UNIT II

MANAGEMENT DECISION MAKING

Simon's Model of Decision Making- Concepts of Management
Organization - Hierarchy of Management Activity- Structured Vs
Unstructured Decisions- Formal Vs Informal Systems - Levels of
Management - Introduction to different kinds of Information Systems -
Concept, Characteristics and Components: ESS, EIS, DSS, MIS, KWS,
TPS, OAS and EDP- GDSS.

1. Simon's Model of Decision Making

● The Herbert Simon Decision Making Theory first appeared in his
renowned book, Administrative Behavior (1947).
● He suggested that decisions were critical because if they weren’t taken on
time, it’ll negatively impact an organization’s objective.
● The concept can be divided into two parts—one is the decision that
someone arrives at and another is the process or actions taken.
● In other words, implementing a decision is as important as making that
decision.
UNDERSTANDING THE DECISION MAKING THEORY BY SIMON
● The Simon Decision Making Theory is a framework that provides a more
realistic view of the world, where decisions affect prices and outputs.
● The theorist argued that making a decision is making a choice between
alternative courses of action.
● It can even mean choosing between action and non-action. In contrast to
classical theorists, Simon suggests that there is never one best course of
action or decision.
● It’s because one can’t have complete information about something,
therefore, there will always be a better course of action or decision.
● The Decision Making Theory by Simon also considers psychological
aspects that classical economists overlooked or ignored.
● Internal factors such as stress and motivations, among others, limit an
individual’s capacity to solve complex problems.
● In short, decisions are based on bounded rationality—humans behave
differently when there are risks and uncertainty involved.
 ● At the core of the theory lies ‘satisficing’, which is a combination of
satisfying and sufficing. It suggests that one should pursue objectives or
make decisions that involve minimum risks and complications as opposed
to focusing on maximizing profits.
THERE ARE THREE STAGES INVOLVED IN THE DECISION
MAKING PROCESS:
INTELLIGENCE ACTIVITY STAGE
● At this stage, people identify the problems in an organization and the
upper management analyzes the organizational environment to work
toward a solution.
DESIGN ACTIVITY STAGE
● In order to identify possible solutions to problems, the upper management
looks for suitable strategies.
● They further analyze the merits and demerits to select a particular course
of action.

CHOICE ACTIVITY STAGE

● After making a list of alternatives, the choice activity stage begins.
● It critically examines and evaluates the various consequences of all
alternatives and the most suitable course of action is selected.
● This stage requires creativity, judgment and quantitative analysis skills.

EXPLORING THE TYPES OF DECISIONS

With respect to organizational decision-making, the Simon Decision Making
Theory recognized two types of decisions:

PROGRAMMED
● Programmed decision making involves those decisions that already have
a plan or rule in place, which is used to reach a solution or conclusion.
● They follow already established guidelines and formal patterns. For
example, managers have already made such decisions before and it’s a
repetitive and routine process.
NON-PROGRAMMED
● Contrary to programmed decision making, non-programmed decisions are
ill-structured and one-time decisions.
● Problems or situations that don’t have a concrete set of rules or guidelines
to follow rely on non-programmed decision making. These are complex
and have long-term impact.
Whether it’s a programmed or non-programmed decision, here are effective
strategies to make sound decisions at work.

● Clearly define the problem you need to solve through your

decision

● Always do your homework and collect relevant information before

arriving at a decision

● Evaluate whether the information you gathered addresses the

original purpose

● Herbert Simon’s Decision Making Theory also emphasized the

importance of rationality. He proposed the concept of bounded rationality,
where people make decisions within certain limitations.

● He further supported the behavioral aspect of organization theory as

personal biases and perspectives affect the way employees make
decisions.

