TOPIC 3: DECISION MAKING

### Introduction to Decision-Making

- **Managerial Duty:** Decision-making is a crucial responsibility of managers.

- **Definition:**

- Process to identify problems.

- Generate alternative solutions.

- Select and implement the best solution.

- **Definition:** Choosing the best solution from available alternatives.

### Rational Decision-Making

- **Concept:** Based on facts, opinions, and reasonable reasons.

- **Best Decisions:** Generally stem from factual and opinion-based analysis.

- **Challenges:**

- Not all decisions are rational due to environmental or personal limitations.

### Terminology

- **Interchangeable Terms:** "Decision maker" and "manager" both refer to the individual making
decisions within an organization.

### Decision-Making Environment

- **Influencing Factors:**

- Experience, efficiency, and skills of the decision maker.

- Adequacy and validity of information related to the business environment.

- **Importance of Information:**

- Helps forecast future situations (e.g., competitors' actions, interest rates, legislative changes).

- Accurate forecasts make decision-making easier and more precise.

- **Three Information Situations:**

1. Completely obtained information.

2. Incompletely obtained information.

3. No information at all.

### Three Decision-Making Environments

1. **Certain Conditions:**

- Complete information is available.

- Predict future situations with certainty.

- Known outcomes for each alternative.

- Example: Choosing between two investments with known returns.

2. **Uncertain Conditions:** *(Further details to be discussed in subsequent subtopics)*

3. **Risky Conditions:** *(Further details to be discussed in subsequent subtopics)*

### Example of Decision-Making in Certain Conditions

- **Scenario:**

- Two investment options: Investment A (5% return in two years) and Investment B (6% return in
two years).

- Complete information is available: types, periods, and returns of investments.

- **Decision:**

- Rational decision-maker will choose Investment B for its higher return.

3.1.2 ### Decision-Making in Uncertain Conditions

- **Lack of Information:**

- No information available to assist in decision-making.

- Uncertainty about future outcomes and results of alternatives.

- **Decision-Making Approach:**

- Relies on the decision maker's experience and discretion.

- High risk propensity is necessary.

- **Risk Propensity:**

- Tendency to take or avoid risks.

- High risk propensity: Willingness to take risks despite uncertainty.

### Example Scenario

- **Company ABC:**

- Long-time rattan furniture business in Bandar Banjau.

- Introducing a new product: ceramic decorative items.

- No prior data on consumer response to ceramic products.

- Unpredictable consumer reaction and decision outcomes.

- **Decision-Making Process:**

- Setting the selling price for ceramic decorations.

- Possible prices: RM10, RM7, RM5.

- Decision based on the discretion of the decision maker due to lack of information.

3.1.3 ### Decision-Making in Risky Conditions

- **Incomplete Information:**

- Partial information available.

- Cannot be certain about future situations.

- Predictions are based on available information and probability.

- **Insight and Probability:**

- Minimal information offers some insight.

- Decisions are made based on assumed probabilities.

### Example Scenario

- **Sales Trend Analysis:**

- Monthly sales statements show increasing sales.

- Assumption: Company will make a net profit this year after losses last year.

- Lacking full information: operational costs, consumer taste changes, loan interest rates.

- **Probability Estimation:**

- Probability of profit: 60%.

- Probability of loss: 40%.

- **Decision:**

- Based on the assumption of probable profit, decide to increase investment.

- Operating in risky conditions without certainty of outcomes.

3.2 ### Rational Decision-Making Process

#### Overview

- **Importance:** Decisions must be rational, based on facts, opinions, and reasonable reasons.

- **Definition:** A systematic process of defining problems, evaluating alternatives, and selecting

the best decision.

#### Six Steps of Rational Decision-Making (Williams, 2013)

1. **Defining Problems**

- Identify the problem, its source, and possible resolutions.

- **Example:** Office work is delayed due to a shortage of computers; solution is to purchase

more computers.

