Chapter+12+-+Decision+Analysis+-+Handout

Chapter+12+-+Decision+Analysis+-+Handout - Chapter 12...

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Decision Analysis Chapter 12
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Introduction to Decision Analysis Models HELP managers gain insight and understanding, but they CANNOT make decisions. Decision making often remains a difficult task due to: uncertainty regarding the future conflicting values or objectives Consider the following example. ..
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Deciding Between Job Offers Company A In a new industry that could boom or bust. Low starting salary, but could increase rapidly. Located near friends, family and favorite sports team. Company B Established firm with financial strength and commitment to employees. Higher starting salary but slower advancement opportunity. Distant location, offering few cultural or sporting activities. Which job would you take?
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Good Decisions vs. Good Outcomes A structured approach to decision making can help us make good decisions, but can’t guarantee good outcomes. Good decisions sometimes result in bad outcomes.
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Components in Decision Making Decision Alternatives: Different courses of action (choices) intended to solve a problem. Work for company A Work for company B Reject booths offers and keep looking States of Nature: Future events that are beyond decision maker’s control. Company A grows Company A goes bust etc Criteria: Factors that are important to the decision maker and influenced by the alternatives. Salary Career potential Location
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Example: Retail Developers Associates Retail Developers Associates is a developer of shopping malls in the southeastern United States. The firm wants to develop a regional mall in a particular area that encompasses several cities and towns. It has identified five potential sites and has projected annual customer traffic flow at the sites under three different economic growth scenarios in the area - no growth, moderate growth, and high growth. Some of the sites are in more established areas where the traffic would be greater in the immediate future, while some sites are in more isolated areas where growth would likely occur in the future if conditions are right. The average annual customer traffic (in millions of people) for each site under each future growth condition for the immediate planning horizon is shown in the following table.
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The Decision Alternatives 1) Build the Mall at Site 1 2) Build the Mall at Site 2 3) Build the Mall at Site 3 4) Build the Mall at Site 4 5) Build the Mall at Site 5
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The Possible States of Nature 1) Stable Growth Conditions 2) Moderate Growth Conditions 3) High Growth Conditions
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Constructing a Payoff Table Mall Site Stable Moderate High 1 1.82 2.05 2.42 2 2.43 2.51 2.71 3 1.14 2.10 3.20 4 1.46 2.18 3.05 5 2.15 2.93 3.12 Future Growth Conditions
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Decision Rules If the future state of nature (Growth Condition) were known, it would be easy to make a decision. Real decision making.
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This note was uploaded on 11/21/2011 for the course BIT 3104 taught by Professor Norttingham during the Spring '10 term at Virginia Tech.

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Chapter+12+-+Decision+Analysis+-+Handout - Chapter 12...

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