UNIT- III

DECISION-
MAKING
DEC ISION-MAKING
C ONC EPT
◦The word “Decision” is derived from the Latin word decido, means to ‘cut
off’.
◦The concept of decision, therefore, is settlement, a fixed intention bringing to
a conclusive result, a judgement and a resolution.
◦A decision is the choice out of several options made by the decision maker
to achieve some objectives in a given situation.
Meaning
◦ Business decisions are those, which are made in the
process of conducting business to achieve its
objectives in a given environment.
◦ In concept, whether we are talking about business
decisions or any other decisions, we assume that the
dec ision maker is a rational person.
C HARAC TERISTIC S OF
BUSINESS DEC ISION
MAKING
1.Sequential in nature
2.Exceedingly complex due to risks and trade offs
3. Influenc ed by personal values.
4.Made in institutional settings and business
environment
1. Sequential in
nature
◦ The business decision-making is sequential in nature. In
business, the decisions are not isolated events. Each of
them has a relation to some other decision or
situations.
◦ The decision may appear as a ‘snap’ decision but it is
made only after long chain of developments and a
series of related earlier dec isions.
2. Exc eedingly c omplex due to risks
and trade offs

◦ The decision-making process is a complex process in the higher

hierarc hy of management.
◦ The complexity is the result of many factors, such as the inter-
relationship among the experts or decisions makers, a job
responsibility, a question of feasibility, the codes of morals and
ethics, and a probable impact on business.
3. Influenced by Personal
Values.
◦ A decision otherwise being very sound on the business principle
and economic rationality may be rejected on the basis of the
personal values, which are defeated if such a decision is
implemented.
◦ The culture, the discipline and the individual’s commitment to
goals will decide the process and success of the decision.
4. Made in institutional settings and
business environment
◦ The decision-making process requires creativity, imagination and
a deep understanding of human-behaviour. The process
covers a number of tangible and intangible factors affecting
the decision process.
◦ It requires a foresight to predict the post-decision implications
and a willingness to fac e those implic ations.
◦ All decisions solve a problem over a period of time they give
rise to a number of other problems.
Rational Dec ision-
Making
◦ A rational decision is the one which, effectively and efficiently, ensures the
achievement of the goal for which the decision is made.
◦ Eg. If it is raining, it is rational to look for cover so that you do not get wet. If you are in
business and want to make profit, then you must produce goods and sell them at a
price higher than cost of production.
◦ In reality, there is no right and wrong decision but a rational or an irrational decisions.
◦ The quality of decision-making is to be judged on the rationality and not necessarily
on the result it produces.
◦ The rationality of the decision made is not the same in every situation. It will vary with
the organisation. The situation and the individual’s view of the business situation.
The rational decision-making process involves careful, methodical steps. The
more carefully and strictly these steps are followed, the more rational the
process is. We’ll look at each step in closer detail.
◦ Rational decision making is defined not only by adherence to a careful process, but
also by a logical, data-driven manner of following the steps of that process.
◦ The process can be time-consuming and costly. It is generally not worthwhile on
everyday decisions.
◦ It is more useful for big decisions with many criteria that affect many people.
◦ In other words, so long as the decision maker can explain with
logic and reason, the objectivity and the circumstances in
which the dec ision is made, it c an be termed as a rational
dec ision.
◦ Gross Bertram M’ suggests three dimensions of rationality. First,
the degree of satisfac tion of human interest.
◦ Second, the degree of feasibility in achieving the objectives.
◦ Third, a consistency in decision-making. If the decision maker
shows a consistent behaviour in the process of decision-making,
then one can say that he meets the test of the rationality.
The Problems in Making
Rational Decisions
1. Ascertaining the Problem: As Peter Drucker points out. “the
most common source of mistakes in the management
decisions is the emphasis on finding the right answers rather
than the right questions”. The main task is to define the right
problem in clear terms.
2. Insufficient Knowledge: For rationality, total information leading
to complete knowledge is necessary. An important function of
a manager is to determine whether the dividing line is
reached between insufficient knowledge and the enough
information, to make a decision.
3. Not Enough Time to be Rational: The decision maker is under
pressure to make decisions. If time is limited, he/she may make
a hasty decisions which may not satisfy the test of rationality
of the decision.
4. The Environment may not be Cooperative: Sometimes, the
timing of the decisions is such that one is forced to make a
decision but the environment is not conducive for it. The
decision may fail the test of rationality as the environmental
factors considered in the decision-making turn out to be
untrue.
5. Other Limitations: like misjudging the motives & values of
people, poor communication, misappraisal of uncertainties
and risks, inability to handle the available knowledge and
human behaviour.
DEC ISION-MAKING
PROC ESS
TYPES OF DECISIONS
TYPES OF
DEC ISIONS
1. Programmed And Non-Programmed Decisions:
◦ Programmed decisions are routine and repetitive in nature. These decisions deal with
common and frequently occurring problems in an organization such as buying behaviour
of consumers, sanctioning of different types of leave to employees, purchasing decisions,
salary increment, etc.
◦

