Chapter 5

Chapter 5

1. Decision Trees

   • Used when financial information is available and the probability of the outcome can be estimated.
   • Provides a pictoral approach to decision making
   • There is always the option to do nothing
   • Expected value = the financial value of an outcome calculated by multiplying the estimated financial effect by its probability
   • Net Gain = expected value minus costs of decision. The value to be gained from taking the decision

2. The Decision Making Process

   • Setting objectives - the success can only be judged against objectives or targets that have been set.
   • Gathering and Interpreting Information - before making the decision they may want to collect extra information such as costs or benefits
   • Selecting the Chosen Option -having weighed up available options have to make a decision based on the data and experience.
   • Implementing the Decision - Will take actions such as using the resources in the chosen way and communicating their intentions to interested parties.
   • Reviewing the Decision - Needed to judge whether the decision is having the desired effect and meeting objectives that were set

3. Types of Decision

   • Programmed decisions - deals with problems that are familiar and where information needed to make them is easy to define and obtain. They are well structured and often have established procedures, rules and policies.
   • Non Programmed Decisions - deals with situations that are unstructured and require a unique solution. They are unusual decisions that may be risky.
   • Strategic Decisions - they are long term, involve a major commitment of resources and are difficult to reverse
   • Tactical Decisions - they are short term, are taken more regularly and involve fewer resources

4. Decision Making, Risks, Rewards and Uncertainty

   • Rewards result if managers take good decisions. It is often the case that the riskier a decision, the greater the potential rewards. However risky decisions can go badly wrong.
   • Opportunity Costs = is the best option that a manager gives up in making a decision
   • Some decisions are unique and involve situations that managers have not experienced before. This makes it difficult to assess the degree of risk and the likelihood of incurring some loss or misfortune. This creates uncertainty

5. Scientific Decision Making

   • It is scientific because it is rational, logical and based on data
   • 6. Chosing and implementing a course of action
     • 5. Compare alternatives by analysing data
       • 4. Developing and identifying alternatives
         • 3. setting decision criteria and importance of each
           • 2. Setting objectives for what you want to achieve
             • 1. Recognise there is a problem or opportunity and a decision has to be made
     • 7. Reviewing the effectiveness
   • This approach is likely if there is a high degree of risk
     • Mangers need to understand the environment in which they operate andconsider the external environment
   • Limitations - data may be unavailable or too expensive to collect and analyse

6. Decision Making Based on Intuition or 'hunch'

   • May be appropriate when data is less likely to be available or managers fear it may not be reliable.
   • May also be appropriate when;
     • An important part of a decision is making an assessment of a potential business partners personality or character
     • Assessing whether an advertising campaign will catch the attention of customers