1.The manager should seek some balance between quantitative and qualitative factors in decision making’. Elaborate the statement giving the situations in which various statistical tools are used.
Quantitative and Qualitative Factors in Decision Making
QUANTATIVE FACTORS
LET US TAKE
THE Investment Appraisal.
THE FACTORS CONSIDERED ARE
Payback period
NPV
ARR
NPV
ARR
Provide a numerical basis for decision making – reduces decisions to looking at a monetary value for the next 3 years
The cost of a series of redundancies against the longer term financial benefits to the firm of this process But: such data provides only part of the story Other factors need to be taken into account, particularly the effects of decisions on stakeholder groups and their response to such decisions, e.g. placed on different choices, e.g.
Forecasted sales figures
The takeover of Manchester United CLUB by Malcolm Glazer might make financial sense but the reaction of the supporters might make the move unworkable.
The cost of a series of redundancies against the longer term financial benefits to the firm of this process But: such data provides only part of the story Other factors need to be taken into account, particularly the effects of decisions on stakeholder groups and their response to such decisions, e.g. placed on different choices, e.g.
Forecasted sales figures
The takeover of Manchester United CLUB by Malcolm Glazer might make financial sense but the reaction of the supporters might make the move unworkable.
QUALITATIVE FACTORS
Qualitative factors look to take account of these other issues that may influence the outcome
of a decision Can be wide ranging and especially need to consider the impact on human resources and their response to decisions
of a decision Can be wide ranging and especially need to consider the impact on human resources and their response to decisions
CONDUCT THE SWOT ANALYSIS
A decisions (for example, investment in a new production plant) could be considered not only in
financial terms but also to apply other techniques of decision making to look at wider issues:
A SWOT analysis might be part of this:
financial terms but also to apply other techniques of decision making to look at wider issues:
A SWOT analysis might be part of this:
-STRENGTHS
-WEAKNESSES
-OPPORTUNITIES
-THREATS
-WEAKNESSES
-OPPORTUNITIES
-THREATS
QUALITATIVE METHODS
PEST ANALYSIS
Might also need to factor in other external issues that might influence the decision making
process which can be summarized as:
-POLITICAL
-ECONOMIC
-SOCIAL
-TECHNOLOGOCAL
process which can be summarized as:
-POLITICAL
-ECONOMIC
-SOCIAL
-TECHNOLOGOCAL
Political could be in its widest sense, e.g. the internal politics of a firm as well as the national and international political effect The decision to site a series of wind turbines in a coastal area might be justified on financial grounds but:
What is the reaction of the local community?
Does government policy support such planning developments?
Are there social impacts – e.g. noise pollution, damage to eco-systems, etc?
Such factors may make the difference between success and failure
Does government policy support such planning developments?
Are there social impacts – e.g. noise pollution, damage to eco-systems, etc?
Such factors may make the difference between success and failure
Human Resources Management
Impact on a firm’s human resources is essential to consider,
in particular the effects on:
Motivation
Morale
Recruitment and Retention
May be difficulty to assess and measure
May need to distinguish between short term effects and long term
Impact on a firm’s human resources is essential to consider,
in particular the effects on:
Motivation
Morale
Recruitment and Retention
May be difficulty to assess and measure
May need to distinguish between short term effects and long term
Stakeholder Analysis
Wider impacts on stakeholder groups may also be necessary, such stakeholders include:
-EMPLOYEES
-SHAREHOLDERS
-MANAGERS
-ENVIRONMENT
-LOCAL COMMUNITY
-SUPPLIERS
-GOVERNMENT
-CONSUMERS
-SHAREHOLDERS
-MANAGERS
-ENVIRONMENT
-LOCAL COMMUNITY
-SUPPLIERS
-GOVERNMENT
-CONSUMERS
DECISION MAKING
Eventual decision may rest on the balance between the perceived effects of quantitative and
qualitative.
If the long term effect on the workforce for example was to reduce productivity or increase
absence because of the impact on motivation and morale, the fact that a decision makes financial sense may be shelved!
Qualitative by its nature, therefore, is very subjective considerations in decision making, in addition to the quantitative or financial factors highlighted by incremental analysis . They are the factors relevant to a decision that are difficult to measure in terms of money. Qualitative factors may include: (1) effect on employee morale, schedules and other internal elements; (2) relationships with and commitments to suppliers; (3) effect on present and future customers; and (4) long-term future effect on profitability. In some decision-making situations, qualitative aspects are more important than immediate financial benefit from a decision.
qualitative.
If the long term effect on the workforce for example was to reduce productivity or increase
absence because of the impact on motivation and morale, the fact that a decision makes financial sense may be shelved!
