MODULE 3

PRODUCTIVITY AND DECISION MAKING

Assignment Topic-

PRODUCTIVITY

COMPETITIVENESS

DECISION MAKING
DECISION MAKING PROCESS

Decision making is the process by which a course of action is selected from among
alternatives. It is at the core of planning. A plan cannot be said to exist unless a decision
has been made. People at all levels in an organization are constantly making decisions
and solving problems. For managers, the decision-making and problem-solving tasks
are particularly important aspects of their jobs. The process leading to decision making
involves (1) premising, (2) identifying alternatives, (3) evaluating the alternatives, and
(4) selecting the best alternative.
(1) Premising
Though there are innumerable factors in the environment, all of them do not affect
operations of the business enterprise. Top managers should select the premises which
have direct impact on developing organisational plans. There are many factors that
affect business decisions, some of which are general in nature while others are
selective.

The general factors affect all the firms alike but specific factors affect different firms
differently. While developing premises, organisations should focus more on specific
factors (or its micro environment) as they have immediate impact on making the plans.

(2) Identifyingalternatives
Assuming that we are clear regarding our goals as well as premises, it is necessary to
develop alternatives. In order to choose the best alternative and make a decision, every
manager needs to have the ideal resources - information, time, personnel, equipment,
and supplies. But this is an ideal situation and may not always be possible. A limiting
factor is something that stands in the way of accomplishing a desired objective.
Recognizing the limiting factor in a given situation makes it possible to narrow down
the search for alternatives and make the best decision possible with the information,
resources, and time available. The principle of limiting factor states that, by recognizing
and overcoming those factors that stand critically in the way of goal, the best alternative
course of action can beselected.

Some methods for developing alternatives are Brainstorming, Nominal group technique, and
Delphi technique.
1) Brainstorming - Brainstorming is the process of suggesting many possible
alternatives without evaluation. It is necessary to include diverse people. The group is
presented with a problem and asked to develop as many solutions as possible. Members
should be encouraged to make wild, extreme suggestions. You should also build on
suggestions made by others. Everyone should have an equal voice. No criticizing
others’ ideas, and none of the alternatives should be evaluated until all possible
alternatives have been presented. Research has also shown that we are more creative
when walking, so with small groups, some companies are holding walking
brainstorming sessions. Using technology, a newer form of brain storming is electronic
e-brainstorming. Participants synchronously send ideas without getting together.
People who are far apart geographically can brainstorm this way, and the number of
participants does not have to be limited.
2) Nominal Grouping - Nominal grouping is the process of generating and evaluating
alternatives using a structured voting method. This process usually involves six steps:

i. Listing - Each participant generates ideas in writing.

ii. Recording - Each member presents one idea at a time, and the leader records
these ideas where everyone can see them. This continues until all ideas are posted.

iii. Clarification - Alternatives are clarified through a guided discussion, and any
additional ideas are listed.

iv. Ranking - Each employee rank orders the ideas and identifies what he or she sees
as the top three; low-ranked alternatives are eliminated.

v. Discussion -Rankings are discussed for clarification, not persuasion. During this
time, participants should explain their choices and their reasons for making them

vi. Vote - A secret vote is taken to select the alternative

3) The Delphi Technique - The Delphi technique involves using a series of
confidential questionnaires to refine a solution. Responses on the first questionnaire are
analyzed and resubmitted to participants on a second questionnaire. This process may
continue for five or more rounds before a consensus emerges.

(3) Evaluating the alternatives

After making all the alternatives, the next step in planning is to evaluate these
alternatives. Evaluation is required in order to select the best alternative for
implementation.
While evaluating alternatives, the managers must compare the alternative plans or
decisions. For this, the manager must consider the quantitative and qualitative factors.
Quantitative factors are those factors that can be measured numerically. For e.g.
Number of units sold, costs in rupees, etc. The quantitative factors are tangible in nature.
Qualitative factors, on the other hand, are intangible in nature. For e.g. quality of labour
force, customer satisfaction, etc.
The management must give importance not only to quantitative factors but also to
qualitative factors. For e.g. an excellent production plan may prove to be a failure due
to bad quality of labour force, poor maintenance of machines, etc.

The methods or techniques for the evaluation of alternatives are:

(i) MarginalAnalysis
The marginal analysis technique helps to compare additional revenues with additional
costs. If the additional revenue is greater than the additional costs, more profit can be
made by producing more. However, if the additional revenue is less than the additional
costs, more profit can be made by producingless.

(ii) Cost-EffectivenessAnalysis
This technique, also known as cost-benefit analysis, is an improvement of the traditional
marginal analysis. The alternative that provides the maximum benefits at the minimum
cost is selected. The cost can be measured in terms of money, time, risk, goodwill,etc.

(4) Selecting the best alternative, that is making adecision

(i) Experience, (ii) experimentation, and (iii) research and analysis are the three or
approaches for choosing the best alternative in decision making.

