Business Analytics - Course Description

Introduction to Business Analytics
Unit 5: Decision-Making
Table of Contents
1. Introduction to the Unit
2. Objectives
3. What is a Decision-Making Process?
4. Importance of Effective Decision-Making
5. Characteristics of the Analytical Decision-Making Process
6. Factors Influencing Decision-Making
7. Decision-Making Models
8. Types of Decision-Making Processes
9. Analytical Decision-Making Process
10. Analytical Decision-Making Skills
11. Decision Trees
12. Case Study
13. Summary
14. Check Your Understanding
15. Glossary
Introduction to the Unit

We all face choices in our daily lives, from deciding what to eat to what career path we want to
follow.
Employees and managers in an organisation frequently need to select an option from several
alternatives. These decisions are time-bound and must be made after weighing the benefits
and challenges of each alternative.
This unit will help you understand the meaning and importance of making decisions. There are
different methods used to arrive at a solution, based on various criteria such as time, resources
and the approach used to arrive at a solution. This unit also compares the analytical method of
decision-making with other approaches to problem-solving.
You will also learn about the skills required for one to make analytical decisions.
Objectives
Upon completion of this unit, you will be able to:
 Explain the decision-making process and its characteristics

 List the factors that influence decision-making
 Identify the decision-making model or style used in a particular scenario
 Recognise the decision-making process followed in a given scenario
 Identify the steps in the analytical decision-making process
 Distinguish between the analytical approach and the other approaches to problem-solving
Unit 5: Decision-making 1
 Identify the skills a decision-maker require for analytical decision-making

 Identify common errors in the decision-making process
 Explain the significance of using Decision Trees in problem-solving
What Is a Decision-Making Process?

Making a decision is an act of selecting an option that gives the highest probability of
effectiveness and success from the other available alternatives. Decision-making involves a
mix of cognitive and social psychology.
In today’s business environment, employees and managers must make the right decisions
amid rapid change, greater complexity, uncertainty and specific time frames. Before making a
decision, an individual or a team collects the data relevant to each alternative. The pros and
cons of each alternative are analysed with their possible outcomes. Then, a decision is arrived
at after taking into consideration the outcome and its impact on the relevant resources. Figure
5.1 illustrates the structure of a typical decision-making process in an organisation.
Stage 1 Stage 2 Stage 3 Stage 4

Identify the Generate Select the Implement
problem possible optimal and assess
solutions solution the solution
Figure 5.1: Decision-Making Process
Stage 1: Identify the problem
In the first stage, the problem and its causes are identified. A problem may be linked to other
related problems. Therefore, it is necessary to prioritise and isolate the main problem from the
smaller ones. The focus must be to find solutions for the problems and improve the present
situation.
Stage 2: Generate possible solutions

In the second stage, decision-makers focus on getting alternative solutions to the problem. To
do this, facts relevant to the problem are collected and analysed. Alternative solutions are
arrived at by weighing their pros and cons and eliminating the ones that are not beneficial to
the organisation.
Stage 3: Select the optimal solution

This is the decision-making stage. Here, the choices are narrowed down again by eliminating
solutions that do not fully solve the problem. Decision-makers evaluate the solutions and select
the best alternative that gives the optimal level of effectiveness. It is important to remember
that at this stage the decision taken is final and decision-makers cannot be ambiguous in their
reasons for selecting the solution.
Stage 4: Implement and assess the solution

In the fourth stage, the solution is implemented. It is monitored and evaluated to assess its
effectiveness. An effective solution must close the gap between the estimated and actual
outcome of the solution.
In today’s competitive world, time is money. Delays in making decisions or taking the wrong
ones can cost an organisation in terms of finance and human resources. This, in turn, can lead
to a downturn in the organisation’s progress. Conversely, a good decision saves an
organisation’s time and resources.
Importance of Effective Decision-Making

You have learnt how the decision-making process leads to selecting the best solution.
Selecting an optimal solution is important because it impacts the resources that are involved in
the problem. The effect may be short-term or long-term, positive or negative. The following
aspects describe the impact of effective decision-making:
Optimum utilisation of available resources

An organisation operates on money, men, material, machines, methods and markets. Carefully
made decisions ensure that these resources are used efficiently and effectively.
Ability to solve new challenges

The process of carefully analysed decisions leaves a positive impact on the organisation
which, in turn, motivates the employees to the challenge when new problems arise. Rather
than basing a solution on precedence, a manager can think of a creative decision-making
process to find an innovative solution.
Growth of the organisation

Correct decisions lead to utilising resources in an efficient and effective way. This results in
resources being able to make decisions faster and wisely. This helps an organisation to grow.
Achieving the organisation’s aims and objectives

Correct decisions are based on logic and the values of the organisation. These decisions are in
alignment with the organisation’s aims and objectives.
Increase in efficiency of the resources of an organisation

When the resources of an organisation are effectively and efficiently utilised, it results in an
increase in efficiency. Therefore, if the returns are high while the cost is low, the organisation
reaches a higher level of efficiency.
Boost in innovative thinking

