Chapter 3

Decision Making
Types of decisions, stages, levels and environments – Decision making process -
Overview of DM models – Modelling decision situation.  Decision making Tools: DSS:
Concept and philosophy, characteristics and components of DSS - Payoff Matrix,
Decision Tree and decision tables, Managing Knowledge and Collaboration, Enhancing
Decision Making
Decision Making
What is decision?

A choice or judgement that you make after thinking about various possibilities
The ability to make choices quickly and confidently after looking at various possibilities
The act or process of deciding

Strategic Tactical Operational

Long Term Medium Term Day-to-day

Complex Less Complex Simple And Routine

Made By Senior Managers Made By Middle Managers Made By Junior Managers

Eg: Launching New Product/Opening Eg: Regular Ordering Of

Eg: Aiming To Be Market Leader New Branches Supplies/Creating Staff Roaster
Types of Decisions
1. Programmed and non-programmed decisions
2. Routine and strategic decisions
3. Tactical (Policy) and operational decisions
4. Organizational and personal decisions
5. Major and minor decisions
6. Individual and group decisions

https://www.youtube.com/watch?v=Jg62oeEzMkU
Decision Making
It is regarded as the cognitive process resulting in the selection of a belief or a course of action
among several alternative possibilities. I
It is the process of identifying and choosing alternatives based on the values, preferences and
beliefs of the decision maker.
It 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 defining alternatives.
DM Process
1. Defining and Analysing the real problem : The manager should first find out what is the real problem. The problem may be decrease in
sales, increase in cost or bad relations between management and employees etc. After finding out the true problem manager must
analyse it carefully. He should find out the cause and effect of the problem.

2. Developing Alternative Solutions : After defining and analysing the real problem, the manager should develop (make) alternative
(different) solutions for solving the problem. Only realistic solutions should be considered. Group participation and computers should be
used for developing alternative solutions.

3. Evaluating the Alternative Solutions : The manager should carefully evaluate the merits and demerits of each alternative solution. He
should compare the cost of each solution. He should compare the risks involved. He should also compare the feasibility of each solution.
He should find out which solution will be accepted by the employees.

4. Selecting the best Solution : After evaluating all the solutions, the manager should select the best solution. He should select a solution
which is less costly and less risky. He should select a solution which is most feasible, and which is accepted by the employees. In short, the
manager should select a solution which has the most merits and least demerits. The best solution is called the "Decision".

5. Implementing the Decision : After making the decision, the manager should implement it. That is, he should put the decision into
action. He should communicate the decision to the employees. He should persuade the employees to accept the decision. This can be
done by involving them in the decision-making process. Then the manager should provide the employees with all the resources, which are
required for implementing the decision. He should also motivate them to implement the decision.

6. Follow Up : After implementing the decision, the manager must do follow up. That is, he must get the feedback about the decision. He
should find out whether the decision was effective or not. This is done by comparing the decision with the action, finding out the
deviations (differences) and taking essential steps to remove these deviations. So, follow-up is just like the control function. It helps to
improve the quality of future decisions.
Decision Making
Process
Step 1 : In this step, the problem is thoroughly analysed. There are a couple of questions one should ask when it comes
to identifying the purpose of the decision. What exactly is the problem? Why the problem should be solved? Who
are the affected parties of the problem? Does the problem have a deadline or a specific time-line?
Step 2: Information gathering : A problem of an organization will have many stakeholders. In addition, there can be
dozens of factors involved and affected by the problem. In the process of solving the problem, you will have to gather
as much as information related to the factors and stakeholders involved in the problem. For the process of information
gathering, tools such as 'Check Sheets' can be effectively used.
Step 3: Principles for judging the alternatives : In this step, the baseline criteria for judging the alternatives should be
set up. When it comes to defining the criteria, organizational goals as well as the corporate culture should be taken
into consideration. As an example, profit is one of the main concerns in every decision-making process. Companies
usually do not make decisions that reduce profits, unless it is an exceptional case. Likewise, baseline principles should
be identified related to the problem in hand.
Step 4: Brainstorm and analyse the different choices : For this step, brainstorming to list down all the ideas is the best
option. Before the idea generation step, it is vital to understand the causes of the problem and prioritization of causes.
For this, you can make use of Cause-and-Effect diagrams and Pareto Chart tool. Cause-and-Effect diagram helps you to
identify all possible causes of the problem and Pareto chart helps you to prioritize and identify the causes with highest
effect. Then, you can move on generating all possible solutions (alternatives) for the problem in hand.
Step 5: Evaluation of alternatives : Use your judgement principles and decision-making criteria to evaluate each
alternative. In this step, experience and effectiveness of the judgement principles come into play. You need to
compare each alternative for their positives and negatives.
Step 6: Select the best alternative : Once you go through from Step 1 to Step 5, this step is easy. In addition, the
selection of the best alternative is an informed decision since you have already followed a methodology to derive
and select the best alternative.
Step 7: Execute the decision : Convert your decision into a plan or a sequence of activities. Execute your plan by
yourself or with the help of subordinates.
Step 8: Evaluate the results : Evaluate the outcome of your decision. See whether there is anything you should learn
and then correct in future decision making. This is one of the best practices that will improve your decision-making
skills.
Conclusion
When it comes to making decisions, one should always weigh the positive and negative business consequences and
should favour the positive outcomes. This avoids the possible losses to the organization and keeps the company
running with a sustained growth.
Case Study 1
Mr. Shivakumar is Social science teacher and a self taught engineer who works in Sri.
Vidya Government school in Mankulur district of Karnataka. Even though he has no prior
experience in building, he proposed the construction of two huge dams that would help to
overcome the irrigation problems of the district. The people of the district was enthusiastic about
the plan and took Shivakumar’s plan to the district collector.
What is the best course of action by that should be taken by the collector?
A Praise Mr. Shivakumar for the service he has done for the society
B Experiment the plan in a small scale to check its feasibility
C Accept the proposal given by Mr.Shivakumar as his plan seems to be plausible
D Make necessary arrangements to ensure that the plan is successfully implemented
E Reject the proposal of Mr. Shivakumar as he is inexperienced in the field
Solution
Answer: B

Explanation:

Even though Mr. Shivakumar is not very experienced in Engineering, the collector
should have an open mind about the plan.

