ENGG 406 - Engineering Management

Chapter 2 Decision Making

Decision-making is one of the most important aspects in an organization. Decisions
are made in the best interest of the organization and to support organizational growth,
however the process of arriving at a decision continues to become more complex. For
that matter, decision making and problem solving is taken and used in all engineering
management functions, although usually they are considered a part of the planning
phase. Making good decisions is something that every engineer manager strives to do
since the overall quality of managerial decisions has a major influence on
organizational success or failure. In this chapter, students will learn the nature of
decision making, how decisions are made every day within organizations and how
managers make decisions.

When you have finished studying this chapter, you should be able to do the
following:

Nature of Decision Making

Decision-

making means - the process of deciding about something important, especially in a

group of people or in an organization.
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Managerial decision making is the process of making a conscious choice between

two or more rational alternatives in order to select the one that will produce the most
desirable consequences (benefits) relative to unwanted consequences (costs). If there
is only one alternative, there is nothing to decide. Thereby, it is a continuous and
dynamic activity that pervades all other activities pertaining to the organization. Since
it is an ongoing activity, the decision making process plays vital importance in the
functioning of an organization. Since intellectual minds are involved in the process of
decision making, it requires solid scientific knowledge coupled with skills and
experience in addition to mental maturity.

Further, decision making can be regarded as a check and balance system that
keeps the organization growing both in vertical and linear directions. It means that
the decision making process seeks a goal. The goals are pre-set business objectives,
company missions and its vision. To achieve these goals, companies may face a lot of
obstacles in administrative, operational, marketing wings and operational domains.
Such problems are sorted out through a comprehensive decision making process. No
decision comes as an end in itself, since it may evolve new problems to solve. When
one problem is solved another arises and so on, such that the decision making
process, as said earlier, is continuous and dynamic.

Types of Problems and Decisions

Engineer Managers will encounter different types of problems and decisions as
they do their jobs. Depending on the nature of the problem, the engineer manager
can use different types of decisions.

1. Well-Structured Problems and Programmed Decisions. Some problems are

straightforward. The goal of the decision maker is clear, the problem is familiar,
and information about the problem is easily defined and complete.
Decisions are programmed to the extent that they are repetitive and routine
and to the extent that a definite approach has been worked out for handling
them. Because the problem is well structured, the manager doesn't have to go
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to the trouble and expense of going through an involved decision process. Once
the structured problem is defined, its solution is usually self-evident or at least
reduced to very few alternatives that are familiar and that have proved
successful in the past. Programmed decisions also known as routine decisions
involve standard decision procedures, and entail a minimum of uncertainty.
In many cases, programmed decision making becomes decision making by
guide. In the given example, the spilled drink on the customer's coat doesn't
require the restaurant manager to identify and weight decision criteria or to
develop a long list of possible solutions. Rather, the manager falls back on a
systematic procedure, rule, or policy.

Examples of these types of problems might include a customer's wanting to return a

purchase to a retail store, a supplier's being late with an important delivery, a news team's
responding to an unexpected and fast-breaking event, or a college's handling of a student
wanting to drop a class. Such situations are called well-structured problems since they are
straightforward, familiar, and easily defined problems.
For instance, a server in a restaurant spills a drink on a customer's coat. The manager has
an upset customer and he or she needs to do something. Because drinks are frequently spilled,
there's probably some standardized routine for handling the problem. For example, the
manager offers to have the coat cleaned at the restaurant's expense. In handling this problem
situation, the manager uses a programmed decision.

Various types of programmed decisions are:

a. Organizational decisions. Decisions taken in interest of the

organization.
b. Operational decisions. Decisions are taken as a matter of routine. It
relates to daily operations and aims to achieve short-term objectives
of the firm. Operational decisions are taken by middle and lower-
level managers within the framework of policies and procedures and
allow limited use of discretion by managers.
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c. Research decisions. Decisions which involve regular survey of the

market are research decisions and decisions made under situations
of crisis or emergency are crisis intuitive decisions.
d. Opportunity decisions. These decisions reflect foresightedness.
Managers forecast opportunities to promote organizational growth.
The decision to grow and diversify (i.e. market penetration and
market development) is an opportunity decision.

