Decision Making

7 Cs of Decision Making Model

Decision Making
Management is the practice of consciously and continually shaping formal organizations, and the art of decision making is central to doing that. It involves identifying and selecting a course of action to deal with a specific problem (when the actual state of affairs differs from the normal course) or take advantage of the opportunity is an important part of managers job. Problems and opportunities are generally intertwined and can be clarified as something that problem endangers organizations ability to reach its objectives while opportunity offers a chance to exceed the objectives Peter Drucker makes it clear that opportunities rather than problems are key to the success of an organization

The problem and its threshold finding

Problem finding is not always easy and straightforward. The three main categories of pitfalls are (a) false association of events, (b) false expectation of events and (c) false self perception and self image (the case of mainframe computers and evolution of laptops). How big is the gap between the actual and the desired state of affairs (for this the managers need to be always updated with reliable information). The value base and the backgrounds of the managers influence the magnitude and the type of problems (economic, environmental, political - or a source of personal advancement) Alert managers often sense problems early

Decisions in Management Functions

Decision making, therefore, is the study of identifying and choosing alternatives based on the values and preferences (goals, desires, lifestyle) of the decision maker. Planning: Long-term / short term objectives, strategies to meet the objectives and fixing individual goals and targets. Organizing: Organization structure and line of command, decentralization / delegation , job definition, change management Leading: Motivation, conflict resolution, leadership style, efficiency booster Controlling: How and what activities need to be controlled, setting performance deviation tolerance limit, use of communication network and up-gradation

Decision Environment
Every decision is made within a decision making environment, defined as collection of information, alternatives, values and preferences available at the time of decision making. Both information and alternatives are constrained by time and effort. Since the decisions are to be made within the constrained environment, the major challenge of decision making is the uncertainty and the major goal is to reduce the uncertainty Time (past experiences, future projections / implications) and human relationships (one does not take decision in isolation) are critical to the process of decision making.

Delaying a decision
Since the environment continues to expand with time, it is advisable to put off decision making close to the deadline. Armed with the new information and alternatives, hindsighters can look back many times and make better decisions Delaying a decision has the following benefits: There is time for more thoughtful and extended analysis New alternatives might be recognized or created The decision makers preference might change With greater maturity, may be in a position to make a more pragmatic choice.

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Decision making is a Recursive Process

Decision making is a nonlinear, recursive process. Most decisions are made by moving back and forth between the choice of criteria (characteristics we want our choice to meet) and the identification of the alternatives (the possibilities we can choose from among). decision whether select criteria identify alternatives make a choice Example: Should I get married?

The Nature of Decision Making

Business is a series of decision linked by implementation and follow-up.It sets the pace and direction Decision making is process driven. Being smart and hard working does not ensure the quality of output. When the process is right, quality will improve. Different type of problems require different types of decision making; programmed (solutions to routine problems determined by rule, procedure or habit) and non-programmed decision (specific solutions created through an unstructured process to deal with non routine problems). As one moves up the ladder, the ability to make non programmed decisions becomes more important. Training will improve the output.

Ill Structured

Top

Non programmed decision Problem type Programmed decision Lower Level in Organization

Well Structured Problems / Decisions /Levels

Kinds of Decisions
Simple straight forward decision having short term repercussion (assigning work or space to a subordinate) Complex decision having long term connotations (changing the quality of the material used and change of supplier) Decisions whether: This is Yes / No. Made be weighing pros and cons. Should I buy a new TV ? Should I take a holiday? Decisions which: Involve a choice of one or more alternatives from amongst a set of possibilities. Eat vegetarian / non vegetarian food. Contingent Decisions: Decisions that have already been made but put on hold until some conditions are met. Shall buy a car if the price is right.

Group versus individual decisions

Positives of group decisions
pooling of resources specialization of labor usually results in greater acceptance

Negatives of group decisions

potential to waste time group conflict intimidation by leaders or assertive members Not a good option when dealing with crisis (Time taken = Decision making + Explaining + Acceptance) Groups are superior to even the best individuals. However,during CRISIS it has to be leader driven

Decision Making Models

A model is a simplified description of a process, relationship, or other phenomenon and focuses on a few key features of a problem to examine carefully how they work while ignoring other complicating and less important factors The kind of predictive models are as varied as the decision problems to which they are applied. Many rest on economic relationship, some on engineering, statistical, legal, biological and scientific relationships Organizational level decisions involve several managers. Problem identification and solution involve many departments, multiple view points and even organizations which are beyond the scope of an individual manager. 1. Management science approach / model, 2. Carnegie model, 3. Incremental decision process model, 4. Garbage can model

Management Science Approach

This model is analog to the rational approach by individual decision maker and came into being during the WW II. Mathematical and statistical techniques were applied to large scale military problems that were beyond the ability of individual decision makers. This system is applied to problems that are analyzable, measurable, and can be structured in a logical way. Amongst is limitations, it can not sense qualitative date like competitor reactions, customer taste, product warmth etc that can not be incorporated in any mathematical model.

