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2.2 Understanding management decision making
Terms in this set (22)
What is scientific decision making?
- controlling business variables, absenteeism and morale as well as external variables as much as possible
- sales are forecast with great precision and computer software is used to model every foreseeable situation
- tries to take the art out of decision-making, replacing intuition with facts and quantitative data
- it is the goal for most firms as it's a routine way to measure opportunities or problems
What is a strategic decision?
A decision that is made in circumstances of uncertainty and where the outcomes will have a major impacts on the medium-long term future of the business
What is a tactical decision?
Deciding what to do in circumstances that are immediate (short term) and where a mistake is unlikely to have a major impact on the business
What is decision making based on intuition?
Decisions based on a combination of experience and a feel for the future - qualitative criteria.
A widespread tendency within a business to focus on short-term results, probably at the cost of long-term success.
What is uncertainty?
- the natural state of affairs in businesses where many external factors affect sales and costs
- the number of variables make it impossible to predict what will happen
- allows conclusions to be drawn
- businesses need a wide-enough range of products to be sure than one flop doesn't hit the business too hard
How does risk and reward affect decision making?
Risk may be quantifiable, e.g. if 1/8 Hollywood films brings in more revenue than the cost of making it, the risk of making a loss is 7/8. A decision can then be made on whether the risk is worth the chance of reward. For some companies, only low-risk projects can be considered, even if the returns are low too. Other companies are willing to take bigger gambles.
What is opportunity cost?
The cost of missing out on the next best alternative when making a decision
What are the most important opportunity cost issues for start-ups?
- do not tie up too much capital in stock as it could be used more productively elsewhere
- do not overstretch yourself, good decisions take time
- take care with every decision that uses up cash, it is hard to get more of it but more is always needed
What are personal opportunity costs when starting a business?
- missing out on the opportunity to earn a regular income
- investment spending on buildings, fixtures etc., as well as staff
- it takes a lot of time which could be spent with family or doing other things
What factors are crucial when deciding between business start-up opportunities?
- estimating potential sales - difficult but is made easier if the owner has inside knowledge of the market such as previous experience
- considering cash requirements
- deciding whether the time is right, taking consumer taste into account
- deciding whether the skills needed fits the owner's set of skills
What are trade-offs?
- when one factor has to be traded for another
- trading off aspects of the business you enjoy for those that prove the most profitable
- trading off time in the short-term for time in the long-term (such as an early retirement)
What are decision trees?
Diagrams that set out all the options available when making a decision, plus an estimate of their likelihood of occurring. They are used in scientific decision making.
How do you calculate expected value and net gain?
Expected value = money that will be made from success x probability + money that will be made from failure x probability
Net gain = expected value - cost to implement
What are the advantages of decision trees?
- allows for uncertainty
- demands that managers consider all possible outcomes
- clear and encourage a logical approach
- probabilities for the outcomes occurring
- even more useful when similar scenarios have occurred before so that good estimates can be made
- useful in tactical or routine decisions
What are the disadvantages of decision trees?
- biased (especially if data comes from someone who would gain from a certain decision being made)
- may be difficult to get meaningful data
- less useful in new problems or one-off strategic problems
- do not take into account the variability of the business environment
- may divert managers from taking into account qualitative data when making the decision
What are actual values?
Forecasts for the net cash flows which result following a sequence of decisions
How does the mission influence decision-making?
- good decisions contribute to the overall mission
- decisions that go against the business objectives, perhaps due to ethics, may be made
How do objectives influence decision-making?
- middle managers who want promotions will make decisions focused on the objectives they have been set
- timescale is important, as objectives focused on the short-term may affect the business' long-term success, e.g. rising market share
- objectives and decisions should be for the medium-long term
How do ethics influence decision-making?
- enter business decisions when they form part of the scientific appraisal of risk and reward
- easy for family businesses as they most likely don't have shareholders that want dividends
How does the external environment influence decision-making?
- big strategic decisions must be rooted in the economic, social, competitive and consumer environment of the time
- consumer taste is most important
- more competition makes is harder to run a comfortably profitable business
How does resource constraints influence decision-making?
- capital and management talent must be considered
- attempting to expand without sufficient resources is likely to lead to 'overtrading' - expanding more rapidly than the business' resource base allows
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