Decisions based on logic and rational thinking encourage employees to explore new ideas. An
organisation that is innovative always has an edge over its competitors.
Characteristics of the Analytical Decision-Making Process

The following are the characteristics of a decision-making process:
 Process of selection
The crux of the decision-making process is to select the best possible solution out of
the other available solutions. The need for decision-making occurs only when there is
an alternative solution to a problem.
 Defined objectives
Decision-making is based on the purpose of finding a solution. Ideally, the objective is
to find the optimal solution that will benefit the stakeholders with minimum risk.
 Rational process
In a well-thought decision-making process, solutions are not randomly selected based
on incomplete information. The process of selecting the optimal solution is based on
logical thinking and comparing the pros and cons of each possible solution.
 Commitment
The entire process of decision-making involves gathering information, analysis,
comparing the possible alternatives, selecting the best solution and evaluating the
decision. All these steps in the decision-making process require commitment from the
stakeholders involved.
 Situation or the environment

Decisions may not always follow the same pattern of logic due to the situation. In one
situation, a manager may take one decision while in another he may not use his
previous judgment as precedence.
 Function of the management

Decision-making in an organisation is generally the responsibility of managers at
different levels. In this case, based on the level of management, decisions are
influenced by the situation or the environment.
 Human and social process

Making decisions is a cognitive skill. In addition, it involves the decision-maker’s
perception that is subject to his or her values and the objectives of the organisation.
 Uncertainty
Decision-making involves selecting the best solution out of other alternative solutions.
Even though each alternative is analysed carefully, the outcome of a decision during
implementation may be different from what is expected.
Factors Influencing Decision-Making

Decision-makers rely on the analysed information to select the best solution. However, there
are other factors that influence their decisions. These factors may be based on individual
goals, values and the past experiences faced by the managers and employees while dealing
with the same problem. There are external factors that help to decide on a solution such as
societal values, culture and pressure from peers, friends and family. Figure 5.2 illustrates some
of the factors that influence a decision.
Decision
Decision criteria
Time
situation
Resources
Goals
affected
Decision
Personal
approach
values
used
Impact of
Decision-
makers Decision the
decision
Figure 5.2: Factors that Influence a Decision
 Decision-makers
A decision-maker may approach the same dilemma differently from other decision-makers.
For example, one person may prefer to act alone while another may ask the opinions of
other people involved in taking a decision. Similarly, the same set of data may be
interpreted in different ways by multiple decision-makers. Decisions are also influenced by
individual beliefs, social and political factors.
 Personal values
The personal values of a decision-maker sometimes influence the decision-making

process. These values are personal beliefs. For example, if a decision-maker strongly
believes in moral ethics, he or she will not encourage solutions that go against these
beliefs.
 Goals
A goal may be the end result for an individual, a family or a community. Goals may be
short-term or long-term. Short-term goals have a time period of three to six months
whereas long-term goals may be longer. For example, a public relations company may set
up short-term goals to increase the number of sales promotions every three months. Its
long-term goal may be to double its sales by the end of the current financial year. In a
business, the outcome of the decision must be aligned to the goals of an organisation.
 Decision situation
In a decision situation, decision-makers are faced with the known and the unknown. The
unknown factors include prices and the availability of resources. A change in these factors
can change the way a decision-maker sees a possible solution.
Decisions are affected by situational factors such as risk and uncertainty. Risk refers to the
positive or negative impact that the outcome of a decision may have on people and the
other resources involved. Uncertainty is based on the ‘unknown’ and the estimated
outcome of the decision. Analysing the possible risk and uncertainty affects one’s
decisions.
The ‘garbage can’ approach in decision-making lists four influencers on decisions: the
problem, the alternative solutions, those who are affected and the opportunities. A mix of
these factors can change the decision-making style.
 Decision criteria
Before arriving at a solution to a problem, certain baseline factors are determined to set the
qualifying standards to consider if a decision is valid or not. Therefore, different decision-
makers with different sets of criteria have different solutions to a problem. When a group is
involved in decision-making, a common set of criteria is determined so that the decision-
making is unanimous and not based on individual choice. There may be a difference of
opinion about the criteria on which decisions are based, but these can be settled with
negotiations or compromise.
 Time
The timing of a decision or a new development may change the impact of a decision on an
organisation. For example, based on certain criteria, an organisation may decide to delay
introducing its product into the market and decide to wait for the next quarter in the financial
year. It may seem to be the best solution at that point in time. However, a competitor may
introduce the same type of product immediately. Thus, the delay in introducing its product
may cause a significant dip in the expected sales of the organisation.
Making timely decisions is a skill that a decision-maker must possess. The people involved
in the decision-making process must be able to judge the right time and the outcome of the
decision.
 Resources affected
The decisions taken may directly or indirectly affect individuals, a department or an entire
organisation. These stakeholders may have interests that are not restricted only to
economic interests
 Stakeholders may participate actively or passively in the decision-making process. For

