BBA Management Rationality Decision Making Study Material Notes

BBA Management Rationality Decision Making Study Material Notes: Economic man model administrative man model limits on rationality Decision making conditions Certainty Uncertainty Risk Problem-Solving Routine Approach Scientific Approach Quantitative Approach Creative Approach Role of Creativity in decision making Stages in Creative Process Nonquantitative techniques for Decision making Innovation Diffusion Creativity and Innovation Experience Considered Opinions Intuition Facts ( This Post is Most Important For BBA Students )

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RATIONALITY IN DECISION MAKING

Although there is considerable agreement on the desirability of rationality in decision there is much less agreement on what rationality really means. The topic has been of much controversy. For example, Simon has described different types of rationem Generally, the concept of rationality is defined in terms of obiective and intelligent acco is usually characterised by behavioural nexus between ends and means. If appropria means are chosen to reach desired ends, the decision is rational. This means relationship is commonly referred to as ‘means-ends chain or hierarchy’. However, this means and ends test of rationality presents many problems because it is very dicuno separate means from ends; an apparent ends may be means for some future ends. Simon has observed three problems in using this chain to identify rationality. First, the ends to DC attained by the choice of a behaviour alternative are often incompletely or incorrectly stated through failure to consider the alternative ends that could be reached by selection of another behaviour. Second, in actual situation, complete separation of means from ends is usually impossible because what might be an end today may be means for tomorrow or what might be an end for a particular level of manager may be a means for a higher-level manager. Third, the means-ends terminology tends to obscure the role of the time element in decision making.

Presenting these difficulties in the means-ends chain as test of rationality. Simon considers rationality as “the selection of preferred behaviour alternatives in terins of values whereby the consequences of behaviour can be evaluated”. However, if value is attached to the concept of rationality, an action may be rational from one point of view and nonrational from another point of view. For example, in this context, Simon observes as follows:

Rationality Decision Making

1 Decision maker does not have information about all the alternatives. Even for a single alternative, he may not have all the relevant information. He makes assumptions about Some aspects of the decision. In fact, major decisions which are generally non-programmed are made under the conditions of partial ignorance. Besides the lack of information about alternatives for decision making, there is a problem in anticipating the consequences of various alternatives on the objectives sought to be achieved by a decision. Since outcome of a decision can be known only in future, it is virtually impossible to know the exact outcome of the decisions before the things actually happen. This is more pronounced in the case of non-repetitive decisions. Therefore, to the extent a decision situation is uncertain, there is limit on rationality.

2. Human Factor in Decision Making. A major source of limit on rationality is human factor in decision making. Personal factors affect the choice of an alternative in two ways. First, the choice is an ordering of a kind of personal preference, and a decision maker cannot eliminate his personal preference altogether. Second, choice depends on various qualitative information and its interpretation is likely to be personalised. This is the reason why major organisational decisions are changed when a new chief executive with different personality features takes over the charge of an organisation. The major human factors which affect rationality in decision making are the following: (a) Personal Value System. Value system is a framework of personal philosophy which governs and influences the individual reactions and responses to any situation. Personal value system is viewed as a relatively permanent framework which shapes the general nature of behaviour. Thus, what is good or bad is judged on the basis of personal value system. Therefore, it cannot only affect choice of an alternative in terms of what should be best for the organisation but also in terms of perception of various situations under which an alternative is being chosen

(b) Perception. Problems and their solutions are quite abstract in nature. Thus, there is a likelihood that individual’s perception regarding the problems and their solutions is different and consequently the way of tackling the problems may be different. This is so because people act according to what they see. For example, an organisational problem is generally interpreted as marketing problem by marketing people but financial problem by finance people. The perception of people is affected by several factors most of which are related with personal characteristics. (c) Political and Power Behaviour. Political and power behaviour in an organisation also affects the extent to which a decision would be rational. Since the major choices in an organisation are arrived at after a lot of consultation and involvement of various people at some stage of total decision making process, their interactions play significant part in the choice process. For example, Mintzberg has identified three way in which major decisions are made. These are judgement, bargaining, and analysis. In judgement, the choice is made in a single individual’s mind and others do not contribute. In bargaining. choice is made by a group of decision makers with conflicting objectives. In analysis, factual data are brought to bear systematically on the evaluation process, generally by expert staff as opposed to managers. In the organisation, various choices are made through bargaining process where various interest groups put pressure according to their own interest. Similarly, lower-level managers affect decision making at the higher levels. A lot of filtering and choices are made at lower levels before they go to the top level. Thus, managers at various levels affect the decision process in such a way that the final choice does not consider all alternatives.

