Chapters 8 and 9
Fundamentals of Decision Making
&
Planning and Decision Aids
OVERVIEW CHAPTER 8




What is Decision Making
Conditions that affect decision making
The Differences between decision types
Understanding how goals relate to
decision making
 Understanding the three models of
decision making
What is Decision Making
 The process of defining problems,
gathering information, making sense of
that information, generating alternatives,
and choosing a course of action.
Conditions Under Which
Decisions Are Made
 Certainty vs.
Uncertainty
 Risk
 Objective Probability
vs. Subjective
Probability
Certainty vs. Uncertainty
 Certainty
 The condition under
which individuals are
fully informed about a
problem, alternative
solutions are obvious,
and the possible
results of each
solution are clear.
 Uncertainty
 The condition under
which an individual
does not have the
necessary information
to assign probabilities
to the outcome of
alternative solutions.
Risk
 The condition under which individuals
can define a problem, specify the
probability of certain events, identify
alternative solutions, and state the
probability of each solution leading to the
desired results
 Generally a risk falls somewhere
between the extremes of certainty and
uncertainty.
Objective vs Subjective Probability
 Objective Probability
 Determines the likelihood
that a specific outcome
will occur based on hard
facts and numbers.
 Example: examining past
records
 Subjective Probability
 Determines the likelihood
that a specific outcome
will occur, based on
personal judgments and
beliefs
 This varies between
individuals based on
expertise, intuition, etc.
Types of Decisions to be Made
 Routine Decisions: choices made in response to relatively
well-defined and common problems and alternative
solutions.
 Adaptive Decisions: choices made in response to a
combination of moderately unusual and only partially known
problems and alternative solutions
 Continuous improvement: streams of adaptive decisions
made over time in an organization that result in a large
number of small, incremental improvements year after year.
 Innovative decisions: choices based on the discovery,
identification, and diagnosis of unusual and ambiguous
problems and the development of unique or creative
alternative solutions.
Goals affect decision making
 Goals are results to be
attained
 Therefore, giving
direction to decisions
and actions.
 When a goal is changed
or modified, the
individual is engaging in
the decision making
process.
General and Operational Goals
 General Goals: provide broad direction
for decision making in qualitative terms.
 Operational goals state what is to be
achieved in quantitative terms, for whom,
and within what time period.
How do Stakeholders
Affect Goal Setting?
 Shape demands, contraints, and choices of
alternatives that managers and employees
face when setting goals.
Decision-Making Models
 Rational
 Bounded Rational
 Political
Rational Model
 A series of steps that individuals or teams
should follow to increase the likelihood
that their decisions will be logical and
well founded
 Permits maximum achievement of goals w/in
limitations of the situation
 Routine decisions or situations involving
conditions of low risk
Rational Decision Making
Model As A Seven Step
Process
1.
2.
3.
4.
Define & diagnose the problem
Set goals
Search for Alternative Solutions
Compare & Evaluate Alternative
Solutions
5. Choose among alternative solutions
6. Implement the solution selected
7. Follow up and control
Bounded Rationality Model
An individual’s tendency…
1. To select less than the best goal or
alternative solution
2. To engage in a limited search for
alternative solutions
3. To have inadequate information &
control over external and internal
environmental forces influencing the
outcomes of decisions
Information Processing
Biases
1.
2.
3.
4.
5.
Availability Bias
Selective Perception Bias
Concrete Information Bias
Law of Small Numbers Bias
Gambler’s Fallacy Bias
Political Model
 A description of the decision-making
process in terms of the particular
interests and goals of powerful external
and internal stakeholders
 Power – the ability to influence or control
 Scapegoating – Casting blame for problems
on innocent
 Co-optation – means of averting threats
CHAPTER 9 OUTLINE
 Forecasting
 3 Forecasting Aids: Scenario, Delphi, and
Simulation
 Brainstorming
 Cause and Effect Relationships
 TQM topics
 Pert Network
FORECASTING
 Is the projecting,
predicting, or estimating
future events or
conditions in an
organization’s
environment.
 Forecasting deals with
conditions or external
events beyond the
organization’s control
that are important to its
survival.
 EXAMPLES ????
 Extrapolation:
uses both the past
and present to
predict the future.
FOUR FORCASTING
PITFALLS
1) Listening to the
media.
2) Assuming things
are going to return to
the way they used to
be.
3) Hearsay
4) Tunnel Vision
First forecasting aid:
SCENARIO
 Written description of a possible future.
 3 scenarios are usually given for companies
and they are for the best case, worst case,
and most likely to occur.
 Scenarios provide possibilities of what could
happen and the business can plan strategies.
 They give companies a broad vision of
possible events.
 Companies can identify patterns,
interrelationships, and generalizations that
help plan for the future.
Second forecasting aid:
DELPHI TECHNIQUE
 Based on a
consensus of a
group of experts.
 This technique relies
on opinions, so it is
not foolproof, but it is
usually more
accurate than an
opinion from one
expert.
3 BASIC STEPS OF THE
DELPHI TECHNIQUE
STEP 1: Questionnaire is sent to a group
of experts.
STEP 2: Summary of the first round is
prepared.
STEP 3: Summary of the second round is
prepared.
Third forecasting aid:
SIMULATION
 A representation of a
real system.
 Effects of environmental
changes and internal
management decisions
can be forecasted by
simulation.
 The simulation goal is to
test reality without
actually experiencing it.
 Downfalls: impossible to
apply all aspects and it is
expensive.
VIRTUAL REALITY
 Simulation by
computer systems.
 The user can “enter”,
move around, and
interact with objects.
 Flight Simulators
BRAINSTORMING
 Flow of ideas without restrictions or
judgments.
4 BASIC RULES OF
BRAINSTORMING
1)
Criticism is ruled out.
2)
Freewheeling is
welcomed.
3)
Quantity is wanted.
4)
Combination and
improvement are
sought.
Cause and Effect
 A then B, therefore A causes B
 But what about C, D, E, F??
 Cause and effect Diagram- helps back
track a problem to its roots
 Also known as fishbone diagrams
9.6
General Framework of Cause and Effect
(Fishbone) Diagram
People
Materials
Effect
(or Problem
Statement)
Equipment
Methods
Adapted from Figure 9.1
Cause and Effect Diagram
 The cause and effect diagram helps team
members display, categorize, and
evaluate all the possible causes of an
effect, which is generally expressed as a
problem.
Cause and effect steps
 Step 1: the team needs to agree on the effect,
which should be stated in terms of the problem
 Step 2: the team identifies all the general
factors of categories that contribute to the
problem, which will help the team organize the
specific causes
 Step 3: the team may also use brainstorming
or other techniques to generate all the possible
causes that contribute to the problem (or effect)
in that category
 Step 4: Involves reaching agreement on the
top 3-5 root causes in each major category
TQM Topics

