quantitative multiple scenario tools - Blog - Global Risk Community2024-03-28T12:38:05Zhttps://globalriskcommunity.com/profiles/blogs/feed/tag/quantitative+multiple+scenario+toolsStrategic Decision Making: 5 Decision Support Toolshttps://globalriskcommunity.com/profiles/blogs/strategic-decision-making-5-decision-support-tools2021-07-15T17:37:45.000Z2021-07-15T17:37:45.000ZMark Bridgeshttps://globalriskcommunity.com/members/MarkBridges<div><div class="entry"><p><span style="font-size:12pt;"><a href="{{#staticFileLink}}9253825882,original{{/staticFileLink}}"><img class="align-right" src="{{#staticFileLink}}9253825882,RESIZE_400x{{/staticFileLink}}" alt="9253825882?profile=RESIZE_400x" width="336" height="224" /></a>Do people always follow a rational linear process to come to a decision? Studies have suggested that a combination of Decision Making Models are used by people to reach quality decisions.</span></p><p><span style="font-size:12pt;">Strategic Decision Making is a complex process with a lot riding on those decisions. Eliminating risk from <a href="https://flevy.com/business-toolkit/decision-making">Decision Making</a> is unthinkable but radically enhancing chances of success is a realistic goal.</span></p><p><span style="font-size:12pt;">In making Strategic Decisions, executives tend to rely only on those Decision Support Tools they know best. The usage of non-optimal Decision Support Tools is, in part, due to lack of knowledge about which tools work best in a particular scenario and, in part, due to lack of information regarding what tools are available out there.</span></p><p><span style="font-size:12pt;">Having access to a variety of Decision Support Tools increases the likelihood of making a successful decision provided the decision maker has knowledge of which tool to employ or a combination thereof in various scenarios.</span></p><p><span style="font-size:12pt;">The following 5 Decision Support Tools or their combination is applicable in a variety of Decision Making scenarios:</span></p><ol><li><span style="font-size:12pt;"><strong>Conventional Capital-Budgeting Tools</strong></span></li><li><span style="font-size:12pt;"><strong>Quantitative Multiple Scenario Tools</strong></span></li><li><span style="font-size:12pt;"><strong>Qualitative Scenario Analysis</strong></span></li><li><span style="font-size:12pt;"><strong>Case-based Decision Analysis</strong></span></li><li><span style="font-size:12pt;"><strong>Information Aggregation Tools</strong></span></li></ol><p><span style="font-size:12pt;"><a href="https://flevy.com/browse/flevypro/decision-support-tools-5653"><img class="aligncenter size-full wp-image-9392" src="https://flevy.com/blog/wp-content/uploads/2021/07/Slide-Deck-Image-Decision-Support-Tools.png" alt="" width="709" height="532" /></a></span></p><p><span style="font-size:12pt;">In some cases, just one tool is needed while in others an assortment of tools makes for the best combination.</span></p><p><span style="font-size:12pt;">Let us delve a little deeper into some of these tools.</span></p><h3><span style="font-size:12pt;"><strong>Conventional Capital Budgeting Tools</strong></span></h3><p><span style="font-size:12pt;">Projected Incremental Cash Flows are used from likely investments to ascertain whether a project merits being funded through the firm’s Capitalization Structure. Included in it are Discounted Cash Flow, Expected Rate of Return, and Net Present Value models.<strong> </strong></span></p><h3><span style="font-size:12pt;"><strong>Quantitative Multiple Scenario Tools</strong></span></h3><p><span style="font-size:12pt;">Decisions are analyzed by completely specifying possible outcomes and their probabilities. Mathematical, Statistical, and Simulation methods are employed to distinguish the Risk and Return properties of prospective choices. The tools include:</span></p><p><span style="font-size:12pt;"> > Monte Carlo Methods</span></p><p><span style="font-size:12pt;"> > Decision Analysis</span></p><p><span style="font-size:12pt;"> > Real Options</span></p><h3><span style="font-size:12pt;"><strong>Qualitative Scenario Analysis</strong></span></h3><p><span style="font-size:12pt;">These techniques are beneficial to decision makers who encounter excessive levels of uncertainty about outcomes because the techniques do not assume a conclusive and entirely specified set of possible outcomes.</span></p><p><span style="font-size:12pt;">Real-life business Decision Making often comprises of judgments that are based on incomplete and uncertain information. This can be mitigated by using appropriate Decision Support Tools. However, which tools are appropriate will depend on the answer to the following critical questions:</span></p><ol><li><span style="font-size:12pt;">Do I know what it will take to succeed?</span></li><li><span style="font-size:12pt;">Can I predict the range of possible outcomes?</span></li></ol><p><span style="font-size:12pt;">The Causal Model question—combination of Critical Success Factors (CSFs) and economic conditions leading to success—needs settling before we can proceed to answer the 2<sup>nd</sup> question regarding Outcome Prediction.</span></p><p><span style="font-size:12pt;">Managers need to ask the following in order to clarify the state of the Causal Model hence the answer to the question:</span></p><ol><li><span style="font-size:12pt;">Do I comprehend what combination of Critical Success Factors will decide if my decision leads to a successful outcome?</span></li><li><span style="font-size:12pt;">Do I recognize what metrics need to be met to guarantee success?</span></li><li><span style="font-size:12pt;">Do I have an accurate understanding of how to attain success?</span></li></ol><p><span style="font-size:12pt;">The other question to answer is: Can I predict the range of possible outcomes?</span></p><p><span style="font-size:12pt;">Managers should ask the following in scenarios predicting various outcomes and probabilities:</span></p><ol><li><span style="font-size:12pt;">Can I outline the range of outcomes that may result as a consequence of my decision, both as a whole and for each Critical Success Factor?</span></li><li><span style="font-size:12pt;">Can I measure the probability of each outcome?</span></li></ol><p><span style="font-size:12pt;">Even where the CSFs and Model for Success are understood, it sometimes becomes difficult to predict range of outcomes and their probabilities due to uncertain conditions.</span></p><p><span style="font-size:12pt;">Interested in learning more about Decision Support Tools? 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