EE 413 – Engg Management

Decision Making

Lecture # 10 (EE-7TH A,B)

By: M Sami uz Zaman

 Definition of Decision
• “A conclusion or resolution reached after consideration”.
• “The action or process of deciding something”.
• “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.
 What is Decision Making?
Decision: a reasoned choice among alternatives
• Examples:
o Where to advertise a new product
o What stock to buy
o What movie to see
o Where to go for dinner
Decision Making: a process of choosing among alternative courses
of action for the purpose of attaining a goal or goals

• Decision making vs. problem solving?

• ART or SCIENCE?
 Importance of Decision making
• Decision-making is a primary function of management. A
manager's major job is sound/rational decision-making. He
takes hundreds of decisions consciously and subconsciously.

• Decision-making is the key part of manager's activities.

Decisions are important as they determine both managerial and
organizational actions.

• A decision may be defined as "a course of action which is

consciously chosen from among a set of alternatives to achieve
a desired result." It represents a well-balanced judgment and a
commitment to action.
 Importance of Decision making
• It is rightly said that the first important function of
management is to take decisions on problems and situations.
Decision-making pervades all managerial actions. It is a
continuous process. Decision-making is an indispensable
component of the management process itself.

• Decision is a choice from among a set of alternatives. The

word 'decision' is derived from the Latin words de ciso which
means 'a cutting away or a cutting off or in a practical sense' to
come to a conclusion. Decisions are made to achieve goals
through suitable follow-up actions. Decision-making is a
process by which course of action is taken.
 Importance of Decision making
• According to Peter Drucker, "Whatever a manager does, he
does through decision-making". A manager has to take a
decision before acting or before preparing a plan for execution.
Moreover, his ability is very often judged by the quality of
decisions he takes because action is not possible unless a firm
decision is taken about a business problem or situation.

• Decision-making is necessary in planning, organizing,

directing, controlling and staffing. For example, in planning
alternative plans are prepared to meet different possible
situations. Out of such alternative plans, the best one (i.e., plan
which most appropriate under the available business
environment) is to be selected.
 Importance of Decision making
• Decision-making has priority over planning function.
According to Peter Drucker, it is the top management which is
responsible for all strategic decisions such as the objectives of
the business, capital expenditure decisions as well as such
operating decisions as training of manpower and so on.
Without such decisions, no action can take place and naturally
the resources would remain idle and unproductive. The
managerial decisions should be correct to the maximum extent
possible. For this, scientific decision-making is essential.

• Decision making involves a certain commitment. A decision

results into the commitment of resources and reputation of the
organisation.
 Importance of Decision making
• Decision making is always related to the situation or the en-
vironment. A manager may take one decision in a particular
situation and an opposite decision in a different situation. In
some situations, there may just be a decision not to decide.
• Decision making is a human and social process. It involves the
use not simply of the intellectual abilities but also of intuition,
subjective values and judgment.
• It is not a purely intellectual process. Perception and human
judgment are indispensable and no technique can replace them.
But knowledge and experience also provide basis for correct
decisions.
• The choice in decision making implies freedom to choose from
among alternative courses of action without coercion. It also
implies uncertainty about the final outcome.
Steps in Decision Making
Decision Making Models (Simon’s Model)
According to this model, a decision must be reached in following steps:
 Intelligence phase

– Reality is examined
– The problem is identified and defined
 Design phase

– Representative model is constructed

– The model is validated and evaluation criteria are set
 Choice phase

– Includes a proposed solution to the model

– If reasonable, move on to the
 Implementation phase

– Solution to the original problem

Failure: Return to the modeling process

 Simon’s Model – Intelligence Phase
Scan the environment to identify problem situations or
opportunities
 Identify organizational goals and objectives
 Determine whether they are being met

 Explicitly define the problem

 Classify the problem

 Decompose into sub-problems
 Is it my problem (ownership)
 Can I solve it

Outcome: Problem statement

 Simon’s Model – Design Phase
 Generating, developing, and analyzing
possible courses of action

Includes
 Understanding the problem
 Testing solutions for feasibility
 A model is constructed, tested, and validated

Modeling
 Conceptualization of the problem
 Abstraction to quantitative and/or qualitative forms
 Types of Decisions
 Type of structure - Nature of task

Structured Unstructured

Level of decision making - Scope

Strategic

Managerial

Operational

13
 Nature of Decision
• Structured Problems
o Routine and repetitive with standard solution
o Well defined decision making procedure
o Given a well-defined set of input, a well defined set of output is
defined
• Semi-structured Problems
o Has some structured aspect
o Some of the inputs or outputs or procedures are not well defined
• Unstructured Problems
o All phases of decision making process are unstructured
o Not well defined input, output set and procedures

14
 Scope of Decision
• Operational Planning and Control:
o Focus on efficient and effective execution of specific tasks.
o They affect activities taking place right now
o E.g... What should be today's production level
• Management Control and Tactical Planning
o Focus on effective utilization of resources
o more longer range planning horizon
o E.g... What is next years production level
• Strategic Planning
o Long-range goals and policies for resource allocation
o E.g... What new products should be offered

15
 Simon’s Model – Choice Phase
• Search, evaluation, and recommending an appropriate solution
to the model
• Specific set of values for the decision variables in a selected
alternative

