Robbins Fom8 Inppt04 GE Version

4Chapter

Foundations of Decision Making

Copyright ©2013 Pearson Education 4-1

Learning Objectives

• Describe the decision making process.• Explain the three approaches managers can

use to make decisions.• Describe the types of decisions and decision-

making conditions managers face.• Discuss group decision making.• Discuss contemporary issues in managerial

decision making.


How Do Managers Make Decisions?


What Defines a Decision Problem?

Problem – A discrepancy between an existing and a desired state of affairs.


Factors in the Decision-Making Process

Relevant decision criteria:• Price• Model (two-or four-door)• Size • Manufacturer • Optional equipment• Fuel economy, or• Repair records.


Weighing Criteria and Analyzing AlternativesTo weigh criteria:

1. Give the most important criterion a weight of 10.

2. Compare remaining criteria against that standard to indicate their relative degrees of importance.


Weighing Criteria and Analyzing Alternatives (cont.)


Determining the Best Choice


Implementing Decisions


The Last Step in the Decision Process


Common Errors


Three Approaches


The Rational Model

• Rational decision making – Choices that are consistent and maximize value within specified constraints


IT can enhance an org’s decision-making capabilities.

Bounded Rationality

• Bounded rationality – Decisions that are rational within the limits of a manager’s ability to process information

• Satisfice – Accepting solutions that are “good enough”

• Escalation of commitment – An increased commitment to a previous decision despite evidence that it may have been a poor one


Intuition in Decision Making


Types of Problems

• Structured problem – A straightforward, familiar, and easily defined problem

• Unstructured problem – A problem that is new or unusual for which information is ambiguous or incomplete


Types of Decisions: Programmed

Programmed decisions – Repetitive decisions that can be handled using a routine approach


Types of Decisions: Nonprogrammed

Nonprogrammed decisions – Unique and nonrecurring decisions; require a custom-made solution


Problems, Decision Types, and Organizational Levels


Decision-Making Conditions


• Risk – A situation where a decision maker estimates the likelihood of certain outcomes

• Certainty – A situation where a manager can make accurate decisions because the outcome of every alternative is known

• Uncertainty – A situation where a decision maker has neither certainty nor reasonable probability estimates available

How Do Groups Make Decisions?

Important decisions are often made by groups who will be most affected by those decisions:• Committees• Task forces• Review panels• Work teams


Group Decision Making: Benefits

• Provides more information

• Generates more alternatives

• Increases acceptance of a solution

• Increases legitimacy of the decision


Group Decision Making: Drawbacks

• Time-consuming• Infrequent and often inefficient interaction• Minority domination• Groupthink• Ambiguous responsibility


When Are Groups Most Effective?

Individual• Faster decision making• More efficient use of

work hours

Group• More accurate decisions• More heterogeneous

representation• More time-consuming• More creative• More effective in

accepting final solution


Improving Group Decision Making

Three ways of making group decisions more creative:• Brainstorming• Nominal group technique• Electronic meetings


Contemporary Issues

• National culture – Influences the way in which decisions are made and the degree of risk a decision maker will take

• Creativity – The ability to produce novel and useful ideas


Creativity in Decision Making

Creativity allows the decision maker to:• Appraise and understand a problem more fully• “See” problems others can’t see • Identify all viable alternatives


Quantitative Module

Quantitative Decision-Making Aids


Payoff Matrices


Payoff Matrices: Regret Matrix


Decision Trees


Break-Even Analysis


Ratio Analysis


Linear Programming


Linear Programming (cont.)


Queuing Theory

n = 3 customers arrival rate = 2 per minuteservice rate = 4 minutes per customer


Economic Order Quantity Model


Robbins Fom8 Inppt04 GE Version

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