● Effective decision making is a much-needed fundamental skill in your

personal and professional life.
● Harappa’s Making Decisions course will equip you with frameworks to
process, reflect and include multiple perspectives for informed decision
making. Enrolling with Harappa is good decision making.
2. Concepts of Management Organization

CONCEPT

● The MIS is an idea which is associated with man, machine, marketing

and methods for collecting information’s from the internal and external
source and processing this information for the purpose of facilitating the
process of decision-making of the business.
● MIS is not new, only the computerization is new , before computers MIS
techniques existed to supply managers with the information that would
permit them to plan and control business operations.
● The computer has added on more dimensions such as speed, accuracy and
increased volume of data that permit the consideration of more
alternatives in decision-making process.
● Management information system is an integrated set of component or
entities that interact to achieve a particular function, objective or goal.
 Therefore it is a computer based system that provides information for
decisions making on planning, organizing and controlling the operation of
the sub-system of the firm and provides a synergistic organization in the
process.
● The component of an information system includes: a hardware which is
used for input/output process and storage of data, software used to
process data and also to instruct the hand-ware component, data bases
which is the location in the system where all the organization data will be
automated and procedures which is a set of documents that explain the
structure of that management information system.
● There are various driving factors of management information system for
example:-
Technological revolutions in all sectors make modern managers to need
to have access to large amount of selective information for the complex
tasks and decisions.
● The lifespan of most product has continued getting shorter and shorter
and therefore the challenge to the manager is to design product that will
take a longer shelf life and in order to do this, the manager must be able
to keep abreast of the factors that influences the organization product and
services thus, management information system come in handy in
supporting the process.
● There are huge amount of information available to today’s manager and
this had therefore meant that managers are increasingly relying on
management information system to access the exploding information.
Management information services helps manager to access relevant,
accurate, up-to-date information which is the more sure way of making
accurate decisions.
● It also helps in automation and incorporation of research and management
science techniques into the overall management information system for
example probability theory.
● The management information services are capable of taking advantage of
the computational ability of the company like processing, storage
capacity among others.
● Based on this relevancy, management information system should be
installed and upgraded in various organizations since today’s managers
need them to access information for managerial decision making and also
management functions.
 ● The Management information system (MIS) is a concept of the last two
decade or two. It has been understood and described in a number of ways.
It is also known as the Information System, the Information and Decision
System, the computer based Decision System.
● Information is the life blood of an organization, particularly in the case of
system approach management. The MIS or Information system can be
define as the knowledge communicated by others or obtained from
investigation or study. It is a system providing needed information to each
manager at the right time in the right form and relevant one which aids
understanding and stimulates the action.
● MIS is an organized method of providing past, present and projection
information relating to internal operations and externals intelligence. It
supports the planning, control and operational functions of an
organization by furnishing uniform information in proper time frame to
help the process of decision-making.
● Management Information System is generally defined as an integrated
user-machine system for providing information to support operations,
management and decision-making functions in an organization. The
system utilizes computer hardware and software, manual procedure,
models for analysis. Information is viewed as a resource much like land,
labor and capital. It must be obtained processed, stored, manipulated and
analyzed, distributed etc. An organization with a well-defined
information system will generally have a competitive advantage over
organization with poor MIS and no MIS.

3. Hierarchy of Management Activity

Management activity describes the levels of management activities. This

article describes the detailed hierarchy architecture of management
activities.

