Part 2: Planning
Chapter 4
Foundations
of
Decision
Making
PowerPoint Presentation by Charlie Cook
Copyright © 2004 Prentice Hall, Inc.
All rights reserved.
LEARNING OUTCOMES
After 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.
Copyright © 2004 Prentice Hall, Inc. All rights reserved.
4–2
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.
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4–3
Decision-making
• Decision-making process
 A set of eight steps that includes identifying a
problem, selecting a solution, and evaluating the
effectiveness of the solution
• Problem
 A discrepancy between an existing and a desired
state of affairs
• Decision criteria
 Factors that are relevant in a decision
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4–4
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
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4–5
The Decision-Making Process
EXHIBIT 4.2
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4–6
Criteria and Weight in Car-Buying Decision
(Scale of 1 to 10)
CRITERION
WEIGHT
Price
10
Interior comfort
8
Durability
5
Repair record
5
Performance
3
Handling
1
EXHIBIT 4.3
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4–7
Assessment of Car Alternatives
ALTERNATIVES
INITIAL INTERIOR
PRICE COMFORT
DURABILITY
REPAIR
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
EXHIBIT 4.4
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4–8
Weighting of Vehicles (Assessment Criteria X Criteria Weight)
EXHIBIT 4.5
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4–9
Decision-making (cont’d)
• Decision implementation
 Putting a decision into action; includes conveying the
decision to the persons who will be affected by it and
getting their commitment to it
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4–10
Making Decisions: The Rational Model
• Certainty
 The implication that the outcome of every possible
alternative is known
• Uncertainty
 A condition under which there is not full knowledge of
the problem and reasonable probabilities for
alternative outcomes cannot be determined.
• Risk
 The probability that a particular outcome will result
from a given decision
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4–11
Assumptions of Rationality
EXHIBIT 4.6
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4–12
Making Decisions: The Rational Model
• Rational
 Describes choices that are consistent and valuemaximizing within specified constraints
• Bounded rationality
 Behavior that is rational within the parameters of a
simplified model that captures the essential features
of a problem
• Satisfice
 Making a “good enough” decision
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4–13
Three Elements of Creativity
Creativity
The ability to produce
novel and useful ideas
Source: T. M. Amabile, “Motivating Creativity in Organizations,” California Management Review (Fall 1997): 43.
Copyright © 2004 Prentice Hall, Inc. All rights reserved.
EXHIBIT 4.7
4–14
Common Decision-making Errors
• Heuristics: Using judgmental shortcuts
 Availability 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 familiar
 Escalation of commitment
 An
increased commitment to a previous decision
despite negative information
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4–15
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
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4–16
Programmed Decision-Making Aids
• Policy
 A general guide that establishes parameters for
making decisions about recurring problems
• Procedure
 A series of interrelated sequential steps that can be
used to respond to a well-structured problem (policy
implementation)
• Rule
 An explicit statement that tells managers what they
ought or ought not to do (limits on procedural actions)
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4–17
Types of Problems, Types of Decisions, and
Level in the Organization
EXHIBIT 4.8
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4–18
Technology And Decision Making
• Expert systems
 Software that acts like an expert in analyzing and solving illstructured 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
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4–19
Decision Making: Styles
• Directive style
 Characterizes 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 style
 Characterizes the high tolerance for ambiguity
combined with a rational way of thinking of individuals
who prefer to have complete information before
making a decision.
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4–20
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.
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4–21
Decision-Making Styles
EXHIBIT 4.9
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4–22
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.
Copyright © 2004 Prentice Hall, Inc. All rights reserved.
• 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
4–23
Improving Group Decision Making
• Brainstorming
 An idea-generating process that encourages
alternatives while withholding criticism
• Nominal group technique
 A decision-making technique in which group
members are physically present but operate
independently
• Electronic meeting
 A type of nominal group technique in which
participants are linked by computer
Copyright © 2004 Prentice Hall, Inc. All rights reserved.
4–24
Copyright © 2004 Prentice Hall, Inc. All rights reserved.
4–25
Payoff Matrix for VISA
VISA
MARKETING
STRATEGY
S1
S2
S3
S4
AMERICAN EXPRESS’
RESPONSE
(IN MILLIONS OF $)
CA1
CA2
CA3
13
9
24
18
14
15
21
14
11
18
15
28
EXHIBIT QM–1
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4–26
Regret Matrix for VISA
VISA
MARKETING
STRATEGY
S1
S2
S3
S4
AMERICAN EXPRESS’
RESPONSE
(IN MILLIONS OF $)
CA1
CA2
CA3
11
15
0
6
7
6
0
7
17
10
13
0
EXHIBIT QM–2
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4–27
Decision Tree and Expected Values for Renting a
Large or Small Retail Space
EXHIBIT QM–3
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4–28
The
Breakeven
Analysis
EXHIBIT QM–4
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4–29
Popular Financial Controls
OBJECTIVE
RATIO
CALCULATION
Liquidity test
Current ratio
_Current assets_
Current liabilities
Acid test
Current assets level inventories
Current liabilities
Debt-to-assets
_Total debt_
Total assets
Times-interest-earned
Profits before interest and taxes
Total interest charges
Inventory turnover
Cost of sales
Inventory
Total-assets-turnover
Revenues
Total assets
Profit margin-on-revenues
Net profit after taxes
Total revenues
Return-on-investment
Net profit after taxes
Total assets
Leverage test
Operations test
Profitability
EXHIBIT QM–5
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4–30
Production Data for Virus Software
Number of Hours Required per Unit
WINDOWS
VERSION
MAC
VERSION
MONTHLY PRODUCT
CAPACITY (HOURS)
4
6
2,400
Manufacture
2.0
2.0
900
Profit per unit
$18
$24
DEPARTMENT
Design
EXHIBIT QM–6
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4–31
Graphical Solution to Hernandez’s Linear
Programming Problem
EXHIBIT QM–7
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4–32
Queuing Theory
• Queuing theory
 A technique that balances the cost of having a waiting
line against the cost of service to maintain that line
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4–33
Determining the Most Economic Order
Quantity
EXHIBIT QM–8
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4–34
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
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4–35