decision
DESCRIPTION
DecisionTRANSCRIPT
Decision Trees
Decision Trees
Planning Tool
Decision Trees
• Enable a business to quantify decision making
• Useful when the outcomes are uncertain
• Places a numerical value on likely or potential outcomes
• Allows comparison of different possible decisions to be made
Decision Trees
• Limitations:– How accurate is the data used in the
construction of the tree?– How reliable are the estimates of the
probabilities?– Data may be historical – does this data
relate to real time?– Necessity of factoring in the qualitative
factors – human resources, motivation, reaction, relations with suppliers and other stakeholders
Process
The Process
Expand by opening new outlet
Maintain current status
Economic growth rises
Economic growth declines
0.7
0.3
Expected outcome£300,000
Expected outcome-£500,000
£0
A square denotes the point where a decision is made, In this example, a business is contemplating opening a new outlet. The uncertainty is the state of the economy – if the economy continues to grow healthily the option is estimated to yield profits of £300,000. However, if the economy fails to grow as expected, the potential loss is estimated at £500,000.
There is also the option to do nothing and maintain the current status quo! This would have an outcome of £0.
The circle denotes the point where different outcomes could occur. The estimates of the probability and the knowledge of the expected outcome allow the firm to make a calculation of the likely return. In this example it is:
Economic growth rises: 0.7 x £300,000 = £210,000
Economic growth declines: 0.3 x £500,000 = -£150,000
The calculation would suggest it is wise to go ahead with the decision ( a net ‘benefit’ figure of +£60,000)
The Process
Expand by opening new outlet
Maintain current status
Economic growth rises
Economic growth declines
0.5
0.5
Expected outcome£300,000
Expected outcome-£500,000
£0
Look what happens however if the probabilities change. If the firm is unsure of the potential for growth, it might estimate it at 50:50. In this case the outcomes will be:
Economic growth rises: 0.5 x £300,000 = £150,000
Economic growth declines: 0.5 x -£500,000 = -£250,000
In this instance, the net benefit is -£100,000 – the decision looks less favourable!
Advantages
Disadvantages
Decision Trees
Decision Trees
Planning Tool
Disadvantages
Advantages
Process
Quantitative and Qualitative Factors in Decision Making
Quantitative and Qualitative Factors in Decision Making
Quantitative Factors
Investment Appraisal
• Payback period• NPV• ARR
Quantitative Factors
• Provide a numerical basis for decision making – reduces decisions to looking at a monetary value placed on different choices, e.g.– Forecasted sales figures
for the next 3 years– The cost of a series of redundancies
against the longer term financial benefits to the firm of this process
Quantitative Factors
• But: such data provides only part of the story
• Other factors need to be taken into account, particularly the effects of decisions on stakeholder groups and their response to such decisions, e.g.– The takeover of Manchester United by
Malcolm Glazer might make financial sense but the reaction of the supporters might make the move unworkable
Qualitative Factors
Qualitative Factors
• Qualitative factors look to take account of these other issues that may influence the outcome of a decision
• Can be wide ranging and especially need to consider the impact on human resources and their response to decisions
SWOT• A decisions (for example, investment in a new
production plant) could be considered not only in financial terms but also to apply other techniques of decision making to look at wider issues:
• A SWOT analysis might be part of this:– Strengths– Weaknesses– Opportunities– Threats
PEST• Might also need to factor in other external
issues that might influence the decision making process which can be summarised as:– Political– Economic– Social– Technological
• Political could be in its widest sense, e.g. the internal politics of a firm as well as the national and international political effect
PEST
• The decision to site a series of wind turbines in a coastal area might be justified on financial grounds but:– What is the reaction of the local
community?– Does government policy support such
planning developments?– Are there social impacts – e.g. noise
pollution, damage to eco-systems, etc?• Such factors may make the difference
between success and failure
Human Resources Management
• Impact on a firm’s human resources is essential to consider, in particular the effects on:
• Motivation• Morale• Recruitment and Retention• May be difficulty to assess and measure• May need to distinguish between short term
effects and long term
Stakeholder Analysis
• Wider impacts on stakeholder groups may also be necessary, such stakeholders include:– Employees– Shareholders– Managers– Environment– Local Community– Suppliers– Government – Consumers
Decision Making
• Eventual decision may rest on the balance between the perceived effects of quantitative and qualitative
• If the long term effect on the workforce for example was to reduce productivity or increase absence because of the impact on motivation and morale, the fact that a decision makes financial sense may be shelved!
• Qualitative by its nature, therefore, is very subjective
Quantitative and Qualitative Factors in Decision Making
Quantitative and Qualitative Factors in Decision Making
Quantitative Factors
Investment Appraisal
• Payback period• NPV• ARR
Qualitative Factors
SWOT
• Strengths• Weaknesses• Opportunities• Threats
HRM
• Motivation• Morale• Recruitment and Retention
PEST
• Political• Economic• Social• Technological
Stakeholder Analysis
• Employees• Shareholders• Managers• Environment• Local Community• Suppliers• Government • Consumers