DECISION MAKING- A PRIMARY TASK OF THE MANAGER As the term implies, decision making is the process of selection of a course of action from among alternatives. All decisions made in an environment of at least some uncertainty. However, the degree will vary from relative certainty to great uncertainty. There are certain risks involved in making decisions. In a situation involving certainty, people are reasonably sure about what will happen when they make a decision. The information is available and is considered to be reliable, and the cause and effect relationships are known. In a situation of uncertainty, on the other hand, people have only a meager database, they do not know whether or not the data are reliable, and they are very unsure about whether or not the situation may change. In a risk situation, factual information may exist but it may be incomplete. To improve decision making, one may estimate the objective probabilities of an outcome by using, for example, mathematical models. On the other hand, subjective probability, based on judgement and experience, may be used. Fortunately, there are a number of tools available that help managers make more effective decisions. All intelligent decision makers dealing with uncertainty like to know the size and nature of the risk they are taking in choosing a course of action. One of the deficiencies in using the traditional approaches of operations research for problem solving is that many of the data used in a model are merely estimates and others are based on probabilities. The ordinary practice is to have staff specialists come up with “best estimates”. However new techniques have been developed that gives a more precise view of risk. Virtually every decision is based on the interaction of a number of important variables, many of which have an element of uncertainty but, perhaps,a fairly high degree of probability. Thus, the wisdom of launching a new product might depend on a number of critical variables the cost of introducing the product, the cost of producing it, the capital investment that will be required, the price that can be set for the product, the size of the potential market, and the share of the total market that it will represent. Manager’s main job is decision making and quite often they have to decide on what is to be done, who is to do it, when, where, and so on and so forth. The first step in decision making after having decided our goals and our planning premises is to develop all the possible ways of reaching the goals. If one thinks hard enough more than one way to achieve the goals can be identified. If you cannot find more than one way to the goals then I would say probably you have not thought hard enough. This is because almost always alternatives exist. There is a good statement I remember on this occasion-I quote the unknown “ If there seems to be only one way of doing a thing, that way is probably the wrong way. ” Now you can understand the limitations and boundaries within which the manager has to act. On the way to achieving the desired goals there would be more often than not something that would stand in the way, obstructing the path. This something that stands in the way accomplishing a desired goal is a limiting factor. The principle of limiting factor states as follows: By recognizing and overcoming those factors that stand critically in the way of a goal, the best alternative course of action can be selected. Steps In Decision-making Process Let us now look at the process of decision making. Having found many alternatives to the goal, the next logical step is to decide and select one of them for adoption. Obviously, you need to evaluate them find the most appropriate one for implementation. In evaluating the alternatives, the managers are likely to do so: Quantitative Factors– 1. The factors that can be measured in numerical terms, 2. Qualitative Factors–factors that are intangible and difficult to measure numerically, 3. marginal analysis–that is to compare additional revenues arising from additional costs 4. cost effectiveness analysis–the process of selecting the best ratio of benefits and costs. After having evaluated the alternatives the job is to select one of them. Here the managers can use three basic approaches: 1. Experience, 2. Experimentation, and 3. Research and analysis Experience There seems to be no greater teacher than experience. But what is experience? It is not the number of years spent in a business. Many managers do not learn by their mistakes. If so what is the benefit of experience? Mostly managers either do not or fail to identify the cause for their failures. Another facet is the lessons of experience may be entirely inapplicable to the new problems. Experimentation Experiments are one way of testing a method. It is probably the most expensive one. Besides, unlike in science, there is no guarantee of repetition of the results. But one should be encouraged to do experiments-to try the various alternatives and see which is best. In view of the high cost involved, I suggest it should be used only after considering other alternatives and its implications. Research and Analysis When a major decision has to be taken, research and analysis is the most effective technique. One of the most comprehensive research and analysis approaches to decision making is operations research. We will discuss the same in detail at later. Types of Managerial Decisions As a manager one would need to take decisions under different situations. We can separately identify two different kinds of decision making situations. The kind of decision used for routine and repetitive work and the other is new, unexpected and non-repetitive one. The earlier one is termed as programmed decision and other non-programmed decision. You should understand that the decisions are not always necessarily be either of the two; it can be a combination of both. Most of the strategic decisions however, are non-programmed decisions and involve a certain amount of risk. Before a non-programmed decision is made the manager should calculate the amount of risk involved in the decision known as Risk Analysis, look at the major alternatives available-Decision Trees. The decision made by the manager would also be dependent on his attitude towards risk taking and this is called preference theory or utility theory. Decision making support systems use modern day gadgets and techniques to help the manager arrive at a decision effectively. Management invariably encounters situations in which uncomfortable decisions must be made. In some cases, the difficulty may be that, although certain alternative choices are clear, the consequences of these choices are not readily apparent. One possible tool for a manager in such a situation is decision tree analysis. A decision tree is a graphical diagram consisting of nodes and branches. The nodes are of two types. The first is a rectangle that represents the decision to be made. The branches emanating from decision nodes are the alternative choices with which the manager is faced. One and only one alternative can be implemented. The second type of node is a circle. Circles represent chance nodes. That is, the alternatives emanating from