Unit 1 Module 1.

Decision Making
 Syllabus Content
(a) Process of decision making:
(i) concept of decision making;
(ii) essential features of information for decision
making – accuracy, timeliness, relevance and
cost effectiveness;
(iii) significance of Qualitative vs. Quantitative
decision-making.
 Syllabus Content
(b) Stages of decision making (in relation to
objectives):
• (i) definition of problem;
• (ii) data collection – importance and sources;
• (iii) analysis and evaluation;
• (iv) formulation of alternative strategies;
• (v) implementation;
• (vi) evaluation.
 Syllabus Content
(c) Factors affecting decision making:
• (i) governmental, political and legal;
• (ii) social and cultural;
• (iii) technological;
• (iv) economic;
• (v) ecological;
• (vi) human and natural constraints.
(d) Decision trees
(a) Process of Decision Making
 Decision Making
• A decision is a choice • The success of every
made from available organisation rest solely on
alternatives. the decisions made by
management.
• Decision making can be
defined as the process
involved in making the
best decisions by
selecting from several
alternatives which will
seek to achieve the
objectives of the
organisation.
 Examples of Decision Making
Decision making at Apple
• which seemed all but dead in the
mid-1990s, became the world’s
most admired company in 2008
based on decisions made by CEO
Steve Jobs and other top managers.
• Apple is now in the music player
business, the cell phone business,
and iTunes is now the
second-largest seller of music
behind Wal-Mart.
 Examples of Decision Making
• YouTube was once referred to
as “Google’s Folly,” but
decisions made by the video
platform’s managers have
more than justified the $1.65
billion that Google paid for it
and turned YouTube into a
highly admired company that is
redefining the entertainment
industry. • Caterpillar’s decision to
purchase China’s ERA Mining
Machinery Ltd. hasn’t worked
out so well. After paying $700
million for the deal, Caterpillar
managers said less than a year
later that they would write
down ERA’s value by $580
million.
 Programmed vs. Non-programmed
Decisions
1. Programmed decisions 2. Non-programmed
(structured) decisions (unstructured)
• repetitive decisions • Novel or unstructured
• A set routine for making decisions where an
the decision will have unusual situation has
been established. Eg. presented itself.
Work roster. • There is no programme
• formal rules which control which will have been
decisions. developed to revolve that
• information is more likely problem.
to be ambiguous or
incomplete
 Programmed vs. Non-programmed
Decisions
• One primary difference
between programmed
and non-programmed
decisions relates to the
degree of uncertainty,
risk, or ambiguity that
managers deal with in
making the decision
 Programmed vs. Non-programmed
Decisions
Programmed decisions Non-Programmed decisions
• deciding how many raw • Whether a company must
materials to order existing acquire another
• anticipated length of time organization or not.
for the delivery of the final • Whether a new technology
product. must be adopted or not.
• a retail store manager • In which global market, the
developing the weekly work business has the highest
schedule for part-time potential.
employees.
 (ii) The essential features of
information for decision making
 Data Quality
• Organizations need to improve data quality to
ensure they’re always using accurate and useful
data.
• According to Experian’s 2021 Global Data
Management Research report, businesses say
that poor quality data:
– Wastes resources and increases costs (40%)
– Damages the reliability of analytics (36%)
– Negatively impacts reputation and customer trust
(32%)
– Negatively affects the customer experience (32%)
– Slows down digital transformation and hinders key
business initiatives (31%)
 The essential features of information
for decision making - CART
Cost effectiveness
• Data gathering can have varying
costs depending on the method
used.
• High-cost information may affect
the budget of an organization.
• Businesses must do a cost benefit
analysis for costly data research.
• Primary data collection is more
costly than secondary data
collection but is more accurate.
 The essential features of information
for decision making - CART
Accuracy • True information plays an
• The accuracy of information effective role in better
or measurements is their decision-making. The quality
quality of being true or of information determines
correct, even in small its usefulness. Wrong
details. information may lead to
• Factors affecting wrong actions.
information accuracy
include:
– sampling method and size
– Use of quantitate and
qualitative
– The source of the data.
 The essential features of information
for decision making - CART
Relevance
• To improve data relevance
• the information collected business should conduct
must be appropriate for primary data
the situation or decision
being made. It must be:
– Current or up-to-date - as
outdated information is
useless.
– Applicable – directly
address the problem or
issue
 The essential features of information
for decision making - CART
Timeliness
• Timely data is available when it is
required.
• Timeliness can be measured as the
time between when information is
expected and when it is readily
available for use.
• An example of when timeliness is of
utmost importance is tracking the time
of patient care events in the
emergency room.
• With present technology, data can be
gathered using ‘Real-time’ analytics
 Real-time analytics
• Real-time analytics is the discipline that applies
logic and mathematics to data to provide insights
for making better decisions quickly.
https://www.youtube.com/watch?v=PdWbAJdn2
ZA
(iii) Qualitative vs. Quantitative
decision-making.
 Qualitative vs. Quantitative
decision-making.
• A qualitative decision is one that is made based
on non-quantifiable information. These decisions
often entail people’s value judgements and
opinions.
• Example: Give your opinion on Keith Rowley’s
performance as an effective Prime Minister?
• A quantitative decision is one based on statistical
data. Eg. In the constituency of Deigo Martin,
100% strongly agreed with this statement.
However, 2% strongly agreed with this statement
in Pt. Fortin.
(b) Stages of decision making
 Decision-making Process
There are 6 stages in the • This process is made for
decision making process: non-programmed
1. Definition of problem decisions.
2. Data collection –
importance and sources
3. Development and
analysis of alternatives
4. Selection of alternatives
5. Implementation
6. Evaluation and feedback
Definition of Problem/Opportunity
• Problem/opportunity identification
could be the result of a situation
which is not in alignment with or
advances the organisations
strategic objectives.
• Business must constantly monitor
their internal and external
environment for issues for
problems/opportunities
• https://www.youtube.com/watch?
v=5a0Fe3AchAI
 Starbucks explains decision-making process
behind recent store closures announcement
Video:
https://edition.cnn.com/2
022/07/19/business/starb
ucks-closures/index.html

In-class team assignment.

Definition of Problem/Opportunity
• A problem occurs when
organizational accomplishment
is less than established goals.
• An opportunity exists when
managers see potential
accomplishment that exceeds
specified current goals.
 Definition of Problem at Google
• Google, some managers noticed that
employees were eating too many of
the free M&Ms.
• Problem: conflict with the company’s
goal of keeping employees not only
happy but healthy as well.
• The company decided to analyze the
problem and experiment with ways
to get people to eat healthier snacks
and drink more water as well as
consume the free candy.
 Data collection
• At this stage, management Data collection decisions:
will undertake a data 1. The budget
collection strategy based on 2. The method used
the problem identification.
3. Primary or secondary data
• Managers analyze
underlying causal factors 4. The time frame needed
associated with the decision 5. Outsourcing or in-house
situation.
• Many times, the real
problem lies hidden behind
the problem that managers
think exists.
• Sources of Data – Primary
and Secondary
 Development and Analysis of
Alternatives
• Develop alternatives to Some analytical decision
solve the problem. making tools used include:
• The benefits and costs 1. cost-benefit analysis,
of each alternative will 2. Return on Investment,
be analyzed. 3. Payback period etc.
• Management will 4. Decision trees
consider the impact of
5. Critical Path analysis
the decision on all
stakeholders.
 Selection of alternative strategies
• Managers try to select the
most promising of several
alternative courses of
action.
• The best alternative
solution is the one that
– best fits the overall goals
and values of the
organization and
– achieves the desired
results using the fewest
resources.
 Implementation
• This stage involves the use of
managerial, administrative and
persuasive abilities to ensure that
the chosen alternative is carried
out.
• Communication, motivation and
leadership skills must be used to
see that the decision is carried out.
• it is also possible that management
may encounter unforeseen
problems and face resistance to
change from employees
 Evaluation
• Decision makers gather Feedback:
information that tells • important because
them how well the decision making is an
decision was ongoing process.
implemented and • provides decision makers
whether it was effective with information that can
in achieving its goals. precipitate a new decision
cycle.
• is the part of the
monitoring that assesses
whether a new decision
needs to be made.
(c) Factors affecting decision
making
Internal and External
 Internal Factors Affecting Decision
Making
1. Financial
• Decision makers are
often prevented from
choosing certain course
of action because the
business cannot afford
them.
 Internal Factors Affecting Decision
Making
2. Technological
• The technology currently
used by the business
may not be able to carry
out decisions made
 Internal Factors Affecting Decision
Making
3. Human - People’s behaviour and
attitudes (culture)
• Decisions will create changes and
people attitude towards change will
determine the succession of
implementing decisions.
• Resistance to change - some people
are very set in their roles and the
idea of change is not welcomed.
• The technology may be available but
the current workforce lack the skills
needed to use it
 PESTLE Analysis
• Business decisions are not made in a
bubble, with ONLY internal factors to
consider but external factors must also
be considered.
• A PESTLE analysis studies the key
external factors that influence an
organisation. The PESTLE tool: PESTLE
is an acronym for:
• P = Political
E = Economic
S = Social
T = Technology
L = Legal
E = Environmental
 PESTLE Analysis
POLITICAL:
This factor examines the political landscape
of the country and how it influences
business decisions:
• The political system: democratic or
communist
• The influence of government in business
decisions
• The level of corruption in the country
(corruption index)
• The taxation system
• Government approach to encourage
business activity with incentives etc.
 PESTLE Analysis
ECONOMIC:
• Inflation – high levels of inflation will have an
impact on the consumers buying decisions.
• Unemployment – high levels of unemployment
reduces citizens ability to purchase and consume.
• Exchange rate – businesses heavily involved in
international trade need foreign exchange to
conduct its operations. The exchange rate, the
exchange rate system and availability of foreign
exchange will affect business decisions.
 PESTLE Analysis
SOCIAL or (socio-cultural):
Management has to consider these socio-cultural
factors
• Demographic factors
• lifestyle factors
• cultural norms and expectations
• Religion
• Traditions and culture
• Changing family structure
• Population age and working habits
 Starbucks Sociocultural Analysis
• As a global coffeehouse chain, Starbucks operates within a dynamic sociocultural environment that significantly influences its business
operations and strategies. Several sociocultural factors are crucial in shaping the company’s approach to product offerings, marketing, and
customer engagement.
• Changing Customer Preferences: Changing consumer preferences have a profound effect on Starbucks’ operations. With an increasing focus on
healthier food and beverage options and sustainable products, consumers are demanding more choices that align with their health-conscious
lifestyles.
• Consequently, Starbucks has responded by expanding its menu to include a broader range of nutritious and plant-based options, such as
almond milk and gluten-free snacks. This shift in consumer preferences necessitates continuous innovation and adaptation to ensure Starbucks
remains relevant and appealing to its target market;
• Lifestyle Trends: Lifestyle trends also significantly influence Starbucks’ business strategy. As people lead busier lives, convenience becomes
paramount. Consumers often seek quick and easy solutions to satisfy their coffee cravings.
• Recognizing this, Starbucks has embraced takeaway and delivery services, enabling customers to enjoy their favorite beverages and food on the
go. By leveraging mobile ordering apps and partnering with third-party delivery platforms, the company has successfully capitalized on the
demand for convenience, enhancing customer satisfaction and driving growth;
• Cultural Diversity: Cultural diversity presents both opportunities and challenges for Starbucks. Operating in various countries with diverse
cultures, the company must navigate and adapt to local preferences and cultural norms.
• Starbucks has implemented localized strategies to cater to different tastes and preferences, such as introducing matcha-flavored beverages in
Japan or offering Chai Tea Lattes in India. This cultural sensitivity has fostered customer loyalty and positioned Starbucks as a global brand that
respects and embraces diversity;
• Health and Wellness Concerns: Health and wellness concerns have become increasingly prevalent among consumers, influencing their choices
and shaping Starbucks’ menu options. As individuals become more health-conscious, they seek out products that align with their wellness goals.
• In response, Starbucks has incorporated healthier alternatives, reduced sugar content, and expanded its tea and fruit-based beverage selection.
Moreover, the company provides transparency by listing nutritional information on its menu boards, empowering consumers to make informed
choices.
• Starbucks operates in a sociocultural landscape that constantly evolves and impacts its business. The company remains adaptable to changing
consumer preferences, recognizing the importance of healthier options and sustainable practices.
• https://businessmodelanalyst.com/starbucks-
pestle-analysis/#Starbucks_Sociocultural_Fact
ors
 PESTLE Analysis
TECHNOLOGY:
• How is your business responding to
technological innovation in your products and
services?
• Other technological advancements will impact
on data storage, disruptive technologies such
as smartphones, social networking,
automation robotics and the increasing shift
towards AI artificial intelligence?
 PESTLE Analysis
LEGAL:
• Shifts in the Legal landscape are constantly
changing especially here in the UK.
Employment labour law and employment
tribunal decisions impact upon working
practices continuously.
• It is also important to keep up to date with all
changes in legislation and of course Health
