Fundamentals of Management
Sixth Edition
Robbins and DeCenzo
with contributions from Henry Moon
CHAPTER
4
© 2008 Prentice Hall, Inc.
All rights reserved.
Part II: Planning
Foundations of
Decision Making
PowerPoint Presentation by Charlie Cook
The University of West Alabama
LEARNING OUTCOMES
After reading this chapter, you will be able to:
1. Describe the steps in the decision-making process.
2. Identify the assumptions of the rational decisionmaking 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.
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4–2
L E A R N I N G O U T C O M E S (cont’d)
After reading this chapter, you will be able to:
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.
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4–3
Decision-Making
• Decision-Making Process
 A set of eight steps that includes identifying a
problem, selecting a solution, and evaluating the
effectiveness of the solution
• Problem
 A discrepancy between an existing and a desired
state of affairs
• Decision Criteria
 Factors that are relevant in a decision
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4–4
EXHIBIT 4–1
Examples of Planning Decisions
 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?
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4–5
EXHIBIT 4–2
The Decision-Making Process
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4–6
EXHIBIT 4–3
Criteria and Weights in Car-Buying Decision
(Scale of 1 to 10)
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4–7
EXHIBIT 4–4
Assessment of Car Alternatives
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4–8
EXHIBIT 4–5
Weighting of Vehicles
(Assessment Criteria × Criteria Weight)
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4–9
Decision-Making (cont’d)
• Decision 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.
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4–10
Making Decisions: The Rational Model
• Certainty
 The implication that the outcome of every possible
alternative is known.
• Uncertainty
 A condition under which there is not full knowledge of
the problem and reasonable probabilities for
alternative outcomes cannot be determined.
• Risk
 The probability that a particular outcome will result
from a given decision.
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4–11
EXHIBIT 4–6
Assumptions of Rationality
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4–12
What Is Creative Potential?
• Expertise
 Understanding, abilities, knowledge, proficiencies,
necessary in the field of creative endeavor.
• Creative-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 Motivation
 The desire to work on something because it’s
interesting, involving, exciting, satisfying, or
personally challenging.
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4–13
EXHIBIT 4–7
Three 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.
© 2008 Prentice Hall, Inc. All rights reserved.
4–14
Steps in Becoming More Creative
1.
2.
3.
4.
Think of yourself as creative.
Pay attention to your intuition.
Move away from your comfort zone.
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.
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4–15
Making Decisions: The Rational Model
• Rational
 Describes choices that are consistent and value-
maximizing within specified constraints.
• Bounded Rationality (Herbert Simon)
 Behavior that is rational within the parameters of a
simplified model that captures the essential features
of a problem.
• Satisfice
 Making a “good enough” decision: choosing the first-
identified alternative that satisfactorily and sufficiently
solves the problem.
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4–16
Common Decision-Making Errors
• Heuristics: 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.
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4–17
How Do Problems and Decisions Differ?
• Well-Structured Problems
 Straightforward, familiar, easily defined problems
• Ill-Structured Problems
 New problems in which information is ambiguous or incomplete
• Programmed Decision
 A repetitive decision that can be handled by a routine approach
• Nonprogrammed Decisions
 Decisions that must be custom-made to solve unique and
nonrecurring problems
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4–18
Programmed Decision-Making Aids
• Policy
 A general guide that establishes parameters for
making decisions about recurring problems.
• Procedure
 A series of interrelated sequential steps that can be
used to respond to a well-structured problem (policy
implementation).
• Rule
 An explicit statement that tells managers what they
ought or ought not to do (limits on procedural
actions).
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4–19
EXHIBIT 4–8
Types of Problems, Types of Decisions,
and Level in the Organization
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4–20
Technology And Decision Making
• Expert 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 Networks
 Software that is designed to imitate the structure of
brain cells and connections among them
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4–21
Decision-Making Styles
Styles of Decision
Making
Directive
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Analytic
Conceptual
Behavioral
4–22
EXHIBIT 4–9
Decision-Making Styles
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4–23
Group Decision Making
• Advantages
 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.
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• Disadvantages
 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
4–24
When Are Groups Most Effective?
• High Need for Creativity
 Groups tend to be more creative than individuals.
• Acceptance of the Final Solution
 Groups help increase the acceptance of decisions.
• Effectiveness of Group Decision Making
 Groups of five to seven members are optimal for
decision process speed and quality.
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4–25
Improving Group Decision Making
Making Group
Decision Making
More Creative
Brainstorming
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Nominal Group
Technique
Electronic
Meeting
4–26
National Culture and Decision-Making
Practices
• 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
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4–27
Quantitative
Module
QUANTITATIVE DECISION-MAKING AIDS
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4–28
EXHIBIT QM–1 Payoff Matrix for Visa
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4–29
EXHIBIT QM–2 Regret Matrix for Visa
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4–30
EXHIBIT QM–3 Decision Tree and Expected Values for Renting a Large or
Small Retail Space
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4–31
EXHIBIT QM–4 Break-Even Analysis
BE = [TFC/(P – VC)]
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4–32
EXHIBIT QM–5 Popular Financial Controls
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4–33
EXHIBIT QM–6 Production Data for Virus Software
4R + 6S < 2,400
2R + 2S < 900
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4–34
EXHIBIT QM–7 Graphical Solution to Free’s Linear Programming Problem
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4–35
Queuing Theory
• Queuing 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
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4–36
Economic Order Quantity Model
• Fixed-Point Reordering System
 A preestablished point for replenishing inventory
• 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

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4–37
EXHIBIT QM–8 Determining the Optimum Economic Order Quantity
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4–38
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.
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4–39