EM6113-Engineering Management

Techniques

Decision Making
Part I

1
Management Functions

Planning

Decision Making

Organizing

Leading

Controlling
Objectives
 Discuss how decision making relates to
planning
 Explain the process of engineering
problem solving
 Be able to solve problems using three
types of decision making tools
 Discuss the differences between decision
making under certainty, risk, and
uncertainty
 Describe the basics of other decision
making techniques
 Decision Making
Making a choice from two or more alternatives.
 The Decision-Making Process
 Identifying a problem and decision criteria and
allocating weights to the criteria.
 Developing, analyzing, and selecting an alternative
that can resolve the problem.
 Implementing the selected alternative.
 Evaluating the decision’s effectiveness.
Types of Decisions
 Routine
 recur frequently, involve standard decision
procedures, and entail a minimum of uncertainty
e.g. paying suppliers, payroll processing, 90%
decisions
 Non-routine
 unstructured situations of a novel, nonrecurring
nature
 Engineers not trained for such decisions!
The Decision-
Making
Process
Step 1: Identifying the Problem
A discrepancy between an existing and desired state
of affairs.
 Characteristics of Problems
 A problem becomes a problem when a manager
becomes aware of it.
 There is pressure to solve the problem.
 The manager must have the authority, information,
or resources needed to solve the problem.
Step 2: Decision Criteria
 Decision criteria are factors that are important
to resolving the problem.
 Costs that will be incurred (investments required)
 Risks likely to be encountered (chance of failure)
 Outcomes that are desired (growth of the firm)
Step 3: Allocating Weights to the
Criteria
 Decision criteria are not of equal importance:
 Assigning a weight to each item places the items
in the correct priority order of their importance in
the decision making process.
Criteria and Weights for Franchise Decision

Criterion Weight
Start-up costs 10
Franchisor support 8
Financial qualifications 6
Open geographical locations 4
Franchisor history 3
Step 4: Developing Alternatives
 Identifying viable alternatives
 Alternatives are listed (without evaluation) that
can resolve the problem.

Step 5: Analyzing Alternatives

• Appraising each alternative’s strengths and
weaknesses
 An alternative’s appraisal is based on its ability to
resolve the issues identified in steps 2 and 3.
Step 6: Selecting an Alternative
 Choosing the best alternative
 The alternative with the highest total weight is
chosen.

Step 7: Implementing the Decision

• Putting the chosen alternative into action.
 Conveying the decision to and gaining commitment
from those who will carry out the decision.
Assessed Values of Franchise Opportunities
Using Decision Criteria

Start-Up Franchise Financial Open Franchisor

Costs Support Qualifications Locations History
Franchise
Curves For Women 10 3 10 8 5
Quiznos Sandwiches 8 7 7 8 7
Jani-King 8 5 7 10 10
Jackson-Hewitt Tax Service 8 7 7 8 7
GNC Vitamins and
Nutritional Supplements 7 8 7 8 7
Radio Shack 8 3 6 10 8
Chem-Dry Carpet Cleaning 10 7 8 6 7
McDonald’s 4 10 4 8 10
Evaluation of Franchise Alternatives Against
Weighted Criteria

Start-Up Franchise Financial Open Franchisor

Costs Support Qualifications Locations History Total
Franchise
Curves For Women 100 24 60 32 15 231
Quiznos Sandwiches 80 56 42 32 21 231
Jani-King 80 40 42 40 30 232
Jackson-Hewitt Tax Service 80 56 42 32 21 231
GNC Vitamins and
Nutritional Supplements 70 64 42 32 21 229
Radio Shack 80 24 36 40 24 204
Chem-Dry Carpet 100 56 48 24 21 249
McDonald’s 40 80 24 32 30 206
Step 8: Evaluating the Decision’s
Effectiveness

 The soundness of the decision is judged by

its outcomes.
 How effectively was the problem resolved by
outcomes resulting from the chosen alternatives?
 If the problem was not resolved, what went
wrong?
Making Decisions
 Rationality
 Managers make consistent, value-maximizing
choices with specified constraints.
 Assumptions are that decision makers:
 Are perfectly rational, fully objective, and logical.
 Have carefully defined the problem and identified all
viable alternatives.
 Have a clear and specific goal
 Will select the alternative that maximizes outcomes in
the organization’s interests rather than personal.
Rationality in Decisions
 Objective vs Bounded Rationality
 Objective Rationality
 Optimizing or maximizing the outcome
 Not possible in reality due to resource constraints
(time, money, information)
 Bounded Rationality
 taking into account only those few factors of which one
is aware, understands, and regards as relevant
 Incomplete knowledge, anticipating future, incomplete
alternatives
Assumptions of Rationality
 Making Decisions (cont’d)
 Bounded Rationality
 Managers make decisions rationally, but are limited
(bounded) by their ability to process information.
 Assumptions are that decision makers:
 Will not seek out or have knowledge of all alternatives
 Will satisfice—choose the first alternative encountered
that satisfactorily solves the problem—rather than
maximize the outcome of their decision by considering
all alternatives and choosing the best.
Influences on Decision Making
 Escalation of Commitment
 Increasing or continuing a commitment to
previous decision despite mounting evidence
that the decision may have been wrong.

