CHAPTER 7

Decision Making
Tools and Techniques
Pamela S. Lewis
Stephen H. Goodman
Patricia M. Fandt
Slides Prepared by
© Copyright ©2004 by South-Western, a division of Thomson Learning. Zulema Seguel
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 Learning Objectives Slide 1 of 3

1. Describe the situations in which

managerial decisions are called for.
2. Discuss the basic classifications for
managerial decisions.
3. Describe the nature of strategic decision
making as well as the strategic decision-
making matrix approach for strategic
selection.

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2 33
 Learning Objectives Slide 2 of 3

4. Identify the differences between the

growth-share matrix and the industry
attractiveness/ business strength matrix
approaches for evaluating business
portfolios.
5. Describe the nature of operational
decision making.
6. Discuss the basic elements that add
structure to the decision-making
process.
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3 33
 Learning Objectives Slide 3 of 3

7. Discuss the differences between

decision making under certainty, risk,
and uncertainty.
8. Describe the solution approaches that
would be taken for risk and uncertainty
situations.
9. Discuss the basics of breakdown
analysis, linear programming, and PERT
analysis.
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4 33
 Managerial Decision Situations
• Managers are faced with decisions when a
problem occurs or when an opportunity
arises.
– Problem
• A situation in which some aspect of
organizational performance is less than
desirable.
– Opportunity
• A situation that has the potential to
provide additional beneficial outcomes.

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5 33
 Classification of Decision Situations
• Programmed decisions
– Decisions made in response to routine
situations that have occurred in the past.
• Nonprogrammed decisions
– Decisions made in response to situations
that are unique, unstructured, or poorly
defined.

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6 33
 Responses to Decision Situations

Programmed Nonprogrammed
Decisions Decisions

Alternatives are Alternatives are not

familiar to decision familiar to decision
makers. makers.

Responses are Responses require

routine. creativity.

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7 33
 Strategic Decision Making Tools
• This strategy defines the long-term
direction of the firm and occurs at the
highest levels of the organization.
• Two important areas for strategic decision
making are:
– Strategy selection
– Evaluation of portfolios

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8 33
 Strategy Selection
• The Strategic Decision-Making Matrix
– A two-dimensional grid used to select the
best strategic alternative in light of
multiple organizational objectives.

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9 33
 Sample Strategic Decision-Making Matrix
Objectives
Increased Increased Increased
Profit Market Production
Share Output

Alternative Strategies .5 .3 .2
Product Development 2 2 3
Horizontal Integration 4 2 2
Joint Venture 5 3 3

Total Weighted Score

.5(2) + .3(2) + .2(3) = 2.2
.5(4) + .3(2) + .2(2) = 3.0
.5(5) + .3(3) + .2(3) = 4.0

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 Evaluation of Portfolios

• Business Portfolio Matrix

– A two-dimensional grid that compares
the strategic positions of each of the
organization’s businesses.
– Most frequently used matrices:
• Growth-share matrix.
• Industry attractiveness/business strength
matrix.

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 Boston Consulting Group (BCG) Matrix
• Business portfolio matrix that uses market
growth rate and relative market share as the
indicators of the firm’s strategic position.
– Market growth rate
• A measure of the annual growth
percentage of the market in which the
business operates.
– Relative market share
• The firm’s market share divided by the
market share of its largest competitor.

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BCG Matrix
 BCG Matrix: Stars and Cash Cows

• Stars: Businesses that fall into the high market

growth/high market share cell of the BCG
matrix.
– Offer attractive profit and growth opportunities.

• Cash Cows: Businesses that fall into the low

market growth/high market share cell of a BCG
matrix.
– Generate substantial cash surpluses.
– Generally yesterday’s stars that have matured.

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 BCG Matrix: Dogs and Question Marks

• Dogs: Businesses that fall into the low market

growth/low market share cell of a BCG matrix.
– Typically generate low profits, and in some cases
may even lose money.

• Question Marks: Businesses that fall into

the high market growth/low market share cell of
a BCG matrix.
– Businesses that look attractive from an industry
standpoint, however, their low market share makes
their profit potential uncertain.

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 GE Matrix
• Business portfolio matrix that uses several
factors to assess industry attractiveness
and business strength.

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GE Matrix
 Operational Decision Making
• Operational decision making relates to
decision situations that cover much
shorter time spans.
• These decisions are typically made at
lower levels within the organization, but
that need not always be the case.

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 Applying Structure
To The Decision-Making Process slide 1 of 2

• Alternative Courses of Action

– Strategies that might be implemented in a
decision-making situation.
• States of Nature
– Conditions over which the decision maker
has little or no control.
• Payoffs
– The outcomes of decision situations.

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 Applying Structure
To The Decision-Making Process slide 2 of 2

• Payoff Table
– A matrix that organizes the alternative
courses of action, states of nature, and
payoffs for a decision situation.

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20 33
 Techniques that
Enhance Quality in Decision Making
• The manner in which the information in
the payoff table is analyzed is a function
of the decision-making environment.
• Types of decision-making:
– Decision-making under certainty
– Decision-making under risk
– Decision-making under uncertainty

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21 33
 Decision Making Under Certainty
• Decision making under certainty
– In decision making under certainty, the
decision maker knows with certainty what
conditions will subsequently occur and affect
the decision outcomes.

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22 33
 Decision Making Under Risk
• Decision making under risk
– In decision making under risk, the
probabilities are used to obtain expected
values of outcomes for each decision
alternative.
• Expected Value: The product of a payoff and its
probability of occurrence.
• Expected Monetary Value (EMV): The sum of
each expected value for an alternative.
• Decision Tree: A branching diagram that
illustrates the alternatives and states of nature for
a decision situation.

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 Decision-Making Under Uncertainty
• In some cases a decision maker cannot
assess the probability of occurrence for
the various states of nature.
• When no probabilities are available, the
situation is referred to as decision making
under uncertainty.

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 Ethical and Social
Implications in Decision Making

How do I balance
economic and social
considerations?

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 Ethical and Social
Implications in Decision Making

How will the decision

affect the personal lives
of my employees?

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 Ethical and Social
Implications in Decision Making

What are the ethical and

social implications of my
decision?

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 Quantitative Decision-Making Aids
• Breakeven Analysis

• Linear Programming

• PERT (Program Evaluation and Review

Technique)

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 Breakeven Analysis
• A graphic display of the
relationship between volume
of output and revenue and
costs.

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29 33
 Linear Programming
• A quantitative analysis that helps
managers decide how to allocate limited
resources among competing users in a
manner that optimizes some objective.
• Computer programs are available to
perform linear programming analysis.

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 PERT (Program
Evaluation and Review Technique)
• A network approach for scheduling
project activities.
• In the PERT approach, four preliminary
steps must be performed before the
project analysis can begin:
– Activity identification, precedence
identification, activity time estimation, and
network construction.

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 Implications for Leaders:
Decision Making Tools slide 1 2

• Be able to recognize quickly problems

and opportunities that call for a decision.
• Be able to recognize the different
timeframes and scopes of strategic
decisions versus operational decisions.
• Be equipped with all the tools and
techniques that can aid in making
strategic decisions.

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 Implications for Leaders:
Decision Making Tools slide 2 of 2

• Be familiar with the framework for

operational decision making as well as the
structural components for displaying
operational decisions.
• Be able to recognize the different decision-
making environments in which operational
decisions will be made.
• Have an awareness and understanding of the
various quantitative tools that can aid in
making the operational decisions.

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