Unit 3 - Decision-making models

Question 1

Why is decision-making important to a business?

Answer 1

Businesses constantly have to choose between alternative courses of action, many of which can significantly affect performance and stakeholders

Question 2

Are all business decision straightforward?

Answer 2

No, while some decisions are simple and routine, others are complex, unclear and often involve trade-offs which can result in both positive/negative outcomes.

Question 3

How can decision-making help solve business problems?

Answer 3

Decision-making can help solve problems by identifying solutions such as relocating operations to increase capacity or introducing training systems to improve employee skills and quality

Question 4

How can business decisions affect stakeholders?

Answer 4

Business decisions can affect stakeholders differently, with some experiencing negative impacts such as redundancies, making it important to consider the overall interests of the business.

Question 5

What should decision-makers prioritise when making decision?

Answer 5

Decision-makers should prioritise the common good of the business to help achieve its aims and objectives

Question 6

Why do all business decisions involve risk?

Answer 6

All business decisions involve risk as outcomes are uncertain and can be influenced by both internal and external factors

Question 7

List the three main types of decisions a business can make. Briefly explain each.

Answer 7

. Strategic - these are long-term decisions and will affect the direction in which the business takes. These decisions are usually made by owners and senior management. These types of decisions often involve huge financial investments and may take many years to achieve e.g. expanding operations overseas
. Tactical - these are not as far reaching as strategic decisions and they tend to be medium term. Tactical decisions are often less complex and are usually carried out by middle management. Tactical decisions can be more flexible e.g. a decision taken by a marketing manager to change the way a product is promoted
. Operational - these are the day-to-day decisions made and tend to be short term with little risk. These decisions tend to be made by junior managers, supervisors and employees e.g. the decision of a retail supervisor to schedule the break times of staff working on a shift

Question 8

What is scientific decision making?

Answer 8

This type of decision making involves the systematic use of facts and data to arrive at a logical and evidence-based solution.
The structure is as follows:
. clearly identify the objective/problem to solve
. collect all relevant information to make the decision- could include both primary and secondary data
. analysis of the information to identify possible ways of moving forward
. making and implementing the decision
. monitoring and reviewing the decision and change, if needed

Question 9

What are the advantages and disadvantages of scientific decision-making?

Answer 9

Adv:
. Objective and data-based - reduces reliance on intuition and bias
. More rational decisions often use quantitative methods
. Reduces risk and uncertainty by analysing possible outcomes
. Improves consistency

Disadv:
. Relies on the accuracy of the data and assumptions made
. Ignores qualitative factors such as employee morale, brand image etc
. Time consuming and costly
. External factors

Question 10

What is intuitive decision-making?

Answer 10

This is when decisions are made using experience and intuition (gut feeling). This type of decision-making has proven to be successful for many entrepreneurs and managers who use their past experiences to make decisions. There is often no data or systematic approach to back up this decision

Question 11

What are the advantages and disadvantages of intuitive decision making?

Answer 11

Adv:
. Fast decision-making - useful in time-pressured situations
. Draws on managerial experience and judgement
. Flexible and adaptable
. Useful for when data is unreliable or limited
. Effective in dynamic industries

Disadv:
. Subjective and prone to bias
. Decisions may be inconsistent
. Higher risk of poor decisions if experience is limited
. Overconfidence may lead to misjudgement

Question 12

What are decision trees and what are they used for?

Answer 12

Decision trees are forms of diagrammatic analysis, used to help businesses make decisions where there are several different options to select from. Decision trees are particularly useful in situations where chance plays an important role in likely outcomes. Decision trees build the probability of success and failure into the decision-making process. This helps to provide an effective and clear structure for presenting options using “expected values”.

Question 13

What does it mean by “expected values”?

Answer 13

Expected values are the financial returns that can be gained for each option., taking into account both success and failure of each course of action

Question 14

List and explain the different component of the decision tree.

Answer 14

. Square decision nodes - doesn’t contain any info - just an indication of the start of the decision tree
. Circular chance nodes - identifies the chance of an outcome
. Lines - represent the decision or probability
. e.g. £36,000 - values of outcomes
. 0.3/30% - probability of outcomes in percentage or as a decimal

Question 15

Explain how to draw a decision tree.

Answer 15

. Start with a decision the business must take
. Draw a decision node (square), starting on the left
. Draw branches/lines for each possible option and label them
. At the end of each option, draw a chance/probability node (circle)
. From each chance node, draw branches for each possible outcome
. Assign a probability to each outcome, ensuring probabilities add up to 1
. Add the payoff/profit at the end of each outcome branch

Question 16

How do you calculate the expected return of an outcome?

Answer 16

It is simply the probability of the outcome multiplied by the estimated return

Question 17

How do you calculate the expected value of an option?

Answer 17

It is simply the total expected return of all the possible outcomes for a given project/investment

Question 18

How do you calculate the net gain?

Answer 18

It is the expected value minus the initial costs.

Question 19

What are the advantages and disadvantages of using decision tree analysis?

Answer 19

Adv:
. Provides visual clarity - makes complex decisions easier to understand and can be useful to explain reasoning to shareholders
. It is a good measure for quantitative evaluation - uses numerical probabilities, so decisions are more objective rather than just based on intuition
. Risk assessment - shows potential risks and rewards for each option

Disadv:
. Time-consuming/opportunity cost
. Estimates may be inaccurate
. Oversimplification - complex decisions may have other factors that cannot be easily quantified

Question 20

What are some evaluative considerations of decision trees (analysis)?

