2.2 Understanding Management Decision Making

Question 1

Two broaded approaches to decision making

Answer 1

Intuition:
Gut feel and exp
Quicker!
Hard to justify for a business decision involving significant risks

Scientific:
Based on data and analysis
Downside: time consuming & costly; no guarantee of the right decision
Common and automated by Big data and analytics

Question 2

Scientific decision making

Answer 2

Involves data/evidence and adopts systematic approach rather than intuition

Question 3

Key considerations for decision making

Answer 3

Risk
Reward
Uncertainty
Opportunity cost

Question 4

Importance of opportunity costs

Answer 4

For most start-up businesses, resource are limited

When resources are scarce, significant decisions on what to spend or what to focus becomes significantly risky

Opportunity costs: is the calculated risk and weight up of the potential implications of decision

Question 5

Decision tree

Answer 5

A mathematical model

Used to help managers make decisions

Uses probability and estimates likely outcomes

Helps to decide if the net-worth is worthwhile

Question 6

What is a probability?

Answer 6

The percentage chance of something happening

Ranges between 1 (100%) and 0

If all the outcomes are considered it must add up to 1

Question 7

Decision tree (Key terms)

LOOK AT HOW TO DO A DECISION TREE

Answer 7

Expected value: the financial value of an outcome calculated by multiplying the estimated financial effect by it’s probability

Net gain: the calculated value gained by taking a decision

Calculation: add together expected value of each outcome - costs associated

Question 8

Benefits of a Decision tree

Answer 8

Choices are set out on a logical way

Potential options & choices are considered at the same time

Use of probabilities enables risks to be assessed

Likely costs and financial benefits are considered

Easy to understand and tangible results

Question 9

Downsides of a Decision tree

Answer 9

Probably are just estimates they are prone to **errors*

Uses quantitative data only and not qualitative data for the aspects of the decision

Decision making does not necessarily reduce the amount of risks

Question 10

Influences on decision making

Answer 10

Mission
Objectives
Ethics
The external environment and competition
Resource constraints