 The Role of Intuition

 Intuitive decision making
 Making decisions on the basis of experience,
feelings, and accumulated judgment.
Intuition as Part of D-M
 Myers-Briggs Cognitive Styles
Thinking - facts
- things

Sensing Intuition
- short term - long term
- concrete - big picture
- problem solving - problem finding
- risk taking
Feeling - people
- values
 What is Intuition?

Source: Based on L.A. Burke and M.K. Miller. “Taking the Mystery Out of Intuitive
Decision Making.” Academy of Management Executive. October 1999. pp. 91–99.
 Problems and Decisions
 Structured Problems
 Involve goals that are clear.
 Are familiar (have occurred before).
 Are easily and completely defined—information
about the problem is available and complete.

 Programmed Decision
 A repetitive decision that can be handled by a
routine approach.
Types of Programmed Decisions
 A Policy
 A general guideline for making a decision about a
structured problem.
 A Procedure
 A series of interrelated steps that a manager can
use to respond (applying a policy) to a structured
problem.
 A Rule
 An explicit statement that limits what a manager or
employee can or cannot do in carrying out the steps
involved in a procedure.
Examples
 Policy
 Accept all customer-returned merchandise.

 Procedure
 Follow all steps for completing merchandise return
documentation.

 Rules
 Managers must approve all refunds over $50.00.
 No credit purchases are refunded for cash.
Problems and Decisions (cont’d)
 Unstructured Problems
 Problems that are new or unusual and for which
information is ambiguous or incomplete.
 Problems that will require custom-made solutions.

 Nonprogrammed Decisions
 Decisions that are unique and nonrecurring.
 Decisions that generate unique responses.
Types of Problems, Types of Decisions, and
Level in the Organization
Decision-Making Styles
 Dimensions of Decision-Making Styles
 Ways of thinking
 Rational, orderly, and consistent
 Intuitive, creative, and unique

 Tolerance for ambiguity

 Low tolerance: require consistency and order
 High tolerance: multiple thoughts simultaneously
Decision-Making Styles(cont’d)
 Types of Decision Makers
 Directive
 Use minimal information and consider few alternatives.
 Analytic
 Make careful decisions in unique situations.
 Conceptual
 Maintain a broad outlook and consider many alternatives
in making long-term decisions.
 Behavioral
 Avoid conflict by working well with others and being
receptive to suggestions.
 Decision-Making Styles

Source: S.P. Robbins and D.A. DeCenzo, Supervision Today.

2nd ed. (Upper Saddle River, NJ: Prentice Hall, 1998). p. 166.
Common Decision-Making Errors and Biases
Decision-Making Biases and Errors
 Heuristics
 E.g. “rules of thumb” to simplify decisions
 Making an approximation without having to do
exhaustive research.

 Overconfidence Bias
 Holding unrealistically positive views of one’s self and
one’s performance.

 Immediate Gratification Bias

 Choosing alternatives that offer immediate rewards and
that to avoid immediate costs.
 Decision-Making Biases and
Errors (cont’d)
 Anchoring Effect
 Fixating on initial information and ignoring
subsequent information.
 Selective Perception
 Selecting, organizing and interpreting events based
on biased perceptions.
 Confirmation Bias
 Seeking out information that reaffirms past choices
and discounting contradictory info.
Decision-Making Biases and
Errors (cont’d)
 Framing Bias
 Selecting and highlighting certain aspects of a situation
while ignoring other aspects.

 Availability Bias
 Losing decision-making objectivity by focusing on the
most available data/recent events.

 Representation Bias
 Drawing analogies and seeing identical situations when
none exist. E.g. Believing that all blondes are dumb

 Randomness Bias
 Creating unfounded meaning out of random events.
Decision-Making Biases and
Errors (cont’d)
 Sunk Costs Errors
 Forgetting that current actions cannot influence past
events and relate only to future consequences.
 Self-Serving Bias
 Taking quick credit for successes and blaming outside
factors for failures.
 Hindsight Bias
 Mistakenly believing that an event could have been
predicted once the actual outcome is known (after-the-fact).
Decision Making for Today’s
World
 Habits of highly reliable organizations (HROs)
 Are not tricked by their success.
 Defer to the experts on the front line.
 Let unexpected circumstances provide the
solution.
 Embrace complexity.
 Anticipate, but also anticipate their limits.
Characteristics of an Effective
Decision-Making Process
 It focuses on what is important.
 It is logical and consistent.
 It acknowledges both subjective and objective thinking
and blends analytical with intuitive thinking.
 It requires only as much information and analysis as is
necessary to resolve a particular dilemma.
 It encourages and guides the gathering of relevant
information and informed opinion.
 It is straightforward, reliable, easy to use, and flexible.
Overview of Managerial Decision Making
Management Science Process
 Formulate the Problem
 Construct a Mathematical Model
 An abstraction or simplification of reality
 Test the Model
 Derive a Solution from the Model

 Apply the Model’s Solution to the Real

System
Planning Process
Scientific Method vs Engineering Problem Solving

 Investigation – Application
 Define the problem – Define the problem
 Collect data – Collect and analyze
 Develop hypotheses the data
 Test hypotheses – Search for alternatives
 Analyze results – Evaluate alternatives
 Draw conclusion – Select solution and
evaluate the impact
Questions?