UNIT- 1

OVERVIEW OF DIFFERENT TYPES OF DECISION

MAKING.
Syllabus:- Unit-I: Overview of different types of decision-making:
Strategic, tactical and operational. Consideration of organizational structures.
Mapping of databases, MIS, EIS, KBS, expert systems OR modeling systems
and simulation, decision analytic systems onto activities within an organization.
Extension to other 'non organizational areas of decision making. Relationship
with knowledge management systems.

1. Strategic decisions:

Strategic decisions are major choices of actions and influence whole or a major part of
business enterprise. They contribute directly to the achievement of common goals of the
enterprise. They have long-term implications on the business enterprise.

They may involve major departures from practices and procedures being followed earlier.
Generally, strategic decision is unstructured and thus, a manager has to apply his business
judgement, evaluation and intuition into the definition of the problem. These decisions are
based on partial knowledge of the environmental factors which are uncertain and dynamic.
Such decisions are taken at the higher level of management.

Strategic Decision Making is a continuous process. There are various models for strategy
generation (My Strategy Generation Model). But still a question that bothers us is - "How do
we formulate and decide a strategy?"

I propose the following model for Strategic Decision Making. I prefer to refer to as "6I's of
Strategic Decision Making"
1. Identification of problem:- During this stage the problem for which the strategic
decision has to be made is identified. he output of this stage would be the problem statement.

2. Information processing: This is the stage where data gathering is done and

information is processed. Referring to my model of strategy generation, this is the Strategic
Assessment stage/phase. We analyze all external and internal factors, conduct appreciative
enquiry and arrive at various objectives.

3. Identification of options: The identified objectives will act as an input for identifying

various options. From IT strategy perspective this would be the second phase of my strategy
generation model, SITP Planning Process (rather even the 4th and 5th Is are related to it).
Otherwise for identifying any strategic option, the objectives will be analyzed to identify the
various ways or options by which it can be accomplished. The focus should be on identifying
as many options that may be possible.

4. Isolating a choice: After identifying various available options, the best one needs to be
identified. There are various qualitative and quantitative techniques that may be used to
isolate the choice. These methods would be discussed in my next post.This would also give
measurable targets for the strategy or objectives.

5. Implementation: After the choice has been identified/isolated, the implementation

plan has to be formulated. Mintzberg's Plan and Pattern will act as an catalyst for formulating
the Implementation plan. Thereafter, steps for implementation of the plan is performed,
which would include allocation of required resources. Thus, resources and capabilities of the
organization will enable in eventual implementation.

6. Improvement via feedback: This is the feedback mechanism. Whether the

implementation is inline with identified measurable targets or not is determined with regular
feedback, gaps and corrective actions identified and implemented. Eventually when the
required target is achieved, it would mean that the strategic decision has been able to
successfully resolve the IT/business strategic problem.
It should be noted that strategic decision making is a cyclic process. Also, it may be possible
that a strategic decision making for a new problem has to be initiated when one for the other
is already at any stage of 6I. In such a situation we can find parallel implementation of 6I.

2. Tactical decisions:

These decisions relate to the implementation of strategic decisions. They are directed towards
developing divisional plans, structuring workflows, establishing distribution channels,
acquisition of resources such as men, materials and money. These decisions are taken at the
middle level of management.

A typical organization is divided into operational, middle, and upper level. The information
requirements for users at each level differ. Towards that end, there are number of information
systems that support each level in an organization.

This tutorial will explore the different types of information systems, the organizational level
that uses them and the characteristics of the particular information system.
Understanding the various levels of an organization is essential to understand the information
required by the users who operate at their respective levels.

Operational management level

The operational level is concerned with performing day to day business transactions of the
organization.

Examples of users at this level of management include cashiers at a point of sale, bank tellers,
nurses in a hospital, customer care staff, etc.

Users at this level use make structured decisions. This means that they have defined rules that
guides them while making decisions.

For example, if a store sells items on credit and they have a credit policy that has some set
limit on the borrowing. All the sales person needs to decide whether to give credit to a
customer or not is based on the current credit information from the system.

Tactical Management Level

This organization level is dominated by middle-level managers, heads of departments,

supervisors, etc. The users at this level usually oversee the activities of the users at the
operational management level.