Carnegie Model
Organization level decision making involve many managers and that final choice is based on a coalition among the managers, rather than by the one at the top based on information fed to them. A coalition is an alliance among several managers and stakeholders (managers from line depts, staff specialists, powerful customers, union leaders, bankers, external groups etc) who agree about the organizational goals and priorities. Two reasons why coalitions are made 1. Organizational goals are often ambiguous and operative goals of the departments are inconsistent 2. Managers do not have time, resources and mental capacity to identify all dimensions and process all information for decision making.

Carnegie Model Contd.

Under this model the decisions are made to satisfice rather than optimize problem solutions. The coalition will accept a solution that is perceived as satisfactory to all coalition members Managers are concerned with immediate problems and their immediate solutions. They dont expect a perfect solution in a conflict laden and ill defined situation One of the best and most visible coalition builders of recent times was George W Bush who sought a broad based coalition before the start of the war in Iraq to gain agreement for his vision of a new world order

Choice Process In Carnegie Model

Uncertainty Information is limited Managers have many constraints Coalition formation Hold joint discussions and interpret goals and problems Share opinion Establish problem priorities Obtain support for problem solution Search Conduct a simple local search Use established procedure if Appropriate Create solutions if needed.

Conflict Managers have diverse goals, opinions, values, experience

Satisficing decision behavior Adopt the first alternative That is acceptable to the coalition

Incremental Decision Process Model

Most of the organization choices are a series of small choices (series of nibbles) that combine to produce major decisions (big bite). They move through several decision points and may hit barriers (decision interrupts). Case of firing of a TV / Radio announcer. Three major stages have been identified 1. Identification phase (problem flagged by complaints from viewers, advertisers, colleagues) 2. Development stage (what the organization had done last time or what is done by other similar organizations) 3. Selection phase (make a choice from available options; in case of difference of opinion bargaining takes place and may have to take recourse to Carnegie model) Finally the decision needs to be authorized by the competent authority (The case of evolution of Mach III Turbo blades by Gillette)

Garbage Can Model

It deals with the pattern or flow of multiple decisions within the organization that experience extremely high uncertainty about growth and change. Such a state is called Organized Anarchy and are not guided by the vertical hierarchy but by the following factors: 1.Problem preferences (goals, problems, alternatives and ambiguity at every stage) 2.Unclear or poorly understood technology (explicit database that facilitates decision making not available) 3.Turnover (experiences high attrition and and the past experience brought on the table is fluid) The unique characteristic of this model is that the decision process is not seen as a sequence of events that begins with a problem and ends with a solution (problem identification, potential solutions, participants and menu of options for decision making)

Consequences of GCM of decision making

1. 2. Solutions may be proposed even when problems do not exist (an employee may be sold on to some idea may try to sell this to others eg introduction of computers) Choices are made without solving the problems (people decide to quit, organization budget is slashed, new policy is issued; these may be oriented towards a problem but do not necessarily solve them) Problems may persist without solving them (organization participants get used to certain kind of problems and give up trying to solve them or may not have the technology or wherewithal to solve them) A few problems are solved (the process works in aggregate, not all problems are solved but the organization moves in the direction of problem reduction case of the film Cassablanca)

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Rationality in Decision Making

Managerial decisions are assumed to be rational (consistent, value maximizing choices within the specified limits, fully objective and logical). Moreover, the steps in the decision making process would consistently lead towards selecting the alternative that maximizes the goal. The factors contributing are: Problem clarity : Clear and unambiguous Goal Orientation: Single, well defined goal; no conflict Known options: Creative, aware of all viable options and the relevant criteria. Clear Preferences: Ranked according to importance Constant Preferences: Specific decision criteria are constant and the weights assigned are stable over time No time or cost constraints Maximum payoffs

RATIONALITY IN DECISION MAKING Models of decision making 1. Economic man model

2. Administrative man model

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Economic man model

Adam smith Fully rational or logical when making work related decisions
Full idea of problem Formulates his goals consciously Scientific thinking Knowledgeable and analyses information intelligently

