Post on 18-Jan-2016
Part 2: PlanningPart 2: Planning
PowerPoint Presentation by LiZheManagement College
C.C.N.U
Chapter 4Chapter 4
Foundations of
Decision Making
Foundations of
Decision Making
4–2
L E A R N I N G O U T C O M E SAfter reading this chapter, I will be able to:
1. Describe the steps in the decision-making process.
2. Identify the assumptions of the rational decision-making model.
3. Explain the limits to rationality.
4. Define certainty, risk, and uncertainty as they relate to decision making.
5. Describe the actions of the bounded-rational decision maker.
4–3
L E A R N I N G O U T C O M E S (cont’d)After reading this chapter, I will be able to:
6. Identify the two types of decision problems and the two types of decisions that are used to solve them.
7. Define heuristics and explain how they affect the decision-making process.
8. Identify four decision-making styles.
9. Describe the advantages and disadvantages of group decisions.
10. Explain three techniques for improving group decision making.
4–4
Decision-making
• Decision-making processA set of eight steps that includes identifying a
problem, selecting a solution, and evaluating the effectiveness of the solution
• ProblemA discrepancy between an existing and a desired
state of affairs
• Decision criteriaFactors that are relevant in a decision
4–5
Examples of Planning-Function Decisions
What are the organization’s long-term objectives?
What strategies will best achieve those objectives?
What should the organization’s short-term objectives be?
What is the most efficient means of completing tasks?
What might the competition be considering?
What budgets are needed to complete department tasks?
How difficult should individual goals be?EXHIBIT 4.1
4–6
The Decision-Making Process
EXHIBIT 4.2
4–7
Criteria and Weight in Car-Buying Decision (Scale of 1 to 10)
EXHIBIT 4.3
CRITERION WEIGHT
Price 10
Interior comfort 8
Durability 5
Repair record 5
Performance 3
Handling 1
4–8
Assessment of Car Alternatives
EXHIBIT 4.4
INITIAL INTERIOR DURA- REPAIRALTERNATIVES PRICE COMFORT BILITY RECORD PERFORMANCE HANDLING TOTAL
Jeep Cherokee 2 10 8 7 5 5 37
Ford Mustang 9 6 5 6 8 6 40
Mercedes C230 8 5 6 6 4 6 35
Pontiac Grand Am 9 5 6 7 6 5 38
Mazda Tribute 5 6 9 10 7 7 44
Dodge Durango 10 5 6 4 3 3 31
Volvo S60 4 8 7 6 8 9 42
Isuzu Axiom 7 6 8 6 5 6 38
BMW 325 9 7 6 4 4 7 37
Audi A6 5 8 5 4 10 10 42
Toyota Camry 6 5 10 10 6 6 43
Volkswagen Passat 8 6 6 5 7 8 40
4–9
Weighting of Vehicles (Assessment Criteria X Criteria Weight)
EXHIBIT 4.5
4–10
Decision-making (cont’d)
• Decision implementationPutting a decision into action; includes conveying the
decision to the persons who will be affected by it and getting their commitment to it
4–11
Making Decisions: The Rational Model
• CertaintyThe implication that the outcome of every possible
alternative is known
• UncertaintyA condition under which there is not full knowledge of
the problem and reasonable probabilities for alternative outcomes cannot be determined.
• RiskThe probability that a particular outcome will result
from a given decision
4–12
Assumptions of Rationality
EXHIBIT 4.6
4–13
Making Decisions: The Rational Model
• RationalDescribes choices that are consistent and value-
maximizing within specified constraints
• Bounded rationalityBehavior that is rational within the parameters of a
simplified model that captures the essential features of a problem
• SatisficeMaking a “good enough” decision
4–14
Three Elements of Creativity
EXHIBIT 4.7Source: T. M. Amabile, “Motivating Creativity in Organizations,” California Management Review (Fall 1997): 43.
CreativityThe ability to produce novel and useful ideas
4–15
Common Decision-making Errors
• Heuristics: Using judgmental shortcutsAvailability heuristic
the tendency for people to base their judgments on information that is readily available to them
Representative heuristic The tendency for people to base judgments of
probability on things with which they are familiarEscalation of commitment
An increased commitment to a previous decision despite negative information
4–16
How Do Problems Differ?