Tactical users make semi-structured decisions. The decisions are partly based on set
guidelines and judgmental calls. As an example, a tactical manager can check the credit limit
and payments history of a customer and decide to make an exception to raise the credit limit
for a particular customer. The decision is partly structured in the sense that the tactical
manager has to use existing information to identify a payments history that benefits the
organization and an allowed increase percentage.

Strategic Management Level

This is the most senior level in an organization. The users at this level make unstructured
decisions. Senior level managers are concerned with the long-term planning of the
organization. They use information from tactical managers and external data to guide them
when making unstructured decisions.

3. Operational decisions:

These decisions relate to day-to-day operations of the enterprise. They have a short-term
horizon as they are taken repetitively. These decisions are based on facts regarding the events
and do not require much of business judgement. Operational decisions are taken at lower
levels of management. As the information is needed for helping the manager to take rational,
well informed decisions, information systems need to focus on the process of managerial
decision making.

Decision-making increasingly happens at all levels of a business. The Board of Directors may
make the grand strategic decisions about investment and direction of future growth, and
managers may make the more tactical decisions about how their own department may
contribute most effectively to the overall business objectives. But quite ordinary employees
are increasingly expected to make decisions about the conduct of their own tasks, responses
to customers and improvements to business practice. This needs careful recruitment and
selection, good training, and enlightened management.

Types of Business Decisions

1. Programmed Decisions. These are standard decisions which always follow the same
routine. As such, they can be written down into a series of fixed steps which anyone can
follow. They could even be written as computer program

2. Non-Programmed Decisions. These are non-standard and non-routine. Each decision is not

quite the same as any previous decision.

3. Strategic Decisions. These affect the long-term direction of the business eg whether to take
over Company A or Company B

4. Tactical Decisions. These are medium-term decisions about how to implement strategy eg

what kind of marketing to have, or how many extra staff to recruit

5. Operational Decisions. These are short-term decisions (also called administrative

decisions) about how to implement the tactics e.g. which firm to use to make deliveries.

Figure 1: Levels of Decision-Making

Figure 2: The Decision-Making Process

The model in Figure 2 above is a normative model, because it illustrates how a good decision
ought to be made. Business Studies also uses positive models which simply aim to illustrate
how decisions are, in fact, made in businesses without commenting on whether they are good
or bad.

Linear programming models help to explore maximising or minimising constraints eg one

can program a computer with information that establishes parameters for minimising costs
subject to certain situations and information about those situations.

Spread-sheets are widely used for ‘what if’ simulations. A very large spread-sheet can be
used to hold all the known information about, say, pricing and the effects of pricing on
profits. The different pricing assumptions can be fed into the spread-sheet ‘modelling’
different pricing strategies. This is a lot quicker and an awful lot cheaper than actually
changing prices to see what happens. On the other hand, a spread-sheet is only as good as the
information put into it and no spread-sheet can fully reflect the real world. But it is very
useful management information to know what might happen to profits ‘what if’ a skimming
strategy, or a penetration strategy were used for pricing.

The computer does not take decisions; managers do. But it helps managers to have quick and
reliable quantitative information about the business as it is and the business as it might be in
different sets of circumstances. There is, however, a lot of research into ‘expert systems’
which aim to replicate the way real people (doctors, lawyers, managers, and the like) take
decisions. The aim is that computers can, one day, take decisions, or at least programmed
decisions (see above). For example, an expedition could carry an expert medical system on a
lap-top to deal with any medical emergencies even though the nearest doctor is thousands of
miles away. Already it is possible, in the US, to put a credit card into a ‘hole-in-the-wall’
machine and get basic legal advice about basic and standard legal problems.

Constraints on Decision-Making
Internal Constraints

These are constraints that come from within the business itself.

- Availability of finance. Certain decisions will be rejected because they cost too much

- Existing Business Policy. It is not always practical to re-write business policy to accommodate
one decision

- People’s abilities and feelings. A decision cannot be taken if it assumes higher skills than
employees actually have, or if the decision is so unpopular no-one will work properly on it.

External Constraints

These come from the business environment outside the business.

