, supervisors will attempt to
solve most problems.
A problem exists whenever there is a difference between what actually happens and
what the supervisor wants to have happen. Some of the problems faced by the
supervisor may occur frequently. The solutions to these problems may be
systematized by establishing policies that will provide a ready solution to them.
In these repetitive situations, the problem solving process is used once and then
the solution (decision) can be used again in similar situations.
Exceptions to established routines or policies become the more difficult decisions
that supervisors must make. When no previous policy exists, the supervisor must
invent a solution. Problem solving is the process of taking corrective action in
order to meet objectives. Some of the more effective decisions involve creativity.
To get better ideas, the supervisor follows the steps in the problem solving
process. The steps are built on a logical analysis.
The supervisor can think through all aspects of the problem by answering the
following questions. What seems to be the trouble? Why is it causing the trouble?
What are the causal factors? What can be done in all possibilities? Are all these
possibilities workable? What are the probabilities of success for each of the
solutions? What are the appropriate alternatives? What is the correct choice? Have
I logically eliminated the other choices? When and how can the solution be
implemented? What is the best way to implement the solution? Has the solution
solved the original problem? Have I planned, organized, and provided for the
control of actions leading to solutions?
The steps in the problem solving process are (1) define the problem, (2) identify
decision criteria, (3) develop alternatives, (4) decide, (5) implement the
decision, and (6) evaluate the decision.

Step 1: Define the problem. The problem solving/decision-making process begins

when the supervisor recognizes the problem, experiences pressure to act on it, and
has the resources to do something about it. This means that the supervisor must
correctly define the problem. Problem identification is not easy. The problem
statement can be too broad or too narrow. Supervisors are easily swayed by a
solution orientation that allows them to gloss over this first and most important
step. Or, what is perceived, as the cause of a problem may actually be a symptom.
The supervisor must solve the right problem. In order to define the problem, the
supervisor must describe the factors that are causing the problem. These are the
symptoms, visible as circumstances or conditions that indicate the existence of
the problem -- the difference between what is desired and what exists. By not
clearly defining the problem, ineffective action will be taken.
Step 2: Identify decision criteria. The supervisor determines what is relevant in
making a decision by isolating the facts pertinent to the problem. Since there is
no single best criterion for decision making where a perfect knowledge of all the
facts is present, a set of criteria must be used for the problem at hand. These
decision criteria identify what will guide the decision-making process. They are
the important facts relevant to the problem as defined. It is important that
decision criteria be established early in the problem solving process because if
the criteria are developed as analysis of data is taking place, the chances are
good that the data will determine the criteria. Thus, setting the criteria early
introduces objectivity. These facts can be tangible as well as intangible.
Tangible facts might include the work assignments, the work schedules, or work
orders. Intangible facts could include morale, motivation, and personal feelings
and perceptions.
This process is somewhat subjective, because what serves as important criteria for
one supervisor may be less important for another. For instance, the decision-
making criteria used to hire employees differs across departments; the sales
department uses the number of new store openings in different geographic areas,
while the manufacturing department uses how many units of the product needs to be
produced and how quickly.
Key uncertainties, the variables that result from simple chance, must be
identified. Regardless of the solution chosen, key uncertainties are important
because they can be plusses or minuses. What are the chance variables? Which way
would these variables fall, relative to each of the workable solutions?
Not all criteria have the same importance. (Criteria weights can vary among
different supervisors as well.) Assigning weights indicates the importance a
supervisor places on each criterion for resolving the problem and helps establish
priorities. Criteria that are extremely important can be given more weight, while
those that are least important can be given less weight.
Step 3: Develop alternatives. The supervisor must identify all workable
alternative solutions for resolving the problem. The term workable prevents
alternative solutions that are too expensive, too time-consuming, or too
elaborate. The best approach in determining workable solutions is to state all
possible alternatives, without evaluating any of the options. This helps to ensure
that a thorough list of possibilities is created.
Generating alternative solutions requires divergent thinking (deviating from
traditional.) Groups can be used to generate alternative solutions. Brainstorming
is the process of suggesting as many alternatives as possible without evaluation.
The group is presented with a problem and asked to develop as many solutions as
possible. When brainstorming, employees should be encouraged to make wild, extreme
suggestions. They build on suggestions made by others. None of the alternatives
are evaluated until all possibilities are exhausted.
The supervisor must judge what would happen with each alternative and its effect
on the problem. The strengths and weaknesses of each alternative are critically
analyzed by comparing the weights assigned and then eliminating the alternatives
that are not workable. Probability factors -- such as risk, uncertainty, and
ignorance - must be considered. Risk is a state of imperfect knowledge in which
the decision-maker judges the different possible outcomes of each alternative and
can determine the probabilities of success for each. Uncertainty is a state in
which the decision-maker judges the different possible outcomes of each
alternative but lacks any feeling for their probabilities of success. Ignorance is
a state in which the decision-maker cannot judge the different possible outcomes
of each alternative, let alone their probabilities. Investigating all the possible
alternatives helps to prevent eliminating the most appropriate one, because a
decision is only as good as the best alternative evaluated.
Step 4: Decide. The supervisor must make a choice among the alternatives. The
alternative that rates the highest score should be the preferred solution. The
decision can be assisted by the supervisor's experience, past judgment, advice
from others, or even a hunch.
Timing impacts the decision. The probable outcome and its advantages versus its
disadvantages are affected at any given time. Which alternative is most
appropriate at a given time?
Decisions are made by consensus when solutions are acceptable to everyone in the
group, not just a majority. Everyone is included, and the decision is a win-win
situation. Consensus does not include voting, averaging, compromising,
negotiating, or trading (win-lose situations). Every member accepts the solution,
even though some members may not be convinced that it is the best solution. The
"right" decision is the best collective judgment of the group as a whole.
Consensus gives every person a chance to be heard and have their input weighed
equally. All members accept responsibility for both listening and contributing.
Disagreements are viewed as helpful rather than hindrances in reaching consensus.
Each member monitors the decision-making process and initiates discussions about
the process if it becomes ineffective. The smallest minority has a chance to
change the collective mind if their input is keener.
Group members do not give in just to reach an agreement. They support only those
solutions that they can truthfully accept. If people exercise this power to go
against the majority, they must have listened to the collective wisdom in good
conscience. A block should not be used to place an individual's will above the
group's.
Consensus works in an environment of trust, where everyone suffers or gains alike
from the decision. Everyone must listen, participate, get informed, be rational,
and be part of the process from the beginning. Thus, consensus can be time
consuming long and exhausting to the participants. Yet, consensus will result in
synergism. Synergy is the combined action of the group, greater in total effect
than the sum of their effects. The combined problem solving/decision making
abilities of the group members produce a better decision than that of the
individual member.
Taking action requires self-confidence or courage. Only a person who is willing to
take risks is able to assume responsibility for a decision involving action. The
fact remains that the supervisor is held accountable for the outcome of the
decision. Thus, he or she must be confident that the right problem has been
defined and the most workable solution has been chosen. Self-confidence is the
best element for a supervisor to possess at this stage.
Step 5: Implement the decision. Once the solution is chosen, the decision is
shared with those whose work will be affected. Ultimately, human beings will
determine whether or not a decision is effectively implemented. If this fact is
neglected, the solution will fail. Thus, implementation is a crucial part of the
decision-making process. Including employees who are directly involved in the
implementation of a decision, or who are indirectly affected by that decision,
will help foster their commitment. Without their commitment, gaining support and
achieving outcomes becomes increasingly difficult. With this commitment, the
supervisor has a reasonable degree of assurance that the decision will be accepted
and has the necessary support.
In order to implement the decision, the supervisor must have a plan for
communicating it to those directly and indirectly affected. Employees must
understand how the decision will affect them. Communication is most effective when
it precedes action and events. In this way, events conform to plans and events
happen when, and in the way, they should happen. Thus, the supervisor should
answer the vital questions before they are asked. Communicating answers to these
questions can overcome much of the resistance that otherwise might be encountered.

Step 6: Evaluate the decision. The supervisor must follow up and appraise the
outcomes from the decision to determine if desired results were achieved. If not,
then the process needs to be reviewed from the beginning to determine where errors
may have been made. Evaluation can take many forms, depending on the type of
decision, the environment, working conditions, needs of managers and employees,
and technical problems. Generally, feedback and reports are necessary to learn of
the decision's outcome. Sometimes, corrections can be introduced for different
steps. Other times, the entire decision-making process needs to start over.
The main function of the follow up is to determine whether or not the problem has
been resolved. Usually follow up requires a supervisory visit to the work area
affected by the decision. The supervisor may have to repeat the entire decision
process if a new problem has been generated by the solution. It is better to
discover this failure during the follow up period rather than remain unaware of a
new problem provoked by the implemented solution.
Step of Decision Making Process

Observe
Observe is the first step of decision making process. The observe stage is not
evidenced and much obvious and it starts with an individual manager feel that
things are not correct, something is wrong and amiss. Although there is very
little evidence in this stage but manger feels that some thing is wrong and need
to be investigated. Very less action is seen in this step my decision makers.
Following the observation there is another step which we call the reflection,
gestation or incubation period. According to Lyles it is “a period of waiting and
interrelating diverse pieces of information, but usually little overt action is
taken by the individual during this phase. Sometimes it can be characterized by
minor activity, possibly in an attempt to make the problem go away.”

Formal Recognition
After the incubation period the manager can not avoid the problem and formally
recognize that there is need for a decision. In this stage the evidence are
clearly demonstrable in type of deviation from standards or not achieving the
desired state of work. According to Lyles this stage is called the triggering
which means that the problem can not be ignored.

Interpretation/Diagnosis
This step is critical important in the decision making process. If this stage goes
wrong a whole process of the decision making will go wrong. As the wrong answer
for the right problem is less valuable same the right answer to the wrong problem
is less valuable. In this stage the problem is understood and determined. The
nature of the problem is studied.
If the decision is structured and well understood, the diagnosis is
straightforward and simple. If the decision is unstructured and ill-understood the
diagnosis is difficult. Many problems are seen by different people in different
ways, and this means that reaching agreement over the nature of the problem itself
can become a decision process. When this type of situation arises, different
perceptions and models are presented by the participants and thus through
negotiation and dialog decision body can reach to a conclusion.

Definition
After the problem is diagnosed it is necessary to give definition to the problem
and for the first time formal request for decision is made in this step. The
important feature of this step is that the boundaries of the decision are
identified. The scope of the decision is defined and the attention of the decision
makers is focused toward important aspects of the decision.

Set Objectives
In this step we set objectives for the decision. In simple words what we desire to
achieve through decision is called the objectives of the decision. Such goals are
best described in terms of the behavior of whatever part of the organization
prompted an awareness of the problem in the first place.
In many cases one decision serves for several objectives in this type of cases we
have to give importance relatively to each other. The objectives are normally
concerned with filling gaps between what has been observe and the desired state of
the problem. The desired state of a problem is always seen in the light of overall
goals of the organization.

Determine the Options

In this step we propose alternative courses of actions through which we will
achieve objectives of our decision. This step is closely related to the earlier
steps of the decision process. If the boundaries of the decision is defined
narrowly then the options might be given (for example should do this thing or
not.)
If the boundaries of the decision is defined wide then many alternative options
can be proposed. This step in the decision process is difficult to distinguish
sometimes from the following step (evaluation) because many times we do some
screening while selecting the option to apart the poor options.

Evaluation Option
This is also very important stage of the decision process. In this step we
determine that into what extent a given alternative can meet the objectives of the
decision. The result of each option is described in details. Decision models can
be used in this stage.

Select Option
This stage is the heart of the decision process. All other stages which we studied
above are devised to select the best option among alternatives which can meet the
objectives of the decision into high degree.
The procedure for selection will depend largely on the size and constitution of
the decision making body. If there is one person in decision making body, so the
selection will depend on his/her own wish. If there are more than one person in
decision making body then other mechanisms can be used for example through
political, debate, consultation, delegation and other, the option can be selected.

Implementation
In this stage we implement the decision, and if any change require we bring. The
successful implementation of a decision largely depends on the skills of the
person who is in-charged for the implementation and to the degree of implement-
ability of the option itself. To study the implement-ability of the decision we
have to study different attributes and features of an option.

