Acctg.

Ed 07 – MANAGEMENT SCIENCE
THE FOUR BASIC STEPS OF THE PROBLEM-SOLVING
Conditions that Influence Managerial Decision PROCESS
Making
In order to effectively manage and run a successful
I. PROBLEM SOLVING PROCESS organization, leadership must guide their employees
and develop problem-solving techniques. Finding a
Problem solving is the act of defining a problem; suitable solution for issues can be accomplished by
determining the cause of the problem; identifying, following the four-step problem-solving process and
prioritizing, and selecting alternatives for a solution; methodology outlined below.
and implementing a solution.

Step Characteristics

1. Define the problem  Differentiate fact from opinion

 Specify underlying causes
 Consult each faction involved for information
 State the problem specifically
 Identify what standard or expectation is violated
 Determine in which process the problem lies
 Avoid trying to solve the problem without data

2. Generate alternative solutions  Postpone evaluating alternatives initially

 Include all involved individuals in the generating of alternatives
 Specify alternatives consistent with organizational goals
 Specify short- and long-term alternatives
 Brainstorm on others' ideas
 Seek alternatives that may solve the problem

3. Evaluate and select an Evaluate alternatives relative to a target standard

alternative  Evaluate all alternatives without bias
 Evaluate alternatives relative to established goals
 Evaluate both proven and possible outcomes
 State the selected alternative explicitly

4. Implement and follow up on the Plan and implement a pilot test of the chosen alternative
solution  Gather feedback from all affected parties
 Seek acceptance or consensus by all those affected
 Establish ongoing measures and monitoring
 Evaluate long-term results based on final solution

II. DECISION MAKING PROCESS

Decision making
- the process of making choices by
identifying a decision, gathering
information, and assessing alternative
resolutions.

