The Importance Of Decision Making And Application Of Decision Analysis

Importance of Decision Making

Decision making is basically a process of taking or making important decisions. It is considered as an essential part of modern management and is a primary function performed by the managers. Decisions plays an important role in achieving the organization predetermined goals. They are been taken at every level of management, to ensure growth and drivability in the products and services provided by the organization (Nicholas, 2017). The process of decision making is continuous and is been done by the professionals for better functioning of the business. A systematic and quantitative approach used for evaluating the relevant information, which is required in the decision making process, is known as decision analysis. The approach uses various tools which helps in assessing the decisions made in respect of multiple variables and which have various possible outcomes (Nutt and Wilson, 2010). 

This report explains the importance of decision making and application of decision analysis. In addition to this, a decision problem is also stated in form of a business case in the report, which is evaluated by using SMART analysis tool. In the last the limitations and the strength of the analysis are mentioned, followed by a conclusion.

According to Oxford Dictionary, decision making is generally defined as the process of deciding something important among the group of individuals or in the organization (Crowley and Zentall, 2013). As the name suggest, it is very important for the business managers to take appropriate and correct decisions. Following are the points which reflects the importance of decision making:

• It is a pervasive function of management which is performed in the best interest of the organization. The manager take decisions at all the stages, for the purpose of smooth functioning of the business (Kumar and Sharma, 2000). 
• The decisions may lead to the downfall in the business, if taken wrongly. So it is very important for the management to follow a correct procedure while making the decisions.
• Decision making is very crucial for an organization as it provides a base for utilizing the resources available within the business, required for achieving the desired objectives (Morato, 2013).
• There are various resources such as materials, man power, money, machines and many more. Right decision at right time facilitates the efficient and effective use of all these resources, without any wastage.
• The importance of decision making also lies with the fact that it helps in choosing the best alternative among the available ones. A problem has multiple solutions and to select the best alternative, management needs to analyse each of them with the use various analytical tools (Noyes, Cook and Masakowski, 2012). 
• Apart from choosing best option, it also assist in evaluating the performance of a manager. The success and expertise of a manager largely depends upon its capability to take right decisions in the business. Therefore, decision making is one of the important criteria used for measuring the performance of the top level management.
• Making of decisions also results in the formation of a framework or guidelines for the operational staff. It also includes different benefits and facilities available to the employees. As a result, employees feel motivated and work according to the organization requirements (Conroy and Peterson, 2013). 

It is a process that deals with analysing, modelling and optimizing the decisions made by the individuals or organizations. The main objective of decision analysis is to help the decision makers in taking appropriate decisions, especially under uncertainty and complex situations. It also provides insights to the managers into how the available alternatives are different from each other and then provides suggestions for improved options (Parnell, Terry, Tani and Johnson, 2013). Businesses and government widely use this analysis in order to make right decisions. Some of the applications of the analysis are:

1. In business

• Ensuring quality and control
• Launching a new product
• Selecting a project
• Managing the operations in the business like airlines, hotel management, oil refinery and many more.
• Making the management efficient.
• Choosing a best loan portfolio.
• Making the organization reliable and successful (Covaliu, 2001).  

1. Government

• Managing the risk associated with environment.
• Choosing the new energy resources.
• Implementing research and development programs.
• Managing the emergency situations (Covaliu, 2001).  

1. Other Applications

• Treatment and diagnosis.
• Legal process (Covaliu, 2001). 

In general terms, decision problem is a difference between the current situation and the target situation which can be solved with the number of options available (Grünig and Kühn, 2017). In order to analyse the decisions which includes multiple objectives, following problem is been identified and framed:

A small retail shop situated in Melbourne has to shift its entire business to another location. The owner of the shop decides to expand its business by renovating and reconstructing his existing shop, and for this he needs to shift his business to some other location. In order to do this, he need to take a shop on rent. The owner decide to keep the cost low and takes into account the other factors which affects its turnover and profits.

