Everything you need to know about the techniques and tools of decision-making. Decision making is an important job of a manager.
Decision making involves choosing a course of action from several alternative courses of action. It is the selection of one course of action from two or more alternative courses of action.
The way a manager acts or decides the course of action from among various alternatives is an act of decision making. All managerial functions are performed through the medium of decision.
The techniques of decision-making can be studied as:-
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A. Methods of Evaluation of Alternatives:-
1. How to Zero in on the ‘Best’ Alternative 2. Marginal Income or Cost Analysis 3. Psychological Analysis—What Profit Level will Satisfy
4. Intuition—Gut Feeling 5. Experience— What Worked in the Past must also Work Now 6. “Follow the Leader” or ‘Patterned’ Decisions 7. Experimentation—Try Out Each Alternative 8. In-Depth Analysis of Problem-Situation.
B. Quantitative methods of decision-making:- 1. Sampling 2. Linear Programming 3. Correlation 4. Program Evaluation and Review Technique (PERT) 5. Simulation 6. Decision-Theory 7. Decision Tree.
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C. Traditional techniques of decision-making:- 1. Standard Procedure 2. Incorporating Well-Defined Information System 3. Decision by Habit 4. Decision-Making by Creativity, Intuition and Judgement 5. Training the Selected Executives 6. Adopting Rule of Thumb Method.
D. Modern techniques of decision-making:- 1. Operations Research 2. Electronic Data Processing 3. Training Decision-Makers in Heuristic Problem-Solving 4. Developing Heuristic Computer Programmes 5. Adopting “Decision Tree” Technique.
Some of the other techniques of decision-making are:- 1. Decision Tree Analysis 2. Pareto Analysis 3. Force Field Analysis 4. Stepladder Technique 5. Cost/Benefit Analysis 6. Pros & Cons 7. Payback Analysis 8. Simulations 9. Linear Programming 10. Heuristic Methods 11. Buriden’s Ass 12. Six Thinking Hats 13. Starbursting 14. Game Theory 15. Queing Theory 16. Networking 17. Creative 18. Participative 18. Heuristic.
Techniques and Tools of Decision-Making Adopted by Managers
Techniques of Decision-Making – Methods of Evaluation of Alternatives and Quantitative Techniques
Technique # 1. Methods of Evaluation of Alternatives:
i. How to Zero in on the ‘Best’ Alternative:
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By carefully evaluating each of the various alternatives to solve a problem or exploit a business opportunity, a manager will be able to zero in on the best alternative. He can pick any of the following methods of evaluation.
ii. Marginal Income or Cost Analysis:
This involves comparison between the cost of producing an extra (marginal) unit and the extra (marginal) benefit from sale of that unit. The point at which marginal cost is equal to marginal benefit, will be the breakeven point—the point at which sales revenue is equal to total cost, variable as well as fixed.
But this method will work only if the manager has full information about components of the total cost and there is clear identification of variable and fixed costs—variable cost will increase with production of each extra unit though fixed cost, also called sunk cost, will remain unchanged. As long as marginal benefit is more than the marginal cost, the difference will contribute to meet fixed costs.
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To illustrate, suppose variable cost per unit is Rs. 500, the sale price is Rs. 800, and the common fixed cost is Rs. 9,00,000. The breakeven point will be reached when production reaches 30,000 units. Up to this point, production of extra units will contribute to meeting the fixed costs. Every additional unit produced beyond this point will contribute to profit. A manager should therefore, decide to keep the production at the maximum profit point.
iii. Psychological Analysis—What Profit Level will Satisfy?
A manager in pursuit of profit-maximization will apply marginal analysis method. But Herbert Simon says earning highest possible profits is not the goal of all managers; some of them only seek profits that would “satisfy” them, in other words, profits that they consider adequate. They hate being called profit-crazy—their ethos and culture may be against it.
An optimist would favor earning the maximum profit; in other words, to maximize the maximum possible payoff, also called maximax. A pessimist—thinking that only the worst possible situation might occur—would work to maximize the minimum payoff, also called maxim in. And if the environment does not turn out to be what was expected at the time of decision-making, he would seek to minimize the maximum regret, also called minimax.
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As G.L.S. Shackle puts it, a man faced with decision-making is mainly influenced by what he thinks would be the best possible or worst possible outcome of his decision. So, he says “why settle for ‘good’ when the ‘best’ is within reach”—or “why only think of ‘bad’ when the ‘worst’ could also happen?
Intuition is the immediate grasping of an object by the mind, without any reasoning process. Intuition is felt by senses.
Business decision-making based on intuition is marked by inner feelings and convictions of manager. It denotes some kind of a sixth sense that gives him an insight into a certain state of affairs. Intuition is not very different from rashness, though it also refers to the quality of a genius.
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Not everyone has the intuition of an action-plan that will bring success; therefore, it is called a godly quality. But it is also true that if intuition fails to deliver, it is called madness, and if successful, it wins praise as quality of a genius.
As the basis of decision-making, intuition has its advantages. First, there is quickness in making decisions; to make an intuitive decision, one does not need to collect, analyze and interpret the relevant data and information. Second, it only needs to spot the person whose intuition is known to deliver results. Third, one can implement intuitive decisions in case of issues that will not impact the organization significantly. But there are also certain disadvantages.
First, decisions based on incorrect intuition may prove costly for the organization. Second, intuition-inspired decision-maker cannot cite any concrete evidence to support his decisions. Third, it makes the other decision-making methods irrelevant.
v. Experience— What Worked in the Past must also Work Now:
Past is a useful guide to the future. If similar issues had arisen in the past and were decided successfully applying one method or the other, decision-maker can use the same method to tackle the present issue, too.
However, dependence on past experience prevents experimentation with new ideas. Also, it promotes conservative, old-world approach believing that what had worked in the past would also work in tackling the issue on hand, conveniently forgetting that the present-day complex issues call for an entirely fresh approach to decision-making.
vi. “Follow the Leader” or ‘Patterned’ Decisions:
This method of evaluation is no evaluation at all. It only says make the decisions as per policies and guidelines prescribed by the superiors. It ignores the fact that present-day circumstances are qualitatively different from the circumstances under which the policies and guidelines were formulated by superiors. In any case, for making major decisions, this method just cannot work.
vii. Experimentation—Try Out Each Alternative:
The guiding principle in this method is to implement each alternative course of action, one after another, and see how it actually works in practice.
‘The proof of the pudding is in the eating’, runs the argument in favor of this method. Thus, if the idea is to arrest the declining market share of a product, one alternative may be to introduce an improved version of the product by using better technology and hiring more skilled workforce, both of which would require additional capital. Another alternative may be to reduce the price of the existing product.
That would require cost reduction on all fronts, curtailing all avoidable expenditure, like provision of free accommodation and cars to staff, financing their vacations and also, perhaps, reduction in workforce. This might invite wrath of employees but the risk is well worth taking because declining market share might endanger the existence of the organization itself.
Yet another alternative—launching a creative, more appealing advertising campaign—would make hole in the organization finances but is likely to deliver expected results, whether by arresting the decline of market share or gaining a foothold in a foreign market. Take, for example, Cadbury’s ad campaign that has succeeded in establishing its brand recognition in India by integrating its chocolates into our food habits weaning the consumers—especially children—away from local sweets.
However, experimenting with every alternative will be risky, besides involving extra expenditure. What if the experiment does not work? How does the organization recover the additional expenditure on experimentation that has failed to achieve the objective? And, more important, will not the implementation of each alternative, one after another, delay the implementation of the selected ideal alternative?
Yes, one may experiment with each alternative in a limited way, and for a brief period. But then such experimenting will definitely delay the choice and implementation of the best alternative.
viii. In-Depth Analysis of Problem-Situation:
Under this method, each element of the problem-situation as also the whole of it is studied in depth. The object is to identify and evaluate cause-effect relationship between different aspects and then arrive at the best alternative.
Take, for example, a decision that involves introduction of a new product-design. One can divide this into three main aspects, that is to say, technical, financial and market reception. The questions – First, is it possible to do the job with available technology, or will it require replacement—in which case, does the organization have funds for the purpose?
Second, can existing workers cope with the new tasks, or will they need training or replacement—in which case, does the organization have funds and training facilities for the purpose? Third, where will the required funds come from? Fourth, and most important, will there be favorable consumer-response to the new design?
Technique # 2. Quantitative Methods of Decision-Making:
These days, managers often rely on quantitative techniques to make decisions, particularly major decisions. Examples of the quantitative methods are – Sampling, Linear Programming, Correlation, PERT, Simulation, and Decision Theory.
It is useful in making generalizations about a mass of items on the basis of a careful study of a smaller number of items drawn from the mass. The whole mass is called the population (or universe), and the smaller number of items, the sample.
But generalizations based on a sample study cannot be reliable if the size of the sample is small, or if it is not fairly representative of the population.