example, when an organisation decides to launch an ‘education for all’ campaign to admit
children from marginalised backgrounds into private schools, the active participants are
those who speak to the media and directly approach the schools. The passive participants
are those who do not support the campaign and refuse to admit their children into those
private schools.
 Decision approach used
There are many theories, tools and techniques which decision-makers use to arrive at a
solution. However, depending on the decision process followed, the results may vary. For
example, a group may want to use a SWOT analysis to analyse the strengths,
weaknesses, opportunities and threats of a problem and then arrive at a solution. Another
group may approach the same problem by conducting a market research. While both these
methods may be acceptable, they may have different outcomes.
 Impact of the decision
The outcome of a decision may be a problem for some resources and an opportunity for
others. For example, an organisation’s decision to retrench specific levels of employees
may lead to cost-saving. On the other hand, the same decision may lead to a shortage of
skilled resources or misalignment of the existing resources to the new jobs.
Decision-Making Models
Decision-makers approach problems from various angles depending on the situation. Below
are some decision-making approaches:
The classical or rational approach

The classical or rational decision-making model is popular because it ensures that decision-
makers analyse all the available information in a logical manner. This model is based on two
assumptions:
 Decision-makers follow a logical sequence to arrive at a decision.
 Decision-makers are objective in their approach and have all the relevant
information.
The classical or rational approach follows these steps.
1. First, a problem is identified.

2. The decision-makers then gather all the required information about the problem. The
problem is distinguished from its symptoms.
3. Several alternative solutions are identified and the criteria for each alternative option is
identified.
4. Each of the options is analysed for its advantages and disadvantages and its impact on
the resources involved.
5. Of the possible alternative solutions, the decision-makers select the option that has the
highest perceived value.
6. The decision is implemented.
Figure 5.3: Rational Decision-Making Model
In spite of a comprehensive process, this model has been criticised for its assumption that
decision-makers are always rational in their thinking. It ignores other factors that may influence
decisions.
This approach has its drawbacks because it is not feasible for complicated cases. It gives the
decision-makers a bird’s eye view of the decision-making process without giving details on how
to perform each step.
Herbert Simon Model

Herbert Simon, a pioneer in the field of decision-making models, described the core of the
decision-making process in a model with three phases
Phase one is Intelligence, when raw data is collected, processed and examined and a problem
calling for a decision is identified. Phase 2 is Design when different decision alternatives are
invented, developed and analysed, the feasibility of implementation tested and the value of the
decision outcome evaluated. The third phase is Choice when, based on the selection criteria,
one alternative is selected as a decision.
Intelligence
Design
Choice
Figure 5.4: Herebrt Simon Decision-Making Model
The administrative approach

In organisations, administrative decision-making refers to the process by which a single
individual or a small group makes key decisions. In democratic systems, the decision-makers
are usually expected to get input from stakeholders and affected parties and then arrive at a
decision that is optimal for the interests of the entire organisation. However, in a non-
democratic setup, administrative decisions may be arrived at without such a discussion, usually
to resolve the conflicting interests of various parties.
Administrative decision-makers may be business owners, department heads, The Chief

Executive Officer, the Chief Operating Officer and government officials. While
administrative decision-making processes are widely used and may be very effective, their
effectiveness depends on the knowledge, skills and empathy of the decision maker(s).
This model has its drawbacks as:
 Such decisions are not always beneficial for an organisation and its resources.
 A decision may or may not be based on a well-thought out analysis of the problem.
The normative model
Victor Vroom, a professor and scholar on leadership and decision-making, developed the
normative model of decision-making. Vroom’s model predicts the effectiveness of decision-
making procedures by taking into account the situation and the importance of the decision.
Vroom identified five types of decision-making processes, each varying as per the degree of
participation by the leader. In the first type, the leader makes the decision or solves the
problem alone. In the second, the leader approaches group members individually for
suggestions but makes the decision himself or herself. In the third type, the leader holds a
group meeting, presents the problem to the group and asks all members to make suggestions.
Then, the leader makes his or her decision alone, choosing which information from the group
meeting to use or discard. In the next type, the leader presents the problem to the group as a
whole and the decision is made by group consensus. In the final type, the leader does not
actively participate in the decision-making process but provides resources such as information
and encouragement.
Vroom identified seven situational factors that leaders should consider when choosing a
decision-making process. These included how the decision would affect the project or the
organisation, the importance of team members’ commitment, the leader’s expertise, the
likelihood of commitment, the group support for the objectives, the group expertise and team
competence.
Vroom’s normative model of decision-making has been used in a wide array of organisational
settings to help leaders select the best decision-making style.
Non-rational models
Non-rational models explain how decisions are actually made in contrast to how they may be
made. This model considers the fact that decisions are bound by certain factors such as
complexity of the problem, time, uncertainty and the resources involved. This model considers
the following aspects:
 Limited information or bounded rationality: This model recognises that there is a limit
to how much information a decision-maker can use to analyse a problem. These
constraints may be due to limited financial resources, limited human capital,
employment levels and governmental policies.
 Satisficing: Satisficing is when decisions are taken based on alternatives that meet only
a certain criteria. Instead of evaluating all the possible alternatives, the decision-makers
select a solution that gives satisfactory results. The solution selected might not
necessarily come with optimal success.
 Judgmental heuristics: Thanks to the satisficing factor, decisions are taken by
focusing only on one part of the problem while ignoring the others. Though this model
uses a relatively simple approach, it does not always follow logic while making a
decision. The decision-makers who are given limited information cannot always make a
fair decision.
Cognitive style
Isabel Myers, a behaviourist, proposed that the decision-making process involved the following
cognitive dimensions:
 Thinking and feeling
 Extroversion and introversion
 Judgment and perception
 Sensing and intuition
In her theory, Myers said that a decision-maker’s approach is based on how he or she scores
on each of the four cognitive dimensions. If a person scored near each of the dimensions, the
decisions would have a logical, analytical, objective, critical and empirical decision-making
style. For example, if a decision-maker scored near the ends of the thinking, sensing,
extroversion and judgment dimensions, he or she would be considered to have a logical and
objective decision-making approach. This model has been criticised because it ignores the fact
that decision-makers may reject analysed information that may support other conclusions.
Types of Decision-Making Processes

