U2: Understanding Management and Decision Making Flashcards
What are many decisions in business are based on? And what are they usually driven by?
Many decisions in business are based on hard, probably numerical data and are therefore scientific. This is usually driven by the need to minimise the risks and maximise rewards and research data may help limit uncertainty.
What are more tactical decisions made by and what are decisions based on?
More and more tactical decisions are actually being made by computer programmes. McDonald’s managers are sent details of how many staff should be employed every hour for the next Saturday; the decision is made based on sales forecast using last year’s data and
recent weeks - it is a scientific decision.
What is the scientific decision making model?
- Set objectives
- Gather data
- Analyse data
- Select
- Implement
- Review
What does intuitive decision making do?
Who is this method more likely to be used by?
This method of decision making uses qualitative criteria, perhaps experience and strength of market understanding, or perhaps little more than guesswork or a “hunch”. This method is more likely to be used by small businesses owned by a single individual or small group. It can be useful and appropriate for
creativity and innovation.
Why are strategic decisions even more risky?
Strategic decisions are even more risky because of more uncertainty so a computer may be less helpful and there may be a greater need for intuitive
decisions to be made.
Scientific Decision Making definition
A systematic process for making decisions in an objective manner. This eliminates intuition and hunches and should avoid bias and subjectivity as decisions should be based on well researched factual data/evidence.
Intuitive Decision Making definition
The ability to understand something without the need for conscious reasoning; similar to ‘hunch’ or ‘gut feeling’ held by the decision maker.
What do small firms make decisions based on?
What can managers in big businesses cannot afford to do? What do they look for instead?
Small firms make decisions based on intuition, because the decision makers know their customers really well - and know that they can reverse the decisions easily. Managers in big businesses cannot afford to make mistakes; their careers may be on the line. So they look for ‘scientific’ decision making methods, i.e, ones based on facts and calculations, not hunch and guesswork.
If data isn’t available or too difficult what would be the best approach?
Information Available: Sometimes data may not be available or too difficult to obtain so an intuitive approach would be best. If data is available, however it is best to use it!
Why does the size of the business matter?
Size of the business: Smaller businesses usually have decisions made by the few owners and are likely to be based on hunches rather than data analysis. Larger companies often need to make far more complex decisions and are more likely to use a scientific approach.
What you should do if the situation is unpredictable or predictable?
Predictability of the situation: if a situation is unpredictable then a hunch may be an acceptable way to decide. If there are more predictable outcomes and there is past data, a more scientific approach would be best.
What is an entrepreneurial risk taker more like to do?
Character of the person/people or culture of the company: an entrepreneurial risk taker is more likely to use intuition and hunches. A manager trying to avoid risk or blame would be more likely to use scientific methods.
What do businesses have to consider when making decisions?
When businesses make decisions they have to consider risk, reward, uncertainty, opportunity cost
What is opportunity cost?
The real cost of taking a particular action or the next best alternative foregone i.e. the next best thing that you could have
chosen but did not.
What is a decision tree?
A mathematical model used to help managers make decisions when faced with choices
Excepted value definition
The financial value of an outcome calculated by multiplying the
estimated financial effect by its probability
Net gain definition
The value to be gained from taking a decision
How is net gain calculated?
Net gain is calculated by adding together the expected value or each outcome and deducting the costs associated with the decision.
What are important to the outcome of a decision tree?
Associated costs, outcome probabilities and financial results are particularly important to the outcome of a decision tree
What is probability?
Probability is the percentage chance or possibility that an event will occur. Ranges between 1 (100%) and 0. If all outcomes of an event are considered, the total probability must add up to 1.
What does a decision tree use to calculate likely outcomes?
A decision tree uses estimates and probabilities to calculate likely outcomes. Calculating these estimates helps to decide whether the net gain from a decisions is worthwhile.
What is the four step approach to decision trees?
- Identify the Options
- Add Possible Outcomes
- Add Associated Costs, Outcome Probabilities and Financial Results
- Calculate the Expected Values and Net Gains
What are the benefits of using decision trees?
- choices are set out in a logical way
- potential options and choices are considered at the same time
- use of probabilities enables the ‘risk’ of the options to be addressed
- likely costs are considered as well as potential benefits
- easy to understand and tangible results
What are the drawbacks of using decision trees?
- probabilities are just estimates - always prone to error
- uses quantitative data only - ignores qualitative aspects of decisions
- assignments of probabilities and expected values prone to bias
- decision-making technique doesn’t necessarily reduce the amount of risk