chance nodes have some element of uncertainty as to whether or not they will occur. The primary benefit of a decision tree is that it provides a visual representation of the choices facing the manager. Analytic Considerations The first task of the manager is to identify the decision that needs to be made based upon a given situation. Next, the manager must think of all the possible alternative actions that could be implemented which would “solve” the problem. These alternatives are connected to the decision node as straight lines emanating from the node. The next step is to identify all the possible consequences that could occur as a result of an alternative being implemented. This process is accomplished for each and every alternative action identified in the previous step. Since these consequences have some element of uncertainty as to whether or not they will occur, the manager needs some way in which to evaluate the likelihood that they will (may) occur. The end goal is to obtain probabilities as to the likelihood of each consequence occurring. The best process to obtain these probabilities is to use past experience of similar outcomes. But, often there is no past experience of similar outcomes available to the manager. In these cases, the best tool is to utilize the collective wisdom of experts as to how likely it is that the particular consequence will occur in the future. Using an appropriate consensus building technique, estimates from a panel of experts can be combined or averaged to create a probability of the likelihood of the occurrence of each and every consequence. The only requirement is that the sum of the probabilities of the set of consequences emanating from a chance node must equal one. The next step is to evaluate the end result of each possible alternative in concert with the consequences identified for each alternative. This step results in a monetary figure that would be obtained if this course of action were implemented. This step is accomplished for each possible alternative. Finally, the entire tree is evaluated by employing a technique known as mathematical expectation in order to select the most beneficial alternative. Product Planning at Gerber Gerber Products, Inc. , the well-known baby products company, recently used decision tree analysis in deciding whether to continue using the plastic known as poly-vinyl chloride or, more commonly, PVC. The situation involved a number of organizations including the environmental group Greenpeace, the U. S. Consumer Products Safety Commission, the toy and plastics industries, and the general public. PVC is a composite plastic material used in numerous household, commercial, and medical products including food storage containers, toys, and medical tubing. To make PVC soft and pliable, a chemical plasticizer known as “phthalates” is added to soften the plastic. In the latter half of 1998, Greenpeace announced that it had conducted scientific testing on phthalates and found them to be carcinogenic in lab rats. Further, Greenpeace claimed that the chemical leeches from the plastic over time and voiced particular concern with, “products that were aimed at small children and used to suck on or chew on. Although phthalates have been used in plastic for over 30 years, and there are no known cases of phthalates causing health problems, Greenpeace’s press release was strategically timed to coincide with the Christmas toy season, thereby guaranteeing maximum media coverage. As expected, it was immediately picked up by the television networks and, in fact, the ABC show 20/20 did an entire segment on the possible health risks of phthalates. The problem grew worse for Gerber when the media focused specifically on products made for oral use by children. Gerber, the largest producer of nipples, pacifiers, and feeding products in the U. S. , produced some 75 different products containing phthalates and was under considerable pressure to respond publicly to the investigation. Decisions Gerber management had to evaluate all of the current information, weigh the consequences of each action, and proceed on the most prudent course to insure as limited an interruption in business as possible. Gerber knew that a vast body of scientific evidence indicates that phthalates are completely safe. However, once the Greenpeace announcement was publicized, the Consumer Product Safety Commission was spurred to issue a press release expressing new doubts. As the focus gradually fell on items children put in their mouths, and large toy manufacturers like Mattel and Disney began to distance themselves from phthalates, the spotlight of the CPSC fell squarely on Gerber. A month before Christmas, the CPSC informed Gerber they would issue a press release advising parents of the potential dangers of phthalates, and Gerber would be named as one of the companies involved. This is the point at which Gerber implemented a decision tree. Gerber basically faced two choices, neither of which was particularly beneficial. The firm could be reactive, wait for the announcement, and gauge consumer response before deciding on a course of action, or it could be proactive and aggressively pursue resolution of the problem regardless of the public’s response to the report. The CSPC report suggested the agency would either issue a recall of all products containing phthalates (shown on the decision tree as the unfavorable response), or they would issue a report merely expressing concern in which case the public response would be minimal (shown on the decision tree as favorable). Gerber projected eight possible outcomes on its decision tree. If the firm reacted proactively by discontinuing use of all phthalates, and the CSPC report simply issued a warning, Gerber predicted an 80 percent chance that the public would react favorably to Gerber’s responsiveness causing sales to increase over competitors who reacted more slowly. A potential nationwide revenue increase of $l million was entered into the decision tree. Given a proactive response and a favorable CSPC report, Gerber also recorded a 20 percent chance that sales ould decline by $1 million due to the sensationalistic nature of the press coverage. If the CSPC report is negative and a recall is issued, Gerber predicted 25 percent likelihood that it could preserve current sales through a proactive response. On the other hand, the firm placed a 75 percent probability that a recall would hurt sales by $1. 25 million. Four more alternatives were predicted in the event that Gerber waited for the CSPC report before taking action. With a favorable report and a delayed response, there was thought to be a 25 percent chance that sales would remain flat, along with a 75 percent chance that sales would decline by $2 million. The worst case scenario is if Gerber remains passive and the CSPC report calls for a recall. In that case, Gerber optimistically predicted a 20 percent probability that it could still increase sales by taking advantage of companies who were less prepared for the report and actually gain approximately $. 5 million. However, it was considered an 80 percent probability that significant volume would be lost.
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