Sampling technique can be used in market research, production control, quality control, collection of cost data, inventory control, and auditing.
It aims to seek the optimum position in relation to any objective, which may be either minimization of costs or maximization of profits. It involves the selection of an alternative or an appropriate combination of alternatives, giving due weightage to the constraints or limitations within which a decision is to be made. Thus, if the decision relates to production of certain quantities of goods, then plant capacity and the capacities of various departments will have to be taken into account.
But linear programming can be done only when the variables involved in decision-making are quantifiable and there is linear relationship between them.
A simple illustration will explain the meaning. Suppose Anant wants to open a bank account. A bank offers him two plans. Under the first plan, he need not keep a minimum balance in his account but for each cheque issued by him he will have to pay Rs. 0.10 to the bank. The second plan insists on a minimum balance (without interest) of Rs. 100, but there will be no charge for cheques issued by him.
Now, if the prevailing rate of interest/dividend is 12%, the cost of keeping the minimum balance under the second plan will be Rs. 12 per year, i.e., Re. 1 per month.
Under linear programming, for the two plans the following equations can be drawn to point to the relationship between total costs and operating the bank account.
First Plan- C = 0.10 X
Second Plan- C = Re. 1.00
Where, C = Total cost per month, and
X = Number of cheques issued per month.
We can see that the total cost under both the plans will be the same if the number of cheques issued per month is up to 10. However, if Anant draws more than 10 cheques every month, the second plan should be preferred. If the number of cheques is to be less than 10, the costs will be lower under the first plan.
Under this, one variable is estimated if the value of another variable is known. Thus, it is used to study the degree of functional relationship between any two or more variables involved in the decision-making.
For example, there is a positive correlation between profits and the number of units sold, or between the variable cost and the number of units produced. Regression analysis, correlation coefficients and scatter diagrams are used to denote correlation between variables.
iv. Program Evaluation and Review Technique (PERT):
PERT was originally developed for use in defense projects, particularly in the development of Polaris Missile Program. But nowadays, it is commonly used in business situations involving scheduling of operations.
Under it, there is application of a statistically refined method to estimate the time required for completing any activity, particularly where the project is new and there is not enough past experience for guidance. It also highlights danger signals to enable the user to make quick modifications in the earlier schedules.
To have a reliable estimate of the time required for performing any activity, three time-values are taken—the most optimistic time, the most likely time, and the most pessimistic time. Obviously, the most optimistic time denotes the shortest possible time to perform that activity if things proceed as originally planned.
But, if experience is any guide, this rarely happens in a business, such that one or the other original calculation may not come true. As against this, the pessimistic time is the longest time estimated to perform the same activity. It provides for most unexpected and unusual delays. Like most optimistic time, most pessimistic time is also a rarity.
This leaves the most likely time which is the normal time required to perform the activity. The difference between the three time-estimates indicates the degree of relative uncertainty involved in the performance of the activity. The weighted arithmetic mean of the three estimates is taken to compute the expected time for the activity.
Since estimate of the expected time involves complicated statistical calculations, often electronic computers are used for the purpose.
This technique is used when even mathematical equations fail to provide the solution to a ticklish business problem. It is a device to construct and produce the events that are likely to occur during actual performance.
Thus, the manager estimates the results of each of the proposed courses of action before initiating any particular course of action. In this way, he can know which of the proposed courses of action is likely to produce the desired result.
Simulation technique is based on the probability factor. The manager assigns random numbers to each likely event, depending on the probability of its happening. This enables him to determine the cost and benefit of each course of action.
However, the calculations involved in the simulation technique are often too complex and cannot be attempted without the aid of electronic computers.
It provides the best way to decision-making under conditions of risk and uncertainty. Of course, it is possible to know or estimate the outcomes of a decision in conditions of risk. But not so in the case of conditions of uncertainty, about which the manager is completely in the dark.
Under this technique, the probable or possible outcomes of different decisions are placed in a systematic order to know which of the decisions would be the best under the present circumstances. This technique is particularly suitable where most of the factors likely to affect the outcomes of the decision are beyond the control of the manager.
For example, suppose a company is able to sell 10,000 units at a profit of Rs. 10 per unit. It believes that by reducing the price and the profit per unit to Rs. 5, it can increase its sales to 30,000 units.
The various probable outcomes will be arranged as follows:
The manager may also consider the effects of reduction of the profit by or per unit and study the probable outcomes thereof. This way, he can estimate not only the effects of his present decisions, but also what effects these will have on the alternatives he may face in the future.
