1. PowerPoint Presentation by Charlie Cook The University of West Alabama C H A P T E R 4 Part II: Planning Fundamentals of Management Sixth Edition Robbins and DeCenzo with contributions from Henry Moon © 2008 Prentice Hall, Inc. All rights reserved. Foundations of Decision Making

2. © 2008 Prentice Hall, Inc. All rights reserved.4–2 L E A R N I N G O U T C O M E S 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. 6.Identify the two types of decision problems and the two types of decisions that are used to solve them. After reading this chapter, you will be able to:

3. © 2008 Prentice Hall, Inc. All rights reserved.4–3 L E A R N I N G O U T C O M E S (cont’d) 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. After reading this chapter, you will be able to:

4. © 2008 Prentice Hall, Inc. All rights reserved.4–4 Decision-Making Decision-Making ProcessDecision-Making Process  A set of eight steps that includes identifying a problem, selecting a solution, and evaluating the effectiveness of the solution ProblemProblem  A discrepancy between an existing and a desired state of affairs Decision CriteriaDecision Criteria  Factors that are relevant in a decision

5. © 2008 Prentice Hall, Inc. All rights reserved.4–5  What are the organization’s long-term objectives?  What strategies will best achieve those objectives?  What should the organization’s short-term objectives  What is the most efficient means of completing tasks?  What might the competition be considering?  What budgets are needed to complete department  How difficult should individual goals be? EXHIBIT 4–1Examples of Planning Decisions

6. © 2008 Prentice Hall, Inc. All rights reserved.4–6 EXHIBIT 4–2The Decision-Making Process

7. © 2008 Prentice Hall, Inc. All rights reserved.4–7 EXHIBIT 4–3Criteria and Weights in Car-Buying Decision (Scale of 1 to 10)

8. © 2008 Prentice Hall, Inc. All rights reserved.4–8 EXHIBIT 4–4Assessment of Car Alternatives

9. © 2008 Prentice Hall, Inc. All rights reserved.4–9 EXHIBIT 4–5Weighting of Vehicles (Assessment Criteria × Criteria Weight)

10. © 2008 Prentice Hall, Inc. All rights reserved.4–10 Decision-Making (cont’d) Decision ImplementationDecision 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.

11. © 2008 Prentice Hall, Inc. All rights reserved.4–11 Making Decisions: The Rational Model CertaintyCertainty  The implication that the outcome of every possible alternative is known. UncertaintyUncertainty  A condition under which there is not full knowledge of the problem and reasonable probabilities for alternative outcomes cannot be determined. RiskRisk  The probability that a particular outcome will result from a given decision.

12. © 2008 Prentice Hall, Inc. All rights reserved.4–12 EXHIBIT 4–6Assumptions of Rationality

13. © 2008 Prentice Hall, Inc. All rights reserved.4–13 What Is Creative Potential? ExpertiseExpertise  Understanding, abilities, knowledge, proficiencies, necessary in the field of creative endeavor. Creative-Thinking SkillsCreative-Thinking Skills  The personality characteristics associated with creativity, the ability to use analogies, as well as the talent to see the familiar in a different light. Intrinsic Task MotivationIntrinsic Task Motivation  The desire to work on something because it’s interesting, involving, exciting, satisfying, or personally challenging.

14. © 2008 Prentice Hall, Inc. All rights reserved.4–14 EXHIBIT 4–7Three Elements of Creativity Source: T. M. Amabile. “Motivating Creativity in Organizations,” California Management Review (Fall 1997), p. 43. Copyright © 1997, by The Regents of the University of California. Reprinted by permission of the Regents.

15. © 2008 Prentice Hall, Inc. All rights reserved.4–15 Steps in Becoming More Creative 1.Think of yourself as creative. 2.Pay attention to your intuition. 3.Move away from your comfort zone. 4.Engage in activities that put you outside your comfort zone. 5.Seek a change of scenery. 6.Find several right answers. 7.Play your own devil’s advocate. 8.Believe in finding a workable solution. 9.Brainstorm with others. 10.Turn creative ideas into action.

16. © 2008 Prentice Hall, Inc. All rights reserved.4–16 Making Decisions: The Rational Model RationalRational  Describes choices that are consistent and value- maximizing within specified constraints. Bounded Rationality (Herbert Simon)Bounded Rationality (Herbert Simon)  Behavior that is rational within the parameters of a simplified model that captures the essential features of a problem. SatisficeSatisfice  Making a “good enough” decision: choosing the first- identified alternative that satisfactorily and sufficiently solves the problem.

17. © 2008 Prentice Hall, Inc. All rights reserved.4–17 Common Decision-Making Errors Heuristics: Using Judgmental ShortcutsHeuristics: Using Judgmental Shortcuts  Availability heuristic  The tendency to base judgments on information that is readily available.  Representative heuristic  The tendency to base judgments of probability on things (objects or events) that are familiar  Escalation of commitment  An increased commitment to a previous decision despite negative information about the decision’s present outcomes.

