UNIT II: INTRODUCTION TO DECISION MAKING

Decision Making Introduction:

Consciously or sub-consciously, we make a number of decisions (important and routine) in our daily lives. Sometimes,
decisions are taken without analysing their impact on our behaviour. In the business world, however, decision-making is
done in a scientific and rational manner as decisions affect the efficiency of business operations and interests of a large
number of stakeholders (consumers, financiers, Government etc.) who interact with the business.
Decision-Making and Planning : Planning and decision-making are related to each other in the following ways: 1. The
process of planning involves decision-making regarding organisational objectives and plans. 2. Both decision-making
and planning require value judgement, creativity and innovative thinking by managers. 3. Plans and decisions are
related to achievement of goals. 4. Planning and decision-making are continuous and pervasive processes. Managers
perform them at all levels. 5. Efficiency of planning is largely determined by the efficiency of decisions. Good decisions
lead to good plans and vice-versa. 6. Planning and decision-making exploit environmental opportunities and threats to
match organisational strengths and weakness. 7. Managers plan and decide for every situation — risk, certainty and
uncertainty. 8. Decision-making and planning are based on forecasts and assumptions about environmental factors.
Features of Decision-Making : Decision-making has the following features: 1. Decision-making is goal-oriented. The
purpose of decision is to achieve a goal; sectional, departmental and organisational. 2. It is required for every
managerial function though it is closely related to planning. How good are the decisions determines how effective are
the organisational plans. 3. It is a process of choosing a course of action out of various courses to solve a specific
problem. 4. Problem-solving is the basis for decision-making as decisions are made to solve problems. Unless there are
problems, there will be no decision-making.
5.Decisions are made to solve organisational problems and exploit environmental opportunities. Both problems and
opportunities, thus, need decision-making. 6. It is a pervasive process. Decisions are made in business and non-
business organisaitons. In business organisations, they are made at all levels. 7. Decisions are made at all levels in the
organisation; though nature and importance of decisions vary at different levels. However, overall organisational
effectiveness is determined by the quality of decisions made at all the levels. 8. It is required for every situation —
certainty, risk or uncertainty. 9. It is situational in nature. Different situations (both internal and external to the
organisation) require diffferent decisions. Not to make a decision is also a decision in some situations. 10. It is a
continuous process. Managers continuously evaluate organisational activities and find problems that require decision-
making. 11. It is an intellectual process. Managers use judgement, knowledge and creativity to develop solutions to the
problem. 12. A manager is oriented towards making decisions rather than performing the actions personally; actions are
carried out by others.

Techniques of Decision Support System (DSS):