(d) Time Constraints. Time factor also affects the rationality in decision making. In many cases, even though further information is needed. decisions are made only with pa data. This may be purposeful, however, it is often merely a reaction to the time limitations placed on decision makers. When one makes several decisions every day, some of major significance and others of only minor to the organisation’s operations, obvious efficiency criteria justify making them promptly. Pressures to make decisions often require behaviour that contradicts the assumptions of rational economic man assumptions.

DECISION-MAKING CONDITIONS

Decision making involves selection of alternative out of the several available. The alternative is put into action which will take place in future period. Thus, the decision maker is making the decision for future conditions. In fact, long-term decision is not a process of making the future decision but a means of reflecting the future in today’s decision. The future conditions for a decision vary along a continuum ranging from conditions of perfect certainty to conditions of complete uncertainty as shown in Figure 10.2.

In each condition, the outcome of a decision differs. An outcome defines what will happen if a particular alternative or course of action is chosen. Knowledge of outcomes is important when there are multiple alternatives. In the analysis of decision making, three types of knowledge with respect to outcomes are usually distinguished as shown in Table 10.1.

Rationality Decision Making

Certainty

When a manager knows exactly which state of nature will occur, a circumstance of certainty exists. This means that the manager will be able to make perfectly accurate decisions time after time. Such conditions exist when decision involves action in immediate future, and the manager has made such a decision a number of times with the same results. Under such conditions, he can use a deterministic model, the one in which all factors are assumed to be exact with chance playing no role. Under such conditions, he does not need to analyse the chance element. This can be explained by an example of payoff table. Payoff table indicates the outcomes of a decision under various conditions, as shown in Table

The data presented in Table 10.2 deal with monetary payoff to a decision maker. The decision maker has two alternative actions and three states of nature of demand for product. The decision involves selecting action in terms of distribution-centralised or decentralised. The demand for the product is considered under three situations-low, moderate, high. Revenue to be earned under various conditions and particular action is given in terms of rupees (ten millions). In reaching certainty decision, the manager would only have to utilise a part of the table and would have to examine a number of alternatives, but only the payoffs related to the one state of nature will occur. Supposing that the manager is sure about the demand, that is high demand, he can select decentralised distribution which gives maximum revenue of Rs. 35 crores. In this condition, the manager is sure about the demand of the product. However, such conditions rarely exist because decision making requires more variables than presented here and all such factors may not behave in the same way. Therefore, in many situations, the manager is forced to use probability about such happening, demand of product in this case.

Risk

Most of the major organisational decisions particularly involving investment are made under the conditions of risk in which some information is available but that is not sufficient to answer overall question about the outcomes of decisions. In such a case, managers have to decide two things-amount of risk involved in a decision and amount of risk that the organisation is ready to assume. Amount of risk involved can be calculated by risk analysis while organisation’s propensity to take risk depends on its risk taking ability and risk taking attitudes. However, here we are concerned with only risk analysis or arriving alternatives for decision making.

Risk Analysis. Virtually, every decision is based on the interaction of a number of critical variables, many of which have an element of uncertainty but, perhaps, a fairly high degree of probability. Risk analysis attempts to develop probability for every critical variable in a decision problem. Probability is statistical measure of the chance of occurring a certain event or outcome. For example, if a coin having two sides-head and tail-is tossed, the probability of having head or tail is 0.5. However, in decision-making conditions, probability of the outcomes of different variables cannot be predicted in the same way as we have seen in the case of tossing a coin which is a single variable. In decision making, there are three methods of estimating probability.

1 A Priori Probabilitu. A priori probability is obtained through inferences from assumed conditions. For example, the probability of getting a head is 0.5 when a coin is tossed. Through the knowledge of nature of coin, one can know the probability of outcome if a coin is tossed several times though it is not possible to predict with certainty the outcome of any single toss.

