Problem Solving and

Decision Making
Problem
Problem Solving
Decision Making

Decision Making

Problem Solving and

Problem
Decision
Making

Decision Making

A discrepancy (difference) between an existing and

desired state of affairs.
Characteristics of Problems
* A problem becomes a problem when a manager
becomes aware of it.
* there is a pressure to solve the problem.
* the manager must have the authority, information,
or resources needed to solve the problem.

Problem Solving and

Problem
Decision
Making

Decision Making

Exists whenever objectives are not being met.

What is happening vs. what is wanted to happen

Problem Solving
The process of taking corrective action to meet
objectives.

Decision Making
The process of selecting an alternative course of
action that will solve a problem.
First decision is whether to take corrective action.

Problem Solving and

Decision Making

Decision Making

Decision making Basics

Characteristics of Effective Decision
Making
Benefits of Effective Decision making

Decision Making

Decision Making Basics

The word decision is defined as:

A choice between two or more alternatives.

Thus decision-making can be defined as:
the selection of a course of action from among
alternatives .
the process of responding to a problem by
searching for and selecting a solution or course of
action that will create value for organisational
stakeholders.

Decision Making

Decision Making Basics

The decision-making process involves

identifying alternatives,

analyzing their consequences and the

outcomes you want

and making the best choice

Decision Making

Decision-making Basics
Decisions are made:

to solve problems If several alternative remedies are available,

you have to choose the best.
to move organizations forward These decisions are frequently
complex and difficult, so it's important you have effective decisionmaking skills.
to cover up mistakes This can have negative consequences
because decisions aren't made for the good of other people or the
organization.
to improve one's standing A desire to gain prestige or impress
others isn't a good reason to make a decision.
to facilitate fitting into a peer group Sometimes people make
popular or unpopular decisions because they think they will help
them fit in or further their careers.

Decision Making

Characteristics of
Effective Decision-making

It focuses on what is important

It is logical and consistent.

It acknowledges both subjective and objective thinking and

blends analytical with intuitive thinking.

It requires only as much information and analysis as is

necessary to resolve a particular dilemma.

It encourages and guides the gathering of relevant information

and informed opinion.

It is straight-forward, reliable, easy to use, and flexible.

Decision Making

Benefits of Effective
Decision-making
Effective decision making is important for personal
and professional success.
Good

decision making is also essential for career

advancement.
Good

decisions move teams and organizations

forward, give them competitive advantage, and
help them achieve their goals.
An

effective decision maker is more confident

about the outcome of his decisions. This is because
he have carefully analyzed the potential
consequences of your actions.

Decision Making
Structures
Conditions
Models
Approaches
Styles
Characteristics of Decision
maker

Decision Making

Decision
Structures/Types
Programmed Decisions

Decision Making

Recurring or routine situations in which the

decision maker should use decision rules or
organizational policies and procedures to
make the decision.

Non-programmed Decisions
Significant and nonrecurring and nonroutine situations in which the decision
maker should use the decision-making
model.

Decision Making
Continuum

Decision Making

Non-programmed Decision:
Significant, nonrecurring, and non-routine
(Longer period of time to make decisions)

Programmed Decision:
Non-significant, recurring, and routine
(Shorter period of time to make decisions)

Programmed Decisions
A decision that is repetitive and routine
A definite method for its solution can be
established
Does not have to be treated a new each time
it occurs
Procedures are often already laid out
Examples: pricing standard customer
orders, determining billing dates, recording
office supplies etc.

Non-programmed Decisions
A decision that is novel (new or unique)
or Ill structured
No established methods exist, because
it has never occurred before or because
It is too complex

Non-programmed Decisions
Organizational
Levels

Nature of
Problems

Nature of
Decision-making

Non-programmed Decisions
Are tough decisions that involve risk
and uncertainty and
call for entrepreneurial abilities
Such decisions draw heavily on the
analytical abilities of the manager
Examples: Moving into a new market,
investing in a new unproven
technology, changing strategic direction

Decision making
Certainty
Conditions

Decision Making

Each alternatives outcome is known in

advance.

