Module 2

Module 2
Decision Making
©2017 Batangas State University

1
Introduction
Decision-making is one of the most important aspects in an organization.

Decisions are made in the best interest of the organization and to support
organizational growth, however the process of arriving at a decision continues to
become more complex.
For that matter, decision making and problem solving is taken and used in all
engineering management functions, although usually they are considered a part of
the planning phase. Making good decisions is something that every engineer
manager strives to do since the overall quality of managerial decisions has a major
influence on organizational success or failure.
In this chapter, students will learn the nature of decision making, how
decisions are made every day within organizations and how managers make
decisions.
2 ©2017 Batangas State University

Learning Objectives
Understand different types of decisions.
Explain the process of decision making.
Demonstrate problem-solving abilities and

rational effective decision making to
address organization challenges.

Nature of Decision Making
Decision making may be defined as “the process of identifying
and choosing alternative courses of action in a manner
appropriate to the demands of the situation”.
Decision-making, according to Nickels and others, “is the heart of

all the management functions”.
According to the Oxford Advanced Learner’s Dictionary the term

decision making means - the process of deciding about something
important, especially in a group of people or in an organization.
Managerial decision making is the process of making a conscious
choice between two or more rational alternatives in order to select the
one that will produce the most desirable consequences (benefits)
relative to unwanted consequences (costs). If there is only one
alternative, there is nothing to decide.
Thereby, it is a continuous and dynamic activity that pervades all
other activities pertaining to the organization.
Since it is an ongoing activity, the decision making process plays vital
importance in the functioning of an organization..

►it requires solid scientific knowledge coupled with skills and experience in
addition to mental maturity.
►regarded as a check and balance system that keeps the organization
growing both in vertical and linear directions.
►decision making process seeks a goal.
When one problem is solved another arises and so on, such that the
decision making process, as said earlier, is
continuous and dynamic.

Types of Problems and Decisions
Engineer Managers will encounter different types of problems and decisions
as they do their jobs. Depending on the nature of the problem, the engineer
manager can use different types of decisions.
►Well-Structured Problems and Programmed Decisions.

►Poorly Structured Problems and Nonprogrammed Decisions.

Well-Structured Problems and Programmed Decisions.
▪ Problems are straight forward
▪ The goal of the decision maker is clear, the problem is familiar, and information
about the problem is easily defined and complete.
▪ Decisions are programmed to the extent that they are repetitive and routine and to
the extent that a definite approach has been worked out for handling them.
▪ Its solution is usually self-evident or at least reduced to very few alternatives that
are familiar and that have proved successful in the past.
▪ Also known as routine decisions involve standard decision procedures, and entail a
minimum of uncertainty.

Example:
• customer's wanting to return a purchase to a retail store
• a supplier's being late with an important delivery
• a news team's responding to an unexpected and fast-breaking event
• a college's handling of a student wanting to drop a class.

Various types of programmed decisions are
a. Organizational decisions. Decisions taken in interest of the organization.
b. Operational decisions. Decisions are taken as a matter of routine. It relates to daily
operations and aims to achieve short-term objectives of the firm. Operational decisions are
taken by middle and lower- level managers within the framework of policies and
procedures and allow limited use of discretion by managers.
c. Research decisions. Decisions which involve regular survey of the market are research
decisions and decisions made under situations of crisis or emergency are crisis — intuitive
decisions.
d. Opportunity decisions. These decisions reflect foresightedness. Managers forecast
opportunities to promote organizational growth. The decision to grow and diversify (i.e.
market penetration and market development) is an opportunity decision.

Poorly Structured Problems and Nonprogrammed Decisions.
▪ Problems that are new or unusual and for which information is ambiguous or
incomplete.
▪ Decisions are taken in unstructured situations which reflect novel, ill-defined and
complex problems.
▪ The problems are non-recurring or exceptional in nature.
▪ require extensive brainstorming
▪ Managers use skills and subjective judgment to solve the problems through
scientific analysis and logical reasoning.

