Chapter 4 decision making

B. H. Gardi College of Engineering & Technology, RAJKOT
Department of Master of Computer Application
Prepared By : Ajay A. Ardeshana
Email : ajay.24021985@gmail.com Mobile : 9558820298 1
Prepared By :-
Mr. Ajay A. Ardeshana
MCA Lecturer
At GARDI VIDYAPITH
RAJKOT.
Email :- ajay.24021985@gmail.com
Mobile :- + 91 – 95588 20298
DECISIONDECISIONDECISIONDECISION
MAKINGMAKINGMAKINGMAKING
Chapter - 4

Decision-Making Concepts
Prepared By :- Ajay A. Ardeshana Email :- ajay.24021985@gmail.com Mobile :- 9558820298
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’.

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.

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.

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

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

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.

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.

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.

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.

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
0.50 0.20 0.30
No Change in
the Price
4 5 8 5.40
Increase Price
6 4 3 4.70
Decrease Price
10 12 4 8.60
3. Decision Tree Analysis :-
When the decision must make a sequence of decisions, the decision
tree analysis is useful in selecting the set of decisions.

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.

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.

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 inter-
relationship with the other manager.

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.

Chapter 4 decision making

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