- National & EU legislation

- Competitors’ behaviour, and their likely response to decisions your business makes

- Lack of technology

- Economic climate

Quality of Decision-Making

Some managers and businesses make better decisions than others. Good decision-making
comes from:-

1. Training of managers in decision-making skills. See Developing Managers

2. Good information in the first place.

3. Management skills in analysing information and handling its shortcomings.

4. Experience and natural ability in decision-making.

5. Risk and attitudes to risk.

6. Human factors. People are people. Emotional responses come before rational responses, and
it is very difficult to get people to make rational decisions about things they feel very strongly
about. Rivalries and vested interests also come into it. People simply take different views on the
same facts, and people also simply make mistakes. Business Thinkers -John Pierpoint Morgan &
Good Management Self-Assessment

4. Decision Support System:

A decision support system (DSS) is a computerized information system used to help in
decision-making activities in an organization or a business by analysing large datasets and it
compiles the information which can be used to solve problems and make better decisions.

4.1 Components of DSS

There are 3 main fundamental architectural components which are as follows:

The Users

The main component of the Decision Support System is the user. As DSS uses are normally
managers, policymakers, etc who may not qualified computer expert, Hence DSS should
provide easy to use interfaces and some guidance for using DSS and also interaction with the
model, such as getting recommendations from it.

The Main goal of DSS is to make sure that the users are utilizing and get benefitted from
DSS.

Database Management System (DBMS)

A DBMS acts as a data bank for the DSS. It stores large quantities of data collected from
different sources. It provides logical data structures for user interaction. Inputs and outputs
are stored in The database. All the processing is done in the database.

DBMS should able to inform the system user about how to access database and what are the
different types of data is available.

Model-based Management System (MBMS)

The function of this system is to fetch the data and from DBMS and transform that data into
information which helps for proper decision making. It should also provide proper assistance
to the user for model development.

 Components of DSS

Components of DSS can be categorized as:

1. Inputs: Records, Data factors, numbers, and characteristics for analyzing.

2. User Knowledge and Expertise: To run the proper functioning and providing inputs,
the user must be aware of how to use the system.
3. User Interface: DSS should support model construction and model analysis by
providing a well-structured user interface.
4. Decisions: Based on user requirements, results are generated by the Decision Support
System.

4.2 Types of Decision Support System

There are various types of decision support system which are classified as:
 1. Data-driven

Decision Support System includes file drawer systems, data analytics systems, analytical
information systems, data storage systems and emphasizes access and manipulation of large
structured data databases.

2. Model-driven

Decision Support System model comes from a variety of fields or specialties and could
include accounting models, financial models, representative models, optimization models,
etc.

3. Knowledge-driven

This Knowledge-driven focuses on knowledge and advise managers to take action on the
basis of a certain knowledge base analysis. Predefined facts, Stored procedures, rules, and
limitations are also referred to solve problems. It also has special expertise in problem-
solving and is closely associated with data mining.

4. Document-driven

This system assists managers in obtaining and managing unstructured documents and web
pages by integrating a range of storage and processing technologies in order to provide a
complete review of documents and analysis.

5. Communication -driven

This is also called group decision support systems (GDSS). Communication driven
DSS includes more than one person working to solve complex problems. It helps executives,
managers to work together as one group to come to the final solution to solve problems.
Technology can be used for Communication driven DSS like Microsoft’s NetMeeting,
Groove, etc.

 4.3 Advantages and disadvantages of DSS .

Advantages of a Decision Support System:

 It Saves Time by speeding up the process of decision making.

 It Improves communication between people through meetings, brainstorming
sessions, etc.
 Reports generated by the Decision Support System can be used as evidence.
  It helps to automate processes.
 Reduction of cost

 Disadvantages of a Decision Support System:

 Overload Information
 Reduction of status
 Unanticipated effects
 Cost in Monetary
 Too much DSS dependency

4.4 Steps For Decision making:-

1. Identify the decision

To make a decision, you must first identify the problem you need to solve or the question you
need to answer. Clearly define your decision. If you misidentify the problem to solve, or if
the problem you’ve chosen is too broad, you’ll knock the decision train off the track before it
even leaves the station.
If you need to achieve a specific goal from your decision, make it measurable and timely so
you know for certain that you met the goal at the end of the process.

2. Gather relevant information

Once you have identified your decision, it’s time to gather the information relevant to that
choice. Do an internal assessment, seeing where your organization has succeeded and failed
in areas related to your decision. Also, seek information from external sources, including
studies, market research, and, in some cases, evaluation from paid consultants.

Beware: you can easily become bogged down by too much information—facts and statistics
that seem applicable to your situation might only complicate the process.

