Fundamentals of Management: 4-1Gao Junshan, UST Beijing Foundations of Decision Making

Fundamentals of Management: 4-2Gao Junshan, UST Beijing Where We Are Part 1 Introduction Part 2 Planning Part 3 Organizing Part 4 Leading Part 5 Controlling Part 2 Planning Chapter 3 Foundations of Planning Chapter 4 Foundations of Decision Making Chapter 3 Foundations of Planning Chapter 4 Foundations of Decision Making

Fundamentals of Management: 4-3Gao Junshan, UST Beijing Chapter Guide Process of decision making Assumptions on rationality –Rational model of decision making –Modification of the rational model Decision making in real world –Types and styles of decision making –Common errors in decision making –Cultural factors –Decision making in groups Social responsibility and ethics

Fundamentals of Management: 4-4Gao Junshan, UST Beijing Examples of Decisions in Planning 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? Decision-making process: Relevance to planning

Fundamentals of Management: 4-5Gao Junshan, UST Beijing An example of the Decision-Making Process Identifying a Problem Identifying Decision Criteria Allocating Weights to Criteria I need to buy a new car. Price Interior Comfort Durability Repair Record Performance Price Interior Comfort Durability Repair Record Performance Decision-making process: Car buying example

Fundamentals of Management: 4-6Gao Junshan, UST Beijing Developing Alternatives Analyzing Alternatives Selecting an Alternative Implementing the Choice The Toyota is the best. Ford Jeep Mazda Dodge Audi Isuzu Chevy Price Comfort Durability Repair Record Performance Toyota ChevyIsuzuAudiDodge MazdaJeepFordToyota Appraising Decision Results Decision-making process: Car buying example

Fundamentals of Management: 4-7Gao Junshan, UST Beijing Problem Identification Solving the wrong problem perfectly is no better than do nothing for the right problem Problem is identified by comparing the current state with some standards that represent a desired state of affaires: –Past performance, previously set goals, performance of other units/organizations … Problem identification is subjective in nature Decision-making process: Some comments

Fundamentals of Management: 4-8Gao Junshan, UST Beijing Decision Criteria They reflect the factors that managers think important in making the choice They are not equally important A simple approach to deal with different criteria is to assign them different weights Judgments are involved in selecting criteria and assigning weighs Decision-making process: Some comments

Fundamentals of Management: 4-9Gao Junshan, UST Beijing Developing and Analyzing Alternatives INITIAL INTERIOR DURA- REPAIR PERFOR- HAND- PRICE COMFORT BILITY RECORD MANCE LING TOTAL ALTERNATIVES(10) (8) (5) (5) (3) (1) INITIAL INTERIOR DURA- REPAIR PERFOR- HAND- PRICE COMFORT BILITY RECORD MANCE LING TOTAL ALTERNATIVES(10) (8) (5) (5) (3) (1) Jeep Cherokee Ford Taurus Mercedes C Saab Mazda Dodge Intrepid Ford Explorer Isuzu Rodeo Volvo 850` Audi Toyota Camry Volkswagen Passat Jeep Cherokee Ford Taurus Mercedes C Saab Mazda Dodge Intrepid Ford Explorer Isuzu Rodeo Volvo 850` Audi Toyota Camry Volkswagen Passat Decision-making process:

Fundamentals of Management: 4-10Gao Junshan, UST Beijing Quantitative Tools to Decision Analysis Decision-making process: Some comments (see Quantitative module p141) Operations research models –Linear programming –Queuing theory –Economic order quantity (EOQ) Financial techniques –Ratio analysis –Break-even analysis Decision analysis tools –Decision tree –Payoff matrix

Fundamentals of Management: 4-11Gao Junshan, UST Beijing Implementation and Evaluation Selecting the “best” choice based on the analysis Putting into the decision into action includes –Communicating with those to be affected and –Gaining their commitment of support Participation of decision making brings enthusiasms Evaluation of the decision result is an important phase of decision making process and part of the controlling function Decision-making process: Some comments

Fundamentals of Management: 4-12Gao Junshan, UST Beijing The Decision- Making Process Identification of a problem Identification of Decision criteria Allocation of Weights to criteria Development of alternatives Analysis of alternatives Selection of an alternative Implementation of The alternative Evaluation of decision effectiveness Decision-making process: Summary

Fundamentals of Management: 4-13Gao Junshan, UST Beijing Rational Model of Decision Making Decision choices are consistent, value maximizing within the specified constraints Decision makers remain logical and objective Outcomes of all alternatives are known and accurate comparison of them can be made MazdaJeepFordToyota Rationality assumptions: Rational model

Fundamentals of Management: 4-14Gao Junshan, UST Beijing ProblemClarityProblemClarity SingleGoalSingleGoal KnownOptionsKnownOptions ClearPreferencesClearPreferences ConstantPreferencesConstantPreferences No time/cost Constraints Constraints MaximumPayoffMaximumPayoff Assumptions of Rational DecisionMakingAssumptions DecisionMaking Rationality assumptions: Rational model