Monitor
This is the last step in the process of decision making. If the decision is
implemented successfully and achieve its objectives then this step ends the
decision making process. If a decision do not achieve the objectives, then we
switch to the first step (observe)

How does decision making fit into managerial activity

The issues can be extracted from the two following headings;

Managers and decision making:

As the beginning of this chapter we posed the question of how central decision
making is in management activity. This truth may well be, that we still now know
very little of the answers to this question. Although a great deal has been
written on the role of the manager, very little of it has examined what managers
actually do in practice. In common with most writing on management authors
concerned with managerial jobs tend to offer ideas about what managers ought to
do, rather than describe what actually happens. Consideration of what ought to be
is a very necessary process, especially if we are interested in improving
management skills. The key thought, in coming to understand the part that decision
making plays in a manager’s job, is to examine closely what it is that managers do
in reality, and exactly how they spend their time. And the first thing we must do
to achieve this, is to decide exactly what we mean by the term “manager”. And will
be explained momentarily as follow:

What is a manager?
The idea of “managing” can be used in at least two very different ways. When we
ask someone “How are you managing?” we usually mean it in the sense of “Can you
cope?” or “Are you keeping your head above water?” used in this way, the notion of
managing has almost a defensive quality about it. The accent is on mere survival,
on riding out the storm and keeping losses, damage or injury to a minimum. There
is certainly an element of this kind of management in almost all organizational
activity, especially in harsh economic climates. But when we talk about management
in organizational terms, we mean something rather more than this.
For example, consider the following quotations: in general, our understanding of
modern management is enhanced if we remember the fundamental managing process:
“managers” perform basic “management functions” (of planning, organizing,
staffing, influencing and controlling), which are facilitated by the fundamental
“thinking processes” of decision making and communicating, to achieve the basic
managerial purpose of organizational effectiveness. This statement of what
managers do (or at least ought to do) contains no suggestion of defensiveness. On
the contrary, the impression is one of very positive activity. A range of
managerial functions is identified, given means, and an end. So, by identifying
these roles within the organization where such functions are located, we can
determine who, by this definition, are actually managers, as distinct from those
who carry the title of manager
Rosemary Stewart uses “manager” in the hierarchical sense, to mean all those above
the level of foreman on the production side, and above first level supervisor in
commercial and administrative work. Whilst this usage obviously includes many of
those who can genuinely be said to be managers in the sense of the previous
statement, it also includes some who are not. Furthermore, it clearly excludes
some people who carry out managerial functions, even though they are not given the
organizational status of managers. For example, the print room foreman at a local
newspaper and printing company, quotes for and takes on work, schedules and
products, makes decisions and communicate to his operatives, even though there is
a well defined management structure above him. Many such first line supervisors
are “manager” although they do not carry the little.

What do managers do?

One of the most important studies, focusing on what managers actually do, was that
carried out by Rosemary Stewart. One hundred and sixty senior and middle managers
kept diaries recording their work activities for a four week period. Her study
focused on such factors as hours worked, location, time spent alone and with other
people, rather than investigating work content. So, for example, while the time
spent in discussions with another person was recorded, little attempt was made to
find out what the discussion involved, aside from logging the functional area
concerned. For our purposes, perhaps the most useful outcome of the study is the
identification of five management job profiles, on the basis of characteristic
work patterns. These are:

• The emissaries: spending much of their time away form their own
organization, dealing and talking with people from outside. They tend to have more
time to themselves than other managers, working longer hours in a less fragmented
pattern. This group includes Sales managers, and those who are required to work on
behalf of their company in public relations and promotional activities.
• The writers: such managers spend a large proportion of their time by
themselves writing, reading, and working on figures and other data. Much of their
contact with other people is on a one-to-one basis, rather than in groups. They
tend to be more specialized than other managers, spending much of their time in
their own function. The group might typically include computer specialists, some
kinds of accountants, and administrators whose main preoccupation is with
paperwork.
• The discussers: a way variety of managers fit into this group. They spend a
considerable amount of time with other people, particularly with colleagues.
Managers in this group come form a wide range of functions.
• The trouble shooters: these managers have the most fragmented work pattern.
They spend a lot of their time on problems needing a quick solution. Much time is
spent with subordinates, rather than with colleague. Relative to other managers,
trouble shooters spend a high proportion of their time on inspection tasks. Most
managers in this group are responsible for a physical area or process. Production
and factory managers are typical trouble shooters.
• The committeeman: managers in this group tend to have a wide range of
contacts within the organization, and spend a great deal of their time in
committee and group discussions. The come exclusively from large companies.
Identification of the five job profiles suggests very clearly that we are not
likely to come up with a simple answer to the question “what do managers do?” it
may be that all managers do undertake activities from the same common range. The
proportion of time, effort and energy devoted to each activity will vary
considerably from profile to profile.

The Managerial role and decision making

To study the managers’ activities and decision making it is good to consider the
Mintzberg’s approach to classifying the managerial activities. This classification
has then roles for mangers. These ten roles are clubbed in three categories:

1- the interpersonal roles

2- the informational roles
3- the decisional roles

Interpersonal roles
When a person is selected as a manager, he is given power, authority and prestige
and status which give birth to interpersonal role of a manager.
Three roles are classified in interpersonal roles.

Figurehead: Leaders, particularly high-ranking managers, spend some part of their

time engaging in ceremonial activities, or acting as a figurehead.
Four specific behaviors fit the figurehead role of a manager.
a. Entering clients or customers as an official representative of the
organization.
b. Making on self available to outsiders as a representative of the
organization.
c. Serving as an official representative of the organization at gatherings
outside the organization.
d. Escorting official visitors.

Leader: the manager provides direction, guidance and motivation to team members.
Good managers train and develop their subordinates and make them able to lead.
Leadership is the most acknowledged character of a manager.

Liaison: the liaison role is concern with establishing linkages within

organization and outside the organization. This role of manager links the
organization or a part of an organization to its environment.

Informational Roles
Managers are in a good position in an organization. They have access to
information. The managers perform two activities concerning the information 1)
collector 2) disseminator; the manager collect information form inside the
organization and outside of the organization and transfer it to his subordinates
and same they spread information to environment and other part of the
organization.

Monitor
This is an important role of a manager to collect information about the external
and internal environment, raise his awareness about the opportunities and threats.
So the monitoring role is very necessary to see what is going on around.

Disseminator
The manager plays a role of disseminator. It means that the manager transfer
information to his group members which he get from outside and those which are
generated inside the organization.

Spoke-person
As we discussed above that it is a manager’s role to disseminate information same
the manager transfer the information to outside of organization. For example a
public speech about the progress a new product etc. this role is concern to tell
about the organization to public.

Decisional Roles
The remaining four roles of managers are categorized as decisional roles. These
are the most crucial and important roles mentioned below.

Entrepreneur
In this role the manager bring positive changes in the organization. The manager
does creativity and innovation. The entrepreneur role is concern to find new
business and strategies. This role is also heavily depended on strong monitoring
of inside and outside the organization.

Disturbance Handler
Many problems occur in the daily work routine which can drive out the company from
business. The manager plays a role of disturbance handler to deal which problems
and trouble which can affect the normal work flow.
Some trouble may be occurred suddenly and unforeseen which are out of control of
managers. Unexpected disturbances may occur where, although the change is planned,
the full consequences may not be known. They can of course also occur as a result
of bad management through insensitive handling of the interpersonal and
informational roles. In this type of the situation the manager calls for the
coping mechanism.

Resource Allocator
Managers have to allocate resource to different projects and programs. This
authority is given to manager by his/her position and status. Playing role of
resources allocator the manager know better that what activities are completed
need to be completed and what the top priorities.

Negotiator
To organize, utilize and disposition the resource the managers have to negotiate.
With three different parties the mangers have to negotiate.

1) Their supervisor for more resources funds and equipments.

2) 2) With their colleges for organization of resource and common benefiting of
them.
3) With suppliers for receiving the required resource on time and according to
schedule

Specialization and management activity

In medium and large organizations, management structure usually involves some
separation or delegation of function. Managers are appointed to deal with a
particular process or range of operations. Many managers find themselves with
responsibility for a sub-unit within the overall framework of the larger
organization. For example, we often find a specialist manager in charge of
production. Under him there may be shift managers, quality control managers, and a
number of other specialist management positions. The same process of
specialization occurs in other functional areas such as sales and finance. The
result is an increase in the number of levels in the management hierarchy, and a
widening of the differences between managements jobs within the organization.
Faced with the problem of coordinating the activities of specialized subunits,
those running large organizations need to develop structures or mechanisms which
will allow those units to operate effectively, and in the interests of the
organization as a whole. So we find specialist management roles which are
concerned with monitoring, evaluating, and coordinating and those which exist to
provide specialist services and support both to line and senior management.

Management level
In the same way that the importance of work roles varies with management function,
we might expect variation according to the level which managers occupy in the
organizational hierarchy. However, Mint berg holds that there is essentially no
difference in kind between the jobs of top managers and of those at lower levels.
He argues that the real difference is in orientation, and in the ends to which
managerial activities are directed. Lower level managers are likely to be
concerned more with maintaining a steady work flow within the unit or area for
which they are held to be responsible. Work in likely to be focused around current
issues and immediate problems. In addition, managers at lower levels in the
organization are likely to be more specialized; that is, to be concerned with a
much narrower range of issues than managers higher up in the organization. Given
such an immediate emphasis on daily promotion and work flow, then the two decision
roles of disturbance handler and negotiator are going to be particularly
important. Senior managers, on the other hand, are likely to spend proportionately
more of their time on strategic issues that relate the organization to its
environment. They will be concerned with the longer term, rather than the day-to-
day issues of the operational manager. As a result, senior managers and executives
will play more of an entrepreneurial role than managers at lower levels. In some
organization; the question of management level is not as relevant. Many small
companies, for instance, have only one person, often the owner, who might be
considered to be a manager. Indeed, the range of the differences between
management jobs within any organization is determined largely by its size.

Managerial activity and discretion:

Any formal statement of a manager’s functional responsibility will not alone
determine the total range of activities which constitute the job. Take two
individuals and place them in exactly the same managerial job, and they are likely
to spend their time doing different things. There must be few, if any, management
jobs, where some degree of discretion does not exist, either in what work is done,
or how it is done. Stewart describes this discretion as choices- being “the
activities which a jobholder can do but does not have to do. They are the
opportunities for one jobholder to do different work from mother, and do it in
different ways.

Constraints
Constraint

Demands

The demands, constraints, choices model

Jobs which have wide ranging demands but are highly constrained will have less
discretion than jobs where demands are relatively few and constraints relaxed. So,
for, example, a line production manager in a food processing plant might be
required to be physically present, supervising the operations of the plant, for a
large part of the working day.

The place of decision making in management: we can see then, that the work content
of any manager’s job can vary according to such factors as size of organization,
level in the hierarchy, and the particular job function. Whilst all managers may
indeed carry out all ten of Mintzberg’s work roles, some of those roles will be
very much more important than others for any individual manager. Equally, the type
and nature of decision made will vary according to the position of the decision
maker within his or her organization. Nonetheless, decision making is a key
activity for management.

Time spent in making decisions: an assessment of how much time managers spend on
decision making will depend on how wide our view of decision making is. When
managers choose or select one particular option, they “make a decision”. Whilst
the time taken to make that act of choice may well vary according to the method
used, relatively speaking, it is not a lengthy actively. After all, in common
usage, “decisiveness” carries with it the implication of speed. When used in this
very structured way, we might even suggest that managers spend hardly any time at
all in making decision.

Choice may only take up a small proportion of managerial time, but all the
activities which go together to make up the total decision making/problem solving
process can take up a great deal. As we described earlier, the total process
includes all the stages of

• Observing,
• Recognizing
• Interpreting diagnosing
• Defining
• Objective setting
• Determining options
• Evaluating
• Choosing
• Implementing and
• Monitoring.

The following figure illustrates the way in which several of Mintzberg’s

managerial roles might contribute to the decision making/problem solving process.
tags in decision making/problem solving process major appropriate managerial
roles

Recognizing the need for a decision

(Observe, recognize) Entrepreneur
Liaison
Monitor
Defining the Problem
(Interpret/Diagnose, Define, Objective Setting)Leader
Liaison
Monitor
Disseminator

Determining the Options Disseminator

Leader
Negotiator
Evaluation Liaison
Disseminator
Making the choice Leader
Leader
Resource Allocator
Disturbance Handler
Spokesman
Implementation and Monitoring Resource Allocator
Monitor
Leader
Spokesman

Not all aspects of each of the roles referred to in the illustration above relate
directly to managerial decision making. The leadership role for example, includes
most of a manager’s activities which relate to subordinates much of which has
little to do with making decision. Nonetheless, when we regard decision making in
its wider sense, it become s clear that a great deal of management effort
throughout the organization is directly concerned with decision making. In
addition, we should include the time that managers spend in monitoring the effects
of decisions taken previously. This monitoring activity can go on for a
considerable length of time before the effects of a decision are regarded as
steady stable.

Q2. Management decision may be regarded as being a continuum ranging from

strategic and operational, where strategic decision which relate the organization
to its environment and involve a large part of the organization. Discuss and
explain the term used?

In order to better understand the decision making management it is critical to

study the elements of a decision, which are the:
1) Decision body
2) Options
3) Uncontrollable factors
4) Consequences and the different types of the decision.
The decision body is referred to individual or a group who will take the final
decision. The simple and straightforward decision making body is one person
decision making body. When there is more than one person involve in decision
making process then we say multiple decision makers decision body. Options are the
available alternative courses of action which are used to achieve the objectives
of the decision. The number of options is between two and infinite. The simple and
easy decisions are those, which have just two options “(to do something or not to
do something). For example should we buy new machine? Or not. Uncontrollable
factors are those which can affect the result of the decision but are out of the
control of the decision maker. For example the demand, this can not be controlled
by the decision maker but can affect a decision while allocating the production
capacity for a new product. For each combination of a decision option and the
state of nature, there will be a consequence.

The Strategic Decisions

Many people still remain in the bondage of self-incurred tutelage. Tutelage is a
person's inability to make his/her own decisions. Self-incurred is this tutelage
when its cause lies not in lack of reason but in lack of resolution and courage to
use it without wishing to have been told what to do by something or somebody else.

