The Decision Making Process and Tools

• Management is more/less a centre where

decisions are made.
• 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)
 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
Alternative Methods State A (0.34) State B (0.45) State C (0.21)

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
 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.