Fundamentals of Management: 4-15Gao Junshan, UST Beijing Real World Decisional Conditions Real World Decisional Conditions CertaintyCertaintyUncertaintyUncertaintyRiskRisk Rationality assumptions: Modification of rational model

Fundamentals of Management: 4-16Gao Junshan, UST Beijing Bounded Rationality Time and cost constrain Uncertainty of environments Incomplete information Limited abilities to process massive information Rationality assumptions: Modification of rational model

Fundamentals of Management: 4-17Gao Junshan, UST Beijing A Search Process to “Satisfice” Ascertain the Need for a Decision Simplify the Problem Set“Satisficing”Criteria Identify a Limited Set of Alternatives CompareAlternatives Against Criteria Expand Search for Alternatives Select the First “Good Enough” Choice A “Satisficing” AlternativeExists Yes No Rationality assumptions: Modification of rational model

Fundamentals of Management: 4-18Gao Junshan, UST Beijing ProgrammedDecisions NonprogrammedDecisions How Do Problems Differ? Well-Structured PoorlyStructured Decision making in reality: Types and style

Fundamentals of Management: 4-19Gao Junshan, UST Beijing GuidingPoliciesGuidingPolicies SpecificRulesSpecificRules SequentialProceduresSequentialProceduresMakingProgrammedDecisionsMakingProgrammedDecisions Decision making in reality: Types and style

Fundamentals of Management: 4-20Gao Junshan, UST Beijing Integrating Decision Making Well-Structured Level in Organization Programmed Decisions Programmed Decisions TopPoorly Structured Type of Problem Lower Nonprogrammed Decisions Nonprogrammed Decisions Decision making in reality: Types and style

Fundamentals of Management: 4-21Gao Junshan, UST Beijing Escalation of Commitment RepresentativeHeuristic AvailabilityHeuristic Common Errors in Decision Making Decision making in reality: Common errors

Fundamentals of Management: 4-22Gao Junshan, UST Beijing Analytic Conceptual Behavioral Directive RationalIntuitive Way of Thinking High Low Tolerance for Ambiguity Decision-Making Styles Decision making in reality: Types and style

Fundamentals of Management: 4-23Gao Junshan, UST Beijing National Culture and Decision Making Degree of Risk DecisionStyle Decision making in reality: Cultural factors

Fundamentals of Management: 4-24Gao Junshan, UST Beijing PowerDistanceIndividualism UncertaintyAvoidance Quantity Versus Quality of Life Hofstede’s Dimensions of National Culture Decision making in reality: Cultural factors (see Chap 2 p53)

Fundamentals of Management: 4-25Gao Junshan, UST Beijing Cultural Differences in Decision Making Practices SwedenIndiaJapanUSAEgyptGermanyItaly Power distanceLowHigh Uncertainty avoidance LowHigh Time pressureHighLow Conformity and cooperation HighLow Concern for structure and order High Attitude on history and tradition High Decision making in reality: Cultural factors

Fundamentals of Management: 4-26Gao Junshan, UST Beijing Group Decision Making More information More alternatives Increased acceptance Legitimacy Time-consuming Minority domination Pressures to conform Unclear responsibility AdvantagesDisadvantages Decision making in reality: Decision making in groups

Fundamentals of Management: 4-27Gao Junshan, UST Beijing Rationalizeresistance Illusion of unanimityAvoiddivating Apply direct pressure Evidence of Groupthink Decision making in reality: Decision making in groups

Fundamentals of Management: 4-28Gao Junshan, UST Beijing Techniques to Improve Group Decision Making Brainstorming Nominal Group Technique Electronic Meetings Decision making in reality: Decision making in groups

Fundamentals of Management: 4-29Gao Junshan, UST Beijing Conducting Effective Meeting Prepare and distribute an agenda well in advance of the meeting Consult with participants before the meeting to ensure proper participation Establish specific time parameters for the meeting; specify when it will start and end. Maintain focused discussion during the meeting Encourage and support participation by all members Encourage the clash of ideas discourage the clash of personalities Bring closure by summarizing accomplishments and allocating follow-up assignments Management skills: Effective meeting

Fundamentals of Management: 4-30Gao Junshan, UST Beijing Arguments for Social Responsibility Arguments for Social Responsibility uPublic expectations uLong-run profits uEthical obligations uPublic relations image uBetter environment uPublic expectations uLong-run profits uEthical obligations uPublic relations image uBetter environment Social responsibility and ethics: Argument s for it (see Chap 2 p58)

Fundamentals of Management: 4-31Gao Junshan, UST Beijing Arguments for Social Responsibility Arguments for Social Responsibility uFewer government regulations uBalance of responsibility and power uStockholder interests uPossession of resources uPrevention versus cures uFewer government regulations uBalance of responsibility and power uStockholder interests uPossession of resources uPrevention versus cures Social responsibility and ethics: Argument s for it (see Chap 2 p58)

Fundamentals of Management: 4-32Gao Junshan, UST Beijing Arguments Against Social Responsibility Violation of profit maximization Dilution of purpose Costs outweigh benefits Too much power Lack of skills Lack of accountability Lack of broad public support Social responsibility and ethics: Argument s against it (see Chap 2 p58)

