Chapter 5 / Decision Making

Question 1

What is the decision-making process?

Answer 1

1) Setting objectives
2) Gathering and interpreting information
3) Selecting the chosen option
4) Implementing the decision
5) Reviewing

Question 2

What are the types of decisions?

Answer 2

1) Programmed and non-programmed decisions
2) Tactical and Strategic decisions

Question 3

Programmed and Non explained?

Answer 3

• Programmed decisions - familiar and routine decisions
• Non-programmed decisions - less structured and require unique solutions

Question 4

What are strategic decisions?

Answer 4

They are long-term, with a large use of resources managed by senior management.

Question 5

What are tactical decisions?

Answer 5

They are short-term, with few resources involved, and managed by junior management.

Question 6

What is the HUNCH approach?

Answer 6

A decision based on gut feeling, these decisions are quick but hard to justify if the decision is high risk.

Question 7

What is the SCIENTIFIC approach?

Answer 7

Scientific decision-making involves making decisions based on evidence and adopting a systematic approach

Question 8

When may HUNCH decisions be needed?

Answer 8

When assessing a potential business partner’s character, to decide if the new advertisement is attractive.

Question 9

What are the key influences on business decisions?

Answer 9

Budgets, organizational structure, attitude to risks, availability and reliability of data, and the external environment.

Question 10

What is an opportunity cost?

Answer 10

• The cost of missing out on the next best alternative
• The benefits that could have been gained by taking a different decision

Question 11

Why are opportunity costs important?

Answer 11

When resources are scarce. significant decisions of where to invest and spend become riskier, managers take calculated risks and weigh up the implications.

Question 12

What is a decision tree?

Answer 12

1) A mathematical model
2) Used to help managers make decisions
3) Uses estimates and probabilities to calculate likely outcomes
4) Helps to decide whether the net gain from a decision is worthwhile

Question 13

What is probability?

Answer 13

The percentage chance or possibility that an event will occur

Question 14

What is the expected value?

Answer 14

The financial value of an outcome is calculated by multiplying the estimated financial effect by its probability

Question 15

What is Net Gain?

Answer 15

The value to be gained from taking a decision. Calculated by adding together the expected value of each outcome and deducting the costs associated with the decision

Question 16

What are the advantages of a decision tree?

Answer 16

1) Choices are set out in a logical way
2) Potential options & choices are considered at the same time

Question 17

What are the disadvantages of a decision tree?

Answer 17

1) Probabilities are just estimates – always prone to error
2) Uses quantitative data only – ignores qualitative aspects of decisions