Eventually human beings gained their natural freedom to think for themselves.
However, this has been too heavy a responsibility for many people to carry. There
has been an excess of failure. They easily give up their natural freedom to any
cult in exchange for an easy life. The difficulty in life is the choice. They do
not even have the courage to repeat the very phrases which our founding fathers
used in the struggle for independence. What an ironic phenomenon it is that you
can get men to die for the liberty of the world who will not make the little
sacrifice that it takes to free themselves from their own individual bondage.
Good decision-making brings about a better life. It gives you some control over
your life. In fact, many frustrations with oneself are caused by not being able to
use one's own mind to understand the decision problem, and the courage to act upon
it.
A bad decision may force you to make another one, as Harry Truman said, "Whenever
I make a bum decision, I go out and make another one." Remember, if the first
button of one's coat is wrongly buttoned, all the rest will be crooked.
A good decision is never an accident; it is always the result of high intention,
sincere effort, intelligent direction and skillful execution; it represents the
wise choice of many alternatives. One must appreciate the difference between a
decision and an objective. A good decision is the process of optimally achieving a
given objective.
When decision making is too complex or the interests at stake are too important,
quite often we do not know nor are not sure what to decide. In many instances, we
resort to informal decision support techniques such as tossing a coin, asking an
oracle, visiting an astrologer, etc. However formal decision support from an
expert has many advantages.
The rationalist decision-making model is based on several assumptions. First, a
set of possible outcomes is known and their expected optimal outcome can be known
to a high degree of confidence. Next, calculations are based on similar past
actions, assuming what affected past performance will similarly affect future
performance. Traditional models are based on history. Feedback causes corrections
within the model for deviations to the plan. It is assumed that proliferation of
information (input data) will lead to greater convergence. In other words, greater
information lowers ambiguity and uncertainty can be reduced by gathering necessary
information. This model relies greatly on the reliability of information gathered.
Rationality also assumes a common experience base among those participating in the
decision-making process. Finally, this model presumes to be objective. Criteria
are established and weighted mathematically, and the factors are added up, thus
reducing the chance for subjectivity to drive the decision
Rational decisions are often made unwillingly, perhaps unconsciously. We may start
the process of consideration. It is best to learn the decision-making process for
complex, important and critical decisions. Critical decisions are those that
cannot and must not be wrong. Ask yourself the objective: What is the most
important thing that I am trying to achieve here?
The decision-maker's style and characteristics can be classified as: The thinker,
the cowboy (snap and uncompromising), Machiavellian (ends justifies the means),
the historian (how others did it), the cautious (even nervous), etc. For example,
political thinking consists in deciding upon the conclusion first and then finding
good arguments for it.
On a daily basis a manager has to make many decisions. Some of these decisions are
routine and inconsequential, while others have drastic impacts on the operations
of the firm for which he/she works. Some of these decisions could involve large
sums of money being gained or lost, or could involve whether or not the firm
accomplishes its mission and its goals. In our increasingly complex world, the
tasks of decision-makers are becoming more challenging with each passing day. The
decision-maker (i.e., the responsible manager) must respond quickly to events that
seem to take place at an ever-increasing pace. In addition, a decision-maker must
incorporate a sometimes-bewildering array of choices and consequences into his or
her decision. Routine decisions are often made quickly, perhaps unconsciously
without the need for a detailed process of consideration. However, for complex,
critical or important managerial decisions it is necessary to take time to decide
systematically. Being a manager means making critical decisions that cannot and
must not be wrong or fail. One must trust one's judgments and accept
responsibility. There is a tendency to look for scapegoats or to shift
responsibility.
Decisions are at the heart of any organization. At times there are critical
moments when these decisions can be difficult, perplexing and nerve-wracking.
Making decisions can be hard for a variety of structural, emotional, and
organizational reasons. Doubling the difficulties are factors such as
uncertainties, having multiple objectives, interactive complexity, and anxiety.
Strategic decisions are purposeful actions. The future of your organization and
the progress of your career might be profoundly affected by what you decide.
Good decisions are made with less stress, and it is easier to explain the reasons
for the decision that was made. Decisions should be made strategically. That is,
one should make decisions skillfully in a way that is adapted to the end one
wishes to achieve. To make strategic decisions requires that one takes a
structured approach following a formal decision making process. Otherwise, it will
be difficult to be sure that one has considered all the key aspects of the
decision.
Making good strategic decisions is learnable and teachable through an effective,
efficient, and systematic process known as the decision-making process. This
structured and well-focused approach to decision-making is achieved by the
modeling process, which helps in reflecting on the decisions before taking any
actions. Remember that: one must not only be conscious of his/her purposeful
decisions, one must also find out the causes for which they are made. There is no
such thing as "free-will". Those who believe in their free wills are in fact
ignorant to the causes that impel them to their decisions. There is no such thing
as arbitrary in any activity of man, least of all in his decision-making. Just as
he has learned to be guided by objective criteria in making his physical tools, so
he is guided by unconscious objective criteria in forming his decision in most
cases.
In an organization the manager of a small manufacturing unit might make the
following decision in a period of the time;

1) Should we buy a new machine or repair the current one

2) Should we hire new young staff and train them or we hire the experienced
staff
3) Should be give priority to product A this week or to product B

If we see the above mentioned decisions and the like, are taken in a situation
where the daily work follow of the organization is concerned. If these decisions
are not taken on time the organization immediately gets out of the business. These
are called the operational decisions. The operational decisions are made in a
routine manner and are repetitive decision thus we can make a common rule, how to
deal with such kind of problem if occurs in future.
Normally the low management level is involved in such type of the decision. The
manager of the manufacturing unit may be involved in strategic decision but the
unit level.

Let’s consider the following example. In the same organization the CEO of the
organization might be involved in the following type of the decisions.

1) Do we have to relay on export to Europe or we should open a manufacturing

unit.
2) Should we work in the centralized management system or we should move to
decentralized management system.
3) Should we introduce high quality expensive goods production lines or we have
to relay on the currently inexpensive massive goods products line.

If we see the decisions which are taken by the CEO are important for the future of
the whole organization. These are called strategic decisions which involve a big
part of the organization; these are not repetitive and can not be done on routine
manner. As we know that organization are facing a lot of challenges due to
advancement of the technology, unstable environment increasing competition, and
often changing ways of business. These challenges have made the strategic
decisions vulnerable to risk and uncertainty.

The strategic decisions can be differentiating from operational in that they

a) relate the organization to its environment

b) involve a large part of the organization

The first manager in our example can also make the strategic decisions for his/her
working unit. For example if the manger change the two shifts to three shifts, it
will change the position of the manufacturing unit in its environment (the
organization is the environment for the manufacturing Unit.) although this
decision is strategic for the manufacturing unit but still it is operational one
for the organization.

Strategic Planning he defines are:

… The process of deciding on objectives of the organization, on changes in these
objectives, on the resources to obtain these objectives, and on the policies that
are to govern the acquisition, use, and disposition of these resources

Management Control is defined as:

…. The process by which the mangers assure that the resources are obtained and
used effectively and efficiently in the accomplishment of the organization’s
objectives.

Operational Control is defined as:

…. The process of assuring that tasks are carried out effectively and efficiently

If we study the Antony’s framework the term strategic planning is used for
strategic decisions while the operation and management is seen as control
activities. This means that strategic decisions set the intended directions for
the organization and the operational control decisions are dealing with detailed
implementation plan.

The operational decisions and Strategic decisions express a continuum than a

straightforward dichotomy, a decision may be placed anywhere on each continuum of
decision types. This means that theoretically there is infinite number of the
decisions between these to ends of the continuum (operational end and strategic
end). However, in order to examine the way in which the elements of decisions vary
with decision type, we can make a generalization which greatly simplifies the
task.

This is that strategic decisions tend to be unstructured and dependent, whereas

operational decisions tend to be structured and independent. This crude
generalization is borne out when we see the characteristics of each decision
element for the two categories of decision.
This generalization does not mean that all strategic decisions are unstructured
and dependent and all operation decisions are independent and structured. But we
can say that most strategic decisions are unstructured and dependent and most
operational decisions are structured and independent.

The conclusion is, management decision may be regarded as being a continuum

ranging from strategic to operational, where strategic decisions both relate the
organization to its environment and involve a large part of the organization. They
may also be classified as structured or unstructured, where structured means clear
and unambiguous, and unstructured means ill-understood and difficult to tackle.
Finally, decisions may be classed as being either dependent or independent.
Decisions with a high degree of dependency will have to take account of past or
possible future decisions in the same part of the organization, or decisions which
have, or could, take place in other areas of the organization. Where any decision
lies within these three dimensions will influence its decision elements. Decision
which are strategic, unstructured and dependent will tend to have multi-person
decision bodies, options which are not immediately apparent, uncontrollable
factors which are both numerous and unpredictable, and multi-attribute
consequences. Conversely, decisions which are operational, structured and
independent can have single decision makers, apparent options, relatively few
uncontrollable factors, and predictable consequences.
The environment of a decision is particularly important when the decision concerns
a task on the boundary of the organization. The state of the decision environment
determines the perceived uncertainty surrounding the decision, and the amount or
type of information available to the decision body. It can also determine the
amount of time available in which to make the decision and hence the perceived
stimulus of the decision.

Q3. A model provides us with an abstraction of a more complex reality and managers
communicate by means of models and use them in decision process. What are the
different dimensions on which such models can be placed? Explain.

Alternative to traditional mathematical models are provided by heuristic models

which use “common sense” rules of thumb in a logical manner, and give good sub-
optimal solutions, or simulation models which follow procedures that describe the
underlying logic of a decision area. One particular class of simulation model is
the corporate model which simulates financial systems over the long term.
Finally, there are five dimensions on which models can be placed are proposed,
these dimensions are:

• Optimizing-satisfying: models are used for evaluation both directly and

indirectly. Direct evaluation requires the model to identify the single best
option or alternatively identify an option that will prove satisfactory to the
decision maker. Here they distinguished between the normative concept of man as
the rational maximizing decision maker, and the descriptive view of limited
rationality and satisfying behavior. The necessary operating conditions for the
former, those of perfect knowledge and perfect judgment, are rendered unlikely in
the light of:

o The selective nature of the perceptual process which imposes limitations on

the relationship between the decision maker and the decision situation.
o The central position of values and value systems in the determination of
human behavior and their effect on the decision making process.

In real life, many decisions are made in circumstances where outcomes are
uncertain and the manager must make a judgment in respect of probability without
the aid of objective measures or statistical data. The combination of subjective
probability with an assessment of utility for each outcome is suggested as forming
the basis of individual decision making behavior under conditions of uncertainty.
To this may be added the notion that risk taking itself has different utility or
worth for different decision makers.
Within the work organization, a significant feature of the decision environment
for the manager is the presence of others. The strength of social pressure is felt
by decision makers both as normative and informational influence and will vary
according to perceptions of the role, status and significance of others within the
work organization. The combination of imperfect knowledge and judgment, together
with the desire to accommodate the needs of others around us points firmly to the
notion of individual decision behavior as a satisfying process.

• Concrete-abstract:
Closely associated with the iconic-analogue-symbolic classification used earlier,
this scale refers to the degree of correspondence with reality that a model
possesses. Similar scales have been developed. The following one is more
differentiated, with five levels of abstraction based on the number of elements
produced in the model, their faithfulness of reproduction and explicability

o Level 0 the process, activity or situation on which the model is based

o Level 1 A replication of the initial process or situation; examples of this
are controlled “run” industry maneuvers in the area of military science, and drama
(a model of a real or hypothetically real is situation).
o Level 2 A controlled, laboratory-type models, capable of repetition;
laboratory models of industrial processes, war games, and the cinema (as opposed
to live drama) are examples of this.
o Level 3 A completely synthetic extractions of essential elements of the
initial situation; for example, computer models of industrial or military
situations or play-script.
o Level 4 A closed analytical models.
Models at the “concrete” end of the scale can be useful as a first step towards
more abstract models, as communication vehicles, or to stimulate creativity and
insight, but they lack the power inherent in the more tractable abstractions of
mathematical modeling.

• Normative-descriptive:
Normative models are those which are prescriptive in the sense that they contain
within their structure the means to say what ought to be done. Normative models
attempt to impose on the decision maker the values reflected in the assumptions of
the model. Inevitably, they are more dominant in the “decision maker model”
relationship than purely descriptive models, since they assume responsibility for
the direct evaluation of feasible solutions. Not that all such models are designed
to choose the best of all the possible solutions. In other words, normative models
do not necessarily optimize. Heuristic models, for example, are clearly normative
in as much as they prescribe what ought to be done; but their evaluation mechanism
adopts a satisfying criterion for doing so. Descriptive models, on the other hand,
tend to be more modest in their aspirations if not their complexity. They make no
direct attempt to evaluate alternative decision solutions, they merely describe
them. This does not mean that descriptive models lack value. On the contrary, as
we have seen, they can aid understanding and predict future behavior. Furthermore,
descriptive models can perform the first steps in the evaluative process by
stating different feasible decision solutions in common units-for example,
predicting the effect of all decision alternatives on a Company’s total cost.
However, nothing is descriptive in a totally objective way. A photograph may seem
to be truthful and an objective representation. But it is an old argument in the
communications business that by pointing a camera at one thing you are
deliberately excluding everything else, and hence the photographer is adding an
element of his own judgment. The camera cannot lie, but it cannot avoid
selecting. Likewise, as discussed previously, a descriptive model will almost
certainly contain some normative bias, since it is formed through the unique
perception of the model builder.

