4

Chapter

Foundations of Decision Making

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Learning Objectives
Describe the decision making process. Explain the three approaches managers can use to make decisions. Describe the types of decisions and decisionmaking conditions managers face. Discuss group decision making. Discuss contemporary issues in managerial decision making.
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How Do Managers Make Decisions?

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What Defines a Decision Problem?

Problem A discrepancy between an existing and a desired state of affairs.

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Factors in the Decision-Making Process

Relevant decision criteria:
Price Model (two-or four-door) Size Manufacturer Optional equipment Fuel economy, or Repair records.

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Weighing Criteria and Analyzing Alternatives

To weigh criteria:
1. Give the most important criterion a weight of 10. 2. Compare remaining criteria against that standard to indicate their relative degrees of importance.

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Weighing Criteria and Analyzing Alternatives (cont.)

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Weighing Criteria and Analyzing Alternatives (cont.)

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Determining the Best Choice

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Implementing Decisions

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The Last Step in the Decision Process

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Common Errors

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Three Approaches

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The Rational Model

Rational decision making Choices that are consistent and maximize value within specified constraints
IT can enhance an orgs decision-making capabilities.

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Bounded Rationality
Bounded rationality Decisions that are rational within the limits of a managers 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

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Intuition in Decision Making

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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

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Types of Decisions: Programmed

Programmed decisions Repetitive decisions that can be handled using a routine approach

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Types of Decisions: Nonprogrammed

Nonprogrammed decisions Unique and nonrecurring decisions; require a custom-made solution

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Problems, Decision Types, and Organizational Levels

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Decision-Making Conditions
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

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Group Decision Making: Benefits

Provides more information Generates more alternatives Increases acceptance of a solution Increases legitimacy of the decision
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Group Decision Making: Drawbacks

Time-consuming Infrequent and often inefficient interaction Minority domination Groupthink Ambiguous responsibility

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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

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Improving Group Decision Making

Three ways of making group decisions more creative:
Brainstorming Nominal group technique Electronic meetings

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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

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Creativity in Decision Making

Creativity allows the decision maker to: Appraise and understand a problem more fully See problems others cant see Identify all viable alternatives

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Quantitative Module Quantitative Decision-Making Aids

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Payoff Matrices

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Payoff Matrices: Regret Matrix

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Decision Trees

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Break-Even Analysis

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Ratio Analysis

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Linear Programming

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Linear Programming (cont.)

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Queuing Theory

n = 3 customers arrival rate = 2 per minute service rate = 4 minutes per customer

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Economic Order Quantity Model

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