Part 2: Planning

Chapter 4
Foundations
of
Decision
Making

PowerPoint Presentation by Charlie Cook

Copyright 2004 Prentice Hall, Inc.
All rights reserved.

LEAR N I N G O U TC O M E S
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.
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42

L E A R N I N G O U T C O M E S (contd)
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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43

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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44

Examples of Planning-Function Decisions

What are the organizations long-term objectives?
What strategies will best achieve those objectives?
What should the organizations 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?

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EXHIBIT 4.1

45

The Decision-Making Process

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EXHIBIT 4.2

46

Criteria and Weight in Car-Buying Decision

(Scale of 1 to 10)
CRITERION

WEIGHT

Price

10

Interior comfort

Durability

Repair record

Performance

Handling

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EXHIBIT 4.3

47

Assessment of Car Alternatives

ALTERNATIVES

INITIAL INTERIOR
PRICE COMFORT

DURABILITY

REPAIR
RECORD

PERFORMANCE HANDLING

TOTAL

Jeep Cherokee

10

37

Ford Mustang

40

Mercedes C230

35

Pontiac Grand Am

38

Mazda Tribute

10

44

Dodge Durango

10

31

Volvo S60

42

Isuzu Axiom

38

BMW 325

37

Audi A6

10

10

42

Toyota Camry

10

10

43

Volkswagen Passat

40

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EXHIBIT 4.4

48

Weighting of Vehicles (Assessment Criteria X Criteria Weight)

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EXHIBIT 4.5

49

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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410

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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411

Assumptions of Rationality

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EXHIBIT 4.6

412

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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413

Three Elements of Creativity

Creativity
The ability to produce
novel and useful ideas

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Source: T. M. Amabile, Motivating Creativity in Organizations, California Management Review (Fall 1997): 43.

EXHIBIT 4.7

414

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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415

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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416

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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417

Types of Problems, Types of Decisions, and

Level in the Organization

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EXHIBIT 4.8

418

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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419

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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420

Decision Making: Styles (contd)

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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421

Decision-Making Styles

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EXHIBIT 4.9

422

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.

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Disadvantages
Is more time-consuming
and less efficient
Minority domination can
influence decision process
Increased pressures to
conform to the groups
mindset (groupthink)
Ambiguous responsibility
for the outcomes of
decisions

423

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

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424

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425

Payoff Matrix for VISA

VISA
MARKETING
STRATEGY

S1
S2
S3
S4

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AMERICAN EXPRESS
RESPONSE
(IN MILLIONS OF $)
CA1

CA2

CA3

13
9
24
18

14
15
21
14

11
18
15
28

EXHIBIT QM1

426

Regret Matrix for VISA

VISA
MARKETING
STRATEGY

S1
S2
S3
S4

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Inc. All rights reserved.

AMERICAN EXPRESS
RESPONSE
(IN MILLIONS OF $)
CA1

CA2

CA3

11
15
0
6

7
6
0
7

17
10
13
0

EXHIBIT QM2

427

Decision Tree and Expected Values for Renting a

Large or Small Retail Space

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EXHIBIT QM3

428

The
Breakeven
Analysis

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EXHIBIT QM4

429

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 QM5

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430

Production Data for Virus Software

Number of Hours Required per Unit
WINDOWS
VERSION

MAC
VERSION

MONTHLY PRODUCT
CAPACITY (HOURS)

2,400

Manufacture

2.0

2.0

900

Profit per unit

$18

$24

DEPARTMENT
Design

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EXHIBIT QM6

431

Graphical Solution to Hernandezs Linear

Programming Problem

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EXHIBIT QM7

432

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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433

Determining the Most Economic Order

Quantity

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EXHIBIT QM8

434

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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435