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CS507 - Information Systems - Lecture Handout 15

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Decision Making

There are some of the critical decisions that top managers face every day. How to decide whether to sell or spin off a business? Should the supplier relationships be renegotiated? What can be done to improve decision-making competency throughout your organization?

To capture maximum value, executives not only must make the right decisions, but also must negotiate skillfully. Since most business decisions involve other parties, it is essential for managers to understand their individual role as it relates to other decision makers, as well as how to use this knowledge to create the strongest possible negotiating position.

Hence, keeping in mind the importance of decision making for managers, information systems are also designed in a way to help them out to control operations and perform their managerial responsibilities more effectively.

Decision making is the cognitive process of selecting a course of action from among multiple alternatives.

Cognitive process is the mental process of knowing, including aspects such as awareness, perception, reasoning, and judgment.

  • Every decision-making process produces a final choice. It can be an action or an opinion.
  • It begins when we need to do something but we do not know what.
  • A decision-making is a reasoning process which can be rational or irrational, and can be based on explicit assumptions or tacit assumptions.

Types of Problems

Nature of problem determines the approach to decision making to be followed to solve it. There are three broad categories.

  • Structured: Well-structured problems are constrained problems with convergent solutions that engage the application of a limited number of rules and principles within well-defined parameters.
  • Unstructured: Problems possess multiple solutions, solution paths, fewer parameters which are less manipulate able, and contain uncertainty about which concepts, rules, and principles are necessary for the solution or how they are organized and which solution is best.
  • Semi-structured – a gray area lies between the structured and unstructured range. Here part of the decision can be specified allowing for certain factors out of control.

Types of problems

A newly formed organization may be taken as an unstructured organization due to lack of defined organizational structure, operating procedures. The question that a problem is structured or unstructured is not dependant on the organization being structured or unstructured. Even a highly structured organization can face novel and unprecedented problems.

Example-Daily Life

  • Unstructured – Mr. A thinks that he has to wake up at any time in the morning,
  • Structured – Mr. A is a soldier and he has to wake at 6 in the morning when army bugle is played/blown.
    This procedure will be followed no matter what.
  • Semi Structured – Waking up is subject to a clock alarm (procedure), but it can be turned off as waking up at that time is also subject to some sort of individual judgment.

Example – Business

Bank has a policy that two persons, Mr. A & B would open the bank 30 min before bank timings, so that bank should be open for public dealing at 9 a.m. No other situation has been forecast in the policy.

  • Structured – Staff shall be in the bank by 8:00 a.m. to ensure opening for public dealing at 9 a.m. This procedure will be followed no matter what.
  • Semi Structured – Branch Manager is informed a day earlier that Mr. A will be unable to make it the next day. Rest is left at the discretion of branch manager’s judgment to decide who else is to be made responsible to open the branch in the morning.
  • Unstructured – Employees start reaching before 9 a.m. but branch is not open. The decision taken by employees there and then would be totally unstructured due to the novelty of the situation arose.

Type of Decisions

All problems require decision making, however the nature of problem determines how it should be approached. The decision making process There are three types of decisions

  • Structured
  • Non-structured
  • Semi Structured

Structured decisions

Where problem is recurring and repetitive, the common factors can be identified in order to identify a particular course of action. Due to which defined set of procedure can be devised for their solution. Hence,

  • Procedures for obtaining the best solution are standardized
  • Objectives are clearly defined
  • Clearly specified inputs and outputs

Un-structured decisions

When problems are non routine, critical and novel in nature, they require individual judgment, evaluation and insight varying on case-to-case basis. There is no well understood or agreed upon procedure for handling these problems. For such situations, predefined policy cannot be devised. However, once the problem has been figured out, a policy may be devised to handle the problem in future. This can make the problem look like as structured one giving regard to the role of individual judgment.

Semi-structured Decisions

The term is used to refer to the grey area of decisions which lie between the two extremes. Some (but not all) structured phases and often solved using standardized solution procedures and human judgment.

In small organizations decisions are usually transferred from form top to bottom. In large organizations the decision are usually taken based on meeting of all departmental heads. The fact is that whether decisions are taken by single person or all in a formal meeting is not the sole determinant of a decision being structured or unstructured. Rather it simply shows the complexity of the problem.

Decision-making process

  • Intelligence – searching for conditions in the environment that call for decisions
  • Design – inventing, developing, and analyzing possible courses of action
  • Choice – selecting a course of action from those available
  • Implementation – implementing the selected course of action
  • Monitoring – checking the consequences of the decision made after implementation

Phases for Decision Making – Example

Any deviation from the norm should be reported as an exception for managers’ attention. As it is the case with “Debtors Aging Analysis”. (Debtors Aging analysis is the stratification of trade receivables in accordance of period of time since they have been due.)

Intelligence: Identifying the problems occurring in an organization. MIS is the primary source for the managers to be aware of red-alerts.

Design: Once the debtors have been analyzed on the basis of pattern of collection, options can be generated to improve collection rates. For example

  • Offering early payment discounts.
  • Devising various collection strategies for
  • various classes of customer based on
  • Collection period
  • Discounts rates
  • Strengthening sales department for collecting revenue through negotiation and settlement.

Choice: Now a selection has to be made which single strategy or combination of strategies should be implemented.

  • Here a DSS system can be used to simulate the consequences of each alternative generated.
  • The diversity and complexity of the alternatives generated would determine how extensive the DSS system should be.

Implementation: Now the stage comes of communicating the policy approved to the interested and relevant: for example

  • Conducting training sessions of sales department or issuing an office memorandum.
  • Communicating and convincing customers of the new credit terms so as to avoid confusion.
  • Once again MIS will be used to record and report the results/effects of the policy.

Monitoring: Once the decision has been implemented, the effects and responses should be monitored. The quality of decisions can be judged only once after they have been implemented. Monitoring helps in evaluating the quality of decisions that have been made. This may include the following:

  • Quantifying the speed in the process of recovery.
  • Discount costs being born by the organization.
  • Customer response in accepting the entire policy.
  • Once again MIS will be used to record and report the results / effects of the policy.
Phases Example
Intelligence Debtor’s aging report
Design Devise a discount or
training policy
Choice Select a discount/training
Implementation Implement the
discount/training policy
Monitoring Evaluate recovery patterns,
relevant costs involved.