Decision making

Decision making
⚫ Decision making may be reviewed as the
process of selecting a course of action
from among several
alternatives in order to accomplish a desired r
esult.

⚫ It involves committing
the organisation and its resources to a
particular choice of course of action
thought to be sufficient and
capable of achieving some predetermined obje
characteristics of
decision-making
⚫ Decision-making is based on rational thinking. The manager tries
to foresee various possible effects of a decision before deciding a
particular one.

⚫ It is a process of selecting the best from among alternatives

available.

⚫ Decision-making is the end product because it is preceded by

discussions and deliberations.

⚫ Decision-making is aimed to achieve organizational goals.

⚫ It also involves certain commitment. Management is committed to

every decision it takes.
TYPES OF DECISIONS
⚫ Each level in an organization has different
information requirements for decision
support and responsibility for different
types of decisions .

⚫ Decisions are classified as structured,

semistructured, and unstructured.
TYPES OF DECISIONS
Types of decisions
⚫ Unstructured decisions are those in which the decision maker
must provide judgment, evaluation, and insight to solve the
problem. Each of these decisions is novel, important, and
nonroutine, and there is no well-understood or agreed-on
procedure for making them.

⚫ Structured decisions, by contrast, are repetitive and routine,

and they involve a definite procedure for handling them so that
they do not have to be treated each time as if they were new.

⚫ Many decisions have elements of both types of decisions and are

semistructured, where only part of the problem has a clear-cut
answer provided by an accepted procedure. In general, structured
decisions are more prevalent at lower organizational levels,
whereas unstructured problems are more common at higher levels
of the firm.
TYPES OF DECISIONS
⚫ Senior executives face many unstructured decision situations, such as establishing the
firm’s five- or ten-year goals or deciding new markets to enter. Answering the question
“Should we enter a new market?” would require access to news, government reports,
and industry views as well as high-level summaries of firm performance. However, the
answer would also require senior managers to use their own best judgment and poll
other managers for their opinions

⚫ Middle management faces more structured decision scenarios but their decisions may
include unstructured components. A typical middle-level management decision might be
“Why is the reported order fulfillment report showing a decline over the past six
months at a distribution center?” This middle manager will obtain a report from the
firm’s enterprise system or distribution management system on order activity and
operational efficiency at the center. This is the structured part of the decision. But
before arriving at an answer, this middle manager will have to interview employees and
gather more unstructured information from external sources about local economic
conditions or sales trends.