• Static-dynamic:

One of the difficult challenges when discussing the productivity of dynamic

languages is to make any sort of proof about said productivity. I believe this is
because it's one of those synergistic, emergent systems, where everything taken
together produces a surprising or unexpected result. But this makes it hard to
come up with any kind of proof, and as a result we have a bunch of people who are
primarily just speaking about their personal experiences trying to convince people
who haven't had such experiences that it's a Good Thing One aspect of reality
which the decision maker might choose to exclude or to simplify is time. This can
be done in two broad ways. Time can be momentarily halted and a model constructed
to describe the situation at that point in time in the same way as a photograph
captures an instantaneous image. Alternatively, the model can describe the
situation in terms of average or total values over a stated period of time. The
balance sheet and the profit and loss account are two conveniently related
examples of descriptive models using these two approaches. Models which do not
include time as a variable are termed static models. Dynamic models, on the other
hand, use time as a major element and whatever phenomena are examined are studied
in relation to preceding and succeeding events. Thus, in a dynamic model, the
values of endogenous variables in one time period can become the values of
exogenous variables in the next. However, it is not always necessary to use
dynamic models to represent a decision situation which is clearly time-related or
on-going, provided it is operating at a steady state. That is, there are no major
long term disturbances to the behavior or the decision situation which cause
transient conditions to predominate. However, if it is specifically desired to
examine non-steady state behavior or explore the response to external stimuli then
any model used must be dynamic.

• Deterministic-stochastic:

Deterministic models use single estimates to represent the value of each variable
in the decision, whereas stochastic models use probability distributions,
histograms, or some other description of the range of values which a variable can
take. Stochastic models describe decisions in terms of the uncertainty inherent in
them.
Viewed in one way, of course, there is nothing certain in life but death and
taxes, and as everything in life is uncertain to some extent, all models ought to
be stochastic. However, this denies the modeler the normal license in modeling to
simplify elements of what he observes, so as to present reality in a convenient
and useful form. The “decision approaches” explained before can mean that
deterministic models exclude the undoubted uncertainty present in everyday life
for the sake of conveniences, clarity or tractability.

Here we must distinguish between two types of stochastic model. First, those which
model systems having elements which take different values according to an assumed
or historically derived pattern and which predict a system’s behavior, the prime
determinant of which is the variability itself. Second, those models which use
probability to describe the modeler’s ignorance of future occurrence in a more
fundamentally way, where the nature of uncertainty is described much more
tentatively.

The two key dimensions: two questions are of particular importance when choosing
decision models which relate directly to two of the scales discussed.
• Should an optimizing or a satisfying model be chosen?
• Do we want to treat the decision variables as being known with certainty or
being best described as probabilities?

The following figure classifies some of the types of models.

Optimizing -linear programming - decision trees

Satisficing -most “corporate modeling
- CRAFT facilities layout technique
- many heuristic models - queuing theory
- stochastic simulations
Such as the stock control simulation described
-risk analysis

The fact that we select a model which optimize does not necessarily mean that we
are trying to optimize in the real decision. We could obtain an “optimal” solution
from the model, and then deliberately adapt that solution to fit the needs of
reality- after all, a model does not optimize reality, it optimize its simplified
version of reality. So using an “optimizing” model could be a perfectly legitimate
tactical ploy in the search for a satisfactory solution. Likewise, deterministic
models can provide valuable assistance to the decision makers, even though their
reality is stochastic. We have used the term model to describe any explicit
statement we make about our perception of reality. The concept of “the model” and
“modeling” is particularly important in decision making, because the mental model
we have of the decision represents our understanding of it, and therefore any move
to make that understanding explicit will aid the decision maker in three ways-
namely:

1. by enhancing understanding
2. by simulating creativity
3. By aiding the evaluation of possible solutions.
Building a symbolic model of the decision area involves three steps;
• Listing the input or exogenous variables to the decision, some of which are
controllable and some uncontrollable, and listing the relevant endogenous
variables that will be used to evaluate the decision.
• Indicating the existence of relationships between variables by means of a
cause-effect model.
• Describing the form of those relationships in mathematical terms.

Q4. Draw a decision matrix, highlighting its various components. Explain with the
help of an example the following decision rules:

For better understanding we will discuss the question in three parts:

1. First we will draw the decision matrix and then we will high lights its
various components in details. Second,
2. We will study a practical example. Third,
3. With the help of an examples, we will explain the following decision rules:
a. The optimistic decision rule
b. The pessimistic decision rule
c. The regret decision rule
d. The expected value decision rules

First let’s draw the decision matrix and highlight its various components; the
following illustration is the decision matrix with its various components

The decision matrix

The decision matrix is a method of modeling relatively straightforward decisions

under uncertainty in such a way as to make explicit the options open to the
decision taker, the states of nature pertinent to the decision, and the decision
rule used to choose between options.

The optimistic decision rule:

The optimist criterion attempts to describe the decision-making behavior of people
who are overly optimistic in their expectations. An optimistic decision maker is
attracted by large rewards and is willing to risk high losses in order to obtain
them.

It is possible to model the optimist profile with the MAXIMAX decision rule (when
the payoffs are positive-flow rewards, such as profits or income. When payoffs are
given as negative-flow rewards, such as costs or losses, the optimist decision
rule is MINIMIM. Note that negative-flow rewards are expressed with positive
numbers.)

Let's assume that ACME's managers are thoroughly optimistic. We would suppose they
would therefore go for a large manufacturing facility in hopes of attaining the
maximum profit. The psychological processes leading to such behavior can be
captured by the two-step logic of the Maximax rule.

Maximax decision rule

1. For each action alternative (matrix row) determine the maximum payoff
possible.
2. From these maxima, select the maximum payoff. The action alternative leading
to this payoff is the chosen decision.

Using ACME's decision matrix defined previously:

S
A H M W Row Max
Maximax Decision
L 15 3 -6 15
15 L
JR 9 4 -2 9
S 3 2 1 3
"Maximax" is shorthand for "Maximum of the (row) maxima."
By convention, only one additional column is appended to the original matrix. The
decision is shown by highlighting the maximax value, thus indicating the row of
the chosen action alternative:
S
A H M W Maximax
L 15 3 -6 15
b denotes decision is L
JR 9 4 -2 9
S 3 2 1 3
The Minimim decision rule applies when the payoff matrix consists of negative-flow
rewards, such as costs or losses. An optimistic decision maker would be attracted
by lower costs.
Critique of Maximax / Minimim
Maximax / Minimim is not a rationally acceptable decision rule because it excludes
most of the information available in the payoff matrix. Notice that the Maximax
column above shows only three numbers (15, 9, 3) from which to select the course
of action. Six payoffs were excluded from consideration in the choice. This means
that ~67% of the data for the problem were neglected. Neglecting available
information in a decision problem is not rational.
Decide for yourself
Consider the following situation: Would you risk getting nothing for a chance to
obtain an extra $1 over a sure $99? Most people wouldn't.
S1 S2 Maximax
A1 0 100 100
A2 99 99 99

This approach to selecting the preferred option is to consider all possible

circumstances and choose that option which yields the best possible outcome. For
Tailed, the best unit cost is $2000. This occurs when method 1 is used and the
annual sales volume is 3000 units. So the total optimist would choose method 1,
because it provides the opportunity so achieve the best outcome. In detail, this
decision rule involves examining each option, selecting the minimum cost outcome,
and choosing the option which provides the lowest minimum cost. For this reason
the rule is sometimes called the minimum cost rule (if we were dealing with
revenues it would be the maximize revenue rule).
The pessimistic decision rule:
The pessimist criterion attempts to describe the decision-making behavior of
people who are overly pessimistic in their expectations. A pessimistic decision
maker is averse to large losses and is willing to forgo attractive gains in order
to avoid a large risk.

It is possible to model the pessimist profile with the MAXIMIN decision rule (when
the payoffs are positive-flow rewards, such as profits or income. When payoffs are
given as negative-flow rewards, such as costs or losses, the pessimist decision
rule is MINIMAX.)

Let's assume that ACME's managers are diehard pessimists. We would suppose they
would therefore opt for a small manufacturing facility in hopes of securing a
profit, even though it may be small. The psychological processes leading to such
behavior can be captured by the two-step logic of the Maximin rule.

Wald's Maximin decision rule

1. For each action alternative (matrix row) determine the minimum payoff
possible. This represents the worst possible outcome if that decision alternative
were chosen.
2. From these minima, select the maximum payoff. The person may be pessimistic
but is not a dunderhead: from among the bad outcomes, choose the least bad. The
action alternative leading to this payoff is the chosen decision.

Using ACME's decision matrix defined previously:

S
A H M W Row Min Maximin
Decision
L 15 3 -6 -6
JR 9 4 -2 -2
S 3 2 1 1
1 S
"Maximin" is shorthand for "Maximum of the (row) minima."
By convention, only one additional column is required. The decision is shown by
highlighting the maximin value, thus indicating the row of the chosen action
alternative:
S
A H M W Maximin
L 15 3 -6 -6
JR 9 4 -2 -2
S 3 2 1 1
b denotes decision is S
The Minimax decision rule applies when the payoff matrix measures negative-flow
rewards, such as costs. A pessimistic decision maker would tend to avoid higher
costs. The minimax rule guarantees the lesser of possible worst evils. It portrays
a very conservative approach to risk.
Critique of Maximin / Minimax
Maximin / Minimax is not a rationally acceptable decision rule because it excludes
most of the information available in the payoff matrix. In this example, six
payoffs were excluded from consideration in making the choice. Since ~67% of the
data for the problem were neglected, the decision process was not rational.
A decision maker who took the very opposite view to the one described above would
follow the reverse procedure. Each option would be examined, and the worst
possible outcome for that option identified. The option would be selected which
provided the best of the worst outcomes. In the case of Trailaid, the worst
outcome would be a unit cost of $3300, if we choose manufacturing method 1,
whereas if we choose manufacturing method 2 the worst outcome would be a unit cost
of $3100. The better of these two outcomes is the unit cost of $3100 associated
with method 2. Thus a pessimist would assume that the worst is going to happen,
and because the worst outcome with method 2 is better than the worst outcome with
method 1, would choose method 2. Because this decision rule involves choosing the
option which has the minimum of the maximum cost, it is often called the minimize
cost rule.

The regret decision rule:

The regret decision rule is based on a deceptively simple but extremely useful
question. That is “if we decide on one particular option, then, with hindsight,
how much would we regret not having chosen what turns out to be the best option
for a particular set of circumstances?”
For example, suppose we choose method 1. If sales are 1000 units per year, then we
would have made the wrong decision. Method 2 would have given us a lower unit
cost. A measure of how much we would regret having chosen method 1 is given by the
difference in unit costs between the two manufacturing methods at that level of
sales volume. The regret at having chosen method 1 would be $3300-$3100=$200. If
we had chosen manufacturing method 2, we would regret nothing, since at this
particular level of sales volume this is the best method. Thus the regret would be
zero. At the 3000 annual sales volume level the position reverses. If we choose
method 1, then we regret nothing because it is the lowest cost method at this
level of sales. However, if we had chosen method 2, then we would regret that
decision by the difference between the unit costs, i.e. $2400-$200=$400. The
following figure shows the table for this decision; the regrets are shown in
brackets.
Annual Sales Volume Maximum
Regret
1000 units 3000 units

Method1
Method2
$3300
$3100
$2000 (0)
$2400 (400)

200*
400

Regret Table

If we choose method 1, we suffer a regret of wither $200 or zero and if we choose

method 2, we suffer a regret zero or $400, depending on the level of sales. Thus
the maximum regret we could suffer if we chose method 1 is $200, whereas the
maximum regret we could suffer if we chose method 2 is $400. Under the regret
decision rule we would choose the option which gave us the minimum of the maximum
regrets-method 1.
The regret decision rule is a powerful and intuitively attractive idea. In
attempts to minimize the embarrassment we might feel at making the wrong decision.
It is closely related to the economist’s traditional concept of the “opportunity
cost” of a decision; that is, by choosing one alternative course of action?
Unfortunately, as a decision rule the concept has a major disadvantage; if we are
choosing the alternative which will gave us the least cause for regret when
compared with another alternative, and then the degree of regret will depend upon
which other options are considered. This can cause problems of logical
inconsistency.
Suppose that while the two options open to Trailaid are being considered, the
purchasing manager of the company suggests a third alternative. This is to
subcontract virtually everything; a special modified shell assembly could be
manufactured by the existing shell supplier and all the internal fittings could be
specially ordered and bought out. All that would be left to do “in house” would be
to assemble the trailer-a brief operation. This option would require practically
no fixed costs and give a unit cost of about $2800, no matter what production
levels were required. If the new option, let us call it method 3, is included in
the decision process, then it should be included with the other two in the
decision matrix. The following illustration shows all three options, their
respective unit costs, and the regret values for each outcome.

Annual Sales Volume Maximum

Regret
1000 units 3000 units

Method1
Method2
Method3
$3300 (500)
$3100 (200)
$2800 (0)
$2000 (0)
$2400 (400)
$ 2800 (400)

500
400*
800

Unit cost and regret tables with when the third option is included
For the low demand level the option with the lowest unit cost is the new proposal,
method 3. This has a regret value of zero. Should manufacturing method 2 have been
chosen, then we would regret it by $300. Likewise, if manufacturing method 1 had
been chosen, then the regret would be $500. If the demand is at the high level,
then method 1 would have been the best decision, and so have a regret of zero.
Method 2 is $400 and method 3 $800 more expensive than method 1. So, if method 1
is chosen we will regret the choice of either $500 or zero, if method 2 is chosen
we will regret the choice by either $300 or $400, and if method 3 is chosen we
will regret the choice by either zero or $800. Using the mimiax regret decision
rule we could choose method 2, since this is the lowest of the maximum regrets.
However, surely this is an inconsistency. By including the third option we have
shifted our decision from method 1 to method 2. Yet, even when it is included,
method 3 is not the preferred option by the regret decision rule! Herein lies the
major problem with opportunity costing-against what other opportunity are you
going to evaluate a particular option?
The expected value decision rule:
The three criteria so far described may go some way towards clarifying the
decision for us, but they do not use one of the potentially most useful factors
within any management decision. That is our estimate of the likelihood of a
particular situation occurring.
The principle of expectation weights each outcome by the likelihood of it
occurring. Suppose that, as yet, Trail aid are unwilling to put a definite figure
on their chances of gaining the developing agency contract. They can still explore
the decision further by calculating the expected unit costs associated with each
method as the probability of gaining the contract varies.
Let us call the probability of gaining the contract p, and then the probability of
not gaining the contract will be 1-p.