2. Poorly Structured Problems and Nonprogrammed Decisions. Various

organizational situations involve poorly structured problems, which are
problems that are new or unusual and for which information is ambiguous or
incomplete. Decisions are taken in unstructured situations which reflect novel,
ill-defined and complex problems. The problems are non-recurring or
exceptional in nature. Since they have not occurred before, they require
extensive brainstorming. Managers use skills and subjective judgment to solve
the problems through scientific analysis and logical reasoning.

For example, increase in advertising expenditure, effective salesmanship, upgraded technology,

quality controls, brand image and reasonable prices are expected to increase sales and profits.
If, despite all this, profits are declining, it requires immediate decision-making and such
decisions are non-programmed decisions

When problems are poorly structured, managers must rely on

nonprogrammed decision making in order to develop unique solutions.
Nonprogrammed decisions also called as nonroutine decisions are unique and
nonrecurring, often involving incomplete knowledge, high uncertainty, and the
use of subjective judgment or even intuition, where no alternative can be
proved to be the best possible solution to the particular problem. Such
decisions become more and more common the higher one goes in management
and the longer the future period influenced by the decision is. When a manager
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confronts a poorly structured problem, or one that is unique, there is no cut

and-dried solution, thus, it requires a custom-made response through
nonprogrammed decision making.

Decision Making Process

Rational decision-making describes a series of steps that decision makers should
consider if their goal is to maximize the quality of their outcomes. In other words, if
an engineer manager wants to make sure to make the best choice, going through the
formal steps of rational decision-making may make sense. Rational decision-making
involves the following steps as illustrated in Figure 2-1:

Figure 2-1. Decision Making Process

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1. Identify the problem or Diagnose the Problem. Decisions are made to solve
problems. As a first step to decision--making, therefore, managers identify the
problem. Problem is any deviation from a set of expectations. Managers find
causes of the problem by collecting facts and information that have resulted in
the problem. For example, if the sales target is 10,000 units per month but
actual sales are 6,000 units, managers sense some problem in the company.
The problem is identified with the marketing department of the company.
Managers use their judgment, imagination and experience to identify the
problem as wrong identification will lead to wrong decisions.

2. Analyze the environment. The objective of environmental analysis is the

identification of constraints which may be spelled out as either internal or
external limitations. Managers scan the internal and external environment to
see whether or not organizational operations conform to environmental
standards. The internal environment refers to organizational activities within
the company that surrounds decision making. While the external environment
refers to variables that are outside the organization and not typically within the
short-run control of top management.

3. Articulate problem or opportunity. Information provides input for generating

solutions. Information may be quantitative or qualitative. It should be reliable,
adequate and timely so that right action can be taken at the right time.

4. Develop viable alternatives. In this step, the engineer manager prepares a list
of alternative solutions, then determines the viability of each solution.
Alternatives means developing two or more ways of solving the problem.
Managers develop many solutions to choose the best, creative and most
applicable alternative to solve the problem.
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5. Evaluate Alternatives. This is important since the next step is about making a
choice. Proper evaluation makes choosing the right solution less difficult. All
the alternatives are weighed for their strengths and weaknesses. Further, the
alternatives will be evaluated depending on the nature of the problem,
objectives of the company and the nature of alternatives presented.

6. Make a choice. After the alternatives have been evaluated, the decision maker
must now be ready to make a choice. Choice-making refers to the process of
selecting among alternatives representing potential solutions to a problem. To
make the selection process easier, the alternatives can be ranked from best to
worst on the basis of some factors like benefit, cost, or risk.
7. Implement Decision. Implementation refers to carrying out the decision so that
the objectives sought will be achieved. At this stage, the resources must be
made available so that decision may be properly implemented.

