Chapter 8 : Forecasting and Decision-making

Introduction to Forecasting and Decision-making

Planning involves forecasting and decision-making. Forecasting is concerned with estimating the future events (or making assumptions). It is inevitable while planning. Decision-making is a choice of from many alternatives. an appropriate alternative

Business groups and their managers are known by their decision-making skills.
2

Definition of Forecasting

Forecasting is a process of predicting (estimating or projecting) the future happening of events relevant to business operations by analysing the present and the past data.

Forecasting Process
Steps:
1. 2.
3.

Recognising the Need for Forecasting Systematic Investigation and Collection of Information Forecasting the Events

4.

Reviewing and Regulating Forecasting

Difference between Forecasting Process

No. 1. 2. 3. 4. 5. 6. 7. 8. Planning Forecasting Planning is an act of taking advance decisions Forecasting is an act of getting the future about objective, task, person, etc. estimates on the basis of analysis data. Planning involves forecasting and decisionmaking. It is wider term. A large number of people are influenced by planning. It involves making advance decisions on several areas. It is outcome of forecasting. Forecasting is an input to planning. It is the task of top level management. It involves only companys top executives. It contains commitment of action. It is just a part of planning. It is relatively a narrow term. It is a planning tool. It has a limited direct influence. It involves only estimating the future occurrence of events. It is a base for planning; planning is prepared as per the future estimates. It is the task of middle level management. It may involve outside experts. It doesnt contain any commitment.
5

Importance of Forecasting
1. 2. 3. 4. 5. Promoting the Organisation Base for Planning Tool for Coordination and Control Reduced Risk Improved Performance

Forecasting is useful, but it also suffers from certain limitations

Decision-making

Planning involves forecasting and decision-making. A planner has to decide on various aspects, like what to do, how to do, when to do, and so forth. Planning involves a number of decisions, whereas decisionmaking is related to individual decision.
Definition: Decision-making is an act of selecting the suitable solution to the problem from various available alternative solutions to guide actions toward achievement of desired objectives.

Steps in Decision-making Process

1. Objective Specification 2. Problem Identification 3. Search for Alternatives 4. Evaluation of Alternatives 5. Choice of Alternative(s)

6. Action or Implementation of Decision

7. Measurement of Results and Review of Decisions
8

Steps in Decision-making Process

1. Objective Specification 2. Problem Identification 3. Search for Alternatives 4. Evaluation of Alternatives 5. Choice of Alternative(s)

6. Action or Implementation of Decision

7. Measurement of Results and Review of Decisions
9

Types of Decisions
On the basis of criteria like, strategic consideration, time, scope, repetition, complexity, and decision-maker, different types of decisions can be made.
Strategic and Operational Decisions

Minor and Major Decisions

Programmed and non-programmed Decisions

Types of Decisions
Simple and Complex Decisions

Long-term and Short-term Decisions

Individual and Group Decisions

10

Types of Decision-making Techniques

The techniques can be classified techniques

qualitative or quantitative

Quantitative Techniques: A set of quantitative techniques/tools used for decision-making in different areas is popularly known as Operations Research (OR). Mathematicians, statisticians, managers, management experts, etc., have contributed to their development.

Qualitative Techniques: Qualitative methods for decisionmaking are used when quantitative information is not available. Most qualitative techniques are group-based techniques.
11

Decision-making Conditions
Decisions taken today are implemented in the future. Obviously, the future (estimated) conditions are reflected in todays decisions. The future exhibits different degree of certainty, uncertainty and risk. There are three decision-making conditions.
1. 2. 3. Conditions of Perfect Certainty Conditions of Complete Uncertainty Conditions of Risk (different degree of certainty/uncertainty

12

Decision-making Approaches
The decision-making mechanism is affected by many factors, such as personality of decision-maker, his initiative skills, the present situation, human qualities, etc. Accordingly, decisionmakers follow different approaches while making decisions.
1. 2. 3. 4.

The Rational Decision-making Approach The Emotional Decision-making Approach The Political Decision-making Approach The Satisfying Decision-making Approach
13

Rationality in Decisionmaking

Rational means purely logical, free from emotions, personal values, perception, and attitudes. When any decision is based on impersonal needs, the decision may be said to be rational. There are certain conditions to justify whether the decision is rational.

But, practically, due to certain factors, decision-making tends to have a limited scope to realise rationality. Most decisions seem to both rationality and irrationality bound.
14