He should first let experts study the plan carefully and then decide whether the
plan is feasible or not.

From the options only option B suggests something in this nature. Thus, B is the
best decision of the author given the circumstances
 Case Study 2
Malibaba is a Japanese e-commerce company. In the annual meeting of the board of directors, it is decided
that company will expand its business overseas. They want to invest in at least 1 Asian country. The
company forms a committee to analyze the market situation in various Asian countries. The committee
studies the market conditions in developing Asian countries and boiled down its search to 3 different
countries.
The pros and cons for each of the countries are listed in a report which the committee submits to the board
of directors. India is one of the prospective countries where Malibaba plans to Create invest. However, the
country has restrictions on FDI in retail market. Moreover, there are already existing players like klipkart and
napdeal in the Indian market.
Another prospective country is Sri Lanka where there is no existing competitor but the market reach is low.
In comparison to India’s 1.2 billion, the population of Sri Lanka is merely 20 million.
The third prospective country is Pakistan. This country has a reasonably good market and there’s no
competition . However, the country is not well developed and thus the purchasing power of the people is
low. Moreover, because of being called a terrorist hub, there are also security concerns in Pakistan.
Sri Lankan government is providing incentives for the foreign companies investing in the country. Malibaba
wants to invest in only one country. Most of the board members are in favour of investing in India while
some of them want to invest in Sri Lanka. Which of the following reasons will convince the other members
to invest in India?

A The market in India is far bigger than the market in Sri Lanka

B The cost of setting up the business per potential customer in India would be way lower than that in Sri
Lanka despite the government’s incentives

C The benefits that Sri Lanka is offering are only for the short term. After some time the taxes in Sri Lanka
would be same as those in India

D Only a and b

E All of these
Answer: B

Explanation:

Because of the larger market potential the cost of setting up the

business per potential customer in India would be much lower
than that in Sri Lanka. Hence,despite government incentives in Sri
Lanka, the company will still prefer to invest in India.
The company has finally decided to invest in India. However, the FDI restriction laws
prevent the company from entering the Indian market in its current form. Which of
the following would be the best option for the company in such a scenario?

A Give up on the plan to invest in India and invest in Pakistan and Sri Lanka instead.

B Register a company with a new name and start operations.

C Tie up with an already existing e-commerce company in the Indian market.

D Request the Indian government to relax the FDI norms.

E Asks one of its board members, who has good political connections, to put
pressure on the Indian government to allow FDI.
Answer: C

Explanation:

The easiest way to enter the Indian market would be to tie up with
an already existing company. It would provide the infrastructure
which is already there and also help overcome the investment
restrictions which have been put in by the government.
 Case Study 3
Since two years, Balu is working in a software company, Axis Software Pvt. Ltd., as a Software
Engineer. Due to the recent death of his father, he is the sole earning member of his family. He is
awaiting his promotion to a Senior Software Engineer as the improved pay would make the
financial position of his family better. Balu reports to his manager Amit, who is off late under
pressure as his performance review is due and his team has been unable to meet the targets set
for this year.
During his time at Axis Software, Balu in his free time has developed a software which would
efficiently streamline the leave processes of all the employees in the company. One day Balu has
shared the details of this software, in person, to his manager Amit hoping it would make his way
clear for a promotion. Amit, after testing the software has found it to be very good and now is
thinking of presenting it as his own, in his performance review so as to make it benefit him. He
thinks he can easily convince Balu with this plan by giving him a promotion and also a salary raise
of 30%.
Which of the following actions is the most helpful for Amit?

A Present the software as his own

B Present the software as the work of his team

C Present the software along with Balu so that it makes both appear good

D Give Balu the opportunity to present his software

E Do not present the software to his manager

Answer: C

Explanation:

If Amit presents the software as his own it may lead him into trouble later on
when the truth comes out. So Option A can be eliminated.

Options D and E do not benefit Amit in any way. So they can be ruled out.

If Amit presents Balu’s work as the work of the entire team it would make Balu
as the entire team will get the credit. So the best option for Amit is to present
the software along with Balu so that it makes both of them look good.
Amit has now informed Balu that he will present Balu’s software as his
own and in return will grant Balu a raise and promotion. What should
Balu do now?

A Let Amit present his software as his own

B Talk to Amit’s boss Mandar, about the plans of Amit

C Leave the company

D Tell Amit that he is not willing to accept the proposal

E Talk to his colleagues and take the decision

Answer: D

Explanation:

Option A is unethical and must be ruled out.

Option B is not desirable as in this case Balu would be violating the organizational hierarchy.
Leaving the company at this stage is not advisable as it would create a financial burden on Balu.
So Option C can also be ruled out.

Informing his colleagues about Amit’s proposal is also not advisable as it may lead to
misunderstanding with his boss.