2. Empirical Probability. Empirical probability is based on recordirig actual experience over a period of time and computing the percentage of times each event has occurred. Managers can calculate this probability on the basis of various data. For example, insurance companies generally compute probability of deaths on this basis.

3. Subjective Probability. When the manager does not have sufficient data to calculate cu a priori or empirical probability, he may estimate probability on his own judgement. This 15 subjective probability because the manager does not have any information to calculate probability. This probability is likely to be less exact as compared to others and may vary from manager to manager.

The assignment of probability is never so simple as it might appear. The manager who finalises the assignment of probability is the ultimate arbiter. Decision making under risk conditions, in addition to requiring probability estimates, also necessitates the use of expected values. An expected value is the conditional value multiplied by the probability of occurrence of the event. For example, as cited in Table 10.2, if the probability estimates for low, medium, and high demand are 0.2, 0.5 and 0.3, the payoff table can be constructed as shown in Table 10.3.

Thus, the expected values for centralised distribution are Rs. 19.5 crores and for decentralised distribution are Rs. 20 crores. The perusal of payoff table shows that expected values are greater for decentralised distribution and the company should go for this alternative. However, the difference is not very significant between the two expected values. Moreover, probabilities are based on estimates that could be off the target. This clearly indicates that the decision to centralise or decentralise is being reached under conditions of risk. Therefore, the decision should be made with utmost caution and alternative strategy should also be kept ready. There are various techniques which can be used for making decisions under risk conditions. These have been discussed later.

Rationality Decision Making

Uncertainty

If a decision involves conditions about which the manager has no information, either about the outcome or the relative chances for any single outcome, he is said to be operating under conditions of uncertainty. Since the manager does not have any information on which he can develop any analysis, the best he can do is to be aware that he has no chance of predicting the events. Under such conditions, a number of different decision criteria have been proposed as possible bases for decision-making. These are as follows:

1 Maximising the maximum possible payoff–the maximax criterion (optimistic).

2. Maximising the minimum possible payoff-the maximin criterion (pessimistic).

3. Minimising the maximum possible regret to the decision maker-the minimix criterion (regret).

4. Assuming equally likely probabilities for the occurrence of each possible state of nature-the insufficient criterion (insufficient reasoning). The first basic step in making decisions under uncertainty is to construct a conditional value payoff table like that given in Table 10.2. The next step is the selection and application of one of the decision criteria. This can be done in the following manner:

5. Maximax Criterion. This decision criterion is applied by the most optimist decision maker when he thinks optimistically about the occurrence of events influencing a decision. this philosophy is followed, the manager will select that alternative under which it is possible to receive the most favourable payoff. However, it is dangerous to employ this criterion because it ignores possible losses and chances of making or not making a profit. Referring to Table 10.2, the manager using the maximax criterion will list the most favourable payoff for each alternative as follows:

Centralisation                                                                   Rs. 30 crores

Decentralisation                                                               Rs. 35 crores

If maximum monetary payoff is the objective, the decision maker will decentralise. However, he is not sure that the given payoff materialises because the nature of demand is completely unknown. 2. Maximin Criterion. As against maximax criterion, maximin criterion is adopted by the most pessimistic decision maker. The manager believes that worst possible may occur. This pessimism results in the selection of that alternative which maximises the least favourable payoff. In Table 10.2. the minimum payoff for each alternative is as follows:

Centralisation                                                                 Rs. 15 crores

Decentralisation                                                             Rs. 10 crores

Accordingly, the decision would be to centralise the distribution because it maximises the minimum payoff.

3. Minimax Criterion. This criterion leads to the minimisation of regret. The managerial regret is defined as the payoff for each alternative under every state of nature of competitive action subtracted from the most favourable payoff that is possible with the occurrence of the particular event. If the manager selects an alternative and if a state of nature occurs that does not result in the most favourable payoff, regret occurs. The manager is regretful that the alternative selected did not lead to the best payoff. Since the manager does not know the probability of happening a particular event, he will choose an alternative which minimises his regret. Referring to Table 10.2, the payoff table using minimax criterion can be constructed as shown in Table

The regret table shows that in the case of high demand, the manager has a regret of Rs. 15 crore if he chooses the alternative of centralised distribution. Similarly, in case of low demand, he has a regret of Rs. 20 crores if he chooses the alternative of decentralised distribution. Since he is interested in minimising his regret, he will choose centralisation.

