2.

2 DECISION MAKING : INTRODUCTION AND DEFINITION

We are about to examine how decision making is practiced and the underlying theories and
models of decision making. You will also learn about the various traits of decision makers,
including what characterizes a good decision maker. Knowing this can help yau to understand
the types of decision support tools that managers can use to make more ecffective decision. In
the following sections, we discuss various aspects of decision making.

CHARACTERISTICS OF DECISION MAKING

In addition to the characteristics presented in the opening vignette, decision making my

involve the following :

1. groupthink, (i.e., group members accept the solution without thinking for themselves)
can lead to bad decision.
2. Decision maker are interested in evaluating what-if scenarios.
3. Experimentation with a real system (e.g., develop a schedule, try it, and see how well
it works) many result in failure.
4. Experimentation with a real system is possible only for one set f conditions at a time
and can be disastrous.
5. Changes in decision-making environment may occur continuosly, leading to
invalidating assumptions about a situation (e.g., deliveries around holiday times may
increase, requiring a different view of the problem).
6. Changes in decision-making environment may effect decision quality by imposing
time pressure on the decision maker.
7. Collecting information and analyzing a problem takes and can be expensive. It is
difficult to determine when to stop and make a decision.
8. There may not be sufficient information to make an intelligent decision.
9. Too much informasion may be available (i.e., information overload).

Untimately, we want to help decision makers make better decision (e.g., see Churchman,
1982). However, making better decisions does not necessarily mean making decisions
more quickly. The fast-changing business environment often requires faster decisions,
which may actually be detrimental to decision quality. One study asked managers which
areas suffered most when fast decision making was required (Horgan, 2001). The areas
that managers identified as suffering most when fast decision making included
personnel/human resource (27%), budgeting/finance (24%), organizational structuring
(22%), quality/productivity (20%), information technology (IT), selection and installation
(17%), and proccess improvement (17%).
To determine how real decision maker make decisions, we must understand the proccess
and the important issues involved in decision making. The we can understand appropriate
methodelogies for assisting decision makers and the contributions information systems
can make. Only then can we develop DSS to help decision makers.

This chapter is orgnized based on the three key words that form the term DSS : decision,
support, and systems. A decision maker should not simply apply to IT tools blindly.
Rather, the decision maker gets support through a rational approach that simplifies reality
and provides a relatively quick and inexpensive means of considering various alternative
courses of action to arrive at the best (or at least a very good) solution to the problem.

A WORKING DEFINITION OF DECISION MAKING

Decision making is a proccess of choosing among two or more alternative courses of

action for the purpose of attaining one or more goals. According to simon (1977),
managerial decision making is synonymous with the entire management proccess.
Consoder the important managerial function of planning. Planning involves a series of
decisions : what should be clone? When? Where? Why? How? By whom? Managers set
goals, or planhence, planning implies decision making. Other managerial functions, such
as orgnizing and controlling, aolso involve decision making.

DECISION MAKING AND PROBLEM SOLVING

A problem occurs when a system does not meet its established goal, does not yield the
predicted result, or does not work as planned. Problem solving may also dela with
identifying new opportunities. Differentiating the term decision making and problem
solving can be cinfusing. One way to distringuish between the two is to examine the
phases of the decision proccess (see chapter 1) : (1) intelligence, (2) design, (3) choice
and, (4) implementation. Some consider the entire proccess (phases 1-4) as problem
solving, with the choice phase as the real decision-making proccess. Other view phases
1-3 as formal decision making, ending ith a recommendation, with problem solving
additionally including the actual implementation of the recommendation (phases 4). Note
that a problrm may include situation in which a person must decide which aopportunity to
exploit

In this book, we use the term decision making and problem solving interchangeably
DECISION-MAKING DISCIPLINES

Decision making is directly indluenced by sevral major disciplines, some of which are
behavioral and some of which are scientific in nature. We mist be aere of how their
philosophies can effect our ability to make decisions and provide support. Behavioral
disciplines include anthropology, law, philosophy, polotical science, psychology, social
psychology and sociology. Scientific disciplines include computer science, decision
analysis, economic, engineering, the hard science (e.g., biology, chemeistry, physics),
management science/operation research, mathematic, and statistic.

Each discipline has its own set of assumption about reality and methods. Each also
contributes a unique, valid view of how people make decisions. Finally, a lot of variation
exists as to what constitutes a succcessful decision in practice. For example, Grainer
(2002) discussed the 75 greates management decisions ever made. All of them were
succcessful for a member of reasons, some serendipitous. Other great decision, such as
building the the Great Wall of Cina, made good sense at the time (Grainer consudered it a
success) but actually failed in practice becouse of bad manegerial practice. Other
decisions eventally failed as well.

