Part 2: Planning PowerPoint Presentation by LiZhe Management College C.C.N.U Chapter 4 Foundations of Decision Making.

Part 2: PlanningPart 2: Planning

PowerPoint Presentation by LiZheManagement College

C.C.N.U

Chapter 4Chapter 4

Foundations of

Decision Making

Foundations of

Decision Making

4–2

L E A R N I N G O U T C O M E SAfter 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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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.

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Decision-making

• Decision-making processA set of eight steps that includes identifying a

problem, selecting a solution, and evaluating the effectiveness of the solution

• ProblemA discrepancy between an existing and a desired

state of affairs

• Decision criteriaFactors that are relevant in a decision

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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

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The Decision-Making Process

EXHIBIT 4.2

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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

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Assessment of Car Alternatives

EXHIBIT 4.4

INITIAL INTERIOR DURA- REPAIRALTERNATIVES 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

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Weighting of Vehicles (Assessment Criteria X Criteria Weight)

EXHIBIT 4.5

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Decision-making (cont’d)

• Decision implementationPutting 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

• CertaintyThe implication that the outcome of every possible

alternative is known

• UncertaintyA condition under which there is not full knowledge of

the problem and reasonable probabilities for alternative outcomes cannot be determined.

• RiskThe probability that a particular outcome will result

from a given decision

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Assumptions of Rationality

EXHIBIT 4.6

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Making Decisions: The Rational Model

• RationalDescribes choices that are consistent and value-

maximizing within specified constraints

• Bounded rationalityBehavior that is rational within the parameters of a

simplified model that captures the essential features of a problem

• SatisficeMaking a “good enough” decision

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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

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Common Decision-making Errors

• Heuristics: Using judgmental shortcutsAvailability 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 familiarEscalation of commitment

An increased commitment to a previous decision despite negative information

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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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Programmed Decision-Making Aids

• PolicyA general guide that establishes parameters for

making decisions about recurring problems

• ProcedureA series of interrelated sequential steps that can be

used to respond to a well-structured problem (policy implementation)

• RuleAn explicit statement that tells managers what they

ought or ought not to do (limits on procedural actions)

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

EXHIBIT 4.8

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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

• Directive styleCharacterizes 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 styleCharacterizes 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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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.

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Decision-Making Styles

EXHIBIT 4.9

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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

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Improving Group Decision Making

• BrainstormingAn idea-generating process that encourages

alternatives while withholding criticism

• Nominal group techniqueA decision-making technique in which group members

are physically present but operate independently

• Electronic meetingA type of nominal group technique in which

participants are linked by computer

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Payoff Matrix for VISA

EXHIBIT QM–1

VISA AMERICAN EXPRESS’MARKETING RESPONSESTRATEGY (IN MILLIONS OF $)

CA1 CA2 CA3

S1 13 14 11S2 9 15 18S3 24 21 15S4 18 14 28

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Regret Matrix for VISA

EXHIBIT QM–2

VISA AMERICAN EXPRESS’MARKETING RESPONSESTRATEGY (IN MILLIONS OF $)

CA1 CA2 CA3

S1 11 7 17S2 15 6 10S3 0 0 13S4 6 7 0

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

EXHIBIT QM–3

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The Breakeven Analysis

EXHIBIT QM–4

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OBJECTIVE RATIO CALCULATION

Liquidity test Current ratio _Current assets_Current liabilities

Acid test Current assets level inventoriesCurrent liabilities

Leverage test Debt-to-assets _Total debt_ Total assets

Times-interest-earned Profits before interest and taxesTotal interest charges

Operations test Inventory turnover Cost of salesInventory

Total-assets-turnover Revenues Total assets

Profitability Profit margin-on-revenues Net profit after taxesTotal revenues

Return-on-investment Net profit after taxesTotal assets

Popular Financial Controls

EXHIBIT QM–5

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Production Data for Virus Software

EXHIBIT QM–6

Number of Hours Required per Unit

WINDOWS MAC MONTHLY PRODUCTDEPARTMENT VERSION VERSION CAPACITY (HOURS)

Design 4 6 2,400

Manufacture 2.0 2.0 900

Profit per unit $18 $24

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Graphical Solution to Hernandez’s Linear Programming Problem

EXHIBIT QM–7

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Queuing Theory

• Queuing theoryA technique that balances the cost of having a waiting

line against the cost of service to maintain that line

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Determining the Most Economic Order Quantity

EXHIBIT QM–8

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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