2. **Identifying Decision Criteria**

- Establish standards or features to consider in the decision.

- **Example Criteria for Computers:** Price, quality, compatibility, and warranty.

3. **Allocating Weight to Each Criterion**

- Compare criteria to determine their importance.

- **Example Prioritization:** Quality (most important), compatibility, price, warranty (least

important).

4. **Generating Alternative Solutions**

- Develop multiple options to choose from.

- **Example Alternatives:** Acer, HP, iMac.

5. **Evaluating Alternatives**

- Compare each alternative against the decision criteria.

- **Example Evaluation:** Assess Acer, HP, iMac based on quality, compatibility, price, and
warranty.
6. **Selecting the Optimal Decision**

- Choose the best alternative that fulfills the most important criteria.

- **Example Decision:** Select the computer brand that best meets the prioritized criteria.

Each step ensures a comprehensive and rational approach to decision-making, facilitating well-
informed and effective choices.

3.3 ### Limitations in Rational Decision-Making

#### Overview

- Following all the steps in rational decision-making can improve the process.

- However, obstacles can confuse decision makers and hinder optimal decision-making.

#### Key Limitations

1. **Lack of Information:**

- Difficulties in defining problems without sufficient information.

- Impacts the quality of decision-making.

2. **Financial Constraints:**

- Limited finances restrict the range of alternative solutions considered.

3. **Time Constraints:**

- Insufficient time limits the exploration of alternative solutions.

- Reduces the ability to make the best or optimal decision.

#### Categories of Limitations (Williams, 2013)

1. **Common Mistakes:**

- Errors in judgment or process.

- **Examples:** Misinterpreting data, overlooking critical factors.

2. **Bounded Rationality:**

- Decision makers operate within constraints that limit their ability to make fully rational decisions.

- **Sub-factors:**

- **Additional Information:** Lack of access to all relevant data.

- **Expertise Problem:** Limited knowledge or skills in certain areas.

- **Limited Resources:** Insufficient resources to gather or process all necessary information.

- **Memory Problem:** Human memory limitations affecting the recall of information.

3. **Risky Environment:**

- Decisions made under conditions of uncertainty and risk.

- **Challenges:** Incomplete information and the need to estimate probabilities of outcomes.

#### Illustration (Figure 3.3)

- **Limitations in Rational Decision-Making:**

- **Common Mistakes**

- **Bounded Rationality**

- Additional Information

- Expertise Problem

- Limited Resources

- Memory Problem

- **Risky Environment**
These limitations highlight the complexities and challenges faced by managers in making rational
decisions.

### Limitations in Rational Decision-Making

3.3.1 #### Common Mistakes in Decision-Making

- **Influence of Intuition:**

- Experienced managers may rely on instinct rather than data.

- Neglecting data can lead to decisions not based on facts and reasons.

- **Bias in Decision-Making:**

- Assuming future issues are similar to past incidents.

- **Example:** A company avoids hiring graduates from a specific university because one graduate
performed poorly, leading to biased decisions.

3.3.2 Bounded Rationality

- **Definition:** Managers attempt to make rational decisions but face limitations such as limited
resources, lack of information, and the capacity to analyze decisions.

- **Four Problems Obstructing Rational Decision-Making:**

1. **Limited Resources:**

- Constraints in time, money, equipment, and manpower.

- **Example:** Economic downturn postpones plans to set up new branches due to financial
constraints.

2. **Excessive Additional Information:**

- Technology advancements lead to information overload.

- Managers may struggle to handle all available information, leading to selective consideration
and potentially suboptimal decisions.
 3. **Memory Problems:**

- Difficulties in remembering or recording information.

- Even with recorded information, some may be overlooked, affecting decision quality.

4. **Expertise Problems:**

- Lack of expertise in certain areas hinders understanding and summarizing information.

- Despite computer analysis, specific skills are needed to interpret results accurately, leading to
potential evaluation errors.

