CHAPTER 7

Decision Making
Tools and Techniques

Pamela S. Lewis
Stephen H. Goodman
Patricia M. Fandt
Copyright 2004 by South-Western, a division of Thomson Learning.
All rights reserved.

Slides Prepared by
Zulema Seguel

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 decisionmaking matrix approach for strategic
selection.
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33

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.
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33

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.
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33

Managerial Decision Situations

Managers are faced with decisions when a
problem occurs or when an opportunity
arises.
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.
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33

Classification of Decision Situations

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.

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33

Responses to Decision Situations

Programmed
Decisions

Nonprogrammed
Decisions

Alternatives are Alternatives are not

familiar to decision familiar to decision
makers.
makers.
Responses are
routine.

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Responses require
creativity.

33

Strategic Decision Making Tools

This strategy defines the long-term
direction of the firm and occurs at the
highest levels of the organization.
Two important areas for strategic decision
making are:
Strategy selection
Evaluation of portfolios

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33

Strategy Selection
The Strategic Decision-Making Matrix
A two-dimensional grid used to select the
best strategic alternative in light of
multiple organizational objectives.

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33

Sample Strategic Decision-Making Matrix

Objectives
Increased
Profit

Increased
Market
Share

Increased
Production
Output

Alternative Strategies

.5

.3

.2

Product Development
Horizontal Integration
Joint Venture

2
4
5

2
2
3

3
2
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
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10 33

Evaluation of Portfolios

Business Portfolio Matrix

A two-dimensional grid that compares
the strategic positions of each of the
organizations businesses.
Most frequently used matrices:
Growth-share matrix.
Industry attractiveness/business strength
matrix.

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11 33

Boston Consulting Group (BCG) Matrix

Business portfolio matrix that uses market
growth rate and relative market share as the
indicators of the firms strategic position.
Market growth rate
A measure of the annual growth
percentage of the market in which the
business operates.
Relative market share
The firms market share divided by the
market share of its largest competitor.
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12 33

BCG Matrix

BCG Matrix: Stars and Cash Cows

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 yesterdays stars that have matured.

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14 33

BCG Matrix: Dogs and Question Marks

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.
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15 33

GE Matrix
Business portfolio matrix that uses
several factors to assess industry
attractiveness and business strength.

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16 33

GE Matrix

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.

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18 33

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.

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19 33

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.

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20 33

Techniques that
Enhance Quality in Decision Making
The manner in which the information in
the payoff table is analyzed is a function
of the decision-making environment.
Types of decision-making:
Decision-making under certainty
Decision-making under risk
Decision-making under uncertainty

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21 33

Decision Making Under Certainty

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.

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22 33

Decision Making Under Risk

Decision making under risk
In decision making under risk, the
probabilities are used to obtain expected
values of outcomes for each decision
alternative.
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.
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23 33

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.

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24 33

Ethical and Social

Implications in Decision Making
How do I balance
economic and social
considerations?

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25 33

Ethical and Social

Implications in Decision Making
How will the decision
affect the personal lives
of my employees?

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26 33

Ethical and Social

Implications in Decision Making
What are the ethical
and social implications
of my decision?

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27 33

Quantitative Decision-Making Aids

Breakeven Analysis
Linear Programming
PERT (Program Evaluation and Review
Technique)

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28 33

Breakeven Analysis
A graphic display of the
relationship between volume
of output and revenue and
costs.

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29 33

Linear Programming
A quantitative analysis 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.

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30 33

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.

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31 33

Implications for Leaders:

Decision Making Tools

slide 1 2

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.
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32 33

Implications for Leaders:

Decision Making Tools

slide 2 of 2

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 decisionmaking 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.
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