Management Information Systems

Chapter 5

Chapter 5: Decision Making in Management Information Systems
Unit Structure
5.1 Introduction 5.2 Levels of Decision Making 5.3 Types of Decision 5.4 Decision making Concepts 5.4.1 Rational Decision making 5.4.2 The Problems in Making Rational Decisions 5.5 Decision making Process 5.5.1 Types of Decision making Systems 5.5.2 Types of Decisions 5.5.3 Nature of Decisions 5.6 Decision Analysis by Analytical Modelling 5.7 MIS and Decision making 5.8 Summary

Lecturer: Mr Vinesh Persand

Page 1

· Describe Herbert Simon’s model of decision making. Decision making in an organization can be categorized into 3 parts: (1) Strategic Decision Making determines the objectives. a fixed intention bringing to a conclusive result. which means ‘to cut off’. a judgment. This process generally involves a small group of high level managers who deal with very complex and non-routine problems. · Explain rational decision making and its problems.1 Introduction Chapter 5 The word 'decision’ is derived from the Latin root decido. A decision is the choice out of several options made by the decision maker to achieve some objectives in a given situation. 5. · Examine the behavioural concepts and decision making. It also takes place within the context of broad policies and objectives set out by strategic decision making. you will be able to: · Explain the characteristics of the business decisions. The concept of decision. This unit throws light on the decision making process in an organization and its relevance to MIS. · Mention the types of decisions.2 Levels of Decision Making Differences in decision making can be classified by organizational level.Management Information Systems 5. (2) Management Control Decision Making is primarily concerned with how efficiently and effectively resources are utilized and how well operational units are performing. Lecturer: Mr Vinesh Persand Page 2 . · State the four ways of decision analysis. and a resolution. resources and policies of the organization. Learning Objectives After studying this unit. A major problem at this level of decision making is predicting the future of the organization and its environment and matching the characteristics of the organization to the environment. therefore. (3) Knowledge Level decision making deals with evaluating new ideas for products and services. ways to communicate new knowledge and ways to distribute information throughout the organization. is settlement. Management control requires close interaction with those who are carrying out the tasks of the organization.

The major characteristics of the business decision making are: (a) Sequential in nature. (b) Exceedingly complex due to risks and trade off. (c) Influenced by personal values. (2) Structured decisions are repetitive. (3) Semi-structured decisions are only part of the problem that has a clear-cut answer provided by an accepted procedure. we assume that the decision maker is a rational person. Determining which units in the organization will carry out the tasks. whether we are talking about business decisions or any other decisions. which are made in the process of conducting business to achieve its objectives in a given environment. evaluation and insights into the problem definition. (1) Unstructured decisions are those in which the decision maker must provide judgment. Structured and semi-structured decisions. (d) Made in institutional settings and business environment. In concept. All of these tasks require decisions about operational control. In business. important and non-routine and there is no well-understood or agreed upon procedure for making them. routine and involve a definite procedure for handling so that they do not have to be treated each time as if they are new. establishing criteria for completion and resource utilization and evaluating outputs.3 Types of Decisions There are 3 types of decisions namely: Unstructured. the decisions are not isolated events.Management Information Systems Chapter 5 (4) Operational Control decision making determines how to carry out the specific tasks set forth by strategic and middle management decision makers. 5. Lecturer: Mr Vinesh Persand Page 3 .4 Decision Making Concepts Business decisions are those. The decision may appear as "snap" decision but it is made only after a long chain of developments and a series of related earlier decisions. These decisions are novel. 5. Each of them has a relation to some other decision or situation. The business decision making is sequential in nature.