An important characteristic of management support systems (MSS) is their emphasis on

the effectiveness, or goodness, of the decision produced rather that on the
computational efficiency of obtaining it ; this is usually a major concern of a transaction
proccessing system. Most Web-based DSS are focused on improving decision
effectivenss. Efficiency may a by-product.

DECISION STYLE AND DECISION MAKERS

In teh following section, we examine the nation of decision style and specific aspects
about decision maker.

DECISION STYLE decision style is the manner by which decision makers think and
responses, and how values and benefit vary from individual to individual and from
situation to situation. As a result, poeple make decision in different ways. Althrough
there is gneral proccess of decision making, it is far from linear. Poeple do follow the
same steps of the proccess in the same sequence, nor do they use all the steps.
Furthemore, the emphasis, time allotment and priorities given to each step vary
significantly, not only from one person to another, but also from one situationto the next.
The manner in which managers make decisions (and the way they interact with other
poeple) describes their decision style. Because there are many such tests, it is important to
try to equated them in determning decision style. However, the caruous tests measure
somewhat different aspects of personality, so they cannot be equated.

Researchers have identifed a number of decison-making style. These include heuristic and
analytic styles. One can also distinguish between autocratic versus democratic styles.
Another styles is consultative (with indivduals or groups). Of course, there are many
combinations and varriations of styles. For example, aperson can be nalalytic and
autocratic, or consultative (with indivduals) and heuristic.

For a computerized system to successfully support a manager, it should fit the decision
situation as well as the decision style. Therefore, the system should bi flexible and
adaptable to different user. The ability to ask what-if and goal-seeking questions provides
flexibility in this decision. A Web-based interface using graphics is a desirable feature ini
supporting certain decision style. If an MSS is to support varying style, skill, and
knowledge, it should not attempt to to enfoce a spesific proccess. Rather, is should help
decision makers use and develop their own styles, skill, and knowledge.

Different decision styles required different types of support. A major factor that
determines the type of support required is whether the decision maker is na individual or
a group. Individual decision makers need access to data and to experts who can provide
advice, whereas groups additionally need collaboration tools, Web-based MSS can
provide support to both.

A lot of information is available on the wwb about cognitivi styles and decision styles
(e.g., see Birkman International, Inc., birkman.com; Keirsey Temperamen Sorter and
Keirsey Temperament Thoery, keirsey.com). many perosnallity/temperament tests are
available to help managers identify their own the most effective communication patterns
and ideal tasks for which the person is suited.

DECISION MAKERS decisions are often made by individual, especially at lower

managerial levels and i small organizations. There may be conficting objectives even for
a sole decision maker. For example, when making an investment decision an individual
investor may consider the are of return on the investment, liquidity, and safery as
objectives. Finally, decisions may be fully automated (but only after a human decision
maker decides to do so!).

This discusion of decision making focuses in large part on an individual decisio maker.
Most major decision in medium- sized and large organizations are made by groups.
Obviously, there are often conflicting objectives in a group decision-making setting.
Groups can be of variable size and may include poeple from different departements or
from defferent organizations. Collaborating individual may yhave different cognitive
styles, personality types, and decision styles. Some clash, whereas others are matually
enhacing. Consenseus can be a dificult pilotocal problem. Therefore, the proccess of
decision making by a group can be very complicated. Computerized support can greatly
enhance group decision making. Computer support can be provides at a broad level,
enabling member of whole departements, deivisions, or even entire organizations to
collaborate online. Such support has evolved over the past few years into enterprise
information systems (EIS) and include group support systems (GSS), enterprise resource
management (ERM)/enterprise resource planning (ERP), supply chin management
(SCM), kwnoledge management systems (KMS), and cuntomer relationship management
(CRM) systems.

2,4 PHASES OF THE DECISION-MAKING PROCCESS

It is advisable to follow a systematic decision-making proccess. Simon (1977) said that

this involves three major phases : intelligence, design, and choice. He leter added a fourth
phase, implementation, monitoring can be considered a fifth phasea form of feddback.
However, we view monitoring as the intelligence phase applied to the impementation
phase. Simons model is the most concise and yet complete characterization of rational
decision making. A conceptual pictureof the decision-making proccess is shown in Figure
2.1.
There is a conntinuous flow of activity from intelligence to design to choice (see the bold
line in Figure 2.1), but at any phase, there may be a return to a prevuous phase
(feedback). Modeling is an essential part of this proccess. The seemingly chaotic nature of
following a haphazard path from problem discovery to solutionn via decision maikng can
be explained by these feedback loops.

