What is decision modeling?

There are some standard business processes that every organization performs daily.
Due to their frequency and importance, it is vital that these business processes remain efficient and
effective.
These type of business processes are ideal for improvement especially if those improvements can help
identify and eliminate bottlenecks.
To improve these processes, it may be necessary to streamline and automate some steps in the
process.
Steps in the process such as approvals, are ideal candidates for automation and a decision model can
be used to identify these steps.
Decision models are visual representation of a process which show how data and knowledge are
merged together to make a particular business decision.
The model is connected to business processes, business rules, resources and performance measures in
the organizations.
For example: an example of a behavioral rule is: if the customer’s billing address matches the credit
card details provided then the order should be processed.

In the world of business, decision making plays a crucial role in the success or failure of an
organization. Companies have to make hundreds of decisions every day, ranging from simple
operational decisions to complex strategic decisions. To make these decisions, businesses need to use
data and knowledge to understand the impact of various alternatives and choose the best course of
action. This is where decision modeling comes in.

Decision models are visual representations of a process that show how data and knowledge are
merged together to make a particular business decision. These models provide a framework for
decision making by illustrating the relationships between different variables, such as inputs,
processes, and outputs. Decision models can be created using a variety of techniques, including
mathematical modeling, simulation, and rule-based systems.

The decision model is connected to various business processes, business rules, resources, and
performance measures in the organization. This helps decision makers to understand the impact of
different decisions on the overall performance of the business. By creating a decision model,
businesses can identify the key factors that impact their performance and make more informed
decisions.

An example of a behavioral rule is: if the customer’s billing address matches the credit card details
provided, then the order should be processed. This rule is a simple example of a decision model that
can be used by an e-commerce business. The decision model here is to determine whether to process
an order or not based on a set of conditions. By creating this decision model, the e-commerce business
can automate the order processing and reduce the risk of fraudulent transactions.

Another example of a decision model is the capital budgeting decision model. This model is used by
companies to evaluate potential investments based on their expected return on investment (ROI). The
model takes into account various factors such as cash flows, risk, and timing to determine whether an
investment is worth pursuing. By using this decision model, companies can make more informed
investment decisions and allocate their resources more effectively.

In the marketing world, decision models can be used to optimize the marketing mix. For example, a
decision model can be created to determine the optimal price for a product or service based on
consumer demand, competition, and cost. By using this decision model, businesses can identify the
optimal price point that maximizes their revenue and profitability.

In conclusion, decision modeling is a powerful tool that can help businesses make more informed
decisions by providing a visual representation of a process. Decision models can be used to optimize a
wide range of business decisions, from operational decisions to strategic decisions. By using data and
knowledge to inform their decisions, businesses can improve their performance and achieve their
goals.

Different Types of Decisions

In business, there are three main types of decisions that organizations make: strategic decisions,
tactical decisions, and operational decisions. Each of these types of decisions serves a specific
purpose and requires a unique approach to decision making.

1. Strategic Decisions: Organizations make infrequent but large impact strategic decisions. Much
analysis is done before the decision is made and the implications for a business can be dramatic.
Strategic decisions are long-term decisions that set the direction and scope of an organization.
They are typically made by top-level executives and involve allocating resources, identifying new
markets, developing long-term goals, and making decisions about mergers, acquisitions, and
partnerships. The goal of strategic decision making is to position the organization for success over
the long term.
Example: A technology company decides to invest in developing a new product line that will
allow them to enter a new market segment. This decision involves a significant investment of
resources and has the potential to impact the company's long-term growth and profitability.

2. Tactical Decisions: Regular tactical decisions involving management and control are also made.
There is generally still time and energy for significant analysis but there is time pressure too, a
need for consistency and the opportunity to learn what works. Tactical decisions are short to
medium-term decisions that are made by middle-level managers and focus on implementing the
strategies set by the organization. These decisions are more focused on achieving specific
objectives, such as increasing sales, improving efficiency, or reducing costs. Tactical decisions
are often based on data analysis and involve a range of stakeholders within the organization.
Example: A retail store decides to launch a promotional campaign to boost sales of a particular
product line. This decision is based on data analysis that shows a decline in sales of this product
and involves coordinating with various departments to design and implement the campaign.

