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WE PROVIDE GUIDANCE ON MBA PROJECT FOR ALL UNIVERSITIES

Course Code : MS 08

Course Title : Quantitative Analysis for Managerial

Applications

Assignment No. : 08/TMA/SEM-II/2010

1.The manager should seek some balance between quantitative and

qualitative factors in decision making’. Elaborate the statement giving the

situations in which various statistical tools are used.

Quantitative and Qualitative Factors in Decision Making

QUANTATIVE FACTORS

LET US TAKE

THE Investment Appraisal.

THE FACTORS CONSIDERED ARE

Payback period

NPV

ARR

Provide a numerical basis for decision making – reduces decisions to looking at a

monetary value for the next 3 years

The cost of a series of redundancies against the longer term financial benefits to the firm of this

process But: such data provides only part of the story Other factors need to be taken into account,

particularly the effects of decisions on stakeholder groups and their response to such decisions,

e.g. placed on different choices, e.g.

Forecasted sales figures

The takeover of Manchester United CLUB by Malcolm Glazer might make financial sense but

the reaction of the supporters might make the move unworkable.

QUALITATIVE FACTORS

Qualitative factors look to take account of these other issues that may influence the outcome

of a decision Can be wide ranging and especially need to consider the impact on human resources

and their response to decisions

CONDUCT THE SWOT ANALYSIS

A decisions (for example, investment in a new production plant) could be considered not only in

financial terms but also to apply other techniques of decision making to look at wider issues:

A SWOT analysis might be part of this:

-STRENGTHS

-WEAKNESSES

-OPPORTUNITIES

-THREATS

QUALITATIVE METHODS

PEST ANALYSIS

Might also need to factor in other external issues that might influence the decision making

process which can be summarized as:

-POLITICAL

-ECONOMIC

-SOCIAL

-TECHNOLOGOCAL

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Political could be in its widest sense, e.g. the internal politics of a firm as well as the national and

international political effect The decision to site a series of wind turbines in a coastal area might

be justified on financial grounds but:

What is the reaction of the local community?

Does government policy support such planning developments?

Are there social impacts – e.g. noise pollution, damage to eco-systems, etc?

Such factors may make the difference between success and failure

Human Resources Management

Impact on a firm’s human resources is essential to consider,

in particular the effects on:

Motivation

Morale

Recruitment and Retention

May be difficulty to assess and measure

May need to distinguish between short term effects and long term

Stakeholder Analysis

Wider impacts on stakeholder groups may also be necessary, such stakeholders include:

-EMPLOYEES

-SHAREHOLDERS

-MANAGERS

-ENVIRONMENT

-LOCAL COMMUNITY

-SUPPLIERS

-GOVERNMENT

-CONSUMERS

DECISION MAKING

Eventual decision may rest on the balance between the perceived effects of quantitative and

qualitative.

If the long term effect on the workforce for example was to reduce productivity or increase

absence because of the impact on motivation and morale, the fact that a decision makes financial

sense may be shelved!

Qualitative by its nature, therefore, is very subjective considerations in decision making, in

addition to the quantitative or financial factors highlighted by incremental analysis . They are the

factors relevant to a decision that are difficult to measure in terms of money. Qualitative factors

may include: (1) effect on employee morale, schedules and other internal elements; (2)

relationships with and commitments to suppliers; (3) effect on present and future customers; and

(4) long-term future effect on profitability. In some decision-making situations, qualitative

aspects are more important than immediate financial benefit from a decision.

====================================

HERE IS ANOTHER EXAMPLE OF THE QUANTITATIVE AND QUALITATIVE

FACTORS IN DECISION MAKING. SALES FORECAST FOR AN ORGANIZATION.

THE SALES MANAGER WOULD USE A COMBINATION OF THESE TOOLS TO ARRIVE

AT THE FINAL DECISION.

QUANTITATIVE METHODS

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METHOD 1

• The field perspective, or “field assessment,” is based on a rollup

of individual forecasts, providing management with a bottom-up view

of current market conditions

TERRITORY 1 FORECASTS $5mill.

TERRITORY 2 FORECASTS $6mill.

TERRITORY 3 FORECASTS $9mill.

TERRITORY 4 FORECASTS $6mill.

