3.3- Decision Making Techniques Flashcards
What is quantitative sales forecasting
QSF is a statistical technique which uses data to make predictions about the future
What can a business do with Quantitive sales forecasting
Once a business has carried out time series analysis they will use this information to;
• Organise production
• Organise resources in the business e.g. employees, premises, raw materials
• Organise marketing to back up the sales predictions
What is time series analysis (QSF)
uses historical data, smoothed out, to make better predictions for the future
Limitations of quantitative sales forecasting
Past performance is no guarantee of the future
Relies on the past
high technology markets change happens rapidly and products have a short product life cycle
It is time-consuming and complex
• Businesses need to appreciate the SWOT and PESTLE factors that may affect future predictions, for example;
• Weather
• Trends
• Competitor activity
• Terrorist activity
What is Investment appraisal
Investment appraisal attempts to determine the value of capital expenditure projects. It enables the business and its investors to compare projects
Investment appraisal is the planning process used to determine whether the long term investments will give the best return.
• Projects such as;
• new machinery
• new premises
• research and development projects
Why might a business use investment appraisal
A business needs to decide which project or proposal to invest in.
• It cannot afford all four so it will have a number of methods to work out which one it should spend the money on.
How to calculate average rate of return
Add up all the cash inflows from years
Then minus the original cost of the project
Then divide this by the number of years the project runs for
Now take this figure and divide it by the cost of the project x100
What is the NPV (net present value)
Once a business has looked at the payback period for a set of projects and then looked at the ARR they may need to look at the NPV
• This is the net present value and it takes into account that money in the future is not worth what it is today – so it adds in a discount table to make it more realistic
Limitations of investment appraisal
Payback limitations; very simple, only looks at speed of payback and dopes not look at profitability
• ARR limitations; Does not take into account the effects of time on the value of money
• NPV limitations; Very complex, not used by small business, also results dependent on rate of discount used, the higher the rate the more likely it is that the project will be rejected as unprofitable
What is decision trees
A business can’t afford to follow every option so it may use a decision tree to analyse the probability of a success in a choice of strategies;
• A new product launch
• A new marketing campaign on the
current product
• Relocation to a new building
How does a decision tree work
• A decision tree traces an alternative outcome of a decision, the results can be compared and the business can decide which option would be the most profitable
• This is a quantitative approach (means it uses numbers) it is pictorial as it’s in the shape of a tree and it predicts the best bet outcome so a business knows what to spend its money on
Limitations of decision trees
Decision trees are based on predicted data of the potential impact of a decision
- Decision tree does not take into account unforeseen costs and circumstances
- Probabilities and net outcomes are all estimates
- Using decision trees might fit with the culture exhibited by the business but this is likely to be overridden by the need to act quickly, which would suggest the decision trees are not that useful in some situations
- Large degree of uncertainty about any situation that a decision tree might be used for, so the benefits of adding numbers to uncertainty e.g. 58% might not be correct
What is critical path analysis
CPA is a management tool which helps a business to identify how long a project will take and what the critical tasks in that project are
Uses of critical path analysis
CPA can be used to schedule a building project, for example the roof is not the first thing to go on a house and the site may not have enough room for all the roof tiles at the start.
Launch a new product onto a
market.
• A photo shoot of the new product would not happen on day 1 so a schedule would be useful so bookings can be made
• Installation of new technology in a business
• Renovation of old buildings
• Advertising campaigns
What are benefits of using critical path analysis
Stakeholders will be able to see the total time frame for the project to be completed
B. Parallel activities can be scheduled, for example electricians can work on the lighting in the kitchen while the plasterers put plaster on the upstairs walls. This will save time on the project
C. Very useful for businesses in the FMCG (Fast Moving Consumer Goods) markets where speed is important
D. Useful to know when to deliver resources or arrange for labour to arrive e.g. can’t put a carpet in while painters are still working