Answer 20

Depends on:
. The accuracy of the probabilities and other related data
. Complexity of the decision
. Time and resources available
. Complementary decision-making tools - often more useful when used in conjunction with other (qualitative tools)

Question 21

What is CPA (Critical Path Analysis)?

Answer 21

CPA is a method used by businesses to plan, schedule and control large projects. It identifies all tasks required, shows the order they must be completed in and highlights which tasks are critical . It helps businesses in various ways such as allocating resources efficiently, estimating how long projects will take and identifying critical tasks to ensure the project is completed on time.
It is usually represented using network diagrams, allowing managers to plan activities in the most efficient way.

Question 22

List and explain the different components used for CPA.

Answer 22

. Nodes (circles) which indicate the start or finish of the task. Each node is numbered. These nodes are then split up into 3 sections. On the left, is a semi-circle in which the node number is given in. The EST (earliest start time) is given in the top right of the right hand side and the LFT (latest finish time) is given in the bottom right hand side of the node
. The arrows indicate the task or activity.
. Above the arrows, is a letter identifying the task below and below, is the amount of time taken to complete the task.

Question 23

List and explain the way in which a CPA is constructed.

Answer 23

. Draw the nodes, label activities and write in the duration of the activities
. Calculate the EST of each activity. The EST for the first activity is always 0. Assuming the next activity’s duration is 3, add 0 and 3 to get 3 seconds as the EST for the second activity. Add 3 to the duration of the next activity and that will be the EST for the latter activity etc.
. Calculate the LFT for each of the activities- work from right to left (the LFT for the final activity will equal the EST for the same activity). Work backwards by subtracting
the duration from the LFT of the previous activity.
. Identify the activities and the critical path - the critical activities are those with connected nodes either side that have the same EST and LFT. The critical path is the list of activities that have the same EST and LFT and therefore cannot be delayed - use two parallel lines to identify the activities which are on the critical path

Question 24

How do you calculate the float time?

Answer 24

The float time is essentially non-critical activities that can be delayed without causing the entire project to be delayed
Total float time = LFT of activity - EST of activity

Question 25

What are the advantages and disadvantages of using CPA?

Answer 25

Adv: . Efficient project planning as it shows the order of activities to complete the project in the shortest amount of time . Resource allocation - helps managers decide where to assign resources to ensure tasks are completed on time . Identifies critical tasks - highlights which activities cannot be delayed without affecting the overall project timeline . Time management Disadv: . Complex and time-consuming - especially for large projects which involve numerous activities . Assumes accurate estimates - relies heavily on the duration of tasks . Less flexible . May be too detailed for smaller projects

Question 26

What is cost-benefit analysis?

Answer 26

CBA is a method used to measure and compare the financial costs and benefits of a project or decision. Unlike other decision models, it considers both private costs and benefits (the direct impact on the business) and the external/social costs and benefits (the wider impact on society) CBA helps businesses or governments decide whether a project is worthwhile and allows different options to be ranked based on their overall value. It is commonly used for projects such as building roads, bridges, hospitals or business investments

Question 27

What is the calculation for cost-benefit analysis?

Answer 27

Cost benefit analysis = social benefit - social cost Social benefit is the sum of private benefit and external benefits Social cost is the sum of private and external costs

Question 28

What are private costs and what are some examples?

Answer 28

Private costs are costs that the business must accept when investing in a project e.g. training and recruitment costs, purchasing of new capital equipment and marketing costs

Question 29

What are external costs and what are some examples?

Answer 29

External costs are costs which are external to the business making the investment: . a building company will have an environmental impact as it build houses - increased traffic, congestion etc. . a new factory may involve the loss of open space . local communities may be impacted by increased noise pollution from an aiport

Question 30

What are private benefits and what are some examples?

Answer 30

Private benefits are the benefits which the business gains from making the investment: . increased productivity . Increased sales . brand values . increased profits

Question 31

What are external benefits and what are some examples?

Answer 31

These are the benefits which are external to the business which is making the investment: . large-scale investment would create jobs . Increase in tax paid to the government . Increased employment, reduced crime, reduced poverty and increases in regional wealth

Question 32

How are costs and benefits valued?

Answer 32

. Private costs and benefits are usually easier to calculate in financial terms . External/public costs and benefits are harder to value because they are often intangible . Businesses must assign a monetary value to things like loss of parks, wildlife impact or community disruption . Despite the difficulty, CBA is unique because it considers the effect on external stakeholders, making it more socially aware than other decision-making tools.

Question 33

List the cost benefit analysis process.

Answer 33

. Calculate private benefits and costs . Calculate external benefits and costs . Calculate social benefits and costs . Consider qualitative factors . Decide if the project goes ahead

Question 34

What are the advantages and disadvantages of using cost benefit analysis?

Answer 34

Adv: . Considers all types of costs and benefits, giving a more complete picture . Supports decision-making as it provides a structured, quantitative way to compare different options and choose the most worthwhile project . Encourages long-term thinking . Increases transparency Disadv: . Difficult to assign monetary values - external costs/benefits are harder to quantify, so estimates may be subjective . Time-consuming and complex . May ignore qualitative factors . Relies on assumptions . Can be biased - businesses may overstate benefits or underestimate costs to make a project look more attractive

Question 35

How can computer technology and information systems support business decision-making?

Answer 35

. Computer technology helps businesses make day-to-day decisions like ordering stock, managing deliveries or scheduling staff etc. . Information systems can collect data from multiple sources, organise it and distribute it to improve efficiency . MIS (Management Information Systems) - provide continuous, processed data to support tactical and strategic decisions . Decision-making models can be run by IT systems