A wide range of techniques are avaiable to enrich the decision-making proces. These can be broadly classified as: 1.
Traditional Techniques 2. Modern Techniques Traditional Techniques : These techniques are divided into two groups: 1.
Traditional techniques for making programmed decisions. 2. Traditional techniques for making non-programmed
decisions. 1. Traditional techniques for making programmed decisions: Three generally accepted traditional techniques
for making programmed decisions are:
(a) Habits: Habits are the ways in which problems are solved according to predefined notions. Managers do not
apply scientific techniques to solve problems. By solving the same problem in a defined way over and over
again, managers form the habit of solving it in that manner. It does not require much of thinking and initiative. (b)
 Operating procedures: Operating procedures are oganisational habits. They guide decision-makers in solving
organisational problems in a predefined manner. They are more formal than habits. However, they are flexible
and can be changed. Cases of absence without leave are not decided by managerial discretion. Standard
procedures guide action against such cases. (c) Organisation structure: It is a well defined structure of authority-
responsibility relationships. Each person knows his position in the organisation, his authority to make decisions,
the extent to which it can be delegated to subordinates, the communication channel, the persons to whom he
has to report etc. which helps in solving programmed problems.
Modern Techniques : Modern techniques use mathematical models to solve business problems. They apply
scientific and rational decision-making process to arrive at the optimum solution. They use quantifiable variables and
establish relationships through mathematical equations and operations research techniques. They make use of
computers for data processing and storage to solve copmlex management problems. These techniques can be
classified as follows: 1. Modern techniques for making programmed decisions: These can be classified as follows:
(a) Break-even technique: It helps managers determine that level of output at which total costs (variable costs and
fixed costs) and total revenue are the same. Total profit at this volume called the break-even point is zero. It helps
managers analyse the economic feasibility of a proposal. For any level of output., the amount of profit can be
ascertained which serves as acceptance/rejection criterion of the proposal. It is only a rough estimate a assessing a
project since it assumes a constant selling price and fixed cost which is not always so. (b) Inventory models: Firms
carry enough inventory with them so that they do not run out of stock. Though this ensures regular supply of goods
to customers, they incur costs to carry the inventory like handling costs, storage costs, insurance costs, opportunity
cost of money tied in the inventory etc. These are known as carrying costs. In order to reduce these costs, firms
keep minimum inventory in store and order fresh inventory when they need. This will reduce the carrying cost of
inventory but the ordering cost will go up. These are the costs of placing an order and include cost of preparing an
order and cost of receiving and inspecting the goods. Both the carrying and ordering costs operate in reverse
direction. Increase in one means decrease in the other. Sophisticated inventory models are available for
management of inventory. They place order for goods at the point where total of ordering costs and carrying costs is
the least. (c) Linear programming: It is a technique of resource allocation that maximises output or minimises costs
through optimum allocation of resources. It is applied when resources are scarce and have to be optimally utilised
so that output can be maximised out of limited resources. Linear programming is "a quantitative tool for planning
how to allocate limited or scarce resources so that a single criterion or goal (oft en profits) is optimised." It aims to
maximise profits or minimise costs by combining two variables which involves best use of resources. The (two)
variables, the dependent and independent must be linearly related, i.e., increase or decrease in the independent
variable should result in a corresponding increase or decrease in the dependent variable. The linear relationship is
explained like this: If cost of one unit is Rs. 10, selling price is Rs. 20, profit per unit is Rs. 10. If X sells 5 units of
output, cost will be Rs. 50, selling price Rs. 100 and profit will be Rs. 50. Linear programming is, thus, a managerial
tool that helps in optimum use of resources. Its use is facilitated through mathematical equations. (d) Simulation:
This technique is used to create artificial models of real life situations to study the impact of different variables on
that decision. A model is prepared on the basis of empirical data and put to all kinds of influences, positive and
negative which may affect the project, and final results are the predictions of actual results if the project in question
is put to use. For example, if a transportation company wants to make a road or rail system, it will prepare a
simulation model to analyse the effect of all the factors (e.g., traffic signals, fly overs, other heavey and light traffic
commuting on the road) and if this model appears to be feasible, acutal construction of the rail/road system shall
commence. (e) Probability theory: Probability is the number of times an outcome shall appear when an experiment
is repeated. What is the probability that sales will increase if expenditure on advertisement is increased is answered
through probability theory. These decisions are based on past experience and some amount of quantifiable data. (f)
Decision-tree: It is a diagrammatic representation of future events that will occur when decisions are made under
different option plans. It reflects outcomes and risks associated with each outcome. Each outcome or future event is
evaluated in terms of desired results and the outcome which gives the maximum value is selected out of alternative
courses of action. "Decision-trees depict, in the form of a 'tree', the decision points, chance events, and probabilities
involved in various courses that might be undertaken.
(g) Queuing theory: This technique describes the features of queuing situations where service is provided to people
or units waiting in a queue. When people or materials wait in queue (because of insufficeint facilities), it involves cost
in terms of loss of time and unutilised labour. Queuing theory aims at smooth flow of men and material so that
waiting time is reduced. This involves additional cost also. Thus, a balance is maintained between the cost of