An OPTIMAL DECISION which maximizes return / minimize cost

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Administrative man model

Herbert Simon
Economic man model is narrative

Describe how a manager should make decisions Managers rarely behave in scientific manner

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Practical problems Bounded Rationality

1. 2. 3. 4. 5. 6. 7. 8. No scientific way of and identifying and analyzing novel and unstructured problems Not possible to formulate explicit goals (vague assumptions mixed with personal values) goals become distorted Lack of complete information Limited skill of manager Lack of time for exhaustive search Environment is uncertain, complex, probabilistic rather than deterministic Organizational constraints do not allow complete rationality forces of stability, continuity often prevail upon forces of change & challenge Decision both influenced by both reason and emotions Manager content when decision which do not make undue demand on times talent
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Bounded Rationality
In reality the problems seeking decisions are complex and the decision making do not meet all these tests. Research suggest that the decision making usually isnt the logical, consistent and systematic process that the rationality implies Bounded rationality is a behavior that is rational within the parameters of a simplified model that captures the essential features of a problem. This theory points out that decision makers must cope with (a) inadequate information about the nature of the problem and its possible solutions, (b) lack of time and money to compile more complete information, (c) inability to remember large volumes of information and (d) limits to their own intelligence.

Factors Limiting Rationality

1. 2. 3. Limits to individual capacity to information processing Decision makers tend to intermix solutions with problems Perpetual biases can distort problem identification (managers sometime do not see what they believe cant be there) 4. Selective information gathering based on accessibility than quality 5. Commit themselves prematurely to a specific alternative early in the decision making process 6. Evidence of fallibility of previous solution does not always result in search for new alternatives (Challenger episode) 7. Prior decision precedents constrain current choices 8. Divergent interest groups make it difficult to have a common goal 9. Time and cost constraints 10. Despite the potential for diversity, a strong bias exists in most organizational culture; they reinforce status quo, discourages risk taking and innovation

Decision Making Strategies --1

There are many solutions to a given problem and the decision makers task is to choose one of them. There are several strategies for choosing; some of them are: Optimizing: Choose from the best possible solution to the problem. Optimizing may be dependent on Importance of the problem Time available for solving it Cost involved with alternative solutions Availability of resources, expertise\Personal psychology, values Full realization of all the parameters are seldom possible, hence limitations are placed on the alternatives

Strategies -- 2
Satisficing: In this strategy (satisfactory and sufficient), the first satisfactory alternative is chosen rather than the best alternative. In many small decisions, such as where to park, what to drink, which pen to use, which tie to wear and so on, staistificing strategy is normally used. Example: Kaun banega krorepati

Strategy -- 3
Maximax: This stands for maximizing the maximums. This strategy focuses on evaluating and then choosing the alternatives based on maximum possible pay off. This is sometimes described the policy of the optimist, because of favorable outcomes and high potentials are the areas of concern. This is a good strategy for use when risk taking is most acceptable, when the go for broke philosophy is reigning freely.

Strategy -- 4
Maximin: This stands for maximizing the minimums. In this strategy, that of a pessimist, the worst possible outcome of each decision is considered and the decision with the highest minimum is chosen. The Maximin orientation is good when the consequences of a failed decision are particularly harmful or undesirable. Maximin concentrates on the salvage value of the decision, or guaranteed return of the decision. It is the philosophy behind the saying a bird in hand is better than two in the bushes

Heuristics
Researchers have extended the concepts of Bounded Rationality and demonstrated that people rely on heuristic principles (rule of thumb) to simplify decision making. (Case of loan officers). Three heuristics are recognized Availability: Judge events likelihood by testing against their memory Representative -ness: Likelihood of an occurrence by trying to match with preexisting category (Employee ethnic mix) Anchoring and adjustment: People do not pull out decision out of thin air. They start with some initial value (anchor). Case Salary hikes

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Deciding Adaptively
Rational decision making proceeds on the belief that managers can transform a complicated web of facts, assumptions, objectives and educated guesses into a clear decision that people in the organization can act on. This has been now challenged. More and more adaptive approach has emerged which stipulates that the result of a decision action are jointly produced by what your organization does and what other organizations are doing at the same time (price war amongst airlines) Two versions of adaptive approach are (a) Game theory (b) Chaos theory

The Two Theories

Game theory: Is the
study of the people making independent choices. The perspective requires that we view decision making as interaction of processes of two decision makers adapting to each other at the same time. (Driving on the highway). We view decision making as a process of two decision makers adopting to each others presence simultaneously