Thus the best thing for Balu to do is to tell Amit directly that he is not willing to share the credit.
Decision Making Models
Decision modelling has four steps that are performed iteratively:
1. Identify Decisions. Identify the decisions that are the focus of the project.
2. Describe Decisions. Describe the decisions and document how improving these decisions will impact the
business objectives and metrics of the business.
3. Specify Decision Requirements. Move beyond simple descriptions of decisions to specify detailed decision
requirements. Specify the information and knowledge required to make the decisions and combine into a
Decision Requirements Diagram.
4. Decompose and Refine. Refine the requirements for these decisions using the precise yet easy to understand
graphical notation of Decision Requirements Diagrams. Identify additional decisions that need to be described
and specified.

1. Rational Decision-Making Model

2. Intuitive Decision-Making Model
3. Creative Decision-Making Model
4. Recognition-Primed Decision Making Model
 Rational Decision-Making Model

1. A classic decision-making model which consists of eight steps that decision makers need to
take to achieve the optimal decision given their goals and constraints.

2. For this, they should establish a list of criteria used to evaluate their choices. By adopting this
model, the decision-makers have the opportunities to contemplate on what are the things that
matter the most in their situation and select the choices that best reflect their standards.

3. The problem of this model is the fact that people do not always know what they want or have
enough information about the available alternatives, and usually, people end up just making a
"good enough" or a safe-bet decision.

https://www.youtube.com/watch?v=s1KFV0PgggY
Examples of Models :

A - One is the D.E.C.I.D.E. model, proposed by Guo (2008). This suggests going through the
following stages:
D = define the problem : What is the decision you need to make?
E = establish the criteria : What factors are important in this decision?
C = consider all the alternatives : What are your options?
I = identify the best alternative : Which is the best option?
D = develop and implement a plan of action : How will you put the best option into practice?
E = evaluate and monitor the solution : Is it really the best option? Do you need to change
your solution?

B - Another example of this is the Pugh matrix (proposed by Pugh (1990)). This involves
coming up with the criteria you will use to make the decision and then weighting each one
according to its importance. You then give each option a score based on how well it meets
the weighted criteria.
Bounded rationality decision-making model
1. We use this when we don't have enough time or information to follow the full
rational decision-making model.
2. Sometimes it's better to have a good enough decision sooner vs. a "perfect"
decision that's delayed. And it burns a lot less mental energy and other
resources.
3. To help one deal with all the information one must process all the decisions
one has to make in a day, and then weigh each decision.
 Intuitive Decision-Making Model

1. This model appears to be based solely on gut feelings, but closer examination reveals that it is in
fact a very sophisticated process in which the manager applies their intuition in many ways.
2. Intuitively detect a potential problem and use intuition to investigate its patterns. In this case,
intuition means the years of experience, expertise, education background, insider information
and other valuable resources unknown to an average employee.
3. Intuition also helps them to integrate pieces of isolated data, facts and figures to a complete
picture of the whole problem. If there is more than one possible solution to the problem, the
manager will use their intuition as a check point to eliminate anti-intuitive decision and go with
their gut feelings.
4. One distinctive feature of this decision making model is that acting is a part of the process of
defining and analyzing the problems. Managers usually “know” what to do first before they can
explain the justification for their actions, and they use the results from their action to further
their understanding about the problems.
https://www.youtube.com/watch?v=s1KFV0PgggY
 Creative Decision-Making Model

1. This model is applied when the decision maker has to come up with an original and
unique decision for a situation.

2. In the decision-making process, after gathering information and insights about the
problem and generating some initial ideas, the decision maker undergoes a period of
incubation, in which he does not actively think about the solutions but let his
unconscious mind take over the process.

3. After quite some time, the answer just naturally comes to him in an “eureka” moment,
and his next step is just to test and finalize it.

4. The downside of this model is the success of it depends mainly on the decision maker's
personal traits such as his creativity and the contextual situation.
 Recognition-Primed Decision Making Model

1. This model was developed by Gary A. Klein and it incorporates contextual assessment and metal

evaluation to come up with the best reaction to a problem.

2. The characterizing element of this model is that decision makers consider only one option instead of

weighing several choices at a time. After recognizing the problem, the manager identifies its
characteristics including the goals, problem cues, expectations and typical actions to take, the situation.

3. After that the manager will think through the plan, conducting a mental simulation of the scenario to

see if it works and making suitable modifications if necessary. If he thinks the plan is sufficient, he
makes it his final decision.

4. An alternative is only assessed if the initial plan does not work out in the manager's opinion.

5. Although this decision-making model can be applied when managers are under time pressure, its

success rate correlates with managers’ experiences and expertise.