18. © 2008 Prentice Hall, Inc. All rights reserved.4–18 How Do Problems and Decisions Differ? Well-Structured ProblemsWell-Structured Problems  Straightforward, familiar, easily defined problems Ill-Structured ProblemsIll-Structured Problems  New problems in which information is ambiguous or incomplete Programmed DecisionProgrammed Decision  A repetitive decision that can be handled by a routine approach Nonprogrammed DecisionsNonprogrammed Decisions  Decisions that must be custom-made to solve unique and nonrecurring problems

19. © 2008 Prentice Hall, Inc. All rights reserved.4–19 Programmed Decision-Making Aids PolicyPolicy  A general guide that establishes parameters for making decisions about recurring problems. ProcedureProcedure  A series of interrelated sequential steps that can be used to respond to a well-structured problem (policy implementation). RuleRule  An explicit statement that tells managers what they ought or ought not to do (limits on procedural actions).

20. © 2008 Prentice Hall, Inc. All rights reserved.4–20 EXHIBIT 4–8Types of Problems, Types of Decisions, and Level in the Organization

21. © 2008 Prentice Hall, Inc. All rights reserved.4–21 Technology And Decision Making Expert SystemsExpert 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 NetworksNeural Networks  Software that is designed to imitate the structure of brain cells and connections among them

22. © 2008 Prentice Hall, Inc. All rights reserved.4–22 Decision-Making Styles Directive Conceptual Styles of Decision Making AnalyticBehavioral

23. © 2008 Prentice Hall, Inc. All rights reserved.4–23 EXHIBIT 4–9Decision-Making Styles

24. © 2008 Prentice Hall, Inc. All rights reserved.4–24 Group Decision Making AdvantagesAdvantages  Makes 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. DisadvantagesDisadvantages  Is more time-consuming and less efficient  Can result in minority domination that influences decision process  Can produce increased pressures to conform to the group’s mindset (groupthink)  Can create ambiguous responsibility for the outcomes of decisions

25. © 2008 Prentice Hall, Inc. All rights reserved.4–25 When Are Groups Most Effective? High Need for CreativityHigh Need for Creativity  Groups tend to be more creative than individuals. Acceptance of the Final SolutionAcceptance of the Final Solution  Groups help increase the acceptance of decisions. Effectiveness of Group Decision MakingEffectiveness of Group Decision Making  Groups of five to seven members are optimal for decision process speed and quality.

26. © 2008 Prentice Hall, Inc. All rights reserved.4–26 Improving Group Decision Making Brainstorming Electronic Meeting Making Group Decision Making More Creative Nominal Group Technique

27. © 2008 Prentice Hall, Inc. All rights reserved.4–27 National Culture and Decision-Making Practices Decision-making practices differ from country to country by:Decision-making practices differ from country to country by:  Participation: groups, teams, individuals  Power distance: who will make the decision  Level of risk: uncertainty avoidance  Efficiency of decision making: pace of decisions  Alternatives considered: many or few  Consensus building: ringsei  Decision-making style: rational, autocratic or participative

28. © 2008 Prentice Hall, Inc. All rights reserved.4–28 Quantitative Module QUANTITATIVE DECISION-MAKING AIDS

29. © 2008 Prentice Hall, Inc. All rights reserved.4–29 EXHIBIT QM–1Payoff Matrix for Visa

30. © 2008 Prentice Hall, Inc. All rights reserved.4–30 EXHIBIT QM–2Regret Matrix for Visa

31. © 2008 Prentice Hall, Inc. All rights reserved.4–31 EXHIBIT QM–3Decision Tree and Expected Values for Renting a Large or Small Retail Space

32. © 2008 Prentice Hall, Inc. All rights reserved.4–32 EXHIBIT QM–4Break-Even Analysis BE = [TFC/(P – VC)]

33. © 2008 Prentice Hall, Inc. All rights reserved.4–33 EXHIBIT QM–5Popular Financial Controls

34. © 2008 Prentice Hall, Inc. All rights reserved.4–34 EXHIBIT QM–6Production Data for Virus Software 4R + 6S < 2,400 2R + 2S < 900

35. © 2008 Prentice Hall, Inc. All rights reserved.4–35 EXHIBIT QM–7Graphical Solution to Free’s Linear Programming Problem

36. © 2008 Prentice Hall, Inc. All rights reserved.4–36 Queuing Theory Queuing TheoryQueuing Theory  Balancing the cost of having a waiting line against the cost of service to maintain that line. where P = probability of n customers waiting in line, n = 3 customers, arrival rate = 2 per minute, and service rate = 4 minutes per customer

37. © 2008 Prentice Hall, Inc. All rights reserved.4–37 Economic Order Quantity Model Fixed-Point Reordering SystemFixed-Point Reordering System  A preestablished point for replenishing inventory Economic Order Quantity (EOQ)Economic Order Quantity (EOQ)  A technique for balancing purchase, ordering, carrying, and stock-out costs to derive the optimum quantity for a purchase order.  D = forecasted demand for the item  OC = cost of placing each order  V = value or purchase price of the item  CC = carrying cost (as percentage) of total inventory

38. © 2008 Prentice Hall, Inc. All rights reserved.4–38 EXHIBIT QM–8Determining the Optimum Economic Order Quantity

39. © 2008 Prentice Hall, Inc. All rights reserved.4–39 Economic Order Quantity Example Forecast sales:4,000 units a year Unit cost:$50.00 each Ordering cost:$35.00 per order Carrying costs:20% of unit’s value.