◦ Non-programmed decisions are not routine or common in nature. These are related to
exceptional situations in which guidelines or routine management is not set. For example,
problems arising from a decline in market share, increasing competition in the business
environment. The majority of the decisions taken by managers do fall in this non
programmed category.
2. Operational and Strategic Decisions:

◦ Operational decisions are just the normal functioning of the organization. These decisions
do not require much time and take a shorter time as compared to other decisions taken.
Ample of responsibilities are delegated to subordinates. The main decision is to create
harmony in an organization and to see whether the management is proper or not.

◦ Strategic decisions include all present issues and problems. The main idea is to achieve
better working conditions, better equipment, and efficient use of existing equipment, etc.
These all fall under this category. Usually, strategic decisions are taken by top-level
management.
3. Organizational and Personal Decisions:

◦ If the decision is taken collectively keeping in mind the organizational goal, it is

known as the organization goal, and if the manager takes any decision in the
personal capacity (affecting his/her life). It is known as personal decisions.
◦ These decisions may sometimes affect the functioning of the organization
as well. For
example, if the employee has decided to leave the organization, it may affect
the organization. The authority of taking personal decisions cannot be
delegated and is dependent on the individual itself.
 Other Types of
◦ The Dec
type ofisions
decisions are based on the degree of
knowledge about the outcomes or the events yet to take
place.
◦ If manager has full and precise knowledge of the event
or outcome which is to occur, then the decision making
is not a problem. If manager has full knowledge, then it
is a situation of c ertainty.
◦ If he has partial knowledge or a probabilistic knowledge,
then it is dec ision-making under risk.
◦ If the manager does not have any knowledge
whatsoever, then it is decision-making under uncertainty.
◦ A good MIS tries to convert a decision-making situation
under uncertainty to the situation under risk and further to
certainty.
◦ Decision-making in the operations management level, a situation of
is
certainty. This is mainly because at this level, they have fairly good
knowledge about the events, which are to take place and the
environment.

