IE 001

Engineering
Management
Decision-Making
DECISION-MAKING
INTENDED LEARNING OUTCOMES:
1. Describe the eight steps in the decision-making
process.
2. Explain the four ways managers make decisions.
3. Classify decisions and decision-making condition
s.
4. Describe different decision-making styles and dis
cuss how biases affect decision-making.
5. Identify effective decision-making techniques.
DECISION-MAKING

Decision:
- A choice among two (2) or more alternatives.

Problem:
- An obstacle that makes it difficult to achieve a
desired goal or purpose.

Decision-making:
- is typically described as choosing among alternati
ves, the thought process of selecting a logical cho
ice from the available options after considering th
e pros and cons of each option. 1
1
Source: businessdictionary.com
DECISION-MAKING
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Steps in the Decision-Making Process:

1. Identifying a problem
- every decision starts with a problem (the discre
pancy between an existing condition and a desired c
ondition). Problems make it difficult to achieve a de
sired goal or objective.
2. Identifying decision criteria
- are the standards or factors that define what’s
important or relevant to resolving a problem, such a
s cost, delivery, quality, etc.
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3. Allocating weights to the criteria

- criteria are not equally important, so, assigning
weights to each criteria will define their priority or i
mportance in the decision-making process.
4. Developing alternatives
- developing a list of viable alternatives that can
resolve the problem.
5. Analyzing alternatives
- involves evaluating the individual alternatives u
sing the decision criteria and the weights assigned t
o each criteria, their strengths & weaknesses.
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6. Selecting an alternative
- the alternative that gives the highest total is th
e best alternative.
7. Implementing the alternative
- putting the decision into action, it is recommen
ded to involve in the process the people who will pla
y part in the implementation of the alternative.
8. Evaluating decision effectiveness
- evaluation of the result or outcome of the deci
sion to see whether the problem was resolved.
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Decisions Managers May Make:
1. Planning
• What are the organization’s long-term objectives?
• What strategies will best achieve those objectives?
• What should the organization’s short-term objectives be?
• How difficult should individual goals be?
2. Organizing
• How many employees should I have report directly to me
?
• How much centralization should there be in the organizati
on?
• How should jobs be designed?
• When should the organization implement a different struc
ture?
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3. Leading
• How do I handle employees who appear to be unmotivate
d?
• What is the most effective leadership style in a given situ
ation?
• How will a specific change affect worker productivity?
• When is the right time to stimulate conflict?
4. Controlling
• What activities in the organization need to be controlled?
• How should those activities be controlled?
• When is a performance deviation significant?
• What type of management information system should the
organization have?
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Four (4) Ways Managers Make Decision
s:
1. Rational decision-making
- making logical and consistent choices to maxim
ize value.
- making decisions rationally would consistently l
ead to selecting the alternative that maximizes the li
kelihood of achieving the goal, decisions that are to
the best interest of the organization.
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2. Decision-making: Bounded rationality
- decision making that’s rational but under the c
oncept of “bounded-rationality”, that is rational deci
sion-making but limited (bounded) by a manager’s a
bility to process information.
- due to the manager’s inability to process all inf
ormation on all alternatives, managers “satisfice”, ra
ther than maximize.
- satisfice is accepting solutions that are “good e
nough”.
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3. Intuitive decision-making:
- making decisions on the basis of experience, fe
elings and accumulated judgment.
4. Making decisions: The role of evidence-based m
anagement
- decision making process that uses relevant and
reliable evidence
- evidence-based management (EBMgt) is the “s
ystematic use of the best available evidence to impr
ove management practice.”
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What is Intuition?
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Types of Decisions:
1. Structured problems and programmed decisions
- Structured problems are straight-forward, famil
iar and information about them are easily defined a
nd complete.
Example: when a server accidentally spills a drink
on a customer’s coat/dress
- Programmed decisions are repetitive decisions
that can be handled by routine approach.
Example: the manager offers to have the coat/dress
cleaned at the restaurant’s expense
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Three types of programmed decisions are:
 Procedure is a series of sequential steps a manag
er uses to respond to a structured problem.
 Rule is an explicit statement that tells a manager
what can or cannot be done, simple to follow and
ensures consistency.
 Policy is a guideline for making decisions that
establishes general parameters for the decision-
maker rather than specifically stating what shoul
d
or should not be done, typically contain an
ambiguous term that leaves interpretation up to
the decision maker.
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2. Unstructured problems and nonprogrammed deci
sions
- Unstructured problems are new or unusual pr
oblems, and for which information is ambiguous or i
ncomplete.
Example: To build or not to build a manufacturing
facility outside of the country
- Nonprogrammed decisions are unique and no
n-recurring decisions for unstructured problems, whi
ch involved custom-made solutions.
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Programmed vs. Nonprogrammed Decisions:
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Decision-Making Conditions:
1. Certainty - is a situation where a manager can
make accurate decisions because the outcome of
every alternative is known.
2. Risk - conditions in which the decision-maker is
able to estimate the likelihood of certain outcom
es. Under risk, managers have historical data fro
m past personal experiences or secondary infor
mation that lets them assign probabilities to diffe
rent alternatives.
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Example of decision-making under condition of risk:
- A ski manager would like to expand by adding lift
s. His decision will be influenced by past data on
revenue which is dependent on snowfall.
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3. Uncertainty – conditions where outcomes are not
certain and reasonable probability estimates coul
d not be made. Under these conditions, the choi
ce of alternative is influenced by the limited amo
unt of available information and by the psycholo
gical orientation of the decision maker.
 An optimistic manager will follow a maximax
choice (maximizing the maximum possible payo
ff)
 A pessimist will follow a maximin choice (max
imizing the minimum possible payoff)
 A manager who desires to minimize his maxi
mum “regret” will opt for a minimax choice.
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Example of decision-making under condition of unce
rtainty:
- A marketing manager from VISA is planning to promote the
ir product Westcoast region with payoff matrix below:
 VISA has 4 possible strategies (S)
 Mastercard (biggest competitor) is also doing same with
3 possible actions (C).
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- For the manager who desires to minimize his maximum
“regret” (the amount of money that could have been made
had a different strategy been used), the “regret matrix” is s
hown below:

1. Get the highest pay-off for each Mastercard action

(CA1 = 24, CA2 = 21, CA3 = 28)
2. To get regret, subtract payoff for each (S) from the highest
CA payoff (S1CA1 regret = 24 – 13 = 11)
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Decision-Making Styles:
1. Linear thinking - is characterized by a person’s p
reference for using external data and facts and p
rocessing this information through rational, logic
al thinking to guide decisions and actions.
2. Nonlinear thinking - is characterized by a prefere
nce for internal sources of information (feelings
and intuition) and processing this information wit
h internal insights, feelings, and hunches to guid
e decisions and actions.
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Decision-Making Biases & Errors:
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Decision-Making Biases and Errors:
1. Overconfidence bias - when decision makers ten
d to think they know more than they do or hold
unrealistically positive views of themselves and t
heir performance.
2. Immediate gratification bias - describes decision
makers who tend to want immediate rewards an
d to avoid immediate costs.
3. Anchoring effect bias - describes how decision m
akers fixate on initial information as a starting po
int and then, once set, fail to adequately adjust f
or subsequent information.
4. Selective perception bias - decision makers who
selectively organize and interpret events based o
n their biased perceptions.
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5. Confirmation bias - decision makers who seek ou
t information that reaffirms their past choices an
d discount information that contradicts past judg
ments exhibit.
6. Framing bias - is when decision makers select an
d highlight certain aspects of a situation while ex
cluding others.
7. Availability bias – is when decisions makers tend
to remember events that are the most recent an
d vivid in their memory, thus, distorting their abil
ity to recall events in an objective manner and re
sulting in distorted judgments and probability est
imates.
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8. Representation bias – is when decision makers a
ssess the likelihood of an event based on how cl
osely it resembles other events or sets of events.
9. Randomness bias - describes the actions of decis
ion makers who try to create meaning out of ran
dom events.
10. Sunk costs error - occurs when decision makers
forget that current choices can’t correct the past,
they incorrectly fixate on past expenditures of ti
me, money, or effort in assessing choices rather
than on future consequences.
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11. Self-serving bias – when decision makers who ar
e quick to take credit for their successes and bla
me failure on outside factors.
12. Hindsight bias - is the tendency for decision mak
ers to falsely believe that they would have accur
ately predicted the outcome of an event once th
at outcome is actually known.
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Overview of Managerial Decision Making: