Decision Making(Process & Technique)

DECISION MAKING

Process & Techniques RESEARCH METHODOLOGY MBM 302 SUBMITED BY

RUCHI GOYAL MBA 3RD SEM

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TABLE OF CONTENT

S TOPICS .NO 1 DESION MAKING MEANING 2 3

4 5 6 7 8 9

KINDS OF DECISIONS COMPONENTS OF DECISION MAKING THE EFFECTS OF QUANTITY ON DECISION MAKING DECISION MAKING CONCEPTS APPROACHES TO DECISION MAKING DECISION MAKING STRATEGIES DECISION MAKING PROCESS DECISION MAKING TECHNIQUES

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LIST OF PICTURES S.NO

Pic 1 Table 1

TOPICS DECISION MAKING CONCEPTS DECISION MAKING STRATEGIES

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DECISION MAKING PROCESS DECISION MAKING TECHNIQUES

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TOPIC:

DECISION MAKING - (Process & Techniques)

OBJECTIVES:  TO UNDERSTAND NEED OF DECISION MAKING  TO UNDERSTAND DECSION MAKING PROCESS  TO UNDERSTAND ITS TECHNIQUE

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DECISION MAKING

Decision making is the study of identifying and choosing alternatives based on the values and preferences of the decision maker. Making a decision implies that there are alternative choices to be considered, and in such a case we want not only to identify as many of these alternatives as possible but to choose the one that (1) has the highest probability of success or effectiveness and (2) best fits with our goals, desires, lifestyle, values, and so on.

Decision making is the process of sufficiently reducing uncertainty and doubt about alternatives to allow a reasonable choice to be made from among them. This definition stresses the information-gathering function of decision making. It should be noted here that uncertainty is reduced rather than eliminated. Very few decisions are made with absolute certainty because complete knowledge about all the alternatives is seldom possible. Thus, every decision involves a certain amount of risk.

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KINDS OF DECISIONS There are several basic kinds of decisions:

1. Decisions whether. This is the yes/no, either/or decision that must be made before we proceed with the selection of an alternative. Should I buy a new TV? Should I travel this summer? Decisions whether are made by weighing reasons pro and con. The PMI technique discussed in the next chapter is ideal for this kind of decision. It is important to be aware of having made a decision whether, since too often we assume that decision making begins with the identification of alternatives, assuming that the decision to choose one has already been made. 2. Decisions which. These decisions involve a choice of one or more alternatives from among a set of possibilities, the choice being based on how well each alternative measures up to a set of predefined criteria. 3. Contingent decisions. These are decisions that have been made but put on hold until some condition is met. For example, I have decided to buy that car if I can get it for the right price; I have decided to write that article if I can work the necessary time for it into my schedule. OR even, We'll take the route through the valley if we can control the ridge and if we detect no enemy activity to the north. Most people carry around a set of already made, contingent decisions, just waiting for the right conditions or opportunity to arise. Time, energy, price, availability, opportunity, encouragement--all these factors can figure into the necessary conditions that need to be met before we can act on our decision. Page 5 of 21

THE COMPONENTS OF DECISION MAKING The Decision Environment: Every decision is made within a decision environment, which is defined as the collection of information, alternatives, values, and preferences available at the time of the decision. An ideal decision environment would include all possible information, all of it accurate, and every possible alternative. However, both information and alternatives are constrained because the time and effort to gain information or identify alternatives are limited. The time constraint simply means that a decision must be made by a certain time. The effort constraint reflects the limits of manpower, money, and priorities. (You wouldn't want to spend three hours and half a tank of gas trying to find the very best parking place at the mall.) Since decisions must be made within this constrained environment, we can say that the major challenge of decision making is uncertainty, and a major goal of decision analysis is to reduce uncertainty. We can almost never have all information needed to make a decision with certainty, so most decisions involve an undeniable amount of risk. The fact that decisions must be made within a limiting decision environment suggests two things. First, it explains why hindsight is so much more accurate and better at making decisions that foresight. As time passes, the decision environment continues to grow and expand. New information and new alternatives appear--even after the decision must be made. Armed with new information after the fact, the hind sighters can many times look back and make a much better decision than the original maker, because the decision environment has continued to expand. The second thing suggested by the decision-within-an-environment idea follows from the above point. Since the decision environment continues to expand as time passes, it is often advisable to put off making a decision until close to the deadline. Information and alternatives continue to grow as time passes, so to have access to the most information and to the best alternatives, do not make the decision too soon. Now, since we are dealing with real life, it is obvious that some alternatives might no longer be available if too much time Page 6 of 21

passes; that is a tension we have to work with, a tension that helps to shape the cutoff date for the decision. Delaying a decision as long as reasonably possible, then, provides three benefits: 1. The decision environment will be larger, providing more information. 2. There is also time for more thoughtful and extended analysis. 3. New alternatives might be recognized or created. 4. The decision maker's preferences might change. With further thought, wisdom, and maturity, you may decide not to buy car X and instead to buy car Y.

THE EFFECTS OF QUANTITY ON DECISION MAKING Many decision makers have a tendency to seek more information than required to make a good decision. When too much information is sought and obtained, one or more of several problems can arise.  A delay in the decision occurs because of the time required to obtain and process the extra information. This delay could impair the effectiveness of the decision or solution.  Information overload will occur. In this state, so much information is available that decision-making ability actually declines because the information in its entirety can no longer be managed or assessed appropriately. A major problem caused by information overload is forgetfulness. When too much information is taken into memory, especially in a short period of time, some of the information (often that received early on) will be pushed out. The example is sometimes given of the man who spent the day at an information-heavy seminar. At the end of the day, he was not only unable to remember the first half of the seminar but he had also forgotten where he parked his car that morning.  Selective use of the information will occur. That is, the decision maker will choose from among all the information available only those facts which support a preconceived solution or position.  Mental fatigue occurs, which results in slower work or poor quality work.  Decision fatigue occurs, where the decision maker tires of making decisions. Often the result is fast, careless decisions or even decision paralysis--no decisions are made at all. Page 7 of 21

The quantity of information that can be processed by the human mind is limited. Unless information is consciously selected, processing will be biased toward the first part of the information received. After that, the mind tires and begins to ignore subsequent information or forget earlier information.

CONCEPTS

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1. Information:This is knowledge about the decision, the effects of its alternatives, the probability of each alternative, and so forth. A major point to make here is that while substantial information is desirable, the statement that "the more information, the better" is not true. Too much information can actually reduce the quality of a decision. 2. Alternatives.: These are the possibilities one has to choose from. Alternatives can be identified (that is, searched for and located) or even developed (created where they did not previously exist). Merely searching for preexisting alternatives will result in less effective decision making. 3. Criteria: These are the characteristics or requirements that each alternative must possess to a greater or lesser extent. Usually the alternatives are rated on how well they possess each criterion. For example, alternative Toyota ranks an 8 on the criterion of economy, while alternative Buick ranks a 6 on the same criterion. 4. Goals: What is it you want to accomplish? Strangely enough, many decision makers collect a bunch of alternatives (say cars to buy or people to marry) and then ask, "Which should I choose?" without thinking first of what their goals are, what overall objective they want to achieve. A component of goal identification should be included in every instance of decision analysis. 5. Value: Value refers to how desirable a particular outcome is, the value of the alternative, whether in dollars, satisfaction, or other benefit. 6. Preferences: These reflect the philosophy and moral hierarchy of the decision maker. We could say that they are the decision maker's "values," but that might be confusing with the other use of the word, above. If we could use that word here, we would say that personal values dictate preferences. Some people prefer excitement to calmness, certainty to risk, efficiency to esthetics, quality to quantity, and so on. Thus, when one person chooses to ride the wildest roller coaster in the park and another chooses a mild ride, both may be making good decisions, if based on their individual preferences. 7. Decision Quality: This is a rating of whether a decision is good or bad. A good decision is a logical one based on the available information and reflecting the preferences of the decision maker. The important concept to grasp here is that the quality of a decision is not related to its outcome: a good decision can have either a good or a bad outcome. Similarly, a bad decision (one not based on adequate information or not reflecting the decision maker's preferences) can still have a good outcome. Good decisions that result in bad outcomes should thus not because for guilt or recrimination. If you decide to take the scenic route based on what you know of the road (reasonably safe, not heavily traveled) and your preferences (minimal risk, prefer scenery Page 9 of 21

over early arrival), then your decision is a good one, even though you might happen to get in an accident, or have a flat tire in the middle of nowhere. It is not justified to say, "Well, this was a bad decision." In judging the quality of a decision, in addition to the concerns of logic, use of information and alternatives, three other considerations come into play: a. The decision must meet the stated objectives most thoroughly and completely.

How well does the alternative chosen meet the goals identified? b. The decision must meet the stated objectives most efficiently, with concern over

cost, energy, side effects. Are there negative consequences to the alternative that make that choice less desirable? We sometimes overlook this consideration in our search for thrills. c. The decision must take into account valuable byproducts or indirect advantages. A new employee candidate may also have extra abilities not directly related to the job but valuable to the company nonetheless. These should be taken into account.

APPROACHES TO DECISION MAKING: There are two major approaches to decision making in an organization, the authoritarian method in which an executive figure makes a decision for the group and the group method in which the group decides what to do.

1. Authoritarian. The manager makes the decision based on the knowledge he can gather. He then must explain the decision to the group and gain their acceptance of it. In some studies, the time breakdown for a typical operating decision is something like this: make decision, 5 min.; explain decision, 30 min.; gain acceptance, 30 min. 2. Group. The group shares ideas and analyses, and agrees upon a decision to implement. Studies show that the group often has values, feelings, and reactions quite different from those the manager supposes they have. No one knows the group and its tastes and preferences as well as the group itself. And, interestingly, the time breakdown is something like this: group makes decision, 30 min.; explain decision, 0 min.; gain acceptance, 0 min. Clearly, just from an efficiency standpoint, group decision making is better. More than this, it has been shown many times that people prefer to implement the ideas they themselves think of. They will work harder and more energetically to implement their own idea than Page 10 of 21

they would to implement an idea imposed on them by others. We all have a love for our own ideas and solutions, and we will always work harder on a solution supported by our own vision and our own ego than we will on a solution we have little creative involvement with. There are two types of group decision making sessions: a. Free discussion in this the problem is simply put on the table for the group to talk about. For example, Joe has been offered a job change from shift supervisor to maintenance foreman. Should he take the job? b. Developmental discussion or structured discussion in this the problem is broken down into steps, smaller parts with specific goals. For example, instead of asking generally whether Joe should take the job, the group works on sub questions: What are Joe's skills? What skills does the new job require? How does Joe rate on each of the skills required? Notice that these questions seek specific information rather than more general impressionistic opinions. Developmental discussion (1) insures systematic coverage of a topic and (2) insures that all members of the group are talking about the same aspect of the problem at the same time.

DECISION MAKING STRATEGIES There are often many solutions to a given problem, and the decision maker's task is to choose one of them. The task of choosing can be as simple or as complex as the importance of the decision warrants, and the number and quality of alternatives can also be adjusted according to importance, time, and resources and so on. There are several strategies used for choosing. Among them are the following:

1. Optimizing:

This is the strategy of choosing the best possible solution to the problem, discovering as many alternatives as possible and choosing the very best. How thoroughly optimizing can be done is dependent on A. importance of the problem B. time available for solving it C. cost involved with alternative solutions D. availability of resources, knowledge E. personal psychology, values Page 11 of 21

2. Satisficing:

3. Maximax:

4. Maximin:

In this strategy, the first satisfactory alternative is chosen rather than the best alternative. If you are very hungry, you might choose to stop at the first decent looking restaurant in the next town rather than attempting to choose the best restaurant from among all (the optimizing strategy). The word satisficing was coined by combining satisfactory and sufficient. For many small decisions, such as where to park, what to drink, which pen to use, which tie to wear, and so on, the satisficing strategy is perfect. This stands for "maximize the maximums." This strategy focuses on evaluating and then choosing the alternatives based on their maximum possible payoff. This is sometimes described as the strategy of the optimist, because favorable outcomes and high potentials are the areas of concern. It is a good strategy for use when risk taking is most acceptable, when the go-for-broke philosophy is reigning freely. This stands for "maximize the minimums." In this strategy, that of the pessimist, the worst possible outcome of each decision is considered and the decision with the highest minimum is chosen. The Maximin orientation is good when the consequences of a failed decision are particularly harmful or undesirable. Maximin concentrates on the salvage value of a decision, or of the guaranteed return of the decision. It's the philosophy behind the saying, "A bird in the hand is worth two in the bush." Table 1

THE DECISION MAKING PROCESS

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DECISION MAKING TECHNIQUES

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GRID ANALYSIS Grid Analysis (also known as Decision Matrix Analysis, Pugh Matrix Analysis or MAUT, which stands for Multi-Attribute Utility Theory) is a useful technique to use for making a decision. It is particularly powerful where you have a number of good alternatives to choose from, and many different factors to take into account. STEPS: 1. Lay out your options as rows on a table. 2. Set up the columns to show your factors. 3. Allocate weights to show the importance of each of these factors. Score each choice for each factor using numbers from 0 (poor) to 5 (very good). 4. Multiply each score by the weight of the factor, to show its contribution to the overall selection. 5. Finally add up the total scores for each option. Select the highest scoring option.