4. Insufficient Reason Criterion. The three preceding decision criteria assume that without any previous experience it is not possible or worth while to assign any probability to the states of situation. In this case also, probability can be assigned though there is no criterion for assigning the probability. The situation is known as insufficient reason criterion or La Place criterion, or Bayes’ postulate. In this criterion, since the probability cannot be assigned on any basis, equal probability is assigned to each event. The basis is that the probability of occurring an event is unknown, every event should be treated as equal. Applying this criterion in Table 10.2, following payoffs will be expected from two alternative actions:

We have taken example with only two alternatives and three demand conditions. Even with these limited variables, the choice process is quite complex. Added more alternative and decision situations, there would be more complexity in the decision making The choice of a criterion is a personalised phenomenon. Each decision maker at deren times probably may act on each of these criteria in making decisions.

Rationality Decision Making

Problem Solving

A manager is confronted daily with a host of problems/opportunities, regardless of the size and type of his organisation and he has to solve these problems. Problem solving is the process of taking corrective action in order to achieve certain objectives. In management literature, decision making and problem-solving are either used interchangeably or together because the process and techniques for both are same. However, there is difference between the two. There are two views on decision making and problem solving. One view is that the decision maker is a problem solver with available alternatives to choose. The other view is that decision making process and problem solving process differ in kind. In this latter view, decision making is the selection of an alternative and problem-solving is the invention of an alternative that is different in meaningful ways from the existing one. Thus, problem solving is more concerned with solving the problem that has emerged because of implementation of an earlier decision. For example, if the marketing manager of an organisation has fixed certain amount of price of a product (a decision) but the problem is that at this price level, there is not adequate demand from customers (a problem). Therefore, the question is: what should the marketing manager do to overcome the problem (problem solving). However, such a fine distinction is seldom made in practice and both decision making and problem solving are used interchangeably. In an organisation, though there may be numerous areas in which problem solving is required, some of the relevant areas are costs, competitive position, product pricing, production planning, product quality. employee grievances, better use of organisational resources, conflict resolution, and so on. In each of these areas, there may be unique issues for which innovative alternatives have to be developed. As we shall see later, there are various approaches for problem solving. However, before adopting a particular approach or a combination of various approaches. the problem solver must recognise the problem to be solved. In decision-making process. we have seen that a problem can be identified by undergoing through diagnosis and analysis for which information of different types is required. Usually, such an information is collected from historical data, planning data (comparing results with objectives), unfavourable comparisons with competitors, criticisms by outsiders, etc. Based on this information. problem solvers usually categorise problems in one of two ways:

1 Forward working, which is to project the likely results if the problem is overlooked and becomes a basis for decision making.

2. Means-end factoring, which involves dissecting the problem into several smaller problems and solving each one separately.

Approaches for Problem Solving There may be several approaches for problem solving as each manager, as a problem solver, acts in his own ways. However, these approaches can broadly be classified into four broad categories:

1 Routine approach,

2. Scientific approach,

3. Quantitative approach, and

4. Creative approach.

Rationality Decision Making

ROUTINE APPROACH

Routine approach of problem solving involves solving a problem using traditional means, or doing what has always been done when the problem of this type arose. In this approach, reference is simply made to history or precedent and the same answer used before is used now. Some organisations, particularly large ones and those which put emphasis on formalisation, develop standard operating procedures (SOPs) to solve problems of recurring nature. Standard operating procedures are formal rules for accomplishing tasks. These rules are developed over the period and guide the organisational members in a variety of procedures. Most procedures are formalised and written down, but many others are informal work practices. With the changing situations, these SOPs get on changing with the deletion of old procedures and addition of new ones. Another means under the routine approach is to solve problems by a superior order. Here, the problem-solver has no choice at all but follows the edict of his superior.

Though routine approach of problem solving is the most common with many organisations because it facilitates to follow similar practices throughout the organisation, it has some serious limitations. Noted industrial psychologist, Norman Maier, has suggested that managers should consider each problem with respect to its effect on the organisation’s betterment as well as its employees, which he called quality and acceptance respectively. 13 In routine approach, both these elements are often missing.