As you know, decisions may be made by an individual or a team. Therefore, the approaches
used may be different. Figure 5.3 illustrates the types of decision-making processes used in
organisations.
Analytical
Conceptual
Directive
Decision-making
Processes Behavioural
Creative
Procedural
Intuitive
Figure 5.3: Types of Decision-Making Processes
Analytical
In the analytical process, the leader gathers information from different sources associated with
the problem without mentioning what the problem is. Using this information, the leader studies
the full situation in detail, makes comparisons between the possible solutions, and then arrives
at a decision. You will learn about this process in detail later in this unit.
Conceptual
In the conceptual process, the leader provides the team with all the relevant information. The
information is analysed and different solutions are presented. Then, they select the solution
that provides long-term benefits.
Directive
In the directive process, the leader takes decisions based on the information on hand. This is
done without consulting anyone else. The main drawback of this type of decision-making
process is the assumption that the leader has all the information required to correctly analyse
the problem to arrive at an optimal solution. In this process, the focus is to find short-term
solutions based on, most often, ambiguous data.
Behavioural
In the behavioural process, the leader asks his team members to help him prepare his solution
to the problem. He gives them the relevant information which is studied and a possible solution
is arrived at. The solution is presented to the other members who negotiate a solution that is
acceptable to all the members of the organisation. In this process, the aim is to avoid conflict in
the organisation.
Creative
The creative decision-making process requires analysis of the information relevant to the
problem that is unfamiliar. The information is analysed and the solution arrived at is novel and
creative. This process is used in the planning stage rather than the implementation stage of
any operation.
Procedural
The procedural decision-making process is based on the solutions arrived at in the past for
similar problems. The procedures are retrieved from the memory of those who dealt with
similar situations. This process is used by leaders who prefer to approach a problem based on
precedence.
Intuitive
The intuitive decision-making process is the fastest of all the decision-making processes. In
this case, the decision-maker quickly recognises an appropriate solution or course of action
based on prior incidents.
The creative, procedural and intuitive approaches are based on the decision-makers’ sixth
sense and on following precedence. These decision-making approaches are not necessarily
backed by arguments that validate a point. However, there is a commonly used decision-
making process that follows logic and a methodological pattern to find the best solution to a
problem—the analytical decision-making process.
Analytical Decision-Making Process

As you have seen, the decision-making process is the selection of the best alternative from
various choices. Let’s learn about the analytical decision-making process that is widely used in
organisations.
Based on the approach, analytical decision-making processes have eight or five steps. Figure
5.4 illustrates the eight-step analytical decision-making process to derive the optimal solution.
Step 3: Determine
Step 1: Identify
Step 2: Gather the criteria to Step 4: Select the
the purpose of
information judge alternative best solution
the decision solutions
Step 7: Step 6: Analyse Step 5: Evaluate

Step 8: Evaluate
Implement the the alternative alternative
the results
decision solutions solutions
Figure 5.4: Decision-Making Process
Step 1: Identify the purpose of the decision

The decision-making process begins with a problem for which a solution must be found. Some
questions that must be answered before going to the next step in the decision-making process
are:
 What is the problem?
 Why is it important to solve the problem?
 Who will be impacted by the problem?
 Is there a specific time frame to make a decision?
Step 2: Gather information

Information may be gathered from a single source or many. Gather information that is relevant
to the problem. Speak to as many people as possible to get their varied views on the problem
and their suggestions. This will help you understand the problem better.
Step 3: Determine the criteria to judge alternative solutions

Determine the baseline criteria for alternative solutions to be accepted. For example, every
alternative solution must be aligned to the organisation’s goals and culture. If an organisation
decides to close down one of its newly acquired subsidiaries that manufacture tobacco-based
products, it must align to societal values as well as its corporate identity.
Step 4: Analyse the alternative solutions

This is the stage when alternative solutions are analysed based on the criteria and their short-
and long-term impact. Prioritise solutions that give the highest probability of effectiveness.
Step 5: Evaluate the alternative solutions

