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Introduction of Different “Easy to Handle“ Decision Making Techniques

Research Paper (undergraduate) 2015 28 Pages

Business economics - Miscellaneous

Excerpt

Table of Contents

List of Abbreviations

List of Figures

List of Tables

1 Introduction
1.1 Problem and Objectives
1.2 Procedure of Seminar Paper

2 Defining the Terms
2.1 Decision Making Techniques
2.2 “easy to handle”

3 Introducing different “easy to handle” Decision Making Techniques
3.1 Decision Matrix
3.2 Decision Tree
3.3 Cost-Benefit Analysis
3.4 Observe-Orient-Decide-Act Loop
3.5 Kepner-Tregoe Analysis
3.6 Vroom-Yetton-Jago Decision Model
3.7 Recognition-Primed Decision Model
3.8 Analytic Hierarchy Process
3.9 Pros and Cons Analysis (of the introduced Techniques)

4 Conclusion and Outlook

Appendices

Bibliography

List of Abbreviations

illustration not visible in this excerpt

List of Figures

Figure 1: Decision Tree for the Product Development Problem (Eisenfuhr et al. 2010, p. 46)

Figure 2: Boyd´s Observe-Orient-Decide-Act Loop (Richards 2005)

Figure 3: The Vroom-Yetton-Jago Decision Model (Mindtools 2014c)

Figure 4: Integrated Recognition-Primed Decision Model (Klein 1944, p. 27)

Figure 5: Comparison Matrices and Priorities of Alternatives and Criteria (Sander 2014)

Figure 6: Choosing a Leader using the AHP (Sander 2014)

Figure 7: The Decision Making Process

Figure 8: Calculation for the Alternatives with Respect to the Goals (Sander 2014)

Figure 9: Overall Priorities for the Alternatives (Sander 2014)

List of Tables

Table 1: Example Decision Matrix: How Suppliers satisfy each Factor (Mindtools, 2014a)

Table 2: Example of CBA Calculation, Alternative 1 (referring to Baker et al. 2001, p. 25)

Table 3: Ranking of Objectives (Decision Making 2013a)

Table 4: Assigning a relative Score for Alternative 1 (Decision Making 2013a)

Table 5: Adversity Rating for Alternative 1 (Decision Making 2013a)

Table 6: Pros and Cons Analysis of the introduced Techniques (own Exposition)

Table 7: Vroom-Jago Leadership Styles (Mindtools 2014c)

1 Introduction

1.1 Problem and Objectives

The most important job of any executive is making decisions. It is also the toughest and riskiest job, because bad decisions can damage a business and a career, in some situations irreparably. In many cases these bad decisions occur when alternatives were not clearly defined, the right information was not collected, the costs and benefits were not accurately weighed, or the decision maker himself was sabotaged by the human brain. In the present complex environment, the executives call for a way to cope with the myriad factors that affect the achievement of goals and the consistency of the judgement the decision makers use to draw valid conclusions. (Harvard Business Review 2011, p. 1, Saaty 2013, p. 6) Many difficulties like uncertainty about the future, variation of consequences of different actions, difficulties because of too few or too many available alternatives, and complexity of a decision situation, if more factors have to be taken into account, make it more important to support the decision makers with procedures and tools that have been developed for a systematic selection of requirements and processing of relevant information. The general approach of decision making ranges from the highly complex problems to the relatively simple choices but ensures its applicability and can be helpful in various decisions. So it is not only relevant to executives and managers but also to physicians, politicians, judges, and engineers to structure analytical thinking which supports decision making perceived as rational and well-founded. (Eisenfuhr et al. 2010, p. 3)

This assignment introduces different “easy to handle” decision making techniques that help to decide rather on intuition than on structured analysis and methodical dissection.

1.2 Procedure of Seminar Paper

In this assignment the most relevant terms are defined in Chapter 2. The main chapter 3 introduces different “easy to handle” decision making techniques. Chapter 4 concludes the assignment and gives an outlook.

2 Defining the Terms

2.1 Decision Making Techniques

Decision making can be defined as the thought process of selecting a logical choice from the available options. When trying to make a good decision, a person must weight the positives and negatives of each option, and consider all the alternatives. For effective decision making, a person must be able to forecast the outcome of each option as well, and based on all these items, determine which option is the best for that particular situation. (Business 2014a) Decision making techniques are systematic procedures, formulas, or routines by which tasks are accomplished. The techniques support persons to make decisions. (Business 2014b)

2.2 “easy to handle”

A possibility to describe “easy to handle” is usability, effectiveness, and efficiency of the techniques that are used. The “easy to handle” procedures, formulas, or routines should improve the decision making but not being difficult and complex to deal with. Often they are mapped on a tool to simplify the handling. (Investorwords 2014)

3 Introducing different “easy to handle” Decision Making Techniques

One of the executives´ tasks is to make decisions. They do not make great many decisions but they concentrate on important ones. Executives try to think through what is strategic and generic in opposite to solving problems. A systematic process with clearly defined elements and in a distinct sequence of steps is given to them by the decision making process. (Drucker 2002, p. 118) The process is shortly described and illustrated in general in the appendix (Appendix 1: Figure 7).