a question of feasibility. such as the interrelationship among the experts or decision makers. A decision otherwise being very sound on the business principle and economic rationality may be rejected on the basis of the personal values.Management Information Systems Chapter 5 The decision making process is a complex process in the higher hierarchy of management. it would be observed that there are common characteristics in each of them. The quality of decision making is to be judged on the rationality and not necessarily on the result it produces. If you are in business and want to make profit. If it is raining. which are defeated if such a decision is implemented.' 5. imagination and a deep understanding of human behaviour. The complexity is the result of many factors. Whatever may be the situation. the discipline and the individual's commitment to goals will decide the process and success of the decision. Simon Herbert differentiates among the types of rationality. then you must produce goods and sell them at a much higher price than cost of production. In reality. and a probable impact on business. ensures the achievement of the goal for which the decision is made. a job responsibility. Lecturer: Mr Vinesh Persand Page 4 . A decision. the codes of morals and ethics. The personal values of the decision maker play a major role in decision making. There is a definite method of arriving at a decision and it can be put in the form of decision process model. All decisions solve a 'problem' but over a period of time they give rise to a number of other 'problems. effectively and efficiently. It also requires a foresight to predict the post decision implications and a willingness to face those implications. The culture. there is no right or wrong decision but a rational or irrational decision. if one analyses the factors underlying the decision making process.4. in a given situation is: • Objectively rational if it maximizes the value of the objective. it is rational to look for a cover so that you do not get wet. The process covers a number of tangible and intangible factors affecting the decision making process.1 Rational Decision making Rational decision is the one which. The decision making process requires creativity. • Subjectively rational if it maximizes the attainment of value within limitation of the knowledge and awareness of the subject.

so long as the decision maker can explain with logic and reason. If a decision maker shows a consistent behaviour in the process of decision making. (b) Insufficient knowledge For perfect rationality. the decline of sales is symptomatic; the real problem may be somewhere else. Gross Bertram M. In other words. total information leading to complete knowledge is necessary. Whether the rationality applied is appropriate or not could be a point for debate." Actually. Lecturer: Mr Vinesh Persand Page 5 . the objectivity and the circumstances in which the decision is made. the problem may be the poor quality of the product and you may be thinking of improving the quality of advertising. "the most common source of mistakes in the management decisions is the emphasis on finding the right answers rather than the right questions. it can be termed as a rational decision. For example.4. 5. The management may define the problem as the "Sales are declining. 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. the degree of feasibility in achieving the objectives; Third." The main task is to define the right problem in clear terms. he may make hasty decisions which may not satisfy the test of rationality of the decision.Management Information Systems Chapter 5 • Consciously rational to the extent the process of the decision making is deliberate and a conscious one. • Organizationally rational to the degree of the orientation towards the organization. If time is limited. the degree of satisfaction of human interest; Second. (c) Not enough time to be rational The decision maker is under pressure to make decisions. • Personally rational to the extent it achieves an individual's personal goals. consistency in decision making. First.2 The Problems in Making Rational Decisions (a) Ascertaining the problem As Peter Drucker points out. then one can say that he meets the test of the rationality. suggests three dimensions of rationality.

5 Decision Making Process Decision making is a process which the decision maker uses to arrive at a decision. 5. and inability to handle the available knowledge and human behaviour. The decision may fail the test of rationality as the environmental factors considered in the decision making turn out to be untrue. (e) Other limitations Other limitations are the need for a compromise among the different positions. in a product pricing. poor communications. But the post decision environment proves the consideration to be wrong. the timing of the decision is such that one is forced to make a decision but the environment is not conducive for it. For example.Management Information Systems (d) The environment may not cooperate Chapter 5 Sometimes. misappraisal of uncertainties and risks. He describes the model in four phases as shown in below: (a) Intelligence (b) Design (c) Choice (d) Implementation Is there a problem? Intelligence What are the alternatives? Design What is the best solution? Choice Implementation Is the choice working? Lecturer: Mr Vinesh Persand Page 6 . misjudging the motives and values of people. The core of this process is described by Herbert Simon in a model. the factor of oil and petroleum product price is considered as stable.

Intelligence indicates why.Management Information Systems Chapter 5 Intelligence It consists of identifying the problems occurring in the organization. Choice It consists of choosing among solution alternatives. Here a manager can use information tools that can calculate and keep track of the consequences. summarized and presented. If the model developed is useful in generating the decision alternatives. where and with what effects a situation occurs. The data is scanned. In the intelligence phase. checked and edited. In this process. the MIS collects the data. the data is sorted and merged with other data and computations are made. the attention of the manager is drawn to all problem situations by highlighting the significant differences between the actual and the expected. The decision maker might require a larger DSS system to develop more expensive data on a variety of alternatives and to use complex analytic models needed to account for all of the consequences. This activity may require more intelligence so that the manager can decide if a particular solution is appropriate. Smaller DSS systems are ideal in this stage of decision making because they operate on simple model. the budgeted or the targeted. Lecturer: Mr Vinesh Persand Page 7 . examined. This broad set of information gathering activities is required to inform managers how well the organization is performing and to let them know where problems exist. can be developed quickly and can be operated with limited data. costs and opportunities provided by each alternative designed in this stage. the individual designs possible solutions to the problems. he then further moves into phase of selection called as choice. Further. 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. Design In this stage.