Poorly Structured Problems and Nonprogrammed Decisions.
▪ When problems are poorly structured, managers must rely on nonprogrammed decision
making in order to develop unique solutions.
▪ Nonprogrammed decisions also called as nonroutine decisions are unique and nonrecurring,
often involving incomplete knowledge, high uncertainty, and the use of subjective judgment or
even intuition, where no alternative can be proved to be the best possible solution to the
particular problem.
▪ Such decisions become more and more common the higher one goes in management and the
longer the future period influenced by the decision is.
▪ When a manager confronts a poorly structured problem, or one that is unique, there is no cut
and-dried solution, thus, it requires a custom-made response through nonprogrammed
decision making.

Decision Making Process
Rational decision-making describes a series of steps
that decision makers should consider if their goal is
to maximize the quality of their outcomes.
In other words, if an engineer manager wants to
make sure to make the best choice, going through
the formal steps of rational decision-making may
make sense.

1. Identify the problem or Diagnose the Problem.
Decisions are made to solve problems. As a first step to decision-making,
therefore, managers identify the problem.
Problem is any deviation from a set of expectations. Managers find causes of
the problem by collecting facts and information that have resulted in the
problem.
For example, if the sales target is 10,000 units per month but actual sales are
6,000 units, managers sense some problem in the company. The problem is
identified with the marketing department of the company. Managers use
their judgment, imagination and experience to identify the problem as wrong
identification will lead to wrong decisions.
2. Analyze the environment.
The objective of environmental analysis is the identification of constraints
which may be spelled out as either internal or external limitations. Managers
scan the internal and external environment to see whether or not
organizational operations conform to environmental standards.
The internal environment refers to organizational activities within the
company that surrounds decision making. While the external environment
refers to variables that are outside the organization and not typically within
the short-run control of top management.

3. Articulate problem or opportunity.
Information provides input for generating solutions. Information may be
quantitative or qualitative. It should be reliable, adequate and timely so that
right action can be taken at the right time.

4. Develop viable alternatives.
In this step, the engineer manager prepares a list of
alternative solutions, then determines the viability of each
solution.
Alternatives means developing two or more ways of solving
the problem. Managers develop many solutions to choose the
best, creative and most applicable alternative to solve the
problem.

5. Evaluate Alternatives.
This is important since the next step is about making a choice. Proper
evaluation makes choosing the right solution less difficult. All the alternatives
are weighed for their strengths and weaknesses. Further, the alternatives will
be evaluated depending on the nature of the problem, objectives of the
company and the nature of alternatives presented.

6. Make a choice. After the alternatives have been evaluated, the decision
maker must now be ready to make a choice. Choice-making refers to the
process of selecting among alternatives representing potential solutions to a
problem. To make the selection process easier, the alternatives can be ranked
from best to worst on the basis of some factors like benefit, cost, or risk.

7. Implement Decision. Implementation refers to carrying out the decision so
that the objectives sought will be achieved. At this stage, the resources must
be made available so that decision may be properly implemented.

8. Evaluate and adapt decision results. In implementing the decision, the
results expected may or may not happen. It is therefore important for the
engineer manager to use control and feedback mechanisms to ensure results
and to provide information for future decisions.

Decision Making Conditions
Decisions may also be classified as being made under conditions of certainty,
risk, or uncertainty, depending on the degree with which the future
environment determining the outcome of these decisions is known. These
three categories are compared:

Certainty
The ideal situation for making decisions is one of certainty, that is, a situation
in which a manager can make accurate decisions because the outcome of
every alternative is known.
Decision making under certainty implies that we are certain of the future
state of nature.
For example, when a state treasurer is deciding on which bank to deposit excess state funds, he
knows exactly how much interest is being offered by each bank and will be earned on the funds.
He is certain about the outcomes of each alternative. As you might expect this condition isn't
characteristic of most managerial decision situations. It's more idealistic than realistic.

One common technique for decision making under certainty is called linear
programming. In this method, a desired benefit (such as profit) can be
expressed as a mathematical function (the value model or objective function)
of several variables. The solution is the set of values for the independent
variables (decision variables) that serves to maximize the benefit (or, in many
problems, to minimize the cost), subject to certain limits (constraints). Steps
include: 1.) State the problem, 2.) decision variables, 3.) Objective function
and 4.) Constraints.


Risk
A far more common situation is one of risk, those conditions in
which the decision maker is able to estimate the likelihood of
certain alternatives or outcomes. The ability to assign probabilities
to outcomes may be the result of personal experiences or
secondary information. Under the conditions of risk, managers
have historical data that allow them to assign probabilities to
different alternatives.