Benchmarking- comparing self to the best in
terms of:
*process, strategies, products, and
performance
Steps:
1. Define domain
2. Determine what is best
3. Collect information to create performance
gap
The Benchmarking Process






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1. Define the issue
2. Identify the best performers
3. Collect and analyze data to identify gaps
4. Set improvement goals
5. Develop and implement plans
6. Evaluate results
7. Repeat evaluation
Deming Cycle
 Developed by W. Edwards Demming
 Also called the PDCA cycle:
Planning: goals, what to change, how to know
Doing: Pilot-testing
Check: look at results
Act: implement and perform
* Continuously repeated for improvement
Pareto Principle
 States that a small number of causes (usually
20%) accounts for most of the impacts of the
problems (80%) aka the 80-20 rule
 Pareto analysis separates the vital few from
the trivial many, thus improving the analysts
chances of getting the greatest results for the
least amount of time and effort
9.10
Pareto Diagram: Data
Categorized by Shift
Frequency
35
Source: Adapted from E. S. Fine.
Pareto diagrams get to the root
of process problems. Quality,
October 1996, available at
www.qualitymag.com/1096ql
(January 16, 1998).
9
7
Mon
1
Tue
2
Mon
2
7
Wed
1
6
Thu
1
5
Wed
2
3
2
Fri
1
Thu
2
4
Tue
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0
Fri
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Defect
Adapted from Figure 9.6
Pareto Diagram
 A chart used to determine the relative
priorities of issues, defects, or problems.
They are arranged in descending order of
magnitude of importance, indicating
which problems to address first
 Can also be used to compare before and
after results of projects by comparing
diagrams
PERT
 Program Evaluation and Review Technique
- Method of sequencing activities and
estimating cost and time for project completion
 First use:1958 – Polaris missile
program
Commonly used for:
1. One-of-a-kind projects – Disney World
2. Projects involving new production
processes – robotic automobile plant
3. Projects with multiple/interlocking
building processes – apartment
complexes
PERT Network
 Diagram showing the sequence and
relationships of activities and events to
finish a project
 Critical Path – the path which takes the
longest time to complete
A Basic PERT Network
Activity B
(8 weeks)
Event 1
Activity A
(8 weeks)
Event 3
Activity C
(15 weeks)
Event 2
9.12
Activity E
(6 weeks)
Event 4
Activity D
(12 weeks)
Adapted from Figure 9.8
Resources, Time, and
Money
 Resource availability influences time and cost for
completion
 Cost estimates must be provided
 Time estimates must be provided
* “most likely time”
* “optimistic time”
* “pessimistic time”
* “expected time”
Purpose
 Used as a control mechanism that allows project
managers to monitor differences in actual and
projected estimates, resulting in more efficient
completion.
THE END
COURTESY OF THE PEANUT
GALLERY