The Decision Making Process and Tools

Learning Outcomes
At the end of this module, you should be able to:
 Describe different kinds of business environments
where decisions have to be taken.
 Identify tools that can aid decision making in any
of the business environments.
 Apply any of the known tools in decision making
to make decision under the kinds of business
environments identified
 Problem Definition
A decision making situation arises because there
is some problem to be solved. Thus, decision
making can be viewed as a problem solving
process. A good understanding of the problem
followed by a clear definition by the decision
maker is therefore a very important factor.
A problem which is poorly defined may be
unsolved even if the best decision making
techniques are used.
 The Decision Making Process
• 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 (cost).
• If there is only one alternative however, then there is nothing to decide. In
decision making, it is of paramount importance to develop and evaluate
alternatives before selecting from amongst them the best alternative. Decision
making is an essential part of planning as you have to make decisions in the
course of planning.
 Essence of Making Decisions
• It is required in designing and staffing an
organization
• It is required in developing methods of
motivating subordinates
• It is required in identifying corrective actions
in control process.
 Occasions for Decision Making

• Authoritative communications from superiors;

being ordered or commanded
• Cases referred for decision by subordinates
• Cases originating in the initiative of the
executive concerned.
 Types of Decision Making

• Depending on the extent to which they are

structured, decision making can be: Routine or
Non-Routine
• Routine decisions focus on well-structured
situation that: recur frequently, involve standard
decision procedures, and entail a minimum of
uncertainty. Examples include payroll processing,
reordering standard inventory items, paying
suppliers etc. It can be delegated to lower-levels
within established policy limits
 Types of Decision Making Contd

• Non routine decisions deal with unstructured

situations of a novel, non recurring nature,
often involving incomplete knowledge, high
uncertainty and the use of subjective
judgments or even intuition, where no
alternative can be proved to be the best
possible solution to the particular problem
 The State of Nature
• The quality of decision depends to a large
extent on the knowledge of the state of
nature when decision is to be made.
• The state of nature is regarded as the
conditions of the business environment when
the decision is to be taken and or
implemented.
 The State of Nature and Decision
Making
• All the states of nature in a decision situation may
not be known and because the quality of decision
is seriously affected by the extent to which state
of nature is known decision situations are
classified by the knowledge of the state of nature.
There are three main possible situations:
• Decision making under Certainty, Decision
making under Risk and Decision making under
Uncertainty
 Decision Making Under Certainty

• This decision situation arises when we know

with certainty which state of nature will occur
at the time the decision will be implemented
• In this situation, the quality of decision is
better since it is better to deal with a known
instead of an unknown situation.
 Decision Making Under Certainty
• A manufacturing company is a manufacturer of 4 types of products
simply named products 1, 2, 3 and 4. The unit profits realisable
from products 1, 2, 3 and 4 are N250, N300, N100 and N200
respectively. Labour cost for every unit of products 1, 2, 3 and 4 is
N25, N15, N35 and N40 respectively; materials cost per unit is N35,
N40, N65 and N42 for product 1, 2, 3 and 4 respectively. It takes
0.10hrs, 0.08hrs, 0.22hrs and 0.45hrs to produce a unit of product
1, 2, 3 and 4 respectively.
• The company can only get N4m worth of materials in the year while
budget limitations require maximum spending of N2,455,000 on
labour. The maximum machine hours availability for the year is
5840hrs.
• You are required to advise this coy on quantity of each product to
produce in order to maximise profit.
 Decision making under risk
• If the chance of occurrence of each possible
condition or state of nature can be estimated
in terms of numerical probability values, the
condition is decision making under risk. The
probabilities have a value of risk associated
with them.
 Decision making under risk
Alternative State A (0.34) State B (0.45) State C (0.21)
Methods
Process 1 100,000 500,000 200,000
Process 2 140,000 450,000 120,000
Process 3 130,000 370,000 140,000

In Risk analysis the objective function is expected value of the pay-off or

utility defined as follows:
Expected value = (Probability of state of Nature) x (Value of pay-off in
state of Nature that state of Nature)
 DECISION MAKING UNDER
UNCERTAINTY
• When the states of nature are unknown or the
probability of occurrence cannot be
estimated, then the situation is known as
Decision under Uncertainty. Though difficult
situation, decision still have to be made.
• There are about five different rational
approaches to decision making under
uncertainty
 The Subjective Approach
• Here the probability of the state of
nature occurring is estimated
subjectively and then the decision
making carried out as in Decision making
under Risk
 The Pessimist Approach
Alternative No flood Moderate Heavy Flood Minimum
Actions z
flood Flood
Process 1 100,000 500,000 200,000 100,000
Process 2 140,000 450,000 120,000 120,000
Process 3 130,000 370,000 140,000 130,000
 The Pessimist Approach Contd
• The Pessimist take decisions by selecting the
action corresponding to the maximum of the
minimum pay-off value i.e MAXMUM
 The Optimist Approach
• While the pessimist takes decisions in a
manner that suggests for risk, the optimist is a
risk lover
• The decision criterion for the optimist is to
select the course of action with the best of the
best
• This decision criterion is known as MAXIMAX
 The In-betweenist Approach
• The weighted value of pay-off = α(worst of
pay-off) + (1 - α) (Best of pay-off)
• Where α lies between 0 and 1. The criterion is
the maximization of the weighted pay-off.
• The determination of the value of α depends
on the inclination of the decision maker.
 The Regretist Approach
• The regretist is full of regret for the difference
between the outcome that is realised and the
maximum that could be obtained for the
particular state of nature which prevailed.
The decision criteria in the Regretist approach is
“minimise maximum Regret”
The following table illustrates this approach.
 The Regretist Approach

•Alternative
The
Actions
regretist
No floodis fullModerate
of regret for
Heavythe difference
Flood Row Maxima

between the outcome flood that he realises and the

Process 1 40,000 0 0 40,000
maximum
Process 2 0
he could50,000have realised
80,000
for the
80,000
particular
Process 3 state of nature
10,000 130,000 which
60,000prevailed.
130,000

• Regret Approach Matrix