3. Identify the alternatives

With relevant information now at your fingertips, identify possible solutions to your problem.
There is usually more than one option to consider when trying to meet a goal—for example,
if your company is trying to gain more engagement on social media, your alternatives could
include paid social advertisements, a change in your organic social media strategy, or a
combination of the two.

4. Weigh the evidence

Once you have identified multiple alternatives, weigh the evidence for or against said
alternatives. See what companies have done in the past to succeed in these areas, and take a
good hard look at your own organization’s wins and losses. Identify potential pitfalls for each
of your alternatives, and weigh those against the possible rewards.

5. Choose among alternatives

Here is the part of the decision-making process where you, you know, make the decision.
Hopefully, you’ve identified and clarified what decision needs to be made, gathered all
relevant information, and developed and considered the potential paths to take. You are
perfectly prepared to choose.

6. Take action

Once you’ve made your decision, act on it! Develop a plan to make your decision tangible
and achievable. Develop a project plan related to your decision, and then set the team loose
on their tasks once the plan is in place.

7. Review your decision

After a predetermined amount of time—which you defined in step one of the decision-
making process—take an honest look back at your decision. Did you solve the problem? Did
you answer the question? Did you meet your goals?
 5. Management Information System: -
MIS is the use of information technology, people, and business processes to record, store and
process data to produce information that decision makers can use to make day to day
decisions. The full form of MIS is Management Information Systems. The purpose of MIS
is to extract data from varied sources and derive insights that drive business growth.
Role of MIS in DSS: -

The following are some of the justifications for having an MIS system in DSS:

 Decision makers need information to make effective decisions. Management

Information Systems (MIS) make this possible.
 MIS systems facilitate communication within and outside the organization –
employees within the organization are able to easily access the required information
for the day to day operations. Facilitates such as Short Message Service (SMS) &
Email make it possible to communicate with customers and suppliers from within the
MIS system that an organization is using.
 Record keeping – management information systems record all business transactions
of an organization and provide a reference point for the transactions.
 Supports the business processes and operations of an organisation.
 Support of decision making by employees and managers of an organisation.
 Support the strategies of an organisation for competitive advantage.

Advantages of MIS:

 Improves quality of an organization or an information content by providing relevant

information for sound decision making.
 MIS change large amount of data into summarize form and thereby avoid confusion
which may an answer when an information officer are flooded with detailed fact.
 MIS facilitates integration of specialized activities by keeping each department aware
of problem and requirements of other departments.
 MIS serves as a link between managerial planning and control. It improves the ability
of management to evaluate and improve performance.

Disadvantages of MIS:

 Too rigid and difficult to adapt.

 Resistance in sharing internal information between departments can reduce the
effectiveness.
 Hard to quantify benefit to justify implementation of MIS.
 Quality of output of an MIS is directly proportional to quality of input and processes.

6. Executive Information System:-

An Executive Information System (EIS) is a kind of decision support system(DSS) used in

organizations to help executives in decision making. It does so by providing easy access to
important data needed in an organization to achieve strategic goals. An EIS usually has
graphical displays on a user-friendly interface.

Executive information systems can be used for monitoring company performance in many
different types of organizations as well as for identifying opportunities and problems.

Advantages of EIS

 Trend Analysis
 Improvement of corporate performance in the marketplace.
 Development of managerial leadership skills
 Improves decision-making
 Simple to use by senior executives
 Better reporting method
 Improved office efficiency

Disadvantage of EIS

 Due to technical functions, not to easy to use by everyone

 Executives may encounter overload of information
 Difficult to manage database due to the large size of data
 Excessive costs for small business organizations

Role of EIS in DSS:-

EIS represents available data in graphical form which helps to analyze it easily.

ESS are able to link data from various sources both internal and external to provide the
amount and kind of information executives find useful.

EIS, is a specialized information system used to support senior-level decision making. An

EIS is not only for the CEO but for any senior manager or executive making strategic
decisions to improve the long-term performance of the organization.

7. Expert System:-

An expert system is a computer system that emulates the decision-making ability of a human
expert.

