1. Chapter 7 ©2001 South-Western College Publishing Pamela S. Lewis Stephen H. Goodman Patricia M. Fandt Slides Prepared by Bruce R. Barringer University of Central Florida Pamela S. Lewis Stephen H. Goodman Patricia M. Fandt Slides Prepared by Bruce R. Barringer University of Central Florida Decision-Making Tools and Techniques

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

3. Transparency 7-3 © 2001 South-Western Publishing 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.

4. Transparency 7-4 © 2001 South-Western Publishing 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.

5. Transparency 7-5 © 2001 South-Western Publishing Sources of Organizational and Entrepreneurial Decisions Slide 1 of 2 Managers are faced with decisions when a problem occurs or when an opportunity arises.

6. Transparency 7-6 © 2001 South-Western Publishing Sources of Organizational and Entrepreneurial Decisions 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.

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

8. Transparency 7-8 © 2001 South-Western Publishing Classification of Decision Situations Slide 2 of 2 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

9. Transparency 7-9 © 2001 South-Western Publishing Strategic 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

10. Transparency 7-10 © 2001 South-Western Publishing Strategy Selection: The Strategic Decision-Making Matrix Slide 1 of 2 A two-dimensional grid used to select the best strategic alternative in light of multiple organizational objectives.

11. Transparency 7-11 © 2001 South-Western Publishing Strategy Selection: The Strategic Decision-Making Matrix (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

12. Transparency 7-12 © 2001 South-Western Publishing 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.

13. Transparency 7-13 © 2001 South-Western Publishing 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.

14. Transparency 7-14 © 2001 South-Western Publishing Boston Consulting Group Matrix Slide 2 of 4 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

15. Transparency 7-15 © 2001 South-Western Publishing Boston Consulting Group Matrix Slide 3 of 4 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.

16. Transparency 7-16 © 2001 South-Western Publishing Boston Consulting Group Matrix Slide 4 of 4 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.

17. Transparency 7-17 © 2001 South-Western Publishing GE 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.

18. Transparency 7-18 © 2001 South-Western Publishing 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.

19. Transparency 7-19 © 2001 South-Western Publishing 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.

20. Transparency 7-20 © 2001 South-Western Publishing 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.

21. Transparency 7-21 © 2001 South-Western Publishing Techniques that Enhance Quality in Decision Making 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.

22. Transparency 7-22 © 2001 South-Western Publishing Techniques that Enhance Quality in Decision Making 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.

23. Transparency 7-23 © 2001 South-Western Publishing Techniques that Enhance Quality in Decision Making 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.

24. Transparency 7-24 © 2001 South-Western Publishing Techniques that Enhance Quality in Decision Making 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.

25. Transparency 7-25 © 2001 South-Western Publishing 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:

26. Transparency 7-26 © 2001 South-Western Publishing Quantitative Decision-Making Aids 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.

27. Transparency 7-27 © 2001 South-Western Publishing Quantitative Decision-Making Aids Slide 2 of 3 Breakeven Analysis Fixed cost Total cost Total variable cost Total revenue. Breakeven point Loss Output Volume Profit

28. Transparency 7-28 © 2001 South-Western Publishing Quantitative Decision-Making Aids 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.

29. Transparency 7-29 © 2001 South-Western Publishing 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.

30. Transparency 7-30 © 2001 South-Western Publishing 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.

31. Transparency 7-31 © 2001 South-Western Publishing Attributes of Effective Decision Makers Slide 3 of 3 Have an awareness and understanding of the various quantitative tools that can aid in making the operational decisions.