The decision-making proccess starts with intelligence phase; in this phase, the decision
maker examine reality and identifies and defines the problem. Problem ownership is
estabilished as well. In the design phase, a model that represents the system is
constructed. This is done by making assumptions that simplify reality and writing down
the ralationships among all the variables. The model is then validatd, and criteria are
determined in a priciple of choice for evaluation of the altrenative course of action that
are idintified. Often, the proccess of model development idintifies altrenative solutions
and viceversa.

The choice phase includes selection of a proposed solution to the model (not necessarity
to the problem it represents). This solution is tested to determine its viability. When the
propesed solution seems reasonable, we are ready for the last phases : implementation of
thedecision (not necessarity of a system). Successful implementation results in solving the
real problem. Failure leads to a return to an earlier phase of the proccess. In fact, we can
return to an earlier phase during any for the latter three phases. The decision-making
situations described in the opening vignette and the MSS running case (in Online File
W2.1) follow Simons four-phase model, as do almost all other decision-making
situations. Web impacts on the four phases, and vice versa, and are shown in table 2.1.

Note that there are many other decision-making models. Notable among them is the
Kepner-Tregoe mothod (Kepner and Tregoe, 1998), which has been adopted by many
firm because its tools are readily available from Kepner-Tregoe, Inc. (kepner-tregoe.com;
also see Bazerman, 2005). We have found that these alternativ models, including the
Kepner-Tregoe mothod, readily, map into Simons four-phase model.
Even through ultimately a human decision maker is responsible for every desicion,
automated systems have evelvod to help business make decision more produtively and
consistently. A complication in the business environment is that decision often must be
made frequenyly and rapidly untilizing online information. Typically, these problem are
highly structured. Yhe insurance indutry wan one of the firs to adopt such automated
decision-making (ADM) technology. It uses ADM in underwriting, but utilizes rules-
based technology. For details on ADM decision making, see Devenport (2004) and Indart
(2005).

We next turn to a detailed discussion of the four phases illustrated by the MSS running
case described in Online File W2.1. note that Online File W2.1 has dour distinctparts,
corresponding to Simons four phases of decision making.

2.5 DECISION MAKING : THE INTELLIGENCE PHASE

Intelligance in decision making involves scanning the environment, either intermittently

or continuously. Is includes several activities aimed at identifying problem situations or
opportunities. It may also include monitoring the result of the implementation phase of a
decision-making proccess. (See the MMs running case situations in Online File W2.1).

Problem (or Opportunity) Identification

The intelligence phase begins with the indentification of orgnizational goals and
objectives related to an issue of concern (e.g., invntory management, job selection, lack of
or incorrect Wb presence) and determination of whether they are being met. Problem
occur because of dissatisfaction with the status quo. Dissatisfaction is the result of a
difference between what poeple desire (or expect) and what is occurring. In this first
phase, a decision maker attempts to determine whether a problem exists,identify its
symptonms, determine its magnitude, and explicitly define it. Often, what is described as
a problem (e.g., excessive costs) may be only a symptom (i.e., measure) of a problem
(e.g., improper inventory levels). Beacause reala-world problem are usually complicated
by may interrelated factors, it is sometimes difficult to distinguish between the symptoms
and the real problem, as described in the MMS running case in Online File W2.1.1. new
opportunities and problem certainly may be uncovered while investigating the causes of
symptoms. Foe example, Application case 2.1 described a classic story of recognizing the
correct problem.
The existence of a problem can be determined by monitoring and analyzing the
organizations productivity level. The measurement of productivity an the construction of
model are based on real data. The collection of data and the estimation of future data are
among the most difficult steps in the nalalysis. The following are some that may arise
during data collection and estimation andthus plague decision makers :

1. Data are not available, as a result, the model is made with, and relies on, potentially
inaccurate estimation.
2. Obtaining data may be expensive.
3. Data may not be accurate or precise enough.
4. Data estimation is often subjective.
5. Data may be insecure.
6. Important data that influence the result may be qualitative (soft).
7. There may be too many data (i.e., information overload).
8. Outcome (or result) may occur over an extanded period. As a result, revenues,
expenses, and profit will be recorded at diffirent point in time. To overcome this
difficulty, a present value approach can be used if the resul are quantifiable.
9. It is assumed that future data will be similar to historical data. If this not the case, the
nature of the change has to be predicted and included in the analysis.

