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Lesson#15
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Decision Making
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Decision Making
There are some of the critical decisions that top managers face
every day. How to decide whether to sell or
spin off a business? Should the supplier relationships be
renegotiated? What can be done to improve
decision-making competency throughout your organization?
To capture maximum value, executives not only must make the
right decisions, but also must negotiate
skillfully. Since most business decisions involve other parties,
it is essential for managers to understand their
individual role as it relates to other decision makers, as well
as how to use this knowledge to create the
strongest possible negotiating position.
Hence, keeping in mind the importance of decision making for
managers, information systems are also
designed in a way to help them out to control operations and
perform their managerial responsibilities more
effectively.
Decision making is the cognitive process of selecting a course
of action from among multiple alternatives.
Cognitive process is the mental process of knowing, including
aspects such as awareness, perception,
reasoning, and judgment.
• 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.
• A decision-making is a reasoning process which can be rational
or irrational, and can be based on explicit
assumptions or tacit assumptions.
15.1 Types of Problems
Nature of problem determines the approach to decision making to
be followed to solve it. There are three
broad categories.
•
Structured
:
Well-structured problems are constrained problems with convergent solutions that
engage the
application of a limited number of rules and principles within
well-defined parameters.
•
Unstructured
:
Problems possess multiple solutions, solution paths, fewer parameters which are
less
manipulate able, and contain uncertainty about which concepts,
rules, and principles are necessary for the
solution or how they are organized and which solution is best.
• Semi-structured
– a
gray area lies between the structured and unstructured range. Here part of the
decision can be specified allowing for certain factors out of
control.
Types of problems
A newly formed organization may be taken as an unstructured
organization due to lack of defined
organizational structure, operating procedures. The question
that a problem is structured or unstructured
is not dependant on the organization being structured or
unstructured. Even a highly structured
organization can face novel and unprecedented problems.
Example-Daily Life
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•
Unstructured
– Mr. A thinks that he has to wake up at
any time in the morning,
•
Structured
– Mr. A is a soldier and he has to wake at
6 in the morning when army bugle is played/blown.
This procedure will be followed no matter what.
•
Semi Structured
– Waking up is subject to a clock
alarm (procedure), but it can be turned off as waking
up at that time is also subject to some sort of individual
judgment.
Example – Business
Bank has a policy that two persons, Mr. A & B would open the
bank 30 min before bank timings, so that
bank should be open for public dealing at 9 a.m. No other
situation has been forecast in the policy.
•
Structured
– Staff shall be in the bank by 8:00 a.m.
to ensure opening for public dealing at 9 a.m. This
procedure will be followed no matter what.
•
Semi Structured
–
Branch Manager is informed a day
earlier that Mr. A will be unable to make it the next
day. Rest is left at the discretion of branch manager’s judgment
to decide who else is to be made
responsible to open the branch in the morning.
•
Unstructured
– Employees start reaching before 9 a.m.
but branch is not open. The decision taken by
employees there and then would be totally unstructured due to
the novelty of the situation arose.
15.2 Type of Decisions
All problems require decision making, however the nature of
problem determines how it should be
approached. The decision making process There are three types of
decisions
• Structured
• Non-structured
• Semi Structured
Structured decisions
Where problem is recurring and repetitive, the common factors
can be identified in order to identify a
particular course of action. Due to which defined set of
procedure can be devised for their solution.
Hence,
o
Procedures for obtaining
the best solution are standardized
o
Objectives are clearly
defined
o
Clearly specified inputs
and outputs
Un-structured decisions
When problems are non routine, critical and novel in nature,
they require individual judgment, evaluation
and insight varying on case-to-case basis. There is no well
understood or agreed upon procedure for
handling these problems. For such situations, predefined policy
cannot be devised. However, once the
problem has been figured out, a policy may be devised to handle
the problem in future. This can make
the problem look like as structured one giving regard to the
role of individual judgment.
Semi-structured Decisions
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The term is used to refer to the grey area of decisions which
lie between the two extremes. Some (but
not all) structured phases and often solved using standardized
solution procedures and human judgment.
In small organizations decisions are usually transferred from
form top to bottom. In large organizations the
decision are usually taken based on meeting of all departmental
heads. The fact is that whether decisions are
taken by single person or all in a formal meeting is not the
sole determinant of a decision being structured
or unstructured. Rather it simply shows the complexity of the
problem.
15.3 Decision-making process
•
Intelligence – searching
for conditions in the environment that call for decisions
•
Design – inventing,
developing, and analyzing possible courses of action
•
Choice – selecting a
course of action from those available
•
Implementation –
implementing the selected course of action
•
Monitoring – checking
the consequences of the decision made after implementation
Phases for Decision Making – Example
Any deviation from the norm should be reported as an exception
for managers’ attention. As it is the
case with “Debtors Aging Analysis”. (Debtors Aging analysis is
the stratification of trade receivables in
accordance of period of time since they have been due.)
Intelligence:
Identifying the problems occurring in an organization. MIS is the primary source
for the
managers to be aware of red-alerts.
Design:
Once the
debtors have been analyzed on the basis of pattern of collection, options can be
generated to improve collection rates. For example
o
Offering early payment
discounts.
o
Devising various
collection strategies for
o
various classes of
customer based on
o
Collection period
o
Discounts rates
o
Strengthening sales
department for collecting revenue through negotiation and settlement.
Choice:
Now a
selection has to be made which single strategy or combination of strategies
should be
implemented.
o
Here a DSS system can be
used to simulate the consequences of each alternative generated.
o
The diversity and
complexity of the alternatives generated would determine how extensive the DSS
system should be.
Implementation
: Now
the stage comes of communicating the policy approved to the interested and
relevant: for example
o
Conducting training
sessions of sales department or issuing an office memorandum.
o
Communicating and
convincing customers of the new credit terms so as to avoid confusion.
o
Once again MIS will be
used to record and report the results/effects of the policy.
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Monitoring:
Once the
decision has been implemented, the effects and responses should be monitored.
The
quality of decisions can be judged only once after they have
been implemented. Monitoring helps in
evaluating the quality of decisions that have been made. This
may include the following:
o
Quantifying the speed in
the process of recovery.
o
Discount costs being
born by the organization.
o
Customer response in
accepting the entire policy.
o
Once again MIS will be
used to record and report the results / effects of the policy.
Implement the
discount/training policy
Implementation
Evaluate recovery patterns,
relevant costs involved.
Monitoring
Select a discount/training
policy
Choice
Devise a discount or
training policy
Design
Intelligence Debtor’s aging report |
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