The problem is considered solved after the recommended

solution to the model is successfully implemented
Search Approaches
• Analytical Techniques
• Algorithms (Optimization)
• Blind and Heuristic Search Techniques
 Simon’s Model – Implementation
Plan
“There is nothing more difficult to carry out, nor more
doubtful of success, nor more dangerous to handle, than to
initiate a new order of things”. Machiavelli (1500s)

Important Issues
• Resistance to change
• Degree of top management support
• Users’ roles and involvement in system development
• Users’ training
 Decision Support Systems

Specific MSS technologies relationship to the decision making

process

• Intelligence: DSS, ES, ANN, MIS, Data Mining, OLAP, EIS,

GDSS
• Design and Choice: DSS, ES, GDSS, Management Science,
ANN
• Implementation: DSS, ES, GDSS
 Vroom-Yetton Model of Decision
• The Vroom–Yetton contingency model is a situational leadership
theory of industrial and organizational psychology developed
by Victor Vroom, in collaboration with Phillip Yetton (1973) and
later with Arthur Jago (1988). The situational theory argues the best
style of leadership is contingent to the situation. This model suggests
the selection a leadership style for group decision making.

• 3 types of leadership behavior

1. Autocratic – leader makes individual decision (little or no
group input)
2. Consultative – leader asks for input, then makes decision
3. Group – leader shares info with group, group makes
decision together

•
 Vroom-Yetton Model
• Autocratic Type 1 (AI) Leader makes own decision using
information that is readily available to him at the time. This
type is completely autocratic.
• Autocratic Type 2 (AII) Leader collects required information
from followers, then makes decision alone. Problem or
decision may or may not be informed to followers. Here,
followers' involvement is just providing information.
• Consultative Type 1 (CI) Leader shares problem to relevant
followers individually and seeks their ideas and suggestions
and makes decision alone. Here followers do not meet each
other and the leader’s decision may or may not reflect his
followers' influence. So, here followers involvement is at the
level of providing alternatives individually.
 Vroom-Yetton Model
• Consultative Type 2 (CII) Leader shares problem to relevant
followers as a group and seeks their ideas and suggestions and
makes decision alone. Here followers meet each other, and
through discussions they understand other alternatives. But the
leader’s decision may or may not reflect his followers'
influence. So, here followers involvement is at the level of
helping as a group in decision-making.

• Group-based Type 2 (GII) Leader discuss problem and

situation with followers as a group and seeks their ideas and
suggestions through brainstorming. Leader accepts any
decision and does not try to force his idea. Decision accepted
by the group is the final one.
 Vroom-Yetton Model
• Vroom & Yetton formulated following seven questions on decision
quality, commitment, problem information and decision acceptance, with
which leaders can determine level of followers involvement in decision.
Answer to the following questions must be either ‘Yes’ or ‘No’ with the
current scenario.

1. Is there a quality requirement? Is the nature of the solution critical? Are

there technical or rational grounds for selecting among possible
solutions?
2. Do I have sufficient information to make a high quality decision?
3. Is the problem structured? Are the alternative courses of action and
methods for their evaluation known?
4. Is acceptance of the decision by subordinates critical to its
implementation?
5. If I were to make the decision by myself, is it reasonably certain that it
would be accepted by my subordinates?
6. Do subordinates share the organizational goals to be obtained in solving
this problem?
7. Is conflict among subordinates likely in obtaining the preferred solution?
Vroom Yetton Graph
 Kepner Tregoe Method
• The Kepner-Tregoe approach is based on the premise that the
end goal of any decision is to make the "best possible" choice.
This is a critical distinction: The goal is not to make the perfect
choice, or the choice that has no defects. So the decision maker
must accept some risk. And an important feature of the
Kepner-Tregoe Matrix is to help evaluate and mitigate the
risks of your decision.
• This type of detailed problem and risk analysis helps you to
make an unbiased decision. By skipping this analysis and
relying on gut instinct, your evaluation will be influenced by
your preconceived beliefs and prior experience – it's simply
human nature. The structure of the Kepner-Tregoe approach
limits these conscious and unconscious biases as much as
possible.
 Kepner Tregoe Method
The Kepner-Tregoe Matrix comprises of four basic steps:

• Situation Appraisal – identify concerns and outline the

priorities.
• Problem Analysis – describe the exact problem or issue by
identifying and evaluating the causes.
• Decision Analysis – identify and evaluate alternatives by
performing a risk analysis for each and then make a final
decision.
• Potential Problem Analysis – evaluate the final decision for
risk and identify the contingencies and preventive actions
necessary to minimize that risk.
 Human Cognition and Decision Styles

Cognition Theory

• Cognition: Activities by which an individual resolves

differences between an internalized view of the environment
and what actually exists in that same environment
(Ability to perceive and understand information)

• Cognitive models are attempts to explain or understand

various human cognitive processes
 Cognitive Style
• The subjective process through which individuals
perceive, organize, and change information during the
decision-making process
• Often determines people's preference for human-
machine interface
• Impacts on preferences for qualitative versus quantitative
analysis and preferences for decision-making aids.
Cognitive style research impacts on the design of
management information systems

• Analytic decision making.

• Heuristic decision making.
 Decision in Groups
• Most major decisions in medium and large organizations are
made by groups
• Conflicting objectives are common
• Variable size
• People from different departments
• People from different organizations
• The group decision making process can be very complicated
• Consider Group Support Systems (GSS)
• Organizational DSS can help in enterprise-wide decision
making situations