Decision Making Process, Lecture notes of Decision Making

Download Decision Making Process and more Lecture notes Decision Making in PDF only on Docsity! DECISION MAKING The Six Steps in Decision Making yn “SS Problem Following Up = Implementing — Decision Selecting the Best Alternatives Determining Alternative Courses of Action J Analyzing the Alternatives | XY Types of Business Decisions 1.Programmed and Non-Programmed Decisions. Programmed Decisions are of a routine nature. These decisions are taken for simple, common and frequently occurring problems. These decisions are repetitive and routine in nature. Non-programmed decisions are _ highly important and non-repetitive in nature. There is no standard procedure for handling such problems. 2. Major and Minor decisions Major decisions have direct bearing on the achievement of goals of the concern and so these decisions are made very carefully. They are decided by the top executives. Minor decisions are made in the course of execution of major decisions. Eg; Developing a new product ===> Major Decision Its packaging $$ $$. Minor Decision 5. Analytical and Adaptive decisions Analytical decisions are taken when the problem is complex but its output is certain. Adaptive decisions are taken when the problem is complex but the output is uncertain. 6. Mechanical and Judgmental Decisions Mechanical decisions are applicable for simple problems the result of which are certain. Judgmental decisions are taken for simple problems the result of which are vague. 7. Technical Decisions These decisions are pertaining to the production Process. Fundamental Concepts (Principles) that aid business decisions The following are the important fundamental concepts that help business managers to take correct business decisions. 1. The Incremental Concept There are two incremental concepts:- Incremental Cost Incremental Revenue Incremental cost is the change in total cost as a result of a change in the nature of business activity. The change may be change in price, introduction of new product etc. Incremental revenue is the change in total revenue as a result of the above mentioned changes in the nature of business activity. While choosing an_ alternative a decision maker should see that the benefit derived from the chosen alternative should be more than the opportunity cost. If there are more than two alternatives the opportunity cost is the benefit sacrificed for the next best alternative. 3. Concept of time perspective Economist distinguish short run and long run on the basis of time. Short run is a period so short that the existing plant and equipment cannot be increased to produce additional units of output. In the short run output can be increased only by increasing the variable inputs like raw-materials, labour etc. 4. The discounting principle The discounting principle is based on the concept of time value of money. The significance of discounting principle is that while making a cost benefit analysis a decision maker should always compare the present value of future cash inflows with the present value of cash outflows. 5. Principle of Equimarginal satisfaction and productivity It is also known as principle of maximum satisfaction. According to it , an input should be allocated in such a manner that the value added by the last unit of the input is the same or equal in all cases. Thus this principle provides a basis for maximum exploitation of all productive resources of a firm so that the profitability of the firm may be maximised. 6. The Contribution Principle This principle tells us that every factor of production makes its own contribution to productivity for the firm and that this contribution changes as the volume of output is changed.