8. Evaluate and adapt decision results. In implementing the decision, the results
expected may or may not happen. It is therefore important for the engineer
manager to use control and feedback mechanisms to ensure results and to
provide information for future decisions.

Decision Making Conditions

Decisions may also be classified as being made under conditions of certainty, risk,
or uncertainty, depending on the degree with which the future environment
determining the outcome of these decisions is known. These three categories are
compared:
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Certainty

The ideal situation for making decisions is one of certainty, that is, a situation in
which a manager can make accurate decisions because the outcome of every
alternative is known. Decision making under certainty implies that we are certain of
the future state of nature. For example, when a state treasurer is deciding on which
bank to deposit excess state funds, he knows exactly how much interest is being
offered by each bank and will be earned on the funds. He is certain about the
outcomes of each alternative. As you might expect this condition isn't characteristic
of most managerial decision situations. It's more idealistic than realistic.

One common technique for decision making under certainty is called linear
programming. In this method, a desired benefit (such as profit) can be expressed
as a mathematical function (the value model or objective function) of several
variables. The solution is the set of values for the independent variables (decision
variables) that serves to maximize the benefit (or, in many problems, to minimize the
cost), subject to certain limits (constraints). Steps include: 1.) State the problem, 2.)
decision variables, 3.) Objective function and 4.) Constraints.
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Risk

A far more common situation is one of risk, those conditions in which the decision
maker is able to estimate the likelihood of certain alternatives or outcomes. The ability
to assign probabilities to outcomes may be the result of personal experiences or
secondary information. Under the conditions of risk, managers have historical data
that allow them to assign probabilities to different alternatives.

Uncertainty

Sometimes a decision maker cannot assess the probability of occurrence for the
various states of nature. In such condition of uncertainty, the decision maker can
choose among several possible approaches for making the decision. The choice of
alternative is influenced by the limited amount of information available to the decision
maker. Another factor that influences choices under conditions of uncertainty is the
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psychological orientation of the decision maker. Different approaches to decision

making under uncertainty include the following:

The optimistic manager will follow a maximax choice, an alternative that offers
the highest possible outcome (maximizing the maximum possible payoff),
The pessimist will follow a maximin choice, the alternative whose worst

The decision maker may simply assume that all states of nature are equally
likely (the so- This method finds the
alternative with the highest average outcome. It calculates the average
outcome for every alternative, which is the sum of all outcomes divided by the
number of outcomes, then pick the alternative with the maximum number. The
equally likely approach assumes that each state of nature is equally likely to
occur.
The manager who desires to minimize his maximum "regret" will opt for a
minimax choice, the alternative that has the smallest difference between the
is
understood as proportional to the difference between what we actually get,
and the better position that we could have received if a different course of

The minimax regret rule captures the behavior of individuals who spend their
post-decision time regretting their choices.
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Different decision makers will have different approaches to decision making under
approach, for
there is no one best approach. Obtaining a solution is not always the end of the
decision making process. The decision maker might still look for other arrangements
to achieve even better results. Different people have different ways of looking at a
problem.

Tools and Techniques for Making Better Decisions

Decision making is a very important and complex process. In order to aid decision
makers, make the right choice, different tools and techniques are used to improve the
overall quality of decision making. In some instances, it may be a combination of a
couple of different strategies that help managers achieve the best results. Following
are some of the commonly used techniques:
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Decision Trees are tools that help choose between several courses
of action or alternatives. They are represented as tree-shaped diagram used to
determine a course of action or show a statistical probability. Each branch of the
decision tree represents a possible decision or occurrence. The tree structure shows
how one choice leads to the next, and the use of branches indicates that each option
is mutually exclusive.

A decision tree can be used by a manager to graphically represent which actions

could be taken and how these actions relate to future events.

Figure 2-4. Decision Tree Diagram

Delphi Technique is a method used to estimate the likelihood

and outcome of future events. It is a group process using written responses to a series
of questionnaires instead of physically bringing individuals together to make a
decision. Individuals are required to respond to a set of multiple questionnaires, with
each subsequent questionnaire built from the information gathered in the previous
one. The process ends when the group reaches a consensus. The responses can be
kept anonymous if required.

