SIMONS 3 STAGE MODEL

Learning Objectives:
· Explain the characteristics of the business decisions.
· Explain rational decisionmaking and its problems.
· Describe Herbert Simon’s model of decisionmaking.
· Mention the types of decisions.
· State the four ways of decision analysis.
· Examine the behavioural concepts and decisionmaking.

DECISION MAKING SYSTEM:

Business decisions are those, which are made in the process of

conducting business to achieve its
Objectives in a given environment. In concept, whether we are
talking about business decisions or
Any other decision, we assume that the decision maker is a
rational person.
The major characteristics of the business decision-making are:
(a) Sequential in nature.
(b) Exceedingly complex due to risks and trade offs.
(c) Influenced by personal values.
(d) Made in institutional settings and business environment.

RATIONAL DECISION MAKING:

Rational decision is the one, which, effectively and efficiently,
ensures the achievement of the goal for which the decision is
made. If it is raining, it is rational to look for a cover so that you do
not get wet. If you are in business and want to make profit, then
you must produce goods and sell them at a much higher price than
cost of production. In reality, there is no right or wrong decision but
a rational or irrational decision. The quality of decision-making is to
be judged on the rationality and not
Necessarily on the result it produces.
Simon Herbert differentiates among the types of rationality. A
decision, in a given situation is:

1. Objectively rational if it maximises the value of the objective.

2. Subjectively rational if it maximises the attainment of value
within limitation of the knowledge
and awareness of the subject.
3. Consciously rational to the extent the process of the decision-
making is deliberate and a
conscious one.
4. Organisationally rational to the degree of the orientation
towards the organisation.

PROBLEM IN MAKING RATIONAL DECISION:

(a) Ascertaining the problem:

As Peter Drucker points out, "the most common source of
mistakes in the management decisions is the emphasis on finding
the right answers rather than the right questions." The main task is
to define the right problem in clear terms. The management may
define the problem as the "Sales are declining." Actually, the
decline of sales is symptomatic; the real problem may be
somewhere else.
For example, the problem may be the poor quality of the product
and you may be thinking of improving the quality of advertising.

(b) Insufficient knowledge:

For perfect rationality, total information leading to complete
knowledge is necessary. An important function of a manager is to
determine whether the dividing line is reached between insufficient
knowledge and the enough information to make a decision.

(c) Not enough time to be rational:

The decisionmaker is under pressure to make decisions. If time is
limited, he may make hasty decisions which may not satisfy the
test of rationality of the decision.
(d) The environment may not cooperate:
Sometimes, the timing of the decision is such that one is forced to
make a decision but the environment is not conducive for it. The
decision may fail the test of rationality as the environmental factors
considered in the decisionmaking turn out to be untrue.
For example, in a product pricing, the factor of oil and petroleum
product price is considered as stable. But the postdecision
environment proves the consideration to be wrong.

Decisionmaking is a process which the decisionmaker uses to

arrive at a decision. The core of this
process is described by Herbert Simon in a model. He describes
the model in three phases as
(a) Intelligence; (b) Design; and (c) Choice.

Intelligence:
Raw data collected, processed and examined. Identify a problem
calling for a decision.
Design:
Inventing, developing and analysing the different decision
alternatives and testing the feasibility of implementation. Assess
the value of the decision outcome.
Choice:
Select one alternative as a decision, based on the selection
criteria.

In the intelligence phase, the MIS collects the data. The data is
scanned, examined, checked and edited. Further, the data is
sorted and merged with other data and computations are made,
summarised and presented. In this process, the attention of the
manager is drawn to all problem situations by highlighting the
significant differences between the actual and the expected, the
budgeted or the targeted.

In the design phase, the manager develops a model of the

problem situation on which he can generate and test the different
decisions to facilitate its implementation. If the model developed is
useful in generating the decision alternatives, he then further
moves into phase of selection called as choice.

In the phase of choice, the manager evolves a selection criterion

such as maximum profit, least cost, minimum waste, least time
taken, and highest utility. The criterion is applied to the various
decision alternatives and the one which satisfies the most is
selected.

In these three phases, if the manager fails, to reach a decision, he

starts the process all over again from the intelligence phase where
additional data and information is collected, the decisionmaking
model is refined, the selection criteria is changed and a decision is
arrived at.
MIS AND DECISION MAKING:

It is necessary to understand the concepts of decisionmaking as

they are relevant to the design of the MIS. The Simon Model
provides a conceptual design of the MIS and decisionmaking,
wherein the designer has to design the system in such a way that
the problem is identified in precise terms.

In the design phase of the model, the designer is to ensure that the
system provides models for decisionmaking. These models should
provide for the generation of decision alternatives, test them and
pave way for the selection of one of them. In a choice phase, the
designer must help to select the criteria to select one alternative
amongst the many.

The concept of programmed decisionmaking is the finest tool

available to the MIS designer, whereby he can transfer decision-
making from a decisionmaker to the MIS and still retain the
responsibility and accountability with the decisionmaker or the
managerThe concept of decision making systems such as the
closed and the open systems helps the designer in providing a
design flexibility. The closed systems are deterministic and rule
based; therefore, the design needs to have limited flexibility, while
in an open system, the design should be flexible to cope up with
the changes
required from time to time.

The methods of decisionmaking can be used directly in the MIS

provided the method to be applied has been decided. A number of
decisionmaking problems call for optimisation, and OR models are
available which can be made a part of the system. The
optimisation models are static and dynamic, and both can be used
in the MIS..
The concepts of the organisational and behavioural aspects of
decisionmaking provide an insight to the designer to handle the
organisational culture and the constraints in the MIS. The concepts
of the rationality of a business decision, the risk averseness of the
managers and the tendency to avoid an uncertainty, makes the
designer conscious about the human limitations, and prompts him
to provide a support in the MIS to handle these limitations.

The decisionmaking concepts are significant in MIS design. The

significance arises out of the complexity of decisionmaking, the
human factors in decisionmaking, the organisational and
behavioural aspects and the uncertain environments.