undertsanding management decision making

Question 1

what is the opportunity cost?

Answer 1

• the cost of the next best alternative forgone
• all firms should consider the opportunity cost when making any important decisions

Question 2

describe the decision making process

Answer 2

1 setting objectives
2 gathering and interpreting info
3 selection and the chosen option
4 implementing the decision
5 reviewing

Question 3

describe types of decisions a business can make

Answer 3

• programmed decisions:
  these are decisions that businesses make on a daily basis , that they are familiar with, with little risk
  -non programmed decisions:
  these deal with unique situations that require some thought and are of a relatively high risk
  -tactical decisions:
  short term targets that are easy to reverse and can be made by junior managers eg employing a new marketing manager
• strategic decisions:
  these are major long term decisions that are made by senior managers, require a lot of resources and are difficult to reverse e.g expansion abroad

Question 4

decision making based on date and intuition

Answer 4

data:
also known as scientific management
involves a logical and rational approach to making important decisions
involves collecting as much research and data as possible therefore enhancing the chances of success and reducing the risk of failure
however the drawbacks are that this method is time consuming, expensive and therefore only really possible for those businesses that can afford it

intuition:
an alternative approach to making decisions is to rely on one’s intuition or instinct
other than the fact that this is a natural way some managers behave using intuition is appropriate in the following circumstances:
1 when a quick decision needs to be made
2 when the time nor money is available for scientific management
3 when the relevant data is simply not available

Question 5

what are decision trees?

Answer 5

a simple visual way of presenting the alternative course of action available when making a decision
a mathematical model based on logic and probability

decision trees identify:
when a decision has to be made
the choices are available
the cost associated with each option
possible outcomes related to each choice
likelihood of each customer occurring
estimated financial result of each outcome

Question 6

what is the value of decision trees?

Answer 6

encourages a logical and structured approach
allows easy comparisons between options
calculates the estimated probability of each outcome

Question 7

criticisms of decision trees

Answer 7

based on and relies heavily estimates - not always accurate
doesnt take into account qualitative factors

Question 8

influences on decision making

Answer 8

1 opportunity cost
2 mission statement and objectives
3 ethics
4 level of risk involved e.g is the decision programmed or non programmed
5 external environment e.g performance of the economy in terms of interest rates and inflation , level of competition
6 resource constraints ( all businesses want to make the best decision , however they may be prevented from doing so through a lack of resources i.e. finance and time )