Risk
Probabilities can be assigned to each
outcome.

Uncertainty
Lack of information or knowledge makes the
outcome of each alternative unpredictable
such that no probabilities can be
determined.

Decision Making
Conditions Continuum

Decision Making

Decision Making

Decision Making Models

Model

A simplified representation or description

of a system or complex entity
Examples
A model of a building
A globe (Earth model)

Decision Making

Decision Making Models

Are less expensive and disruptive than

experimenting with the real world system
Allow operations managers to ask What if types of
questions
Are built for management problems and encourage
management input
Force a consistent and systematic approach to the
analysis of problems
Require managers to be specific about constraints
and goals relating to a problem
Help reduce the time needed in decision making

Decision Making

Decision Making Models

Rational Model (Classical Model)
The decision maker attempts to use
optimizing, selecting the best possible
alternative.

The Bounded Rationality Model

The decision maker uses satisficing,
selecting the first alternative that meets the
minimal criteria for solving the problem.

Decision Making

The Decision Making Approaches

Decision making is grouped into two broad
categories.

Authoritative style - similar to the authority or

expert style
Democratic - The remaining three styles
consultative, traditional majority or voting, and
consensus

The Decision Making Styles

Decision Making

The four decision-making styles

the authority or expert style

the consultative style
the traditional majority or voting style, and
the consensus style

The Decision Making Styles

Decision Making

The authority or expert style

The authority or expert style is used most in a

business environment.

If you use the authority or expert style of decision

making, you should discuss the decision you make
with those affected by it.

Advantage of the authority or expert style is that a

decision can be made quickly,

A disadvantage is that others aren't involved.

The quality of the decision that's made depends solely

on the knowledge and expertise of one person.

Types of Decision Makers

Decision Making

* Directive
# Use minimal information and consider few alternatives.
* Analytic
# Make careful decisions in unique situations.
* Conceptual
# Maintain a broad outlook and consider many alternatives
in making decisions.
* Behavioral
# Avoid conflict by working well with others and being
receptive to suggestions.

Decision Styles: Directive

Directive
Represents low tolerance for
ambiguity and uncertainty
Reflects rational thinking of the
manager
Such decision styles are more suitable
for routine procedural tasks

Decision Styles: Analytic

Analytic
Analytical style is also a rational style
of thinking
Involves a very high tolerance for
ambiguity and uncertainty
Such managers generally seek detailed
information before making a decision

Decision Styles: Conceptual

Conceptual
Conceptual style also reflects a creative
and intuitive way of thinking
Conceptual style managers have a very
broad vision and generally look at
numerous alternatives for decision-making
Focused on the long run and often result
in creative outcomes or alternatives

Decision Styles: Behavioural

Behavioural
Represents a creative way of thinking
Involves a low tolerance for
ambiguity or uncertainty
Managers with a behavioural style
introduce new ways of doing things

The Decision Making Styles

Decision Making

The consultative style

The consultative style involves

incorporating input from others in the
decision you make.

The consultative approach to decision

making takes longer than the authority or
expert style but generally results in better,
more informed decisions being made.

It also leads to a greater sense of trust

because others feel that they've been part
of the decision-making process.

The Decision Making Styles

Decision Making

The consensus style

The consensus style is a "we all decide"

approach. It involves including all affected
parties in the decision-making process and
adopting a final decision only when
everyone agrees that it's the best one.

The consensus style incorporates the

different opinions and perspectives of all
individuals.

The consensus style is often the best style

to use if you really want all individuals
concerned to be involved.

The Decision Making Styles

Decision Making

When you use the consensus style, it's not

necessary that everyone agrees completely.
However, once a decision is made, everyone must
be able to answer yes to two important questions:
"Am
"Will

I able to live with the decision made?

I be able to support the decision that's

made?

Decision-making Process
Identifying a problem
Identifying decision criteria
Allocating weights to criteria
Developing alternatives
Analyzing alternatives
Selecting an alternative
Implementing the alternative
Evaluation (of decision effectiveness)

Problem Definition
Problem is a discrepancy (difference)
between an existing and a desired state.
Example:
The manager has resigned, and we need
another manager
Here the phrase manager has resigned
reflects the current state while need
another manager represents a desired
state.