There are three levels of management activities,

1. Strategic planning
2. Management control
3. Operational control
Hierarchy is the process of ensuring that specific tasks are carried out
effectively and efficiently. Management control is the process by which
managers ensure that the resources are obtained and used effectively and
efficiently to achieve the organizational goals.
Strategic planning is the method of deciding the organization's objectives, the
improvements needed to achieve those goals, the tools used to attain those
goals, and the policies used to obtain, manage and distribute those resources.
These levels of management activities are described in detail as follows...
1) Strategic planning
Strategic management is the comprehensive collection of ongoing procedures
and processes used by organizations throughout an enterprise to consistently
organize and align resources and actions with mission, vision, and strategy.
Strategic management activities turn the static plan into a system that provides
decision-making input on strategic success.
The strategy consists of making choices on the part of managers to achieve
corporate goals between alternative action plans, dedication to specific product
markets, strategic steps and business strategies. Strategic planning is required
from top to bottom levels for management of all levels.
2) Management control
At middle management, the people perform resource control practices.
Management regulation enables the organization's smooth organizational
activities. Management control facilitates smooth operational activities in the
organization. Management control describes how an organization's actions of
individuals or groups are constrained to perform certain actions while avoiding
other actions to achieve organizational objectives. Control of management falls
into two broad categories— regulative and normative controls — but there are
several types within those categories.
It is essential for management to keep a check on the activities and people
involved in operations to avoid any waste of resources and to more effectively
use the resources. This includes making arrangements that are appropriate for
managing the various activities needed for the organization's proper
management. It includes the management of various projects that the
organization is handling.
3) Operational control
Operational control systems are designed to ensure day-to-day actions are
consistent with the plans and goals established. This focuses on recent period
cases. Operational inspection systems are derived from management control
system specifications.
At low-level management, the operational control tasks are done by the staff.
Operational control helps to make use of available resources without any
wastage. This requires proper computer management with reduced costs and
amortization. It also helps manage the workers involved in activities by the
proper direction of supervision. It helps the organization, in a desirable time, to
produce quality products. This involves conducting routine processes, such as
updating and managing user inquiries that belong to the operational control
stage below.

Hierarchy of Management Activities

MIS is an important part of an organization as it helps to collect planning and
decision-making information. It also helps in carrying out other organizational
tasks such as recruiting, managing, and regulating. In an organization, MIS
performs various functions such as collecting and processing data to get
accurate information for decision making. It also helps in storing information
and retrieving it as and when required.
4. Structured Vs Unstructured Decisions

Decision Making and Decision-Support Systems (DDS)

Decisions are made at all levels of the firm. Some decisions are very common
and routine but exceptionally valuable. Although the value of improving any
single one of these decisions may be small, improving hundreds of thousands of
these small decisions adds up to a large annual value.
Decisions are classified according to type:

● Unstructured decisions are those in which the decision maker must

provide judgment, evaluation, and insights into the problem definition.

● Structured decisions, by contrast, are repetitive and routine, and

decision makers can follow a definite procedure for handling them to be
efficient.

● 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.

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

● Senior executives face many unstructured decision situations, such as

establishing the firm's five or ten-year goals

● Middle management faces more structured decision scenarios but their

decisions may include unstructured components.

● Operational management and rank-and-file employees tend to make more

structured decisions.
[Link] Vs Informal Systems

Formal System:
Formal system is a system that is designed and developed using a set of
well-established organizational policies, procedures, and principles, guidelines
to coordinate and facilitate communication between different functional units
and the processes they support, and to meet the overall information needs of the
business.

There are three categories of information related to formal information system :

■ Strategic information
■ Managerial information
■ Operational information
Informal System:
Informal Systems is the systems created by ad hoc, informal work groups to
support information needs that cannot be met by formal systems. These are
powerful systems that meet unique needs and thrive in many organizations.

Informal systems do not follow any formal or pre established rules for
collecting, processing, storing, or disseminating data.

An Introduction to Information Systems

Information system refers to various information technology systems like

computers, software, database, communication systems, the internet, devices,
and others used by an organization to collect, transfer, organize, and store data.
Bursting with changes, the current business milieu has helped companies
implement a varied set of advanced technologies into different processes. These
IT applications have introduced automation, efficiency, and timeliness in
various business activities.
The introduction of information systems into the business has evoked a chain
reaction among different interrelated processes that have only benefited the
companies by increasing profits and reducing costs and lead time, among other
things. Therefore, it is imperative to understand the growing importance of
information systems in companies.
1. Knowledge Work System
There are different knowledge management systems that an organization
implements to ensure a continuous flow of new and updated knowledge into the
company and its processes. A knowledge work system (KWS) is one of the
knowledge management systems that ease the integration of new information or
knowledge into the business process.
Furthermore, KWS also offers support and resources to various knowledge
creation techniques, artificial intelligence applications, and group collaboration
systems for knowledge sharing, among others. It also uses graphics, visuals,
etc., to disseminate new information. Below are some of the applications that
work on the core fundamentals of KWS.