Application of Decision Analysis

Five shopping malls are been shortlisted by the owner, each of which provides shop on rent. Among the five, Melbourne Central is in a prestigious location and have several popular stores under one roof. It is very close to customers, as they can easily reach there with public transport. But the problem is that owner has to pay high rent for taking a shop in this mall. On the top of that, the size of the shop is small, which will be uncomfortable for the staff to work in. In contrast to this, Queen Victoria Village is a mall, popularly known for business and shopping. The shop in this mall is pretty much spacious and provides excellent working conditions. But it is located far away from the main market, where customers can not reach easily. The mall has a wide range of big retail stores such as Woolworths, Big W, Officeworks and many more. The owner is now confused about making his choice, as the problem of choosing shop location involves both cost and benefits. Factors like rent, electricity charges, maintenance charges and cleaning expenses contributes the cost of shop. On the other hand, benefits are derived from the turnover and working environment. Factors that affect the benefits are goodwill of the mall, location or closeness to customers, comfort of the workers and size of the shop.

The owner needs to take a decision regarding shop location, taking into account all these factors. In order to make correct and appropriate choice, SMART technique has been used to evaluate all these points and choose the best option. Following five options are:

• Melbourne Central
• Target Centre
• Queen Victoria Village
• Bourke Street Mall
• Queen Victoria Markets
• SMART Analysis 

It is a simple technique that implements the principle of MAUT (Multi Attributable Utility Theory). It believes that decisions taken depends upon the values and the weights assigned to each and every attribute. These weights and values make it easy for the decision maker to analyse the best option and take the decision accordingly. (Olson, 2012).

A shop location problem

Annual Cost related to the malls

Ranking for the Goodwill

Ranks are been given from the most preferred to least preferred.

Assigning the values to the malls as per different factors

Giving Swing weights

The swing from worst location to best location is taken as 100% and the swing from best goodwill to worst goodwill is considered to be 80%.

Providing weights to each and every attribute

• Melbourne Central

Business Case

Aggregate benefit = 8,071.43/100 = 81 or 80.71

• Queen Victoria Village

Aggregate benefit = 5,429/100 = 54 or 54.29

• Target Centre

Aggregate benefit = 5,321/100 = 53 or 53.21

• Queen Victoria Markets

Aggregate benefit = 8,000/100 = 80

• Bourke Street Mall

Aggregate benefit = 5,286/100 = 53 or 52.86

Summarising the aggregate benefits for each mall

The above graph represents the plotting of benefits against cost for each mall. A mall having highest benefit and low cost will be more desirable among the available alternatives. As it can be seen from the graph that, Melbourne Central and Queen Victoria Markets are the two malls which have highest benefits and the other malls are been dominated by them. Among these two, the rent and the other expenses of Queen Victoria is very much less than that of Melbourne Central and also there is a slightest difference between the benefits derived from the two. So it can be said that Queen Victoria is more preferable.

It is basically a financial modelling tool which measure the extent to which the dependent variable is affected by the different values of independent variable. For choosing the best option among the available five, sensitivity analysis is done on the basis of the Net Present Value for each mall. NPV is the dependent variable and interest rate is independent variable. The analysis measure the changes in value of NPV as and when the interest rate differs (Borgonovo, 2017). 

As per the cost benefit analysis, Melbourne Central and Queen Victoria Markets have been shortlisted. The sensitivity analysis has been performed on these two malls. Hypothetical cash flows are taken for the three years of each mall and the value of NPV is calculated as per the interest rate. It can be seen from the table that, as and when, the interest rate increases, the NPV of both the malls reduces. But the change in NPV of Melbourne Central is more than the change in the NPV of Queen Victoria. This implies that the net present value of first option is highly sensitive towards interest rate and is reducing to a large extent. On the other hand, small change is been there in the NPV of second option, which shows that it is not very much sensitive to the interest rates. So according to the cost benefit analysis and sensitivity analysis, the owner should choose Queen Victoria Markets for taking a shop on rent, as it will cost less and derives more benefits (Asquith and Weiss, 2016).

