DECISION MAKING. Chapter - 4. B. H. Gardi College of Engineering & Technology, RAJKOT Department of Master of Computer Application

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1 Prepared By :- Mr. Ajay A. Ardeshana MCA Lecturer At GARDI VIDYAPITH RAJKOT. - Mobile : Chapter - 4 DECISION MAKING ajay @gmail.com Mobile :

2 Decision-Making Concepts Decision is a choice out of several options, made by decision maker to achieve some objectives in a given situation. Major characteristics of Business Decision-Making :- Sequential (Not Isolated) :- The business decision-making is sequential in nature. It is not an isolated event. Each of them are related to some other decision or situation. Complex :- It is a complex process in the higher hierarchy of management. The complexity is the result of many factors. Influenced by Personal Values :- Personal values of a decision maker play a major role in decision-making. Economics rationality may be rejected on the basis of Personal Values. Made in Institutional Setting and Business Environment :- It will require more creativity, imagination and deep understanding of human behavior. All decisions solve the problem but over a period of time they rise number of other problems. ajay @gmail.com Mobile :

3 Rational Decision-Making Definition :- A rational decision is the one which, effectively and efficiently, ensures the achievement of the goal for which the decision is made. Example :- To decide a higher price then the cost of production. There is no right or wrong decision but a rational or irrational decisions. The rationality of the decision made is not the same in every situation. It will vary with the organization, the situation and the individual s view of the business situation. The reason for this difference in rationality is the different objectives of the decision maker. Types of rationality according to the Simon Herbert 1. Objectively Rational :- If it maximize the value of the objective. 2. Subjectively Rational :- If it maximize the attainment of value within limitation of the knowledge and awareness of the subject. ajay @gmail.com Mobile :

4 3. Consciously Rational :- It extent the process of the decision-making is deliberate (Intentional) and conscious (awareness) one. 4. Organizationally Rational :- Degree of orientation (Person s attitude) towards the organization. 5. Personally Rational :- It achieves an individual s personal goals. The Problems in Making Rational Decision 1. Ascertaining The Problem :- The most common mistake in management decision is it is for finding the right answer rather then finding the right question. The management may define the problem Sales are declining. Actually, the problem is there some where else. Fore example problem may be the poor quality of product or you may be thinking of improving the quality of advertising. 2. Insufficient Knowledge :- For perfect rationality, the total information leading to complete knowledge is necessary. The main function of a manager is to determine the dividing line between insufficient knowledge and enough information. ajay @gmail.com Mobile :

5 3. Not enough time to be Rational :- The decision is under pressure to make the decision. If the time is limited, he may make a hasty decision which may not satisfy the test of rationality of decision. 4. The environment may not cooperate :- Sometimes the timing of the decision is such that one force to make the decision but the environment is not conductive for it. It may fail the test of rationality if environmental factor is consider. For example, Deciding the price for Oil and Petroliam Products. 5. Other Limitations :- Other limitations like : Need for compromise among the different position. Misjudging the motivation and value of people. Poor communication. Inability to handle the available knowledge and human behavior. Decision-Making Process Herbert Simon describes the model of Decision-Making Process in three phases : (a)intelligence :- Raw data collected, proceed and examined. (b)design :- Inventing, analyzing and developing the different decision alternatives (c)choice :- Select one alternative as a decision INTELLIGENCE DESIGN CHOICE ajay @gmail.com Mobile :

6 In the intelligence phase, the MIS collects the data. The data is scanned, examined, checked and edited. Further the data is sorted and managed with other data and computations are made summarized and presented. In the design phase, the manager develops a model of the problem situation on which he can generate and test the different decisions to facilitate its implementation. If the model developed is useful, he then further moves into phase of selection called as choice. In the phase of choice, the manager evolves the selection criterion such as maximum profit, least cost, minimum waste, least time taken and highest utility. The criterion is applied to the various decision alternatives and the one which satisfied the most is selected. Decision-Making Systems : Types The decision-making can be classified in a number of ways. There are two types of the systems based on the manager s knowledge about the environment. 1. Close and 2. Open 1. Close Decision-Making :- If the manager operates in an known environment then it is a Closed Decision-Making System 2. Open Decision-Making :- If the manager operates in an environment not knowing to him then it is a Open Decision-Making System ajay @gmail.com Mobile :