 Vroom-Yetton Decision-Making Model

1. Sometimes known as Vroom-Yetton-Jago, the first part of this model uses seven
yes-or-no questions, like "Is team commitment to the decision important?"
2. The answers to the questions then guides one toward one of five decision-making
processes to use. Options range from making the decision based on what you
know now without consulting your team to reaching a group consensus with your
team.
3. The flexibility of the Vroom-Yetton model is one of its strengths. Anyone at any
level can use it, and it can work even if you're in an unfamiliar situation.
4. However, it doesn't consider personal factors for the decision-maker, the
questions may not be precise enough for some situations and it may not work as
well for larger groups.
 Common decision-making biases
• Confirmation bias : means paying attention to evidence that confirms your beliefs – and ignoring anything that doesn't.
Let's say you're helping choose someone to fill a new position at your organization. The process is down to the two
finalists. Based on their resumes, you prefer Candidate B over Candidate A. But keep an open mind.
• Availability heuristic : leads us to make decisions based on how easily something comes to mind. For example, if your
friend just went through a long flight delay with an airline, the availability heuristic could cause you to avoid that airline
for your upcoming business trip – even though, it actually has a better on-time record than the carrier you ultimately
choose. Because you can quickly recall your friend's experience, you overestimate how likely future flight delays are with
that airline.
• Survivorship bias : causes us to make decisions based only on examples of success – all while assuming that we have the
full story. A common example of the survivorship bias is using other organizations' success stories to decide what your
organization should do. Sure, Company A may have succeeded wildly by using a particular strategy, and everyone is
singing their praises. But what we hear less about is that Companies B, C and D used the same strategy and now they're
out of business.
• Anchoring bias : causes us to use an initial piece of information to make subsequent judgments. For example, the initial
price offer sets the course in a negotiation. But even being exposed to an arbitrary and random cognitive anchor can
affect your choice. In one study, participants spun a roulette-style wheel and then were asked to guess the percentage of
U.N. countries that are in Africa. Those who got a high number on their spin guessed higher percentages.
• Halo Effect : We all know the power of first impressions, but we often overlook just how powerful they can be.
We think we're hiring a contractor because he's intelligent and organized. However, we might just be assuming all of that
because he's tall or has a firm handshake. That's the halo effect in action. It works in reverse, too. If someone spills wine
on you at a networking event, you're probably going to put less stock in the opinions they share later.
Examples
• One example of this is Coca-Cola in 1985. Business and leadership expert John
Addison writes that the company decided to address the changing soda
marketplace by launching “new Coke.” Unfortunately, the rebrand failed miserably
within three months, which forced the company to reintroduce the original Coca-
Cola. The big takeaway: Reversing direction isn’t a sign of failure; rather, it’s
evidence of a leader’s commitment to keeping the company’s health a top priority.
What’s more, it shows how important it is to revisit and evaluate decisions.
 DSS (Decision Support System)
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. The decision
makers compile useful information from raw data, documents, personal knowledge to identify and solve
problems and make decisions.
DSS is an information system that aids a business in decision-making activities that require judgment,
determination, and a sequence of actions. The information system assists the mid- and high-level
management of an organization by analyzing huge volumes of unstructured data and accumulating
information that can help to solve problems and help in decision-making. A DSS is either human-
powered, automated, or a combination of both.
DSS is used in sales projection, for inventory and operations-related data, and to present information to
customers in an easy-to-understand manner. One of the main applications is real-time reporting. It can be
very helpful for organizations that take part in just-in-time (JIT) inventory management.
Michaell S. Scott has defined DSS as an interactive computer-based system that helps decision-makers
utilize data and models to solve unstructured problems. Gorry & Scott Morton defined DSS as a system to
support managerial decisionmakers in semi-structured and unstructured decision situations. Little has
characterized DSS as a model-based set of procedures, data and judgment to assist the manager in his
decision-making tasks.
Characteristics of Decision Support Systems
1. Performs Complex, Sophisticated Analysis and Comparisons Using Advanced Software Packages - There are
several programs (part of DSS) used by various methods that analyse the raw data. For example : A market research
survey can be analysed by different standalone analytical programs associated with DSS. It is DSS which then
integrates these programs to come up with comparative studies.
2. Provides Report and Presentation Flexibility - This information gathered with the help of DSS may be displayed on
the computer screen or can be printed according to the need of the decision makers. Managers get access to
different kinds of reports in formats that fit to their requirement.
3. Provides Rapid Access to Information - Continuous and Rapid access of information is offered by DSS. For example
: The metres on the dashboard of a vehicle are used to keep a watch on how the vehicle is running.
4. Supports Drill-Down Analysis - DSS helps the manager in going through details of the project by drilling down
through data. For example : When reviewing the total project cost, the manager can easily break it down to
estimate the cost for each phase, activity or task.
5. Handles Large Amounts of Data from Different Sources - DSS has the ability to accumulated data from different
databases which are stored on different computer systems or networks. It can also source data from the internet.
6. Offers both Textual and Graphical Orientation - DSS can produce information in a wide variety of text and graphics
such as plain texts, tables, Pie Charts, Trends Lines, line drawings etc. All of these provide a better understanding of
a situation to managers and help them to communicate the same to others.
Advantages of Decision Support Systems
1. Facilitating Communication - DSS helps in indicating when a particular action should be adopted in future or why a
particular action was acceptable in the past. The DSS facilitates interpersonal communication and hence it is used as a
tool for benefit of business.
2. Increasing Organisational Control - DSS control this information, which is in turn used by the managers in assessing
the productivity of an individual in the quantity and quality of their decision making ability. Some DSS can evaluate
the individual's decision making skills.

3. Improving Personal Efficiency - DSS aids in improving personal efficiency. Although it does not do any work in actual
but it aids in doing any work a bit faster and with greater efficiency. For example : Budgets where earlier prepared
manually before spread sheets software was discovered but DSS helps to make work faster with less changes of error.
4. Promoting Learning or Training - DSS helps people to learn more about computer and software packages that are
present in it. Although, this was never the motive of DSS but it promotes learning as well.
5. Improving Problem Solving - DSS helps a personal or a group of people in solving problem at a much faster pace
with accuracy. When probably applied, it increases the efficiency of a task. It aids in solving the problem as a whole.
Disadvantages of Decision Support Systems

1. Limited Storage Capability - DSS has computation limitations because of its small memory and limited storage
capacities.
2. Difficult - It is difficult to understand inter-dependency of functions within the system. Monitoring of
consequences of DSS function usage in relation to decision scenario and integrity of database is complex.
3. Slow - The speed of DSS is much slower than large mainframes.
4. Limited Information Sharing – DSS are mostly designed for individual use but when they are designed for
multiple accesses by several computers, DSS provides only limited sharing of it's information.
5. Translation Problems - The translation problems can occur at the time when users interact with DSS databases
because these databases in turn are made up to different data models, which may face translation problems
while interfacing with one another.
6. Confliction - As users have to constantly work on several decision scenarios at the same time, they have to
simultaneously monitor the decisions taken.
7. Require Extensive Knowledge - There are applications which need extensive technical knowledge.
Components of a DSS

• 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
TPS and 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.
Functions / Activities of Decision Support Systems –

1. Model Building -DSS aids in the decision-making process by identifying the most appropriate model for solving problems. It considers the input
variables, inter relationship among the variables, problem assumption and constraints to design a suitable model. For example : A television
manufacturing company has given the responsibility to its marketing manager to develop a sales forecasting model is for colour TV sets.

