chapter 7 ©2001 south-western college publishing pamela s. lewis stephen h. goodman patricia m....

Chapter 7Chapter 7

©2001 South-Western College Publishing©2001 South-Western College Publishing©2001 South-Western College Publishing©2001 South-Western College Publishing

Pamela S. LewisPamela S. LewisStephen H. GoodmanStephen H. Goodman

Patricia M. FandtPatricia M. Fandt

Slides Prepared bySlides Prepared byBruce R. BarringerBruce R. Barringer

University of Central FloridaUniversity of Central Florida

Pamela S. LewisPamela S. LewisStephen H. GoodmanStephen H. Goodman

Patricia M. FandtPatricia M. Fandt

Slides Prepared bySlides Prepared byBruce R. BarringerBruce R. Barringer

University of Central FloridaUniversity of Central Florida

Decision-Making Tools and Techniques

Decision-Making Tools and Techniques

Transparency 7-2Transparency 7-2© 2001 South-Western Publishing© 2001 South-Western Publishing

Learning ObjectivesSlide 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.




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.




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.


Sources of Organizational and Entrepreneurial Decisions

Slide 1 of 2


Slide 1 of 2

Managers are faced with decisions when a problem occurs or when an opportunity

arises.



Slide 2 of 2


Slide 2 of 2

• 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.


Classification of Decision Situations Slide 1 of 2


• 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.




Responses to Decision Situations

Programmed decisions

Nonprogrammed decisions

Alternatives are familiar to decision

makers

Responses are routine

Alternatives are not familiar to

decision makers

Responses require creativity


Strategic Decision MakingStrategic Decision 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


Strategy Selection: The Strategic Decision-Making Matrix

Slide 1 of 2


Slide 1 of 2

A two-dimensional grid used to select the best strategic alternative in light of multiple

organizational objectives.



(example)Slide 2 of 2


(example)Slide 2 of 2

Objectives

Increased Profit

Increased Production

Output

Increased Market Share

.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

Alternative Strategies


Evaluation of PortfoliosEvaluation 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.


Boston Consulting Group Matrix Slide 1 of 4


• 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.




Relative Market Share

Market Growth

Rate (Percent)

High 20%

Medium 10%

Low 0%

High Medium Low

10 1 .1

Stars (II)

Question Marks (I)

Cash Cows (III)

Dogs (IV)

BCG Matrix




• 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.




• 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.


GE MatrixGE 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.


Operational Decision MakingOperational 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.


Applying Structure to the Decision-Making Process

Slide 1 of 2


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.



Slide 2 of 2


Slide 2 of 2

• Payoff Table– A matrix that organizes the alternative courses

of action, states of nature, and payoffs for a decision situation.


Techniques that Enhance Quality in Decision Making

Slide 1 of 4


Slide 1 of 4

• 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.



Slide 2 of 4


Slide 2 of 4

• 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.



Slide 3 of 4


Slide 3 of 4

• 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.



Slide 4 of 4


Slide 4 of 4

• 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.


Ethical and Social Implications in Decision Making

Ethical and Social Implications in Decision Making

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?

Examples of questions managers sometimes ask:


Quantitative Decision-Making Aids

Slide 1 of 3


Slide 1 of 3

• 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.



Slide 2 of 3


Slide 2 of 3Breakeven Analysis

Fixed cost

Total cost

Total variable cost

Total revenue

.Breakeven

point

Loss

Output Volume

Profit



Slide 3 of 3


Slide 3 of 3

• 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.


Attributes of Effective Decision Makers

Slide 1 of 3

Attributes of Effective Decision Makers

Slide 1 of 3

• 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.


Attributes of Effective Decision Makers Slide 2 of 3


• 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.

chapter 7 ©2001 south-western college publishing pamela s. lewis stephen h. goodman patricia m....

Documents