● Designers often use computer-aided design systems (CAD) to automate

their design process.
● Financial workstations are used to analyze huge amounts of financial data
with the help of new technologies.
● Virtual reality systems are found in the scientific, education, and business
fields for using graphics and different systems to present data.

2. Management Information System

The management information system provides aid to managers by automating
different processes that were initially done manually. Business activities like
business performance tracking and analysis, making business decisions, making
a business plan, and defining workflow. It also provides feedback to the
managers by analyzing the roles and responsibilities.
A management information system is considered a significant application that
helps managers immensely. Here are some of the advantages of the information
system:

● It enhances the efficiency and productivity of the company

● It provides a clear picture of the organization’s performance
● It adds value to the existing products, introduces innovation and improves
product development
● It assists in communication and planning for business processes
● It helps the organization provide a competitive advantage

3. Decision Support System

A decision support system is an information system that analyses business data
and other information related to the enterprise to offer automation in
decision-making or problem-solving. A manager uses it in times of adversities
arising during the operation of the business. Generally, the decision support
system is used to collect information regarding revenue, sales figures or
inventory. It is used across different industries, and the decision support system
is a popular information system.

4. Office Automation System

An office automation system is an information system that automates different
administrative processes like documenting, recording data, and office
transactions, among others. The office automation system is divided into
managerial and clerical activities. Here are some of the business activities that
are done under this type of information system:

● Email
● Voice mail
● Word processing

5. Transaction Processing System

The transaction processing system automates the transaction collection,
modification, and retrieval process. The peculiar characteristic of this type of
information system is that it increases the performance, reliability and
consistency of business transactions. It helps businesses perform daily
operations smoothly without hassle.
Once you are well-versed with different types of information systems,
understanding the application of these systems becomes easy to comprehend.
Therefore, in the last part of the article, we will look into applying information
systems.

6. Executive Support System

An Executive Support System or ESS helps top-level executives to plan and
control workflow and make business decisions. It is very similar to
Management Information System or MIS.
Here are some of the unique characteristics of ESS:

● It provides great telecommunication, better computing capabilities, and

effective display options to executives.
● It enables them with information through static reports, graphs, and
textual information on demand.
● It helps monitor performances, track competitors’ strategies, and forecast
future trends, among others.

A Decision Support System can be seen as a knowledge based system, used by

senior managers, which facilitates the creation of knowledge and allow its
integration into the organization. These systems are often used to analyze
existing structured information and allow managers to project the potential
effects of their decisions into the future. Such systems are usually interactive
and are used to solve ill structured problems. They offer access to databases,
analytical tools, allow "what if" simulations, and may support the exchange of
information within the organization. DECISION SUPPORT SYSTEM
• Refers to systems which support the process of decision-making dealing with
unstructured problems
• May be defined as the “what-if” approach that assists management in
formulating policies and projecting the likely consequences of decisions
• Considered as an extension of MIS
• An effective blend of human intelligence, information technology and
software • Provides strategic information FUNCTIONS OF A DSS
• DSS manipulate and build upon the information from a MIS and/or TPS to
generate insights and new information INPUTS PROCESSING OUTPUTS
Internal Transactions Internal Files External Information Modelling Simulation
Analysis Summarizing Summary reports Forecasts Graphs / Plots DSS
DECISION SUPPORT SYSTEM
• Role of DSS
• Support ill- structured or semi-structured decisions • Have analytical and/or
modelling capacity • Used by more senior managerial levels
• Are concerned with predicting the future • Are effectiveness oriented
• Some examples of DSS • Group Decision Support Systems (GDSS)
• Computer Supported Co-operative work (CSCW)
• Logistics systems
• Financial Planning systems
• Spreadsheet Models

COMPARISON BETWEEN MIS AND DSS MIS DSS Focuses on structured

tasks Focuses on semi-structured tasks Emphasis on data storage Emphasis on
data manipulation Data is often accessed indirectly by managers Data is
accessed directly by managers Places emphasis on efficiency of decision Places
emphasis on effectiveness of decision Provides tactical information to top
management to take decisions Provides strategic information Need is regular
and recurring Need is irregular

