Decision making models

Question 1

List 3 types of decision and who makes them in a business

Answer 1

1 strategic - by senior management
2 tactile by middle management
3 operational - by junior management

Question 2

Describe strategic decisions

Answer 2

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

Question 3

Describe tactical decision

Answer 3

1 not as far reaching as strategic and usually more medium term
2 less complex and more flexible

Question 4

Describe operational decisions

Answer 4

Day to day decisions made by the business - lower let=vel decisions and tend to be short term

Question 5

What are the. 2 categories of decision making

Answer 5

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

Question 6

List 3 models used by a business to approach decision making

Answer 6

1 decision trees
2 critical path analysis
3 cost benefit analysis

Question 7

Describe decision trees

Answer 7

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

Question 8

List the components of a decision tree

Answer 8

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

Question 9

What are the steps of drawing a decision tree

Answer 9

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

Question 10

Why might there be more than one decision node

Answer 10

As the making of one decision may lead to making another

Question 11

Benefits of using a decision tree

Answer 11

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

Question 12

What are the limitations of the decision tree

Answer 12

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

Question 13

What is a critical pathway analysis

Answer 13

CPA is a method of planning and controlling large projects 2 recognises activities that are critical to a project being completed on time

Question 14

How is a CPA constructed

Answer 14

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

Question 15

Advantages of CPA

Answer 15

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

Question 16

Disadvantages of CPA

Answer 16

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

Question 17

What is cost benefit analysis

Answer 17

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

Question 18

The costs and benefits for a cost benefit analysis fall into 2 groups what are the y

Answer 18

1 public costs and benefits
2 private costs and benefits

Question 19

What are the private costs

Answer 19

1 costs the business making the investment has to accept
2 they include training recruitment costs purchase of equipment and marketing

Question 20

What are the public costs

Answer 20

1 costs external to the business making the investment
2 eg the environmental impact
3

Question 21

What are private benefits

Answer 21

1 benefits to the business as a result of making the investment

Question 22

What is the process for cost analysis

Answer 22

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

Question 23

What are public benefits

Answer 23

Benefits external to the business that result from making the investment

Question 24

What is the calculation for cost benefit analysis

Answer 24

Social benefit (private benefit+public benefits)- social costs (private costs+public costs)

Question 25

What are the advantages of cost benefit analysis

Answer 25

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

Question 26

What are the disadvantages of cost benefit analysis

Answer 26

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

Question 27

How can IT be used in decision making

Answer 27

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