Rationality Decision Making

SCIENTIFIC APPROACH

Kepner and Tregoe have suggested scientific approach to managerial problem solving and decision making. They contend that “what a manager needs for effective problem analysis is an orderly system for processing information, a system in which certain steps follow others in a fixed order. “4 According to Kepner-Tregoe scientific approach, problem analysis has following features:

1 A problem analyser has an expected standard of performance against which to compare actual performance.

2. A problem is a deviation from a standard of performance (good or bad).

3. A deviation from standard must be precisely identified, located, and diversified.

4. There is always something distinguishing that which has been affected from that which has not.

5. The cause of a problem is always a change that has taken place through some distinctive feature, mechanism, or condition to produce a new, unwanted elect

6. The possible causes of a deviation are deduced from the relevant changes found in analysing the problem.

7. The most likely cause of a deviation is one that exactly explains all the facts in the specification of the problem. Generally, scientific approach of problem solving follows the following steps in sequence:

8. Identification of the proposition.

9. Acquiring preliminary observations about the proposition.

10. Stating tentative solutions to the proposition.

11. Investigating proposition thoroughly, using both current knowledge and controlled experiments.

12. Classification of relevant data obtained.

13. Stating tentative answer to the proposition.

14. Adjusting and stating answer to the problem.

Rationality Decision Making

QUANTITATIVE APPROACH

With the introduction of computers in business problem solving, quantitative approach has been developed. The emphasis in the quantitative approach is on mathematical modelling of systems. Comparisons of various feasible actions such as cost minimisation. profit maximisation, return on investment, etc., are expressed by measurable values. The relationship of the factors for any given action is stated in mathematical form-by formula or action. By substituting different mathematical values for the variables of the equation, different results are obtained and evaluated in keeping with the requirements of the stated problem. Thus, quantitative approach of problem solving proceeds in the following manner:

1 Formulation of the problem.

2. Building a mathematical model to represent the system under study.

3. Deriving the answer from the model.

4. Testing the model and answer derived to ensure its practicability.

5. Placing needed constraints over use of model and answer.

6. Selecting the final answer.

There are various quantitative techniques for problem solving and decision making. Some of these techniques have been discussed later in this chapter.

Rationality Decision Making

CREATIVE APPROACH

Some managers feel that problem solving and decision making should not be viewed as a logical action, that is, the problem need not be defined and strictly rational steps need not be taken to decide what to do. They point out that stated objectivess are not needed. The decision maker studies the information, people, and facilities involved and concentrates on the interactions and the possible outputs from these resources. This is done through creative approach.

In today’s dynamic environment, creativity is vital in decision making. There are various terms which are used as synonyms to creativity such as discover’, ‘invention’, ‘extending the boundary’. etc. Examples of creativity in decision making may be creation of new product. creation of new method, creation of new market, and so on. In general usage, creativity means a talent for unique combination or unusual association of ideas. But since our approach to creativity is on concentrating on decision making, such a definition is too broad. From a managerial perspective, creativity is the conceiving of original and unique alternatives to the solution of existing problems. Some writers have attempted to differentiate between different types of creativity; for example, viewing ‘innovation’ as something new, ‘synthesis’ as combining unrelated data into something new, ‘extension as expanding boundaries on innovation, and ‘duplication’ as copying others. However, nothing is ever really new. Rather all creativity is synthesis. Undoubtedly, some syntheses are more unique than others, but all creativity builds on the ideas and breakthroughs that have preceded. Thus, from decision making point of view, creativity can be thought of in terms of generating ideas which are unique to the solution of the problem under consideration. John Mee has defined creative thinking as follows:

Rationality Decision Making

Role of Creativity in Decision Making

Creativity is vital for decision making, whether it is organisational decision or personal decision. One skill that significantly differentiates good decision makers from poor is creativity. The creativity is required to develop alternatives, enrich possibilities, and imagine consequences. The role of creativity is maximum in generating alternatives which can be considered for evaluation and choice. Before a solution to a problem can be implemented, it must be developed. A point often overlooked is that any given solution is only one of a number of alternatives. In fact, there is no problem that has only one possible solution; and no decision maker should approach a problem with the assumption that it has only one solution. The concept of equifinality applies to problem solving. Equifinality suggests that final state can be reached from different conditions and by a variety of paths. The decision maker will be in a better position when he considers maximum alternatives through which he can solve the problem requiring decision. Since creative thinking is directed towards generating new ideas, more alternatives can be found out through this process.