Uncertainty
Sometimes a decision maker cannot assess the probability of occurrence for the various states of nature. In
such condition of uncertainty, the decision maker can choose among several possible approaches for making
the decision. The choice of alternative is influenced by the limited amount of information available to the
decision maker. Another factor that influences choices under conditions of uncertainty is the psychological
orientation of the decision maker. Different approaches to decision making under uncertainty include the
following:
► Optimistic manager –maximax choice (maximizing the maximum possible payoff)

► Pessimistic manager –maximin choice (maximizing the minimum possible payoff)
► Decision maker –principle of insufficient reason; all states of nature are equally likely
(highest average)
► Minimax approach –opportunity loss (regret)

Tools and Techniques for Making Better Decisions
Decision making is a very important and complex process. In

order to aid decision makers, make the right choice, different
tools and techniques are used to improve the overall quality
of decision making. In some instances, it may be a
combination of a couple of different strategies that help
managers achieve the best results. Following are some of the
commonly used techniques:

Decision Trees. Decision Trees are tools that help choose between several courses of action or alternatives.
They are represented as tree-shaped diagram used to determine a course of action or show a statistical
probability. Each branch of the decision tree represents a possible decision or occurrence. The tree structure
shows how one choice leads to the next, and the use of branches indicates that each option is mutually
exclusive.
A decision tree can be used by a manager to graphically represent which actions could be taken and how
these actions relate to future events.

Delphi Technique
►Group process using written responses
►Series of questionnaires
►Process ends when consensus is reached
►Responses may be anonymous

Nominal Group Technique

1.Write down ideas
2.Data gathering
3.Discussions / clarifications
4.Voting for favorite ideas

Payback Analysis
►Generally used in financial management
►Break even point analysis
►Objective : choose alternative with quickest payback of initial
cost

Marginal Analysis
►Weighs benefits of an input or activity against the costs
►Emphasis on ROI


Decision Matrix. When dealing with multiple choices and variables, a decision matrix can bring clarity to the
disarray. A decision matrix is similar to a pros/cons list, but it allows decision maker to place a level of
importance on each factor. That way, decision maker can more accurately weigh the different options against
each other. The following are the steps to create decision matrix:
1. List decision alternatives as rows
2. List relevant factors as columns
3. Establish a consistent scale to assess the value of each combination of alternatives and factors
4. Determine how important each factor is towards making your final decision and assign weights accordingly
5. Multiply your original ratings by the weighted rankings
6. Add up the factors under each decision alternative
7. The option that scores the highest wins


Pareto Analysis. It is a statistical technique in decision

making that is used for the selection of a limited number of
tasks that produce significant overall effect. It uses the Pareto
Principle (also known as the 80/20 rule) the idea that by
doing 20% of the work you can generate 80% of the benefit
of doing the whole job. Or in terms of quality improvement, a
large majority of problems (80%) are produced by a few key
causes (20%). This is also known as the vital few and the
trivial many.


Don’t let your
emotions make your
decisions.
©2017 Batangas State University
41

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Module 2

©2017 Batangas State University

Decision-making is one of the most important aspects in an organization.

2 ©2017 Batangas State University

Understand different types of decisions.

Explain the process of decision making.

Demonstrate problem-solving abilities and

3 ©2017 Batangas State University

Decision-making, according to Nickels and others, “is the heart of

According to the Oxford Advanced Learner’s Dictionary the term

5 ©2017 Batangas State University

6 ©2017 Batangas State University

►Well-Structured Problems and Programmed Decisions.

7 ©2017 Batangas State University

8 ©2017 Batangas State University

9 ©2017 Batangas State University

10 ©2017 Batangas State University

11 ©2017 Batangas State University

12 ©2017 Batangas State University

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► Optimistic manager –maximax choice (maximizing the maximum possible payoff)

29 ©2017 Batangas State University

Decision making is a very important and complex process. In

30 ©2017 Batangas State University

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32 ©2017 Batangas State University

Nominal Group Technique

33 ©2017 Batangas State University

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38 ©2017 Batangas State University

Pareto Analysis. It is a statistical technique in decision

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40 ©2017 Batangas State University

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