3. Operational Decision: Finally, every organization makes large numbers of operational decisions
about individual transactions or customers. Time pressure is often extreme and these decisions
must generally be embedded into operational systems and processes.
 Operational decisions are day-to-day decisions made by frontline managers and employees that
ensure the organization runs smoothly. These decisions involve managing resources, scheduling
activities, and ensuring that quality standards are met. Operational decisions are often made in
real-time and involve a high level of coordination and collaboration within the organization.

Example: A restaurant manager decides to increase the number of servers on duty during peak
hours to improve customer service and reduce wait times. This decision involves coordinating with
the scheduling department to ensure that there are enough staff available and communicating the
decision to the servers and kitchen staff.

Operational decisions can be categorized into various types based on their nature and the role
they play in the organization. Here are a few examples:

 Approval decisions: These decisions involve approving or denying requests or proposals

related to the day-to-day operations of the organization. Examples of approval decisions
include approving a purchase order, approving a vacation request, or approving an expense
report.

 Validation decisions: These decisions involve verifying the accuracy or validity of data or
information related to the organization's operations. Examples of validation decisions include
validating the accuracy of an invoice, validating the authenticity of a customer's
identification, or validating the compliance of a product with regulatory standards.

 Targeting decisions: These decisions involve identifying specific targets or objectives for the
organization's operations. Examples of targeting decisions include targeting specific customer
segments for marketing campaigns, targeting specific product lines for production, or
targeting specific geographic regions for expansion.

 Resource allocation decisions: These decisions involve allocating resources, such as

personnel, time, or money, to support the organization's operations. Examples of resource
allocation decisions include allocating staff to specific projects or tasks, allocating funds to
specific departments or initiatives, or allocating time to specific activities or events.

 Quality management decisions: These decisions involve managing and maintaining the
quality of the organization's products or services. Examples of quality management decisions
include establishing quality control procedures, monitoring product or service quality, or
identifying and addressing quality issues.

In conclusion, strategic, tactical, and operational decisions are all important types of decisions that
organizations make. Each type of decision requires a different approach to decision making and
involves different levels of the organization. By understanding the differences between these types of
decisions, organizations can make more informed decisions and achieve their goals.

Decision modeling can help optimize the problems of marketing mix, capital budgeting,
portfolio optimization, and decision making under uncertainty by providing a systematic and
data-driven approach to decision-making. Here are some specific examples:

1. Marketing mix: Marketing mix refers to the set of decisions that a company makes regarding the
four Ps of marketing: product, price, promotion, and place. Decision modeling can help optimize
the marketing mix by simulating the impact of different combinations of these factors on sales
 and revenue. For example, decision modeling can be used to determine the optimal pricing
strategy for a new product or to identify the most effective promotional campaign to increase
sales. By using data and analytics to inform these decisions, companies can improve their
marketing performance and maximize their return on investment.
Here are three examples of how decision modeling can be used to solve marketing mix problems:
 Pricing optimization: One of the most important decisions in the marketing mix is
determining the optimal price for a product or service. Decision modeling can be used to
evaluate the impact of different pricing strategies on sales and revenue. For example, decision
modeling can be used to simulate the impact of different price points on consumer demand
and profitability. By using decision modeling to inform pricing decisions, companies can
identify the optimal price that maximizes revenue and profits.
 Promotion optimization: Another important decision in the marketing mix is determining the
most effective promotional strategies to increase sales and awareness. Decision modeling can
be used to evaluate the impact of different promotional activities on consumer behavior and
sales. For example, decision modeling can be used to simulate the impact of different
advertising campaigns, sales promotions, and other promotional activities on consumer
awareness and purchase behavior. By using decision modeling to inform promotional
decisions, companies can identify the most effective promotional strategies that drive sales
and revenue.
 Product mix optimization: The marketing mix also involves decisions related to the product or
service offerings of a company. Decision modeling can be used to optimize the product mix
by evaluating the impact of different product offerings on sales and profitability. For example,
decision modeling can be used to simulate the impact of adding new products or services to a
company's product line or discontinuing underperforming products. By using decision
modeling to inform product mix decisions, companies can identify the optimal product mix
that maximizes sales and profitability.

