1. Fundamentals of Management: 4-1Gao Junshan, UST Beijing Chapter 4 Foundations of Decision Making

2. Fundamentals of Management: 4-2Gao Junshan, UST Beijing Where We Are Part 1 Introduction Part 2 Planning Part 3 Organizing Part 4 Leading Part 5 Controlling Part 2 Planning Chapter 3 Foundations of Planning Chapter 4 Foundations of Decision Making Chapter 3 Foundations of Planning Chapter 4 Foundations of Decision Making

3. Fundamentals of Management: 4-3Gao Junshan, UST Beijing 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

4. Decision-making process: importance Fundamentals of Management: 4-4Gao Junshan, UST Beijing

5. Fundamentals of Management: 4-5Gao Junshan, UST Beijing An example of the decision-making process Identifying a Problem Identifying Decision Criteria Allocating Weights to Criteria I need to buy a new car. Price Interior Comfort Durability Repair Record Performance Price Interior Comfort Durability Repair Record Performance 10 8 6 4 2 Decision-making process: car buying example

6. Fundamentals of Management: 4-6Gao Junshan, UST Beijing Decision-making process: car buying example Developing Alternatives Analyzing Alternatives Selecting an Alternative Implementing the Choice The Toyota is the best. Ford Jeep Mazda Dodge Audi Isuzu Chevy Price Comfort Durability Repair Record Performance Toyota ChevyIsuzuAudiDodge MazdaJeepFordToyota Appraising Decision Results

7. Fundamentals of Management: 4-7Gao Junshan, UST Beijing 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 Decision-making process: step summary

8. Fundamentals of Management: 4-8Gao Junshan, UST Beijing 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 Decision-making process: step summary

9. Analyzing alternatives Decision-making process: step summary Fundamentals of Management: 4-9Gao Junshan, UST Beijing

10. Selecting an alternative Decision-making process: step summary Fundamentals of Management: 4-10Gao Junshan, UST Beijing

11. Fundamentals of Management: 4-11Gao Junshan, UST Beijing Quantitative Tools to Decision Analysis Decision-making process: step summary 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

12. Fundamentals of Management: 4-12Gao Junshan, UST Beijing and Evaluation 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 Decision-making process: step summary

13. Fundamentals of Management: 4-13Gao 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

14. 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 MazdaJeepFordToyota Rationality assumptions: rational model Fundamentals of Management: 4-14Gao Junshan, UST Beijing

15. Fundamentals of Management: 4-15Gao Junshan, UST Beijing Rationality assumptions: rational model

16. Fundamentals of Management: 4-16Gao Junshan, UST Beijing Creative 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 devil’s advocate Believe in finding a workable solution Brain storming with others Turn creative ideas into action Rationality assumptions: rational model

17. Real World Decisional Conditions Real World Decisional Conditions Certainty U Uncertainty Risk Rationality assumptions: rational model Fundamentals of Management: 4-17Gao Junshan, UST Beijing

18. 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 Rationality assumptions: modification of rational model Fundamentals of Management: 4-18Gao Junshan, UST Beijing

19. Fundamentals of Management: 4-19Gao Junshan, UST Beijing A Search Process to “Satisfice” Ascertain the Need for a Decision Simplify the Problem Set “Satisficing” Criteria Identify a Limited Set of Alternatives Compare Alternatives Against Criteria Expand Search for Alternatives Select the First “Good Enough” Choice A “Satisficing” Alternative Exists Yes No Rationality assumptions: modification of rational model

20. Fundamentals of Management: 4-20Gao Junshan, UST Beijing 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 decision- making 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 Simon, Herbert Alexander （ 1916–2001 ） American social scientist and economist Rationality assumptions: modification of rational model

21. Fundamentals of Management: 4-21Gao Junshan, UST Beijing 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

22. Fundamentals of Management: 4-22Gao Junshan, UST Beijing How Do Problems Differ? ProgrammedDecisions NonprogrammedDecisions Well-Structured PoorlyStructured Decision making in reality: types and style

23. Making programmed Decisions Decision making in reality: types and style Fundamentals of Management: 4-23Gao Junshan, UST Beijing

24. Decision making in reality: types and style Fundamentals of Management: 4-24Gao Junshan, UST Beijing

25. Decision making in reality: types and style Fundamentals of Management: 4-25Gao Junshan, UST Beijing

26. Fundamentals of Management: 4-26Gao Junshan, UST Beijing Escalation of Commitment RepresentativeHeuristic AvailabilityHeuristic Common Errors in Decision Making Decision making in reality: errors and creativity