Creativity is required specially for solving problems which are non-repetitive and unique. Such problems cannot be solved by known methods and past experience is not enough in this case. A fresh approach, a new twist, a novel arrangement of recognised parts, or the addition of a different material or system is often necessary to find an acceptable solution. Preferably, a manager should be able to create original ideas himself; at a minimum, he needs acumen in spotting good ideas of other people.

Rationality Decision Making

Stages in Creative Process

Creativity is a very complex process. People believe that it is unexplainable and comes out of the clear blue sky for no apparent reasons. But this is not a good and valid explanation, and behavioral scientists believe that through specific process, creativity emerges. There are certain identifiable stages in creative process. These stages may be termed as saturation, preparation, incubation, illumination, and verification. A brief description of these stages will spell out their role in creativity.

1 Saturation. While it may be true that some new ideas may come just by the way but it is certain that most important way to get right ideas is to work on a baffling problem and work For a manager, it is essential that he is thoroughly conversant with the problem on hand. For him, saturation stage normally begins in thorough familiarity with a problem itself, its history, its importance, its relationship to other parts of the business, and its setting. This will provide the manager an insight in identifying the real problem and he can think for suitable solution. If the manager is clearly aware about the real problem, he is likely to think in direction which may be very relevant for problem solution.

2. Preparation. Knowledge alone, no matter how complete, does not generate creative ideas. The decision maker has to go through preparation stage at which he tries to collect information relating to the problem. He may recall his past experience and also study new materials. It should be recognised that something new does not come instantaneously or overnight. The preparation stage may last few minutes, hours, days, or weeks, or even years. At this stage, information must be mulled until what we might call mental digestion takes place. During this period, the person commonly suffers from anxiety and frustration specially if the preparation stage lasts for very long. At the preparation stage, creative thinker may deliberate about the problems with others. Deliberation usually includes three steps: (1) analysis, (LI) building relationships and patterns, and (it) seeking useful rearrangements or combinations.

3. Incubation. If no solution of problem is found out at the stage of preparation, the creative person attempts to shelve the problem and to forget about it. He may engage himself in activities totally unconnected with the problem; he may listen to music, go for other entertainment, and so on. However, he may shelve the problem consciously but it exists in the subconscious mird. The difference between conscious and subconscious minds is that the former is the centre of logical thinking and people are aware about it while the latter is unknown but engages continuously in generation of ideas for the solution of problem even though people may not be aware about it. During the process of incubation, the mind will work subconsciously to create certain new ideas. This is so because a new idea is created in the subconscious mind after certain amount of sorting and manipulating of the multitude of information stored there. Subconscious mind can be compared with computer. In computer, certain input is stored which may be needed at a later stage. When any problem is presented, the computer manipulates the stored information until the right combination is reached. This new combination is different from any of the data stored in the computer. In the same way, the new combination may be generated in subconscious mind. However, there is a difference between the two. While in computer, the combination of data is based on mathematical relationship, normally called as programming, in the case of incubation in subconscious mind, there is less direct or determinable connection with the basic ideas and relationship between new ideas and data stored is nebulous.

4. Illumination. The illumination stage of creativity is characterised by a flash of insight or a sudden spontaneous solution. If the previous stages of creativity have been accomplished properly. the new data will be brought to mind. Many other ideas will follow in quick order: faster than what one’s memory can absorb or retain them. Many flashes of ideas are lost others rejected, while some are retained for further analysis. Sometimes, many ideas may come when one is not really thinking about the problem consciously. There are many cases where many great ideas have come in the minds of creative thinkers when they have not been engaged in thinking process consciously.

5. Verification. This is the final stage of creative process and involves verifying, modifying. or applying the ideas towards the solution of the problem under study. During this stage. mind sets about, by logical method or by experimentation, to prove or disprove the solution that has been suggested. Usually a check with cold reality reveals the need for adapting and refining the first conception of an idea. This is actually a very critical phase in creative process because new ideas are worthless until they come into full form and are available for consideration by those who can use them. Creativity and Innovation

Innovation can be generated through creative process. History of human civilisation is full of innovation of different types. Technological inventions have changed the pattern of human lives. In the present globalised and competitive environment in which customers’ aspirations are increasing day-by-day, every forward-looking company is trying to satisfy its customers’ needs in innovative ways. Innovation is the process of creating and doing new things. Everett Rogers has defined innovation as “any product, service, or idea that is perceived as new.”17 Thus, the idea may have a long history, but it is innovation to the person who sees it as new. Based on the nature of this newness, innovation is of three types: radical, systems, and incremental. Radical innovation is a major breakthrough as a result of technological invention that offsets industry as a whole. For example, invention of microchips has changed the face of computer industry-from large-sized punched-card-based to small-sized chipsbased computers with much more memory and data processing. Systems innovation creates a new functionality by assembling parts in new ways. For example, creation of automobile engine was radical innovation and became a systems innovation when it was combined with bicyles to create different types of two-wheeler. Incremental innovation is the technical improvement and extends the applications of radical and systems innovations. Incremental innovations force organisations to continuously improve their products and services and keep abreast or ahead of the competition. In managing innovations, there are two types of strategic issues involved:

1 Innovation generation, and

2. Innovation diffusion.

Rationality Decision Making

Innovation Generation

Innovation generation, whether radical, systems, or incremental, involves four stages:

1 Identification of need for innovation,

2. Idea generation,

3. Idea evaluation, and

4. Idea selection.

At each of these stages, issues involved are different.

1 Identification of Need for Innovation. An innovation is not useful unless it has social relevance. In fact, all technological inventions-radical innovations-have taken place to make the human life better. Therefore, the first issue in any innovation is to identify how it is going to change the social life. In an organisational context, the identification of need for innovation should be related to creating value to customers. Therefore, the customers and their needs are prime focus in an innovation. 17Everette M. Rogers, Diffusion of Innovations, New York: Free Press, 1983.

2. Idea Generation. At the level of idea generation for innovation, an exercise is to find out the way through which the needs of the society (customers in thebfor innovation, an exercise is undertaken company) may be satisfied. Since this involves creativity, several methods may be used technique, market research, intuitions and hunches, and so on. The emphasis at this stage is to generate as many ideas as possible without restricts the relevance of an idea.

3. Idea Evaluation. After the generation of ideas through various sources, these ideas are evaluated against the set criteria. These criteria may be set either objectively based on certain parameters such as availability of resources for implementing innovations of subjectively based on personal preferences. Since the idea evaluation proceeds through a number of stages in sequence, evaluative criteria should be fixed for all such stages.

4. Idea Selection. After evaluation of various ideas, a particular idea is selected which meets the evaluative criteria most. Further activities take place for putting the innovation in operation. Innovation Diffusion

Rationality Decision Making

Innovation diffusion

involves adoption of innovation. Rogers has defined innovation diffusion as “a process of spreading a new idea from its source of invention or creation to its ultimate users or adopters.”18 The process of innovation diffusion involves the following steps:

1 Awareness about innovation if it has taken place outside the organisation, for example, awareness about invention of a new technology:

2. Evaluation of appropriateness of innovation, that is, to find out whether the innovation adoption contributes positively:

3. Trial of innovation to check its feasibility, and

4. Adoption of innovation as the part of the organisation

Rationality Decision Making

Quantitative and Non-quantitative Bases for Decision Making

Various approaches of problem solving and decision making indicate that both quantitative and non-quantitative bases can be used for decision making. Both these bases can be used either in combination or in exclusive form depending on the nature of decisions and decision makers. From practical viewpoint, there is neither one best technique nor one combination that should be used under all circumstances. The selection is individual and is usually predicated on the decision maker’s background and knowledge and the resources available. The basic difference between quantitative and non-quantitative bases of decision making is that the former uses mathematical models in which all decision variables have to be quantified while the latter uses many qualitative variables. In many decision situations, it is not possible to quantify all decision variables. In such situations, it is better to use the combination of both quantitative and non-quantitative bases or only the latter base. Before going through the discussion of quantitative techniques for decision making, let us go through non-quantitative techniques because these techniques have been in use before the introduction of quantitative techniques,

Rationality Decision Making