Identifying Decision Criteria

The word criteria, is defined as a
standard by which something can be
judged.
A decision criteria therefore, is the basis
of a decision, which outlines the relevant
and important factors for a decision. And
implicitly, it also defines what is not
important.

Decision Criteria: Example

In the above-cited scenario, the decision
criteria may include the following factors:
Relevant qualifications
Leadership skills
Communication skills
Planning and analytical skills
Professional experience

Allocating Weights to Criteria

The next step in the decision making
process is prioritization.
Prioritization is achieved by assigning
quantitative weights to each criteria
element.
The weightage defines the relative
significance of each element.

Developing Alternatives
Involves defining the possible
alternatives (or choices) that would
resolve the problem.
In our case, the alternatives would be a
list of candidates or job applicants.

Analyzing Alternatives
Alternatives are rated and analyzed
on the basis of the criteria
The rating can be based on a specified
scale, say 1 5 etc.
Rating may be subjective in nature
and thus,may depend on the judgment
of the individual(s)

Selecting an alternative
Involves choosing the best alternative,
based on the above rating and analysis
Generally implies selecting the
alternative with the highest score.

Implementing the Alternative

Putting the decision into action
Involves clear communication of the
decision to all concerned and obtaining
their commitment

Evaluation
Evaluation forms an integral part of any
process
Involves evaluation of the outcome based on
the desired goal and criteria
Involves assessing the effectiveness and
efficiency of the outcome (or the entire
process)
In case of any undesired results, each step
of the process is carefully reviewed to trace
the root causes

Decision Making

The Decision Making

A basic decision-making model includes five
Process
sequential steps:
1.establishing

a context for success

2. framing the issue properly

3. generating alternatives
4. evaluating alternatives
5. choosing the best alternative

Decision Making

The Decision Making

A basic decision-making model includes five
Process
sequential steps:
1.establishing

a context for success

Establish a context in which to address the

problem effectively.

involve the right people

keep the decision group small,
encourage participation,
choose diverse settings for meetings
avoid advocacy.

Decision Making

The Decision Making

2. framing the issue properly
Process
To

avoid misframing question initial perceptions.

Try to pinpoint your and others' biases.
Seek out the perspectives of other team members
and
try to approach the issue from several angles.

Decision Making

The Decision Making

3. Generating alternatives
Process

Try to come up with as many ways of

understanding the situation as you can.

Brainstorm - write down as many possible

alternatives as you can, without criticizing or
judging them.

Involve creative people

Your list should include as many alternatives as

possible, but it shouldn't be overwhelming.

Decision Making

The Decision Making

4. evaluating alternatives
Process

You now need to evaluate your

alternatives.

This involves determining how well each

meets your objective.

Several tools enable you to reach informed

decisions, including a prioritization matrix,
a trade-off table, a decision tree, and
software programs.

Decision Making

The Decision Making

Process
5. choosing the best alternative

Once you've considered the merits of each

alternative, you need to choose the best.

An important aspect of this is that you need to

know when to end the deliberations. If you make
a decision too quickly, you might miss a better
alternative. If you take too long, you might miss
valuable opportunities.

You'll then need to turn the decision into action.

The Decision Making Styles

Decision Making

Influential factors in decision making

The time that's available

The importance of a decision
Required levels of knowledge
Whether there's a need for buy-in from
Experience

The Decision Making Styles

Decision Making

Adapting your style

In each decision-making situation, you need to

weigh up different factors and then decide which
decision-making style best suits the situation.

The next time you're faced with a decision,

consider factors such as the time constraints, the
experience and knowledge of those around you,
the importance of the decision, and the level of
buy-in required. Then use these factors to help
you choose the decision-making style that is most
appropriate.

