Decision Making

Presentation By: Kashif Ahmad

The Elements of Decision

To Understand Fully Decision of Management Four Key elements in a decision are: 1. 2. 3. 4. The Decision Body The Decision Options The Uncontrollable Factors The Consequences of Each Options

"Advice to Youth," by Mark Twain (1882): "Always obey your parents, when they are present. This is the best policy in the long run, because if you dont, they will make you. Most parents think they know better than you do, and you can generally make more by humoring that superstition than you can by acting on your own better judgment."

1. The Decision Body

Individual/ Individuals who make decision Single Decision Maker or Multiple Decision Makers-Decision Body Important point Very few individual Decision Makers (Owners) In other scenario the Decision Body is most important element in decision Decision Body can control 1. 2. 3. What Options that are to be considered? Which Information that is relevant? How each option is evaluated?

2. The Decision Options

Alternate courses of actions for decision body to select Single Option-No choice therefore no decision Multiple Options- from two to infinity Decision has two courses 1. Take a course of Action 2. Do Nothing-Yes or No Example from Book How much grit should we buy this winters road gritting? Sensible upper limit or Sensible lower limit Some decisions have options which are obvious when the decision is defined Should we subscribe to market information service? Mintzberg classify decision options in following ways. A-Given-Fully developed at the start of the decision B-Found Ready Made-Fully developed in the environment of the decision and discovered during the decision process C-Custom Made-developed especially for the decision in question D-Modified-ready made options with some customized features

3. The Uncontrollable Factors

Parts of decision that can influence final outcome but cannot be controlled by decision body Example: Based on the product demand We cannot control the level of demand for a product directly How much production capacity be allocated to a new product 1. 2. One uncontrollable Factor Multiple uncontrollable Factors

What is the total demand of raw material cost?

3. The Uncontrollable Factors

When dealing with uncontrollable factors within a decision it is useful to follow three steps: 1. Identify the factors that influence final consequences of a decision Example: The major uncontrollable factors are How much is the demand there for a product and raw material cost? 2. Identify levels which each uncontrollable factors could take Example The level of demand will be between 5000 and 7000 units a year or between 7000 and 9000 units a year. The raw material cost is between $25 and $30 per unit 3. Attempt to predict the likelihood of these levels occurring for each of the uncontrollable factors Example: Probability of demand being between 5000 and 7000 unit is 50%. In Production capacity decision sequence might Identify the factors. For example: The major uncontrollable factors are 1) The level of the demand for the product 2) The raw material cost of the product

3. The Consequences of Each Option

For each combination of a decision option and the state of nature there is a consequence. Three types of Consequences a) Primary Consequence Straight forward statements of the operational results of an event Example: Annual demand: 8000 Units, Plant capacity: 7000 Raw material Cost &24 b) Surrogate-substitute or Replacement Interpretation of the event expressed in whatever measure we are using to describe the outcomes Example: Profit & 50,000 backlog order is high and increasing c) Evaluated Consequences Which are a measure of the worth or utility of a the outcome Example: Company is getting revenue needed badly worried about the increasing backlog what are our possible trade offs to reduce backlog.

Managers and Decision Making

3. The Decision Tree