2. Risk Analysis - DSS especially helpful while taking medium or high risks decision. Decision can be low, medium or high risks. DSS helps in
assessment of risks of various alternatives by managers in a business enterprise which helps in making decisions.

3. Goal Oriented - This activity refers to the procedure of determining the value of input that is required to succeed a particular goal. For example :
While deciding to buy a house, a person first calculate the equated monthly installments that she or he can afford and for how long.

4. Graphical Analysis - It provides large volume of data in graphical format to visualise it easily and quickly. Managers can also view the impact of
various courses of action. The use of graph is recommended when :

i) Forecasting

ii) Detecting Trends over time 

iii) A quick summary of data is required 

iv) Composing points and patterns at different variables

5. What-if Analysis - If this activity, an end user will make changes to variables or relationship among them to notice the resulting changes in other
variables. For example : If advertising cost is cut by 10% what would be the corresponding impact on sales ?
• Data-driven DSS. These systems include file drawer and management reporting systems, executive information
systems, and geographic information systems (GIS). They emphasize access to and manipulation of large databases
of structured data, often a time-series of internal company data and sometimes external data.
• Model-driven DSS. These DSS include systems that use accounting and financial models, representational models,
and optimization models. They emphasize access to and manipulation of a model. They generally leverage simple
statistical and analytical tools, but Power notes that some OLAP systems that allow complex analysis of data may be
classified as hybrid DSS systems. Model-driven DSS use data and parameters provided by decision-makers, but
Power notes they are usually not data-intensive.
• Knowledge-driven DSS. These systems suggest or recommend actions to managers. Sometimes called advisory
systems, consultation systems, or suggestion systems, they provide specialized problem-solving expertise based on
a particular domain. They are typically used for tasks including classification, configuration, diagnosis,
interpretation, planning, and prediction that would otherwise depend on a human expert. These systems are often
paired with data mining to sift through databases to produce data content relationships.
• Communication-driven and group DSS. Communication-driven DSS focuses on communication, collaboration, and
coordination to help people working on a shared task, while group DSS (GDSS) focuses on supporting groups of
decision makers to analyze problem situations and perform group decision-making tasks.
• Document-driven DSS. These systems integrate storage and processing technologies for document retrieval and
analysis. A search engine is an example.
 Examples
• GPS route planning is an example of a typical DSS. It compares different routes, taking into
account factors such as distance, driving time and cost. The GPS navigating system also enables
users to choose alternative routes, displaying them on a map and providing step-by-step
instructions.
• ERP dashboards. can use a decision support system to visualize changes in production and
business processes, monitor current business performance against set goals and identify areas for
improvement. ERP dashboards let business owners see a snapshot of their company's most
important numbers and metrics.
• Clinical decision support system. is a software program that uses advanced decision-making
algorithms to help physicians make the best medical decisions. Healthcare professionals often use
these to interpret patient records and test results, and to calculate the best treatment plan. CDSS
in healthcare can help providers identify abnormalities during specific tests, as well as monitor
patients after certain procedures to determine if they are having any adverse reactions.
• Crop-planning. Farmers use DSS to help them determine the best time to plant, fertilize, and reap
their crops. Bayer Crop Science has applied analytics and decision-support to every element of its
business, including the creation of “virtual factories” to perform “what-if” analyses at its corn
manufacturing sites.
 Tools and techniques of Decision Making

1. Decision Matrix : (Also known as Grid Analysis, Pugh Matrix Analysis, and Multi-Attribute Utility
Theory) It helps you evaluate all the options of a decision. Stuart Pugh, who was a professor and head
of design at the University of Strathclyde in Scotland, created the decision matrix method to help in
selecting design alternatives. Since then, the tool has evolved into a general decision-making aid.
Being able to use Decision Matrix Analysis means that you can take decisions confidently and
rationally, at a time when other people might be struggling to make a decision. 
A decision matrix is a series of values in columns and rows that allow you to visually compare possible
solutions by weighing variables based on importance. A decision matrix can not only help you select
the best course of action for your business, but it can also aid you in prioritizing tasks, problem-solving
and crafting arguments to defend a decision you've already made. Use a decision matrix when you
need to assess a situation from a logical view, and you have enough comparable variables to weigh.
• Assign weights to each option on a scale of 1-3 (3 being the lowest) based on the corresponding
criteria, which are determined based on customer preference.
• Add ranks to the criteria to determine most important to least on a scale of 1-3, respectively.
• Multiply each criterion with its rank to determine the final value of its weight.
STEPS IN A DECISION MATRIX ANALYSIS : let’s summarize the steps in the process.

1. DEFINE THE PROBLEM : The first step in the decision analysis matrix is to define the problem you’re trying to solve. You should
know what you want to achieve with your decision-making matrix. It can be complicated and inconclusive if you’re not sure about
your purpose. The problem could be to choose one option among many, decide where to allocate your budget and prioritize one
task over another.