For method 1: expected unit cost + 3300 (1-p) +2000p

For method 2: expected unit cost = 3100(1-p) + 2400p
For method 3: expected unit cost = 2800(1-p) + 2800p=2800

Q5. Discuss the importance of objectives in decision making. What are the
characteristics of decision objective?

Unlike the strategies used in the previous section which tell you what to do, it
is possible to learn how to make good decisions. It is possible to learn the
process of making good strategic decisions by practiced deciding. This Web site is
about practiced deciding, to which you must give enough thought. You will learn
how to use your own abilities within a focused and structured decision process to
actively and pro-actively make decisions. Active decision-making involves a
responsible choice that you must make, while pro-active decision making is the
practice of making decisions in advance just like "in the case of fire".
Decision Problems or Decision Opportunities: At one time or another, organizations
develop an over-abundance of decision problems. Sometimes they can be linked to
organizational trauma, like down sizing, budget restraints or workload increases,
but sometimes they evolve over time with no apparent triggering event. Increased
complaining, a focus on reasons why things can't be done, and what seems to be a
lack of active role characterize the "problem" organization. If the manager is
walking negative and talking in a negative way, staff will follow.
In many instances we forget to find positives. When an employee makes an
impractical solution, we are quick to dismiss the idea. We should be identifying
the effort while gently discussing the idea. Look for small victories, and talk
about them. Turning a problem into an opportunity is a result of many little
actions. Provide positive recognition as soon as you find out about good
performance. Do not couple positive strokes with suggestions for improvement.
Separate them. Combining them devalues the recognition for many people. It is easy
to get caught in the general complaining and bitching, particularly in customers'
complains.
Decisions are an inevitable part of human activities. It requires the right
attitude. Every problem, properly perceived, becomes an opportunity. In most
situations the decision-maker must view the problems as opportunities rather than
solving problems. For example, suppose you receive a serious complaint letter from
a dissatisfied customer. You may turn this problem into an opportunity by finding
out more about what is wrong with the product/service, learning from the
customer's experience in order to improve the quality of your product/service. It
all depends on the decision-maker's attitude. A pessimist sees the difficulty in
every opportunity; an optimist sees the opportunity in every difficulty.
Each problem has hidden in it an opportunity so powerful that it literally dwarfs
the problem. The greatest success stories were created by people who recognized a
problem and turned it into an opportunity.
A deliberate effort to broaden your experiences is the single most helpful effort
in making good decisions. By exposing yourself to a variety of different
experiences causes you to look at things from different perspectives. This
provides you with extra mind-eyes to see problems and issues, and compare them to
apparently unrelated situations and see new opportunities.
Search process approach by diagramming: Most of your decisions can be made using
your past experiences and some strategic thinking. You may encounter problems
where one wrong decision could have adverse long-term effects and lead to severe
mistakes and considerable failures. In many situations, small bad decisions turn
out to have important consequences, as for example, in air traffic accidents. When
things go wrong, one may try to discover the causes for it. In these types of
decision problems that some historical knowledge and experience, the decision-
maker may apply a search process to find the main factor that cause the problem.
This will enable the decision-maker to make the appropriate decisions and take the
necessary steps to remedy the situation.
From the start of human history, diagrams have been pervasive in communication.
The role of diagrams and sketches in communication, cognition, creative thought,
and decision-making is a growing field. Consider the question: "why has profit
declined?" The following diagram contains a search process by diagramming for this
decision problem:

Subjective and Objective Decision-Making: Your decisions might be categorized in

two groups with possible overlaps in some cases. One category is subjective
decision-making which are private, such as how you want to live your life, or
decide on something just because "It feels good". In subjective decisions you
might also consider your strengths, weaknesses, opportunities and threats. The
other group of decisions is objective, purely unemotional decision-makings, which
are public, and require one to "Step outside one" so that you can discount your
emotions. For example, a CIO deciding for the company must ask among other
questions, "Can I convince the shareholders?" This group of decision-making
involves responsibility, which requires rational, defensible and accountable
decisions. Therefore, the first group consists of private decisions which might
involve emotion, and the second is almost entirely based on rational decision-
making. However, the really hard decisions involve a combination of both. The
difficulty might arise from the fact that emotions and rational strategic thinking
are on two different sides of the human brain, and in difficult decisions one must
be able to use both sides simultaneously.
The importance of the objectives
In decision making: the importance of clear objectives in decision making lies in
their ability to direct the decision making process in a purposeful way. Decision
objectives form a hierarchy with primary objectives influencing strategic
objectives, which in turn influence operational objectives. Primary objectives
reflect the fundamental reason for the organization’s existence. Unless the
objectives of a decision are clear and well understood, managers cannot possibly
judge how far the preferred option will go towards achieving their objectives.
Without an indication of the extent to which each option fulfils the objectives of
the decision, the evaluation process cannot discriminate between options in any
useful way. Therefore, the lack of clear, unambiguous and preferably explicit
objectives takes a great deal of value away from the rest of the decision-making
process, for in order to understand decision; we need to understand the direction
in which the decision is supposed to be taking us. We must first of all
distinguish between three types of objectives which may be found within a company,
even though the boundaries between these three types of objectives can sometimes
be unclear. These are:
o Primary objectives: reflect the fundamental reason for the organization’s
being. Objectives are likely to include, survival of the company, independence
from outside control, profit, a desire to be big and important in the market
place, and a desire for growth.
o Strategic objectives: strategic objectives guide the organization’s long
term direction towards the achievement of primary objectives. Strategic objectives
could include, for example, developing innovative products, keep a presence in a
particular market, fund projects only from internally generated profits, and so
on.
o Operational objectives: interpret an organization’s strategic objectives
into manageable terms for shorter term decision making. Operational objectives
could include such things as controlling budgets tightly, giving good delivery,
keeping unit costs low and so on. The most important attribute of strategic
objectives is that they are appropriate for the organization’s primary objectives.
Whereas operational objectives, above all else, need to be consistent with
strategic objectives and each other.

The characteristics of decision objective

Strategic and operational objectives:

Decision can be positions in a strategic operational continuum, and in the same
way, so can their objectives. But strategic and operational objectives have
different purposes and will be expressed in different ways. Nevertheless, the
operational level objectives will have been shaped by whatever strategic
objectives the firm has adopted. There must, therefore, be some link between
strategic objectives and detailed operational objectives. In fact, there must be
different layers of such objectives, which will start broad and become more
specific as they approach the operational level. The following figure illustrates
this hierarchical structure.

Strategic objectives need to be

Appropriate to achieve primary
Primary objectives, operational
Objective need to be appropriate
To the strategic objectives and
Consistent with each other.

Multiple objectives
An organisation’s objectives are not always immediately apparent or clear to an
outsider. Observing the organisation’s actions, it might seem that its goals are
ambiguous or even contradictory. One reason for this is that most organizations
have more than one objective. For example, a company might want to achieve a good
return on investment and grow in the marketplace and design innovative and
exciting new products and conduct polices which are socially responsible. Where
multiple objectives are involved, they can either conflict or be compatible with
each other. However, even if the objectives do not directly conflict, they can
compete when resources are scarce. For example, a company might have the
objectives of developing an up-to date product range and entering new export
markets for its products. In themselves, these two objectives do not conflict. But
with limited cash available, the company might have insufficient cash both to
invest in a new product Research and Development program and pay a heavy entry
price into a new market.

Even when an organization is conscious that a decision involves multiple

objectives, it may choose not to make all of the objectives explicit. Sometimes
are being “too aware” of all the competing and conflicting objectives in a
decision can diffuse the decision making energies within a group. For example, an
organization considering the introduction of Quality Circles on the shop floor
might be fully aware that it is almost impossible for any group of people to
consider quality as an issue independent of other production problems.

When more than one objective is being pursued, priorities must be given to each.
Sometimes objectives which are set as having a high priority take the form of
constraints on lower level objectives. Suppose that a company wishes to develop
products with a good return of investment and also wishes to develop products
which fit into the company’s existing product range. If the degree of fit with
the present product range is regarded as being more important than the return on
investment of a proposed product, then the objective might be stated as follows:
“develop any product which has a likely return on investment higher than 15%
provided the product is compatible with the company’s existing range of products.

Implicit and explicit objectives:

Underlying all organizational decision behavior are the objectives of the
organization. These objectives may form an “invisible hand” which shapes decisions
towards ultimate goals in a quiet and non-obvious way. Alternatively, objectives
can be clearly stated ‘signposts” which are seen by all decision makers, pointing
the way in an unambiguous manner towards the company’s goals. Which of these two
states is true is determined by how explicit the organization has made its
objectives. Unless objectives are:
• Clearly and unambiguously stated (preferably written down)
• Fully understood by all decision makers within the organization

They can be subject to a variety of interpretations by different decision makers

at different points in time. This may cause a lack of cohesion and direction in
decision making.

Yet organizations often find it very difficult to agree on a set of unambiguous

objectives. Sometimes it may be “politically” necessary to stop short of a totally
explicit statement of objectives, and develop a vague statement which can be
agreed by all members of the coalition of managers who form the decision body.
More detailed operational objectives may then develop by political activity. But,
where it possible, explicit objectives do provide a useful discipline for an
organization’s top decision makers. If also acts as the focus for any debate about
the appropriateness or consistency of the objectives. Although just because
objectives are written down, it does not mean that they will necessarily be
useful. The clichés frequently found in a company’s financial report would rarely
make useful operational objectives for decision making.
Some important points when making decision explicit are:
1. Do objectives state what the organization does not want to do?”.... The
concept of goals implies aims forgone, as well as those which are sought;
otherwise all that remains a set of Boy Scout maxims...”
2. Are the objectives a useful guide to action? Especially when guiding the
evaluation of decision alternatives. The objective “to diversify” is less
directive, therefore useful, than the objective “to diversify into complementary
industries”.
3. Are the objectives reasonably comprehensive? Objectives should state the
implications for all stakeholders in the organization, shareholders, managers,
workers, suppliers, etc.

Efficiency and effectiveness

Consider an organization as being represented very simply by a black box. One end
takes in the resources which the organization needs for operation-people,
materials and facilities- the other end puts out finished goods or services which
are sold to customers. Within the black box the transformation of the resources
into goods and services takes place. Many decisions taken within the box in one
way or another concern the efficiency of this transformation process- where
efficiency is measured as some function of output per unit of input resource.
Measures which are used to describe transformation efficiency include: output per
employee, facilities utilization, unit cost, stock turnover, etc. the following
figure shows the input/output nature of efficiency objectives.

Cost

Operation efficiency
For example, a regional sales manager, deciding how to deploy sales people, will
be concerned to allocate areas so as to achieve coverage of the region as
efficiently as possible with no overlaps, and using the minimum number of people.
Similarly, a production manager, when designing a production system, will be
concerned to ensure the best achievable labour productivity, machine utilization
and raw materials scrap rates. In this way cost per unit of output is minimized.
Although efficiency objectives are often important in decision making, they rarely
reveal the complete picture. There is useful purpose served in covering a sales
region efficiently, if the sales people are not effective in bringing in the
orders. Likewise, no matter how efficiently the production manager products
finished goods, the effectiveness of his production will depend on factors other
than unit cost. In other words, an organization must do the right thing as well as
do it well. Effectiveness objectives consider the characteristics of the output as
well as the efficiency of its generation
The next figure illustrates this:

Input resources
output
The characteristics of an organization’s output which might be considered include
such things as:
• The specification of the product or service
(What it contains and how it performs)
• The quality of the product or service
• The reliability of the goods or services
• The flexibility which the organization has to change its activities.
Wild calls these output characteristic objectives “customer service objectives”
and the efficiency objectives “resource productivity” objectives.
Often decisions involved trade-offs between elements within the resources
productivity category or within the customer service category. Similarly, trade-
offs also occur between the two categories. For example, the manager of a city bus
company has to decide how many maintenance crews to employ for the repair and
overhaul of the company’s vehicles. If the number of crews is too low then,
although they will be working a high proportion of their time, and therefore,
suffers low vehicle productivity. If the number of maintenance crews hired is too
high then, although the vehicles will be repaired promptly, giving high vehicle
productivity, the maintenance crews will be under-utilized, meaning low labour
productivity. Furthermore, as well as effecting organizational efficiency,
facilities productivity influences vehicle availability and therefore customer
service. A solution must be found which balances the cost needs of labour and
vehicle utilization, and also provides a level of vehicle availability compatible
with the company’s customer service objectives.