Though quantitative techniques are highly complex and many of these can be used only with the help of electronic computers, they do help in encouraging logical thinking about the organizational objectives and the means (alternatives) through which these can be accomplished.
It means a probability tree that has branches leading to alternatives, called decision branches. Alternative branches lead to events that depend on probabilities, hence called probability branches. Decision tree allows management to assess the consequences of a sequence of decisions concerning the problem at hand.
The analysis starts with one primary decision that has at least two alternatives for evaluation. The probability of each outcome must be ascertained as well as its value in terms of money. Comparison of the contingent outcomes for a number of years, and their net expected values, helps in decision-making.
Techniques of Decision Making – Traditional and Modern Techniques Adopted by Managers
Whatever may be the type of decision taken by the managers, it will have some method which may be ‘scientific’ or ‘unscientific’. The methodology adopted is called “technique”. If it has a professional approach, it can be called scientific and if it is taken without considering the systematic process or otherwise called trial and error method, it is ‘unscientific’. The writers and thinkers on management have termed these two basic approaches as “traditional techniques” and “modern techniques”.
1. Traditional Techniques:
Traditionally, the decision-making at organisational level was taking place in the following forms and even today some of them are adopted in unstructured organisations.
(i) Adoption of standard operating procedure.
(ii) Incorporation and imbibing well-defined information channels in the organisational structure.
(iii) Taking decisions by habit.
(iv) Deciding through intuition, creativity and judgement.
(v) Training the selected executives in decision-making.
(vi) Adopting Rules of thumb method.
These techniques are briefly analysed in the following paragraphs:
(i) Standard Procedure:
This is the most accepted and traditional technique of decision-making. For every type of general or functional problem, certain standards for decision-making are fixed based on past experience. This may be subjected to change whenever need arises. However, managers, without much botheration adopt the standard operating practices in a routine manner. The decision in such cases is automatic.
If any disturbance is caused in carrying out the operations as per standards, the managers can discuss with higher ups and implement the modified decision. Standard operating practices are routine in nature and manager will not be liable for penalty or any other positive action, if anything goes wrong.
(ii) Incorporating Well-Defined Information System:
For taking any good decision, correct information related to the issue should be made available to managers. Well-defined information on every activity of the organisation, facilitates managers to take appropriate decisions. Each and every worker in every functional department should be told about the norms and procedures by respective managers. This ensures the managers to avail necessary information from subordinates to take sound decisions when issues arise.
(iii) Decision by Habit:
Decisions are also taken by habit. Habit may be described as settled tendency or usual manner of behaviour. It is an acquired pattern or mode of behaviour of a person. This is concerned with behaviour of a person. Decision-making may be archaic — a mental make-up. The decision-making is habitual to managers and as and when the problem crops up, decision is taken as a habit.
(iv) Decision-Making by Creativity, Intuition and Judgement:
Some instant decisions are taken at time. This will be a decision of creativity of the manager. Creativity is something that comes out of mind. This emerges from sub-consciousness and will be vague. This vague idea will be connected to consciousness by intuition. As the managers have to take quick decisions for want of time, the creative decisions may be pre-matured. Still, many a time, they workout wonders.
The decision will also be taken by innovation. The decision emerges from various types of experiments on process and practices. Of these processes or practices, certain process may prove cost-effective and very palatable to adopt. This may be adopted by managers for better results. Innovative decisions are relevant to any size of business and any type of activity.
Decision by value judgement is another way of taking decisions. Managers just decide that certain ethical value bring image to the organisation. Considering these values they may take certain decisions that may do good for the organisation. Sometimes personal values of decision- makers also influence decision-making. The judgement based on personal and ethical values, shared beliefs and behaviour pattern of decision-makers will emerge as decision.
(v) Training the Selected Executives:
The organisation may select some top executives and form a core committee to take certain decisions. These executives who form the core committee for decision-making, will be trained in decision-making process, considering all techniques of decision-making. Whenever the crucial decisions are to be taken, the committee will meet and discuss the problem threadbare, come out with a viable decision which may be approved by top management and implemented.
(vi) Adopting Rule of Thumb Method:
This will have no logical thinking. This will be only trail decision taken by the manager which may or may not work in proper direction. However series of corrections are made to the original decision and gradually a workable decision emerges which may be standardised. As the ‘Change’ is the dictum for growth, these decisions also go on changing.