Qualitative by its nature, therefore, is very subjective considerations in decision making, in addition to the quantitative or financial factors highlighted by incremental analysis . They are the factors relevant to a decision that are difficult to measure in terms of money. Qualitative factors may include: (1) effect on employee morale, schedules and other internal elements; (2) relationships with and commitments to suppliers; (3) effect on present and future customers; and (4) long-term future effect on profitability. In some decision-making situations, qualitative aspects are more important than immediate financial benefit from a decision.
====================================
HERE IS ANOTHER EXAMPLE OF THE QUANTITATIVE AND QUAL ITATIVE FACTORS IN DECISION MAKING. SALES FORECAST FOR AN ORGANIZATION.
THE SALES MANAGER WOULD USE A COMBINATION OF THESE TOOLS TO ARRIVE AT THE FINAL DECISION.
QUANTITATIVE METHODS
METHOD 1
• The field perspective, or “field assessment,” is based on a rollup
of individual forecasts, providing management with a bottom-up view
of current market conditions
of individual forecasts, providing management with a bottom-up view
of current market conditions
TERRITORY 1 FORECASTS $5mill.
TERRITORY 2 FORECASTS $6mill.
TERRITORY 3 FORECASTS $9mill.
TERRITORY 4 FORECASTS $6mill.
TERRITORY 2 FORECASTS $6mill.
TERRITORY 3 FORECASTS $9mill.
TERRITORY 4 FORECASTS $6mill.
TERRITORY 5 FORECASTS $8mill.
TERRITORY 6 FORECASTS $7mill.
TERRITORY 7 FORECASTS $4mill.
TERRITORY 8 FORECASTS $4mill.
TERRITORY 9 FORECASTS $3mill.
TERRITORY 10 FORECASTS $3mill.
TERRITORY 6 FORECASTS $7mill.
TERRITORY 7 FORECASTS $4mill.
TERRITORY 8 FORECASTS $4mill.
TERRITORY 9 FORECASTS $3mill.
TERRITORY 10 FORECASTS $3mill.
================================
NATIONAL TOTAL SALES FORECAST =$55 mill.
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METHOD 2
• The pipeline perspective, or “pipeline assessment,” is generated by analyzing
opportunities at each stage of the pipeline, enabling management to
assess sales targets from an aggregate, top-down viewpoint.
opportunities at each stage of the pipeline, enabling management to
assess sales targets from an aggregate, top-down viewpoint.
1.MARKET POTENTAIL FORECAST $400 mill.
MARKET SHARE FORECAST 15% = $60 mill.
2.FIELDSALES FORECAST = $55 mill.
3. MARKETING CHANNEL FORECAST =$ 58 mill.
4. CUSTOMERS' END USE EXPECTATIONS FORECAST =$57 mill.
3. MARKETING CHANNEL FORECAST =$ 58 mill.
4. CUSTOMERS' END USE EXPECTATIONS FORECAST =$57 mill.
THE AVERA GE OF THIS WORKING = $57.5 mill.
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METHOD 3
• The historical perspective, or “analytic assessment,” is based on a comparison
of current pipeline data with historical trends, allowing the company to apply
knowledge gained from prior periods to the current forecast.
of current pipeline data with historical trends, allowing the company to apply
knowledge gained from prior periods to the current forecast.
YEAR 2004 $45mill. YEAR 2005 $48mill. YEAR 2006 $51mill. YEAR 2007 $54mill.
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YEAR 2008 $57mill.
FORECAST
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METHOD 4
Triangulated Forecasting provides a set of checks and balances that enables
management to quickly identify potential problems.
management to quickly identify potential problems.
Additionally, the analytic assessment highlights that, at this point in the quarter,
the company’s forecasts are typically 20 percent above final attainment. Taking
all three perspectives into account, management can quickly recognize that
the company is unlikely to meet its original forecast unless corrective action
is taken immediately.
the company’s forecasts are typically 20 percent above final attainment. Taking
all three perspectives into account, management can quickly recognize that
the company is unlikely to meet its original forecast unless corrective action
is taken immediately.
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METHOD 5
Simple moving average
A simple moving average (SMA) is the unweighted MEAN of the previous N data points.
For example, a 5 -YEAR simple moving average of closing SALES is the mean of the
previous 5 YEARS ' closing SALES .
