Learning Objectives By the end of this lesson students should: Be able to define what is scientific decision making. Be able to define what is intuitive decision-making. understanding of decision trees as a decision making tool

Qualitative Market Analysis Methods Hunch/Gut Feeling vs Scientific Methods

Scientific decision making Cost benefit analysis 6 hat thinking (De bono) Force field analysis (Lewin) Pareto Analysis (Pareto) The 5 Why’s (Toyoda) These are all examples of scientific decision making. This means that the decisions are based on quantifiable facts and evidence rather than based on opinions, past experiences, feelings or intuition.

Intuitive decision making This is based upon people beliefs, perceptions, instincts and gut feeling. Entrepreneurs and risk takers often make decisions based upon the intuition. This might be because of a lack of time and, or due to little or no evidence being available. Decision makers using this approach will generally consider issues that are not necessarily quantifiable, such as the impact on employees and local community and, or ethics. RISKS ARE HIGHER.

Reality! What really happens? Most decisions are a combination of both. It is however invaluable to consider certain factors: Experienced managers may lead to intuitive whereas an inexperience manager may choose scientific The scale of the decision e.g. using scientific methods for a trivial daily matter may be very time consuming and costly.

Learning Outcomes Apply decision-making processes and planning tools (for example, fishbone) to a given situation and evaluate their value.

Defintion A diagram that shows the causes of a certain event. A common use of the Ishikawa (fishbone) diagram is in product design, to identify desirable factors leading to an overall effect.

FishBone Basic Framework

Problem & Cause

Causes Causes in the diagram are often based around a certain category or set of causes, such as the 6 M's, 8 P's or 4 S's. Cause-and-effect diagrams can reveal key relationships among various variables, and the possible causes provide additional insight into process behaviour.

Mother Nature (Environment) The 6 M’s Machine Materials Man Method Maintenance Mother Nature (Environment) (recommended for manufacturing industry). Note: a more modern selection of categories used in manufacturing includes….. Equipment Process People Materials Environment Management

The 8P’s (recommended for administration and service industry). Price Promotion People Processes Place / Plant Policies Procedures Product (or Service) (recommended for administration and service industry).

(recommended for service industry). The 4P’s Surroundings Suppliers Systems Skills (recommended for service industry).

Decision trees (HL) A quantitative decision making tool. It is diagrammatic representation of the different options. Allows managers to calculate the expected value of each decision in order to identify the best option to follow.

Rules used to construct a decision tree Decision nodes or decision points are shown as squares. These are used when there is a decision to be made. Chance nodes are shown as circles, these are used to show the different possible outcomes of a decision. E.g. failure or success. For each chance there will be two or more routes (outcomes) these show the probability of the different outcomes for each chance node. The actual value of each outcome are stated at the end of each branch. It is important to remember that costs of each option must be deducted before writing down this figure. Each unwanted branch is cut off by drawing two parallel lines, leaving only the BEST OPTION.

Option1=(400 000×0.6)+(150 000×0.4)−200 000=£100 000 Option 2(a) = (2 000 000 × 0.6) + (400 000 × 0.4) − 900 000 = £460 000 Option 2(b) = (2 500 000×0.6) + (−100 000×0.4) −1 100 000 = £360 000 O p t i o n 3 = ( 2 5 0 0 0 0 0 × 0 . 6 ) + (1 0 0 0 0 0 0 × 0 . 4 ) − 1 6 0 0 0 0 0 = £ 3 0 0 0 0 0 On financial grounds the best option is to purchase the building next door without a café (2(a)).

Possible advantages for RL include: The brothers can clearly see all the options and sub-options in the visual representation which gives a clear indication of costs and outcomes for RL. The model provides a quantification of the outcomes of each option as well as the risk attached with the probabilities of success and failure for RL.

Possible disadvantages for RL include: The expected financial return (and thus the final decision) will depend on the probabilities. We have no information as to how James arrived at these figures as they are estimated. External and non-financial figures are not included in the diagram, for example moving the bookshop to a large shopping centre outside of central London could alienate some loyal customers. The reactions of competitors are unknown and the risk attitude of the brothers is not reflected in the decision tree.

Advantages of decision trees They allow managers to set out problems in a clear and logical manner All potential options can be seen at the same time, speeding up the decision making process They consider the risks involved in decision making, such as the likelihood of negative outcomes Likely costs can be shown on the diagram Visual stimulus, not reliant upon peoples imagination!!!!

Disadvantages of decision trees They are guesstimations! (made-up word by me) and subject to forecasting error. Qualitative data not considered e.g. ethics or staff morale. Bias can lead to poor decisions (you can make things look favorable) Delays whilst doing the process could void the date. E.g. house prices dropped at over 3% a month in the Uk during 2005.