4 Chapter Foundations of Decision Making Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-1

Learning Objectives Describe the decision making process. Explain the three approaches managers can use to make decisions. Describe the types of decisions and decision- making conditions managers face. Discuss group decision making. Discuss contemporary issues in managerial decision making. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-2

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How Do Managers Make Decisions? Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-4

What Defines a Decision Problem? Problem – A discrepancy between an existing and a desired state of affairs. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-5

Factors in the Decision-Making Process Relevant decision criteria: Price Model (two-or four-door) Size Manufacturer Optional equipment Fuel economy, or Repair records. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 1-6

Weighing Criteria and Analyzing Alternatives To weigh criteria: 1.Give the most important criterion a weight of Compare remaining criteria against that standard to indicate their relative degrees of importance. Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-7

Weighing Criteria and Analyzing Alternatives (cont.) Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-8

Weighing Criteria and Analyzing Alternatives (cont.) Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-9

Determining the Best Choice Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-10

Implementing Decisions Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-11

The Last Step in the Decision Process Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-12

Common Errors Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-13

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Three Approaches Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-15

The Rational Model Rational decision making – Choices that are consistent and maximize value within specified constraints Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-16 IT can enhance an org’s decision-making capabilities.

Bounded Rationality Bounded rationality – Decisions that are rational within the limits of a manager’s ability to process information Satisfice – Accepting solutions that are “good enough” Escalation of commitment – An increased commitment to a previous decision despite evidence that it may have been a poor one Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-17

Intuition in Decision Making Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-18

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Types of Problems Structured problem – A straightforward, familiar, and easily defined problem Unstructured problem – A problem that is new or unusual for which information is ambiguous or incomplete Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-20

Types of Decisions: Programmed Programmed decisions – Repetitive decisions that can be handled using a routine approach Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-21

Types of Decisions: Nonprogrammed Nonprogrammed decisions – Unique and nonrecurring decisions; require a custom-made solution Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-22

Problems, Decision Types, and Organizational Levels Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-23

Decision-Making Conditions Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-24 Risk – A situation where a decision maker estimates the likelihood of certain outcomes Certainty – A situation where a manager can make accurate decisions because the outcome of every alternative is known Uncertainty – A situation where a decision maker has neither certainty nor reasonable probability estimates available

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How Do Groups Make Decisions? Important decisions are often made by groups who will be most affected by those decisions: Committees Task forces Review panels Work teams Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-26

Group Decision Making: Benefits Provides more information Generates more alternatives Increases acceptance of a solution Increases legitimacy of the decision Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-27

Group Decision Making: Drawbacks Time-consuming Infrequent and often inefficient interaction Minority domination Groupthink Ambiguous responsibility Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-28

When Are Groups Most Effective? Individual Faster decision making More efficient use of work hours Group More accurate decisions More heterogeneous representation More time-consuming More creative More effective in accepting final solution Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-29

Improving Group Decision Making Three ways of making group decisions more creative: Brainstorming Nominal group technique Electronic meetings Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-30

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Contemporary Issues National culture – Influences the way in which decisions are made and the degree of risk a decision maker will take Creativity – The ability to produce novel and useful ideas Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-32

Creativity in Decision Making Creativity allows the decision maker to: Appraise and understand a problem more fully “See” problems others can’t see Identify all viable alternatives Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-33

Quantitative Module Quantitative Decision-Making Aids Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-34

Payoff Matrices Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-35

Payoff Matrices: Regret Matrix Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-36

Decision Trees Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-37

Break-Even Analysis Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-38

Ratio Analysis Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-39

Linear Programming Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-40

Linear Programming (cont.) Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-41

Queuing Theory n = 3 customers arrival rate = 2 per minute service rate = 4 minutes per customer Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-42

Economic Order Quantity Model Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 4-43

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