If those SALES are YEAR1= 150, YEAR2 = 170, YEAR3=190, YEAR4= 200, YEAR5=210 ,then the formula is
150+170+190+200+210=800/5 = FORECAST = 220
150+170+190+200+210=800/5 = FORECAST = 220
==============================================================
QUALITITATIVE METHODS
METHOD 1
The Delphi method
-is a systematic interactive forecasting method for obtaining forecasts from a panel of
independent experts. The carefully selected experts answer questionnaires in two or more
rounds. After each round, a facilitator provides an anonymous summary of the experts’ forecasts
from the previous round as well as the reasons they provided for their judgments. Thus,
participants are encouraged to revise their earlier answers in light of the replies of other members
of the group. It is believed that during this process the range of the answers will decrease and the
group will converge towards the "correct" answer. Finally, the process is stopped after a pre-
defined stop criterion (e.g. number of rounds, achievement of consensus, stability of results) and
the mean or median scores of the final rounds determine the results.
Delphi is based on well-researched principles and provides forecasts that are more accurate
than those from unstructured groups. The technique can be adapted for use in face-to-face
meetings, and is then called mini-Delphi or Estimate-Talk-Estimate (ETE). Delphi has been widely used for business forecasting and has certain advantages over another structured forecasting approach: prediction markets.
rounds. After each round, a facilitator provides an anonymous summary of the experts’ forecasts
from the previous round as well as the reasons they provided for their judgments. Thus,
participants are encouraged to revise their earlier answers in light of the replies of other members
of the group. It is believed that during this process the range of the answers will decrease and the
group will converge towards the "correct" answer. Finally, the process is stopped after a pre-
defined stop criterion (e.g. number of rounds, achievement of consensus, stability of results) and
the mean or median scores of the final rounds determine the results.
Delphi is based on well-researched principles and provides forecasts that are more accurate
than those from unstructured groups. The technique can be adapted for use in face-to-face
meetings, and is then called mini-Delphi or Estimate-Talk-Estimate (ETE). Delphi has been widely used for business forecasting and has certain advantages over another structured forecasting approach: prediction markets.
===========================================================
METHOD 2
Scenario analysis
-is a process of analyzing possible future events by considering alternative possible outcomes
(scenarios). The analysis is designed to allow improved decision-making by allowing more
complete consideration of outcomes and their implications.
For example, in economics and finance, a financial institution might attempt to forecast several
-is a process of analyzing possible future events by considering alternative possible outcomes
(scenarios). The analysis is designed to allow improved decision-making by allowing more
complete consideration of outcomes and their implications.
For example, in economics and finance, a financial institution might attempt to forecast several
possible scenarios for the economy (e.g. rapid growth, moderate growth, slow growth) and it
might also attempt to forecast financial market returns (for bonds, stocks and cash) in each of
those scenarios. It might consider sub-sets of each of the possibilities. It might further seek to
determine correlations and assign probabilities to the scenarios (and sub-sets if any). Then it will
be in a position to consider how to distribute assets between asset types (i.e. asset allocation);
the institution can also calculate the scenario-weighted expected return (which figure will indicate
the overall attractiveness of the financial environment).
Depending on the complexity of the financial environment, in economics and finance scenario
analysis can be a demanding exercise. It can be difficult to foresee what the future holds (e.g. the
actual future outcome may be entirely unexpected), i.e. to foresee what the scenarios are, and to
assign probabilities to them; and this is true of the general forecasts never mind the implied
financial market returns. The outcomes can be modelled mathematically/statistically e.g. taking
account of possible variability within single scenarios as well as possible relationships between
scenarios.
might also attempt to forecast financial market returns (for bonds, stocks and cash) in each of
those scenarios. It might consider sub-sets of each of the possibilities. It might further seek to
determine correlations and assign probabilities to the scenarios (and sub-sets if any). Then it will
be in a position to consider how to distribute assets between asset types (i.e. asset allocation);
the institution can also calculate the scenario-weighted expected return (which figure will indicate
the overall attractiveness of the financial environment).
Depending on the complexity of the financial environment, in economics and finance scenario
analysis can be a demanding exercise. It can be difficult to foresee what the future holds (e.g. the
actual future outcome may be entirely unexpected), i.e. to foresee what the scenarios are, and to
assign probabilities to them; and this is true of the general forecasts never mind the implied
financial market returns. The outcomes can be modelled mathematically/statistically e.g. taking
account of possible variability within single scenarios as well as possible relationships between
scenarios.
============================================================
METHOD 3
Rational and explicit methods
The whole purpose of the recitation of alternatives, is to show that there really is no alternative to
forecasting. If a decisionmaker has several alternatives open to him, he will choose among them
on the basis of which provides him with the most desirable outcome. Thus his decision is
inevitably based on a forecast. His only choice is whether the forecast is obtained by rational and
explicit methods, or by intuitive means.