When the preliminary investigation is completed it is possible to determine whether a

problem really exists, where it is located, and how significant it is. A key issue is whether
an information system is reporting a problem or only the symptoms of a problem. For
example, un the MMS running case (see Online W2.1), sales are down; there is a
problem, but the situation, not doubt, is symptomatic of the problem. Also, as suggested
in the opening vignette, it is critical to know the real problem. Sometimes it may be a
problem of percerption, incentive mismatch, or organization proccess rather that a poor
decision model.

Problem Classification

Problem classification is the conceptualization of a problem in an attempt to place it in a

definable category, possiibly leading to a standard solution approach. An important
approach classsifies problem according to the degree of structuredness evident in them.
Tis ranges from totally structured (i.e., programmed) to totally unstructured (i.e.,
unprogrammed), as described in chapter 1.

Peoblem Decomposition
Many complex problem can be devided into subproblem. Solving the simpler
subproblems may help in solving a complex problem. Also, seemingly poorly structured
problem sometimes have highly structured subproblem. Just as a semistructured problem
result when some phases of decision making are structured whereas other phases
areunstructure, so when some subproblem of the decision making problem are structured
with other unstructured, the problem itself is semistructured. As a DSS is developed and
decision maker and development staff learn more about the problem, it gains strusture.
Decomposition also facilitates communication among decision makers. Decomposition is
one the most importan aspects of the analytical hierarchy proccess (AHP is discussed in
chapter 4; see Bhuushan and Rai, 2004; Forman and Sally, 2001; Aaty, 2001; and
experchoice.com), which helps decision makers incirporate both qualitativ and
quantitative factors into their decision making models. In the MMS running case (see
Online File W2.1), several aspects need to be investigated : advertising, sales, new car
acquisition, and so on. Each of these is a subproblem that interacts with the other.

Problem Ownership

In the intelligence phase, it is important to establish problem ownership. A problem exists

in an organization only if someone or some group takes in the responsbility of attacking
it and if the organization has the abilitty to solve it. The assignment of authority to solve
the problem is called problem ownership. For example a manager may feel that her or
she has a problem because interest rates are too high. Because interest rate levels are
determined at the natioanal and international levels, and most managers can do nothing
about them, high interest rates are teh problem of the government, not a problem for a
specific company to solve. The problem campanies actually face is how to operate in a
high interest rate environment. For an individual company, the interest rat level should be
handle as an uncontrollable (environmental) factor to be presicted.

When problem ownership is not established, either someone is not doing his or her job or
the problem at hard has yet to be identified as belonging to anyone. It is then important
for someone to either volunteer ro own it or assign it to someone. This was done, very
clearly, in the MMS running case (see Online File W2.1).

The intelligence phase ends with a formal problem statement.

2.6 DECISION MAKING : THE DESIGN PHASE

The design phase involves finding or developing and analyzing possible couses of action.
There include understanding the problem and testing solutions for feasibility. A model of
the decision making problem is constructed, tested, and validated. (see the MMS running
case in Online File W2.1).

Modeling involves concepstualizing a problem and abstracting it to quantitative and/or

qualitative form (see chapter 4). For a mathematical model, the variable are identified,
and their mutual relationship are established. Simplifications are made, whenever
necessary, through assumptions. For example, a relatioship between two variable may be
assumed to be linear even through in reality there may be some nonlinear effects. A
proper balance between the level of model simplification and the representation of reality
must be obtained because of the cost-benfit trade-off. A simpler model leads to lower
developmenr costs, easier nmanipulation, and a faster solution but is less representativ of
the real problem and can produreinaccurate result. However, a simpler model generally
requires fewee data, or the data are aggregated and easier to obtain.

The process of modeling is a combination of art and science. As a science there are many
standard model classes available, and with practice, and analyst can determine which one
is applicable to a given situation. As an art, creativity and finesse are required when
determining what simplifying assumption can work, how to combine appropriate features
of the model classer, and how to integrate models to obtain valid solutions. In the MMS
running case (see Online File W2.1.1 through W2.1.4), the problem at hand was very
vague : the MMS team investigated the data to develop an understanding that was more
of a mental model of the situation, as teams are wont to do in such a situation. Models
were indeed used and tested, but they were not describe in the MMS running case.
Models have decision variables that describe the alternative from among which a
manager must choose (e.g., how many cars to deliver to a specific rental agency, how to
advertise at specific times, which Web server to buy or lease), a result variable or a set of
result variables (e.g., profit, revenue, sales) that describe the objective or goal of the
decision making problem, and uncontrollable variable or parameters (e.g., ecomonic
conditions) that describe the environment. The process of modeling in volves determining
the (usually mathematical, someone symbolic) relatioship among the variable. These
topics are discussed in Chapter 4.