DSS is a piece of software that simulates the behavior and judgment of a

human or an organization that has experts in a particular domain is known as an
expert system. It does by acquiring relevant knowledge from its knowledge base and
interpreting it according to the user’s problem.
The data in the knowledge base is added by humans that are expert in a
particular domain and this software is used by a non-expert user to acquire some
information. It is widely used in many areas such as medical diagnosis, accounting,
coding, games etc.
An expert system is an DSS software that uses knowledge stored in a
knowledge base to solve problems that would usually require a human expert thus
preserving a human expert’s knowledge in its knowledge base. They can advise
users as well as provide explanations to them about how they reached a particular
conclusion or advice.
Examples: There are many examples of expert system:
 MYCIN: One of the earliest expert systems based on backward chaining. It
can identify various bacteria that can cause severe infections and can also
recommend drugs based on the person’s weight.
 DENDRAL: It was an artificial intelligence based expert system used for
chemical analysis. It used a substance’s spectrographic data to predict it’s
molecular structure.
 R1/XCON: It could select specific software to generate a computer system
wished by the user.
 PXDES: It could easily determine the type and the degree of lung cancer in a
patient based on the data.
 CaDet: It is a clinical support system that could identify cancer in its early
stages in patients.
 DXplain: It was also a clinical support system that could suggest a variety of
diseases based on the findings of the doctor.

Components of an expert system:

 Knowledge base: The knowledge base represents facts and rules. It consists

of knowledge in a particular domain as well as rules to solve a problem,
procedures and intrinsic data relevant to the domain.
 Inference engine: The function of the inference engine is to fetch the relevant
knowledge from the knowledge base, interpret it and to find a solution relevant
to the user’s problem. The inference engine acquires the rules from its
knowledge base and applies them to the known facts to infer new facts.
Inference engines can also include an explanation and debugging abilities.
 Knowledge acquisition and learning module: The function of this
component is to allow the expert system to acquire more and more knowledge
from various sources and store it in the knowledge base.
 User interface: This module makes it possible for a non-expert user to
interact with the expert system and find a solution to the problem.
 Explanation module: This module helps the expert system to give the user
an explanation about how the expert system reached a particular conclusion.

Characteristics of an expert system:

 Human experts are perishable but an expert system is permanent.
 It helps to distribute the expertise of a human.
 One expert system may contain knowledge from more than one human
experts thus making the solutions more efficient.
 It decreases the cost of consulting an expert for various domains such as
medical diagnosis.
  They use a knowledge base and inference engine.
 Expert systems can solve complex problems by deducing new facts through
existing facts of knowledge, represented mostly as if-then rules rather than
through conventional procedural code.
 Expert systems were among the first truly successful forms of artificial
intelligence (AI) software.
Limitations:
 Don’t have human-like decision making power.
 Can’t possess human capabilities.
 Can’t produce correct result from less amount of knowledge.
 Requires excessive training.
Advantages:
 Low accessibility cost.
 Fast response.
 Not affected by emotions unlike humans.
 Low error rate.
 Capable of explaining how they reached a solution.
Disadvantages:
 Expert system have no emotions.
 Common sense is the main issue of the expert system.
 It is developed for a specific domain.
 It needs to be updated manually. It does not learn itself.
 Not capable to explain the logic behind the decision.
Benefits of Expert Systems:-

 Availability − They are easily available due to mass production of software.

 Less Production Cost − Production cost is reasonable. This makes them affordable.

 Speed − They offer great speed. They reduce the amount of work an individual puts
in.

 Less Error Rate − Error rate is low as compared to human errors.

 Reducing Risk − They can work in the environment dangerous to humans.

 Steady response − They work steadily without getting motional, tensed or fatigued.

Role of Expert System in DSS:-

The expert system offers the highest level of expertise. It provides efficiency, accuracy and
imaginative problem-solving.

An expert system is capable of handling challenging decision problems and delivering

solutions.

Limitations of Expert system:

 Don’t have human-like decision making power.

 Can’t possess human capabilities.
 Can’t produce correct result from less amount of knowledge.
 Requires excessive training.

8. Knowledge based system:-

A knowledge-based system (KBS)  aims to capture the knowledge of human experts

to support decision-making. Examples of knowledge-based systems include expert
systems, which are so called because of their reliance on human expertise.

9. Types of decision making:-

There are different types of decision-making at different levels.

Decisions can be classified as:-

 Structured
 Semistructured
 unstructured.

