Chapter 77

Decision-Making
Decision-Making Tools
Tools and
and
Techniques
Techniques
Pamela
Pamela S.
S. Lewis
Lewis
Stephen
Stephen H.
H. Goodman
Goodman
Patricia
Patricia M.
M. Fandt
Fandt
Slides
Slides Prepared
Prepared by
by
Bruce
Bruce R.R. Barringer
Barringer
University
University of
of Central
Central Florida
Florida

©2001
©2001 South-Western
South-Western College
College Publishing
Publishing
 Learning
Learning Objectives
Objectives
Slide
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of 33

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.

© 2001 South-Western Publishing Transparency 7-2

 Learning
Learning Objectives
Objectives
Slide
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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.
© 2001 South-Western Publishing Transparency 7-3
 Learning
Learning Objectives
Objectives
Slide
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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.

© 2001 South-Western Publishing Transparency 7-4

 Sources
Sources of
of Organizational
Organizational and
and
Entrepreneurial
Entrepreneurial Decisions
Decisions
Slide
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of 22

Managers are faced with decisions when a

problem occurs or when an opportunity
arises.

© 2001 South-Western Publishing Transparency 7-5

 Sources
Sources of
of Organizational
Organizational and
and
Entrepreneurial
Entrepreneurial Decisions
Decisions
Slide
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• 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.

© 2001 South-Western Publishing Transparency 7-6

 Classification
Classification of
of Decision
Decision Situations
Situations
Slide
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• 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.

© 2001 South-Western Publishing Transparency 7-7

 Classification
Classification of
of Decision
Decision Situations
Situations
Slide
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Responses to Decision Situations

Programmed Nonprogrammed
decisions decisions
Alternatives are Alternatives are
familiar to decision not familiar to
makers decision makers

Responses are Responses require

routine creativity

© 2001 South-Western Publishing Transparency 7-8

 Strategic
Strategic Decision
Decision Making
Making

• Strategic decision making occurs at the

highest levels in organizations.
– This strategy defines the long-term direction of
the firm.
– Two important areas for strategic decision
making are:
• Strategy selection
• Evaluation of portfolios

© 2001 South-Western Publishing Transparency 7-9

 Strategy
Strategy Selection:
Selection: The
The Strategic
Strategic
Decision-Making
Decision-Making Matrix
Matrix
Slide
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of 22

A two-dimensional grid used to select the best

strategic alternative in light of multiple
organizational objectives.

© 2001 South-Western Publishing Transparency 7-10

 Strategy
Strategy Selection:
Selection: The
The Strategic
Strategic
Decision-Making
Decision-Making Matrix
Matrix (example)
(example)
Slide
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of 22
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
© 2001 South-Western Publishing Transparency 7-11
 Evaluation
Evaluation of
of Portfolios
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.

© 2001 South-Western Publishing Transparency 7-12

 Boston
Boston Consulting
Consulting Group
Group Matrix
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.

© 2001 South-Western Publishing Transparency 7-13

 Boston
Boston Consulting
Consulting Group
Group Matrix
Matrix
Slide
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Relative Market Share
BCG Matrix High Medium Low
10 1 .1
High 20%
Stars (II) Question Marks (I)

Market
Growth
Rate Medium 10%
(Percent)
Cash Cows (III) Dogs (IV)

Low 0%

© 2001 South-Western Publishing Transparency 7-14

 Boston
Boston Consulting
Consulting Group
Group Matrix
Matrix
Slide
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• 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.

© 2001 South-Western Publishing Transparency 7-15

 Boston
Boston Consulting
Consulting Group
Group Matrix
Matrix
Slide
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• 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.
© 2001 South-Western Publishing Transparency 7-16
 GE
GE Matrix
Matrix

• Business portfolio matrix that uses several

factors to assess industry attractiveness and
business strength.
• See Figure 7.2 in the text for an example of
the GE Matrix.

© 2001 South-Western Publishing Transparency 7-17

 Operational
Operational Decision
Decision Making
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.

© 2001 South-Western Publishing Transparency 7-18

 Applying
Applying Structure
Structure to
to the
the Decision-
Decision-
Making
Making Process
Process
Slide
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of 22

• 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.

© 2001 South-Western Publishing Transparency 7-19

 Applying
Applying Structure
Structure to
to the
the Decision-
Decision-
Making
Making Process
Process
Slide
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of 22

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

© 2001 South-Western Publishing Transparency 7-20

 Techniques
Techniques that
that Enhance
Enhance Quality
Quality in
in
Decision
Decision Making
Making
Slide
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• The manner in which the information in the
payoff table is analyzed is a function of the
decision-making environment.
• Three different decision-making
environments are generally identified
depending on the amount of knowledge that
exists about future conditions that might
occur.

© 2001 South-Western Publishing Transparency 7-21

 Techniques
Techniques that
that Enhance
Enhance Quality
Quality in
in
Decision
Decision Making
Making
Slide
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of 44

• Types of Decision-Making Environments:

– 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.
– Decision making under risk
• In decision making under risk, the probabilities are
used to obtain expected values of outcomes for each
decision alternative.

© 2001 South-Western Publishing Transparency 7-22

 Techniques
Techniques that
that Enhance
Enhance Quality
Quality in
in
Decision
Decision Making
Making
Slide
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• Types of Decision Making Environments:

– Decision making under risk (topics)
• 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.

© 2001 South-Western Publishing Transparency 7-23

 Techniques
Techniques that
that Enhance
Enhance Quality
Quality in
in
Decision
Decision Making
Making
Slide
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of 44

• Types of Decision Making Environments:

– 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.

© 2001 South-Western Publishing Transparency 7-24

 Ethical
Ethical and
and Social
Social Implications
Implications in
in
Decision
Decision Making
Making

Examples of questions managers sometimes ask:

What are the ethical and social

implications of my decision?
How will the decision affect the
personal lives of my employees?
How do I balance economic and
social considerations?

© 2001 South-Western Publishing Transparency 7-25

 Quantitative
Quantitative Decision-Making
Decision-Making Aids
Aids
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• Breakeven Analysis
– A graphic display of the relationship between
volume of output and revenue and costs.
• Linear Programming
– A quantitative program 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.
© 2001 South-Western Publishing Transparency 7-26
 Quantitative
Quantitative Decision-Making
Decision-Making Aids
Aids
Slide
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Breakeven Analysis

Total revenue

Profit Total cost

Total
Breakeven variable cost
point
.
Fixed cost

Loss
Output Volume
© 2001 South-Western Publishing Transparency 7-27
 Quantitative
Quantitative Decision-Making
Decision-Making Aids
Aids
Slide
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of 33

• 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.

© 2001 South-Western Publishing Transparency 7-28

 Attributes
Attributes of
of Effective
Effective Decision
Decision
Makers
Makers
Slide
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• 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.
© 2001 South-Western Publishing Transparency 7-29
 Attributes
Attributes of
of Effective
Effective Decision
Decision
Makers
Makers
Slide
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of 33
• 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.

© 2001 South-Western Publishing Transparency 7-30

 Attributes
Attributes of
of Effective
Effective Decision
Decision
Makers
Makers
Slide
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of 33

• Have an awareness and understanding of

the various quantitative tools that can aid in
making the operational decisions.

© 2001 South-Western Publishing Transparency 7-31