2. DETERMINE THE CRITERIA : The second step is to determine the attributes that define the problem. In the example, the criteria
were cost, quality and convenience. These attributes are based on what customers want from a product. You may decide
according to your situation. Choose criteria that’ll help you reach a conclusion—be as specific as possible.

3. BRAINSTORM AND ASSIGN RANKS : Before you start assigning ranks, take inputs from the entire team or key stakeholders who’ll
be affected by your decision. This could be customer surveys, organizational feedback and brainstorming sessions. You can
determine which criterion is the most—or the least—important.

4. WEIGH THE OPTIONS : Assign weights to the criteria and calculate which option has the highest weight. This can help you
simplify the decision-making process. When one option weighs more than the others, you’ll find it easier to pick one and discard
the rest.

5. MAKE A DECISION : Finally, it’s time to make your decision and implement your strategy. A decision-making matrix helps you
visualize your problem with possible solutions. It’s a more streamlined way to solve problems than simply discussing with your
team members, which may not take you anywhere.
2. Payoff Matrix : Game theory was invented by John von Neumann and Oskar Morgenstern in 1944. The importance of game theory to modern
analysis and decision-making can be gauged by the fact that since 1970, as many as 12 leading economists and scientists have been awarded
the Nobel Prize in Economic Sciences for their contributions to game theory. Game theory is applied in a number of fields, including business,
finance, economics, political science, and psychology. Understanding game theory strategies—both the popular ones and some of the relatively
lesser-known stratagems—is important to enhance one’s reasoning and decision-making skills in a complex world.
In game theory, a payoff matrix is a table in which strategies of one player are listed in rows and those of the other player in columns and the
cells show payoffs to each player such that the payoff of the row player is listed first. Payoff of a game is incremental gain/benefit or loss/cost
that accrue to a player by executing its strategy given the strategy of the other player. The payoff depends on the context of the game. For
example, firms deciding about their advertising budgets worry about their revenue, firms undertaking new investment in plant and machinery
are interested in finding their rate of return and so on. A payoff matrix is an important tool in game theory because it summarizes the necessary
information and helps us determine whether a dominant strategy and/or a Nash equilibrium exist. It has application in oligopoly models, etc.
• If the row player has n strategies and the column player has m strategies, the number of cells in the matrix must be n × m and a total number
of 2 × n × m payoff values must be there.
• A payoff matrix lists the name of the row player to the left of the matrix and the name of the column player above the matrix. The strategies
of the row player form the rows of the matrix and the strategies of the column player form its column. The payoff to the row player is always
listed first in each cell but the actual presentation may vary as follows:
• The payoffs may be separated using a comma such that the payoffs to the row player appears to the left of the comma and the payoffs to the
column player are listed to the right of the comma.
• Alternatively, the row payoff is listed in the bottom left of each cell and column payoff is shown in the upper right corner of the cell.
Sometimes a diagonal is drawn inside the cell to separate the two payoffs.
• Game theory is a framework for understanding choice in situations among competing players.
• Game theory can help players reach optimal decision-making when confronted by independent and competing actors in a
strategic setting.
• A common "game" form that appears in economic and business situations is the prisoner's dilemma, where individual
decisionmakers always have an incentive to choose in a way that creates a less than optimal outcome for the individuals as a
group.
• Several other forms of game exist. The practical application of these games can be a valuable tool to aid in the analysis of
industries, sectors, markets, and any strategic interaction between two or more actors.
One of the most popular and basic game theory strategies is the prisoner's dilemma. This concept explores the decision-making
strategy taken by two individuals who, by acting in their own individual best interest, end up with worse outcomes than if they
had cooperated with each other in the first place.
In the prisoner’s dilemma, two suspects apprehended for a crime are held in separate rooms and cannot communicate with
each other. The prosecutor informs both Suspect 1 and Suspect 2 individually that if he confesses and testifies against the other,
he can go free, but if he does not cooperate and the other suspect does, he will be sentenced to three years in prison. If both
confess, they will get a two-year sentence, and if neither confesses, they will be sentenced to one year in prison.
While cooperation is the best strategy for the two suspects, when confronted with such a dilemma, research shows most
rational people prefer to confess and testify against the other person than stay silent and take the chance the other party
confesses.
Q. Zed and Adrian and run a small bicycle shop called "Z to A Bicycles". They must
order bicycles for the coming season. Orders for the bicycles must be placed in
quantities of twenty (20). The cost per bicycle is 70 if they order 20, 67 if they order
40, 65 if they order 60, and 64 if they order 80. The bicycles will be sold for 100
each. Any bicycles left over at the end of the season can be sold (for certain) at 45
each. If Zed and Adrian run out of bicycles during the season, then they will suffer a
loss of "goodwill" among their customers. They estimate this goodwill loss to be 5
per customer who was unable to buy a bicycle. Zed and Adrian estimate that the
demand for bicycles this season will be 10, 30, 50, or 70 bicycles with probabilities
of 0.2, 0.4, 0.3, and 0.1 respectively.
Actions
There are four actions available to Zed and Adrian. They have to decide which of the actions is the best one under each
criteria.
1. Buy 20 bicycles
2. Buy 40 bicycles
3. Buy 60 bicycles
4. Buy 80 bicycles
Zed and Adrian have control over which action they choose. That is the whole point of decision theory - deciding which action
to take.
States of Nature
There are four possible states of nature. A state of nature is an outcome.
5. The demand is 10 bicycles
6. The demand is 30 bicycles
7. The demand is 50 bicycles
8. The demand is 70 bicycles
Zed and Adrian have no control over which state of nature will occur. They can only plan and make the best decision based on
the appropriate decision criteria.
After deciding on each action and state of nature, create a payoff table. Demand is 50, buy 60: Bought 60 at 65 each
= 3900. That is -3900 since that is money spent. Now, sell 50 bicycles at 100 each for 5000. They had 10 bicycles left
over at the end of the season, and they sold those at 45 each of 450. That makes 5000 + 450 - 3900 = 1550.

