Decision Making: Models, Techniques & Real-World Applications

Key Concepts in Decision Making

1. Definition and Importance

Decision-making is the cognitive process of selecting the best course of action from available alternatives to achieve organizational goals. It is a core managerial function that impacts efficiency, profitability, and competitiveness.

Why is it important?

• Guides resource allocation (e.g., Nabil Bank’s loan approvals).
• Reduces uncertainty (e.g., Daraz’s inventory management).
• Ensures alignment with organizational objectives (e.g., NTC’s network expansion).

2. Types of Decisions

Decisions can be classified based on frequency, structure, and level of management:

mindmap
  root((Types of Decisions))
    Strategic
      Long-term
      High risk
      Example: NEPSE’s market entry strategy
    Tactical
      Medium-term
      Moderate risk
      Example: Daraz’s promotional discounts
    Operational
      Short-term
      Low risk
      Example: Pathao’s daily driver routing
    Programmed
      Routine
      Structured
      Example: Ncell’s monthly billing
    Non-Programmed
      Unique
      Unstructured
      Example: Kathmandu’s traffic congestion solutions

Worked Example: Nabil Bank’s Loan Approval Process

• Strategic Decision: Whether to expand microfinance in rural Nepal.
• Tactical Decision: Setting interest rates for SME loans.
• Operational Decision: Approving a ₹50,000 loan for a small business.

3. Decision-Making Models

Two dominant models explain how decisions are made:

Worked Example: Daraz’s Inventory Decision

• Rational Approach: Maximize profit by ordering based on exact demand forecasts (theoretical).
• Bounded Rationality: Order 80% of forecasted demand to avoid overstock (practical).

4. Decision-Making Techniques

A. SWOT Analysis

A structured method to evaluate Strengths, Weaknesses, Opportunities, and Threats.

flowchart TD
  A["SWOT Analysis"] --> B["Strengths"]
  A --> C["Weaknesses"]
  A --> D["Opportunities"]
  A --> E["Threats"]
  B --> F["Internal: Nabil Bank’s strong CSR"]
  C --> G["Internal: High employee turnover"]
  D --> H["External: Rising digital banking trends"]
  E --> I["External: Competition from NMB Bank"]

Worked Example: NEPSE’s Decision to List New Stocks

• Strengths: Strong investor base in Nepal.
• Weaknesses: Limited liquidity for small caps.
• Opportunities: Government push for privatization.
• Threats: Global market volatility.

B. Cost-Benefit Analysis (CBA)

Compares monetary and non-monetary costs vs. benefits of a decision.

Formula: $$\text{Net Present Value (NPV)}=\sum \frac{{\text{Benefits}}_t-{\text{Costs}}_t}{(1+r{)}^t}$$ Where:

• $r$ = discount rate (e.g., 10% for Nabil Bank).
• $t$ = time period.

Worked Example: NTC’s Decision to Upgrade 4G Network

Decision: Proceed if NPV > 0 (here, ₹20.18M gain).

C. Decision Trees

Visualizes probabilistic outcomes of decisions.

flowchart TD
  A["Expand to Pokhara?"] --> B["Yes: 60% chance"]
  B --> C["Profit: ₹5M"]
  B --> D["Loss: ₹2M (40%)"]
  A --> E["No: 100% chance"]
  E --> F["Profit: ₹1M"]

Worked Example: Khalti’s Decision to Launch UPI

• Option 1: Expand UPI (60% success → ₹10M profit; 40% failure → ₹3M loss).
• Option 2: Stick to existing (₹5M profit).
• Expected Value (EV): $$EV(\text{UPI})=0.6\times 10M+0.4\times (-3M)=₹3.8M$$ $$EV(\text{Current})=₹5M$$ Decision: Stick to current (higher EV).

5. Factors Affecting Decision Making

6. Common Decision-Making Biases

In the Real World

1. Nabil Bank’s Loan Approval

   • Uses cost-benefit analysis to decide loan eligibility.
   • SWOT analysis to assess market expansion risks.
   • Decision trees for branch location decisions.

2. Daraz’s Inventory Management

   • Applies bounded rationality (orders 80% of forecasted demand).
   • Uses NPV calculations for warehouse investments.

3. Pathao’s Driver Routing

   • Intuitive model for real-time traffic adjustments.
   • Group decision-making (algorithm + driver feedback).

Exam Tip

1. Define clearly: Always start with a precise definition (e.g., "Decision-making is the process of choosing between alternatives...").
2. Use real examples: Link theories to Nepali companies (Nabil Bank, NTC, Daraz).
3. Show calculations: For CBA/NPV, present tables with clear steps.
4. Compare models: Highlight differences between rational vs. bounded rationality.
5. SWOT + Decision Trees: These are high-scoring techniques—practice drawing them.
6. Biases matter: Mention at least one bias (e.g., anchoring) in your answer.

Visual Summary:

mindmap
  root((Decision Making in Nepal))
    Models
      Rational
      Bounded Rationality
      Intuitive
    Techniques
      SWOT
      Cost-Benefit Analysis
      Decision Trees
    Real-World
      Nabil Bank: Loan Decisions
      Daraz: Inventory
      NTC: Network Upgrades
    Biases
      Anchoring
      Confirmation
      Overconfidence