Decision making models Flashcards
List 3 types of decision and who makes them in a business
1 strategic - by senior management
2 tactile by middle management
3 operational - by junior management
Describe strategic decisions
Long term decisions that affect the direction the business will take
Often complex, , involve large financial commitment , may take a few years to see positive impact
Describe tactical decision
1 not as far reaching as strategic and usually more medium term
2 less complex and more flexible
Describe operational decisions
Day to day decisions made by the business - lower let=vel decisions and tend to be short term
What are the. 2 categories of decision making
Scientific - involves facts and data - favoured by most businesses as reduces risk
Intuitive - uses experience gut and intuition - good at operational level not at strategic and tactile level
List 3 models used by a business to approach decision making
1 decision trees
2 critical path analysis
3 cost benefit analysis
Describe decision trees
1 diagrammatic analysis used by business when there are lots of options
2 good when chance plays an important role in likely outcome
3 they build probability of success and failure into the process
List the components of a decision tree
1 square decision nodes
2 circular chance nodes
3 lines to represent a decision or probability
4 value of outcome in £
Probability of outcome in % or decimal point
What are the steps of drawing a decision tree
1 tree starts with decision a business wants to make
2 drawing stats with a decision node - the point where a business has to make a choice between alternatives
3 from the Edison node lines are drawn out to the right for each choice and the option is written along th line
4 at the end of each line are the likely outcomes of the decision - if the result is uncertain draw a circle
5 chance nodes represent points at which chance may play a dominant role
Why might there be more than one decision node
As the making of one decision may lead to making another
Benefits of using a decision tree
1 they clearly lay out problems so all options can be considered
2 allow managers to analyse fully risks of their decision
3 provide a framework to measure outcomes ad probability of achieving them
What are the limitations of the decision tree
1 use probabilities which only gives an estimate - they may be inaccurate
2 can over simplify a decision and focus too much on financial outcomes
3 don’t include other factors such a man power]4 can be time consuming
What is a critical pathway analysis
CPA is a method of planning and controlling large projects 2 recognises activities that are critical to a project being completed on time
How is a CPA constructed
1 nodes indicate start and finish of tasks
2 nodes are divided into 3 sections - left hand semicircle the node number is given in the top right the est - earliest start time of the next activity , bottom right the latest finish time for the previous task entered
3 arrows indicate a task and above the arrow a letter identifying the task below the arrow time taken to complete the task
Advantages of CPA
1 effective tool to manage and plan a control complex projects
2allows effective management of resources
3 potential problems can be highlighted which may delay project
4reduces the need for working capital as parts can be ordered only when they will be needed
5 can be used to check on efficiency of individual activities - do staff need training
6 managers have a good understanding of the project
7 business can gain competitive advantage as they become more efficient
Disadvantages of CPA
1 information can be distorted an inaccurate
2 can give the wrong results or not account for external factors
3 sub contractors are out of the control of the managers
4 suppliers maybe delayed
5 only identifies critical activities
6 requires continuous checking of activies
7 doe not ensure quality
What is cost benefit analysis
Measure in financial terms the cost and benefit of an investment project
2 it considers the external costs and benefits to society and the business
3 often used by government when considering a public project eg building a motorway
The costs and benefits for a cost benefit analysis fall into 2 groups what are the y
1 public costs and benefits
2 private costs and benefits
What are the private costs
1 costs the business making the investment has to accept
2 they include training recruitment costs purchase of equipment and marketing
What are the public costs
1 costs external to the business making the investment
2 eg the environmental impact
3
What are private benefits
1 benefits to the business as a result of making the investment
What is the process for cost analysis
1 calculate private benefits and cost
2 calculate public benefits and costs
3 ca;curate social benefit and cost
4 consider qualitative factors
5 decide if the project goes ahead
What are public benefits
Benefits external to the business that result from making the investment
What is the calculation for cost benefit analysis
Social benefit (private benefit+public benefits)- social costs (private costs+public costs)
What are the advantages of cost benefit analysis
1 takes into account a wide range of benefits and costs
2 impacts on society an community are included
3 puts a value to external benefits and costs normally ignored by private sector
4 can be used to rank possible major projects in order of public cost
What are the disadvantages of cost benefit analysis
1 valuation of some things is difficult eg the Callie of the effect of pollution
2 valuations will often include value judgements - people have different sets of values
3 if social costs and benefits are inaccurately calculated then wrong choices can be made
How can IT be used in decision making
IT systems can be used in many day to day decisions after data has been inputted
2 EPOS - electronic point of sales halp to forecast future sales
3 MIS management information systems provide managers with information to make tacticle decisions - hey continually collect and process data
4 decision making models ie decision trees and critical path analysis can be carried out by computers to save time
5 data processing technology helps businesses deal with large quantities of information quickly and effectively to speed up decision makng
6 financial information systems alow analysis of financial accounting data and can produce reports
7 internet is almost completely staffed by computers
8 finanicial information systems allow the analysis of financial an accounting data and can produce cash flow reports and income statements
