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Learning Objectives: · Explain the characteristics of the business decisions. · Explain rational decisionmaking and its problems. · Describe Herbert Simon’s model of decisionmaking. · Mention the types of decisions. · State the four ways of decision analysis. · Examine the behavioural concepts and decisionmaking.
DECISION MAKING SYSTEM:
Business decisions are those, which are made in the process of conducting business to achieve its Objectives in a given environment. In concept, whether we are talking about business decisions or Any other decision, we assume that the decision maker is a rational person. The major characteristics of the business decision-making are: (a) Sequential in nature. (b) Exceedingly complex due to risks and trade offs. (c) Influenced by personal values. (d) Made in institutional settings and business environment.
RATIONAL DECISION MAKING: Rational decision is the one, which, effectively and efficiently, ensures the achievement of the goal for which the decision is made. If it is raining, it is rational to look for a cover so that you do not get wet. If you are in business and want to make profit, then you must produce goods and sell them at a much higher price than cost of production. In reality, there is no right or wrong decision but a rational or irrational decision. The quality of decision-making is to be judged on the rationality and not Necessarily on the result it produces. Simon Herbert differentiates among the types of rationality. A
decision, in a given situation is:
1. Objectively rational if it maximises the value of the objective. 2. Subjectively rational if it maximises the attainment of value within limitation of the knowledge and awareness of the subject. 3. Consciously rational to the extent the process of the decisionmaking is deliberate and a conscious one. 4. Organisationally rational to the degree of the orientation towards the organisation. PROBLEM IN MAKING RATIONAL DECISION: (a) Ascertaining the problem: As Peter Drucker points out, "the most common source of mistakes in the management decisions is the emphasis on finding the right answers rather than the right questions." The main task is to define the right problem in clear terms. The management may define the problem as the "Sales are declining." Actually, the decline of sales is symptomatic; the real problem may be somewhere else. For example, the problem may be the poor quality of the product and you may be thinking of improving the quality of advertising. (b) Insufficient knowledge: For perfect rationality, total information leading to complete knowledge is necessary. An important function of a manager is to determine whether the dividing line is reached between insufficient knowledge and the enough information to make a decision. (c) Not enough time to be rational: The decisionmaker is under pressure to make decisions. If time is limited, he may make hasty decisions which may not satisfy the test of rationality of the decision.
(d) The environment may not cooperate: Sometimes, the timing of the decision is such that one is forced to make a decision but the environment is not conducive for it. The decision may fail the test of rationality as the environmental factors considered in the decisionmaking turn out to be untrue. For example, in a product pricing, the factor of oil and petroleum product price is considered as stable. But the postdecision environment proves the consideration to be wrong.
Decisionmaking is a process which the decisionmaker uses to arrive at a decision. The core of this process is described by Herbert Simon in a model. He describes the model in three phases as (a) Intelligence; (b) Design; and (c) Choice.
Intelligence: Raw data collected, processed and examined. Identify a problem calling for a decision. Design: Inventing, developing and analysing the different decision alternatives and testing the feasibility of implementation. Assess the value of the decision outcome. Choice: Select one alternative as a decision, based on the selection
In the intelligence phase, the MIS collects the data. The data is scanned, examined, checked and edited. Further, the data is sorted and merged with other data and computations are made, summarised and presented. In this process, the attention of the manager is drawn to all problem situations by highlighting the significant differences between the actual and the expected, the budgeted or the targeted.
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 in generating the decision alternatives, he then further moves into phase of selection called as choice. In the phase of choice, the manager evolves a 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 satisfies the most is selected.
In these three phases, if the manager fails, to reach a decision, he starts the process all over again from the intelligence phase where additional data and information is collected, the decisionmaking model is refined, the selection criteria is changed and a decision is arrived at.
MIS AND DECISION MAKING: It is necessary to understand the concepts of decisionmaking as they are relevant to the design of the MIS. The Simon Model provides a conceptual design of the MIS and decisionmaking, wherein the designer has to design the system in such a way that the problem is identified in precise terms. In the design phase of the model, the designer is to ensure that the system provides models for decisionmaking. These models should provide for the generation of decision alternatives, test them and pave way for the selection of one of them. In a choice phase, the designer must help to select the criteria to select one alternative amongst the many. The concept of programmed decisionmaking is the finest tool available to the MIS designer, whereby he can transfer decisionmaking from a decisionmaker to the MIS and still retain the responsibility and accountability with the decisionmaker or the managerThe concept of decision making systems such as the closed and the open systems helps the designer in providing a design flexibility. The closed systems are deterministic and rule based; therefore, the design needs to have limited flexibility, while in an open system, the design should be flexible to cope up with the changes required from time to time. The methods of decisionmaking can be used directly in the MIS provided the method to be applied has been decided. A number of decisionmaking problems call for optimisation, and OR models are available which can be made a part of the system. The optimisation models are static and dynamic, and both can be used in the MIS..
The concepts of the organisational and behavioural aspects of decisionmaking provide an insight to the designer to handle the organisational culture and the constraints in the MIS. The concepts of the rationality of a business decision, the risk averseness of the managers and the tendency to avoid an uncertainty, makes the designer conscious about the human limitations, and prompts him to provide a support in the MIS to handle these limitations. The decisionmaking concepts are significant in MIS design. The significance arises out of the complexity of decisionmaking, the human factors in decisionmaking, the organisational and behavioural aspects and the uncertain environments.