Compare the pros and cons of each alternative solution. Weigh the impact of the short-term
and long-term solution on the resources involved as well as the organisation.
Step 6: Select the best alternative

Select an alternative solution that gives minimum risk and maximum long-term benefits to the
organisation and the resources involved.
Step 7: Implement the decision

Execute the decision in a sequence of activities, one stage at a time.
Step 8: Evaluate the results

This is the stage to evaluate the decision and search for additional information or rectify any
problems faced while implementing the decision.
Now that you have learnt about the process of the analytical approach to decision-making, let
us compare it with other approaches.
Comparison of decision-making approaches
Table 5.1 shows the differences in the analytical, directive, conceptual and behavioural
approaches to solving problems.
Directive Analytical Conceptual Behavioural

The solutions are The solutions are The solutions are The solutions are found
simple. based on complex socially oriented. to be for the good of the
problems. organisation
Decisions are made Decisions are made A humanistic The focus on arriving at
quickly. after analysing approach is used to a decision is to help
alternative solutions. making decisions. resources.
A solution is made from Problems are Solutions are arrived Decision-makers are
a limited number of perceived from at creatively. open to considering
alternatives. different angles other options.
Rules are used to Innovative methods New ideas are used Decision-makers rely on
decide on the solution. are used to finding to arrive at a solution. meetings to decide on
solutions. solutions.
Table 5.1: Comparison of Decision-Making Approaches
Analytical approach vs intuitive decision-making approach
The analytical approach to decision-making is based on the normative theory that considers
logical processes to arrive at a solution. This theory assumes that there is a direct link between
the fact and the conclusion.
Decision-makers use the compensatory algorithm to compare the alternative solutions. Here, it
is assumed that the weighted solutions of one type can compensate for the absence of
another. Therefore, the problem is usually broken down into logical sequences.
The intuitive approach, also referred to as Natural Decision-Making (NDM) is based on the
descriptive instead of the normative model. The intuitive approach is based on three principles:
 Decisions are made by sequential and holistic evaluation based on some established
criteria.
 The decision-maker bases his or her judgment on recognition of the correct solution
and comparison of the current problem with past experiences.
 Decision-makers use the satisficing criterion to arrive at a solution. This is especially
true in the real-world scenario where snap judgments are required in time-bound
situations.
Table 5.2 lists the differences in the analytical approach and the intuitive approach.
Analytical approach Intuitive approach

Approach Analyses the parts of the problem Led by the decision-maker’s ‘gut feeling’
and their relationships and considers the problem as a whole
Strengths Best suited for complex problems Suited for problems that need a quick
that must be broken down to study judgment that is backed by experience
the interdependency of each and precedence of similar cases
component in the problem
Weaknesses Not suitable for situations that are The decision-makers who rely on past
time-bound and need quick solutions experiences may not have the adequate
level of knowledge to arrive at the
optimal solution
Table 5.2: Comparison of the Analytical and Intuitive Approaches
Analytical Decision-Making Skills

You have learnt about the analytical decision-making process. This process, like the others,
involves the application of the cognitive dimensions. Apart from using cognitive skills and
appropriate decision-making methods, how do decision-makers decide on the right solution?
In this section, let us study their inherent qualities, types of decision-makers and the common
errors they make.
Characteristics of Decision-Makers
Decision-making is required in all departments of an organisation. For analytical decision-

making, strategic thinking is vital. One must be able to assess a situation comprehensively,
understand the problem, be open to suggestions and, of course, select the best solution that
will meet the expected outcomes. The following are additional skills one must have for
analytical decision-making.
 Analytical thinking skills: A decision-maker must be able to study a problem and its
solutions to detect logical errors and possible incorrect conclusions. Here, one must be
able to think critically and methodically in all situations.
 Lateral thinking skills: A decision-maker, while having skills to think analytically, must
also think creatively. He or she must be able to analyse a problem from a different point
of view.
 Problem-solving skills: This set of skills is a combination of analytical ability and
lateral thinking. The problem-solver must be able to combine logical thinking with
creativity to look beyond tried-and-tested solutions for similar problems.
 Technical skills: Ideally, a decision-maker must have thorough technical knowledge in
order to solve a problem. Merely relying on gathered information will not necessarily
help to arrive at the best solution with the desired outcomes.
 Proactive cognition: Decision-makers must play an active role in solving the problems
before they escalate. For example, a particular work process unnecessarily increases
the efforts of the workers in a plant. The supervisor must take the initiative to restructure
the process in order to increase the workers’ efficiency and reduce unnecessary
burden.
In addition to these skills, a decision-maker must be able to communicate his or her ideas
clearly to those stakeholders who are affected by the decision.
Types of Decision-Makers
Decision-makers are responsible for the outcome their decisions have on an organisation.
Researchers have determined some defining characteristics of different types of decision
makers:
 Procrastinator
Typically, procrastinators do not take immediate action when they see a problem. When
they do, they do not take properly analysed decisions. This is because they want to find
solutions quickly. Such people who are authorised to take decisions must set deadlines
to address pending issues.
 Perfectionist
A perfectionist gathers information in a tedious manner in order to make a fault-free
decision. Though this trait has its good points, it may not always work when an
organisation needs a decision to be taken within a certain period. Such decision-makers
must be able to make calculated decisions based on little data. They must also learn to
trust their intuition.
 Disorganised
Disorganised decision-makers with little or no focus tend to make wrong decisions.
Such decision-makers must not get distracted by trivial matters that take away attention
from the problem analysis. For effective decision-making, they should keep a logbook
and make a record in the book when a decision occurs. They should plan work well
ahead with extra time before the deadline.
 Incrementalist
An incrementalist makes a series of small decisions and gets feedback instantly. If
there are corrections required, they are made immediately. This process is carried out
till the bigger problem is solved. This approach is particularly useful when there is no
precedence to a new problem and the decision-maker must use the trial-and-error
method to arrive at a conclusion.
 Cautiously forward-looking
The cautiously forward-looking decision-maker is one who is afraid of making a
mistake. Such decision-makers must be prepared to make repeated efforts to solve a
problem. It is a good idea to be positive and decide to learn lessons from a failed
decision.
 Knowledgeable of decision timing

