Mohamed Hafiz Bin Othman 8 December 2009 “Why is making rational decision difficult for higher executives? How do information systems assist decision makers of unstructured problems? Decision making occurs as a reaction to a problem or an opportunity, requiring consideration of alternative courses of action. Rational decision making describes choices that are consistent and value-maximizing within specific constraints.
It assumes the problem is clear and unambiguous, there is a single and well-defined goal is to be achieved, all alternatives and consequences are known, preferences are clear, constant and stable, the final choice will maximize economic payoff and no time or cost constraints exist. Decisions can be classified into 3 categories, namely structured, semi-structured and unstructured. Structured decisions are repetitive and routine, having short term impact, low risk and usually involve clear standard operating procedures or SOPs (PK/SK: problems and solutions are known). These type of problems occurs more regularly at the operational level.
Some examples are the decision made by a production floor supervisor on the amount of labour needed to achieve a particular production volume, or when a purchasing staff has to decide which vendor to choose from to order office furniture. Information required to make such decisions is readily available and thus easily automated or programmed, thus have a higher chance of deriving rational decisions. Semi-structured decisions involve tactical issues that have medium term impact such as when middle managers determine production schedules, select new employees, and decide how pay raises are to be allocated.
At the other end of the spectrum are unstructured decisions, which involve judgement, evaluation, intuition and urgency (PU/SU): problems unknown, solutions unknown). A study of experienced professionals holding high-level positions found more than 90 percent of managers said they were likely to use a mix of intuition and data analysis when making decisions. The higher one goes in the managerial hierarchy, the more unstructured decisions seem to shape organizational destinies (long term impact). Such decisions are usually unprecedented and complex that guidelines and procedures are deemed useless.
Thus, years of accumulated experience combined with resourcefulness are crucial qualities of higher executives. This is because they have to rely on methods of sense-making based on acculturated knowledge in reacting to emerging and uncertain conditions. They based on the experience to recognize patterns and clusters of the problem to make a decision. At the strategic level, making sense of fragmentary signals or conflicting information becomes a challenge about human cognition and organizational culture rather than about business technologies or automation.
Due to the non-programmable nature of such decisions, to use rational decision making for unstructured problems is a great challenge for higher executives. Examples are when top managers such as those at Dell determine their organization’s goals, what products or services to offer, how best to finance operations, or where to locate a new high-tech research and development facility. Another example is when Singapore Airlines decided keep a young fleet of airplanes (average just over 6 years). Despite of the high costs of such a policy, it was one of the strategic decisions that have made it one of the most profitable airlines in the world.
Because the capacity of the human mind for solving complex problems is far too small to meet the requirements for full rationality, individuals operate within the confines of bounded rationality. By extracting the essential features from problems, individuals can then behave rationally, albeit within the limits. The decision maker partakes in satisficing by reviewing alternatives until the first alternative that is “good enough” is met, such that the final solution represents a satisfying choice rather than an optimal one.
Programmed decisions minimize the need for managers to exercise discretion. Discretion costs money, so the more non-programmed decisions a manager must make, the higher salary he or she will command because greater judgment is needed. There are strong economic incentives for top management to create standard operational procedures, rules, and policies to guide other middle- and lower-level managers. Information Systems (IS) can help reduce human errors by assisting decision makers to consider the implications of various courses of options by reducing the uncertainty when facing complex issues.
Because there are different interests, specialties, and levels in an organization, there are different kinds of systems. No single system can provide all the information an organization needs. The organization has executive support systems (ESS) at the strategic level; management information systems (MIS) and decision-support systems (DSS) at the management level; knowledge work systems (KWS) and office systems at the knowledge level; and transaction processing systems (TPS) at the operational level.
Systems at each level in turn are specialized to serve each of the major functional areas. Thus, the typical systems found in organizations are designed to assist workers or managers at each level and in the functions of sales and marketing, manufacturing, finance, accounting, and human resources. Transaction processing system (TPS) collects and stores information about transactions and supports the operational level of the business, used to make structured decisions at operational level. It also supplies data for higher-level management decisions (e. . MIS, EIS). An example is manufacturing and production systems that supply data to operate, monitor and control the production process. Management information systems (MIS) evolved out of transaction processing systems when it was realised that computers are capable of performing rapid calculations and data comparisons could produce meaningful information for management. Transactions recorded in a TPS are analyzed and reported by an MIS. They have large quantities of input data and they produce summary reports as output.
Because it generates reports on a regular basis, by condensing and converting TPS data into information for monitoring performance and managing the organisation, a MIS is sometimes called a management reporting system (MRS). Used by middle managers, an example is an annual budgeting system. Though TPS and MIS provide information on a regular basis, frequently higher executives need information not provided in these reports to help them make decisions. A sales manager, for example, might need to determine how high to set yearly sales quotas based on increased sales and lowered product costs.
Decision support systems (DSS) help strategic management staff (often senior managers) make decisions by providing information, models, or analysis tools, supporting semi-structured and unstructured decisions (structured decisions can be automated). Their inputs are aggregate data, and they produce projections. Used for analytical work, rather than general office support, they are flexible, adaptable and quick. The user controls inputs and outputs and they often are sophisticated modelling tools used in making simulations and predictions.
Using spreadsheet software, for example, the user can complete simple modelling tasks or what-if scenarios. An example job for a DSS would be a 5-year operating plan. A special type of DSS, called an executive information system (EIS), is designed to support the information needs of executive management. Information in an EIS is presented in charts and tables that show trends, ratios, and other managerial statistics. Because executives usually focus on strategic issues, EISs rely on external data sources such as the Dow Jones News service or the Internet.
These external data sources can provide current information on interest rates, commodity prices, and other leading economic indicators. EIS or Executive Support System (ESS) provides executives information in a readily accessible, interactive format. They are a form of MIS intended for top-level (strategic) executive use, designed to the individual such as the CEO, CIO or CFO to tie into all levels of the organization. An EIS/ESS usually allows summary over the entire organisation and also allows drilling down to specific levels of detail.
They also use data produced by the ground-level TPS so the executives can gain an overview of the entire organization, providing possible outcomes and quick reference to statistics and numbers needed for decision-making. As EIS/ESS assists the users to make high risk decisions, the high costs of running them is justified. Even though Information systems allow higher executives to more easily gather information and analyze them, it is doubtful that utilizing IS will allow them to be more rational. If we look at the assumptions of rationality (problem clarity, goal orientation, known options, clear preferences, etc. , it is obvious that even by adding IS to the decision-making process, their decision making still will not be rational, affected by bounded rationality and intuition, rather than evidence. As the Billionaire investor George Soros is quoted to have said, “I used to treat it as a warning sign that something was wrong in the portfolio. It used to occur before I knew what was wrong, often even before the fund began to decline in value. That is what made it so valuable as a signal. When I finally discovered what was wrong, my backache usually went away. ” -END-