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Chapter 4

Foundations of Decision Making

Fundamentals of Management: 4-1

Gao Junshan, UST Beijing

Where We Are
Part 1 Introduction Part 2 Planning Part 3 Organizing Part 4 Leading Part 5 Controlling
Chapter 3 Foundations of Planning

Chapter 4 Foundations of Decision Making

Fundamentals of Management: 4-2

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Chapter Guide
Process of decision making
Importance The 8 step process Quantitative analysis tools

Assumptions on rationality
Rational model of decision making Modification of the rational model

Decision making in real world


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Decision-making process: importance

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Decision-making process: car buying example

An example of the decision-making process

Identifying a Problem

I need to buy a new car.


Price Interior Comfort Durability Repair Record Performance

Identifying Decision Criteria

Allocating Weights to Criteria

Price Interior Comfort Durability Repair Record Performance

10 8 6 4 2

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Decision-making process: car buying example

Developing Alternatives

Dodge Toyota

Audi Ford

Isuzu Jeep

Chevy Mazda

Analyzing Alternatives

Toyota Ford Jeep

Mazda

Price Comfort Durability Repair Record Performance

Dodge
Audi Isuzu

Chevy

Selecting an Alternative

The Toyota is the best.

Implementing the Choice

Appraising Decision Results

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Decision-making process: step summary

Problem Identification
Solving the wrong problem perfectly is no better
than do nothing for the right problem Problem is identified by comparing the current

state with some standards that represent a desired


state of affaires:
Past performance, previously set goals, performance of other units/organizations

Problem identification is subjective in nature


Fundamentals of Management: 4-7 Gao Junshan, UST Beijing

Decision-making process: step summary

Decision Criteria
They reflect the factors that managers think
important in making the choice They are not equally important

A simple approach to deal with different


criteria is to assign them different weights Judgments are involved in selecting criteria

and assigning weighs

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Decision-making process: step summary

Analyzing alternatives

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Decision-making process: step summary

Selecting an alternative

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Gao Junshan, UST Beijing

Decision-making process: step summary

Quantitative Tools to Decision Analysis


Operations research models
Linear programming Queuing theory Economic order quantity (EOQ)

Financial techniques
Ratio analysis Break-even analysis

Decision analysis tools


Decision tree Payoff matrix
for more see Quantitative Module p121-129

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Decision-making process: step summary

Implementation and Evaluation


Selecting the best choice based on the analysis Putting into the decision into action includes
Communicating with those to be affected and Gaining their commitment of support

Participation of decision making brings enthusiasms Evaluation of the decision result is an important phase of decision making process and part of the controlling function
Fundamentals of Management: 4-12 Gao Junshan, UST Beijing

Chapter Guide
Process of decision making
Assumptions on rationality
Rational model of decision making
Creativity

Modification of the rational model

Decision making in real world


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Rationality assumptions: rational model

Rational Model of Decision Making


Decision choices are consistent, value maximizing within the specified constraints Decision makers remain logical and objective Outcomes of all alternatives are known and accurate comparison of them can be made
Toyota Ford Jeep Mazda

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Rationality assumptions: rational model

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Rationality assumptions: rational model

Becoming Creative
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

Seek a change of scenery


Find several right answers Play your own devils advocate Believe in finding a workable solution Brain storming with others Turn creative ideas into action

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Rationality assumptions: rational model

Real World Decisional Conditions

Certainty

Risk

Uncertainty

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Rationality assumptions: modification of rational model

In the real world managers make rational choice under the these constraints
Uncertainty of environments
Incomplete information Capabilities to process

massive information
Time and cost

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Rationality assumptions: modification of rational model

A Search Process to Satisfice


Ascertain the Need for a Decision Set Satisficing Criteria Identify a Limited Set of Alternatives

Compare Alternatives Against Criteria

Select the First Good Enough Choice

Simplify the Problem

Expand Search for Alternatives

No

A Satisficing Alternative Exists

Yes

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Rationality assumptions: modification of rational model

Simon, Herbert Alexander


19162001 American social scientist and economist

Simon was a pioneer of the development of computer artificial intelligence. In economics, he contended that the theory of economic man, which argues that the individual invariably chooses a course that will maximize personal benefits, failed to account for the inherent uncertainty of human action. His highly original work on decisionmaking in such books as Administrative Behavior (1947), earned him the Nobel Memorial Prize in Economic Sciences in 1978. Simon's other books include Scientific Discovery (1987). From Columbia Electronic Encyclopedia, 6th Edition
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Chapter Guide
Process of decision making Assumptions on rationality Decision making in real world
Types and styles of decision making Common errors in decision making Decision making in groups Cultural factors
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Decision making in reality: types and style

How Do Problems Differ?


WellStructured Programmed Decisions

Poorly Structured

Nonprogrammed

Decisions

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Decision making in reality: types and style

Making programmed Decisions

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Decision making in reality: types and style

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Decision making in reality: types and style

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Decision making in reality: errors and creativity

Common Errors in Decision Making

Availability Heuristic
Escalation of Commitment

Representative Heuristic

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Decision making in reality: errors and creativity

Information Technology to Assist Decision Makings


Expert system
Software that acts like an expert in analyzing and solving

ill-structured problems Neural network


Software that

is designed to imitate the structure of brain cells and connections among them

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Decision making in reality: decision making in groups

Group Decision Making


Advantages
More information

Disadvantages
Time-consuming Minority domination Pressures to conform Unclear responsibility

More alternatives
Increased acceptance Legitimacy

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Decision making in reality: decision making in groups

Evidence of Groupthink

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Decision making in reality: decision making in groups

Brainstorming

Techniques to Improve Group Decision Making

Nominal Group Technique

Electronic Meetings

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Decision making in reality: cultural factors

National Culture and Decision Making

Decision Style

Degree of Risk

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Decision making in reality: cultural factors (see Chap 2, p47)

Hofstedes Dimensions of National Culture

See: G. Hofstede, Culture Consequences: International Differences in Work Related Values (Beverly Hills, CA: Sage Publications, 1980), pp. 2526; and Hofstede, The Cultural Relativity of Organizational Practices and Theories, Journal of International Business Studies (Fall 1983), pp. 7589.

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Decision making in reality: cultural factors

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Chapter Summary

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Summary in numbers
8 steps of decision making process 7 assumptions of rational model 4 realities leading to bounded rationality 4 decision styles (in 2 dimensions) 4 evidences of groupthink 4 measures of Hofstede culture difference 3 levels of uncertainty 3 common ways of programmed decisions 3 common errors of decision making 3 elements of creativity 3 techniques to improve group decision making 2 types of decision problem vs. 2 types of decisions
Gao Junshan, UST Beijing

Fundamentals of Management: 4-42

Management skills: Effective meeting

Conducting Effective Meeting


Prepare and distribute an agenda well in advance of the meeting Consult with participants before the meeting to ensure proper participation Establish specific time parameters for the meeting; specify when it will start and end. Maintain focused discussion during the meeting Encourage and support participation by all members Encourage the clash of ideas discourage the clash of personalities Bring closure by summarizing accomplishments and allocating follow-up assignments
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