Chapter 7
Decision-Making Tools and
Techniques
Pamela S. Lewis
Stephen H. Goodman
Patricia M. Fandt
Slides Prepared by
Bruce R. Barringer
University of Central Florida
©2001 South-Western College Publishing
Learning Objectives
Slide 1 of 3
1.Describe the situations in which managerial
decisions are called for.
2.Discuss the basic classifications for
managerial decisions.
3.Describe the nature of strategic decision
making as well as the strategic decisionmaking matrix approach for strategic
selection.
© 2001 South-Western Publishing
Transparency 7-2
Learning Objectives
Slide 2 of 3
4.Identify the differences between the growthshare matrix and the industry attractiveness/
business strength matrix approaches for
evaluating business portfolios.
5.Describe the nature of operational decision
making.
6.Discuss the basic elements that add
structure to the decision-making process.
© 2001 South-Western Publishing
Transparency 7-3
Learning Objectives
Slide 3 of 3
7.Discuss the differences between decision
making under certainty, risk, and
uncertainty.
8.Describe the solution approaches that would
be taken for risk and uncertainty situations.
9.Discuss the basics of breakdown analysis,
linear programming, and PERT analysis.
© 2001 South-Western Publishing
Transparency 7-4
Sources of Organizational and
Entrepreneurial Decisions
Slide 1 of 2
Managers are faced with decisions when a
problem occurs or when an opportunity arises.
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Transparency 7-5
Sources of Organizational and
Entrepreneurial Decisions
Slide 2 of 2
• Problem
– A situation in which some aspect of
organizational performance is less than
desirable.
• Opportunity
– A situation that has the potential to provide
additional beneficial outcomes.
© 2001 South-Western Publishing
Transparency 7-6
Classification of Decision Situations
Slide 1 of 2
• Programmed decisions
– Decisions made in response to routine
situations that have occurred in the past.
• Nonprogrammed decisions
– Decisions made in response to situations that
are unique, unstructured, or poorly defined.
© 2001 South-Western Publishing
Transparency 7-7
Classification of Decision Situations
Slide 2 of 2
Responses to Decision Situations
Programmed
decisions
Alternatives are
familiar to decision
makers
Nonprogrammed
decisions
Alternatives are not
familiar to decision
makers
Responses are
routine
Responses require
creativity
© 2001 South-Western Publishing
Transparency 7-8
Strategic Decision Making
• Strategic decision making occurs at the
highest levels in organizations.
– This strategy defines the long-term direction of
the firm.
– Two important areas for strategic decision
making are:
• Strategy selection
• Evaluation of portfolios
© 2001 South-Western Publishing
Transparency 7-9
Strategy Selection: The Strategic
Decision-Making Matrix
Slide 1 of 2
A two-dimensional grid used to select the best
strategic alternative in light of multiple
organizational objectives.
© 2001 South-Western Publishing
Transparency 7-10
Strategy Selection: The Strategic
Decision-Making Matrix (example)
Slide 2 of 2
Objectives
Increased
Profit
Increased
Market
Share
Increased
Production
Output
.5
.3
.2
2
4
5
2
2
3
3
2
3
Alternative Strategies
Product Development
Horizontal Integration
Joint Venture
Total Weighted Score
.5(2) + .3(2) + .2(3) = 2.2
.5(4) + .3(2) + .2(2) = 3.0
.5(5) + .3(3) + .2(3) = 4.0
© 2001 South-Western Publishing
Transparency 7-11
Evaluation of Portfolios
• Business Portfolio Matrix
– A two-dimensional grid that compares the
strategic positions of each of the organization’s
businesses.
– Most frequently used matrices:
• Growth-share matrix.
• Industry attractiveness/business strength matrix.
© 2001 South-Western Publishing
Transparency 7-12
Boston Consulting Group Matrix
Slide 1 of 4
• Boston Consulting Group (BCG) Matrix
– Business portfolio matrix that uses market
growth rate and relative market share as the
indicators of the firm’s strategic position.
• Market growth rate
– A measure of the annual growth percentage of
the market in which the business operates.
• Relative market share
– The firm’s market share divided by the market
share of its largest competitor.
© 2001 South-Western Publishing
Transparency 7-13
Boston Consulting Group Matrix
Slide 2 of 4
Relative Market Share
BCG Matrix
High
High
Medium
Low
10
1
.1
20%
Market
Growth
Medium 10%
Rate
(Percent)
Low
Stars (II)
Cash Cows (III)
Question Marks (I)
Dogs (IV)
0%
© 2001 South-Western Publishing
Transparency 7-14
Boston Consulting Group Matrix
Slide 3 of 4
• Stars
– Businesses that fall into the high market
growth/high market share cell of the BCG
matrix.
• Offer attractive profit and growth opportunities.
• Cash Cows
– Businesses that fall into the low market
growth/high market share cell of a BCG matrix.
• Generate substantial cash surpluses.
• Generally yesterday’s stars that have matured.
© 2001 South-Western Publishing
Transparency 7-15
Boston Consulting Group Matrix
Slide 4 of 4
• Dogs
– Businesses that fall into the low market
growth/low market share cell of a BCG matrix.