State of Nature Buy 20 Buy 40 Buy 60 Buy 80

Demand 10 50 -330 -650 -970
(0.2)

Demand 30 550 770 450 130

(0.4)

Demand 50 450 1270 1550 1230

(0.3)

Demand 70 350 1170 2050 2330

(0.1)
Opportunistic Loss Table : (regret) table is calculated from the payoff table. It is only needed for the
minimax criteria. The maximum payoffs under each state of nature are shown in bold in the payoff
table above. Each element in the opportunistic loss table is found taking each state of nature, one at a
time, and subtracting each payoff from the largest payoff for that state of nature.

State of Nature Buy 20 Buy 40 Buy 60 Buy 80

Demand 10 0 380 700 1020

Demand 30 220 0 320 640
Demand 50 1100 280 0 320
Demand 70 1980 1160 280 0
Expected Value Criterion : For each action, do the following: Multiply the payoff by the probability of that
payoff occurring. Then add those values together. "Buy 60" action :
EV = 0.2 x (-650) + 0.4 x (450) + 0.3 x (1550) + 0.1 x (2050) = 720
The expected values for buying 20, 40, 60, and 80 bicycles are 400, 740, 720, and 460 respectively. Since
the best that you could expect to do is 740, you would buy 40 bicycles.

Maximax Criterion : You simply look at the best you could do under each action (the largest number in
each column). The largest payoff if you buy 20, 40, 60, and 80 bicycles are 550, 1270, 2050, and 2330
respectively. Since the largest of those is 2330, you would buy 80 bicycles.

Maximin Criterion : Take the smallest payoff under each action (smallest number in each column). You
then take the best (largest of these). The smallest payoff if you buy 20, 40, 60, and 80 bicycles are 50, -330,
-650, and -970 respectively. Since the largest of those is 50, you would buy 20 bicycles.

Minimax Criterion : use the opportunistic loss (regret) table for the minimax criterion. You take the largest
loss under each action (largest number in each column). You then take the smallest of these (it is loss,
afterall). The largest losses if you buy 20, 40, 60, and 80 bicycles are 1980, 1160, 700, and 1020
respectively. Since the smallest of those is 700, you would buy 60 bicycles.
Summary
Action
Criteria Buy 20 Buy 40 Buy 60 Buy 80 Best
Action
EV 400 740 720 460 Buy 40
Maximax 550 1270 2050 2330 Buy 80
Maximin 50 -330 -650 -970 Buy 20

Minimax 1980 1160 700 1020 Buy 60

Q. Finicky's Jewelers sells watches for 50 each. During the next month,
they estimate that they will sell 15, 25, 35, or 45 watches with
respective probabilities of 0.35, 0.25, 0.20, and 0.1. They can only buy
watches in lots of ten from their dealer. 10, 20, 30, 40, and 50 watches
cost 40, 39, 37, 36, and 34 per watch respectively. Every month,
Finicky's has a clearance sale and will get rid of any unsold watches for
24 (watches are only in style for a month and so they have to buy the
latest model each month). Any customer that comes in during the
month to buy a watch, but is unable to, costs Finicky's 6 in lost
goodwill. Find the best action under each of the four decision criteria.
Q. A venture capitalist is considering investing in a new company. If he
believes there is a .40 probability of making Rs.100,000, a .30 probability
of making Rs.30,000, and a .30 probability of losing Rs.20,000.
The expected value (EV) of this alternative is
EV = .40 x (100,000) + .30 x (30,000) - .30 x (20,000)
EV = 40,000 + 9,000 - 6,000
EV = Rs. 43,000
The investor can then weigh the expected value of this investment
against the expected values of other available alternatives. The highest
EV signals the investment that should most likely be selected.
Q. A venture capitalist wants to invest Rs. 20,000 in a new business. She has
identified three possible alternatives: a leisure products company, an energy
enhancement company, and a food-producing company. Because the expected
value of each alternative depends on short-run changes in the economy,
especially inflation, she decides to develop a payoff matrix. She estimates that
the probability of high inflation is .30 and the probability of low inflation is .70.