Unstructured decisions:-

 unstructured decisions are made under the emergent situation, for example fire
breakout.
 unstructured decisions are creative and they are not preplanned for example if
fire break there and then manager can make decision unplanned.
 unstructured decisions the situations are uncertain and unclear. 
 unstructured decisions are made for a sudden one-shot kind of situations, for
instance, dealing with a labor strike in a factor
 unstructured decisions are made for general processes.
 Unstructured decision rely on knowledge and/or expertise and often require
data and models to solve, an example of an unstructured decision in my
company is what types of new content should be created and what market
should be targeted.

Structured decisions:-

 Structured decisions are the decisions which are made under the established
situations for example hiring a new employee
 Structured decisions are the programmable decisions and they are preplanned
for example the payroll for employees
 Structured decisions are made in the situations which are fully understood.
 Structured decisions are generally made for routine tasks, for instance the
hiring of new IT specialists in a firm
  Structured decisions are made for specified processes like specialized
manufacturing processes 
 Structured decisions have a well defined methodology for finding a solution
and have the data to reach a decisions. They are usually straight forward and
made on a regular basis, an example of a structured decision in my company is
whether or not to withdraw funds from an international account depending on
the current exchange rate

Semistructured decisions are those in which only part of the problem has a clear-cut answer
provided by an accepted procedure.

In general, structured decisions are more prevalent at lower organizational levels, and
unstructured decision making is more common at higher levels.

10. There are four different decision-making constituencies in a firm:

(1) senior management;

(2) middle management and project teams;

(3) operational management and project teams;

(4) individual employees.

11. OR Modelling: -

Linear programming: It is a mathematical technique by which the limited resources of an

organisation are allotted in optimal solution. The process of involve either maximization or
minimization of the objective function which is bounded by the constraint of the problem.
Linear programming carried out by using either the graphic method of the simplex method.

Simulation: - Simulation is a process of finding solution to complex artificial and natural

system by approximately formulating a model of the same and by experimenting on it. The
process of simulation involves development of model as the basis of experimentation.
Simulation methods are widely used in various areas like computer aided circuit design
factory automation ecological system and engineering etc.

Project Scheduling techniques: -

PERT (Project Evaluation and research technique)

CPM (Critical Path Method)

Pert and CPM are the widely used adopted method for the purpose of planning and
controlling and scheduling the task.

The rational decision-making model 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 you want
to make sure that you make the best choice, going through the formal steps of the rational
decision-making model may make sense.
Let’s imagine that your old, clunky car has broken down, and you have enough money saved
for a substantial down payment on a new car. It will be the first major purchase of your life,
and you want to make the right choice. The first step, therefore, has already been completed
—we know that you want to buy a new car. Next, in step 2, you’ll need to decide which
factors are important to you. How many passengers do you want to accommodate? How
important is fuel economy to you? Is safety a major concern? You only have a certain amount
of money saved, and you don’t want to take on too much debt, so price range is an important
factor as well. If you know you want to have room for at least five adults, get at least 20 miles
per gallon, drive a car with a strong safety rating, not spend more than $22,000 on the
purchase, and like how it looks, you have identified the decision criteria. All the potential
options for purchasing your car will be evaluated against these criteria. Before we can move
too much further, you need to decide how important each factor is to your decision in step 3.
If each is equally important, then there is no need to weigh them, but if you know that price
and mpg are key factors, you might weigh them heavily and keep the other criteria with
medium importance. Step 4 requires you to generate all alternatives about your options. Then,
in step 5, you need to use this information to evaluate each alternative against the criteria you
have established. You choose the best alternative (step 6), and then you would go out and buy
your new car (step 7).

Of course, the outcome of this decision will influence the next decision made. That is where
step 8 comes in. For example, if you purchase a car and have nothing but problems with it,
you will be less likely to consider the same make and model when purchasing a car the next
time.
Figure 11.5 Steps in the Rational Decision-Making Model
While decision makers can get off track during any of these steps, research shows that
searching for alternatives in the fourth step can be the most challenging and often leads to
failure. In fact, one researcher found that no alternative generation occurred in 85% of the
decisions he studied. Conversely, successful managers know what they want at the outset of
the decision-making process, set objectives for others to respond to, carry out an unrestricted
search for solutions, get key people to participate, and avoid using their power to push their
perspective.

