Technique # 1. Marginal Analysis
This technique is used in decision-making to figure out how much extra output will result if one more variable (e.g. raw material, machine, and worker) is added.
In his book, 'Economics', Paul Samuelson defines marginal analysis as the extra output that will result by adding one extra unit of any input variable, other factors being held constant.
Marginal analysis is particularly useful for evaluating alternatives in the decision-making process.
Technique # 2. Financial Analysis
This decision-making tool is used to estimate the profitability of an investment, to calculate the payback period (the period taken for the cash benefits to account for the original cost of an investment), and to analyze cash inflows and cash outflows.
Investment alternatives can be evaluated by discounting the cash inflows and cash outflows (discounting is the process of determining the present value of a future amount, assuming that the decision-maker has an opportunity to earn a certain return on his money).
Technique # 3. Break-Even Analysis
Break-even analysis is a measure by which the level of sales necessary to cover all fixed costs can be determined.
Using this technique, the decision-maker can determine the break-even point for the company as a whole, or for any of its products.
Technique # 4. Ratio Analysis
The basic financial ratios compare costs and revenue for a particular period.
The purpose of conducting a ratio analysis is to interpret financial statements to determine the strengths and weaknesses of a firm, as well as its historical performance and current financial condition.
Technique # 5. Operations Research
Techniques One of the most significant sets of tools available for decision-makers is operations research.
An operation research (OR) involves the practical application of quantitative methods in the process of decision-making.
Technique # 6. Linear Programming
Linear programming is a quantitative technique used in decision-making.
The word 'linear' implies that the relationship among different variables is proportionate.
In order to apply this technique, the situation must involve two or more activities competing for limited resources and all relationships in the situation must be linear.
Technique # 7. Waiting-line Method
This is an operations research method that uses a mathematical technique for balancing services provided and waiting lines.
Waiting lines (or queuing) occur whenever the demand for the service exceeds the service facilities.
When the queue is long and the customers have to wait for a long duration, they may get frustrated.
This may cost the firm its customers.
The queuing technique helps to optimize customer service on the basis of quantitative criteria.
Technique # 8. Game Theory
This is a systematic and sophisticated technique that enables competitors to select rational strategies for attainment of goals.
This decision-making technique involves selecting the best strategy, taking into consideration one's own actions and those of one's competitors.
The primary aim of game theory is to develop rational criteria for selecting a strategy.
It is based on the assumption that every player (a competitor) in the game (decision situation) is perfectly rational and seeks to win the game.
Minimizing the maximum loss (minimax) and maximizing the minimum gain (maximin) are the two concepts used in game theory.
Technique # 9. Simulation
This technique involves building a model that represents a real or an existing system.
Simulation is useful for solving complex problems that cannot be readily solved by other techniques.
In recent years, computers have been used extensively for simulation.
The different variables and their interrelationships are put into the model.
When the model is programmed through the computer, a set of outputs is obtained.
Technique # 10. Decision Tree
This is an interesting technique used for analysis of a decision.
A decision tree is a sophisticated mathematical tool that enables a decision-maker to consider various alternative courses of action and select the best alternative.
A decision tree is a graphical representation of alternative courses of action and the possible outcomes and risks associated with each action.
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