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Business decision, resource mgt and cost benefit analysis
The document provides information on decision making under conditions of certainty, risk, and uncertainty. It discusses three main types of decision making environments - certainty, where all outcomes are known; risk, where probabilities of outcomes are known; and uncertainty, where little is known about outcomes. Modern approaches to decision making under uncertainty include risk analysis, decision trees, and preference theory. Cost-benefit analysis is also summarized as a technique to evaluate the costs and benefits of potential decisions.
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Business decision, resource mgt and cost benefit analysis
- 1. KTU- 2015-2019 B.Tech HSE02 Business Economics PreparedBy Mohammed Jasir PV Asst. Professor Ilahia College of Eng and Tech.
- 2. Decision • A choicemade between alternative courses of action in a situation of uncertainty. Decision Making “Decision-making involves the selection of a course of action from among two or more possible alternatives in order to arrive at a solution for a given problem”
- 3. Decision Making Environment MainlyThree types of environment in which decisions are made. 1. Certainty 2. Uncertainty 3. Risk
- 4. Certainty Theoretical condition inwhich decision making is without risk, because the decision maker has all the information about the exact outcome of the decision, before he or she makes the decision
- 5. Uncertainty • The lackof certainty. • A state of having limited knowledge where it is impossible to exactly describe the existing state, a future outcome, or more than one possible outcome
- 6. Risk • “Exposure tothe chance of injury or loss; a hazard or dangerous chance.” • “ The chance of occurring a loss”
- 7. Decision-making under Certainty: •A condition of certainty exists when the decision-maker knows with reasonable certainty what the alternatives are, what conditions are associated with each alternative, and the outcome of each alternative. • Under conditions of certainty, accurate, measurable, and reliable information on which to base decisions is available.
- 8. Cont... Under this condition Knowthe cause and effect relationships Perfect knowledge about each alternative, and the outcome of each alternative Future is highly predictable Such conditions exist in case of routine and repetitive decisions concerning the day-to-day operations of the business
- 9. Decision-making under Risk •When a manager lacks perfect information or whenever an information asymmetry exists, risk arises. • Under a state of risk, the decision maker has incomplete information about available alternatives but has a good idea of the probability of outcomes for each alternative.
- 10. Cont... • While makingdecisions under a state of risk, managers must determine the probability associated with each alternative on the basis of the available information and his experience.
- 11. Decision-making under Uncertainty •Conditions of uncertainty exist when the future environment is unpredictable and everything is in a state of flux. • The decision-maker is not aware of – All available alternatives – The risks associated with each – The consequences of each alternative or their probabilities.
- 12. Cont... • The managerdoes not possess complete information about the alternatives and whatever information is available, may not be completely reliable. • In the face of such uncertainty, managers need to make certain assumptions about the situation in order to provide a reasonable framework for decision-making. • They have to depend upon their judgment and experience for making decisions.
- 13. Modern Approaches to Decisionmaking under Uncertainty
- 14. The most importantmodern techniques to improve the quality of decision-making under uncertainty (1) Risk Analysis (2) Decision Tree (3) Preference Theory
- 15. (1) Risk Analysis •In this approach analyze the size and nature of the risk involved in choosing a particular course of action. For example, while launching a new product, a manager has to carefully analyze Production Cost Potential Market Size Marketing Cost Competition Capital Investment Required Price Of Product
- 16. • Risk analysisinvolves quantitative and qualitative risk assessment, risk management and risk communication and provides managers with a better understanding of the risk and the benefits associated with a proposed course of action. • The decision represents a trade-off between the risks and the benefits associated with a particular course of action under conditions of uncertainty.
- 17. (2) Decision Tree Itconsidered to be one of the best ways to analyze a decision. • A decision-tree approach involves a graphic representation of alternative courses of action and the possible outcomes and risks associated with each action.
- 18. Cont... • A decisiontree is graphic display of the relationship between a present decision and possible future event, future decision and their consequences. • It indicates the sequence of events, which is mapped out in a form of resembling the branches of tree.