queues and cost incurred to prevent the queues. Queuing models in software packages has made their appplication
feasible. This theory is usually followed in banks and ticket counters. It helps in determining the number of counters
so that customers have to wait for minimum time. (h) Gaming theory: This theory was developed by Von Neumann
and Morgenstern. It helps business organisations face their competitors. If company X changes its plans; say
reduces its price to increase its sales, it is likely that the competitors will do the same. How well is company X
prepared to face this challenge and still continue with its changed plans is provided in the games theory. It is a
technique where two decision-makers maximise their welfare in the competitive environment. The decision maker
puts himself in this competitors' shoes. If he were to compete against his own firm, what would he do. Based on this
thinking, he plans a counter strategy. (i) Network theory: The network techniques plan and control the time taken to
accomplish a project. They involve breaking up the project into smaller activities and finding the time taken to
accomplish each activity. If actual time to complete the project is more than the time determined, it calls for
corrective action. PERT (Project Evaluation Review Technique) and CPM (Critical Path Method) are the important
network techniques which help in planning and controlling the projects, in terms of time and cost.
2. Modern techniques for making non-programmed decisions: The following techniques help in solving novel, non-
routine and unstructured problems: (a) Creative techniques: These techniques use creativity of managers to think of
new ways of solving business problems. An important creativity technique is brainstorming where members of the
group give maximum suggestions to generate alternative solutions to the problem. Together, these ideas help in
formulating the most practical solution to the problem. (b) Participative techniques: Employees and managers jointly
arrive at the optimum decision. If those who make decisions and those who implement them jointly participate in the
decision-making process, the quality of decisions will be better, there will be commitment to the implementation
process and high employee motivation and morale.
(c) Heuristic techniques: These techniques are based on trial and error approach to decision-making. Decision
maker accepts that making strategic decisions in complex situations is not easy. There are role conflicts, information
gaps, environmental uncertainties etc. which make decision-making difficult. Heuristic techniques help decision-
makers proceed in a step wise manner to arrive at a rational decision. These are computer aided techniques and fall
into two categories: (i) Decision support systems: In this system, decision-making is supported by computers.
Managers access information from the data processing system, retrieve data relevant to the decision, test it for
alternative solutions and accept the most appropriate solution. They change the variables in the form of inputs and
analyse their impact on the desired output. (ii) Expert systems: While in decision support systems, managers have
direct access to data and they rely on their judgement to make decisions; in the expert system, managers seek
knowledge of experts to solve problems in specified areas. This is a "Computer-based system that applies the
substantial knowledge of an expert to help solve problems in a specific area."
Development of Decision Support System (DSS):
Models of Decision-Making Models represent the behaviour and perception of decision-makers in the decision making
environment. There are two models that guide decision-making behaviour of managers. These are: 1.
Rational/Normative Model: Economic Man 2. Non-Rational/Administrative Model 1. Rational/Normative Model This
model assumes that decision-maker is an economic man as defined in the classical theory of management. He is
guided by economic motives and self interest. He aims to maximise profits and ignores behavioural or social aspects in
making decisions. The model presumes that decision makers are perfect information assimilators and handler. They can
gather complete and reliable information about the problem area, generate all possible alternatives, know the outcome
of each alternative, rank them in the best order of priority and choose the best alternative. They follow a rational
decision-making process and therefore, make optimum decisions. This model is based on the following assumptions: 1.
Managers have clearly defined goals. They know exactly what they want to achieve. They have clear ends and know
the means to reach those ends. 2. They can collect complete and reliable information from the environment to achieve
the objectives.
3. They are creative, systematic and reasoned in their thinking. They can identify all alternatives and their outcomes
related to the problem. 4. They can analyse all the alternatives and rank them in the order of priority. 5. They are not
constrained by time, cost and information in making decisions. 6. They can choose the best alternative that will give
them maximum returns at minimum cost.
Differences between Rational and Non-Rational Models: The following table highlights the differences between rational
and non-rational models: Rational models Non-rational models 1. They are normative. They are descriptive. 2. They are
theoretical or unrealistic in nature. They are practical or realistic in nature. 3. They follow deterministic approach to They
follow probabilistic approach to problem problem-solving. solving. 4. They believe there exists the optimum They believe
there exists a real situation for situation for decision-making. Such a decision-making. Such a situation is realistic in
situation is hypothetical in nature. nature. 5. They presume that managers can make They presume that managers can
make optimum decisions. satisfying decisions. 6. They are based on complete information They are based on
incomplete information of of environment (internal and external) and of environmental factors and limited knowledge
knowledge of various alternatives that help of various alternatives that help in arriving at the in arriving at the best
alternative. best alternative. 7. They believe that outcome of each They believe in incomplete knowledge about
alternative is known with certainty and outcomes of various alternatives. perfection. 8. They have no scope for
managerial They are based on managerial judgment, intuition judgment, intuition and personal biases. and personal
biases. 9. They advocate perfect rationality in They advocate bounded rationality in decisiondecision-making making