◦ Decision-making at the middle management level is of the risk type. This

is because of the difficulty in forecasting an event with hundred per
cent accuracy and the limited scope of generating the decision
alternatives.
◦ At the top management level, it is a situation of total uncertainty on
account of insufficient knowledge of the external environment and
difficulty in forecasting business growth on a long-term basis.
◦ A good MIS design gives adequate support to all the three levels of
management.
ORGANISATIONAL DEC ISION-
MAKING
◦ An organization is an arrangement of individuals
having different goals. Eac h individual
enjoys
different powers and rights bec ause of
his position, func tion and
importanc e
organization. inthe
◦ Sinc e there is an imbalanc e in the
power
structure, the different individuals can not equally
influence the organizational behaviour, the
management process and the setting of business
goals.
◦ Ultimately, what emerges is an hierarchy of goals
which may be conflicting, self defeating and
inconsistent.
◦ The corporate goals and the goals of the department/divisions or the
func tional goals, many a times, are in c onflic t.
◦ If the organization is a system, and its department/divisions or func tions
are its subsystems, then unless the system’s objective and the subsystems
objectives are aligned and consistent to each other, the corporate goals
are not achieved.
◦ In case of inconsistent goals, the conflict in the organization increases,
affecting the organization’s overall performance.
◦ The organizational decision-making should help in the resolution of such
conflicts. Otherwise, the organization suffers from indecisions.
The organizational theory provides different methods for avoiding
such conflicting goals:
Dealing with
Unc ertainty
◦ The organizations perform in an environment of unc ertainty.
◦ The market uncertainty, the price fluctuations, the changes in the
Government policy, not knowing the moves of the competitors, the
technology changes are some of the fac tors whic h make the business
environment unc ertain.
◦ Organizational behaviour will, therefore, be towards minimizing the risk in
decision-making. The trend will be for risk avoidance with available
information support.
◦ The organization will vote for a decision which has 90% chance of earning
Rs. 1 million as against a decision which has 10% chance of earning Rs 10
million.
◦ The organizational behaviour in decision-making tends to avoid risk and
minimize cost post decision implementation.
Organisational
◦Learning
The Organisational decision-making improves with learning by acquiring, an
additional knowledge and experience, the training and development, the
experience of implementation and so on.
◦ Learning provides a strength to review the goals and the objectives, and
allows to set them more c orrec tly.
◦ It also helps to revise and improve the decision rules. The improvements are
carried out by adopting the policy of modernization, rationalization and the
applic ation of the management sc ienc e.
◦ The procedure brings with small changes in the existing policy and guidelines.
Then it slowly comes to the changes in the strategic decision and planning.
◦ Further, it revamps the decision rules and also provides a systems approach
to decision-making.
MIS & DECISION-
MAKING
MIS AND DEC ISION-
MAKING
◦ It is necessary to understand the conceptsof decision-making
as they are relevant to the design of the MIS.
◦ The Simon Model provides a conceptual design of the MIS and
decision-making, wherein the designer has to design the system
in such a way that the problem is identified in precise terms.
◦ That means the data gathered for data analysis should be such
that the problem is identified in precise terms. That means the
data gathered for data analysis should be such that it provides
diagnostics and also provides a path to bring the problem to
surface.
◦ In the design phase of the model, the designer is to ensure that
the system provides models for dec ision-making.
◦ These models should provide for the generation of decision
alternatives, test them and pave way for the selection of one of
them.
◦ In a choice phase, the designer must help to select the criteria to
select one alternative amongst the many.
◦ The concept of programmed decision-making is the finest tool
available to the MIS designer, whereby he can transfer decision-
making from a decision maker to the MIS and still retain the
responsibility and accountability with the decision maker or the
manager.
◦ In case of non-programmed decision-making, the MIS should provide
the decision support systems to handle the variability in the decision-
making conditions.
◦ The decision support systems provide a generalized model of decision-
making.
◦ The concept of decision-making systems, such as the closed and the
open systems, helps the designer in providing a design flexibility.
◦ The closed systems are deterministic and rule based, therefore the
design needs to have limited flexibility, while in an open system, the
design should be flexible to cope up with the changes required from
time to time.
◦ The methods of decision-making can be used directly in the MIS
provided the method to be applied has been decided.
◦ The concept of organisational and behavioural aspects of decision-making provide
an insight to the designer to handle the organisational culture and the constraints in
the MIS.
◦ The concept of rationality of a business decision, the risk averseness of the
managers and the tendency to avoid an uncertainty, makes the designer
conscious about the human limitations, and prompts him to provide a support in
the MIS to handle these limitations.
◦ The reliance on organisational learning, makes the designer aware of the MIS and
makes him provide the channels in the MIS to make the learning process more
efficient.
◦ The relevance of the decision-making concept is significant in the MIS design
◦ The significance arises out of the complexity of decision-making, the human factors
in the decision-making, the organisational and behavioural aspects, and the
uncertain environment.
◦ The MIS design addressing these factors turns out to be the best design.
 UNIT-III
DEC ISION SUPPORT
SYSTEM
INTRO DUC TIO N

► DSS is an applic ation of Herbert Simon Model.

► The model has three phases: Intelligence, Design and Choice.
► The DSS basically helps the information system in the intelligence
phase where the objective is to identify the problem and then go to
the dec ision phase for solution.
► The Choice of selection criterion varies from problem to problem.
► It is, therefore required to go through these phases again and again
till a satisfac tory solution is found.
► The DSS helps in making a decision and also in its performance
evaluation.
► These systems can be used to validate the decision by performing
sensitivity analysis on various parameters of the problem.
► TheDSS refers to a class of system which
support in the process of decision
making and does not always give a
decision itself.
► The nature of the decision is such that
the decision makers need a variety of
information, when same or similar types
of decisions are to be made.
M EA NING

► Decision support systems (DSS) are interactive software-based

systems intended to help managers in decision-making by
accessing large volumes of information generated from various
related information systems involved in organizational business
processes, such as office automation system, transaction
processing system, etc.
► DSS uses the summary information, exceptions, patterns, and
trends using the analytical models. A decision support system
helps in decision-making but does not necessarily give a decision
itself. The decision makers compile useful information from raw
data, documents, personal knowledge, and/or business models
to identify and solve problems and make decisions.
 Programmed and Non-programmed Decisions

► There are two types of decisions - programmed and non-programmed decisions.