The criterion is applied to the various decision alternatives and the one which satisfies the most is selected. and highest utility. an examination system to declare pass or fail. Lecturer: Mr Vinesh Persand Page 8 . then the decision making system is termed as an open decision making system. (c) The manager can choose one of them.5.Management Information Systems Chapter 5 In the phase of choice. Few examples are a product mix problem. If the manager operates in an environment not known to him. or an acceptance of the fixed deposits. tested. The conditions of the closed decision making system are: (a) The manager has a known set of decision alternatives and knows their outcomes fully in terms of value. the selection criteria is changed and a decision is arrived at. The knowledge of the outcome may be a probabilistic one. least cost. (b) The manager has a model. he starts the process all over again from the intelligence phase where additional data and information are collected. 5. If the manager operates in a known environment then it is a closed decision making system. In these four phases.1 Types of Decision Making Systems The decision making systems can be classified in a number of ways. minimum waste. The conditions of this system in contrast closed decision making system are: (a) The manager does not know all the decision alternatives. if the manager fails to reach a decision. a method or a rule whereby the decision alternatives can be generated. Implementation This is the final stage of decision making when the individual puts the decision into effect and reports on the progress of the solutions. the manager evolves a selection criterion such as maximum profit. the decision making model is refined. and ranked for selection. if implemented. based on some goal or objective criterion. (b) The outcome of the decision is also not known fully. There are two types of systems based on the manager's knowledge about the environment. least time taken.

are some decision making situations which fall in the category of the open decision making systems. he is able to generate the decision alternatives. then it is decision making under risk. A good MIS tries to convert a decision making situation under uncertainty to the situation under risk and further to certainty. test them and select one of them. the manager resorts to that decision. and the plant location. If the manager has full knowledge. whereby the manager knows more and more about environment and the outcomes. where his aspirations or desires are met best. 5. has full knowledge of environment.Management Information Systems Chapter 5 (c) No method.g TPS) Decision making at the middle management level is of the risk type. Deciding on the possible product diversification lines. and has predetermined decision alternatives for choice or for selection. (semi-structured decision e. This is because of the difficulty in forecasting an event with hundred per cent accuracy and the limited scope of generating the decision alternatives. (d) It is difficult to decide an objective or a goal and. The MIS gives the information support. If the manager has full and precise knowledge of the event or outcome which is to occur. (structured decision e.g MIS.5. rule or model is available to study and finalize one decision among the set of decision alternatives. This is mainly because the manager in this field has fairly good knowledge about the events which are to take place. Decision making in the Operations Management is a situation of certainty. then the decision making is not a problem. If he has partial knowledge or a probabilistic knowledge. If the manager does not have any knowledge whatsoever. therefore. then it is decision making under uncertainty.2 Types of Decisions The types of decisions are based on the degree of knowledge about the outcomes or the events yet to take place.DSS) Lecturer: Mr Vinesh Persand Page 9 . The MIS tries to convert every open system to a closed decision making system by providing information support for the best decision. then it is a situation of certainty. A good MIS achieves this. the pricing of a new product.