7 Conditions for the Close Decision-Making System :- The manager has a known set of decision alternatives and knows their outcomes fully in terms of value, if implemented. The manager has a model, a methods or a rule whereby a decision alternatives can be generated, tested and ranked for selection. The manager can choose one of them, based on some goal and objective criterion. Conditions for the Open Decision-Making System :- The manager does not known all the decision alternatives. The outcome of the decision is not known fully. No method, rule or model is available to study and finalized the decision among the set of decision alternatives. It is difficult to decide an objective and a goal and, the manager resorts to that decision, where his aspiration or desire are met best. Types of Decision The types of decision are based on the degree of knowledge about the outcomes or the events yet to take place. If the manager has the full or precise knowledge of events and the outcomes which is to occur, then the decision-making is not a problem. Otherwise 1. If the manager has full knowledge the it is s situation of certainty. 2. If he has partial knowledge or a probabilistic knowledge, then it is decision-making under risk. 3. If manager does not have any knowledge whatsoever, then it is decision-making under uncertainty. ajay @gmail.com Mobile :

8 A good MIS tries to convert the decision-making situation under uncertainty to under risk and further to certainty. Decision-Making in the Operation Management is a situation of certainty. This is mainly because the manager in this field has: Full knowledge of events to take place. Full knowledge of an environment. And Has a predetermine decision alternatives. Decision-Making in the Middle Level Management is of the risk type. This is mainly because the manager in this field has: Difficulties in forecasting the with hundred percent accuracy and The limited scope of generating the decision alternatives. Decision-Making at Top Level Management is a situation of total uncertainty. This is mainly because the manager has: Insufficient knowledge of external environment. And Difficulties to forecasting the business growth on a long term basis. Nature of Decision Decision-Making is a complex situation. To resolve the complexity, the decisions are classified as: Programmed Decision. Non-programmed Decision. If the decision can be based a rule, methods or even guidelines, it is called the Programmed Decision. The programmed decision can be delegate to lower level management. The decision which can not be made by using a rule or a model is the Non-programmed Decision. Non-Programmed decision can not be delegate to lower level management. ajay @gmail.com Mobile :

9 The Low of requisite Variety of Situation The programmed decision making is the necessary for the manager, to enumerate all the stages to the decision-making situation and provide necessary support through rules and formula for each one of them. The failure to provide the decision-making rule, in each of them will lead to a situation where the system will not be able to make the decision. It is therefore necessary to cover a requisite Variety of situations with the necessary decision response. The requisite variety of situations means that for efficient programmed decision-making, it is necessary for the manager to provide: 1. All the decision alternatives and the choices. 2. The decision rules to handle the situation. 3. The system or the method to generate a decision choice. It has found that in a closed-decision-making situation, the programmed decision-making system works efficiently, while in the open decision-making situation it is not efficient. With the advent of KBES and KBAIS, it is now possible for a computer to develop the alternatives, test them and handle them on the criteria of selection leading to the decision. The MIS is expected to provide the necessary information and knowledge support to the computer based system. ajay @gmail.com Mobile :

10 Methods for deciding Decision Alternatives Three methods for selection of decision alternatives are: 1. Optimization Techniques. 2. Payoff Analysis. 3. Decision Tree Analysis. All the operational research models use optimization techniques, to decide on the decision alternatives. When the decision making situation can be expressed, in terms of decision V/s problem event, and its pay-off value, then it is possible to construct matrix of the decision V/s pay-off values. the method of decision making can be adopted, if the decision making situation can be describe as a chain of decisions. 1. Optimization Techniques :- Linear Programming, Integer Programming, Dynamic Programming, Queuing Models, Inventory Models, Capital Budgeting Models are the examples of this techniques. These methods are used in case when the decision-making situation is closed, deterministic and requires to optimize the use of resources under condition of constraints. These methods are termed Operational Research Techniques. All the OR methods are attempt to balance the two aspects of business under condition of constraints. In Linear Programming Model, the Use of resource V/s Demand is balance to maximize the profit. In Inventory Model, the Cost of Holding Inventory V/s the Cost of purchasing the inventory is balanced under constraint of capital and meeting the demand requirements. ajay @gmail.com Mobile :

11 2. The Payoff Analysis :- When all the alternatives and their outcomes are not known with certainty, the decision is made with the help of Payoff Analysis. The Payoff Matrix is constructed where The rows shows the alternatives and The columns shows the conditions or the states of nature with the probability of occurrence. The intersection of Columns and Rows shows the value of Outcome resulting out the alternative and the state of nature. Your Decision Alternative Competitor s Decision: Probability No Change Increase Decrease Expected Gain No Change in the Price Increase Price Decrease Price Decision Tree Analysis :- When the decision must make a sequence of decisions, the decision tree analysis is useful in selecting the set of decisions. ajay @gmail.com Mobile :