Some or all these traditional decision-making tools still prevail in many business enterprises. Particularly in small enterprises, this is the order of the day. Even medium and large enterprises who adopt modem techniques, they finally resort to these methods as a cross-practice.
2. Modern Techniques:
Many modern methods have been evolved to take decisions.
Following are the ones which are in practice:
(i) Operations Research.
(ii) Electronic Data Processing
(iii) Training Decision-Makers in Heuristic (allowing people to learn for themselves) Problem-Solving Techniques.
(iv) Developing Heuristic Computer Programmes.
(v) Adopting “Decision Tree” Technique.
(i) Operations Research:
This is a scientific approach developed after World War II. Originally, during World War II, the group of scientists called “Operations Research”, the group were asked to give solutions to solve complex military operational problems. The group, consisting mainly physicists used problem-solving method and very successful solutions to solve complex military problems.
The OR concept was introduced in 1955 to develop production process models, which also showed amazing results. Cost-saving was the main benefit derived from OR.
The same process came handy to managers to take sound decisions on complex issues.
The technique will have the following phases:
(a) Observe the problem systematically to find the system behaviour.
(b) Group the specific observations to construct a generalized framework or otherwise called a “model” which predicts the consequential changes, if model is introduced.
(c) Use the model to deduce how the system will behave when adopted.
(d) Test the model by conducting an experiment and taking decision if test proves advantageous.
This is a scientific technique, which may give near-precision result, provided other associated factors remaining same. Today, many managers take a scientific approach to decision-making. OR technique is extensively used in large, complex organisations to take decisions and this happens to be a programmed decision-making process.
(ii) Electronic Data Processing – EDP:
This technique is adopted to analyse the information in electronic form, i.e., through computers. If enormous data are to be analysed to take decision, this technique is very useful. Analysis will be precise and this facilitates effective decision-making. The consequences of the decision can also be understood when precious analysis takes place through EDP. But the information fed for processing should be correct to arrive at sound decision.
(iii) Training Decision-Makers in Heuristic Problem-Solving Techniques:
Another modern technique of decision-making is to train the managers to take decision through self- learning. Heuristic (allowing people to learn for themselves) problem-solving techniques can be adopted by intelligent managers, as the decision is self-made based on their own analysis of the problem requiring decision. EDP will analyse the problem and gives the result which may be adopted. This technique is useful in non-programmed decision.
(iv) Developing Heuristic Computer Programmes:
Several self-learning decision models can be developed and made available to decision makers to adopt it implicitly or modifying it as per the need of the situation in the organisation. This can be applied to non-programmed decisions.
This is a tree type of diagram used in decision-making. This can determine the best or of the greatest value, (sometimes under certain parameters or restrictions) or a course of action to be taken for solving an existing problem, when several possible alternatives depicted in a tree form. The decision tree chart, which looks like a cluster of tree branches exhibits the structure of a particular decision. This also shows interrelationships and interplay between different alternatives, decisions and possible outcomes.
Decision trees are useful tools in selecting a decision between several courses of action. They help to form a balanced pictures of the risks and rewards associated with each possible course of action.
Decision trees provide an effective method of decision-making, because of the following benefits:
i. The problem is clearly laid out and all options can be explored.
ii. Allows us to analyse fully the possible consequences of a decision.
iii. Provides a framework to quantify the value of outcomes and the probabilities of achieving them.
iv. Help us to make the best decisions on the basis of existing information and best guesses.
Although decision tree technique is scientific one in taking decision, it should be used in conjunction with the creative judgements of the manager.
A decision tree will have four components, viz., (i) Nodes, (ii) branches, (iii) probability estimates and (iv) Pay-offs.
Nodes are indicated in the form of squares (□). Square nodes represent the points where the manager has to take decision or to analyse the chance factors.
Branches represent the alternative course of action which is to be explored and is shown in the form of circle (O).
Probability estimates show the quantitative analysis of good, moderate or poor outcome of a particular alternative with attached values say. Good outcome – 0.8 value. Moderate outcome 0.6 value poor outcome 0.2 value.
Pay-off shows the quantitative outcome of each alternative Example – Good 25% profit. Moderate 10% value. Poor 10% Loss or it can be in absolute figures. Pay-offs are shown at the terminal points of each node.
Construction of a decision tree will have the different phases depending upon the nature of a problem. Problems may relate to production, finance, marketing or HRD. For every problem, which has alternative solutions, a decision tree can be developed.
The decision tree is so called as the decision options will be analaysed and end result in each option is presented in the form of a graph. This graphic presentation looks like a tree and hence, it is called decision tree.