• Typically generate low profits, and in some cases
may even lose money.
• Question Marks
– Businesses that fall into the high market
growth/low market share cell of a BCG matrix.
• Businesses that look attractive from an industry
standpoint, however, their low market share makes
their profit potential uncertain.
© 2001 South-Western Publishing
Transparency 7-16
GE Matrix
• Business portfolio matrix that uses several
factors to assess industry attractiveness and
business strength.
• See Figure 7.2 in the text for an example of
the GE Matrix.
© 2001 South-Western Publishing
Transparency 7-17
Operational Decision Making
Operational decision making relates to decision
situations that cover much shorter time spans. These
decisions are typically made at lower levels within the
organization, but that need not always be the case.
© 2001 South-Western Publishing
Transparency 7-18
Applying Structure to the DecisionMaking Process
Slide 1 of 2
• Alternative Courses of Action
– Strategies that might be implemented in a
decision-making situation.
• States of Nature
– Conditions over which the decision maker has
little or no control.
• Payoffs
– The outcomes of decision situations.
© 2001 South-Western Publishing
Transparency 7-19
Applying Structure to the DecisionMaking Process
Slide 2 of 2
• Payoff Table
– A matrix that organizes the alternative courses
of action, states of nature, and payoffs for a
decision situation.
© 2001 South-Western Publishing
Transparency 7-20
Techniques that Enhance Quality in
Decision Making
Slide 1 of 4
• The manner in which the information in the
payoff table is analyzed is a function of the
decision-making environment.
• Three different decision-making
environments are generally identified
depending on the amount of knowledge that
exists about future conditions that might
occur.
© 2001 South-Western Publishing
Transparency 7-21
Techniques that Enhance Quality in
Decision Making
Slide 2 of 4
• Types of Decision-Making Environments:
– Decision making under certainty
• In decision making under certainty, the decision
maker knows with certainty what conditions will
subsequently occur and affect the decision
outcomes.
– Decision making under risk
• In decision making under risk, the probabilities are
used to obtain expected values of outcomes for each
decision alternative.
© 2001 South-Western Publishing
Transparency 7-22
Techniques that Enhance Quality in
Decision Making
Slide 3 of 4
• Types of Decision Making Environments:
– Decision making under risk (topics)
• Expected value
– The product of a payoff and its probability of occurrence.
• Expected monetary value (EMV)
– The sum of each expected value for an alternative.
• Decision tree
– A branching diagram that illustrates the alternatives and
states of nature for a decision situation.
© 2001 South-Western Publishing
Transparency 7-23
Techniques that Enhance Quality in
Decision Making
Slide 4 of 4
• Types of Decision Making Environments:
– Decision making under uncertainty
• In some cases a decision maker cannot assess the
probability of occurrence for the various states of
nature.
• When no probabilities are available, the situation is
referred to as decision making under uncertainty.
© 2001 South-Western Publishing
Transparency 7-24
Ethical and Social Implications in
Decision Making
Examples of questions managers sometimes ask:
What are the ethical and social
implications of my decision?
How will the decision affect the
personal lives of my employees?
How do I balance economic and
social considerations?
© 2001 South-Western Publishing
Transparency 7-25
Quantitative Decision-Making Aids
Slide 1 of 3
• Breakeven Analysis
– A graphic display of the relationship between
volume of output and revenue and costs.
• Linear Programming
– A quantitative program that helps managers
decide how to allocate limited resources among
competing users in a manner that optimizes
some objective.
– Computer programs are available to perform
linear programming analysis.
© 2001 South-Western Publishing
Transparency 7-26
Quantitative Decision-Making Aids
Slide 2 of 3
Breakeven Analysis
Total revenue
Profit
Total cost
Total
variable cost
Breakeven
point
.
Fixed cost
Loss
Output Volume
© 2001 South-Western Publishing
Transparency 7-27
Quantitative Decision-Making Aids
Slide 3 of 3
• PERT (Program Evaluation and Review
Technique)
– A network approach for scheduling project
activities.
– In the PERT approach, four preliminary steps
must be performed before the project analysis
can begin:
• Activity identification, precedence identification,
activity time estimation, and network construction.
© 2001 South-Western Publishing
Transparency 7-28
Attributes of Effective Decision
Makers
Slide 1 of 3
• Be able to recognize quickly problems and
opportunities that call for a decision.
• Be able to recognize the different
timeframes and scopes of strategic decisions
versus operational decisions.
• Be equipped with all the tools and
techniques that can aid in making strategic
decisions.
© 2001 South-Western Publishing
Transparency 7-29
Attributes of Effective Decision
Makers
Slide 2 of 3
• Be familiar with the framework for
operational decision making as well as the
structural components for displaying
operational decisions.
• Be able to recognize the different decisionmaking environments in which operational
decisions will be made.
© 2001 South-Western Publishing
Transparency 7-30
Attributes of Effective Decision
Makers
Slide 3 of 3
• Have an awareness and understanding of
the various quantitative tools that can aid in
making the operational decisions.
© 2001 South-Western Publishing
Transparency 7-31