SMART Analysis Tool

Strengths

• SMART analysis is the simple method which calculate value to each and every attribute. After calculating the values, swing weights are assigned to each criteria which make it easier for the decision makers to choose the best alternative.
• The method takes into account lowest level of attributes and considers every aspect of the decision problem.
• By using the direct rating method for selecting raw weights, owner can make more accurate and consistent judgement regarding the selection of mall.
• The weights assigned are then normalized, which makes the analysis easier.
• The method used is less time consuming and process followed is also easy to understand. SMART allow the shop owner to apply any type of weight assessment technique, as a result of which, less efforts are been made by the decision maker (Velasquez and Hester, 2013).
• One of the strength of the analysis is that it includes cost benefit analysis which measures the cost of alternatives against its benefits. By calculating the total cost and aggregate benefit for each mall, owner can easily decide about which option is more favourable and desirable. An alternative which involves low cost and high benefits is generally accepted by the business. The values can also be represented on the graph which makes it easier to understand (Kasie, 2013).
• The last part of SMART includes sensitivity analysis, which is performed by almost every business. With help of this analysis, shop owner can easily decide between the two malls, shortlisted on the basis of cost benefit analysis. It gave the idea about the sensitivity of the options, which make the owner to choose Queen Victoria Markets over Melbourne Central.

Limitations:

• Though the technique is simple, but in case of a business having complex structure, the procedure followed by not proved to be convenient (Velasquez and Hester, 2013).
• The technique cannot be used if the problem is for a longer duration. Reason being, many other attributes will then be considered which makes the problem complicated and the technique which is simple in nature cannot be applied.
• Apart from the method used, the limitation of the analysis is that the values are estimated and approximate figures are taken, which can affect the accuracy of the decision.

Conclusion

From the above report it can be concluded that, decision making is necessary in each and every type of organization and the analysis of the decision made is very much important for the success of the business. The report also concluded that, Simple Multi-Attribute Rating Technique is the simplest method to be applied, for the purpose of choosing best alternative among the available ones. The shop owner in Australia perform SMART analysis and came to a conclusion that, taking a shop on rent in Queen Victoria Markets will be more favourable for his business, as it includes low cost and provides high benefits. So overall, it can be said that, the tools of decision analysis helps in making better decisions and also resulted in the success of the organization as well as the people involved in it.

References

Asquith, P. and Weiss, L.A. (2016). Lessons in corporate finance: A case studies approach to financial tools, financial policies, and valuation. New Jersey: John Wiley & Sons.

Borgonovo, E. (2017). Sensitivity Analysis: An Introduction for the Management Scientist (Vol. 251). USA: Springer.

Conroy, M.J. and Peterson, J.T. (2013). Decision making in natural resource management: a structured, adaptive approach. USA: John Wiley & Sons.

Covaliu, Z. (2001). Decision Analysis: Concepts, Tools and Promise. A Fair Isaac White Paper. [Online]. Available from: https://www.edmblog.com/weblog/files/decision_analytics_white_paper.pdf  [Accessed 25 Feb. 2018].

Crowley, P.H. and Zentall, T.R. eds. (2013). Comparative Decision-making Analysis. USA: Oxford University Press.

Grünig, R. and Kühn, R. (2017). Solving Complex Decision Problems: A Heuristic Process. 4^th ed. USA: Springer.

Kasie, F.M. (2013). Combining Simple Multiple Attribute Rating Technique and Analytical Hierarchy Process for Designing Multi-Criteria Performance Measurement Framework. Global Journal of Researches in Engineering Industrial Engineering [Online]. 13(1). Available from: https://www.engineeringresearch.org/index.php/GJRE/article/download/747/680 [Accessed 25 February 18].

Kumar, A. and Sharma, R. (2000). Principles of business management. New Delhi: Atlantic Publishers & Dist.

Morato, E.A. (2013). Business Decision Making. eBookIt.com

Nicholas, M. (2017). The Little Black Book of Decision Making: Making Complex Decisions with Confidence in a Fast-moving World. USA: John Wiley & Sons.

Noyes, J., Cook, M. and Masakowski, Y. eds., (2012). Decision making in complex environments. USA: Ashgate Publishing, Ltd.

Nutt, P.C. and Wilson, D.C. eds. (2010). Handbook of decision making (Vol. 6). USA: John Wiley & Sons.

Olson, D.L. (2012). Decision Aids for Selection Problems. New York: Springer.

Parnell, G.S., Terry Bresnick, M.B.A., Tani, S.N. and Johnson, E.R. (2013). Handbook of decision analysis (Vol. 6). USA: John Wiley & Sons.

Velasquez, M and Hester, P.T. (2013) An Analysis of Multi-Criteria Decision Making Methods. International Journal of Operations Research [Online]. 10(2), pp.55-66. Available from: https://www.orstw.org.tw/ijor/vol10no2/ijor_vol10_no2_p56_p66.pdf [Accessed 25 February 18]

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