Foundations of Decision Making -...

Part 2: Planning

PowerPoint Presentation by Mohammed

Ramadan

Copyright © 2018 Prentice Hall, Inc.

All rights reserved.

Chapter 4

Foundations

of

Decision

Making

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

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.


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.


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


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


The Decision-Making Process

EXHIBIT 4.2


Criteria and Weight in Car-Buying Decision

(Scale of 1 to 10)

EXHIBIT 4.3

CRITERION WEIGHT

Price 10

Interior comfort 8

Durability 5

Repair record 5

Performance 3

Handling 1


Assessment of Car Alternatives

EXHIBIT 4.4

INITIAL INTERIOR DURA- REPAIR

ALTERNATIVES PRICE COMFORT BILITY 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


Weighting of Vehicles (Assessment Criteria X Criteria Weight)

EXHIBIT 4.5


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


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


Assumptions of Rationality

EXHIBIT 4.6


Making Decisions: The Rational Model

• Rational

Describes choices that are consistent and value-

maximizing 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


Three Elements of Creativity

EXHIBIT 4.7Source: T. M. Amabile, “Motivating Creativity in Organizations,” California Management Review (Fall 1997): 43.

CreativityThe ability to produce

novel and useful ideas


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


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


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)


Types of Problems, Types of Decisions, and

Level in the Organization

EXHIBIT 4.8


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


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.


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.


Decision-Making Styles

EXHIBIT 4.9


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.

• 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


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


Payoff Matrix for VISA

EXHIBIT QM–1

VISA AMERICAN EXPRESS’

MARKETING RESPONSE

STRATEGY (IN MILLIONS OF $)

CA1 CA2 CA3

S1 13 14 11

S2 9 15 18

S3 24 21 15

S4 18 14 28


Regret Matrix for VISA

EXHIBIT QM–2

VISA AMERICAN EXPRESS’

MARKETING RESPONSE

STRATEGY (IN MILLIONS OF $)

CA1 CA2 CA3

S1 11 7 17

S2 15 6 10

S3 0 0 13

S4 6 7 0


Decision Tree and Expected Values for Renting a

Large or Small Retail Space

EXHIBIT QM–3


The

Breakeven

Analysis

EXHIBIT QM–4


OBJECTIVE RATIO CALCULATION

Liquidity test Current ratio _Current assets_

Current liabilities

Acid test Current assets level inventories

Current liabilities

Leverage test Debt-to-assets _Total debt_

Total assets

Times-interest-earned Profits before interest and taxes

Total interest charges

Operations test Inventory turnover Cost of sales

Inventory

Total-assets-turnover Revenues

Total assets

Profitability Profit margin-on-revenues Net profit after taxes

Total revenues

Return-on-investment Net profit after taxes

Total assets

Popular Financial Controls

EXHIBIT QM–5


Production Data for Virus Software

EXHIBIT QM–6

Number of Hours Required per Unit

WINDOWS MAC MONTHLY PRODUCT

DEPARTMENT VERSION VERSION CAPACITY (HOURS)

Design 4 6 2,400

Manufacture 2.0 2.0 900

Profit per unit $18 $24


Graphical Solution to Hernandez’s Linear

Programming Problem

EXHIBIT QM–7


Queuing Theory

• Queuing theory

A technique that balances the cost of having a waiting

line against the cost of service to maintain that line


Determining the Most Economic Order

Quantity

EXHIBIT QM–8


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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