High inflation Low inflation

(probability of .30) (probability of .70)
Investment alternative 1 - 10,000 50,000
Investment alternative 2 90,000 - 15,000
Investment alternative 3 30,000 25,000
The expected value of investing in the leisure products company is
EV = .30 x (- 10,000) + .70 x (50,000)
EV = - 3,000 + 35,000
EV = 32,000
The expected value of investing in the energy enhancement company is
EV = .30 x (90,000) + .70 x ( - 15,000)
EV = 27,000 + ( - 10,500)
EV = 16,500
The expected value of investing in the food-processing company is
EV = .30 x (30,000) + .70 x (25,000)
EV = 9,000 + 17,500
EV = 26,500
Investing in the leisure products company, then, has the highest expected
value
3. Decision Tree : Read email
1. Root Node: This attribute is used for dividing the
data into two or more sets. The feature attribute
in this node is selected based on Attribute
Selection Techniques.
2. Branch or Sub-Tree: A part of the entire decision
tree is called a branch or sub-tree.
3. Splitting: Dividing a node into two or more sub-
nodes based on if-else conditions.
4. Decision Node: After splitting the sub-nodes into
further sub-nodes, then it is called the decision
node.
5. Leaf or Terminal Node: This is the end of the
decision tree where it cannot be split into further
sub-nodes.
6. Pruning: Removing a sub-node from the tree is
called pruning.
Q. A small firm wants to begin exporting its products to a foreign market,
but limited capacity restricts it to only one market at first. Managers feel
that either France or China would be the best place to start. Whichever
alternative is selected, sales for the product in that country may turn out
to be high or low. In France, there is a .80 chance of high sales and a .20
chance of low sales. The anticipated payoffs in these situations are
predicted to be 20 million and 3 million, respectively. In China, the
probabilities of high versus low sales are .60 and .40, respectively, and
the associated payoffs are presumed to be 25 million and 6 million.
Problem Solving
M&M run a small shop called "M&M Toddler Shoes". They must order shoes
for the coming season. Orders for the shoes must be placed in quantities of
twenty 30. The cost per is 100, if they order 30, 95 if they order 60, 90 if
they order 90. The shoes will be sold for 150 each. Any shoes left over at the
end of the season can be sold at 100 each. If M&M run out of shoes during
the season, then they will suffer a loss of "goodwill" among their customers
and it will cost them 20 per customer. M&M estimate that the demand for
shoes this season will be 20, 40, 80, or 100 bicycles with probabilities of 0.4,
0.3, 0.2, and 0.1 respectively. Calculate the payoff for each action and take
decision for M&M according to EV, Maximax, Maximin and Minimax
Q. A venture capitalist wants to invest Rs. 50,000 in a new business. He has
identified three possible alternatives: a sports products company, an health
drink company, and a manufacturing company. The expected value of each
alternative depends on short-run changes in the economy, he decides to
develop a payoff matrix. The probability of high inflation is .40 and the
probability of low inflation is .60. Compute EV for each alternative and decide
the best investment option.
High inflation Low inflation
(probability of .40) (probability of .60)
Investment alternative 1 20,000 - 40,000
Investment alternative 2 - 70,000 35,000
Investment alternative 3 40,000 -15 ,000
A small firm wants to begin expand business and open up
manufacturing units in foreign market as it would be a better option
than exporting. Managers feel that either Thailand or Vietnam would
be the best place to start. Whichever alternative is selected, export
and sale from that country may turn out to be high or low. In
Thailand there is a .70 chance of high sales and a .30 chance of low
sales. The anticipated payoffs in these situations are predicted to be
40 million and 12 million, respectively. In Vietnam, the probabilities of
high versus low sales are .80 and .20, respectively, and the associated
payoffs are presumed to be 35 million and 9 million. Make and
decision tree and calculate EV to decide upon the best alternative
• PEST Analysis – An acronym for political, economic, social and technological, PEST
can improve decision-making and timing by analyzing external factors. This method
considers present trends to help predict future ones.
• T-Chart – This chart is used when weighing the pluses and minuses of the options. It
ensures that all the positives and negatives are taken into consideration when
making a decision. This is also known as creating a pros and cons list.
• Multi-voting – This is used when multiple people are involved in making a decision.
It helps whittle down a large list of options to a smaller group to, finally, the
eventual final decision.
• Cost-benefit analysis – This technique is used when weighing the financial
ramifications of each possible alternative to determine what makes the most sense
from an economic perspective.
• Conjoint analysis – This is a method used by business leaders to determine
consumer preferences when making decisions.
• SWOT analysis : (SWOT stands for strengths, weaknesses, opportunities and threats) is a simple business tool used to
guide decision-making based on internal and external factors. A SWOT analysis should be performed by deeply involved
team members and conducted collaboratively with a team of employees who hold different perspectives on the business
to ensure the analysis is comprehensive. Strengths and weaknesses in a SWOT analysis are internal factors you can control
– like individual team members and your unique intellectual property, including what you know your competitors do
better. Opportunities and threats, then, are external. Examples of opportunities in a SWOT analysis are trends you can
capitalize on or competitors you can overtake; threats include your competition's plans and resources.
• Force-field analysis : For business leaders attempting to find the root cause of a problem (usually those that are workflow-
or process-related), it can identify the cause and aid in crafting solutions. To conduct a force-field analysis, you must first
decide what the desired outcome is – whether it's a goal, a vision or a better understanding of the current situation. Then,
in parallel columns on either side of the "goal," list the driving and restraining forces. Driving forces are favourable to the
goal, and restraining forces oppose it. Rate the forces, and identifying which ones have the most impact and which ones
can be changed. Finally, strategize the changes you need to make to the forces, and prioritize those changes to achieve the
goal.
• Pareto analysis : commonly known as the "80/20 rule," is best used by leaders eager to identify which solutions will have
the biggest impact when implemented. This analysis not only determines problems, but it can also improve efficiency by
prioritizing major issues, increase productivity and even boost profitability. Business leaders can conduct this simple
analysis in table format by making columns for item number, problem, root cause and score, and then filling in the rows
with the corresponding information; this will give you a comprehensive view of the issues.
• Ishikawa diagram : In the manufacturing and product development industries, an Ishikawa diagram can identify potential
causes of disruption to workflows and processes. In addition to identifying the cause and effect of a method, innovators
and entrepreneurs can use this diagram to help them design better products.
References
• https://paginas.fe.up.pt/~acbrito/laudon/ch13/chpt13-2main.htm

https://www.investopedia.com/articles/investing/111113/advanced-
game-theory-strategies-decisionmaking.asp

• https://www.siue.edu/~evailat/decision.htm

• https://hbr.org/1964/07/decision-trees-for-decision-making

• https://www.mindtools.com/dectree.html