PAIRED COMPARISON Paired Comparison Analysis helps you to work out the importance of a number of options relative to each other. It is particularly useful where you do not have objective data to base this on. This makes it easy to choose the most important problem to solve, or select the solution that will give you the greatest advantage. Paired Comparison Analysis helps you to set priorities where there are conflicting demands on your resources. It is also an ideal tool for comparing "apples with oranges" – completely different options. STEPS: 1. List the options you will compare. Assign a letter to each option.

2. Mark the options as row and column headings on the worksheet. 3. Note that the cells on the table where you will be comparing an option with itself have been blocked out - there will never be a difference in these cells! 4. The cells on the table where you will be duplicating a comparison are also blocked out. 5. Within the remaining cells compare the option in the row with the one in the column. For each cell, decide which of the two options is more important. Write down the letter of the more important option in the cell, and score the difference in importance from 0 (no difference) to 3 (major difference). 6. Finally, consolidate the results by adding up the total of all the values for each of the options. You may want to convert these values into a percentage of the total score.

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PARETO ANALYSIS Pareto analysis is a very simple technique that helps you to choose the most effective changes to make. It uses the Pareto principle – the idea that by doing 20% of work you can generate 80% of the advantage of doing the entire job*. Pareto analysis is a formal technique for finding the changes that will give the biggest benefits. It is useful where many possible courses of action are competing for your attention. STEPS: 1. 2. 3. 4.

List the problems you face, or the options you have available Group options where they are facets of the same larger problem Apply an appropriate score to each group Work on the group with the highest score

DECISION TREES Decision Trees are useful tools for helping you to choose between several courses of action. They provide a highly effective structure within which you can explore options, and investigate the possible outcomes of choosing those options. They also help you to form a balanced picture of the risks and rewards associated with each possible course of action. STEPS: 1. Draw a small square to represent this on the left hand side of a large piece of paper, half way down the page. 2. From this box draw out lines towards the right for each possible solution, and write a short description of the solution along the line. Keep the lines apart as far as possible so that you can expand your thoughts. 3. At the end of each line, consider the results. If the result of taking that decision is uncertain, draw a small circle. If the result is another decision that you need to make, draw another square. Squares represent decisions, and circles represent uncertain outcomes. Write the decision or factor above the square or circle. If you have completed the solution at the end of the line, just leave it blank. 4. Starting from the new decision squares on your diagram, draw out lines representing the options that you could select. From the circles draw lines representing possible outcomes. Again make a brief note on the line saying what it means. Keep on doing this until you have drawn out as many of the possible outcomes and decisions as you can see leading on from the original decisions. Page 16 of 21

FORCE FIELD ANALYSIS Force Field Analysis is a useful technique for looking at all the forces for and against a decision. In effect, it is a specialized method of weighing pros and cons. By carrying out the analysis you can plan to strengthen the forces supporting a decision, and reduce the impact of opposition to it. STEPS:

Describe your plan or proposal for change in the middle. List all forces for change in one column, and all forces against change in another column. 3. Assign a score to each force, from 1 (weak) to 5 (strong). 4. Once you have carried out an analysis, you can decide whether your project is viable, based on the total score. 1. 2.

STEP LADDER TECHNIQUE The Stepladder Technique is a useful method for encouraging individual participation in group decision making. The Stepladder Technique is a simple tool that manages how members enter the decision-making group. Developed by Steven Rogelberg, Janet BarnesFarrell and Charles Lowe in 1992, it encourages all members to contribute on an individual level BEFORE being influenced by anyone else. These results in a wider variety of ideas, it prevents people from "hiding" within the group, and it helps people avoid being "stepped on" or overpowered by stronger, louder group members. STEPS: 1. Before getting together as a group, present the task or problem to all members. Give everyone sufficient time to think about what needs to be done and to form their own opinions on how to best accomplish the task or solve the problem. 2. Form a core group of two members. Have them discuss the problem. 3. Add a third group member to the core group. The third member presents ideas to the first two members BEFORE hearing the ideas that have already been discussed. After all three members have laid out their solutions and ideas, they discuss their options together. Page 17 of 21

4. Repeat the same process by adding a fourth member, and so on, to the group. Allow time for discussion after each additional member has presented his or her ideas. 5. Reach a final decision only after all members have been brought in and presented their ideas.