7 STEPS TO EFFECTIVE DECISION MAKING Decision making is the process of making choices by identifying a
decision, gathering information, and assessing alternative resolutions. Using a step-by-step decision-making process
can help you make more deliberate, thoughtful decisions by organizing relevant information and dening alternatives.
This approach increases the chances that you will choose the most satisfying alternative possible. Step 4: Weigh the
evidence Draw on your information and emotions to imagine what it would be like if you carried out each of the
alternatives to the end. Evaluate whether the need identied in Step 1 would be met or resolved through the use of each
alternative. As you go through this dicult internal process, you’ll begin to favor certain alternatives: those that seem to
have a higher potential for reaching your goal. Finally, place the alternatives in a priority order, based upon your own
value system. Step 5: Choose among alternatives Once you have weighed all the evidence, you are ready to select the
alternative that seems to be the best one for you. You may even choose a combination of alternatives. Your choice in
Step 5 may very likely be the same or similar to the alternative you placed at the top of your list at the end of Step 4.
Step 6: Take action You’re now ready to take some positive action by beginning to implement the alternative you chose
in Step 5. Step 7: Review your decision & its consequences In this nal step, consider the results of your decision and
evaluate whether or not it has resolved the need you identied in Step 1. If the decision has not met the identied need,
you may want to repeat certain steps of the process to make a new decision. For example, you might want to gather
more detailed or somewhat dierent information or explore additional alternatives. IDENTIFY THE DECISION GATHER
INFORMATION IDENTIFY ALTERNATIVES WEIGH THE EVIDENCE CHOOSE AMONG ALTERNATIVES TAKE
ACTION REVIEW YOUR DECISION
Step 1: Identify the decision You realize that you need to make a decision. Try to clearly dene the nature of the decision
you must make. This rst step is very important. Step 2: Gather relevant information Collect some pertinent information
before you make your decision: what information is needed, the best sources of information, and how to get it. This step
involves both internal and external “work.” Some information is internal: you’ll seek it through a process of self-
assessment. Other information is external: you’ll nd it online, in books, from other people, and from other sources. Step
3: Identify the alternatives As you collect information, you will probably identify several possible paths of action, or
alternatives. You can also use your imagination and additional information to construct new alternatives. In this step,
you will list all possible and desirable alternatives. Step 4: Weigh the evidence Draw on your information and emotions
to imagine what it would be like if you carried out each of the alternatives to the end. Evaluate whether the need identied
in Step 1 would be met or resolved through the use of each alternative. As you go through this dicult internal process,
you’ll begin to favor certain alternatives: those that seem to have a higher potential for reaching your goal. Finally, place
the alternatives in a priority order, based upon your own value system. Step 5: Choose among alternatives Once you
have weighed all the evidence, you are ready to select the alternative that seems to be the best one for you. You may
even choose a combination of alternatives. Your choice in Step 5 may very likely be the same or similar to the
alternative you placed at the top of your list at the end of Step 4. Step 6: Take action You’re now ready to take some
positive action by beginning to implement the alternative you chose in Step 5. Step 7: Review your decision & its
consequences In this nal step, consider the results of your decision and evaluate whether or not it has resolved the
need you identied in Step 1. If the decision has not met the identied need, you may want to repeat certain steps of the
process to make a new decision. For example, you might want to gather more detailed or somewhat dierent information
or explore additional alternatives.
Applications of DSS:

A decision support system (DSS) is a computer-based information system that organizes,

collects and analyzes business data. This analysis is then used by decision-makers to help
them better manage and plan their organization or business.

The typical types of information that are gathered by a DSS include sales figures, projected
revenue and inventory data that has been organized into relational databases. The
information it analyzes can come from multiple sources, like documents, raw data,
management, business models and personal knowledge from employees.

DSS applications can be used in various fields, including credit loan verification, medical
diagnosis, various types of business management, and evaluating bids on engineering,
agricultural and rail projects.

Examples of DSSs
We all use DSSs in our personal and business lives every day. For example, every time you use
Google, you’re using a highly sophisticated DSS that organizes a massive amount of
information in a searchable, retrievable format. It can locate the specific images, videos and
text files you need to help your business achieve more.

GPS tracking is another type of DSS. As you can see in our Verizon Connect review, its
software allows drivers to determine the best and quickest route between two points while
monitoring traffic conditions and helping them avoid congestion.

These are some other uses of DSS, including:

 Agriculture: Farmers use DSS tools for crop planning to help them determine the best

times for planting, fertilization and harvesting.

 Medicine: Clinical DSS technology has many uses: maintaining research information

about chemotherapy protocols, preventive and follow-up care, and monitoring

medication orders. DSSs are also used with medical diagnosis software.

 Weather forecasting: Some states use DSSs to provide information about potential

future hazards such as floods. To do this, they factor in real-time weather conditions,

floodplain boundaries information and historic county flood data.

 Real estate: Real estate companies use DSSs to manage data on comparable home

prices and acreage.

 Education: Universities and colleges use DSSs to know how many students they

currently have enrolled. This helps them predict how many students will register for

particular courses or whether the student population is sufficient to meet the

university’s costs.
Role of Business Intelligence in DSS:
A decision support system (DSS) is a computer-based information system that supports business or
organizational decision-making activities; typically this results in ranking, sorting, or choosing from among alternatives. DSSs
serve the management, operations, and planning levels of an organization (usually mid and higher management) and help
people make decisions about problems that may be rapidly changing and not easily specified in advance.
There are several types of DSSs that include:
1. Communication-driven DSS which enables cooperation, supporting more than one person working on a shared task;
examples include integrated tools like Google Docs or Microsoft Groove.
2. Document-driven DSS which manages, retrieves, and manipulates unstructured information in a variety of electronic
formats.
3. Knowledge-driven DSS provides specialized problem-solving expertise stored as facts, rules, procedures, or in similar
structures
4. Model-driven DSS emphasizes access to and manipulation of a statistical, financial, optimization, or simulation model.
Model-driven DSS use data and parameters provided by users to assist decision makers in analyzing a situation; they are
not necessarily data-intensive.
5. Data-driven DSS (or data-oriented DSS) emphasizes access to and manipulation of a time series of internal company
data and, sometimes, external data. A data-driven DSS, which we will focus on, emphasizes access to and manipulation
of a time series of internal company data and sometimes external data. Simple file systems accessed by query and
retrieval tools provide the most elementary level of functionality. Data warehouse systems that allow the manipulation of
data by computerized tools tailored to a specific task and setting or by more general tools and operators provide additional
functionality. Data-driven DSS with online analytical processing (OLAP) provide the highest level of functionality.

6. There are a few factors to consider while choosing a Business Intelligence System. What fits one
company might not suit another, and this is because their business is different and has its
requirements. This is also where you should consider the debate of business intelligence vs decision
support systems, as some companies might be able to make do with decision support systems. In
contrast, some might require the options and suggestions provided by BI tools. BI software reviews can
be highly instructive and highlight the features and benefits that companies like yours mention most.
7. While choosing the best BI tool for their organization, managers should go over market research and
product features and match the applications with their business requirements to find the best match.
They should also do this while deciding business intelligence vs decision support systems. BI price
comparisons can also be valuable for choosing the best collection of tools for your business needs and
budget.
8. The company’s size and growth rate also are important factors. Lightweight tools and software are
cheaper and are suitable for small companies with less data variety. They should also consider this
 while deciding business intelligence vs decision support systems. It is also essential to know precisely
what you need the BI tools for. A logistics company would prioritize different BI features over a PR
company.
9. In conclusion, it is imperative to know more about precisely what kind of tools you require while
deciding between business intelligence vs decision support systems. This is because while some
businesses will only need significant bits of information to be processed and compiled, others will also
require some direction.
10. Moreover, even though there is a debate about business intelligence vs decision support systems, it
should be known that decision support systems are only part of business intelligence which is a much
broader concept. Another critical point to consider while thinking about business intelligence vs
decision support systems is that business intelligence tools are usually tailored more specifically to the
needs of each business.