2. Capital budgeting: Capital budgeting involves the process of allocating financial resources to
different projects or investments. Decision modeling can help optimize capital budgeting
decisions by evaluating the potential return on investment for each option. For example, decision
modeling can be used to predict the cash flows and profitability of different investment options,
such as expanding production capacity or launching a new product line. By using decision
modeling to inform capital budgeting decisions, companies can reduce risk and maximize their
return on investment.
Here are three examples of how decision modeling can be used to solve capital budgeting
problems:
 Net Present Value (NPV) Analysis: One common method of capital budgeting is to use net
present value (NPV) analysis. This involves calculating the present value of the cash inflows
and outflows associated with a project and subtracting the costs from the revenues. If the
resulting NPV is positive, the project is considered to be financially viable. Decision
modeling can be used to create a visual representation of the cash flows and costs associated
with a project and simulate different scenarios to determine the optimal investment decision.
 Capital Rationing: Capital rationing is a situation where a company has limited financial
resources and must decide which investment projects to fund. Decision modeling can be used
to create a model that takes into account the limited resources and helps identify the most
profitable investment projects. By considering factors such as expected cash flows, risk, and
the company's strategic goals, decision modeling can help optimize the allocation of resources
to maximize returns.
 Sensitivity Analysis: Sensitivity analysis involves analyzing how changes in different
variables can impact the outcome of a capital budgeting decision. Decision modeling can be
 used to create a model that allows decision-makers to adjust variables such as revenue
projections, cost estimates, and discount rates to see how these changes impact the NPV and
overall profitability of a project. By conducting sensitivity analysis using decision modeling,
companies can identify potential risks and uncertainties associated with a project and make
more informed investment decisions.

3. Portfolio optimization: Portfolio optimization refers to the process of selecting the optimal mix of
assets to achieve a specific investment objective, such as maximizing return or minimizing risk.
Decision modeling can help optimize portfolio selection by simulating the potential returns and
risks of different asset allocations. For example, decision modeling can be used to determine the
optimal mix of stocks, bonds, and other assets to achieve a specific investment objective, based on
historical data and market trends. By using decision modeling to inform portfolio optimization
decisions, investors can achieve their investment goals more efficiently.
Here are three examples of how decision modeling can be used in portfolio management:
 Asset Allocation Modeling: Asset allocation is the process of dividing an investment portfolio
among different asset categories, such as stocks, bonds, and real estate. Decision modeling
can be used to create an asset allocation model that optimizes the portfolio's expected return
and risk based on different assumptions about future market conditions. For example, a
portfolio manager might create a decision model that simulates different market scenarios
(e.g., economic growth, recession, inflation) and calculates the optimal allocation of assets for
each scenario.
 Risk Management Modeling: Risk management is an important aspect of portfolio
management, and decision modeling can be used to create models that help managers
identify, measure, and manage risk. For example, a portfolio manager might create a decision
model that simulates the potential impact of different risk factors (e.g., interest rate changes,
geopolitical events) on the portfolio's performance and identifies strategies to mitigate risk.
 Portfolio Optimization Modeling: Portfolio optimization is the process of selecting the best
mix of assets to achieve a specific investment objective, such as maximizing returns or
minimizing risk. Decision modeling can be used to create optimization models that take into
account various constraints and objectives. For example, a portfolio manager might create a
decision model that optimizes the portfolio's return subject to constraints such as
diversification requirements, liquidity needs, and risk tolerance.

In each of these examples, decision modeling provides a powerful tool for portfolio managers
to make informed investment decisions and manage risk. By using data and analytical
techniques to create decision models, portfolio managers can gain deeper insights into the
factors that affect portfolio performance and develop more effective investment strategies.