3.3.3#### Risky Environment

- **Definition:** Decisions made under conditions where information is available but incomplete.

- **Outcome:** Decisions have a potential for success or failure due to the uncertainty of the
environment.

3.4.1 ### Using Specific Rules and Tests in Decision-Making

#### Decision Rule

- **Definition:** A set of criteria that must be met for an alternative solution to be accepted.

#### Types of Rules in Decision-Making

1. **Rules of Priority**

- **Description:** Decision criteria are prioritized, and alternatives are assessed based on these
priorities.

- **Process:**

- Arrange criteria by importance.

- Evaluate each alternative against these criteria sequentially.

- Select the alternative that meets the highest priority criteria.

- **Example:**

- Ahmad plans to rent a shop lot with criteria:

 1. Located in the town area

2. Large area

3. Rental not exceeding RM500 per month

4. Has electricity and water utilities

- Evaluation of alternatives:

- **Alternative A:** Meets criteria (i) and (iv)

- **Alternative B:** Meets criteria (i) and (ii)

- **Alternative C:** Meets criteria (i), (iii), and (iv)

- **Alternative D:** Meets criteria (ii) and (iii)

- **Decision:** Alternative B is chosen as it fulfills the highest priority criteria (i and ii), despite
Alternative C meeting more criteria overall.

2. **Rules of Minimum Condition**

- **Description:** A minimum set of conditions that must be met for an alternative to be

accepted.

- **Process:**

- Set minimum conditions that must be fulfilled.

- Any alternative that does not meet even one condition is rejected.

- **Example:**

- A sponsor sets minimum conditions for scholarship applications:

1. Management courses

2. Education for first degree

3. Yearly family income not exceeding RM18,000

- Applications must meet all these conditions to be approved.

B)### Simplified Points: Various Variable Tests in Decision-Making

- **Separate Evaluation Limitation**: Traditional decision-making methods evaluate each

alternative separately.

- **Need for Combined Assessment**: Sometimes, assessing multiple alternatives together yields
optimal results.

- **Complex Evaluation Process**: This involves designing experiments and analyzing statistical
data.
### Example: Recreational Park Strategy

- **Objective**: Increase visitors on Mondays, the day with the lowest attendance.

- **Alternative Strategies**:

- **A1**: Two-in-one tickets (one ticket admits two visitors)

- **A2**: Free food coupon for each visitor

- **A3**: Free parking for visitors

### Experiment Results (Table 3.4 Summary)

1. **Week 1**: No changes - Profit: RM1,500

2. **Week 2**: Strategies A1 and A2 - Profit: RM1,000

3. **Week 3**: Strategies A2 and A3 - Profit: RM3,800

4. **Week 4**: Strategies A1 and A3 - Profit: RM2,500

### Conclusion

- **Best Combination**: Strategies A2 (Free food coupon) and A3 (Free parking) generated the
highest profit (RM3,800).

3.4.2 ### : Using Groups in Decision-Making

- **Common Practice**: Organizations frequently use groups for decision-making.

- **Examples**:

- University academic committees evaluating program effectiveness.

- Employee groups determining new products for consumers.

- **Advantages Over Individual Decision-Making**:

- Groups bring diverse perspectives.

- Enhanced problem-solving and creativity.

 - Increased acceptance and support for decisions.

- Shared responsibility reduces individual pressure.

### 3.5 Group Decision-Making Methods

#### Main Methods:

1. **Brainstorming**

2. **Nominal Group Technique**

3. **Delphi Technique**

### 3.5.1 Brainstorming

**What is Brainstorming?**

- A technique to generate as many ideas as possible without criticism.

- Negative feedback on any alternative is forbidden until all alternatives are studied.

**Purpose:**

- To extract ideas openly from each group member.

- Most effective with a group of five to seven individuals.