Fundamentals of Management: 4-33Gao Junshan, UST Beijing SocialInvolvement in Business SocialResponsibility SocialObligation SocialResponsiveness Social responsibility and ethics: Level of involvement (see Chap 2 p59)

Fundamentals of Management: 4-34Gao Junshan, UST Beijing Ethics refers a set of rules or principles that define right and wrong conduct Code of Ethics is a formal document that states an organization’s primary values and the ethical rules it expect employees to follow. Ethics and Code of Ethics Social responsibility and ethics: Ethics (see Chap 2 p59)

Fundamentals of Management: 4-35Gao Junshan, UST Beijing Rights View UtilitarianView Theory of Justice View Three Views of Ethics see chap 2 (p60) Social responsibility and ethics: Ethics (see Chap 2 p60)

Fundamentals of Management: 4-36Gao Junshan, UST Beijing Guidelines for Acting Ethically Know your organization's policy on ethics. Understand the ethics policy. Think before you act. Ask yourself what-if questions. Seek opinions from others. Do what you truly believe is right. Management skills: Acting ethically

Fundamentals of Management: 4-37Gao Junshan, UST Beijing Steps in decision-making process Rational decision-making model Limits of rationality Certainty, risk and uncertainty Bounded-rational decision maker Two type of problems and two decisions Chapter Summary

Fundamentals of Management: 4-38Gao Junshan, UST Beijing Four decision-making styles Heuristics in decision making Cultural factors in decision making Pros and cons of group decisions Techniques to improve group decisions Social responsibility an ethics Chapter Summary

Fundamentals of Management: 4-39Gao Junshan, UST Beijing Payoff Matrix V1V2V3 D D D D Visa’s response Discover’s strategy Maximax choice: D4 Maximin choice: D3 Minimax choice: D4 Quantitative Tools to Decision Analysis (see Quantitative module p141)

Fundamentals of Management: 4-40Gao Junshan, UST Beijing Decision Tree 1 Rent a large store Rent a small store Strong market: 0.7 Weak market: 0.3 Strong market: 0.7 Weak market: 0.3 $ $ $ $ Expected value for large store: $ Quantitative Tools to Decision Analysis (see Quantitative module p143)

Fundamentals of Management: 4-41Gao Junshan, UST Beijing Revenues/Costs ($000) Output (000) Loss Area Profit area Break-even point Variable Costs Fixed Costs Total Revenue Break-Even Point Break-Even Analysis Quantitative Tools to Decision Analysis (see Quantitative module p145)

Fundamentals of Management: 4-42Gao Junshan, UST Beijing Popular Financial Ratios Liquidity Test –Current ratio –Acid test Liquidity Test –Current ratio –Acid test Leverage Test –Debt-to-assets –Time-interest- earned Leverage Test –Debt-to-assets –Time-interest- earned Operation Test –Inventory turnover –Total asset turnover Operation Test –Inventory turnover –Total asset turnover Profitability test –Profit margin-on- revenue –Return-on-investment Profitability test –Profit margin-on- revenue –Return-on-investment Quantitative Tools to Decision Analysis (see Quantitative module p146)

Fundamentals of Management: 4-43Gao Junshan, UST Beijing Number of MAC units (S) Number of DOS units (R) ABD E F R=150 S=300 C Linear Programming Quantitative Tools to Decision Analysis (see Quantitative module p148)

Fundamentals of Management: 4-44Gao Junshan, UST Beijing Queuing Theory cost of having a waiting line Cost of provide more servers Service capacity Quantitative Tools to Decision Analysis (see Quantitative module p148)

Fundamentals of Management: 4-45Gao Junshan, UST Beijing 0 Costs Quantity of Order EOQ Total Costs Carrying Costs Ordering Costs D: Demand for the period V: Purchasing price (Value) OC: Ordering Cost CC: Carrying Cost Economic Order Quantity Quantitative Tools to Decision Analysis (see Quantitative module p150)

Fundamentals of Management: 4-46Gao Junshan, UST Beijing Team skill building exercise Decision-making process: Car buying example A salesclerk had just turned off the lights in the store when a man appeared and demanded money. The owner opened a cash register. The contents of the cash register were scooped up, and the man sped away. A member of the police was notified promptly.

Fundamentals of Management: 4-47Gao Junshan, UST Beijing Team skill building exercise Decision-making process: Car buying example 1.A man appeared after the owner had turned off his store light. F 2.The robber was a man. ? 3.The man did not demand money. F 4.The man who opened the cash register was the owner. ? 5.The store owner scooped up the content of the cash register and run away. ? 6.Some one opened a cash register. T 7.After the man who demanded the money scooped up the content of the cash register, he run away. ? 8.The cash register contained money,but the story does not state how much. ? 9.The robber demanded money of the owner. ? 10.The story concerns a series of events in which only three persons are referred to: the owner of the store, a man who demanded money and a member of the police force. F 11.The following events in the story are true: someone demanded money; a cash register was opened; its contents were scooped up; and a man dashed out of the store. T