4. Decision making under uncertainty: Decision making under uncertainty refers to the process of
making decisions when the outcomes are uncertain or unknown. Decision modeling can help
optimize decisions under uncertainty by simulating the potential outcomes of different options
and evaluating their expected values. For example, decision modeling can be used to evaluate the
potential outcomes of different risk management strategies or to identify the most effective
contingency plan for a potential crisis. By using decision modeling to inform decisions under
uncertainty, companies can reduce risk and improve their resilience to unexpected events.
Here are three examples of how businesses can use decision-making techniques under
uncertainty to make better decisions:
 Investment Decisions: Businesses often face uncertainty when making investment decisions.
For example, they may be uncertain about future market conditions, changes in government
policies, or new technological developments. To make investment decisions under
 uncertainty, businesses can use techniques such as scenario analysis or real options analysis.
Scenario analysis involves creating different scenarios to represent potential future outcomes,
while real options analysis evaluates the value of having the flexibility to make future
decisions.
 Product Development: When developing new products, businesses face uncertainty about
how the market will respond. To make decisions about product development under
uncertainty, businesses can use techniques such as conjoint analysis or simulation modeling.
Conjoint analysis is a market research technique that helps businesses understand how
customers value different product features. Simulation modeling involves creating computer
models to simulate different scenarios and estimate the probability of different outcomes.
 Risk Management: Businesses face a wide range of risks, including financial, operational, and
reputational risks. To manage these risks, businesses can use techniques such as risk
assessment or value-at-risk analysis. Risk assessment involves identifying and assessing the
likelihood and potential impact of different risks, while value-at-risk analysis estimates the
potential loss that could occur in a worst-case scenario.

How decision under certainty is different from decision under uncertainty in business
Decision-making under certainty is different from decision-making under uncertainty in several ways.
Here are three examples:

 Data Availability: Decision-making under certainty assumes that all the relevant data needed to
make a decision is available and known. For example, when calculating the return on investment
(ROI) for a project, decision-makers can assume that they know the exact costs and benefits
associated with the project. In contrast, decision-making under uncertainty assumes that there is
some degree of unknowns, such as market conditions or the behavior of competitors.

 Risk Assessment: Decision-making under certainty does not require a thorough analysis of risk, as
the outcomes of a decision are already known. In contrast, decision-making under uncertainty
requires a thorough analysis of potential risks and uncertainties, such as using scenario analysis to
consider different outcomes based on different sets of assumptions.

 Decision-making Criteria: Decision-making under certainty is often based on clear and objective
criteria, such as maximizing profit or minimizing costs. In contrast, decision-making under
uncertainty may require more subjective criteria and balancing of multiple factors, such as the
probability of different outcomes or the potential impact of different risks.

For example, a business may have a certain amount of cash on hand and must decide between two
investment options. If the return on investment and associated risks are known with certainty, the
business can make a decision based purely on financial criteria. In contrast, if there is uncertainty
surrounding the returns or risks of the investment options, the business may need to consider a
broader range of factors, such as the likelihood of different outcomes, potential impact on other
business initiatives, or external market factors.

Another example might involve a company deciding whether to expand into a new market. If the
market conditions and potential risks and benefits are known with certainty, the decision may be
based purely on financial metrics. In contrast, if there is uncertainty surrounding the market
conditions, competitive landscape, or regulatory environment, the decision may involve more
complex considerations, such as scenario planning, risk management, or alternative investment
options.
Decision modeling is a critical tool in business that offers several advantages and benefits. Here
are some of the key advantages of decision modeling:

 Improved Decision-Making: Decision modeling enables businesses to make more informed and
data-driven decisions. By incorporating data and analytics into the decision-making process,
decision modeling can help identify key variables, predict outcomes, and evaluate the potential
risks and rewards associated with different courses of action.

 Increased Efficiency: Decision modeling can help streamline decision-making processes, reducing
the time and resources required to reach a decision. By automating calculations and analysis,
decision modeling can help reduce errors, increase consistency, and improve the speed at which
decisions can be made.

 Cost Savings: By enabling businesses to make more informed decisions, decision modeling can
help reduce costs and increase profitability. For example, decision modeling can be used to
identify cost-saving opportunities, optimize resource allocation, and forecast revenue and
profitability.

 Improved Risk Management: Decision modeling can help businesses better understand and
manage risks associated with different decisions. By incorporating risk analysis and scenario
planning into the decision-making process, businesses can identify potential risks and develop
strategies to mitigate them.

 Improved Communication: Decision modeling can help facilitate communication and

collaboration among stakeholders. By creating a shared understanding of the decision-making
process and the factors driving the decision, decision modeling can help align stakeholders and
ensure that decisions are made in a transparent and collaborative manner.