This chapter introduces different “easy to handle” decision making techniques that are applicable to a wide range of decisions, from those which are as simple as deciding what to drink in a restaurant to ones that are complicated by interdepartmental company interfaces. They provide organized ways to answer questions about the problem in a step-by-step approach including clarifying the purpose, evaluating alternatives (quantitative, qualitative), assessing risks and benefits, and making decisions. Usually these steps involve a systematic method for handling and communicating information. (Baker et al. 2001, p. 6)

The formal decision making techniques should be used when decisions:

“Require many reviews at different management levels

Involve more than one program

Require congressional line item approval

Affect new or redirected funding

Require approval for new facilities or upgrades to existing facilities

Have alternatives with high technical risk

Have alternatives that appear equally viable

Require a decision to revise or discontinue work on a program

Have impact mainly in the future

Involve multiple or competing drivers, or

Define data needed to support future decisions.” (Baker et al. 2001, p. 1)

The selection of a decision making technique is not always an easy task and depends on the concrete problem. (Fülöp 2005, p. 2) The following chapter introduces some of these methods to make systematic and effective decisions.

3.1 Decision Matrix

The decision matrix analysis as well as the decision tree (chapter 3.2) are two types of graphical representation. They both display full information about the alternatives, uncertain events and consequences. The decision matrix analysis illustrates the data in a way that allows finding easily a numerical solution. (Eisenfuhr et al. 2010, p. 39)

The decision matrix is easy to handle, for example in Microsoft excel. If each row of a matrix represents an alternative and each column a factor that is to consider, then, each cell may be used to display a respective result. Table 1 exemplifies the decision matrix by having four suppliers as alternatives and different factors. At the end supplier 4 is the best alternative, despite the lack of flexibility of its payment options. (Eisenfuhr et al. 2010, p. 44, Mindtools, 2014a)

illustration not visible in this excerpt

Table 1: Example Decision Matrix: How Suppliers satisfy each Factor (Mindtools, 2014a)

3.2 Decision Tree

The decision tree is often better than the decision matrix to visualize multi-stage alternatives. It contains the following elements:

“decisions, represented by squares,

uncertainties, represented by circles or ovals,

consequences, represented by triangles.” (Eisenfuhr et al. 2010, p. 46)

To decide the development of a new product the decision tree is shown in Figure 1. Different uncertainties are provided with probabilities. Additionally the company has to decide whether to produce large or small capacities regarding also different demands. Every path across the tree from left to right ends in a consequence (1 to 6). (Eisenfuhr et al 2010, p. 45-46)

illustration not visible in this excerpt

Figure 1: Decision Tree for the Product Development Problem (Eisenfuhr et al. 2010, p. 46)

The consequences could be a score or a cash value that illustrates which option has the greatest worth. The probabilities can be illustrated in certain values of money that it could be worth. (Mindtools 2014b) It has to be considered that the probabilities and financial estimates indicated in the decision tree have to be realistic and, where possible, based on available data. Generally the more alternatives that are considered the more complex the decision is, but the more likely a solution is found, which meets the needs. (Harvard 2006, p. 56)

3.3 Cost-Benefit Analysis

The cost-benefit analysis (CBA) is a process of identifying, measuring and comparing the costs of investments, projects, or programs with the benefits of those. (Campbell et al. 2007, p. 3) The costs and benefits of the alternatives are evaluated on monetary basis. To improve the quality of environmental decision making there are attempts to incorporate the environmental impacts within the CBA but problems regarding environmental issues in CBA further persist, including the monetary valuation of environmental impacts. (Boardman et al. 2014, p. 6, Campbell et al. 2007, p. 3)

The major steps in CBA are:

Specifying the set of alternative investments, projects, or programs

Deciding whose benefits and costs count

Identifying the impact categories, cataloguing them, and selecting measurement indicators

Predicting the impacts quantitatively over the life of project

Monetizing all impacts

Discounting benefits and costs to obtain present values

Computing the net present value of each alternative

Performing sensitivity analysis

Making a recommendation. (Boardman et al. 2014, p. 6)

Table 2 illustrates the example of deciding which product (alternative) should be developed using the CBA. The sum of expected costs and benefits over a defined time horizon are compared. While the product is developed there are more monetary costs compared to not to develop the product. But after that phase the benefits of developing and selling the product dominate. The break even point of the simplified example is in the 5th year after initiation. The alternatives have to be compared to decide which product will be developed.

