BD, RM AND CBA

1. KTU- 2015-2019
B.Tech
HSE02
Business Economics
Prepared By
Mohammed Jasir PV
Asst. Professor
Ilahia College of Eng and Tech.

2. Decision
• A choice made 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
Mainly Three types of environment in which decisions are made.
1. Certainty
2. Uncertainty
3. Risk

4. Certainty
Theoretical condition in which 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 lack of 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 to the 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
Know the 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 making decisions 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 manager does 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
Decision making under Uncertainty

14. The most important modern 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 analysis involves 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
It considered 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 decision tree 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 of a “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 involved in 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 or Utility 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 Benefit Analysis 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 is the 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 has been 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 effect on 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 Benefit Analysis.???
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 in CBA
1
• Determine the value of benefits
2
• Determine the costs
3
• To allow a comparison of costs and
benefits

31. 1. Determine the value 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
Accuracy problem
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 or productive 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 management is 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 includes planning, 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