Steps:
Step 1: Identify the decision
- Try to clearly define the nature of the
Problem Solving Chart decision to make. This first step is very
important.
Adapted from The Executive Guide to Improvement and
Change, ASQ Quality Press. Step 2: Gather relevant information
https://asq.org/quality-resources/problem-solving - Collect some pertinent information before
making a decision: what information is
 needed, the best sources of information, III. PROBLEM SOLVING VS. DECISION MAKING
and how to get it.
- This step involves both internal and external  The key difference between problem solving and
“work.” Some information is internal: sought decision making is that solving problems is a
through a process of self-assessment. Other process, whereas making decisions is an action
information is external: found online, in based on insights derived during the problem-
books, from other people, and from other solving process.
sources.
 Problem solving is an analytical process used to
Step 3: Identify the alternatives identify the possible solutions to the situation at
- While collecting information, identify hand. Making decisions is a part of problem
several possible paths of action, or solving. Problem solving is a complex process, and
alternatives. judgement calls – or decisions – will have to be
- Use imagination and additional information made on the way.
to construct new alternatives.
- In this step, list all possible and desirable  Decision making is a choice made by using one’s
alternatives. judgement. The art of making sound decisions is a
particularly important skill for leaders and
Step 4: Weigh the evidence managers. You may need to make numerous
- Draw on information and emotions to decisions as part of the problem-solving process.
imagine what it would be like if each of the
alternatives is carried out to the end.  leaders and managers will need to use their
- Evaluate whether the need identified in decision-making skills to determine which solution
Step 1 would be met or resolved through to pursue. They will also typically need to confirm
the use of each alternative. and set into motion next steps to fix the problem.
- Finally, place the alternatives in a priority
order, based upon own value system.  Both problem solving and decision making go
hand in hand, but success in one doesn’t
Step 5: Choose among alternatives automatically lead to the other.
- Once all the evidence have been
weighed, select the alternative that seems  Decisions are made when multiple opportunities
to be best one. for action present themselves. One can make
- a combination of alternatives may be decisions, yet never solve the problem.
chosen.
 Quick decisions don’t always lead to best-case
Step 6: Take action solutions. A purist approach to problem solving
- take some positive action by beginning to doesn’t take into account that sometimes a
implement the alternative chosen in Step 5. business needs to make the best decision under
the existing circumstances (where budget, time
Step 7: Review decision & its consequences and resource constraints might play a factor).
- consider the results of the decision and
evaluate whether or not it has resolved the  Decision-making is part of the problem-solving
need identified in Step 1. process. A business may have multiple problems
- If the decision has not met the identified that all demand time and resource.
need, repeat certain steps of the process to
make a new decision. For example, more  A key role in management and leadership
detailed or somewhat different information positions is deciding which problem to treat as a
or explore additional alternatives may be priority.
gathered.
https://www.umassd.edu/fycm/decision-making/process/  Both problem solving and decision making
involve critical thinking.
The DECIDE model
(1) D = define the problem, SUMMARY:
(2) E = establish the criteria, Problem solving is a method; decision making is a
(3) C = consider all the alternatives, process.
(4) I = identify the best alternative, Decision making is needed during problem solving to
(5) D = develop and implement a plan of reach the conclusion.
action, and Decision making will lead to a course of action or
(6) E = evaluate and monitor the solution and final opinion; problem solving is more analytical and
feedback when necessary. complex
IV. DECISION-MAKING UNDER CERTAINTY: with each, and the consequences of each
alternative or their probabilities.
- exists when the decision-maker knows with - A decision problem, where a decision-maker
reasonable certainty is aware of various possible states of nature
a) what the alternatives are, but has insufficient information to assign any
b) what conditions are associated with probabilities of occurrence to them, is
each alternative, termed as decision-making under
c) and the outcome of each uncertainty.
alternative. - A decision under uncertainty is when there
- accurate, measurable, and reliable are many unknowns and no possibility of
information on which to base decisions is knowing what could occur in the future to
available. alter the outcome of a decision.
- the cause and effect relationships are known - A situation of uncertainty arises when there
and the future is highly predictable (such can be more than one possible
conditions exist in case of routine and consequences of selecting any course of
repetitive decisions concerning the day-to- action.
day operations of the business).
- there is enough clarity about the problem, Modern Approaches to Decision-making under
the situation and the alternatives to consider Uncertainty:
the conditions to be certain.
- conditions of certainty are very rare 1. Risk Analysis:
particularly when significant decisions are - the size and nature of the risk involved in
involved choosing a particular course of action is
- the decision-maker knows which particular analyzed.
state of nature will occur or equivalently, he
is aware of the consequences of each For instance, while launching a new
course of action with certainty. product, a manager has to carefully
analyze each of the following variables:
V. DECISION-MAKING UNDER RISK: the cost of launching the product, its
production cost, the capital investment
- When a manager lacks perfect information required, the price that can be set for the
or whenever an information asymmetry product, the potential market size and
exists, risk arises. what percent of the total market it will
- Under a state of risk, the decision maker has represent.
incomplete information about available
alternatives but has a good idea of the - Risk analysis involves quantitative and
probability of outcomes for each alternative. qualitative risk assessment, risk management
- While making decisions under a state of risk, and risk communication and provides
managers must determine the probability managers with a better understanding of the
associated with each alternative on the basis risk and the benefits associated with a
of the available information and his proposed course of action. The decision
experience. represents a trade-off between the risks and
- When these probabilities are known or can the benefits associated with a particular
be estimated, the choice of an optimal course of action under conditions of
action, based on these probabilities, is uncertainty.
termed as decision making under risk.
- Risk implies a degree of uncertainty and an 2. Decision Trees:
inability to fully control the outcomes or - These are considered to be one of the best
consequences of such an action. ways to analyze a decision.
- A decision-tree approach involves a graphic
VI. DECISION-MAKING UNDER UNCERTAINTY: representation of alternative courses of
action and the possible outcomes and risks
- Most significant decisions made in today’s associated with each action.
complex environment are formulated under - By means of a “tree” diagram depicting the
a state of uncertainty. decision points, chance events and
- Conditions of uncertainty exist when the probabilities involved in various courses of
future environment is unpredictable and action, this technique of decision-making
everything is in a state of flux. allows the decision-maker to trace the
- The decision-maker is not aware of all optimum path or course of action.
available alternatives, the risks associated
3. Preference or Utility Theory:
- This approach is based on the notion that
individual attitudes towards risk vary. Some
individuals are willing to take only smaller risks
(“risk averters”), while others are willing to
take greater risks (“gamblers”). Statistical
probabilities associated with the various
courses of action are based on the
assumption that decision-makers will follow
them.

For instance, if there were a 60 percent

chance of a decision being right, it might
seem reasonable that a person would
take the risk. This may not be necessarily
true as the individual might not wish to
take the risk, since the chances of the
decision being wrong are 40 percent. The
attitudes towards risk vary with events, with
people and positions.

- Top-level managers usually take the largest

amount of risk. However, the same managers
who make a decision that risks millions of
money of the company in a given program
with a 75 percent chance of success are not
likely to do the same with their own money.
Moreover, a manager willing to take a 75
percent risk in one situation may not be willing
to do so in another. Similarly, a top executive
might launch an advertising campaign
having a 70 percent chance of success but
might decide against investing in plant and
machinery unless it involves a higher
probability of success.

- Though personal attitudes towards risk vary,

two things are certain:

a) attitudes towards risk vary with situations, i.e.

some people are risk averters in some
situations and gamblers in others
b) some people have a high aversion to risk,
while others have a low aversion.

- Most managers prefer to be risk averters to a

certain extent, and may thus also forego
opportunities. When the stakes are high, most
managers tend to be risk averters; when the
stakes are small, they tend to be gamblers.

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