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Table 2: Example of CBA Calculation, Alternative 1 (referring to Baker et al. 2001, p. 25)

For guiding public policies, CBA has great attractions. It considers gains and losses to all members of society as well as it values impacts in terms of a single, familiar measurement scale (money) by illustrating furthermore the worth of implementing an alternative relative to another. (Fülöp 2005, p. 4)

3.4 Observe-Orient-Decide-Act Loop

The observe-orient-decide-act (OODA) loop was first introduced by John Boyd, Air Force pilot, during the Korean War in the 50´s. He observed that despite the advantages the adversary´s MIG-15 planes, the American F-86s won a majority of their dogfights because they had a better field of vision as well as faster and easier hydraulic controls. They were able to disrupt the enemy´s process due to better information and faster execution. In other words the American possessed clear advantages in observing and acting, the first and the last step of the OODA loop (Figure 2). (Williams 2013, Adolph 2014)

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Figure 2: Boyd´s Observe-Orient-Decide-Act Loop (Richards 2005)

The OODA loop is easy to transfer from war to business because it has sequential activities that guide leaders to effective decisions plus the speed at which the OODA loop is executed becomes the largest factor in disrupting the competitor. Afterwards it is worth to examine the OODA steps more in detail. (Williams 2013, Adolph 2014)

Observe: The first step of OODA loop is a search for information inside the company but also of its environment. This could include tendencies of the company itself and it´s opponents, as well as the physical, mental, and moral situation. The key challenge of effective observation is not only to know which elements of information to monitor but also how to set the right filters to each. (Williams 2013)

Orient: The orientation step is a synthesis of multiple contributions (experiences, traditions, heritage, etc.). It includes monitoring the outside environment by calculating key performance indicators, making predictions and issuing the right alerts to key decision makers. Often it is necessary to combine software tools (inventory, financial) and the judgement of humans to understand the connection between past business experiences and what to expect next. (Williams 2013, Adolph 2014)

Decide: The decision is a discrete step that means using the data and the orientation to make economic, repeatable, faster, and better decisions. For example the inventory management is a sensitive business, because it includes all of the company´s assets. The ability to order and store the right elements for popular products possibly makes the difference between profitability and failure. (Williams 2013)

Act: The action within the business is made. Workflows, processes, or software tools can support that step. The cyclic of the OODA loop starts again at step one (observation) with the change of the environment by taking the last step. (Williams 2013, Adolph 2014)

3.5 Kepner-Tregoe Analysis

Kepner-Tregoe problem solving and decision making is a structured methodology to organize and analyse vast amounts of information and to take appropriate action. It was developed by Charles H. Kepner and Benjamin B. Tregoe in the 1960s. The idea of Kepner-Tregoe is to find the best possible solution out of many instead of the perfect one with the minimal negative consequences. The process consists of four distinct processes, each of them designed for a specific type of situation. Going below through each of the steps gives knowledge and understanding about the issues that bear on the decision. (Kepner-Tregoe 2004, Decision Making 2013a)

Situational appraisal is the tool of choice, if the situation is unclear, concerns have to be outlined, and a direction has to be chosen. (Decision Making 2013a)

To find the cause of a positive or negative deviation problem analysis is used. It points the relevant information and leads to the root cause when people, machinery, systems, or processes are not performing as expected. (Kepner-Tregoe 2004)

Alternatives are identified and a risk analysis is done for each alternative when the path ahead is uncertain, the number of choices is too high, or making the wrong choice is too risky. It is the decision analysis. (Kepner-Tregoe 2004, Decision Making 2013a)

The potential problem analysis is used if the best alternative is further scrutinized against possible problems and negative consequences. Potential problem analysis uncovers the driving factors and identifies ways to lower risks. (Kepner-Tregoe 2004, Decision Making 2013a)

The following steps perform the Kepner-Tregoe analysis:

Prepare a decision statement

Establish strategic requirements, operational objectives, and restraints

(It is musts, wants, and limits)

Rank objectives and assign relative weights (Table 3)

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Table 3: Ranking of Objectives (Decision Making 2013a)

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Details

Pages
28
Year
2015
ISBN (eBook)
9783656977605
ISBN (Book)
9783656977612
File size
845 KB
Language
English
Catalog Number
v301058
Institution / College
FOM Hochschule für Oekonomie und Management gemeinnützige GmbH, Hochschulstudienzentrum Freiburg
Grade
Tags
management decision making company Entscheidungen Entscheidungsfindung manager techniques techniken methoden methods models modelle cba cost benefit analysis matrix tree observe orient decide act loop oodal ooda kt kepner tregoe vroom yetton jago vyj rp recognition primed analytic hierarchy process strategie strategy pros cons outlook goal objective procedure easy handle kosten entscheidung contra pro ranking supplier factory alternative leadership style führung calculatoin kalkulation

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Title: Introduction of Different “Easy to Handle“ Decision Making Techniques