EXECUTIVE INFORMATION SYSTEM

Executive Information Systems are strategic-level information systems that are
found at the top of the Pyramid. They help executives and senior managers
analyze the environment in which the organization operates, to identify
long-term trends, and to plan appropriate courses of action. The information in
such systems is often weakly structured and comes from both internal and
external sources. Executive Information System are designed to be operated
directly by executives without the need for intermediaries and easily tailored to
the preferences of the individual using them. EXECUTIVE INFORMATION
SYSTEM• Specialized form of DSS • Used by top-level managers • Reduce the
information overload on executives • Makes use of internal and external
information • Provides managers and executives flexible access to information
for monitoring operational results and general business conditions • Provides a
comprehensive picture of business performance by analysing key performance
indicators for growth • Meets strategic information needs of the top
management • Also known as Executive Support System EXECUTIVE
INFORMATION SYSTEM• Role of EIS • Are concerned with ease of use • Are
concerned with predicting the future • Are effectiveness oriented • Are highly
flexible • Support unstructured decisions • Use internal and external data
sources • Used only at the most senior management levels • Some examples: •
Executive Information Systems tend to be highly individualized and are often
custom made for a particular client group; however, a number of off-the- shelf
EIS packages do exist and many enterprise level systems offer a customizable
EIS module
FUNCTIONS OF AN EIS INPUTS PROCESSING OUTPUTS
External Data Internal Files Pre-defined models Summarizing Simulation
"Drilling Down" Summary reports Forecasts Graphs / Plots Information
Systems that Span Organizational Boundaries EXPERT SYSTEMS Expert
systems can be defined as programs that help the computer make decisions in a
similar way as an expert in specific domain, a particular subject area of interest.
It aims at formalising expertise and make it available for repetitive type of
business decisions. It makes use of artificial intelligence to generate knowledge
out of the information, existing theories, beliefs and experiences of managers in
various business activities. It mimics the judgment of experts by following sets
of rules that experts would follow. They’re useful in such diverse areas as
medical diagnosis, portfolio management, and credit assessment. EXPERT
SYSTEMS • Expert systems can be used in several areas of an organisation: •
Accounting and finance • In selecting forecasting models • In providing tax
advice • Marketing • In establishing sales quotas • In responding to customer
inquiries • Manufacturing • In determining whether process is running correctly
• In analysing quality and providing corrective actions • In product design and
layout • Others • In assessing project proposals, etc Artificial intelligence •
Artificial intelligence is referred to as the capabilities which can be imparted to
computers to enable them to display intelligent humanlike behavior. • AI is the
science of developing computer systems that can mimic human behavior. The
term was coined in 1956. AN EXAMPLE OF EXPERT SYSTEMRULES
CONTAINED IN KNOWLEDGE BASE: 1. If the applicant has required
education, then hire applicant 2. If the applicant has required experience, then
hire the applicant 3. If applicant has degree in Commerce, then applicant has
required education. 4. If applicant has two or more years experience, then the
applicant has required experience And so on… ¬ The user enters the above
information. The inference engine uses the rules to evaluate the data entered. ¬
In this example, if the user enters education as [Link] and experience as four
years, then the inference engine would determine that the applicant has the
requisite education and experience as per Rule 3 and Rule 4 respectively.
Therefore as per Rule 1 and 2, the applicant should be hired. This
recommendation is the output of the system OFFICE AUTOMATION
SYSTEMSOffice automation is the integration of computer,
telecommunications and office equipment technologies to improve the
execution of business functions through increasing the productivity,
effectiveness and working conditions of office support. The concept of office
automation encompasses the application of computer and communication
technology to improve the productivity of all types of office workers including
clerical, administrative, professional and executive. OFFICE AUTOMATION
SYSTEMS • Help people perform personal record keeping, writing, and
calculations efficiently • Aim is to improve the productivity of managers at
various levels of management by providing secretarial assistance and better
communication facilities. • Main types of tools include: • Spreadsheet programs
• Text & image processing systems • Presentation packages • Personal database
systems and note-taking systems • Examples: • Communicating and scheduling
• Document preparation • Analyzing data • Consolidating information