► Programmed decisions are basically automated processes, general work,
routine where −
• These decisions have been taken several times.
• These decisions follow some guidelines or rules.
► For example, selecting a reorder level for inventories, is a programmed decision.
► Non-programmed decisions occur in unusual and non-addressed situations, so −
• It would be a new decision.
• There will not be any rules to follow.
• These decisions are made based on the available information.
• These decisions are based on the manger's discretion, instinct, perception
and judgment.
► For example, investing in a new technology is a non-programmed decision.
► Decision support systems generally involve
non-programmed decisions. Therefore,
there will be no exact report, content, or
format for these systems.
Attributes of a DSS

• Adaptability and flexibility

• High level of Interactivity
• Ease of use
• Efficiency and effectiveness
• Complete control by decision-makers
• Ease of development
• Extendibility
• Support for modeling and analysis
• Support for data access
• Standalone, integrated, and Web-
based
Characteristics of a DSS

• Support for decision-makers in semi-structured and unstructured

problems.
• Support for managers at various managerial levels, ranging from
top executive to line managers.
• Support for individuals and groups. Less structured problems
often requires the involvement of several individuals from
different departments and organization level.
• Support for interdependent or sequential decisions.
• Support for intelligence, design, choice, and implementation.
• Support for variety of decision processes and styles.
• DSSs are adaptive over time.
Benefits of DSS

• Improves efficiency and speed of decision-making activities.

• Increases the control, competitiveness and capability of futuristic
decision- making of the organization.
• Facilitates interpersonal communication.
• Encourages learning or training.
• Since it is mostly used in non-programmed decisions,
it reveals new approaches and sets up new evidences
for an unusual decision.
• Helps automate managerial processes.
Components of a DSS

► Following are the components of the Decision Support System −

 Database Management System (DBMS) − To solve a problem the necessary
data may come from internal or external database. In an organization, internal data
are generated by a system such as MIS. External data come from a variety of
sources such as newspapers, online data services, databases (financial,
marketing, human resources).
 Model Management System − It stores and accesses models that managers use
to make decisions. Such models are used for designing manufacturing facility,
analyzing the financial health of an organization, forecasting demand of a product
or service, etc.
 Support Tools − Support tools like online help; pulls down menus, user interfaces,
graphical analysis, error correction mechanism, facilitates the user interactions with
the system.
Classification/Types of DSS

 Following are some typical DSSs −

 Status Inquiry System − It helps in taking operational, management level, or middle level
management decisions, for example daily schedules of jobs to machines or machines to
operators.
 Data Analysis System − It needs comparative analysis and makes use of formula or an
algorithm, for example cash flow analysis, inventory analysis etc.
 Information Analysis System − In this system data is analyzed and the information report
is generated. For example, sales analysis, accounts receivable systems, market analysis
etc.
 Accounting System − It keeps track of accounting and finance related information, for
example, final account, accounts receivables, accounts payables, etc. that keep track of
the major aspects of the business.
 Model Based System − Simulation models or optimization models used for decision-
making are used infrequently and creates general guidelines for operation or
management.
► One strong reason for using DSS is that existing information systems and
MIS are not sufficient for meeting all the needs of information and
decision-making.
► Decision makers still has to look for additional information, analysis and
a model for decision-making in certain one off scenarios.
► The single largest benefit of DSS is that it raises the capabilities of
dec ision maker to make right rational dec isions.
► The capability is built due to several abilities DSS provides to decision
maker to deal with the problems.
► DSS provides ability to view data/information in different dimensions
and sensing the problem, trend, pattern through different views.
► It helps to :-
1. Assess the impact of any change in the business performance and
enabling to focus on the areas where impact is negative.
2. Ability to view a complex scenario or problem and to design a
model to analyze the problem, develop alternatives to solve the
problem, test the solution and to c onduc t sensitivity analysis.
3. Ability to make better decisions due to quick analysis, modelling,
developing alternatives and testing for selection.