12 Decision Analysis by Analytical Modeling A decision is made but such a decision needs to be analyzed for conditions and assumptions considered in the decision model. The Model is analyzed in four ways : 1. What If Analysis. 2. Sensitivity Analysis. 3. Goal Seeking Analysis. 4. Goal Achieving Analysis. 1. What If Analysis :- Decisions are made using a model of the problems for developing various solutions alternatives and testing them for the best choice. The model is built with some variables and relationship among the variables. In reality, the considered value for variables or relationship in the model may not hold good and therefore solution need to be tested for the outcome, if the value of variable or relationship change. This model of analysis is known as What If Analysis. Example :- Decision-Making Problem in determining Inventory Control Parameters. Like: Safety Stock, Maximum Stick, Minimum Stock. Reorder Level. The variable for decision making is Time for Planning Period. Inventory manager want to know how the cost of holding inventory will be effected if time is reduced by one week or increased by one week. What If Analysis creates a confidence in decision-making model by putting a picture of outcomes under different conditions. ajay @gmail.com Mobile :

13 2. Sensitivity Analysis :- In what if analysis we test the effect on solution by changing the value of number of variables simultaneously or changing the relations. But in Sensitivity Analysis, a special case of What If Analysis, only one variable is changed and rest are kept unchanged. Example :- In our problem of inventory, Sensitivity Analysis can be used to access the cost of holding the inventory, if the cost of item increase 20% in sensitivity analysis, we are testing how sensitive is the cost of holding inventory to the change in the cost of item. Sensitivity Analysis helps to understand the significance of variable in decision-making and improve the quality of decision-making. 3. Goal Seeking Analysis :- In goal seeking analysis, the goal is fixed and you go down to analysis the variables and values, which would help to seek the goal. We work backward from the goal. Example :- In our inventory problem, we would fix the goal of achieving the cost of holding inventory of an item at the level of Rs. 10,00,000/- Goal seeking analysis will help you to arrive at the values of parameters to attain the inventory level of Rs. 10,00,000/-. 4. Goal Achieving Analysis :- In goal achieving analysis, we do not seek the goal but we try to achieve the goal of an optimum value arrived at after satisfying all the constraints operating in the problem. In optimization analysis, we come to know which are critical constraints and which are limiting the value of goal. The decision maker use this analysis to work on constraints and resources and find way to improve solution to achieve highest goal. ajay @gmail.com Mobile :

14 Behavioral Concepts in Decision-Making The manager, as a human being, behaves in a particular way in a given situation. The response of one manager may not be the same as that of the other manager as they differ n the behavior platform. Even though tools, methods and procedures are evolved, the decision is many a times influenced by personal factors. The manager differ in their approach towards decision making in the organization and therefore they can be classified like : The achievement oriented. Nature of risk avoidance. Behavior Influenced by the position. The achievement oriented manager will always work for the best and therefore, will be enterprising in every aspects of decision-making. He will endeavor to develop all the possible alternatives. Some of the manager shows the nature of risk avoidance. Their behavior shows the distinct pattern indicating a path of Low Risk or No Risk in decision-making. The behavior of manager is also influenced by the position he hold in the organization. The behavior is influenced by the fear that the personal image may be spoiled due to failure. The rationality of the business decision will depend individuals, their position in organization, and their interrelationship with the other manager. ajay @gmail.com Mobile :

15 MIS and Decision-Making As the Decision-Making is relevant to the design on MIS designer has to design the system in such a way that the problem is identify in precise term. Decision Phases :- The designer is to ensure that the system provides the methods for decision-making. This model should provide for generating decision alternatives, test them and provide a way for selection one of them. Decision-Making System :- The Closed System are deterministic and rule based, therefore the design need to have limited flexibility. In an Open System the design should be flexible to cope up with the changes required from time-to-time. Nature of Design :- Programmed Decision Making is the finest tool available to the MIS Designer where he can transfer the decision-making from a decision maker to MIS and still retain the responsibility as a Decision Maker or Manager. In case of Non-programmed Decision, the MIS should provide a DSS (Decision Support System) to handle the variability in the Decision-Making conditions. Organizational Behavior :- MIS provides an insight to the designer to handle the organizational culture and the constraints in the MIS. ajay @gmail.com Mobile :