2.2 Understanding management decision making (includes scientific decision making & decision trees) Flashcards
(22 cards)
What is included in the process of decision making?
- Setting objectives
- Gathering and interpreting information.
- Selecting the chosen option.
- Implementing the decision
- Reviewing.
What is scientific decision-making?
What is the alternative to this approach?
- The systematic approach of collecting facts and applying logical decision making techniques, such as decision trees to the decision-making process.
- Alternative- trial & error and intuition (gut feeling)
What are programmed decisions?
Decisions - deal with problems that are familiar
& where information required to make them = easy to define and obtain structures in place.
What are non-programmed decisions?
- Deal with situations that are unstructured & unique
- Unusual decisions e.g. a major investment / entering a new market which may have some risk.
What are tactical decisions?
Short term, few resources involved, easier to reverse, usually taken by junior management.
What are strategic decisions?
Long term, large commitment of resources, difficult to reverse and taken by senior managers.
What are the 4 different types of decisions?
Programmed decisions
Non-programmed decisions
Tactical decisions
Strategic decisions
What are rewards?
What would a reward be if price was reduced and sales increased dramatically?
Rewards- the positive outcomes from decision making.
The reward would be increased revenue and possibly profit.
What happens when we can’t measure the risk?
This is known as uncertainty- there is a lack of knowledge and events, outcomes or consequences are unpredictable.
What can decision making be based on?
Experience
Hunch/ instinct
Data (the scientific approach)
Decision making
Data (scientific approach)
A manager gathers the data and analyses it before making a decision. What does this involve?
- Recognising that there is a problem or opportunity - a decision has to be made.
- Setting objectives for what you want to achieve
- Setting criteria and deciding - importance of each
- Developing and identifying alternatives
- Comparing and analysing the alternatives
- Choosing and implementing a course of action
- Reviewing the effectiveness of the decision
Scientific decision making involves the use of what?
- Data mining and big data to source relevant data to inform decisions.
- Application of software logic and predicitve models to analyse scenarios.
- Forecasts to consider the possible implications for the business decisions.
What sorts of models can be linked to scientific decision-making?
- Decision trees
- Investment appraisal
- Sales forecasting
- Sensitivity analysis
- Network analysis
What are the Problems of scientific decision making?
- Cost of gathering and analysing the data.
- Could the cost potentially be bigger than the returns?
- What is the reliability?
When are decisions based on hunches (intuition) appropriate when?
- There is more uncertainty about a decision- insufficient or unreliable data.
- Decision making includes an assessment of a potential business partners character or personality.
- If an advertising campaign will grab the attention of the customers.
- A quick decision is needed- limited research time.
What cost must managers also consider when making a decision?
What is this and why does this occur?
OPPORTUNITY COST
- The cost of the next best alternative that will be missed by taking a particular decision.
- Business resources, particularly finance are limited and as a result, a business will not be able to undertake everything it would like!
What are decision trees?
- They are tree like diagrams which can be used to determine the optimum course of action in situations where several possible alternatives with uncertain outcomes exist.
- They are a visual representation of the various risks, rewards and potential value of each option.
Work out the expected value and net profit from this information (on a decision tree), show your calculations.
There are two options:
- Bringing out new product
- Relaunch existing product
Relaunch existing product-
Cost: £2.5million
Success: £8.5 million, 0.7 probability
Failure: £0.5 million, 0.3 probability
New product
Cost: £6million
Success: £12million, 0.6 probability
Failure: £2 million, 0.4 probability.
1) Relauching product:
Success: £8.5m x 0.7= £5.95m
Failure: £0.5m x 0.3 = £0.15m
Expected value= £5.95m + £0.15m = £6.1m
Net gain= £6.1m - £2.5m = £3.6m
New product:
Success: £12m x 0.6 = £7.2m
Failure: £2 x 0.4 = £0.8m
Expected Value= £7.2m + £0.8m = £8m
Net Gain: £8m - £6m = £2
What are the benefits of decision trees?
- Choices are set out in a logical way.
- Potential options & choices are considered at the same time.
- Use of probabilities enables the “risk” of options to be addressed.
- Likely costs are considered as well as potential benefits.
- Easy to understand and tangible results.
What are the drawbacks of decision trees?
- Probabilities are just estimates- always prone to error.
- Uses quantitative data only- ignores qualitative aspects of decisions.
- Assignment of probabilities and expected values prone to bias.
- Decision making technique doesn’t necessarily reduce the amount of risk.
What are some influences on decision-making?
- The businesses mission and objectives.
- Ethics
- The risk involved
- The external environment
- Resource constraints.
Decision-making influences
Explain what is involved in:
- Mission and objectives
- Ethics
- Risk involved
- External Environment
- Resource Constraints
- Mission and objectives- What the business does and its aim.
- Ethics- Doing something that is morally right, not just financial benefits- but what is better for the person or the people involved. Decisions don’t have to be illegal to be unethical!
- Risk involved- May want to take steps to reduce the risk involved by gathering data to be the basis of decisions.
- The External environment: Outside influences on the business like natural disasters.
- Resource constraints: The necessary resources that need to be available- e.g. information, labour, time and materials.