The rational decision-making model has important lessons for decision makers. First, when
making a decision, you may want to make sure that you establish your decision criteria before
you search for alternatives. This would prevent you from liking one option too much and
setting your criteria accordingly. For example, let’s say you started browsing cars online
before you generated your decision criteria. You may come across a car that you feel reflects
your sense of style and you develop an emotional bond with the car. Then, because of your
love for the particular car, you may say to yourself that the fuel economy of the car and the
innovative braking system are the most important criteria. After purchasing it, you may
realize that the car is too small for your friends to ride in the back seat, which was something
you should have thought about. Setting criteria before you search for alternatives may prevent
you from making such mistakes. Another advantage of the rational model is that it urges
decision makers to generate all alternatives instead of only a few. By generating a large
number of alternatives that cover a wide range of possibilities, you are unlikely to make a
more effective decision that does not require sacrificing one criterion for the sake of another.
Despite all its benefits, you may have noticed that this decision-making model involves a
number of unrealistic assumptions as well. It assumes that people completely understand the
decision to be made, that they know all their available choices, that they have no perceptual
biases, and that they want to make optimal decisions. Nobel Prize winning economist Herbert
Simon observed that while the rational decision-making model may be a helpful device in
aiding decision makers when working through problems, it doesn’t represent how decisions
are frequently made within organizations. In fact, Simon argued that it didn’t even come
close.

Think about how you make important decisions in your life. It is likely that you rarely sit
down and complete all 8 of the steps in the rational decision-making model. For example, this
model proposed that we should search for all possible alternatives before making a decision,
but that process is time consuming, and individuals are often under time pressure to make
decisions. Moreover, even if we had access to all the information that was available, it could
be challenging to compare the pros and cons of each alternative and rank them according to
our preferences. Anyone who has recently purchased a new laptop computer or cell phone
can attest to the challenge of sorting through the different strengths and limitations of each
brand and model and arriving at the solution that best meets particular needs. In fact, the
availability of too much information can lead to analysis paralysis, in which more and more
time is spent on gathering information and thinking about it, but no decisions actually get
made. A senior executive at Hewlett-Packard Development Company LP admits that his
company suffered from this spiral of analyzing things for too long to the point where data
gathering led to “not making decisions, instead of us making decisions.” Moreover, you may
not always be interested in reaching an optimal decision. For example, if you are looking to
purchase a house, you may be willing and able to invest a great deal of time and energy to
find your dream house, but if you are only looking for an apartment to rent for the academic
year, you may be willing to take the first one that meets your criteria of being clean, close to
campus, and within your price range.

Making “Good Enough” Decisions

The bounded rationality model of decision making recognizes the limitations of our decision-
making processes. According to this model, individuals knowingly limit their options to a
manageable set and choose the first acceptable alternative without conducting an exhaustive
search for alternatives. An important part of the bounded rationality approach is the tendency
to satisfice (a term coined by Herbert Simon from satisfy and suffice), which refers to
accepting the first alternative that meets your minimum criteria. For example, many college
graduates do not conduct a national or international search for potential job openings. Instead,
they focus their search on a limited geographic area, and they tend to accept the first offer in
their chosen area, even if it may not be the ideal job situation. Satisficing is similar to rational
decision making. The main difference is that rather than choosing the best option and
maximizing the potential outcome, the decision maker saves cognitive time and effort by
accepting the first alternative that meets the minimum threshold.

Making Intuitive Decisions

The intuitive decision-making model has emerged as an alternative to other decision making

processes. This model refers to arriving at decisions without conscious reasoning. A total of
89% of managers surveyed admitted to using intuition to make decisions at least sometimes
and 59% said they used intuition often. Managers make decisions under challenging
circumstances, including time pressures, constraints, a great deal of uncertainty, changing
conditions, and highly visible and high-stakes outcomes. Thus, it makes sense that they
would not have the time to use the rational decision-making model. Yet when CEOs,
financial analysts, and health care workers are asked about the critical decisions they make,
seldom do they attribute success to luck. To an outside observer, it may seem like they are
making guesses as to the course of action to take, but it turns out that experts systematically
make decisions using a different model than was earlier suspected. Research on life-or-death
decisions made by fire chiefs, pilots, and nurses finds that experts do not choose among a list
of well thought out alternatives. They don’t decide between two or three options and choose
the best one. Instead, they consider only one option at a time. The intuitive decision-making
model argues that in a given situation, experts making decisions scan the environment for
cues to recognize patterns. Once a pattern is recognized, they can play a potential course of
action through to its outcome based on their prior experience. Thanks to training, experience,
and knowledge, these decision makers have an idea of how well a given solution may work.
If they run through the mental model and find that the solution will not work, they alter the
solution before setting it into action. If it still is not deemed a workable solution, it is
discarded as an option, and a new idea is tested until a workable solution is found. Once a
viable course of action is identified, the decision maker puts the solution into motion. The
key point is that only one choice is considered at a time. Novices are not able to make
effective decisions this way, because they do not have enough prior experience to draw upon.