Changing objectives:
A company’s objectives are unlikely to remain constant in the long term. Even if
the prime objective remains substantially unaltered, for example “to survive”, the
means of achieving this, and therefore the other lower level objectives of the
organization, will change over a period of time. The two major reasons for
companies changing their objectives are:
Changes occurring in the organization’s environment
Changes occurring in the organization itself

When changing their goals, companies rarely dismiss totally objectives which they
previously held dear. A company which had “growth in market share” as one of its
primary objectives, is unlikely to forget growth entirely if it becomes the market
leader. Rather, its priorities within the mix of objectives will change.
Maximizing productivity might also have been one of the company’s aims, but
whereas hitherto it had been dominated by the growth objective, it now might
become itself the dominating goal of the organization. Likewise, if industrial
pollution control is a current social issue, “environmental responsibility” as an
objective of the company will increase in importance within the total mix of
objectives. When the objective is met, or the public interest in the issue
declines, then it will itself decline in the importance rankings of the company’s
objectives.
The rate of change of an organization’s objectives depends partly on their level
in the objective hierarch. Primary objectives, however, as the means of achieving
the high level objectives, are more likely to be forced into adapting and changing
under the forces of changing circumstances.

Intrinsic and extrinsic objectives

The decision objectives which managers talk about as applying to their decisions
are usually extrinsic objectives. They exist because they are regarded as being
efficient in achieving the next objective up in the objective hierarchy. The
importance of the intrinsic worth of objectives should not be under-related. There
are many examples of the direction of an organization being determined by its
manager’s intrinsic objections. For example, the airline owner who sets his
company’s objectives as “… to survive as a company, to return profits at a rate
comparable with other companies and to grow in the marketplace…” the owner fails
to mention that these objectives must be achieved by owing an airline, not an
engineering company or a newspaper. He enjoys the flying business and might resist
a decision to move into say, the airport hotel business, even though it would be
consistent with his long-term aims. It might have extrinsic worth but holds very
little intrinsic worth for the owner. Another example, is the engineering company
who decide to survive and give a good return to their investors by remaining in
the high-quality, high-technology, one-off, specialist engineering field, rather
than develop standardized products and sell in higher volume. It may make very
good instrumental sense to stay in the market in which they have developed
expertise and a good reputation, but in addition to the extrinsic worth of their
chain of objectives could be the personal interest they get out of seeing each
product as a new challenge to their engineering skills.

Small retail owners have been found to continue business when, by normal financial
criteria, they would have closed down, because being in business was an end in
itself. The independence provided by being “one’s own boss” was an over-riding
goal (or organizational mission as it is sometimes called). Often there has to be
some compromise between the demands of extrinsic and intrinsic pulls on objectives
formulation. The airline executive might not want to get into the hotel business,
but what if he sees that it is the only way for the airline to compete with its
rivals? The engineering company might get it sees this as the only way to avoid
damaging fluctuation in the company’s order book? The following example will
illustrate the conflict between implicit and explicit objectives.

Example-the Earth wise collective: earth wise was a retail collective which sold
whole-foods to the general public. As well as rice, beans, cereals, dried fruit,
etc., they also retailed a limited variety of organically grown vegetables. The
collective had been set up some seven years earlier by three students of the local
university. They had set up the capital to start the business and were paid
interest on the capital, but had no rights of ownership of the business. Decision
making rights were shared by all members of the collective, which now numbered
five. As to the objectives of the collective, one member described her perception
as follows: the original three people, who set the shop up, saw it as a means of
providing themselves with an occupation which would not be too taxing and socially
useful at the same time. More importantly, though, it was a means of supporting
themselves financially without having to work for an organization in an employer
/employee relationship. I guess that we see the business in more or less the same
way. It is a pleasant thing to do for a few years after you leave college, and it
provides just enough money for us to live on. We all believe in eating the type of
food we sell, and we know we are providing a service to other people who want to
buy it. I guess there is something evangelical in the way we operate, but not to
the point that we constantly preach at customers. Nevertheless, our beliefs do
influence all the decisions we take about the business.
The effect of the members’ intrinsic objectives can be illustrated by describing
two of the business decisions taken since the founding of the shop.
The location decision: four years after the founding of the business, the lease on
the shop expired, and the members of the collective at the time had to decide on a
suitable new location. Their four years’ experience had taught them that the
location of a retail business is one of the major factors in determining its
success. Ideally, all the members of the collective would have preferred a shop
location in one of the poorer districts of the city-it was, after all, the poorer
people who were most in need of wholesome basic foods which the shop could
provide. If the business saw one of its objectives as educating people into a
simpler but better diet, then surely it should go where it could do the most good.
The members of the collective were aware, however, that the vast majority of their
clientele was middle-class. it was the younger, educated, relatively more affluent
citizens who were more attracted to the types of food the shop sold.
Here, then, was the dilemma. If the objective of the decision was “choose a
location where there is the most need”, then one of the middle-class areas of the
city would be selected. The “go to the greatest need” objective had far more
intrinsic worth to the members of the collective than the “go to the greatest
business” objective. However, in extrinsic, instrumental, terms the position was
reversed. The decision was eventually taken to move into an area on the edge of an
affluent part of the city where they could retain their old customers and attract
new ones relatively easily. This was justified on the grounds that it was better
to survive, and do some good, than fail gloriously!
The pricing decision: for the first two years of the business, the prices of the
goods sold in the shop had been determined by simple “cost plus” calculations. The
selling prices were fixed at the percentage over cost which would more or less
balance the business’s need for cash with its forecast revenue. Although the
system worked well, the collective came to feel that they were missing an
opportunity to reflect more accurately their philosophy in their pricing
objectives. It was decided to vary the margin on different products. Margins were
set on the basis of how “staple” the collective considered products. For example,
some products which were considered to form a basic diet such as beans, lentils,
rice, and whole meal flour had very low margins- sometimes zero. Other products
which the collective considered something of a luxury, for example, dried fruit
and some types of cooking oil, had margins which were considerably higher. Since
the change, the system had been working very well. In fact, the collective found
that the price changes had very little effect on total demand for the various
products.
Both objectives-prices in the most straightforward way and price to reflect the
collective’s philosophy-had identical extrinsic worth, in so much as they both
brought in the same amount of revenue. However, the latter objective had
considerably more intrinsic worth to the organization, which derived considerable
satisfaction form operating things in this manner.

Q6. What is the key role of information in decision making? Also discuss the
information needs in stable and uncertain conditions?

The key role of information in decision making

Perfect knowledge and, therefore, perfect information, has previously been
identified as a necessary operating condition for rational decision making. Even
if we accept that this condition is not likely to be achieved, it is clear that
information will play a vital part in the quality of solution achieved. In
addition information plays two other roles in the organizational context.
• Managers need to gather and to collate information in order to decide
whether or not a problem exists.
• Information is needed after the implementation of the chosen solution in
order to determine its effectiveness

The first task therefore in establishing an information process for decision

making is to identify and establish the nature of the information required and the
sources from which it is likely to come. These will vary according to the nature
of the task and problems being worked on. Weiland and uillrich identify three
basic factors which will affect the complexity of the information process
required. These are:

Task uncertainty
The greater the degree of novelty and uncertainty in the task or problem to be
faced, the greater the amount of information that has to be processed and shared
amongst those involved in the decision making. Companies and departments that work
extensively on non-routine problems or one-offs, therefore, need to develop
communication structures which allow such sharing of information. In network terms
this would require the use of decentralized structures. On the other hand, where
the problems being worked on are relatively routine, much of the information
needed will be known and information channels can then be set up. This allows the
use of a centralized network with advantages of speed and initiation of action.

The number of elements involved

The decision situation is complicated by the size of the organization, the range
of different activities involved in decision making, and the number of tasks or
products undertaken at any one time. Each of these factors is likely to require an
increase in the number and intensity of information flows.

The interdependence of decisions

In situations where are likely to be knock-on effects when decisions are made, and
then there is a need for extensive communication of information between
departments, project teams, and decision makers. A change in body styling for a
motor car, for the suspension, which has to be re-designed. This in turn, may
affect cost, or it may allow further possibilities for the designers which were
not possible with the old suspension. The complexity and nature of the system for
sharing and using information seems then to depend on the nature of the task.
Managers working in organizations where tasks are relatively stable and routine,
where there is little interdependence, need relatively simple systems for
processing information. Those who have to cope with relatively high degrees of
novelty and uncertainty in the problems they face need as much information as they
can get, together with highly developed channels of communication, so as to make
the best possible use of that information. In both situations, managers are faced
with the problem of “what kind” of information is needed and “where” it might come
form. Again this is likely to be related to the nature of the predominant or key
tasks they face.

Information needs in stable conditions: managers who operate in relatively stable

product (market environments find most of their information needs concentrated in.
the basic nature of the product or service is likely to be well established, and
will vary only in limited and predictable ways. the problems that arise tend to be
concerned with internal issues such as snags in production or processing or in the
implementation of the decision, and in monitoring effectiveness. Changes in input
conditions do not have a great impact, and therefore the amount of effort which is
put into obtaining input information can be reduced. This situation is represented
in the following figure.

Information needs under stable conditions

focus on
Informat
ion

Needs

The danger here, of course, is that companies whose operations and markets have
been stable for some considerable time may neglect to monitor such outside
conditions altogether. Then, when changes do occur, any response has to be
reactive rather than proactive, with the corresponding loss of initiative and
advantage. Even in stable situations, therefore, it will necessary to gather
information about one’s environment, in order to detect any movement away from
that stability. The number of organizations and, for that matter, the number of
managers who operate in an environment that can genuinely be said to be stable,
must clearly be declining rapidly. The ever increasing rate of technological,
economic and political change affects more and more organizations in industrial,
commercial and service fields. Information sources and systems must be adapted to
meet situations of instability and uncertainty.

Information needs in condition of uncertainty: the more decision makers are faced
with variety and variability in the problems they face, the more they require
investing in gathering information in input conditions. These information needs
are represented in the following figure:

Extra
increased
Information
information
Needs
needs

Information needs under

uncertainty

As well as this relocation of focus, uncertainty often means that “extra”

resources have to be allocated to information gathering and evaluation.
Firstly, this is because the lack of routine means that any information system has
to be flexible enough to be able to draw information forms many outside
information sources so as to meet the needs of a range of one-off decisions.
Secondly, the task of monitoring implementation effectiveness and the achievement
of objectives for a series of one-off decisions is made more difficult in such
circumstances.
Thirdly, the sheer amount of information that is available to be monitored and, in
some cases, the highly technical nature and format of that information, can mean
that the decision maker is highly dependent on other people in the organization
for its supply and for its interpretation. The more complex organizations have
become, the more they have developed specialist functions, recruiting employees
with widely different skills and experience. For instance, a company may employ
scientists, engineers and designers to keep abreast of developments in knowledge
and applications, relying on their competence and judgments in assessing which of
them might be of potential value and use to the company. The same company may rely
heavily on its sales force in monitoring customer interests and market trends. As
products and services become more sophisticated, the number of separate skills to
be managed increases, and consequently the volume of information necessary for
their successful integration goes up.
The argument here is not that increases in the volume of information are the
“unfortunate consequences” of decision making in conditions of rapid change and of
uncertainty. The establishment of adequate information sources and channels is
seen as a “necessary precondition” for effective decision making in these
conditions. There is a danger, though, that the cost of gathering information
outweighs the benefits that are gained from it.

Q7. Creativity is an inherent capability and can not be stimulated and improved.
Discuss. What in your opinion should the creative management strategy be?

Creative thinking plays a valuable role in management decision making. The

creative management strategy: the turning of potential into actual behavior which
is (relatively) highly creative is a central part of the manager’s task,
especially in the decision making situation. Such situations provide an
opportunity for the manager to create the kind of organizational climate in which
creative behavior is encouraged, leading to creative and innovative decisions and
solutions to problems. Such a climate would be characterized by:

1. the free flow of information and open access to it

2. encouragement and reward for finding, using and sharing such information and
3. rewards for the positive acceptance of change and risk taking

Using such ideas as a basis for the kind of climate which might encourage creative
problem solving and decision making, we can identify a managerial strategy for its
achievement or, at least, for its fostering and encouragement. Whilst the
development of any particular climate is not entirely within the hands of the
manager, he or she is obviously a key figure who’s actions can be particularly
influential in “seeding” the process. Certainly, management style can be very
effective in blocking or preventing creativity!
Any successful strategy for “creativity management” must be tailored to suit
particular circumstances, but it is possible to identify two key areas. These are:

• the application of control and reward systems that emphasize creativity and
associated captivities
• the development of a supportive personal style on the part of the manager

To summarize than the answer to this question will be as follow:

The acts of recognizing and formulating the problem, and the generation of a range
of possible solutions, require a creative approach which must somehow be brought
together with the more analytical processes of definition and evaluation.
Unfortunately, creativity is often diverted away form organizational goals and
purposes by structural or personal blocks, including pressures for efficiency, the
establishment of creative versus non-creative roles, variations in occupation and
in status, the process of socialization into non-creative activity, and a lack of
expectation of creativity form the majority of employees. Really creative and
innovative organizations are those which are able to use the full creative talents
of all of their employees, rather than relying on those of a few. Managers can do
a lot to encourage the development of creative behavior by adopting a supportive
personal style, and by developing reward and control systems which:

• Link rewards to task accomplishment

• Set high performance standards
• Reward cooperative activities
• Encourage adaptation and change
• Reward risk taking

A number of operational techniques have been developed for use in short term
problem solving and decision making. These rely heavily on the separation out of
judgment and evaluation from idea generation and on giving equal consideration to
all ideas that are generated.

Q8. In evaluating decision options what are the factors that may generally by
considered? Write a comprehensive note on two such factors.