Decision Tree – How to Construct?
The construction of decision tree starts with a decision that one has to make.
(i) The decision you have to make will be represented by a square (o) on the left hand side in the middle of the large piece of paper.
(ii) From this square, draw lines towards the right for each possible solutions.
(iii) Write a short description of the solution along the line.
(iv) Keep the lines apart as far as possible so that you can expand your thoughts.
(v) Show the probable result at the end of each line.
(vi) If the result shows uncertainty about decision, draw a small circle (O) (circles represent uncertain outcome and the squares represent possible decisions).
(vii) If the result is another decision that you have to make draw another square.
(viii) Write the decision or factor above the square or circle.
(ix) If the result is complete at the end of the line, do not write anything further.
Thus, go on writing new decision squares in the picture for each option as much as possible. Draw out lines for each option you select. Show the possible result after drawing the circle. Again make a brief note on the line saying what it means. This entire diagram, commencing from the square which represents the decision you have to make to the alternative decisions you arrive at. This is how the decision-tree is constructed.
Decision Making Tools and Techniques – Decision Tree Analysis, Pareto Analysis, Force Field Analysis, Stepladder Technique, Cost/Benefit Analysis and a Few Others
Decision analysis and most other decision techniques should be regarded as aids to decision making, not substitutes for it. They are simply methods for making sense of the probabilistic information available. Nor can they capture every nuance of real decision problems. Errors will be made if the techniques are used under the assumption that they provide perfect models of actual situations. On the other hand, it would be equally wrong to reject their use completely, on the grounds that they are merely approximations of reality.
Decision techniques, when properly applied, do capture the most important features of actual situations and can therefore provide a decision maker with valuable help. A variety of structured techniques have been discussed for helping planners and decision makers.
1. Decision Tree Analysis:
Decision Tree Analysis is a very effective tool to choose between several possible courses of action on the basis of available information and intuition by projecting the most likely outcomes of choosing those options. They clearly lay down the negative and positive aspects associated with each possible course of action. A decision tree shows a complete picture of a potential decision and allows a manager to graph alternative decision paths.
Decision trees are a useful way to analyze hiring, marketing, investments, equipment purchases, pricing, and similar decisions that involve a progression of smaller decisions. The term decision tree comes from the graphic appearance of the technique that starts with the initial decision shown as the base. The various alternatives, based upon possible future environmental conditions, and the payoffs associated with each of the decisions branch from the trunk.
Also known as 80/20 rule, Pareto analysis believe that, doing 20% of the work can generate 80% of the benefit of doing the whole job. It is a decision making technique that is used for selection of a limited number of tasks that produce significant overall effect. Pareto analysis helps stimulate thinking and organize thoughts. It helps to identify the top 20% of causes that needs to be addressed to resolve the 80% of the problems.
Force Field Analysis is a useful technique for looking at all the forces for and against a decision. This is also a method based on pros and cons. Here, you create a table where you write down the plan in the middle, list all forces for change in one column, and all forces against change in another column. Then assign score to each force.
The Stepladder Technique is a useful method for motivating individual participation in group decision. It encourages all members to contribute on an individual level before being influenced by anyone else. These results in a wider variety of ideas, it prevents people from “hiding” within the group.
As the name suggest, here the decision is based purely by comparing the cost and the benefit. If the benefit is more, the decision is usually accepted.
In this technique, one lists the advantages and disadvantages of each possible decision and attempts to identify the best possible outcome whereby the advantages outnumber the disadvantages. PMI – is a variation of the Pros & Cons technique adding a third possibility called “interesting” (plus/minus/interesting).
Payback analysis comes in handy if a manager needs to decide whether to purchase a piece of equipment. Many individuals use payback analysis when they decide whether they should continue their education. They determine how much courses will cost, how much salary they will earn as a result of each course completed and perhaps, degree earned, and how long it will take to recover the investment. If the benefits outweigh the costs, the payback is worthwhile.
Simulation is a broad term indicating any type of activity that attempts to imitate an existing system or situation in a simplified manner. Simulation is basically model building, in which the simulator is trying to gain understanding by replicating something and then manipulating it by adjusting the variables used to build the model.
Simulations have great potential in decision making. If a manager could simulate alternatives and predict their outcomes at this point in the decision process, he or she would eliminate much of the guesswork from decision making.
Generally used to optimize limited resources, linear programming is a mathematical technique where the requirements are represented by linear equations. Useful problems in operations research can be addressed using this technique.