Chaos theory: Is the

study of the dynamic patterns in a large social system.. It has three states: equilibrium, disequilibria and bounded instability. The decision maker tries to keep the organization in the third stage as it offers maximum scope for innovation. Decision making becomes a continual process of adaptation to forces largely beyond the decision makers control. It is like surfing a huge wave off Diamond Head, a wave that never hits the shore

The Grieving Cycle

Crisis Leaders Others Relief Shock Denial / disbelief Anger Bargaining Guilt / Remorse Panic Resignation to the situation Acceptance of reality Growth / opportunity New direction

Building

Depression
05/04/12

General model of Decision-making Process

1. Identify the problem this is the most critical step in organizational decision-making. 2. Define objectives establishing the parameters (criteria) of success. 3. Make a pre-decision (allocating weights to the criteria) most critical in mitigating decision biases and errors. 4. Generate and select alternatives 5. Evaluate alternatives balanced view 6. Make a choice 7. Implement the chosen alternative 8. Follow-up; Evaluate decision effectiveness (case study cake mixture)

Context refers to the environment of interpersonal relationships and behaviors within which decisions are made. The right context is critical to making successful choices A healthy context includes the right people, puts them in an appropriate physical setting, ensures that they agree how decisions will be made and support diverse views and healthy debate. Group should include person / persons in authority to allocate resources and make the decision stick. Limit the number of people in the group (6 to 7) The spectrum of decision making approaches include consensus, qualified consensus, majority rule, and directive leadership. Advocacy is antithetical to effective decision making; should encourage rational and open minded inquiry

Frame is a mental window through which we view a particular problem, situation or opportunity.
Frames are prisms through we view the world . They determine both what we see and how we interpret it (direct sales or through vendors) If the situation is framed incorrectly, it would lead to a bad decision; correct would lead halfway to a good decision Some people will try to frame the issues to suit their personal agenda Never be in a hurry to accept the initial frame; actively seek alternates Look for biases and false assumptions in all frames.

Good decisions emerge from a set of feasible alternatives. Decision makers in these situations dont simply say yes or no to a single choice
As a decision maker, your job is to identify a manageable set of good alternatives. Good alternatives are broadly constructed, genuine, feasible, and sufficiently numerous to give decision makers a real set of choices. Brainstorming is a useful technique for generating alternatives and problem solutions. However, it will work when the people feel comfortable speaking their minds. Hybrid alternatives are welcome which combines the best of two or more alternatives. Get people on board with diverse skills and view points. This will generate creative (positive) conflicts; your job is to turn this conflict into a productive direction.

Once the set of alternatives are identified, they have to be evaluated vis--vis the established objectives.
Ask the most respected and objective members to act as the devils advocates; they may build a case why the preferred option should not be accepted. Acknowledge and discuss minority point of view; include more than one person with a divergent view. A lone dissenter may be reluctant to speak up. In business, uncertainty of outcome is synonymous with risk; this must be factored in evaluation. Strategic and capital budgeting decisions to be examined using financial tools eg. NPV, IRR, break even analysis, sensitivity analysis etc. A prioritization matrix, trade off table or a decision tree provides a way to compare how each alternative achieves your objectives. Specialized soft-wares have been developed to help decision makers handle huge volume of data

Decision making is not an easy process; some could be committed to one option, others may be blind to merit and shortcomings of the alternatives. Some may disagree with the basic assumptions while unresolved uncertainties may force to dither Proven management tools Catch-the-ball, Point-counter-Point or the Intellectual Watchdog Technique may be used to arrive at a decision. Avoid ending the deliberation too early or too late. Ending too early may leave promising opportunities unexplored; prolonging may fuddle the issues After the decision is made, it needs to be communicated to the concerned team members and other concerned persons. While communicating, show consideration for the views of others, explain the thinking behind the decision. Implementation will be more effective if the people affected by it view the decision process as fair.

Promoting a Fair Process

Be a good listener; do not interrupt Make eye contact with team members and actively participate in the process Take notes Make clear that though not all of the groups suggestions will be adopted, every one receive a fair consideration. Promote understanding, foster debate, promote new ideas Do not show preference to a segment of the members If you are responsible for making the final decision, let the group members know that their point of view affected the outcome and explain why you preferred to differ.

Decision Making Tools

Researchers have identified various decision making tools which can be utilized to proceed to decision making. Some of the important ones are: Pareto Analysis Grid Analysis Paired Comparison Analysis Decision Trees PMI (Plus / Minus / Interesting) Force Field Analysis Six Thinking Hats Cost Benefit Analysis

Pareto Analysis
It uses the Pareto principle the idea that by doing 20% of the work you can generate 80% of the advantage of doing the entire job. This is mostly used technique for finding the changes that will give the maximum benefits. Example: Rejuvenation of a failing service center. This is a simple technique that helps identify the most important problem to solve; also gives you a score showing how severe the problem is.