• General factors to be considered when evaluating decision: the precise set

of attributes to be evaluated for each option should depend on the nature of the
decision itself. There will almost certainly be several of them, since very few
real decisions can be evaluated in terms of one attribute alone. Although there is
no “all purpose” list of attributes to be evaluated, there are some factors which
have a general importance and therefore need some further discussion. These
factors are as follows:
o The option’s “resource requirements” what resources would be needed to
implement the option, and how does this requirement match up to individual
capabilities?
o The option’s “degree of fit” with other activities: how much congruence
exists between an option and the other activities on which the organization is
currently engaged?
o The option’s “degree of risk” the likelihood and magnitude of any deviation
form the expected set of consequences of an option
o The option’s “financial consequences” the measurement and description of the
option’s financial pay-offs.
o The option’s affect on future “flexibility” the degree to which choosing an
option constrains future decisions
Of these factors, the first is different to the others, or at least will probably
be used differently. Along with the evaluation of whatever other attributes are
considered appropriate, the option’s “degree of fit” financial pay-offs, degree of
risk, and affect on future flexibility will together determine its acceptability
to the decision body. The option’s resource requirements, on the other hand,
largely determine its feasibility.
• Comprehensive note on two of such factors: the following two factors will be
discussed comprehensively:
o Resource requirements: when assessing resource requirements, the following
question should be asked:
What technical or human skills are required to implement the option?
What are the capacity requirements over the evaluation period?
What are the funding or cash requirements over the evaluation period?

Skills requirements: every decision option will need a set of skills to be present
within the organization, in order that it can be successfully implemented. If an
option requires a course of action which is very similar to the usual activities
of the organization, then it is likely that the necessary skills will already be
present. If, however, the option involves the organization in a completely novel
set of actions, then it is necessary to identify the required skills to match
these against those existing in the organization.
As an example, consider a small engineering design consultancy partnership which
has hitherto specialized in designing port facilities for developing countries.
They are approached by a national government, for whom they have worked before, to
see whether the company would be interested in bidding for the contract for a
large petrochemical plant and docks complex. The contract involves not only the
engineering and design of the complex, but also managing the construction itself.
The job would be by far the biggest the company had ever undertaken. It would
involve hiring more engineers, and designers, and also getting involved in project
management for the first time.
The first consideration the company will face is, do they have sufficient
expertise within the company to cope with this kind of work? The first problem
lies in identifying the type of skills necessary. As one of company’s managers
puts it “…it’s not just a mater of hiring the expertise… it’s knowing what it is
that you want to hire”. After consideration, the company decides to classify the
expertise needed for the whole job by the skills necessary in the basic
engineering, detailed design and project management of both petrochemical plant
work and docks facility work. The following figure shows the results of their
investigation into the existing skills within the company. It also illustrates
that the company is short of skills in three areas: project management, both in
docks and petrochemical plant construction and basic petrochemical plant
engineering. The company must now decide how it fills these gaps in its expertise.
Generally, an organization can either develop its existing personnel, or hire new
people. In this case, as we shall see, the expansion in aggregate workforce, which
would be necessary to accept the contract, probably means that hiring, rather than
development, would be more appropriate.

Basic engineering detailed design

project management

Docks
Facilities

Petrochemical plant

Expertise requirements for petrochemical/docks complex

Capacity requirements:
Determining capacity requirements involves detailing the quantity of resources-
people, facilities, space, materials, etc. - required for each option. The number
of people required and facilities requirements will depend on the amount of work
involved in implementing the option. Unfortunately, there is no convenient
universal measure of work, so the time taken to do the work is often used as a
proxy measure. Because of this, the preliminaries to establishing capacity
requirements often involve estimating the time necessary to perform whatever tasks
are involved in the option. In the case of the engineering consultancy company,
their task is to assess the amount of work which is likely to be involved in the
proposed project. They do this by asking their engineers to estimate the amount of
basic engineering and detailed design work necessary for each part of the job.
Work in this case is estimated in terms of “person/weeks” of effort. The company
knows the date by which the total project would need to be finished, and so can
superimpose the aggregate work load for the proposed project on to its existing
work environment.
Financial requirements: perhaps the most important resources requirement question
is, “how much cash would the option require, and can we afford it?” for some
operational decisions this could mean simply examining a one-off cost, such as the
purchase price of a machine. Other, more strategic decisions may need an
examination of the effect of each option on the case requirements of the whole
organization. In this of decision, it is often worth simulating the organization’s
cash flow over the period of time being considered. This can be done by computing
the total inflow of cash over time as it occurs, and subtracting from it the total
outflow of cash as it occurs. This then leaves the net funding requirements for
the option.
For example, the engineering consultants first of all find out the proposed
schedule of payments form the customers as the work proceeds. They then detail and
cost the extra personnel, computing facilities, and office space as these costs
occur over the project period.
The degree of change in resource requirements:
We have considered the resource requirements of a decision option in terms of the
skills necessary, the aggregate level of operating capacity necessary, and the
funding requirements. Any one of these could render and option infeasible. If an
organization does not have the skills to implement an option, nor is it able to
recruit such skills, then the option cannot be considered feasible. If the
operating capacity required by an option exceeds available capacity, it is again
infeasible. Similarly, if the funds required to implement the option exceed the
borrowing capability of the organization, then we cannot pursue that particular
option. However, even if all these resource requirements can quite feasibly be
obtained individually by the organization, the degree of change in the total
resource position of the company might itself be infeasible. So, in the example we
have been using throughout, the engineering consultancy company might be able to
obtain all the required resources individually. They believe that they can recruit
the engineering and management expertise. They can also obtain this expertise in
sufficient quantity from the labor market. Furthermore, they believe that they
could fund the project until it broke even. Yet, the company may still regard the
project as infeasible. It may decide that an expansion of its activities, which
more than doubled in size in six months, would put too great a strain on its own
capability of organizing itself. It may want to grow, but may not be able to
manage growth at such a high rate. Thus, it is not the absolute level of resource
requirements which has rendered the project infeasible. Rather, it is the rate of
change in resource requirements which is regarded as infeasible.

o Degree of risk: the degree of risk involved in any decision option must be
evaluated. Risk can be satisfactorily measured by means of the coefficient of
variation of the distribution of possible outcomes for each option. The risk of
each option can then be compared both with each other, on a risk/return
comparison, and with the organization’s existing portfolio of risk bearing
activities.
Evaluating risk: the risk inherent in any decision option can be as a result of
the decision maker’s inability to product or estimate:
The internal effects of an option within the organization, or
The environmental conditions, prevailing after the decision is taken, or
The reaction of other bodies within the environment to the decision.
Whatever its source, risk is conveniently described by the range of possible
outcomes. It is discussed that we use the “outcome balance” to illustrate risk
where only a limited number of outcomes were possible, and a probability
distribution to describe risk where outcomes were measured on a continuous scale.
Yet, often these measures of risk are more sophisticated than crude preliminary
evaluation warrants. If so, then perhaps the simplest, but the most powerful
method of evaluating risk, is just to assess the worst possible outcome form the
option. Then we can ask the question, “would we be prepared to accept such a
consequence?” this is sometimes called assessing the “downside” risk of an option.
So, if the outcomes of two options A and B are shown in the following figure, then
even though option B might be preferred on the basis of expected payoff, its
downside risk could be too great for the company to bear.
Option A
Option
B
 Worst worst expected expected
Outcome outcome outcome outcome
Option B option A option A option B

Outcome distributions for two options

Generally, though, the most useful measure of the risk of an option is the
dispersion or spread of its possible outcomes, and the most convenient measure of
dispersion is standard deviation. But this alone is inadequate for evaluation. To
say that one option has a standard deviation of $100 and another one of $1000,
means nothing without knowing each option’s expected outcome as well. The standard
deviation of $100 could apply to an option which had an expected pay-off of $10,
and was therefore a risky option, whereas the standard deviation of $1000 could
apply to an option whose expected pay-off was $1million. The most satisfactory
method of expressing the spread of consequences for evaluation purposes is as a
proportion of the expected pay-off.

The most common form of such a measure is the coefficient of variation (cover) of
a distribution where,
Standard deviation
Cover = ---------------------------

Mean
Any option involving risk can be evaluated in terms of its expected pay-off and
its risk, represented by the cover of the distribution of its possible outcomes.
The below figure shows four decision options, A, B, X, and Y, plotted on a graph
with the coefficient of variation and the expected pay-off as the axes.

Expected payoff

The efficient frontier for payoff and risk

The top left-hand part of the graph represents the undesirable area where options
have low expected pay-offs, yet run high risks. The bottom right-hand part of the
graph includes the extremely attractive options which give a high pay-off, but
involve little risk. Somewhere, between these two extremes, will lie a line
representing combinations of risk and pay-off which are the best that can be hoped
for in a particular decision. Options X and Y are contained in this set- sometimes
called the efficient frontier. Any option which is positioned on the line is said
to dominate any other option which lies towards the top left-hand part of the
graph. Os option X dominates option A (X gives a better pay-off for the same risk)
and option Y dominates option B (Y has a lower risk for the name pay-off).
The portfolio approach to risk: the above figure allows managers to asses the
risks associated with an option, either in isolation, or by comparing its
risk/return characteristics against other options. What it cannot do is indicate
the combined risk/return position of a number of activities taken together. It
follows, then, that neither can it indicate the influence of including a further
option on the total risk/return position of the organization. Yet, evaluating risk
in the context of the other activities of the organization is necessary, since it
will often determine the company’s attitude to risk at any point in time. An
organization which already has several high risk projects might not want to take
on another. Conversely, another organization with safe but low return investments
might look more favorably on the same risky investment. Expressed in the language
of the financial investor, the basis of evaluation should be the total portfolio o
fan organization’s investment.
A portfolio used in this sense, consists of several activities projects,
securities or investments for which expected returns and their associated risks
may be estimated. The expected return from the portfolio is simply the sum of the
expected returns from the individual activities. The total portfolio’s degree of
risk, however, will depend on three factors:

The degree of risk of each activity in the portfolio

The amount invested in each activity
The degree of correlation of connection between the activities

The first two factors are intuitively obvious, but the third needs some
explanation.
Suppose two activities are subject in the same way to exactly the same set of
uncontrollable factors. If the pay-off from one activity declines, then so will
the pay-off from the other-both eggs will be in the same basket. But, if the
uncontrollable factors in the decision influence the two activities in opposite
directions, then a reduction in the pay-off from one activity will, be accompanied
by an increase in the pay-off from the other. So the effect that any additional
investment has on the hazard ness of the group of investment will depend on
whether the risk derives from the same set of uncontrollable factors in the same
way, that is, the extent to which the risks from investments are correlated.

The nature of the correlation between two investments can range from:
Perfect positive correlation-if the uncontrollable factors cause an increase
in the pay-off from one investment, there will certainly be an increase from the
pay-off of the other. Likewise, a decrease in the pay-off from one investment will
mean a decrease in the pay-off from the other.
Through
Totally uncorrelated-increase or decrease in pay-off from one investment
adds nothing to our knowledge as to whether the pay-off from the other will
increase, decrease or remain unchanged.
To
Perfect negative correlation-if the uncontrollable factors cause an increase
in the pay-off from one investment there will necessarily be a decrease in the
pay-off from the other and vice-versa.
Adding further investments which are strongly positively correlated to the
existing group of activities will increase the risk of the total portfolio. But
including new investments which are negatively correlated will decrease the
portfolio’s risk. For example, suppose a company is already investing heavily in
railway transportation equipment. The company knows that the government is
considering a large capital investment program in the rail network, but has not
yet decided. The company is faced with deciding between two product development
options. One involves developing a smaller engine which would power large freight
trucks. The two options have identical risk return characteristics. That is, if
they were both marked on the figure (efficient frontier for payoff and risk), they
would occupy the same position on the graph. However, when added to the other
activities of the company, they will have quite different effects on the hazard
ness of the company’s activities, taken as a whole. The first option-developing
the locomotive engine-is subject to very similar uncontrollable factors as the
other activities of the company. If the governments not go ahead with the
investment program, then all railway related work will flourish; if it does not,
it will add to the hazard ness of the total portfolio. The second option-
developing the truck engine-is not subject to the same set of uncontrollable
factors as the other activities of the company. Should the government not go ahead
with the capital investment program, then the market for truck engines will not be
adversely affected. It might even benefit, since freight will be diverted fro the
railway to the trucking companies. Thus, adding the second option to the
activities of the company would decrease the risk of the company’s total set of
activities. Of course, there may be other considerations, such as having to set up
a different set of marketing activities, if the second option is adopted. But the
example does illustrate that risk can be more meaningfully assessed in the context
of the other activities of the company.

Q9. Develop a cause effect diagram for a stock control situation and solve the
following problems using an appropriate mathematical model developed in chapter-6
of the Book by Cooke & Slack. Demand of a product for a firm is 1200 units per
year. Find total ordering costs per year for the firm subject to the conditions
that the company decides to place two orders of 600 units each in the year and
that the cost of placing an order in Rs.25/-

• Cause effect diagram for a stock control situation: before developing the
cause effect diagram let see the simplest method of indicating that some
relationship exists between two factors within a decision is to show the direction
of influence by arrows on a cause-effect diagram. If, for example, it is thought
that price and promotion expenditure influence the total demand for a product, we
could show this as in the following figure.

e.g.

Simple cost effect relationship

These diagrams can be drawn by working backwards from the endogenous factors,
specifying the influencing factors, until the exogenous variables are reached. The
next figure illustrates this process for one part of the stock control decision.
 Cause-effect model describing influences on total ordering cost.

