Management decisions and problems

Types of decisions and problems

Every organization grows, prospers, or falls as a result of decisions by its managers. Managers often are referred to as decision makers. Plans and strategies are arrived at through decision making.

A decision is a choice made from available alternatives.

Decision- making is the process of identifying problems and opportunities and then resolving them.

Management decisions:

1)Programmed decisions

A decision made in response to a situation that has occurred often enough to enable decision rules to be developed .Ex.: The decision to reorder paper and other office supplies when inventories drop to a certain level.

2) Nonprogrammed decisions.

A decision made in response to a situation that is unique is poorly defined and largely unstructured, and has important consequences for the organization. Ex.: The decision to build a new factory, develop a new product or service, etc.

Every decision situation can be organized on a scale according to the availability of information and the possibility of failure. The four positions on the scale are:

1. Certainty. All inf-n the decision maker needs are fully available.
2. Risk. A decision has clear goals, and good info is available, but the future outcomes associated with each alternative are subject to chance.

Probability                 ex.A: 80% – profit   10000     =>     =10000*0,8-10000*0,2=8000-2000=6000

events                          20% – looses  10000

B:  99% – profit   9000      =>     =9000*0,99-1000*0,01=8,910-10=8900

1% – loss       1000

Enough information is available to allow the probability of a successful outcome for each alternative to be estimated. Statistical analysis might be used to calculate the probabilities of success and failure.

Some of companies use a quantitative simulation approach to estimate hydrocarbon reserves. Many companies use quantitative techniques (statistics, mathematical modeling)

3. Uncertainty. Managers know what goal they wish to achieve, but information about alternatives and future events is incomplete.

Factors that may affect a decision such as a price, production costs, volume, or future interest rates, are difficult to analyze and predict. Managers may have to make decisions based on assumptions. The decision may be wrong if the assumptions are incorrect. Managers face uncertainty every day. They may have to be creative and use personal judgment to determine which alternative is lost.

4. Ambiguity is the most difficult decision situation. It means that the goals to be achieved or the problem to be solved is unclear alternatives are difficult to define, and information about outcomes is unavailable.

An example of ambiguity is in the movie industry. At Warner Brothers studio executives build personal relationships with top stars, so they will want to do pictures with the studio. Another approach is to provide stars with a percentage of gross revenue rather than a huge salary. It reduces financial ambiguity when making new movies.

Decision – making models

1. Classical model

is based on the assumption that managers should make logical decisions that will be in the organization’s best economic interests.

Economic assumptions:

1. Goals are known.
2. Info is complete.
3. Criteria for evaluating alternatives are known.
4. The decision maker is traditional and rises logic( doesn’t rely safely on intuition).

The classical model is considered to be normative. It means that:

*it defines how a decision maker should make decisions;

*it provides guidelines for reaching an ideal outcome for the organization.

In recent years the classical model has been applied more widely because of the growth of quantitative decision techniques( decision trees, payoff matrixes, break-even point analysis, linear programming, forecasting, and operations research models) that use computers.

The classical model is most valuable when applied to decisions characterized by certainty and risk because relevant information is available and probabilities can be calculated.

Ex.: Schedules for an ambulance service agency( ambulances, technicians)

2. The administrative model

describes how managers actually make decisions in difficult situations, such as those characterized by nonprogrammer decisions, uncertainty, and ambiguity. In some situations managers can’t make economically rational decisions( described in classical model) even if they want to.

The administrative model is based on the work of Herbert A.Simon. He proposed two concepts :

1.bounded rationality means that people have limits, or boundaries, on how rational they can be. The organization is very complex and managers have the time and cognitive ability to process only a limited amount of information with which they make decisions =>

3. Satisfying (поведение на основе принципа разумной достаточности) means that decision makers choose the first solution alternative that satisfies minimal decision criteria.

Assumptions:

1. Decision goals are not clear.
2. Rational procedures don’t always capture real organizational events.
3. There are human, information and resource constants.
4. Satisfying rather than maximizing solution is chosen.

We see that administrative model is descriptive – it describes how managers actually make decisions rather than dictating how they should make decision.

Another aspect of administrative decision making is intuition. It represents a quick apprehension of a decision situation based on past experience but without conscious thought. Intuition is also used to check the result of rational analysis. Ex.: Star wars. Fox studio. George Lucas.