These are trial and error decision making approaches that start with a model that is refined with ongoing experimentation. Because they aren’t accurate, normally they are used to reduce options or save time when approximations will be acceptable.
This method is used when two or more equally attractive alternatives are faced. The name comes from an old story of an ass placed between two equally tempting bales of hay. The ass couldn’t decide which bale to turn to because they were both so attractive, and so it starved to death from indecision. The decision maker lists all of the negative points or drawbacks about each alternative. The Buriden’s Ass method focuses on the drawbacks of each possible alternative.
Six Thinking Hats is an important decision making technique where you take decision based on different points of views. Here, you wear six different colors of hats while taking decision.
White Hat – With this thinking hat, you focus on the data available. Your decision is purely information based.
Red Hat – You look at the decision using intuition, gut reaction, and emotion.
Black Hat – You take decisions pessimistically, cautiously and defensively.
Yellow Hat – You take decisions positively. You have an optimistic view point.
Green Hat – This stands for creativity and helps in creative solutions.
Blue Hat – The Blue Hat stands for process control.
Starbursting is a form of brainstorming that focuses on generating questions rather than answers. It is more interactive. For example, the R& D people colleague suggests a new design of Ski boot. One question you ask might be “Who is the customer?” Answer – “Skiiers”. But you need to go further than this to ensure that you target your promotions accurately: “What kind of skiiers?” Answer – “Those who do a lot of jumping, who need extra support”, and so on.
Group Decision-Making Techniques:
The most common form of group decision making takes place in interacting groups. In these groups, members meet face-to-face and rely on both verbal and nonverbal interaction to communicate with each other.
But phenomenon like groupthink demonstrate that, interacting groups often censor themselves and pressure individual members toward conformity of opinion. Brainstorming the nominal group technique, and electronic meetings have been proposed as ways to reduce many of the problems inherent in the traditional interacting group.
Brainstorming is meant to overcome pressures for conformity in the interacting group that retard the development of creative alternatives .It does this by utilizing an idea-generation process that specifically encourages any and all alternatives, while withholding any criticism of those alternatives.
In a typical brainstorming session, the group leader states the problem in a clear manner so that it is understood by all participants. Members then freewheel as many alternatives as they can in a given length of time. No criticism is allowed, and all the alternatives are recorded for later discussion and analysis.
2. The Nominal Group Technique:
The nominal group technique restricts discussion or interpersonal communication during the decision-making process, hence, the term nominal Group members are all physically present, as in a traditional committee meeting but members operate independently.
The following steps take place in a nominal group:
i. Members meet as a group but, each member independently writes down his or her ideas on the problem before the discussion.
ii. After this, each member presents one idea to the group. Each member takes his or her turn, presenting a single idea until all ideas have been presented and recorded .No discussions takes place until all ideas have been recorded.
iii. The group now discusses the ideas for clarity and evaluates them
iv. Each group member silently and independently rank-orders the ideas. The ideas with the highest aggregate ranking amongst the members determine the final decision.
The most recent approach to group decision making blends the nominal group technique with sophisticated computer technology. Its called computer-assisted group or electronic meeting Once the technology is in place the issues are presented to participants and they type their response onto their computer screen.
The major advantages of electronic meetings are anonymity, honesty and speed. Participants can type any message they want and it flashes on the computer screen for all to see.
As opposed to face-to-face group discussions, Delphi Technique helps generate ideas anonymously. The experts answer questions in two or more rounds. Thereafter an anonymous summary of the experts from the previous round is provided.
Thus, experts are encouraged to revise their earlier answers in light of the replies of other members of their panel. It is believed that during this process the range of the answers will decrease and the group will converge towards the “correct” answer.
Techniques of Decision Making – Linear Programming, Probability Decision Theory, Game Theory, Queuing Theory, Simulation, Networking Techniques and a Few Others
Managers solve the decisions instantaneously, consciously or otherwise, particularly if the decisions are of routine and repetitive nature through some established habits or routines. The experience and internalised learning through training programmes enhance the decision making capabilities of the managers.
They respond to problems effectively and efficiently and this becomes a habit for them.
The best patterns that evolve over a period of time are codified and developed into certain Standard Operating Procedures (SOPs) which can be taken as Bible for decision making. Managers who cannot solve problems instantaneously can refer to the SOP and find solution from the procedures, policies, systems etc.
Organisational structure also is another source of solution for many problems such as – to whom to accountable or report, whom to involve in the decisions, whom to contact for resources and information etc. Organisational structure is web of authority and activity relationships.