Grid Analysis
Also known as Decision Matrix Analysis is particularly powerful where you have a number of good alternatives to choose from and many different factors to take into account. Example: Deciding on the type of car to buy.

Paired Comparison Analysis

Helps you work out the importance of the number of options relative to each other. It is an ideal tool to compare apples with oranges Example: An entrepreneur is looking at expanding his / her business. She has limited resources and the following options 1. Expand into overseas market 2. Expand into home markets 3. Improve customer service 4. Improve quality

Decision Trees
Decision trees are useful tools for helping you to choose between several courses of action. They provide a highly effective structure within which you can explore options, and investigate the possible outcomes of those options. They also help you to form a balanced picture of the risks and rewards associated with each possible course of action. This makes them particularly useful for choosing between different strategies, projects and investment opportunities, particularly when your resources are limited.

PMI (Plus / Minus / Interesting)

It is a valuable improvement to the weighing pros and cons technique used for centuries. PMI is a good way of weighing the pros, cons and implications of a decision. When you have taken a decision, PMI is a good technique to check its implication. Example: A young professional is deciding where to live. The question is, should she move to a big city?

Force Field Analysis

This is a useful technique for looking at all the forces for and against a decision. By carrying out the analysis one can plan to strengthen the forces supporting the decision and reduce the impact of opposition to it. Example: Organizational up-gradation

Six Thinking Hats

This is a powerful tool that helps you to look at important decisions from a number of different perspectives. It helps you making better decisions by pushing you to move outside your habitual ways of thinking. A such it helps you understand the full complexity of a decision and spot issues and opportunities which you might not otherwise notice. Successful people think positive and rational. Often they may fail to look at problems from emotional, intuitive, creative or negative view points. This can mean that they underestimate resistance to change, do not make creative leaps and fail to make essential contingency plans.

Cost Benefit Analysis

You may have been intensely creative in generating solutions to a problem and rigorous in your selection of the best. However, this solution still may not be worthy implementing as the investment of time and money may not be worth the effort. Costs are either one off are ongoing. Benefits are for most part received over a period of time. We build this effect of time into our analysis by calculating a payback period.

Decision Making Process Two Views

Decision making step Problem identification Decision criteria Criteria value Identify Alternatives Analyze alternatives Alternatives Selection Implementation Evaluation Perfect Rationality
Problem identified Criteria identified Values assigned Comprehensive list Consequences of each variable known Maximizing decision High acceptability Objectively evaluated

Bounded Rationality
Commensurate with managers background Limited set of criteria identified Managers trademark model identified Limited set identified Begins with favored alternative Satisficing decision Politics and power come into play Rarely evaluated objectively

Decision Making Styles Two different perspectives

There are three different ways managers approach problems in work place: Problem avoider: Ignores information that points to problems Problem solver: Tries to solve problems when they come up. Problem seekers: Actively seek out problems to solve or new opportunities to pursue The second perspective takes into account the two dimensions of human behavior viz the way they think and their tolerance for ambiguity leading to four different styles: Directive: Make fast decisions focusing on the short run Analytic: careful decision makers with ability to cope with unique situations Conceptual: Very broad in outlook; find creative solutions Behavioral: Team players; sensitive to the feeling of others

Most managers have characteristics of more than one style

Decision Making Style

High Analytic
Tolerance for ambiguity

Conceptual

Directive Low Rational

Way of thinking

Behavioral

Intuitive

Organizational Traps
We are social animals and our judgments are influenced by the environment The judgment of some is influenced by (i) the desire to please others, (ii) to avoid conflict, to be in step with others and avoid conflict or future criticism Groupthink is a potential side effect of strong team identity. The highlighting of similarities in thinking and suppression or avoidance of differences characterize groupthink. Be wary of undue optimism. It must have a factual basis. Groups generally make better decisions than individuals. Under optimum conditions a diversity of opinion, the independence of group members, decentralization and the presence of a mechanism to convert individual judgment into decision helps doing this.

Smart Decision
Improved decisions by the employees at every level can have a major impact on the value of the business. Even small improvements make a big difference To improve decisions, adopt a rational decision process, train personnel to use the process and the tools, and improve implementation of the process through repeated use. When you introduce a new decision process, start small and expand the process as it demonstrates its value. Enlist top management support, but localize control and responsibility Encourage improvement.

QUESTIONS ?