The virtues of the use of rational methods are as follows:
They can be taught and learned,
They can be described and explained,
They provide a procedure followable by anyone who has absorbed the necessary training, and in
some cases,
These methods are even guaranteed to produce the same forecast regardless of who uses them. The virtue of the use of EXPLICIT methods is that they can be reviewed by others, and can be
METHOD 3
Rational and explicit methods
The whole purpose of the recitation of alternatives, is to show that there really is no alternative to
forecasting. If a decisionmaker has several alternatives open to him, he will choose among them
on the basis of which provides him with the most desirable outcome. Thus his decision is
inevitably based on a forecast. His only choice is whether the forecast is obtained by rational and
explicit methods, or by intuitive means.
The virtues of the use of rational methods are as follows:
They can be taught and learned,
They can be described and explained,
They provide a procedure followable by anyone who has absorbed the necessary training, and in
some cases,
These methods are even guaranteed to produce the same forecast regardless of who uses them. The virtue of the use of EXPLICIT methods is that they can be reviewed by others, and can be
checked for consistency. Furthermore, the forecast can be reviewed at any subsequent time.
===================================================================
METHOD 4
Genius forecasting
- This method is based on a combination of intuition, insight, and luck. Psychics and crystal ball
readers are the most extreme case of genius forecasting. Their forecasts are based exclusively
- This method is based on a combination of intuition, insight, and luck. Psychics and crystal ball
readers are the most extreme case of genius forecasting. Their forecasts are based exclusively
on intuition. Science fiction writers have sometimes described new technologies with uncanny
accuracy.
There are many examples where men and women have been remarkable successful at predicting
the future. There are also many examples of wrong forecasts. The weakness in genius
forecasting is that its impossible to recognize a good forecast until the forecast has come to pass.
Some psychic individuals are capable of producing consistently accurate forecasts. Mainstream
science generally ignores this fact because the implications are simply to difficult to accept. Our
current understanding of reality is not adequate to explain this phenomena.
accuracy.
There are many examples where men and women have been remarkable successful at predicting
the future. There are also many examples of wrong forecasts. The weakness in genius
forecasting is that its impossible to recognize a good forecast until the forecast has come to pass.
Some psychic individuals are capable of producing consistently accurate forecasts. Mainstream
science generally ignores this fact because the implications are simply to difficult to accept. Our
current understanding of reality is not adequate to explain this phenomena.
=================================================
METHOD 5
Cross-impact matrix method
- Relationships often exist between events and developments that are not revealed by univariate
forecasting techniques. The cross-impact matrix method recognizes that the occurrence of an
event can, in turn, effect the likelihoods of other events. Probabilities are assigned to reflect the
likelihood of an event in the presence and absence of other events. The resultant inter-
correlational structure can be used to examine the relationships of the components to each other,
and within the overall system. The advantage of this technique is that it forces forecasters and
policy-makers to look at the relationships between system components, rather than viewing any
variable as working independently of the others.
- Relationships often exist between events and developments that are not revealed by univariate
forecasting techniques. The cross-impact matrix method recognizes that the occurrence of an
event can, in turn, effect the likelihoods of other events. Probabilities are assigned to reflect the
likelihood of an event in the presence and absence of other events. The resultant inter-
correlational structure can be used to examine the relationships of the components to each other,
and within the overall system. The advantage of this technique is that it forces forecasters and
policy-makers to look at the relationships between system components, rather than viewing any
variable as working independently of the others.
===========================================
Considerations in the choice of forecasting methods?
The selection of the forecast method should be based on several criteria taking into
account the applicability of the forecast methodcomplexity, i.e., forecast accuracy level, period of time, the scope of initial data, forecast costs, and the level of result
appropriateness and applicability.
account the applicability of the forecast methodcomplexity, i.e., forecast accuracy level, period of time, the scope of initial data, forecast costs, and the level of result
appropriateness and applicability.
Type of information (quantitative and qualitative forecast methods).
• Forecast time span (short-term, mid-term and longterm forecast development methods).
• Forecast object (micro and macro economic indicator forecast methods).
• Forecast goal (genetic and normative forecast methods).
• Forecast time span (short-term, mid-term and longterm forecast development methods).
• Forecast object (micro and macro economic indicator forecast methods).
• Forecast goal (genetic and normative forecast methods).
CRITERIA FOR THE DECISION MAKING.
Accuracy
Ease of interpretation
Ease of use
Ease of using data
Credibility
Speed
Cost savings
Ease of implementation
Time horizon
Adaptive to condition
Ease of interpretation
Ease of use
Ease of using data
Credibility
Speed
Cost savings
Ease of implementation
Time horizon
Adaptive to condition
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