DECISION MAKING MODELS

What are the 3 main types of decisions a business makes?

1. Strategic decisions – Long-term, high-risk decisions made by senior management, affecting the overall direction of the business (e.g., entering new markets).
2. Tactical decisions – Medium-term, medium-risk decisions made by middle management to implement strategies (e.g., marketing campaigns, staffing levels).
3. Operational decisions – Short-term, low-risk decisions made by lower management or employees, focused on day-to-day activities (e.g., ordering stock, scheduling shifts).

Why is decision-making important to a business?

Decision-making:

• Ensures resources are used efficiently.
• Helps achieve objectives and improve profitability.
• Reduces risk by choosing the best option.
• Improves competitiveness and responsiveness.
• Guides the business through change and uncertainty.

What are the 2 types of decision-making tools?

1. Scientific – Based on data, analysis, and structured methods (e.g., decision trees, CPA, CBA).
2. Intuitive – Based on experience, judgement, and instinct, useful when data is limited or decisions are urgent.

What is a decision tree and its purpose?

A decision tree is a diagrammatic tool showing choices, possible outcomes, and probabilities. It helps businesses:

• Evaluate risks and rewards.
• Identify the most profitable option.
• Make structured, data-driven decisions.

What are the benefits of decision trees?

• Provides a clear visual representation.
• Quantifies risk and expected outcomes.
• Supports rational decision-making.
• Allows comparison of multiple options.

What are the limitations of decision trees?

• Probabilities may be inaccurate.
• Can be complex for many options.
• Ignores qualitative factors (e.g., employee morale).
• Assumes future events are predictable.

How do you construct a decision tree?

Steps:

1. Draw decision nodes (squares) for choices.
2. Draw branches for options and outcomes.
3. Assign probabilities to outcomes.
4. Assign monetary values to outcomes.
5. Calculate expected values (EV) for each branch: EV = Probability \times Payoff.
6. Choose the option with the highest EV.

What is Critical Path Analysis (CPA) and its purpose?

CPA is a project management tool that identifies the longest sequence of dependent tasks (critical path) needed to complete a project. It helps:

• Minimise project duration.
• Allocate resources efficiently.
• Identify tasks that cannot be delayed.

What are the benefits of CPA?

• Highlights critical tasks.
• Reduces delays and costs.
• Helps in resource allocation.
• Improves project planning and control.

What are the limitations of CPA?

• Assumes accurate time estimates.
• Can be complex for large projects.
• Ignores external uncertainties (e.g., supplier delays).
• Does not consider costs directly.

How do you complete a CPA diagram?

Steps:

1. List all tasks with duration and dependencies.
2. Draw network diagram showing sequence of tasks.
3. Calculate earliest start (ES) and finish (EF) times.
4. Calculate latest start (LS) and finish (LF) times.
5. Identify slack and the critical path.
6. Interpret which tasks can/cannot be delayed.

What is Cost-Benefit Analysis (CBA) and its purpose?

CBA compares the total expected costs and benefits of a decision. Purpose:

• Determine financial feasibility.
• Decide if a project adds value.
• Identify the best option based on net gain.

What are the benefits of CBA?

• Provides a clear financial basis for decisions.
• Helps prioritise options.
• Encourages objective evaluation of alternatives.
• Useful for comparing projects.

What are the limitations of CBA?

• Some costs/benefits are hard to quantify.
• Ignores qualitative factors (e.g., reputation).
• Assumes predictions of costs and benefits are accurate.
• May oversimplify complex decisions.

How do you carry out a CBA?

Steps:

1. List all costs (financial, time, resources).
2. List all benefits (financial, non-financial).
3. Quantify in monetary terms if possible.
4. Subtract costs from benefits to calculate net gain.
5. Compare alternatives and select the best option.

What are the advantages of using decision trees, CPA, and CBA?

• Structured, logical decision-making.
• Reduces risk and uncertainty.
• Helps evaluate financial and time implications.
• Supports resource allocation and planning.
• Facilitates comparison of options.

What are the disadvantages of using decision trees, CPA, and CBA?

• Can be time-consuming and complex.
• Relies on assumptions and estimates.
• Ignores qualitative or external factors.
• May be difficult to interpret for large projects.

How does information technology support business decision-making?

IT helps by:

• Providing fast access to accurate data.
• Supporting data analysis and visualisation.
• Enabling simulation and forecasting.
• Improving communication across departments.
• Allowing real-time monitoring and evaluation of decisions.