PLUS/MINUS/INTERESTING PMI stands for 'Plus/Minus/Interesting'. It is a valuable improvement to the 'weighing pros and cons' technique used for centuries. PMI is an important Decision Making tool: the mind tools used so far in this section have focused on selecting a course of action from a range of options. Before you move straight to action on this course of action, it is important to check that it is going to improve the situation PMI is a good way of weighing the pros, cons and implications of a decision. When you have selected a course of action, PMI is a good technique to use to check that it is worth taking. STEPS: 1. Draw up a table with three columns headed plus, minus and Interesting. 2. Write down all the positive points of following the course of action, all the negatives, and all the interesting implications and possible outcomes within the table. 3. If the decision is still not obvious, you can then score the table to show the importance of individual items. The total score should show whether it is worth implementing the decision.

STAR BURSTING Star bursting is a form of brainstorming that focuses on generating questions rather than answers. It can be used iteratively, with further layers of questioning about the answers to the initial set of questions.The best way to see the power of this simple but effective technique is to think of a product, challenge or issue to work on, and follow the steps STEPS: 1. Draw a large six-pointed star in the middle, and write your idea, product or challenge in the centre. 2. Write the words Who, What, Why, Where, When and How at the tip of each point of the star. Page 18 of 21

3. Brainstorm questions about the idea or product starting with each of these words. The questions radiate out from the central star. Don't try to answer any of the questions as you go along. Instead, concentrate on thinking up as many questions as you can. 4. Depending on the scope of the exercise, you may want to have further star bursting sessions to explore the answers to these initial questions further

COST BENEFIT ANALYSIS Cost Benefit Analysis or CBA is a relatively* simple and widely used technique for deciding whether to make a change. As its name suggests, you simply add up the value of the benefits of a course of action, and subtract the costs associated with it. STEPS: 1. Firstly work out how much the change will cost to make. Then calculate the benefit you will from it. 2. Where costs or benefits are paid or received over time, work out the time it will take for the benefits to repay the costs. 3. Cost/Benefit Analysis can be carried out using only financial costs and financial benefits. You may, however, decide to include intangible items within the analysis. As you must estimate a value for these, this inevitably brings an element of subjectivity into the process. 4. Larger projects are evaluated using formal finance/capital budgeting, which takes into account many of the complexities involved with financial Decision Making.

SIX THINKING HATS "Six Thinking Hats" is a powerful technique that helps you look at important decisions from a number of different perspectives. It helps you make better decisions by pushing you to move outside your habitual ways of thinking. As such, it helps you understand the full complexity of a decision, and spot issues and opportunities which you might otherwise not notice. To use Six Thinking Hats to improve the quality of your decision-making, look at the decision "wearing" each of the thinking hats in turn. Each "Thinking Hat" is a different style of thinking. These are explained below: Page 19 of 21

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White Hat: With this thinking hat, you focus on the data available. Look at the information you have, and see what you can learn from it. Look for gaps in your knowledge, and either try to fill them or take account of them. This is where you analyze past trends, and try to extrapolate from historical data.

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Red Hat: Wearing the red hat, you look at the decision using intuition, gut reaction, and emotion. Also try to think how other people will react emotionally, and try to understand the intuitive responses of people who do not fully know your reasoning.

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Black Hat: When using black hat thinking, look at things pessimistically, cautiously and defensively. Try to see why ideas and approaches might not work. This is important because it highlights the weak points in a plan or course of action. It allows you to eliminate them, alter your approach, or prepare contingency plans to counter problems that arise. Black Hat thinking helps to make your plans tougher and more resilient. It can also help you to spot fatal flaws and risks before you embark on a course of action. Black Hat thinking is one of the real benefits of this technique, as many successful people get so used to thinking positively that often they cannot see problems in advance, leaving them under-prepared for difficulties.

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Yellow Hat: The yellow hat helps you to think positively. It is the optimistic viewpoint that helps you to see all the benefits of the decision and the value in it, and spot the opportunities that arise from it. Yellow Hat thinking helps you to keep going when everything looks gloomy and difficult.

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Green Hat: The Green Hat stands for creativity. This is where you can develop creative solutions to a problem. It is a freewheeling way of thinking, in which there is little criticism of ideas. A whole range of creativity tools can help you here.

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Blue Hat: The Blue Hat stands for process control. This is the hat worn by people chairing meetings. When running into difficulties because ideas are running dry, they may direct activity into Green Hat thinking. When contingency plans are needed, they will ask for Black Hat thinking, and so on.

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BIBLIOGRAPHY BOOK: 

Financial Management, I M PANDEY

WEBSITES:   

www.virtualsalt.com www.wikipedia www.mindstool.com

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