It is important for a decision-maker to make a decision at the right time. These decision-
makers may not be able to make timely decisions always due to factors such as
resources, risk or involvement of the higher management. To overcome this, they
should determine the cause for the delay that they make in taking certain kinds of
decisions and address those issues.
 Hesitant to adjudicate
In this case, the decision-maker hesitates to take action for fear of how others may
react to the outcome of the decision. A decision-maker must be able to confidently
defend the decision made and be prepared to answer questions and criticism.
Common Errors in the Decision-Making Process
Decision-making is an integral part of an organisation. Some decisions can be made quickly

while others need more analysis and time to arrive at a conclusion. At times, decision-makers
may not be able to take the correct decision due to certain errors that they may have
committed in the decision-making process, such as:
Identifying an incorrect problem
At times, a problem may not be identified correctly, thus wasting the organisation’s time and
money. To prevent this loss, the organisation must ensure its resources are utilised in an
efficient and effective manner and not wasted on false alarms.
Using a single source of information

In some decision-making processes, decision-makers tend to rely on a single source of
information. The information given may be incomplete or incorrect which can result in incorrect
decisions that can have a negative impact on the organisation.
Using too many sources of information

In contrast to gathering information from one source, having too many sources can be equally
damaging if it is not analysed properly. Collecting as much relevant data as possible is
necessary to provide the decision-maker with all the information. However, the decision-maker
may get confused when faced with too much information.
Making a decision at the wrong time

Making a decision at the right time is important. At times, a decision may have to be delayed
for the benefit of the organisation. On the other hand, a delay in decision-making may result in
loss in terms of money and resources for the organisation.
Making an incorrect prediction about the outcome