It was developed to help with group decision

making by ensuring that all members participate fully. NGT is not a technique to be
used at all meetings routinely. Rather, it is used to structure group meetings when
members are grappling with problem solving or idea generation. It follows four steps.
First, each member of the group engages in a period of independently and silently
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writing down ideas. Second, the group goes in order around the room to gather all
the ideas that were generated. This goes on until all the ideas are shared. Third, a
discussion takes place around each idea and members ask for and give clarification
and make evaluative statements. Finally, individuals vote for their favorite ideas by
using either ranking or rating techniques. Following the four-step NGT helps to ensure
that all members participate fully and avoids group decision-making problems such as
groupthink.

Payback analysis is a technique generally used in financial

management. It refers to the period of time required to recoup the funds expended
in an investment, or to reach the break-even point. It is generally used to evaluate
capital-purchasing alternatives. Alternatives are ranked according to the time each
takes to pay back its initial cost. The strategy is to choose the alternative that has the
quickest payback of the initial cost.

Marginal analysis weighs the benefits of an input or activity

against the costs. This type of analysis helps managers determine whether an activity
or input is providing the maximum return-on-investment (ROI). To conduct a marginal
analysis, you need to change a variable, such as the quantity of an input you use, or
the volume of
what the increase in total benefits would be if one more unit of the control variable
were added. This is considered the marginal benefit of the added unit. Likewise, the
marginal cost of the added good should also be calculated. The marginal cost is the
increase in total cost if one more unit of the control variable were added. If the

marginal unit of the variable should be added.

When organization is planning to make a significant change in

their business. A SWOT Analysis can help manager identify the forces that influence
a strategy, action, or initiative. This information can then be used to guide decision
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maker in the right direction and support the business decisions SWOT diagrams can
break down the situation into four distinct quadrants:

a. Strengths: What does your company do better than its competitors? Think
of both internal and external strengths that you possess.
b. Weaknesses: Where can your company improve? Try to take a neutral
approach and consider what factors may be hurting your business.
c. Opportunities: Look at your strengths and think of how you can leverage
them to create new openings for your business. Also consider how
eliminating a specific weakness could open you up to a new opportunity.
d. Threats: Determine what challenges stand in the way of achieving your
goals. Identify the primary threats to your organization.

Figure 2-5. SWOT Diagram

When dealing with multiple choices and variables, a decision

matrix can bring clarity to the disarray. A decision matrix is similar to a pros/cons list,
but it allows decision maker to place a level of importance on each factor. That way,
decision maker can more accurately weigh the different options against each other.
The following are the steps to create decision matrix:

1. List decision alternatives as rows

2. List relevant factors as columns
3. Establish a consistent scale to assess the value of each combination of
alternatives and factors
4. Determine how important each factor is towards making your final decision
and assign weights accordingly
5. Multiply your original ratings by the weighted rankings
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6. Add up the factors under each decision alternative

7. The option that scores the highest wins

It is a statistical technique in decision making that is used for the

selection of a limited number of tasks that produce significant overall effect. It uses
the Pareto Principle (also known as the 80/20 rule) the idea that by doing 20% of the
work you can generate 80% of the benefit of doing the whole job. Or in terms of
quality improvement, a large majority of problems (80%) are produced by a few key
causes (20%). This is also known as the vital few and the trivial many. Example Pareto
diagram is illustrated in Figure 2-6.

Figure 2-6. Pareto Diagram

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Summing Up
A decision maker who was perfectly rational would be fully objective and logical.
The problem would be clear and unambiguous and the decision maker would have a
clear and specific goal and know all possible alternatives and consequences. Rational
managerial decision making assumes that decisions are made in the best interest of
the organization using different strategies and techniques, thus, maximizing the

Chapter Test

2-1. Give an example of a time when you had to keep from speaking or making a
decision because you did not have enough information.