and safety regulations.
 PESTLE Analysis
ENVIRONMENTAL:
• Does your business have a direct impact on the
environment?
• Political sanctions now govern carbon emissions
and a move towards sustainable resources such as
wind turbines and recycling.
• This area also covers CSR corporate social
responsibility and ethical sourcing of goods and
services which in turn has a direct impact on
procurement and your businesses supply chain
management.
 Real World Examples
• Starbucks -
https://www.youtube.com/watch?v=h_V59kdoCLI
• Unilever - https://youtu.be/6rP10yauhAQ
• Tesla -
https://www.youtube.com/watch?v=NstwdaZDGGs
• Nestle - https://youtu.be/p2ql-AFn0NM
 Decision Trees
• A decision tree is a map of the possible
outcomes of a series of related choices
represented in a diagram.
• A decision tree is a method of tracing the
alternative outcomes of any decision.
When faced with a number of different
decisions a business will want to choose
the course of action which gives the most
returns. When the outcome is uncertain,
decision trees can be used to help a
business reach a decision which could
minimize risk and gain the greatest return
 Decision Trees
• Decision node - Decisions points are denoted by a square called
decision nodes
• Chance node - points where there are different possible
outcomesin a decision tree are represented by circles and are
called chance nodes.-
• It is constructed from left to right
• Each branch represents an option together with a range of
consequences or outcomes and the chances of these occurring
• Probabilities measure the chance of an outcome occurring.
• The pay-offs are the expected financial gains or losses of a
particular outcome.
• Expected values – the financial outcome of a decision. It is based
on the predicted profit or loss of an outcome and the probability
of that outcome occurring. He profit or loss of any decision is
shown on the right had side .
 Decision Trees
A manager has to decide between opening a store in two locations:
Town A –
• The annual cost is $50,000.
• When the economy is performing well (expansionary) revenues are estimated to be
$120,000 and
• Recession revenues are $60,000
Town B –
• The annual cost is $75,000.
• When the economy is performing well (expansionary) revenues are expected to be
$200,000 and
• recession revenues are estimated at $80,000.
The economic results depend upon the state of the national economy, which could either be
in recession or expanding. Based on past data, the chance of an expanding economy is 0.7
(therefore the chance of a recession economy is 0.3).
a) Draw a decision tree to represent the information above
b) Calculate the expected values at both nodes 1 and 2
c) What factors needed to be taken into consideration in estimating the economic
consequences?
 Decision Trees

Town A = -$50,000 + $102,000 = $52,000

Town B = -$75,000 + $164,000 = $89,000
 Decision Trees
• The owner of a car repair garage is planning to expand the
business. The two options are to build a forecourt to sell petrol or
to construct a showroom to sell cars. The cost of petrol forecourt is
estimated at $100,000 and the showroom is $150,000. The
probability of demand being low during the life span of these
investments is 20%; high 80%.
• The expected returns depend on the demand in the economy as
seen below:
a) Construct a decisions tree
b) Calculate the expected value of both investments and
recommend which option should be taken
c) State THREE other factors that you might consider might
influence the owner’s final decisions.
Demand Petrol forecourt Car showroom
High $500,000 $800,000
Low $400,000 $200,000
 Decision Trees

Forecourt = - $100,000 + $480,000 = $380,000

Showroom = -$150.000 + $680,000 = $530,000
 Decision Trees

Advantages Disadvantages
Easy to understand and interpret. Overfitting can occur.
Can handle both categorical and Decision trees can be sensitive to
numerical data. small changes in the data.
Can handle missing values and They can be biased towards certain
outliers. outcomes.
Can be used for classification and Large decision trees can be hard to
regression problems. interpret.
Can help identify important features They may not work well with certain
in the data. types of data.