Predicting the Consequences

Introduction

Predicting the consequences is the fourth step in the six$-$step decision$-$making process. Business managers try to predict the consequences of each option in order to identify the best course of action, often using models. As you read this section, think about how businesses and organizations use models in decision making. In the Discussion Board, share one example of how a business has used a model to determine outcomes of a particular problem.

Step $4$: Predict the Consequences

After the most feasible options are determined, it is necessary to map out the consequences of each course of action, including the likelihood of each consequence if the outcome is uncertain. It is also necessary to determine if the uncertainties can be reduced and how the outcome will be impacted if conditions change.

Depending on the particular scenario, the act of predicting outcomes can be a simple math equation, such as subtracting costs from revenues, or extremely complicated, where the decision$-$maker utilizes models. Models are basic representations of a process or a relationship that enable the user to understand previous outcomes as well as forecast future results from a certain course of action. Models are straightforward in that they deliberately focus on only a few key features while ignoring less important information that only serves to complicate the scenario.

The types of managerial economic decisions that are encountered are as diverse as the types of predictive models that are used to address them; however, the most common is based on economic relationships. The most fundamental economic relationship is the demand curve, which illustrates how demand for a product varies in relation to changes in its price.

Other models are based on different relationships, for example:

Statistical: Major construction projects rely heavily on engineering predictions.

Legal: When a corporation is determining how aggressively to pursue collections, interpretation of legal statutes and precedents as well as analysis of future legal costs may dictate the company$$s policy.

Scientific: Corporate research and development teams use the scientific method to assess how a product is being developed and the positive or negative reaction it elicits during the product testing phase. Another example can be seen in the growing demand for Greek yogurt, whose makers regularly utilize scientific models to evaluate the market success of their product.

Models can also be based on the likelihood of outcomes, such as a deterministic model, where the outcome is fairly certain, versus a probabilistic model, where the probability of a series of outcomes is predicted. For example, using a deterministic model, a tricycle manufacturer can predict the number of three$-$year$-$olds living in the country in two years. This is because birth and mortality rates are readily available and generally reliable. On the other hand, the same company would have to use a probabilistic model to determine what percentage of the market share they would control because of the many variables in tricycle ridership. There is no guarantee regarding the number of children who will want to ride a tricycle and, since all children develop at different rates, no guarantee of the number of three$-$year$-$olds who will actually be able to ride one. And, while tricycles have been a staple item for small children for decades, trends in toys are constantly shifting, which may lead to a change in demand.

Of the five models presented in the Learning Activity titled $$Predicting the Consequences,$$ select three and apply them to your industry, profession, or a personal organization with which you are affiliated. Explain the advantages and disadvantages of using each of these models. Lastly, if you were an administrator within an organization, explain what type of model you would find most appropriate to apply and why.