Making Creative Decisions

In addition to the rational decision making, bounded rationality, and intuitive decision-
making models, creative decision making is a vital part of being an effective decision
maker. Creativity is the generation of new, imaginative ideas. With the flattening of
organizations and intense competition among companies, individuals and organizations are
driven to be creative in decisions ranging from cutting costs to generating new ways of doing
business. Please note that, while creativity is the first step in the innovation process, creativity
and innovation are not the same thing. Innovation begins with creative ideas, but it also
involves realistic planning and follow-through. Innovations such as 3M’s Clearview Window
Tinting grow out of a creative decision-making process about what may or may not work to
solve real-world problems.

The five steps to creative decision making are similar to the previous decision-making
models in some keys ways. All the models include problem identification, which is the step
in which the need for problem solving becomes apparent. If you do not recognize that you
have a problem, it is impossible to solve it. Immersion is the step in which the decision maker
consciously thinks about the problem and gathers information. A key to success in creative
decision making is having or acquiring expertise in the area being studied. Then, incubation
occurs. During incubation, the individual sets the problem aside and does not think about it
for a while. At this time, the brain is actually working on the problem unconsciously. Then
comes illumination, or the insight moment when the solution to the problem becomes
apparent to the person, sometimes when it is least expected. This sudden insight is the
“eureka” moment, similar to what happened to the ancient Greek inventor Archimedes, who
found a solution to the problem he was working on while taking a bath. Finally, the
verification and application stage happens when the decision maker consciously verifies the
feasibility of the solution and implements the decision.
Figure 11.6 The Creative Decision-Making Process
A NASA scientist describes his decision-making process leading to a creative outcome as
follows: He had been trying to figure out a better way to de-ice planes to make the process
faster and safer. After recognizing the problem, he immersed himself in the literature to
understand all the options, and he worked on the problem for months trying to figure out a
solution. It was not until he was sitting outside a McDonald’s restaurant with his
grandchildren that it dawned on him. The golden arches of the M of the McDonald’s logo
inspired his solution—he would design the de-icer as a series of Ms.In person interview
conducted by author Talya Bauer at Ames Research Center, Mountain View, CA, 1990. This
represented the illumination stage. After he tested and verified his creative solution, he was
done with that problem, except to reflect on the outcome and process.

How Do You Know If Your Decision-Making Process Is Creative?

Researchers focus on three factors to evaluate the level of creativity in the decision-making
process. Fluency refers to the number of ideas a person is able to generate. Flexibility refers
to how different the ideas are from one another. If you are able to generate several distinct
solutions to a problem, your decision-making process is high on flexibility. Originality refers
to how unique a person’s ideas are. You might say that Reed Hastings, founder and CEO of
Netflix Inc. is a pretty creative person. His decision-making process shows at least two
elements of creativity. We do not know exactly how many ideas he had over the course of his
career, but his ideas are fairly different from each other. After teaching math in Africa with
the Peace Corps, Hastings was accepted at Stanford, where he earned a master’s degree in
computer science. Soon after starting work at a software company, he invented a successful
debugging tool, which led to his founding of the computer troubleshooting company Pure
Software LLC in 1991. After a merger and the subsequent sale of the resulting company in
1997, Hastings founded Netflix, which revolutionized the DVD rental business with online
rentals delivered through the mail with no late fees. In 2007, Hastings was elected to
Microsoft’s board of directors. As you can see, his ideas are high in originality and flexibility.

Figure 11.7 Dimensions of Creativity

Some experts have proposed that creativity occurs as an interaction among three factors:
people’s personality traits (openness to experience, risk taking), their attributes (expertise,
imagination, motivation), and the situational context (encouragement from others, time
pressure, physical structures). For example, research shows that individuals who are open to
experience, less conscientious, more self-accepting, and more impulsive tend to be more
creative.