The uncertainty of administrative decision making often requires coalition building. A coalition is an informal alliance among managers who support a specific goal. In politics and other spheres of life also exist. When outcomes are not predictable, people gain support through discussion, negotiation, and bargaining.

=> *Classical and administrative models are two extremes, so, a manager can balance them.

* Rational classical procedures are associated with stable environments. Administrative decision- making procedures – with unstable environments, in which decisions must be made rapidly under more difficult conditions.

Decision – making steps

Six steps are usually associated with effective decision process:

1) recognition of decision requirement;

2) diagnosis analysis of causes;

3) development of alternative;

4) selection of desired alternative;

5) implementation of chosen alternative;

6) evaluation and feedback.

1. Managers confront a decision requirement in the form of

*a problem – a situation in which organizational accomplishments have failed to meet established goals.

* an opportunity – a situation, in which managers see potential organizational accomplishments that exceed current goals.

Managers analyze info( periodic accounting reports, MIS reports etc) to determine the situation in organization.

Ex.: Employee turnover => training programmes, team works, etc implementation.

2. Deep exploration of causes of the problem. Questions:

1) What is the stare of disequilibrium affecting us?

2) When did it occur?

3) How did it occur?

4) To whom did it occur?

5) What is the urgency of the problem?

6) What is the interconnectedness of events?

7) What result came from which activity?

3. Decision alternatives – tools for reducing the difference between the organization current and desired performance.

Example: Qriyster. Small cars. Dodge Neon.

4. Selection among feasible alternatives Ex.: Johnson&Johnson . Tyleenol. Cyanide in some capsules.

Making choices depends on manager’s personality factors and willingness to accept risk and uncertainty. For example, risk propensity is the willingness to undertake risk with the opportunity of gaining an increased payoff.

Ex.: A college senior. To become a physician( 80% of success) or an actress (20 % of success)

5. On this stage managerial, administrative, and persuasive abilities are used to translate the chosen alternative info action. Communication, motivation, and leadership skills are needed.
6. Decision makers gather information that tells them how will the decision was implemented and whether it was effective in achieving goals. Feedback is important, because decision – making is a continuous process. Feedback tells whether a new decision needs to be made.

Increasing participation in decision making

Many of today’s managers are including lower-level employees in the decision – making process whenever possible. Decisions may be made through and committee, a task group, department participation, or informal coalition.

Vroom – Jago model.

Helps the manager find the appropriate amount of participation for subordinates. It has three major components:

1) leader participation styles,

2) a set of diagnostic questions with which to analyze a decision situation,

3) and a series of decision rules.

1. One model employs five levels of subordinate participation in decision making. They range from highly autocratic ti highly democratic:

autocratic–>consulting style–>group decisions

The manager should select one of the 5 styles according to the situation. The situation is revealed through questions (2). Then the decision tree is used to determine what decision rule should be used (3).

2. Daft Chapter9.p.294-297.

Now we shall consider *group participation formats.

1. Interactive groups. Members are brought together face-to- face. First a group leader states a problem and asks for input from members. Then alternatives are generated and evaluated. Ex.: A staff meeting of departmental meeting formed to discuss next’ goals.

2. In №1 some participants may talk more and dominate group discussions . Therefore the nominal group technique was developed. It emphasizes equal participation in the decision process by all group members. So, the steps are:

1. Each participant writes down his/her idea on a piece of paper
2. The ideas are written on a chalkboard.

III. Only after II the discussion is held.

1. After that participants vote for preferred solution.( secret ballot)

The adopted decision is the one that receives the most votes.

3. Delphi groups. Are used to combine expert opinions from different perspectives about an ambiguous problem. Questionnaires are compiled. They are circulated among participants. After the answers are received, a summary of the opinions is developed and distributed to participants. The process of sending out questionnaires and then sharing the results continues until a consensus is reached.

Advantages of participative decision making:

+broader perspective for problem definition & analysis;

+more knowledge, facts, and alternatives can be evaluated;

+discussion clarities ambiguous problems and reduces uncertainty about alternatives;

+participation fosters member satisfaction and support for decision.

Disadvantages of participative decision making:

– time -consuming; wasted resources if used for programmed decisions;

– compromise decisions can satisfy no one;

– groupthink: group norms may reduce dissent and opinion diversity;

– no clear focus for decision responsibility;

Several things can be done to improve decision- making breath and creativity:

* Devils advocate. A decision making technique, in which an individual is assigned the role of challenging the assumptions made by the group to prevent premature consensus.