There are many other problems which can be solved only through some advanced tools and these tools are discussed here:
1. Linear Programming:
It is an optimising function under given resources and constraints. The objective function is either to maximize the utility such as – revenue or minimise the disutility such as – costs. The technique is useful under conditions of certainty.
It is mathematical technique for determining the optimal allocation of resources and achieving the specified objective when there are alternative uses of resources like money, manpower, materials, machines etc. The objective in resource allocation may be minimising costs or maximising the profit.
2. Probability Decision Theory:
Where the detail of probability in respect of different outcomes is available, this theory can be made use of. Pay-off matrices and decision trees are constructed to represent the variables. Decision tree is an aid to decision making in uncertain conditions. It sets out alternative courses of action along with the financial consequences of each alternative, and assigns subjective probabilities to the likelihood of future events happening.
For instance, a firm thinking of opening a new showroom, the success of the business will depend upon the consumer spending (which in turn is influence by boom or recessionary conditions in the economy) would have a decision tree.
3. Game Theory:
It is a useful tool for taking decisions under conditions of competitive conflict. Here, the adversaries in the conflict are supposed to be involved in a game of gaining while others lose totally or partially. There are many games such as – two-person, three-person or n-person games as also zero-sum and non-zero sum games.
4. Queuing Theory:
Where it is necessary to find solutions to waiting line problems for staff, equipment or services under conditions of irregular or uncertain demand. It aims at finding optimum volume of facilities to minimise the waiting period, investments in infrastructural facilities. All those who provide public utility services such as – public transport systems, hospitals, big departmental stores etc., use this theory extensively.
5. Simulation:
Simulation is a quantitative procedure that explains how a process is developed and a series of organised trial and error experiments are conducted to predict the behaviour of the process over time. To know how the real process would react to certain changes, these changes are incorporated into the model and simulate the reaction of the real process.
For instance, take the case of the design of an aeroplane. The designer can build a scale model and observe its behaviour to wind tunnel. In simulation, mathematical models are run on trial data to simulate the behaviour of the system.
6. Networking Techniques:
Networking techniques are used for planning, scheduling and controlling different projects of different magnitude and complexity levels. They are so simple that they can be applied in our day to day life to plan our schedule also. They are Programme Evaluation Review Technique (PERT) and Critical Path Method (CPM). Project managers of construction works, or software assignments, for instance, find these techniques immensely useful.
Complex projects involve considerable cost and time and to ensure that these are completed as per schedule and without time over-runs or cost over-runs, these PERT and CPM are deployed. The main purpose is to minimise both time and cost by working out a critical path which consumes otherwise maximum resources in the normal course.
PERT and CPM are the network techniques representing the logical sequence in detail diagrammatically among the activities required for completing of a project. The deployment of resources also can be scheduled and where the excess materials, machinery or men are available at one point, they can be moved to places of requirement with the help of these techniques.
7. Creative Techniques:
All problems are not of routine nature. Some problems are non-routine or novel and demand creative thinking for solving. Creativity refers to the ability to generate new ideas and new ways of doing things. Innovation is the outcome of creativity. Brainstorming is one of the creative techniques where on being given a problem, experts get involved to generate maximum number of alternative solutions for a given problem.
Whether the solution suggested is feasible or not, is not the focus at the brain storming stage. Generating as many alternatives as possible is the main focus during brain storming. Experts are assembled in a group and encouraged to throw up all the solutions, including wild or impractical, to a given problem that may lead to creative solution.
8. Participative Techniques:
Involving the employees in taking decisions and even routine matters of management is the sign of democracy and proactive managers widely believe in this approach to solve the problems of management. Since many employees take part in these techniques, individual bias can be is minimised; collective wisdom can be the main advantage of involving employees at different level.
This is a group-based technique to decision making. These techniques promote goodwill, enhance employee motivation and morale. They facilitate more acceptable and timely decisions while minimising the wastages of resources.
9. Heuristic Techniques:
Some problems are so complex that the decisions do not result in desired results at one stroke. They may require trial and error approach to find solutions on a step-by-step basis. Decision making in reality may be complex as some problems, which are particularly of strategic nature, cannot be too rational and systematic.
Several constraints such as – information/communication gaps, conflicting goals, perverse human behaviour and the uncertain nature of business environment, etc., limit the validity of every type of decision making tool. In these cases, the only alternative is rule of thumb or heuristic technique and this facilitates the transition towards decisions. Computers are extensively used in making use of heuristic techniques.