Fundamentals of Management

Sixth Edition

Robbins and DeCenzo

with contributions from Henry Moon

CHAPTER

Part II: Planning

4
2008 Prentice Hall, Inc. All rights reserved.

Foundations of Decision Making

PowerPoint Presentation by Charlie Cook The University of West Alabama

LEARNING OUTCOMES After reading this chapter, you will be able to:
1. Describe the steps in the decision-making process.

2. Identify the assumptions of the rational decisionmaking 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.

6. Identify the two types of decision problems and the two types of decisions that are used to solve them.
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L E A R N I N G O U T C O M E S (contd) After reading this chapter, you will be able to:

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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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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EXHIBIT 41

Examples of Planning Decisions

What are the organizations long-term objectives? What strategies will best achieve those objectives? What should the organizations short-term objectives What is the most efficient means of completing tasks? What might the competition be considering? What budgets are needed to complete department How difficult should individual goals be?

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EXHIBIT 42

The Decision-Making Process

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EXHIBIT 43

Criteria and Weights in Car-Buying Decision (Scale of 1 to 10)

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EXHIBIT 44

Assessment of Car Alternatives

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EXHIBIT 45

Weighting of Vehicles (Assessment Criteria Criteria Weight)

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Decision-Making (contd)
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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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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EXHIBIT 46

Assumptions of Rationality

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What Is Creative Potential?

Expertise
Understanding, abilities, knowledge, proficiencies,

necessary in the field of creative endeavor.

Creative-Thinking Skills
The personality characteristics associated with

creativity, the ability to use analogies, as well as the talent to see the familiar in a different light.

Intrinsic Task Motivation

The desire to work on something because its

interesting, involving, exciting, satisfying, or personally challenging.

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EXHIBIT 47

Three Elements of Creativity

Source: T. M. Amabile. Motivating Creativity in Organizations, California Management Review (Fall 1997), p. 43. Copyright 1997, by The Regents of the University of California. Reprinted by permission of the Regents. 2008 Prentice Hall, Inc. All rights reserved. 414

Steps in Becoming More Creative

1. 2. 3. 4. Think of yourself as creative. Pay attention to your intuition. Move away from your comfort zone. Engage in activities that put you outside your comfort zone. 5. Seek a change of scenery. 6. Find several right answers. 7. Play your own devils advocate. 8. Believe in finding a workable solution. 9. Brainstorm with others. 10. Turn creative ideas into action.
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Making Decisions: The Rational Model

Rational
Describes choices that are consistent and value-

maximizing within specified constraints.

Bounded Rationality (Herbert Simon)

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: choosing the first-

identified alternative that satisfactorily and sufficiently solves the problem.

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Common Decision-Making Errors

Heuristics: Using Judgmental Shortcuts
Availability heuristic

The tendency to base judgments on information that is readily available. The tendency to base judgments of probability on things (objects or events) that are familiar An increased commitment to a previous decision despite negative information about the decisions present outcomes.

Representative heuristic

Escalation of commitment

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How Do Problems and Decisions 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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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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EXHIBIT 48

Types of Problems, Types of Decisions, and Level in the Organization

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Technology And Decision Making

Expert Systems
Software that acts like an expert in analyzing and

solving ill-structured 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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Decision-Making Styles

Styles of Decision Making

Directive

Analytic

Conceptual

Behavioral

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EXHIBIT 49

Decision-Making Styles

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Group Decision Making

Advantages
Makes more accurate

Disadvantages
Is more time-consuming

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.

and less efficient Can result in minority domination that influences decision process Can produce increased pressures to conform to the groups mindset (groupthink) Can create ambiguous responsibility for the outcomes of decisions

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When Are Groups Most Effective?

High Need for Creativity
Groups tend to be more creative than individuals.

Acceptance of the Final Solution

Groups help increase the acceptance of decisions.

Effectiveness of Group Decision Making

Groups of five to seven members are optimal for

decision process speed and quality.

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Improving Group Decision Making

Making Group Decision Making More Creative

Brainstorming

Nominal Group Technique

Electronic Meeting

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National Culture and Decision-Making Practices

Decision-making practices differ from country to country by:
Participation: groups, teams, individuals Power distance: who will make the decision Level of risk: uncertainty avoidance Efficiency of decision making: pace of decisions Alternatives considered: many or few

Consensus building: ringsei

Decision-making style: rational, autocratic or

participative
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Quantitative Module
QUANTITATIVE DECISION-MAKING AIDS

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EXHIBIT QM1 Payoff Matrix for Visa

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EXHIBIT QM2 Regret Matrix for Visa

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EXHIBIT QM3 Decision Tree and Expected Values for Renting a Large or Small Retail Space

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EXHIBIT QM4 Break-Even Analysis

BE = [TFC/(P VC)]

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EXHIBIT QM5 Popular Financial Controls

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EXHIBIT QM6 Production Data for Virus Software

4R + 6S < 2,400 2R + 2S < 900

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EXHIBIT QM7 Graphical Solution to Frees Linear Programming Problem

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Queuing Theory
Queuing Theory
Balancing the cost of having a waiting line against

the cost of service to maintain that line.

where P = probability of n customers waiting in line, n = 3 customers, arrival rate = 2 per minute, and service rate = 4 minutes per customer

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Economic Order Quantity Model

Fixed-Point Reordering System
A preestablished point for replenishing inventory

Economic Order Quantity (EOQ)

A technique for balancing purchase, ordering,

carrying, and stock-out costs to derive the optimum quantity for a purchase order.
D = forecasted demand for the item OC = cost of placing each order V = value or purchase price of the item CC = carrying cost (as percentage) of total inventory

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EXHIBIT QM8 Determining the Optimum Economic Order Quantity

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Economic Order Quantity Example

Forecast sales: 4,000 units a year Unit cost: $50.00 each

Ordering cost: $35.00 per order Carrying costs: 20% of units value.

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