A decision is made after deliberating its short-term and long-term benefits for the organisation.
However, the outcome of the decision may not turn out as expected due to miscalculation or
change in situations.
Table 5.3 lists the dos and don’ts to follow for a decision-making process to be effective:
Dos Don’ts
Clearly identify the decision to be made. Avoid making assumptions when making a
decision.
Make decisions with stakeholders who are Avoid procrastinating decision-making
involved in the decision-making process. because it may worsen a situation.
Identify the reasons for the decision. Avoid making hasty decision even though you
are given only limited time.
Identify all the alternative solutions. Avoid drawing conclusions based on
incomplete information.
Evaluate each alternative solution. Avoid predetermining a solution without
proper analysis of other alternative solutions.
Evaluate the risk of each alternative solution. Avoid involving people who do not have
adequate knowledge to solve the problem.
Use your intuition along with the analysis Avoid making a decision that does not have a
when you make a decision. direct impact on the problem.
After careful analysis, select a solution and do Avoid making decisions based on emotions.
not waver in your decision. Be objective.
Table 5.3: Dos and Don’ts for Effective Decision-Making
Decision Trees
A decision tree is a kind of flowchart or graphical representation of the process for making a
decision or a series of decisions.
Businesses use them to determine the company policy, to choose a policy or to use it as a
published tool for the employees or the organisation. Decision trees are used to help an
individual or organisation make difficult decisions by reducing them to a series of simple
choices. It is important to note that the structure of a decision tree remains the same,
irrespective of the context or type of decision.
In other words, a decision tree is a decision support tool that uses a tree-like graph or model of
decisions. Each branch of the tree leads to possible outcomes in terms of costs, utility and
events. This is one of the ways to display the decision-making as an algorithm.
Steps to draw a Decision Tree
As you have learnt, a decision tree is used to break down complicated situations to simpler
scenarios that can be understood easily. The decision tree is illustrated in Figure 5.5. The
following are the steps to draw a decision tree:
1. Begin with the decision. Represent the decision with a square on the left side of your
page.
2. Mark the different options. Draw one line out from the square towards the right of the
page. Write each option on this line.
3. Review each line. Decide if each option results in another decision or an uncertainty.
To represent a sub-decision, draw a square and for an uncertainty a circle.
4. Review each square and circle. For squares (decisions), extend the lines for more
options and mark them. For circles (uncertainties), draw further lines to indicate
possible outcomes from those uncertainties.
5. Continue expanding the branches of the tree until all the possible outcomes are
included.
Figure 5.5: Outline of a Decision Tree
Examples of Decision Trees
Some examples of decision trees that indicate how a problem can be broken down are given
below.
Example 1
The following is a decision tree with two choices.
Figure 5.6: A Decision Tree with Two Choices
Example 2
The following is an example of decision-making based on the possible outcomes if a business
is expanded or not.
Figure 5.7: A Decision Tree with Possible Outcomes
Case Study
Gopi is the proud owner of a mid-sized food canning company that supplies canned food to five
major departmental stores in India. He has a team of dedicated sales representatives who
manage the supplies to these department stores.
One day, Anand, the owner of one of the departmental stores, complains to Gopi about one of
his sales representatives, Suresh. He says that Suresh is inefficient and asks for another sales
representative in place of him.
Gopi studies the problem. This is the information he needs to analyse before he makes his
decision:
 Suresh’s consistently good records are proof of his efficiency and loyalty to the
company.
 Suresh’s colleagues vouch for the diplomacy he practises when dealing with difficult
clients such as Anand.
 Gopi learns that Anand and Suresh were former colleagues in a previous company and
had an acrimonious relationship there.
 Further investigation reveals that Suresh is always polite to Anand in spite of the latter’s
rudeness.
What should Gopi do? Which of these options indicate the correct decision Gopi must take to
keep the goodwill of Anand and the good services of Suresh?
a) Gopi cannot afford to lose a client like Anand. To placate Anand, he can replace Suresh with
another sales representative.
b) He can stop taking Anand’s calls and let time heal the strained relationship.
c) He can arrange for a meeting between Anand and Suresh and attempt to help them to
reconcile their differences.
Summary
Making a decision is the act of selecting an option from other alternatives that gives the highest
probability of effectiveness and success.
Decision-makers rely on the analysed information to select the best solution. However, there
are other factors that influence their decisions. These factors may be individual goals, values,
past experiences dealing with the same problem, societal values, culture and pressure from
peers, friends and family.
Decision-makers approach problems from various angles depending on the situation.
Decisions may be made by an individual or as a team. Therefore, the approaches used may be
different.
The decision-making process involves the following steps:

1. Identify the purpose of the decision
2. Gather information
3. Determine the criteria to judge alternative solutions
4. Analyse the alternative solutions
5. Evaluate the alternative solutions
6. Select the best alternative
7. Implement the decision
8. Evaluate the results
The outcome of decision-making may be short-term or long-term, positive or negative.
Check Your Understanding

Question 1:
Which of these statements describe the decision-making process?
a) Act of selecting only the optimal solution

b) Involves a mix of cognitive and social psychology
c) Made by all the managers in an organisation
d) Involves all the stakeholders who are impacted
Question 2:
Which of these factors influence decision-making?
a) Factors in the 'garbage can' approach

b) Stakeholders
c) Decision-makers
d) Human resources
Question 3:
These are the steps of the analytical decision-making process. Arrange the steps in sequential
order:
1. Select the best solution

2. Evaluate alternative solutions
5. Determine criteria to judge alternative solutions

Question 4:
Which of the following describe the analytical approach to decision-making?
a) The whole problem is broken down into parts and analysed.

b) This approach is based on the descriptive instead of the normative model.
c) This approach is suitable for time-bound decisions.
d) The satisficing approach is used to arrive at a decision.
Question 5:
Which of these statements is not true?
a) In the Analytical process, the leader gathers information from different sources.
b) In the Directive process, the leader takes decisions based on the information on hand.
c) The Creative decision-making process is used in the planning stage rather than the
implementation stage.
d) The Procedural decision-making process is based on intuition.
Question 6:
Which of the following options indicate the correctly matched names of decision-making
models to their corresponding descriptions?
i. Normative model
ii. Cognitive style
iii. Rational model
iv. Formative model
A. Non-rational approach
B. Cognitive dimensions
C. Satisficing
D. Four-step decision-making process
a) i-A
b) ii-B
c) iii-D
d) iv-C
Question 7:
Which of these statements are correct?

a) In the conceptual decision-making approach, new ideas are used to arrive at a solution.
b) In the analytical decision-making approach, innovative methods are used to finding
solutions.
c) In the directive decision-making approach, rules are used to decide on the solution.
d) In the behavioural decision-making approach, the leader makes comparisons between the
different possible solutions, and then arrives at a decision.
Question 8:
The finance department of a mid-sized company had been using an old version of a
computerised accounting application to maintain its accounts. With the settings on the
accounting application, it was time-consuming to make daily updates on the company’s
receivables and payables. Sometimes, a clerk would make an incorrect entry and it would take
days to find and rectify the error.
The owner of the company studied the problem of the finance department and decided to
upgrade the accounting package to the latest version regardless of its high cost. He did not
consider the other accounting applications which were priced lower and offered additional
features.
What kind of decision process was followed?
a) The directive decision-making process was followed.