**Process:**

1. Group members propose ideas in turn.

2. All ideas are accepted initially without evaluation.

3. This motivates members to generate more ideas.

4. Process continues until no more ideas are proposed.

5. After collecting all ideas, they are evaluated by discussing pros and cons.

6. The best idea is then accepted.

**Brainstorming Process Summary (Figure 3.5):**

1. **Idea Sharing:** Group members share ideas.

2. **Recording Ideas:** Group leader records each idea where the group can read it.

3. **Evaluation:** Ideas are evaluated only after all have been recorded.

4. **No Early Comments:** No comments on ideas during the initial stage.

**Advantages:**

- Good for generating a wide range of ideas.

**Weaknesses:**

- **Turn-taking Restriction:** Ideas might be lost while waiting for a turn to speak.

- **Shyness:** Members might feel their ideas are not good enough and hesitate to express them.

**Solution:**

- **Computerized Brainstorming:** Allows members to type ideas directly, preventing loss of ideas
and maintaining anonymity to reduce shyness and discomfort during evaluation.

### 3.5.2 Nominal Group Technique

**What is Nominal Group Technique?**

- A decision-making method where group members individually propose and evaluate ideas before
sharing them with the group.
1. **Step 1:**

- Each group member records individual ideas on the decision or problem discussed.

2. **Step 2:**

- Each member reads out their ideas to the group.

- Ideas are written on a blackboard/whiteboard for group review and reference.

3. **Step 3:**

- A discussion is held to evaluate the advantages and disadvantages of each idea.

4. **Step 4:**

- Members vote secretly on paper.

- The idea with the highest number of votes is accepted and implemented.

### 3.5.3 Delphi Technique

**What is the Delphi Technique?**

- A decision-making method where a panel of experts answers questions and collaborates until a
solution is reached for a specific issue.

- Interaction among panel members is not face-to-face; it is done via mail, e-mail, etc.

**Steps in the Delphi Technique:**

1. **Step (a):**

- Identify and select experts in related departments as panel members.

2. **Step (b):**

- Compose problems in the form of a questionnaire with open-ended questions.

3. **Step (c):**

- Distribute the questionnaire to panel members to propose solutions.

4. **Step (d):**

- Each expert completes the questionnaire and returns it to the manager.

5. **Step (e):**

- Summarize and compile all answers into a report.

- Return the report to all panel members with a more specific and detailed questionnaire.
6. **Step (f):**

- Panel members read the report to understand other members' opinions and proposals.

- Complete the second questionnaire.

7. **Step (g):**

- Repeat the process until a unanimous decision is achieved on the best solution.

### 3.5.4 Advantages of Group Decision-Making

1. **Increased Knowledge and Skills:**

- Groups bring together diverse experiences and skills, enhancing problem-solving capabilities.

2. **Comprehensive Problem Handling:**

- More information leads to better handling of problems and identification of root causes.

3. **Multiple Perspectives:**

- Varied member backgrounds (e.g., marketing, operations, training) provide diverse viewpoints.

4. **More Alternative Solutions:**

- Greater variety of solutions generated.

5. **Member Satisfaction and Commitment:**

- Involvement in decision-making leads to higher satisfaction and commitment to implementation.

### 3.5.5 Disadvantages of Group Decision-Making

1. **Time-Consuming:**

- Requires time for meetings, discussions, and resolving conflicts.

2. **Dominance by Certain Individuals:**

- Discussions can be dominated by a few, limiting others' participation and affecting decision
quality.

3. **Compromise Required:**

- Group members often need to compromise, which can dilute the decision.

4. **High Costs:**

- Involving many members can be expensive.

5. **Pressure to Conform:**
 - Members may feel pressured to agree with the group to avoid conflict or rejection.

6. **Groupthink:**

- Desire for harmony or conformity leads to irrational or dysfunctional decision-making outcomes.

### Summary Table (Table 3.6)

Understanding these advantages and disadvantages helps managers decide whether to use group or
individual decision-making approaches.