TERRITORY 5 FORECASTS $8mill.

TERRITORY 6 FORECASTS $7mill.

TERRITORY 7 FORECASTS $4mill.

TERRITORY 8 FORECASTS $4mill.

TERRITORY 9 FORECASTS $3mill.

TERRITORY 10 FORECASTS $3mill.

================================

NATIONAL TOTAL SALES FORECAST =$55 mill.

=================================

METHOD 2

• The pipeline perspective, or “pipeline assessment,” is generated by analyzing

opportunities at each stage of the pipeline, enabling management to

assess sales targets from an aggregate, top-down viewpoint.

1.MARKET POTENTAIL FORECAST $400 mill.

MARKET SHARE FORECAST 15% = $60 mill.

2.FIELDSALES FORECAST = $55 mill.

3. MARKETING CHANNEL FORECAST =$ 58 mill.

4. CUSTOMERS' END USE EXPECTATIONS FORECAST =$57 mill.

THE AVERAGE OF THIS WORKING = $57.5 mill.

============================================

METHOD 3

• The historical perspective, or “analytic assessment,” is based on a comparison

of current pipeline data with historical trends, allowing the company to apply

knowledge gained from prior periods to the current forecast.

YEAR 2004 $45mill. YEAR 2005 $48mill. YEAR 2006 $51mill. YEAR 2007 $54mill.

-----------------------------------------------------------

YEAR 2008 $57mill.

FORECAST

======================================

METHOD 4

Triangulated Forecasting provides a set of checks and balances that enables

management to quickly identify potential problems.

Additionally, the analytic assessment highlights that, at this point in the quarter,

the company’s forecasts are typically 20 percent above final attainment. Taking

all three perspectives into account, management can quickly recognize that

the company is unlikely to meet its original forecast unless corrective action

is taken immediately.

===========================================

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METHOD 5

Simple moving average

A simple moving average (SMA) is the unweighted MEAN of the previous N data points.

For example, a 5 -YEAR simple moving average of closing SALES is the mean of the

previous 5 YEARS ' closing SALES .

If those SALES are YEAR1= 150, YEAR2 = 170, YEAR3=190, YEAR4= 200, YEAR5=210

,then the formula is

150+170+190+200+210=800/5 = FORECAST = 220

==============================================================

QUALITITATIVE METHODS

METHOD 1

The Delphi method

-is a systematic interactive forecasting method for obtaining forecasts from a panel of

independent experts. The carefully selected experts answer questionnaires in two or more

rounds. After each round, a facilitator provides an anonymous summary of the experts’ forecasts

from the previous round as well as the reasons they provided for their judgments. Thus,

participants are encouraged to revise their earlier answers in light of the replies of other members

of the group. It is believed that during this process the range of the answers will decrease and the

group will converge towards the "correct" answer. Finally, the process is stopped after a pre-

defined stop criterion (e.g. number of rounds, achievement of consensus, stability of results) and

the mean or median scores of the final rounds determine the results.

Delphi is based on well-researched principles and provides forecasts that are more accurate

than those from unstructured groups. The technique can be adapted for use in face-to-face

meetings, and is then called mini-Delphi or Estimate-Talk-Estimate (ETE). Delphi has been

widely used for business forecasting and has certain advantages over another structured

forecasting approach: prediction markets.

===========================================================

METHOD 2

Scenario analysis

-is a process of analyzing possible future events by considering alternative possible outcomes

(scenarios). The analysis is designed to allow improved decision-making by allowing more

complete consideration of outcomes and their implications.

For example, in economics and finance, a financial institution might attempt to forecast several

possible scenarios for the economy (e.g. rapid growth, moderate growth, slow growth) and it

might also attempt to forecast financial market returns (for bonds, stocks and cash) in each of

those scenarios. It might consider sub-sets of each of the possibilities. It might further seek to

determine correlations and assign probabilities to the scenarios (and sub-sets if any). Then it will

be in a position to consider how to distribute assets between asset types (i.e. asset allocation);

the institution can also calculate the scenario-weighted expected return (which figure will indicate

the overall attractiveness of the financial environment).