b) The analytical decision-making process was followed.
c) The procedural decision-making process was followed.
d) The creative decision-making process was followed.
Question 9:
Two angry customers called the customer care department of an airline to complain about the
shoddy treatment they received on separate occasions.
After many weeks of inaction, one customer was compensated with a free coupon to use on
his next travel. Hearing this, the other customer threatened to air the unfair treatment on social
media platforms like Facebook and Twitter.
In an attempt to mitigate the escalation, the operations manager recommended that the second
customer also be given a free coupon to use on his next travel. What kind of decision-making
model did the operations manager use to make his decision?
a) Simon’s normative model

b) The Administrative approach
c) The Classical approach
d) The Cognitive style
Question 10:
A fire broke out in a warehouse for timber destroying a small percentage of goods and
seriously injuring two workers. After the incident, an inquiry was conducted. Over the next few
months, the manager made the following decisions.
Which of the following statements suggest that the manager may have taken the wrong
decision with regard to the accident?
a) The manager installed fire extinguishers at key points in the premises.
b) The manager set up an inquiry committee to make a list of inflammable items in the
warehouse.
c) The manager set up fire-fighting demonstrations for all the workers.
d) The manager promised to consider medical benefits to the injured.
Question 11:
How are decision-making and decision trees helpful for project managers?
Question 12:
What are the parameters or constraints to be considered prior to decision-making?
Question 13:
Compare and contrast a feasibility study and decision-making.
Answers
1. a) and b)
2. a), b) and c)
3. Correct sequence:
5. Determine the criteria to judge alternative solutions

7. Select the best solution
2. Evaluate alternative solutions
4. a)
5. d)
6. a) and b)
7. a), b) and c)
8. a)
9. a)
10. b) and d)
11. Project managers use decision trees to help them make difficult decisions by breaking
them to a series of simpler or smaller options. Decision can be made to make optimum
utilisation of available resources, increase in efficiency of the resources of an organisation
and encourage innovative ideas.
12. Before making decisions, the following must be considered:
 Objectives of the decision
 Process of selecting the solution
 Decision criteria
 Time period
 Impact of the decision on resources and the organisation
13. Decision-making analyses the available information, weighs the pros and cons of
alternative solutions before arriving at the optimal solution. A feasibility study analyses the
possibility of a decision being successful.
Glossary
SWOT Acronym for Strength, Weakness, Opportunities and Threats

NDM Abbreviation for Natural Decision-Making

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Introduction to Business Analytics

Introduction to the Unit

 Explain the decision-making process and its characteristics

 Identify the skills a decision-maker require for analytical decision-making

What Is a Decision-Making Process?

Stage 1 Stage 2 Stage 3 Stage 4

Figure 5.1: Decision-Making Process

Stage 1: Identify the problem

Stage 2: Generate possible solutions

Stage 3: Select the optimal solution

Stage 4: Implement and assess the solution

Importance of Effective Decision-Making

Optimum utilisation of available resources

Ability to solve new challenges

Growth of the organisation

Achieving the organisation’s aims and objectives

Increase in efficiency of the resources of an organisation

Boost in innovative thinking

Characteristics of the Analytical Decision-Making Process

 Situation or the environment

 Function of the management

 Human and social process

Factors Influencing Decision-Making

Figure 5.2: Factors that Influence a Decision

The personal values of a decision-maker sometimes influence the decision-making

 Stakeholders may participate actively or passively in the decision-making process. For

 Decision approach used

 Impact of the decision

The classical or rational approach

The classical or rational approach follows these steps.

1. First, a problem is identified.

Figure 5.3: Rational Decision-Making Model

Herbert Simon Model

Figure 5.4: Herebrt Simon Decision-Making Model

The administrative approach

Administrative decision-makers may be business owners, department heads, The Chief

The normative model

Types of Decision-Making Processes

Figure 5.3: Types of Decision-Making Processes

Analytical Decision-Making Process

Step 7: Step 6: Analyse Step 5: Evaluate

Figure 5.4: Decision-Making Process

Step 1: Identify the purpose of the decision

Step 2: Gather information

Step 3: Determine the criteria to judge alternative solutions

Step 4: Analyse the alternative solutions

Step 5: Evaluate the alternative solutions

Step 6: Select the best alternative

Step 7: Implement the decision

Step 8: Evaluate the results

Comparison of decision-making approaches

Directive Analytical Conceptual Behavioural

Table 5.1: Comparison of Decision-Making Approaches

Analytical approach vs intuitive decision-making approach

Analytical approach Intuitive approach

Table 5.2: Comparison of the Analytical and Intuitive Approaches

Analytical Decision-Making Skills

Decision-making is required in all departments of an organisation. For analytical decision-

 Knowledgeable of decision timing

Common Errors in the Decision-Making Process

Decision-making is an integral part of an organisation. Some decisions can be made quickly

Using a single source of information

Using too many sources of information

Making a decision at the wrong time