Decision Modeling and

Analysis

Decision Making

represents a general approach

to decision making

suitable for a wide range of

operations management
decisions
capacity planning
product and service design
equipment selection
location planning

Decision Making

Elements for Decision

Analysis
1. There is a random variable with a set of
possible future conditions that will have a
bearing on the results of the decision.
2. There is a decision with a list of
alternatives for the manager to choose
from.
3. A known payoff for each alternative under
each possible future condition.

Decision Making

Decision Analysis Process

1. Identify

the possible future conditions

These are called states of nature for the random variable.

demand will be low, medium, or high;
the number of contracts awarded will be one, two, or three;
the competitor will or will not introduce a new product

2. Develop a list of possible alternatives for the

decision one of which may be to do nothing.
3. Determine or estimate the payoff associated
with each alternative for every possible future
condition.
4. Estimate the likelihood of each possible future
condition.
5. Evaluate alternatives according to some

Payoff Table

Contains the
summary of
information for a
decision

Shows the payoffs

for each
alternative under
the various
possible states of
nature.

Facilitates
comparison of
alternatives.

Places all
alternatives on a
comparable basis.

Decision Making

Problem: Select one of the alternatives, taking the net

present values into account.

Note: The states should be mutually exclusive and

collectively exhaustive, thus the probabilities must add to
1.00.

Decision Making

Expected Monetary Value

criterion (EMV)

The expected value is the sum of the payoffs

times probabilities for an alternative

The probabilities for each state of nature must be

given

The expected value is computed for each

alternative, and

The one with the highest expected value is

selected.

Most appropriate when a decision maker is

neither risk averse nor risk seeking, but is risk
neutral.

Decision Making

Expected Monetary Value

criterion (EMV)

Decision Making

Expected Monetary Value

criterion (EMV)

DECISION TREES

Decision Making

A decision tree is a schematic representation of

the decision variables, random variables and
their payoffs.

The term gets its name from the treelike

appearance of the diagram

Decision trees are particularly useful for

analyzing situations that involve sequential
decisions.

A decision tree is composed of a number of

nodes that have branches emanating from
them

DECISION TREES

Decision Making

Notations

Square nodes denote decision points

Circular nodes denote chance events.

Reading Decision Trees

Read the tree from left to right

Branches leaving square nodes represent alternatives;
branches leaving circular nodes represent chance events (i.e.,
the states of nature).

After the tree has been drawn, it is analyzed from right to left;
that is, starting with the last decision that might be made

For each decision, choose the alternative that will yield the
greatest return (or the lowest cost).

If chance events follow a decision, choose the alternative that

has the highest expected monetary value (or lowest expected
cost).

DECISION TREES

Decision Making

A manager must decide on the size of a video arcade to

construct. The manager has narrowed the choices to two: large
or small. Information has been collected on payoffs, and the
following decision tree has been constructed. Analyze the
decision tree and determine which initial alternative (build
small or build large) should be chosen in order to maximize
expected monetary value.

DECISION TREES

Decision Making

Analyze the decisions from right

to left:

1.

Determine which alternative

would be selected for each
possible second decision.

2. Determine the product of the

chance probabilities and their
respective payoffs for the
remaining branches:

3. Determine the expected value of each

initial alternative:

Influence Diagrams

Influence diagrams graphically

represent complex situations with

many random variables (events)
and one or more decision variable.

They are more concise than

decision trees

They do not show the alternatives

at the decision nodes and states of
nature at the chance events.

Constructing and validating the

influence diagram improves
communication and consensus
building at the beginning of the
decision modeling process.

The circles show the random

variables (chance events) and the
rounded squares show the payoff
or part of it.

Decision Making

Decision Making

Expected value of perfect

information
(EVPI)
-the difference between the expected payoff with

perfect information and the expected payoff under

risk.

To determine the EVPI, one can compute the

expected payoff under certainty and
subtract the expected payoff under risk.

Sensitivity analysis

Decision Making

Sensitivity analysis provides a range of

probability over which the choice of alternatives
would remain the same

Example:
Given the following payoff table, determine the range of probability for
state of nature #2, that is, P(2), for which each alternative is optimal using
the expected-value criteria.

Sensitivity analysis

Decision Making