Depending on the complexity of the financial environment, in economics and finance scenario

analysis can be a demanding exercise. It can be difficult to foresee what the future holds (e.g. the

actual future outcome may be entirely unexpected), i.e. to foresee what the scenarios are, and to

assign probabilities to them; and this is true of the general forecasts never mind the implied

financial market returns. The outcomes can be modelled mathematically/statistically e.g. taking

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account of possible variability within single scenarios as well as possible relationships between

scenarios.

============================================================

METHOD 3

Rational and explicit methods

The whole purpose of the recitation of alternatives, is to show that there really is no alternative to

forecasting. If a decisionmaker has several alternatives open to him, he will choose among them

on the basis of which provides him with the most desirable outcome. Thus his decision is

inevitably based on a forecast. His only choice is whether the forecast is obtained by rational and

explicit methods, or by intuitive means.

The virtues of the use of rational methods are as follows:

They can be taught and learned,

They can be described and explained,

They provide a procedure followable by anyone who has absorbed the necessary training, and in

some cases,

These methods are even guaranteed to produce the same forecast regardless of who uses them.

The virtue of the use of EXPLICIT methods is that they can be reviewed by others, and can be

checked for consistency. Furthermore, the forecast can be reviewed at any subsequent time.

===================================================================

METHOD 4

Genius forecasting

- This method is based on a combination of intuition, insight, and luck. Psychics and crystal ball

readers are the most extreme case of genius forecasting. Their forecasts are based exclusively

on intuition. Science fiction writers have sometimes described new technologies with uncanny

accuracy.

There are many examples where men and women have been remarkable successful at predicting

the future. There are also many examples of wrong forecasts. The weakness in genius

forecasting is that its impossible to recognize a good forecast until the forecast has come to pass.

Some psychic individuals are capable of producing consistently accurate forecasts. Mainstream

science generally ignores this fact because the implications are simply to difficult to accept. Our

current understanding of reality is not adequate to explain this phenomena.

=================================================

METHOD 5

Cross-impact matrix method

- Relationships often exist between events and developments that are not revealed by univariate

forecasting techniques. The cross-impact matrix method recognizes that the occurrence of an

event can, in turn, effect the likelihoods of other events. Probabilities are assigned to reflect the

likelihood of an event in the presence and absence of other events. The resultant inter-

correlational structure can be used to examine the relationships of the components to each other,

and within the overall system. The advantage of this technique is that it forces forecasters and

policy-makers to look at the relationships between system components, rather than viewing any

variable as working independently of the others.

===========================================

Considerations in the choice of forecasting methods?

The selection of the forecast method should be based on several criteria taking into

account the applicability of the forecast methodcomplexity, i.e., forecast accuracy level, period of

time, the scope of initial data, forecast costs, and the level of result

appropriateness and applicability.

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Type of information (quantitative and qualitative forecast methods).

• Forecast time span (short-term, mid-term and longterm forecast development methods).

• Forecast object (micro and macro economic indicator forecast methods).

• Forecast goal (genetic and normative forecast methods).

CRITERIA FOR THE DECISION MAKING.

Accuracy

Ease of interpretation

Ease of use

Ease of using data

Credibility

Speed

Cost savings

Ease of implementation

Time horizon

Adaptive to condition

==========================================

2. Among the examinees in an examination 30%, 35% and 45% failed in Statistics, in Mathematics,

and in at least one of the subjects respectively. An examinee is selected at random. Find the

probabilities that

a. He failed in Mathematics only

b. He passed in Statistics, if it is known that he has failed in Mathematics

Solution:

Given: P (failed in statistics) = P(S.F) = 30% = 30/100 = 0.3

= 45/100 = 0.45

= 0.20

= 0.35-0.20 = 0.15

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= 0.35 * 0.70 = 0.245

3.From a set of 1000 observations known to be normally distributed, the mean is 534 cm and SD is

13.5 cm. How many observations are likely to exceed 561 cm? How many will be between 520.5 cm

and 547.5 cm? Between what limits will the middle 50% of the observations lie?