(i) Experience
Reliance on past experience, plays a comparatively big role in decision-making.
Experienced managers usually believe, often without realizing it, that the things they
have successfully accomplished and the mistakes they have made provide almost a
foolproof guide to the future. Experience helps a great deal to develop the ability to
exercise good judgment.

(ii) Experience
Reliance on past experience, plays a comparatively big role in decision-making.
Experienced managers usually believe, often without realizing it, that the things they
have successfully accomplished and the mistakes they have made provide almost a
foolproof guide to the future. Experience helps a great deal to develop the ability to
exercise good judgment.
(iii) Experimentation
Trying one of the alternatives and see what happens is a usual way of choosing an
alternative. This kind of experimentation is often used in scientific inquiry. It is
frequently suggested that this method should be employed more often in managing.
Because only by trying various alternatives a manager can be sure about the best way,
especially in view of the intangible factors involved in the decision process. The
experimental method is likely to be the most expensive of all methods, particularly
where it involves a substantial amount of money and manpower. Moreover, even after
carrying out an experiment, there may still be doubt about what it proved, since future
may not duplicate the present. Therefore, this technique should be used only after
considering other alternatives.

(iv) Research andanalysis

One of the best techniques for selecting from among alternatives when major decisions
are involved is research and analysis. This approach means solving a problem by first
comprehending it. It involves a search for relationships among the more critical
variables, constraints, and premises that bear upon the goal sought. It is the pen-and-
paper approach to decision-making. Solving a planning problem requires breaking it
into its component parts and studying the various quantitative and qualitative factors.
A major step in the research-and-analysis approach is to develop a model stimulating
the problem. Conceptualizing a problem is a major step toward its solution.

ENVIRONMENT OF DECISION MAKING

Taking Decisions Under Certainty
When managers know with certainty what their possible alternatives are and what
conditions are associated with each alternative, a state of certainty exists.

Taking Decisions Under Risk

A more realistic decision-making situation is a state of risk. Under a state of risk, the
availability of each alternative and its potential pay-offs (rewards) and costs are all
associated with profitability estimates. It is, therefore, quite obvious that the key
element in decision-making under a state of risk is accurately determining the
probabilities associated with each alternative.

Taking Decisions Under Uncertainty

However, most important and strategic decisions in modern organisations are taken
under conditions of uncertainty. A state of uncertainty refers to a situation in which the
decision maker does not know what all the alternatives are, and the risks associated
with each, or what consequences each is likely to have.

This complexity arises from the complexity and dynamism of today’s organisations
and their environments. All successful organisations have made various effective
decisions under uncertainty. The key to effective decision-making under uncertainty is
to acquire as much relevant information as possible and to approach the situation from
a logical and rational perspective. Intuition, judgment and experience always play a
very important role in decision-making under uncertain conditions.

DECISION TREE
Model of Decision Making

Intuition is the ability to have a grasp on a situation or information without the need for
reasoning. The opposite of intuitive decision making is rational decision making, which
is when individuals use analytics, facts and a step-by-step process to come to a decision.

In a rational model, an individual has goals and objectives and has a payoff, utility or
preference function that permits that person to rank all possible alternative actions by
the actions contribution to the desired goal. The person is presented with and
understands alternative courses and actions. Each alternative has a set of consequences.
The decision maker chooses the alternative and consequences that rank highest in
terms of the payoff functions, that is, that contribute most to the ultimategoal.
Some decision theorist t say that a manger is completely rational in his decision, some say that
completely irrational. Still others say that he exercise limited rationality. These 3 types of views
on a manager’s decision making behavior are based on 3 models of man- Economic man,
Administrative man, and social man.
Significance of Decision Making

1) Managers who use a rational, intelligent, and systematic approach are morelikely
to come up with high quality solutions to the problems they face than the ones who
do not use thisapproach.
2) Rational decision-makers have a clear understanding of alternative courses of
action to accomplish a goal under a particular set ofcircumstances.
3) Rational decision-making is based on the information available with the decision-
 makers and their ability to evaluatealternatives.
4) Rational decision-making aims at deciding the best solution by selecting the
alternative that most effectively facilitates goal achievement

Limitations of Decision-Making

1) It is very difficult for managers to be completely rational in their decision-making

since decisions are taken keeping the future in mind, and the future is
veryuncertain.
2) It is very difficult to determine all the alternative courses of action that might be
followed to accomplish agoal.
3) Rational decision-making becomes almost an impossible task when one has to
explore areas which have never been ventured intobefore.
4) In most cases, all possible alternatives generated cannot be thoroughly analyzed,
even with sophisticated analytical techniques and computers.
5) Even though the decision-maker strives to be completely rational, sometimes
limitations of information, time and certainty, curbrationality.
6) Sometimes, managers allow their risk-avoiding tendency to disrupt their rational
decision-makingprocess.