- 19. By means ofa “tree” diagram depicting the decision points, chance events and probabilities involved in various courses of action, this technique of decision- making allows the decision-maker to trace the optimum path or course of action
- 20. Various steps involvedin decision tree analysis are 1. Identification of the problem; 2. Finding out the alternatives; 3. Exhibiting the decision tree indicating the decision points, chance events, and other relevant data; 4. Specification of probabilities and monetary values for cash inflows; 5. Analysis of the alternatives
- 21. (3) Preference orUtility Theory • This approach is based on the notion that individual attitudes towards risk vary. • Some individuals are willing to take only smaller risks (risk averters), while others are willing to take greater risks (gamblers). • Statistical probabilities associated with the various courses of action are based on the assumption that decision-makers will follow them.
- 22. • For Example,if there were a 60 percent chance of a decision being right, it might seem reasonable that a person would take the risk. This may not be necessarily true as the individual might not wish to take the risk, since the chances of the decision being wrong are 40 percent. • The attitudes towards risk vary with events, with people and positions.
- 24. • Cost BenefitAnalysis can be traced back to the 19th century by a French engineer & economist Jules Dupuit. • In 1936, it is a simple way of weighing up project costs and benefits, to determine whether to go ahead with a project or not. Jules Dupuit. History :
- 25. • Cost isthe value of money that has been used up to produce something, and hence is not available for use anymore • Benefit are the monetary values of desirable consequence of economic policies and decisions
- 26. Cost Benefit Analysis(CBA) • It is an economic evaluation technique that measures all the positive (beneficial) and negative (costly) consequences of an intervention or program in monetary terms. • The valuation of all program outcomes in monetary units allows decision makers to directly compare the outcomes of different types of interventions
- 27. • CBA hasbeen established primarily as a tool for use by governments in making their social and economic decisions. • CBA is a process for evaluating the merits of a particular project in a systematic way in terms of cost and benefit’s of the project. • The benefits of a given situation or business- related action are summed, and then the costs associated with taking that action are subtracted.
- 28. Any negative effecton an organization resulting from the implementation of the project. Examples: 1. maintenance costs 2.Environment 3.Research and development 4. Labour costs A benefit is any positive effect on the organization resulting from the implementation of the project. Examples: 1. increase in productivity 2. reduction in costs 3. Saving Time 4. Decrease road congestion COST BENEFIT
- 29. Why Cost BenefitAnalysis.??? Cost Benefit Analysis is used to determine: whether a solution/project is economically feasible which of two or more projects provides the best return on investment Other issues : Is the project worthwhile financially? Is it the best option? Should it be undertaken at all?
- 30. The steps inCBA 1 • Determine the value of benefits 2 • Determine the costs 3 • To allow a comparison of costs and benefits
- 31. 1. Determine thevalue of benefits from a project where benefits are defined as the value of the additional goods and services flowing from the project. 2. Determine the costs of the project where costs are defined as the value of goods and services that would otherwise have been produced if the project did not proceed. Costs are opportunity costs only. 3. To allow a comparison of costs and benefits at different times over the life of the project, all costs and benefits have to be reduced to a comparable and additive value (a dollar today is not worth the same as a dollar tomorrow!).
- 32. Advantages of CBA •Simplicity • Estimation • Common Unit of Measure • CBA delivers an efficient out come • CBA helps govt decide whether or not to carry out large public sector projects • CBA helps to prioritizing one project with another • CBA also dealing with Opportunity Cost.
- 33. Challenges of CBA Accuracyproblem 1) Inaccurate cost and benefit estimation 2) Rely heavily on similar projects of past 3) Rely heavily on project members 4) Can’t avoid the unconscious bias of team members
- 35. Resource An economic orproductive factor required to accomplish an activity, or as means to undertake an enterprise and achieve desired outcome. Three most basic resources are land, labour, and capital; other resources include energy, entrepreneurship, information, expertise, management, and time.
- 36. Resource Management Resource managementis the efficient and effective arrangement and allocation of an organization's resources when and where they are needed. Such resources may include financial resources, inventory, human skills, production resources, or information technology.
- 37. Cont... Resource management includesplanning, allocating and scheduling of resources to tasks, which typically includes manpower, machine money and material.
- 38. Resource Mgt Activities •Determining Resource Needs • Resource Ordering • Check in Process • Utilizing Resources • Tracking Resources • Evaluating Resources • Demobilizing Resources