• Well-structured problems Straightforward, familiar, easily defined problems
• Ill-structured problems New problems in which information is ambiguous or
incomplete
• Programmed decision A repetitive decision that can be handled by a routine
approach
• Nonprogrammed decisions Decisions that must be custom-made to solve unique and
nonrecurring problems
4–17
Programmed Decision-Making Aids
• PolicyA general guide that establishes parameters for
making decisions about recurring problems
• ProcedureA series of interrelated sequential steps that can be
used to respond to a well-structured problem (policy implementation)
• RuleAn explicit statement that tells managers what they
ought or ought not to do (limits on procedural actions)
4–18
Types of Problems, Types of Decisions, and Level in the Organization
EXHIBIT 4.8
4–19
Technology And Decision Making
• Expert systems Software that acts like an expert in analyzing and solving ill-
structured problems Use specialized knowledge about a particular problem
area rather than general knowledge Use qualitative reasoning rather than numerical
calculations Perform at a level of competence higher than that of
nonexpert humans.
• Neural networks Software that is designed to imitate the structure of brain
cells and connections among them
4–20
Decision Making: Styles
• Directive styleCharacterizes the low tolerance for ambiguity and a
rational way of thinking of individuals who are logical and efficient and typically make fast decisions that focus on the short term.
• Analytic styleCharacterizes the high tolerance for ambiguity
combined with a rational way of thinking of individuals who prefer to have complete information before making a decision.
4–21
Decision Making: Styles (cont’d)
• Conceptual style Individuals who tend to be very broad in outlook, to
look at many alternatives, and to focus on the long run and often look for creative solutions.
• Behavioral style Individuals who think intuitively but have a low
tolerance for uncertainty; they work well with others, are open to suggestions, and are concerned about the individuals who work for them.
4–22
Decision-Making Styles
EXHIBIT 4.9
4–23
Group Decision Making
• Advantages Make more accurate
decisions Provides more complete
information Offers a greater diversity of
experiences and perspectives
Generates more alternatives
Increases acceptance of a solution
Increases the legitimacy of a decision.
• Disadvantages Is more time-consuming
and less efficient Minority domination can
influence decision process Increased pressures to
conform to the group’s mindset (groupthink)
Ambiguous responsibility for the outcomes of decisions
4–24
Improving Group Decision Making
• BrainstormingAn idea-generating process that encourages
alternatives while withholding criticism
• Nominal group techniqueA decision-making technique in which group members
are physically present but operate independently
• Electronic meetingA type of nominal group technique in which
participants are linked by computer
4–25
4–26
Payoff Matrix for VISA
EXHIBIT QM–1
VISA AMERICAN EXPRESS’MARKETING RESPONSESTRATEGY (IN MILLIONS OF $)
CA1 CA2 CA3
S1 13 14 11S2 9 15 18S3 24 21 15S4 18 14 28
4–27
Regret Matrix for VISA
EXHIBIT QM–2
VISA AMERICAN EXPRESS’MARKETING RESPONSESTRATEGY (IN MILLIONS OF $)
CA1 CA2 CA3
S1 11 7 17S2 15 6 10S3 0 0 13S4 6 7 0
4–28
Decision Tree and Expected Values for Renting a Large or Small Retail Space
EXHIBIT QM–3
4–29
The Breakeven Analysis
EXHIBIT QM–4
4–30
OBJECTIVE RATIO CALCULATION
Liquidity test Current ratio _Current assets_Current liabilities
Acid test Current assets level inventoriesCurrent liabilities
Leverage test Debt-to-assets _Total debt_ Total assets
Times-interest-earned Profits before interest and taxesTotal interest charges
Operations test Inventory turnover Cost of salesInventory
Total-assets-turnover Revenues Total assets
Profitability Profit margin-on-revenues Net profit after taxesTotal revenues
Return-on-investment Net profit after taxesTotal assets
Popular Financial Controls
EXHIBIT QM–5
4–31
Production Data for Virus Software
EXHIBIT QM–6
Number of Hours Required per Unit
WINDOWS MAC MONTHLY PRODUCTDEPARTMENT VERSION VERSION CAPACITY (HOURS)
Design 4 6 2,400
Manufacture 2.0 2.0 900
Profit per unit $18 $24
4–32
Graphical Solution to Hernandez’s Linear Programming Problem
EXHIBIT QM–7
4–33
Queuing Theory
• Queuing theoryA technique that balances the cost of having a waiting
line against the cost of service to maintain that line
4–34
Determining the Most Economic Order Quantity
EXHIBIT QM–8
4–35
Economic Order Quantity
• Economic order quantity (EOQ)A technique for balancing purchase, ordering,
carrying, and stock-out costs to derive the optimum quantity for a purchase order