Risk Reduction Techniques in Management Decision Making

2051 WordsDec 10, 20109 Pages
Risk Reduction Techniques in Management Decision Making 11/3/2009 ------------------------------------------------- 1. Sensitivity Analysis This is a technique that shows how different variables affect the value of a particular variable. For example, it shows the affect on profit following a change in sales price and/or volume. Pros: Sensitivity analysis shows the sensitivity of economic payoffs to uncertain values such as discount rates. Management can see the profitability of a project if input values change [ (Marshall, 1995) ]. It is easy to use and understand. Therefore it is most useful when more advanced and time consuming techniques are not possible. Management can see which factors are the most influential in…show more content…
Therefore the decisions for management should be easier to make. Knowing the exact cost structure would allow the firm to use CVP analysis reliably. Cons: Perfect information means all uncertainty is removed. This is rarely achievable and therefore this concept is more theoretical than practical. Information is also costly to attain. ------------------------------------------------- 6. Simulation Simulation is a technique for studying a system that involves setting up a model of the real system and then performing experiments on the model rather than on the system. It is used in problems like inventory control and production planning. Pros: The simulation model can be used to test different alternatives that would be too expensive or impractical to perform on the real system. Simulation is useful where other analytical techniques are not applicable. Simulation is cheaper and less risky than altering the real system [ (Lucey, 2002) ]. Cons: The models are complex and therefore they can take up significant amounts of managerial and technical time. Computer expertise is also required and this may not be available [ (Lucey, 2002) ]. Simulations do not always result in the optimal outcome. The manager makes the decision based on the tested alternatives. The optimal decision may not have been tested. Simulations are not relevant to all management decisions.
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