Organization and Management

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Decision
Making
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 Quick Management Lesson

A sales rep, an administration clerk, and the manager are walking to lunch
when they find an antique oil lamp. They rub it and a Genie comes out. The
Genie says, 'I'll give each of you just one wish.' 'Me first! Me first!' says the
admin clerk. 'I want to be in the Bahamas , driving a speedboat, without a
care in the world.' Puff! She's gone. 'Me next! Me next!' says the sales rep. 'I
want to be in Hawaii , relaxing on the beach with my personal masseuse,
an endless supply of Pina Coladas and the love of my life.' Puff! He's gone.
'OK, you're up,' the Genie says to the manager. The manager says, 'I want
those two back in the office after lunch.‘

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What is Decision making is the process of

Decision defining the problem and identifying

and choosing alternative courses of

Making? action in a manner appropriate to

the demands of the situation.
Decision making is regarded as “the
heart” of all management functions.
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 1 Diagnosing the Problem

2 Analyzing the Environment

3 Develop Viable Alternatives

Decision Making 4 Evaluate Alternatives
Process
5 Make a choice

5 Implement Decision

5 Evaluate and Adapt Decision Results

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 1
Feedback refers to the process which requires
checking each stage of the process to assure that Definition
the alternatives generated, the criteria used in the
evaluation, and the solution selected for the
implementation are in keeping with the original

Feedback
goals and objectives.

2
and Control
Control refers to actions made to
ensure that the activities performed
match the desired activities or goals
that have been set.

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 Approaches in Decision Making

Qualitative Evaluation Quantitative Evaluation

This term refers to the evaluation of This term refers to the evaluation of alternatives
using any of the technique in a group classified
alternatives using intuition and subjective
as rational and analytical
judgment when:
The problem is complex,
Problem is fairly simple
The problem is very important
Problem is familiar The problem is new and the manager has no
Costs involved are not great previous experience from which to draw
Immediate decisions are needed The problem involves many variables

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Decision Making Under
Probabilities

Definition of terms:
Decision Alternative – the workable options that must be
considered in the decision
States of Nature – the probable future events that can
occur, not under the control of the decision maker
Payoff Table – a table which shows the payoffs which
would result from each possible combination of decision
alternative and state of nature

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 Different
Decision Making Under
Conditions of Certainty
Environments
only one state of nature exists. There is
complete certainty about the future.

Decision Making Under

Conditions of Risk
More than one state of nature exists, but now
the decision maker has information which will
support the assignment of probability values
Decision Making Under
Conditions of Uncertainty to each of the states

More than one state of nature exists, but

the decision maker has no knowledge
about the various states

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 The Criteria for Decision Making
Under Uncertainty

Maximax Maximin Criterion

CRITERION CRITERION REALISM

In the optimistic criterion, select In the pessimistic criterion, it is It is considering both optimism
the decision alternative which to maximize his minimum and pessimism. Alpha is used as
would maximize his maximum possible payoff or to choose the an index of optimism. Determine
payoff. Select the maximum best of the worst. Select the the maximum and the minimum
payoff possible for each minimum payoff possible for payoff for each decision
decision alternative then choose each decision alternative then alternative and use the formula.

the alternative that provides the choose the alternative that

Measure of Realism = α (Maximum
maximum payoff within the provides the maximum payoff
Payoff) + (1 – α)(Minimum Payoff)
group. within the group

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Problem

ABC Construction Company is going to decide whether they are going to expand their
business, build an additional facility, or subcontract a partner company. The research and
development department forecasted the following payoff values which are summarized
in the table below. The values are expressed as GAINS and alpha = 0.6. Come up with a
decision using the different criteria under conditions of uncertainty:

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Assignment

Even though independent gasoline stations have been having a difficult time, Susan Solomon has been
thinking about starting her own independent gasoline station. Susan’s problem is to decide how large her
station should be. The annual returns will depend on both the size of her station and a number of
marketing factors related to the oil industry and demand for gasoline. After a careful analysis, Susan
developed the decision table. For example, if Susan constructs a small station and the market is good, she
will realize a profit of $50,000.
(a) What is the maximax decision? (b) What is the maximin decision? (c) What is the criterion of realism
decision? Use an α value of 0.8.

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 Thank You

Any questions?

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