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Management 4 Decision Making
Management 4 Decision Making
Management 4 Decision Making
Definitions
The Manager as Decision Maker
Organizational Decisions Type, Nature, Scope
The Decision Making Process
Decision Making under Certainty
Decision Making under Risk
Decision Making under Uncertainty
Decisions Based on Break-Even Analysis
Group Decision Making
Common Decision-Making Errors and Biases
Definitions
Planning
What are the organization's long-term objectives?
What strategies will best achieve those objectives?
What should the organization's short-term
objectives be?
How difficult should individual goals be?
Leading
Controlling
Decision making is part of all four managerial functions decision making is the essence of management.
Rationality
We assume that managers decision making is going to be
rational.
Managers make consistent, value-maximizing choices with
specified constraints.
Assumptions are that decision makers:
Bounded Rationality
Managers make decisions rationally, but are limited
(bounded) by their ability to process information.
Assumptions are that decision makers:
Why satisfice?
Intuition
Non-programmed
Programmed
Novel opportunities or
problems
Recurring opportunities
or problems
Requires extra
information
Uncertainty
Little ambiguity
involved
Nature of Decision
Structured Problems
Routine and repetitive with standard solution
Well defined decision making procedure
Given a well-defined set of input, a well defined set of output is
defined
Semi-structured Problems
Has some structured aspect
Some of the inputs or outputs or procedures are not well
defined
Unstructured Problems
All phases of decision making process are unstructured
Not well defined input, output set and procedures
Scope of Decision
Strategic Planning
Long-range goals and policies for resource allocation
(E.g. What new products should be offered?)
Information Characteristics
Characteristics
Accuracy
Level of detail
Time horizon
Use
Source
Scope
Nature
Age
Operational Managerial
High
Detailed
Present
Frequent
Internal
Narrow
Quantitative
Current
Strategic
Low
Aggregate
Future
Infrequent
External
Wide
Qualitative
Current/old
Choose among
alternatives
Implement the
chosen alternative
Learn from
feedback
Risk
A conditions in which
the decision maker is
able to estimate the
likelihood of certain
outcomes.
The ability to assign
probabilities may be
result of past personal
experiences or
secondary information.
Uncertainty
The choice of
alternative is influenced
by the limited amount
of information available
to the decision maker.
Certainty
Risk
Knowledge of what the alternatives are
Know the probabilities of outcomes resulting from each
alternative.
Uncertainty
Alternative/
Criteria
C1
C2
... Cj ...
Cn
A1
a11
a12
a1n
A2
a21
a22
a2n
ai1
a12
ain
am1
am2
amn
...
Ai
...
Am
2.
3.
4.
For an event node, multiply the payoff of each branch by the events
probability. Add the results to get the events node expected payoff
For a decision node, pick the alternative that has the best expected
payoff; if an alternative leads to an event node, its payoff is equal to
that nodes expected payoff (already calculated)
C1
C2
C3
C4
C5
C6
C7
C8
A1
2000
3100
2650
3200
2600
3350
2980
2800
A2
3290
2300
2400
2650
2800
3100
3200
2700
A3
3700
2900
2300
2150
2600
2900
2700
3150
A4
2400
2540
3000
3100
3000
2900
2750
2850
A5
3100
3300
2200
2350
2400
2350
3500
2600
A6
2900
3200
2850
2500
2550
2900
3600
3300
1.
2.
3.
4.
The manager can list the possible events but cannot estimate their
probabilities
Decision rules:
Maximin (pesimistic) choose the alternative that is the best of
the worst; anticipates the worst case for each alternative
Maximax (optimistic) choose the alternative that is the best of
the best; used when the decision maker has high expectations
Laplace (realistic) choose the alternative with the best
weighted payoff; to find the weighted payoff, give equal
importance (or probability) to each event
Minimax regret choose the alternative with the best worst
regret (the alternative with the highest compared payoff in case
the worst happens)
Regret the difference between a given payoff and the best payoff in the
same conditions (on the same column); it shows how much is lost by picking
an alternative over the one that is best for this event (situation/conditions)
Break-Even Analysis
Break-even quantity the volume at which total revenues equal
total costs.
money
Revenue (pQ)
Total Cost (F + cQ)
Break-even point
BEP
Units (quantity)
Break-Even Analysis
a)
How low must be the variable cost per unit be to break even,
based on current prices and sales forecast?
Total cost = F + cQ
Revenue = pQ
Q=
F
p-c
F fixed cost
c variable cost per unit
Q quantity (number of units sold)
p price per unit
Example:
A hospital is considering a new procedure to be offered at 200 RON
per patient.The fixed cost per year would be 100 000 RON, with
variable cost of 100 RON per patient. What is the break even quantity
for this service?
C=F+cQ
C=100000+100*x
R=200*x
C=R
100000+100*x=200*x
x=1000
350.000
300.000
1.500
250.000
1.500
200.000
1.000
150.000
500
100.000
500
50.000
1
-
200
400
600
ct
800
1.000
valoare
1.200
1.400
1.600
Break-Even Analysis
b) Evaluating processes:
When choosing between two internal processes;
When choosing between an internal process and buying
services or materials on the outside
Fb + cbQ = Fm + cmQ
Q=
Fm - Fb
cb - cm
Example:
The manager of a fast-food restaurant featuring hamburgers is adding salads
to the menu. For the two new options, the price for the customer will be the
same.
The make options is to install a salad bar stocked with vegetables, fruits, and
toppings and let the customer assemble the salad. The salad bar should have
be leased and a part-time employee hired. The manager estimates the fixed
costs at 12000 RON and variable costs totaling 5,5 RON per salad.
The buy option is to have preassembled salads available for sale. They would
be purchased from a local supplier at 6 RON per salad. Offering preassembled
salads would require installation and operation of additional refrigeration,
with an annual fixed cost of 2400 RON.
The manager expects to sell 25000 salads per year.
What is the break-even quantity?
Availability/ diversity of
members skills, knowledge,
expertise
Enhanced memory
Greater ability to correct
errors
Greater decision acceptance
More alternatives generated
Better understanding of the
decision
Disadvantages
Time consuming
Group conflict, social
pressure, group polarization
Potential for groupthink
Lack of clear responsibility
(diffusion of responsibility)
Social loafing
Groupthink
Phenomenon in which the norm for consensus
overrides the realistic appraisal of alternative course
of action
Conditions:
Symptoms of Groupthink
Group members rationalize any resistance to the
assumptions they have made.
Members apply direct pressures on those who express
doubts about shared views or who question the alternative
favored by the majority.
Members who have doubts or differing points of view keep
silent about misgivings
Characteristics:
Illusion of invulnerability
Collective rationalizations
Stereotypes of other groups
Self-censorship
Illusions of unanimity
Acceptance of decision is
unnecessary or likely to occur
anyway