2-2. List a few examples of routine decisions apart from the examples mentioned in
this chapter. How do you think engineers can learn to handle nonroutine or
unstructured situations?

2-3. What steps do you follow to study a problem before making a decision?

2-4. Give an example of a time when you had to be relatively quick in coming to a
decision.

2-5. What was your most difficult decision in the last 6 months? What made it
difficult?

2-1. You operate a small wooden toy company making two products: alphabet blocks
and wooden trucks. Your profit is $30.00 per box of blocks and $40.00 per box of
trucks. Producing a box of blocks requires one hour of woodworking and two hours
of painting; producing a box of trucks takes three hours of woodworking, but only one
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hour of painting. You employ three woodworkers and two painters, each working 40
hours a week. How many boxes of blocks (B) and trucks (T) should you make each
week to maximize profit? Solve graphically as a linear program and confirm
analytically.

2-2. Read through the case study. Write down all of the strengths, weaknesses,
opportunities and threats you can think of in relation to the New Valley Inn.

The New Valley Inn is a 50-unit, no-frills operation in the less scenic part of a major
Bakersfield resort town. The owner, Mr. Shaw, firmly believes that there is a need for
his style of low-cost family accommodation amid the luxury and beauty of the area.
His rooms are large, family-style rooms (there is no television, for example). Although
there is plenty of room for future expansion, the grounds are fairly plain with a bit of
landscaping, but mostly grass.

Mr. Shaw can serve breakfast to the rooms and provides tea-making facilities. There
are now a lot of good restaurants and take-
less than half of what similar hotels charge and only a fraction of what the big five-

shops and other attractions.

The problem is occupancy. He has some regulars who come every holiday period and
have been doing so for the four years he has owned the property. Overall, occupancy
is about 50% year round and he knows from the local tourist office that the other
properties average around 68% occupancy year round. New developments could
mean trouble. This lack of occupancy can be quite frustrating for Mr. Shaw. Cars pull
in, drive around the parking areas, and then drive away.

Currently Mr. Shaw does very little advertising in local district guides and the holiday
papers, mainly because he really thinks word-of-mouth is the best form of advertising.
He is a member of the local tourist committee, but too busy to go to meetings.
However, he does receive the local statistics and knows the average stay in the area
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is 3 nights, and that local families and couples and increasingly overseas visitors are
his potential customers.

would be overrun with g

Shaw need to do?

2-3. Use the following questions as your guide to solve the following problem:

What is the problem?

What are the choices you have?
What do you think the consequences of these choices will be for
yourself and others who are involved?
What is your decision?
Do you think you made the right decision? Why?
a. An engineer notices a fine white powder covers everything in a room that has
a laminating press. She asks the operator how long he has been working in
this room. He replies that he has been working there for over ten years. The
engineer is concerned that the health of this operator may be at risk from
inhaling this powder for so long. What should she do?
b. An engineer notices a fine white powder covers everything in a room that has
a laminating press. He asks the operator how long he has been working in this
room. He replies that he has been working there for over ten years. The
engineer is concerned that the health of this operator may be at risk from
inhaling this powder for so long. What should he do?
c. Your company has recently entered into a cooperative venture with a Japanese
firm. A team of Japanese engineers has come to your plant to teach your
engineers a new manufacturing process. However, the senior member of this
team, a Japanese engineer with very traditional cultural views, refuses to work
with a female member of your team despite the fact that she is a highly
qualified engineer. What should you do?
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REFERENCE:

Medina, Roberto G., , Rex Book Store Philippines

Babcock, Daniel L. and Lucy C. Morse , Pearson,

2014

http://www.saylor.org/site/textbooks/Principles%20of%20Management.pdf

https://www.managementstudyguide.com/what-is-decision-making.htm

https://www.kau.edu.sa/Files/0052361/Subjects/IE256_Topic04_Fall2009.pdf

https://www.businessmanagementideas.com/decision-making/types-of-decisions-programmed-and-
non-programmed/4831