⚫ Operational management tend to make more structured decisions. For example, a

supervisor on an assembly line has to decide whether an hourly paid worker is entitled
to overtime pay. If the employee worked more than eight hours on a particular day, the
supervisor would routinely grant overtime pay for any time beyond eight hours that was
clocked on that day. The decisions is highly structured and are routinely made
thousands of times each day in most large firms. The answer has been pre-programmed
into the firm’s payroll and accounts receivable systems.
Models of decision making
⚫ Rational Model:
⚫ This day proposes that people follow a rational, four
step sequence when making decisions. The four steps
are:
⚫ Indentifying the problem
⚫ Generating solutions
⚫ Selecting a solution
⚫ Implementing and evaluating the solution
⚫ Some of the limitations not considered in this model
are issues such as not having enough information
relevant to the problem and also the fact that
problems can change in a short period of time.
HERBERT SIMON MODEL
HERBERT SIMON MODEL
⚫ Decision-making is a process in which the decision-maker
uses to arrive at a decision. The core of this process is
described by Herbert Simon in a model. He describes the
model in three phases as shown in the figure above:
⚫ I. Intelligence: raw data collected, processed
and examined, Identifies a problem calling for a decision.
⚫ II. Design: inventing, developing and analyzing
the different decision alternatives and testing the feasibility
of implementation. Assess the value of the decision
outcome.
⚫ III. Choice: select one alternative as a decision,
based on the selection criteria.
⚫ IV Implementation : involves making the
chosen alternative work and continuing to monitor how
well the solution is working.
HERBERT SIMON MODEL
⚫ In the intelligence phase, the MIS collects the data. The data is scanned,
examined, checked and edited. Further, the data is sorted and merged with
other data and computations are made, summarized and presented. In this
process, the attention of the manager is drawn to all problem situations by
highlighting the significant differences between the actual and the expected,
the budgeted or the targeted.
⚫ In the design phase, the manager develops a model of the problem
situation on which he can generate and test the different decision
alternatives, he then further moves into phase of selection called as choice.
⚫ In the phase of choice, the manager evolves selection criteria such as
maximum profit, least cost, minimum wastage, least time taken and highest
utility. The criterion is applied to the various decision alternatives and the
one which satisfies the most is selected.
⚫ Implementation , What happens if the solution you have chosen doesn’t
work? In these phases, if the manager fails to reach a decision, he starts the
process all over again and again. An ideal MIS is supposed to make a decision
for the manager.
Tools for decision making- Pareto
analysis
Pareto analysis is a formal technique useful where many possible courses of action are competing for attention. In
essence, the problem-solver estimates the benefit delivered by each action, then selects a number of the most
effective actions that deliver a total benefit reasonably close to the maximal possible one. It is commonly referred to
as "80/20" rule, under the assumption that, in all situations, 20% of causes determine 80% of problems.
Involves the following steps
⚫ Step 1: Identify and List Problems
A list of all of the problems that you need to resolve. Discussion with the clients and team members to get the
input , surveys, helpdesk logs etc
⚫ Step 2: Identify the Root Cause of Each Problem
For each problem, identify its fundamental cause. (Techniques such as Brainstorming , the 5 Whys , Cause and
Effect Analysis , and Root Cause Analysis .)
⚫ Step 3: Score Problems
Now you need to score each problem. The scoring method you use depends on the sort of problem you're trying
to solve.
⚫ Step 4: Group Problems Together By Root Cause
Next, group problems together by cause. For example, if three of your problems are caused by lack of staff, put
these in the same group.
⚫ Step 5: Add up the Scores for Each Group
You can now add up the scores for each cause group. The group with the top score is your highest priority, and the
group with the lowest score is your lowest priority.
⚫ Step 6: Take Action
Now you need to deal with the causes of your problems, dealing with your top-priority problem, or group of
problems, first.
 Tools for decision making-Grid
⚫
analysis
Grid Analysis - Evaluate a larger set of options based on numerous criteria, then weight the
importance of each criterion to derive the best choice. Given the complexity and arithmetic
required, this one really benefits from using good old Excel.
⚫ Step 1
⚫ List all of your options as the row labels on the table, and list the factors that you need to
consider as the column headings. For example, if you were buying a new laptop computer, factors
to consider might be cost, dimensions, and hard disk size.
⚫ Step 2
⚫ Next, work your way down the columns of your table, scoring each option for each of the factors
in your decision. Score each option from 0 (poor) to 5 (very good). Note that you do not have to
have a different score for each option – if none of them are good for a particular factor in your
decision, then all options should score 0.
⚫ Step 3
⚫ The next step is to work out the relative importance of the factors in your decision. Show these
as numbers from, say, 0 to 5, where 0 means that the factor is absolutely unimportant in the final
decision, and 5 means that it is very important.
⚫ Step 4
⚫ Now multiply each of your scores from step 2 by the values for relative importance of the factor
that you calculated in step 3. This will give you weighted scores for each option/factor
combination.
⚫ Step 5
⚫ Finally, add up these weighted scores for each of your options. The option that scores the highest
wins!
Tools for decision making
⚫ Cost/Benefit - Cost-Benefit Analysis involves adding up the benefits of a course
of action, and then comparing these with the costs associated with it.
⚫ You can use Cost-Benefit Analysis in a wide variety of situations. For example,deciding
whether to hire new team members,evaluating a new project ,etc.
⚫ Follow these steps to do a Cost-Benefit Analysis.
⚫ Step One: Brainstorm Costs and Benefits
⚫ Step Two: Assign a Monetary Value to the Costs
⚫ Step Three: Assign a Monetary Value to the Benefits
⚫ Total cost / total revenue (or benefits) = length of time (payback period).

⚫ Decision trees– It is a decision support tool that uses a tree-like graph or model of
decisions and their possible consequences, including event outcomes, resource costs,
and utility. Here you build a set of “what-ifs” based on a tree of possible options,
assigning the estimated value, cost, or savings associated with each choice.
Questions:
1. Explain the term ‘decision making’ for an organization.
2. Give any 2 characteristics of decision making.
3. What kind of decisions are performed at the senior level
of management?
4. What are semi structured decisions?
5. Explain the different models of decision making.
6. Explain Herbert-Simon model of decision making with a
diagram.
7. Explain the different tools of decision making in brief.
8. Explain how Pareto analysis helps in the process of
decision making.
9. Discuss how Grid analysis aids in decision making process.