Techniques and Tools For Decision Making
The decision means selecting a future course of action today. For an effective decision, a manager uses various techniques and tools for decision making.
The manager may use different qualitative and quantitive tools. Qualitative tools use through the interpretation of problems and generating ideas whereas quantitive tools are the use of mathematical and other scientific means of solution. The important quantitative tools for decision making include the following:
- Linear Programming
- Payoff Matrix
- Decision Tree
- Queuing Model
- Game Theory
- Accounting Tools
7 Tools For Decision Making: Defining
Linear programming is a mathematical tool for decision-making. This tool is used for an optimum combination of scarce resources and activities to achieve the desired objectives. In other words, it is used to allocate scarce resources effectively to get optimum output from it.
Under this tool, mathematical equations are employed to describe the system in the form of linear relations between variables. It is appropriate when an objective must be met within the set of constraints. It is extremely useful for maximizing profit and minimizing costs.
Combining the resources helps to determine the future values of certain variables affecting their outcome.
The linear programming model is useful in varieties of situations where numerous activities have to complete within limited resources. Thus a manager must find an optimum way to allocate the limited resources to achieve an objective within the constraints.
Simulation represents a model to solve real-life problems.
Under this technique of decision-making, related variables, and their inter-relationships are put into a system to find out the outcome. Basically, a computer program is used to find out the set of outputs with the combination of different variables. Until an optimum output is obtained the regular changes are made in the combination of different variables.
In simple words, here different variables are combined and processed through the computer programs to find out the optimum output from them.
The simulation tool is more useful in a complex situation characterized by various constraints and opportunities. It is a descriptive rather than a perspective technique. It helps to analyze more information speedily. Thus, this technique is used for decision-making in large organizations that requires more resources.
A payoff matrix is a mathematical tool for decision-making. Here the alternatives are evaluated by calculating their expected value. An alternative having the highest expected outcome is selected.
It provides a method of computing outcomes of various available alternatives to the manager. In the payoff matrix, the probability of various alternatives and their expected values are taken into consideration. The probability ranges from zero (0) to one (1).
Most of the probabilities managers are used based on subjective judgment, intuition, and historical data. And, while the outcome is calculated from the calculation, the expected value of an alternative course of action is multiplied by the respective probability.
And, finally, the decision-maker weighs the expected value of all available alternatives, and the highest expected value alternative is selected.
A decision tree is a graphical tool for decision-making. Here a manager uses graphics to study alternative solutions available.
The decision tree is like a payoff matrix because alternatives are evaluated by calculating their expected value, just like in the payoff matrix. But here is the use of financial tools to calculate the net expected value (NEV) of available alternatives and the highest expected value alternative is selected.
However, it is most appropriate when numbers of decisions are to be made in sequence. It enables the manager to consider an alternative solution, assign financial value to them, estimate the probability of a given outcome for each alternative, make comparisons, and choose the best alternatives.
Steps to solving problems in the decision tree;
- Identify the problem by developing a decision tree diagram.
- Developing the course of action which is represented by a separate branch of the decision tree.
- Assign a probability of the outcome of each course of action.
- Determine the financial outcome of each outcome.
- Calculate the net expected value of each outcome.
After calculating the net expected value the alternative with the highest net expected value is selected.
Queuing model is used to analyze the cost of the waiting line. This method is used to optimize the waiting lines in the organization so that better services can be provided to the customers.
Queuing problem arises when the demand of customers can not be matched perfectly by a set of organization service facilities. Thus, a manager has to develop the service facility in a way the customers get service when they want.
The main objective of queuing model is to achieve an optimal balance between the cost of increasing service and the amount of time during which individuals, machines, or materials wait for service. When customers are forced to wait for a long time due to a shortage of services, they may get bored and frustrated, and the organization may lose customers.
Queuing model is appropriate in service sectors like banks, public transport, gas and petrol pumps, hospitals, airports, cinema halls, department stores, etc.
Game theory is applied in the competitive environment. It was originally developed to predict the effects of one company’s decision over competitors.
This theory intends to predict how a competitor will react to various activities that an organization undertakes such as a change in price, promotion, the introduction of a new product, etc. The objective of every competitor in business is to choose a particular strategy or course of action to frustrate others to win the game.
The primary objective of game theory is to develop a rational procedure for selecting a strategy. In businesses, it is applied in a competitive situation where it is more difficult to assess the competitor’s response.
It develops a framework for analyzing decision-making and describes various phenomena in a conflicting situation. It is a highly sophisticated and systematic model that enables a selection of rational strategies for attaining goals.
In the financial decision process, accounting tools play important roles. In accounting tools for decision making, a manager need to collect, analyze, and interpret financial information and data. It is essential to evaluate the financial strengths and weaknesses of the organization before taking a decision.
These financial and accounting tools consist of beak even analysis, ratio analysis, standard costing, funds flow, cash flow analysis, budgeting, etc.