Solution:

= 0.0256

= 26cms (approx)

(ii) P (520.5<X<547.5)

= -13.5/13.5 = -1

= 13.5/ 13.5 = 1

Number of observations between 520.5 and 547.5 = 1000* 0.6826 = 682.6 = 683cms

(approx)

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Confidence interval

µ = Mean 0.67*σ

= 5 3 4 0.67∗ 13.5

= 5 2 4.955, 543.045

4. Write a note on “standard error. Distinguish between Standard error and Sampling

error

STANDARD ERROR

For a value that is sampled with an unbiased normally distributed error, the above depicts the

proportion of samples that would fall between 0, 1, 2, and 3 standard errors above and below the

actual value.

The standard error of a method of measurement or estimation is the standard deviation of the

sampling distribution associated with the estimation method.[1] The term may also be used to refer

to an estimate of that standard deviation, derived from a particular sample used to compute the

estimate.

For example, the sample mean is the usual estimator of a population mean. However, different

samples drawn from that same population would in general have different values of the sample

mean. The standard error of the mean (i.e., of using the sample mean as a method of estimating

the population mean) is the standard deviation of those sample means over all possible samples

(of a given size) drawn from the population. Secondly, the standard error of the mean can refer to

an estimate of that standard deviation, computed from the sample of data being analysed at the

time.

A mnemonic for remembering the term standard error is that, as long as the estimator is

unbiased, the standard deviation of the error (the difference between the estimate and the true

value) is the same as the standard deviation of the estimates themselves; this is true since the

standard deviation of the difference between the random variable and its expected value is equal

to the standard deviation of a random variable itself.

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In many practical applications, the true value of the standard deviation is usually unknown. As a

result, the term standard error is often used to refer to an estimate of this unknown quantity. In

such cases it is important to be clear about what has been done and to attempt to take proper

account of the fact that the standard error is only an estimate. Unfortunately, this is not often

possible and it may then be better to use an approach that avoids using a standard error, for

example by using maximum likelihood or a more formal approach to deriving confidence

intervals. One well-known case where a proper allowance can be made arises where the Student's

t-distribution is used to provide a confidence interval for an estimated mean or difference of

means. In other cases, the standard error may usefully be used to provide an indication of the size

of the uncertainty, but its formal or semi-formal use to provide confidence intervals or tests

should be avoided unless the sample size is at least moderately large. Here "large enough" would

depend on the particular quantities being analysed.

SAMPLING ERROR

In statistics, sampling error or estimation error is the error caused by observing a sample

instead of the whole population. The sampling error can be found by subtracting the value of a

parameter from the value of a statistic. In nursing research, a sampling error is the difference

between a sample statistic used to estimate a population parameter and the actual but unknown

value of the parameter . An estimate of a quantity of interest, such as an average or percentage,

will generally be subject to sample-to-sample variation. These variations in the possible sample

values of a statistic can theoretically be expressed as sampling errors, although in practice the

exact sampling error is typically unknown. Sampling error also refers more broadly to this

phenomenon of random sampling variation.

The likely size of the sampling error can generally be controlled by taking a large enough random

sample from the population,although the cost of doing this may be prohibitive; see sample size

and statistical power for more detail. If the observations are collected from a random sample,

statistical theory provides probabilistic estimates of the likely size of the sampling error for a

particular statistic or estimator. These are often expressed in terms of its standard error.

Sampling bias is a possible source of sampling errors. It leads to sampling errors which either

have a prevalence to be positive or negative. Such errors can be considered to be systematic

errors.

Sampling error can be contrasted with non-sampling error. Non-sampling error is a catch-all term

for the deviations from the true value that are not a function of the sample chosen, including

various systematic errors and any random errors that are not due to sampling. Non-sampling

errors are much harder to quantify than sampling error.

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5.Compute the two regression equations on the basis of the following data:

X Y

Mean 40 45

Standard Deviation 10 9

0.50. Also estimate the value of Y for X=48?

Solution:

_ _

X = 40 ; Y = 45 ; σ = 10 ; σ = 9; r = 0.50

X Y

Regression equation of X on Y

_ _

X–X=r σ (Y – Y)

X

----

σ

Y

X-40= 0.56(Y-45)

X-40=0.56Y-25.2

X=0.56Y+ 14.8

Regression equation of Y on X

_ _

Y–Y=r σ (X-X)

Y

−−−

σ

X

Y-45 = 0.45X – 18

Y = 0.45X + 23

When X = 48 , Y = 0.45(48) + 23

= 44.6

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