27. 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 Decision making in reality: errors and creativity Fundamentals of Management: 4-27Gao Junshan, UST Beijing

28. Fundamentals of Management: 4-28Gao Junshan, UST Beijing Group Decision Making More information More alternatives Increased acceptance Legitimacy Time-consuming Minority domination Pressures to conform Unclear responsibility Advantages Disadvantages Decision making in reality: decision making in groups

29. Evidence of Groupthink Decision making in reality: decision making in groups Fundamentals of Management: 4-29Gao Junshan, UST Beijing

30. Fundamentals of Management: 4-30Gao Junshan, UST Beijing Techniques to Improve Group Decision Making Brainstorming Nominal Group Technique Electronic Meetings Decision making in reality: decision making in groups

31. Fundamentals of Management: 4-31Gao Junshan, UST Beijing National Culture and Decision Making Degree of Risk DecisionStyle Decision making in reality: cultural factors

32. Hofstede’s Dimensions of National Culture Decision making in reality: cultural factors (see Chap 2, p47) See: G. Hofstede, Culture Consequences: International Differences in Work Related Values (Beverly Hills, CA: Sage Publications, 1980), pp. 25–26; and Hofstede, “The Cultural Relativity of Organizational Practices and Theories,” Journal of International Business Studies (Fall 1983), pp. 75–89. Fundamentals of Management: 4-32Gao Junshan, UST Beijing

33. Decision making in reality: cultural factors Fundamentals of Management: 4-33Gao Junshan, UST Beijing

34. Chapter Summary Fundamentals of Management: 4-34Gao Junshan, UST Beijing

35. Fundamentals of Management: 4-35Gao Junshan, UST Beijing Payoff Matrix V1V2V3 D1131411 D291518 D3242115 D4181428 Visa’s response Discover’s strategy Maximax choice: D4 Maximin choice: D3 Minimax choice: D4 Quantitative Tools to Decision Analysis (see Quantitative Module, p121)

36. Fundamentals of Management: 4-36Gao Junshan, UST Beijing Decision Tree 1 Rent a large store Rent a small store Strong market: 0.7 Weak market: 0.3 Strong market: 0.7 Weak market: 0.3 $320 000 $50 000 $240 000 $130 000 Expected value for large store: $239 000 Quantitative Tools to Decision Analysis (see Quantitative Module, p123)

37. Fundamentals of Management: 4-37Gao Junshan, UST Beijing Revenues/Costs ($000) Output (000) 80 70 60 50 40 30 20 10 10 20 30 40 50 60 70 Loss Area Profit area Break-even point Variable Costs Fixed Costs Total Revenue Break-Even Point Break-Even Analysis Quantitative Tools to Decision Analysis (see Quantitative Module, p124)

38. Fundamentals of Management: 4-38Gao Junshan, UST Beijing Popular Financial Ratios Liquidity Test –Current ratio –Acid test Liquidity Test –Current ratio –Acid test Leverage Test –Debt-to-assets –Time-interest- earned Leverage Test –Debt-to-assets –Time-interest- earned Operation Test –Inventory turnover –Total asset turnover Operation Test –Inventory turnover –Total asset turnover Profitability test –Profit margin-on- revenue –Return-on-investment Profitability test –Profit margin-on- revenue –Return-on-investment Quantitative Tools to Decision Analysis (see Quantitative Module, p125)

39. Fundamentals of Management: 4-39Gao Junshan, UST Beijing Number of MAC units (S) 800 700 600 500 400 300 200 100 Number of DOS units (R) 100 200 300 400 500 600 ABD E F R=150 S=300 C Linear Programming Quantitative Tools to Decision Analysis (see Quantitative Module p127)

40. Fundamentals of Management: 4-40Gao Junshan, UST Beijing Queuing Theory cost of having a waiting line Cost of provide more servers Service capacity Quantitative Tools to Decision Analysis (see Quantitative Module, p127)

41. Fundamentals of Management: 4-41Gao Junshan, UST Beijing 0 Costs Quantity of Order EOQ Total Costs Carrying Costs Ordering Costs D: Demand for the period V: Purchasing price (Value) OC: Ordering Cost CC: Carrying Cost Economic Order Quantity Quantitative Tools to Decision Analysis (see Quantitative Module, p128)

42. Fundamentals of Management: 4-42Gao Junshan, UST Beijing 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

43. Fundamentals of Management: 4-43Gao Junshan, UST Beijing 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 Management skills: Effective meeting