3.2.2 Understanding management decision making

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    3.2.2 Understanding management decision making

    The value of decision making based on data (scientific decision making) and on intuition

    Scientific decision making:

    • Set the objective
    • Gather and interpret information (market research)
    • Select the chosen option
    • Implement the decision
    • Review

     

    Advantages of a scientific approach:

    • Provides a clear sense of direction for all involved in the business
    • Decisions are made and based on business logic
    • It is flexible – at any stage in making a decision, it can be reviewed and changed if needed

     

    Non-scientific decision making (intuition):

    • The ability to understand something without the need for conscious reasoning; similar to a ‘hunch’
    • Making decisions with a lack of evidence to prove it is the right thing to do
    • This would be appropriate when a quick decision is necessary as it provides quick results when under a time scale
    • It is mainly used by smaller businesses

     

    The scientific approach vs intuition depends upon:

    • Speed of decisions
    • Information available
    • Size of business
    • Predictability of situation
    • Character of person or culture

     

    The use and value of decision trees in decision making

    Characteristics of decision trees:

    • They are good at choosing between several courses of action
    • Provides a highly effective structure within which you can lay out options and investigate the possible outcomes of choosing these options
    • It uses estimates and probabilities to calculate likely outcomes
    • It helps to decide whether the net gain from a decision is worthwhile

    Expected Value = the financial value of an outcome.

    • = the estimated financial effect x its probability

    Net Gain = the value to be gained from taking a decision.

    • = the expected value of each outcome – the costs associated with the decision.

     

    Advantages of decision trees:

    • Gives you a decision
    • Evidence to gain a source of finance
    • Set out logically
    • Easy to understand and results are tangible
    • Likely costs considered as well as benefits
    • Assesses risks
    • Potential options and choices are considered at the same time – direct comparison

     

    Disadvantages of decision trees:

    • Always probe to arrow
    • Calculating probability can be rad
    • Could be inaccurate or unreliable as only estimates
    • Doesn’t necessarily reduce the amount of risk
    • Prone to bias
    • Uses quantitative data only – ignores qualitative aspects such as effects on employee motivation and brand image

     

    Influence on decision making

    The influences on decision making:

    • The business’ mission and objectives – do decisions match with the mission statement and current objectives of the firm?
    • Ethics – this is the desire to act in a way that it morally correct ( these decisions are often not quantifiable and can attract negative publicity for the business
    • The risk involved
      • Non programmable = high risk – needs to be calculated and not taken on a hunch
      • Programmable = low risk – can often be made using intuition or a hunch
    • The external environment
      • Demographics
      • The environment
      • Incomes
      • Competition/market conditions
      • Interest rates
    • Resource constraints (e.g. information, time, labour, and materials)
      • It may be costly to overcome these challenged associated with decision making
    • Stakeholders – the different people who are an interest in the business

     

     

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