The endogenous factor “total ordering cost” will be determined by the

organizational cost of making an order together with “order frequency”. The order
frequency is in its turn a function of “demand rate” and “order quantity”, both
exogenous variables.
Following this procedure of tracing the reverse influences, a model can gradually
be built up of the interactions between the factors in a decision. The following
figure shows a fuller model of stock control decision.

A cause-effect model of the stock control decision

As well as exogenous and endogenous variables, there are intermediate variables in

this model, namely “order frequency”, “average stock level” and “maximum stock
level”. These variables are influenced by the exogenous factors, and in turn
influence the endogenous factors, but are internal to the model. They are
sometimes referred to as state variables.

Cause-effect models are a useful step in understanding a decision. Their major

disadvantage is that they are not capable of describing the nature of the
relationship between decision factors in any detailed manner. To do this, we need
the more formal symbolic notation of mathematics. Cause-effect models, however,
are often used as a preliminary step towards the development of more powerful
symbolic models.

• By use of appropriate mathematical model (developed in chapter-6 of the Book

by Cooke and Slack) solution of the following problems
Demand of a product for a firm is 1200 units per year. Find total ordering costs
per year for the firm subject to the conditions that the company decides to place
two orders of 600 units each in the year and that the cost of placing an order in
Rs.25/-

This is the mathematical model developed by Cooke and Slack;

R
Tº = Cº X --------------
Q

Now in the given question there is:

T = total ordering cost per year (to be found)?

C = organizational cost of placing an order = Rs.25/
R = demand per time period = 1200 units
Q = quantity = 600units

25X1200
T = ---------------- = 50, so T = 50
600

Q10. A firm is considering introducing a new product into the market. The
company’s competitor is also considering doing so. The following matrix gives the
cost increased by the firm in its sales promotion efforts:

Competitor action
Company’s s1= new product
Strategy s2= no new product

Find the value of perfect information also convert the above matrix
into a decision tree.

Competitor action
Company’s s1= new product
Strategy s2= no new product

Find the value of perfect information also convert the above matrix
into a decision tree.

This question must have two parts.

• To find the value of perfect information and to convert the above matrix
into a decision tree.

A decision matrix is a method of meddling relatively straightforward decision

under uncertainty in such way as to make explicit the option open to the decision
taker, the states of the nature pertinent to the decision, and the decision rule
used to choose between options. The following example will illustrate how such a
matrix can be used.

Option S1
S2
S3
I
I
I
I
Sm State of nature
N1 N2 N3 ------------------------Nn
O11 O12 O13 -----------------------------------O1n
O21 O22 O23------------------------------------02n
O31 032 033---------------------------------

0m1 Om2 Om3 -----------------------Omn

For the questions:

Company’s Strategy
s1= new product
s2= no new product

Summary of Decision Making:-

A decision is an allocation of resources. It can be likened to writing a check and
delivering it to the payee. It is irrevocable, except that a new decision may
reverse it.
In the same way that a check is signed by the account owner, a decision is made by
the decision maker. The decision maker is one who has authority over the resources
being allocated. Presumably, he (or she) makes the decision in order to further
some objective, which is what he hopes to achieve by allocating the resources.
Key distinction: decision vs. objective.
Why decision is important: The decision might not succeed in achieving the
objective. One might spend the funds and yet, for any number of reasons, achieve
no acceleration at all.
The decision maker will make decisions consistent with his values, which are those
things that are important to him, especially those that are relevant to this
decision. A common value is economic, according to which the decision maker will
attempt to increase his wealth. Others might be personal, such as happiness or
security, or social, such as fairness.
The decision maker might set a goal for his decision, which is a specific degree
of satisfaction of a given objective. For example, the objective of the decision
might be to increase wealth, and the goal might be to make a million dollars.
A decision maker might employ decision analysis, which is a structured way of
thinking about how the action taken in the current decision would lead to a
result. In doing this, one distinguishes three features of the situation: the
decision to be made, the chance and unknown events which can affect the result,
and the result itself. Decision analysis then constructs models, logical and
perhaps even mathematical representations of the relationships within and between
these three features of the decision situation. The models then allow the decision
maker to estimate the possible implications of each course of action that he might
take, so that he can better understand the relationship between his actions and
his objectives.
The three features of a decision situation
At the time of the decision, the decision maker has available to him at least two
alternatives, which are the courses of action that he might take. When he chooses
an alternative and commits to it, he has made the decision and then uncertainties
come into play. These are those uncontrollable elements that we sometimes call
luck. Different alternatives that the decision maker might choose might subject
him to different uncertainties, but in every case the alternatives combine with
the uncertainties to produce the outcome. The outcome is the result of the
decision situation and is measured on the scale of the decision maker's values.
Since the outcome is the result not only of the chosen alternative but also of the
uncertainties, it is itself an uncertainty. For example, an objective might be to
increase wealth, but any alternative intended to lead to that outcome might lead
instead to poverty.
Key distinction: good decision vs. good outcome
Example: Someone who buys a lottery ticket and wins the lottery obtains a good
outcome. Yet, the decision to buy the lottery ticket may or may not have been a
good decision.
Why it's important: A bad decision may lead to a good outcome and conversely a
good decision may lead to a bad outcome. The quality of a decision must be
evaluated on the basis of the decision maker's alternatives, information, values,
and logic at the time the decision was made.

Types of decisions
A simple decision is one in which there is only one decision to be made, even
though there might be many alternatives. An example of this is the very limited
consideration of purchasing collision insurance for an automobile. The decision
maker might be interested only in comparing three alternatives, such as no
insurance, insurance with $100 deductible, or a policy with $500 deductible. If at
the same time we attempt to add another decision, we have created a problem of
strategy, which is a situation in which several decisions are to be made at the
same time. Each of the decisions in the strategy will have different alternatives,
and the decision maker will attempt to choose a coherent combination of
alternatives. For example, if the decision maker is considering whether to buy a
new car or keep his 10-year old one, and at the same time he is considering the
insurance decision, he might compare only two candidate strategies: keep the old
car and not buy collision insurance, or buy a new car and buy some level of
collision insurance.
Key distinction: strategy vs. goal
Example: Launching two new products a year is a goal. Investing in additional
personnel, while at the same time stopping the funding of some stalled projects,
is a strategy intended to lead to that goal.
Why it's important: Strategy describes a collection of actions that the decision
maker takes. The outcome of the actions is uncertain, but one of the possible
outcomes is attainment of that goal.
An important special case of a strategy problem is the portfolio problem, in which
the various decisions faced in the strategy are of a similar nature, and the
decision maker does not have sufficient resources for funding all combinations of
alternatives. An example is an investment portfolio, in which the decision maker
is aware of a good number of investments he would like to make, but is unable to
afford all of them. Especially in situations like this example, people sometimes
address the problem as one of performing a prioritization of the various
opportunities. If one opportunity is prioritized higher than another, then, in the
case of limited resources, the decision maker would prefer to invest in the former
than in the latter.
Key distinction: decision vs. prioritization
Example: To assert that one would rather fund development project A than
development project B, and project B than project C, is a prioritization. Actually
funding project A is a decision.
Why it's important: A prioritization might be an intermediate step en route to a
decision, and one might even use a prioritization as a tool to aid in a decision.
Some decisions offer the opportunity to adopt a particular type of alternative
called an option. An option is an alternative that permits a future decision
following revelation of information. All options are alternatives, but not all
alternatives are options.
Key distinction: alternative vs. option
Example: To allocate the resources needed to drill an oil well is an alternative.
To pay money now to reserve the right to drill after geological testing is done is
an alternative that is also an option.
Why it's important: Options, as an important type of alternatives, have the
potential of adding value to a decision situation. A wise decision maker is alert
to that possibility, and actively searches for valuable options.
Uncertainties
Decision making would be easy if we could predict reliably what outcome would
follow from the selection of which alternative. To this end decision makers use
forecasts, or predictions of the future, to guide their choice of alternatives.
They attempt to predict the outcome, on all values of interest to the decision
maker, associated with each alternative that might be chosen. For example, the
decision maker may use forecasts of market size, market share, prices and
production costs in order to predict the profits associated with a new product.
When the quantities forecasted are uncertain, forecasters can describe their
uncertainty about these uncertainties using a probability distribution. A
probability distribution is a mathematical form for capturing what we know about
uncertainties, and how confident we are of what we know. A probability
distribution could record, for example, that the decision maker (or his designated
expert) believes that there is a 30 percent chance of a product having less than
10 percent market share 2 years after its launch, and a 60 percent chance of the
product having less than a 30 percent market share. After assigning probability
distributions to each uncertainty, one can examine the uncertainty associated with
the outcomes of the decision situation. For example, given probability
distributions for price, market share, market size, cost, etc., one can determine
a probability distribution for profits.
Key distinction: sensitivity of the decision vs. sensitivity of the outcome
Example: The profitability of the new product we are developing is sensitive to
the market share we achieve. However it may be the case that, as long as we
achieve a market share within the range of our 10-50-90s, we would still choose to
develop the product. In this case, our development decision is not sensitive to
market share.
Why it's important: Everyone wants the outcome to be as good as possible, and in
that sense might be interested in knowing to what uncertainties the outcome is
sensitive. However, if one is interested in achieving clarity of action, as
opposed to predicting the future, one need only be concerned about those
uncertainties which would change the decision if we could know in advance how they
will turn out.
Outcomes and values
We consider decisions carefully because we care about the outcomes, whose goodness
we measure against our values. The most commonly studied and discussed value is
economic value, which we assume to be measured in dollars. Given a stream of cash
flows over time, people often use the NPV (net present value) to describe the
current value of future cash flows. The NPV is a calculation performed on cash
flows over time, allowing one to condense that stream of cash flows into a single
number. Decision makers often use the NPV of profits or cash flows as a measure of
the value of a project. The NPV calculation makes use of the discount rate, which
has several interpretations, but can be thought of as a factor applied to future
income to reflect the fact that it is less valuable than income received now. It
also reduces the impact of future costs, since costs that can be deferred into the
future are preferable to those that must be paid now.
In thinking about the value of a scenario, it is helpful to distinguish between
direct and indirect values. Direct values are cash flows directly related to a
project, for example, the profits resulting from the manufacture and sales of a
new product. Indirect values are things that the decision maker values that are
not likely to show up in accounting statements. For example, a decision maker may
experience "pride" or "goodwill" in producing some products and value such an
outcome beyond its direct economic value. These indirect values could include
costs associated with, for example, laying off workers, or negative impacts on
reputation. While some of these indirect values are intangible, others are
tangible but difficult to put a number on. For example, increases in "goodwill"
associated with one product may result in increased sales of other products though
this effect may be hard to estimate.
Key distinction: direct vs. indirect values
Example: The direct value of a new product might be the current value of the
future cash flow associated with the manufacture and sale of the product. The
indirect value might include effects like increased goodwill or strategic
advantage that come from having the product but are not directly associated with
the manufacture and sale of the product.
Why it's important: Typically, maximizing the NPV associated with a product is one
of the decision maker's objectives. The decision maker might, however, assign
value in excess of a cash flow based NPV, and that increment might be for what is
sometimes termed "strategic value." These indirect sources of value must be
included in the NPVs, if one is to think appropriately about values. It is better
to put a rough value on these indirect sources (so it can be discussed and
evaluated) than to assume they are worth precisely zero.
Often the decision maker will have values other than economic, and in this case he
will have to make trade-offs between values, which are judgments about how much he
is willing to sacrifice on one value in order to receive more of another. For
example, in a personal context, a decision maker may need to make a trade off
between hours spent at work (something he may wish to minimize so as to maximize
the time he spends with his family) and the amount of income he receives.
Risk
As decision makers consider the possible outcomes of their decisions they often
think about risk, which is the possibility of an undesirable result. In discussing
this, it is convenient to consider the notion of a risk-neutral decision maker.
Someone who is risk neutral is willing to play the long-run odds when making
decisions, and will evaluate alternatives according to their expected values.
Decisions where risk aversion holds can be analyzed using a utility function,
which encodes a decision maker's attitude toward risk taking in mathematical form
by relating the decision maker's satisfaction with the outcome (or "utility"
associated with the outcome) to the monetary value of the outcome itself. These
utility functions can be indexed by their risk tolerance, which is a technical
term describing the decision maker's attitude toward risk. The greater the
decision maker's risk tolerance, the closer the certain equivalent of a gamble
will be to its expected value. The risk tolerance is a mathematical quantity that
describes the decision maker's attitude towards risk; it is not the maximum amount
that the decision maker can afford to lose, though generally decision makers with
greater wealth will have larger risk tolerances. The decision maker needs to think
about his risk tolerance only in cases where the stakes are large and he is not
comfortable basing his decision on the expected monetary value.
END

References:

Community Decision Making for Social Welfare

By Robert S. Magill

Decision Making
By Sarojini Balachandran

Primer on Decision Making: How Decisions Happen

By James G. March

Winning Decisions: Getting It Right the First Time

By J. Edward Russo

Smart Choices: A Practical Guide to Making Better Decisions

By John S. Hammond

Thinking and Deciding -3rd Edition

By Jonathan Baron

Games, Strategies, and Managers: How Managers Can Use Game Theory to Make Better
Business Decisions
By John McMillan

Judgment in Managerial Decision Making (5th Edition)

By Max H. Bazerman

Value-Focused Thinking: A Path to Creative Decision-making

By Ralph L

Dr M.Bashaar Ulfat