is a programmed decision making situation. giving the relevant information to handle the specific decision making situation.Management Information Systems Chapter 5 At the top management level. method or even guidelines. The decision maker here is told to make a decision based on the instructions or on the rule of ordering a quantity of 400 items when its stock level reaches 200. The programmed decision making can be delegated to a lower level in the management cadre. the effectiveness of the rule can be analyzed and the rule can be reviewed and modified from time to time for an improvement. The MIS in the non-programmed decision situation can help to some extent. - What if analysis Page 10 Lecturer: Mr Vinesh Persand . a decision is made but such decision needs to be analyzed for conditions and assumptions considered in the decision model. A good MIS design gives adequate support to all the three levels of management. The system in such cases plays the role of a decision maker based on a given rule or a method. in other words.6 Decision Analysis by Analytical Modelling Based on the methods discussed.g ESS) 5. To resolve the complexity. If the stock level of an item is 200 numbers.5. Therefore. A decision which cannot be made by using a rule or a model is the non-programmed decision. The MIS. 5. Such decisions are infrequent but the stakes are usually larger. then the decision to raise a purchase requisition for 400 numbers. can develop support systems in the nonprogrammed decision making situations. The model is analyzed in four ways. it is called the programmed decision. they cannot be delegated to the lower level. it is a situation of total uncertainty on account of insufficient knowledge of the external environment and the difficulty in forecasting business growth on a long term basis. Since the programmed decisions are made through MIS. If such rules can be developed wherever possible. in identifying the problem. then the MIS itself can be designed to make a decision and even execute. If a decision can be based on a rule.3 Nature of Decisions Decision making is a complex situation. (Unstructured decision e. The process is executed through analytical modelling of problem and solution. the decisions are classified as programmed and non-programmed decisions.

Goal Seeking Analysis In a goal seeking analysis. a special case of what if analysis. if the considered values of variables or relationship change.Management Information Systems - Chapter 5 Goal Seeking Analysis Sensitivity analysis Goal Achieving analysis What if analysis Decisions are made using a model of the problem for developing various solution alternatives and testing them for best choice. The model is built with some variables and relationship between variables. you come to know which the critical constraints are and which are limiting the value of Lecturer: Mr Vinesh Persand Page 11 . We work backward from the goal.' Sensitivity Analysis In what if analysis you test the effect on solution by changing the value of number of variables simultaneously or changing the relations between them. which would help to seek that goal. In reality. Sensitivity analysis helps to understand the significance of variable in decision making and improves the quality of decision making. Goal Achieving Analysis In goal seeking analysis. goal is fixed and you go down to analyze the variables and values. only one variable is changed and rest are kept unchanged. the considered values of variables or relationship in the model may not hold good and therefore solution needs to be tested for an outcome. This method of analysis is called 'what if analysis. you analyze the problem in exactly reverse way as that of what if analysis or sensitivity analysis. In optimization analysis. you do not fix the goal but you try to achieve a goal of an optimum value arrived at after satisfying all the constraints operating in the problem. But in sensitivity analysis. In goal seeking analysis.

The concept of programmed decision making is the finest tool available to the MIS designer.7 MIS and Decision Making It is necessary to understand the concepts of decision making as they are relevant to the design of the MIS. In a choice phase. the design should be flexible to cope up with the changes required from time to time. · Decision making is a process which the decision maker uses to arrive at a decision. The decision maker can use this analysis to work on constraints and resources and find ways to improve upon solution to seek highest goal. which are made in the process of conducting business to achieve its objectives in a given environment. In the design phase of the model. the designer must help to select the criteria to select one alternative amongst the many.Management Information Systems Chapter 5 goal.8 Summary · Business decisions are those. test them and pave way for the selection of one of them. The closed systems are deterministic and rule based; therefore. the designer is to ensure that the system provides models for Decision making. The Simon Model provides a conceptual design of the MIS and decision making. The concept of decision making systems such as the closed and the open systems helps the designer in providing a design flexibility. the design needs to have limited flexibility. Lecturer: Mr Vinesh Persand Page 12 . while in an open system. 5. wherein the designer has to design the system in such a way that the problem is identified in precise terms. These models should provide for the generation of decision alternatives. 5. The methods of decision making can be used directly in the MIS provided the method to be applied has been decided. whereby he can transfer decision making from a decision maker to the MIS and still retain the responsibility and accountability with the decision maker or the manager.

· The decision making process requires creativity. the decisions are not isolated events. effectively and efficiently.Management Information Systems Chapter 5 · The business decision making is sequential in nature. then the decision making system is termed as an ‘open decision making system’. - If the manager operates in an environment not known to him. If the manager operates in a known environment then it is a ‘closed decision making system’. In business. imagination and a deep understanding of human behaviour." · The decision making systems can be classified in a number of ways. · Rational decision is the one which. Lecturer: Mr Vinesh Persand Page 13 . There are two types of systems based on the manager's knowledge about the environment. · 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. ensures the achievement of the goal for which the decision is made.