AQA A-Level Business (7132)

## Learning Outcomes

- Understand what management decision-making means and why it is central to business performance
- Explain the difference between decision making based on data and decision making based on intuition
- Calculate and interpret **expected value** and **net gain** in decision trees
- Analyse the role of risk, reward, uncertainty and opportunity cost in business choices
- Identify the main influences on managerial decisions, including mission, objectives, ethics, external factors and resource constraints
- Evaluate when quantitative methods are useful and when managers should be cautious about relying on them

## AQA A-Level Business (7132) Syllabus

For the AQA A-Level Business (7132), you are expected to understand management decision-making, with a focus on the following syllabus points:

- Know that managers make decisions using both **scientific decision making** based on data and **intuition**
- Understand the meaning and value of **decision trees**
- Calculate **expected value (EV)** using probabilities and outcomes
- Calculate **net gain** by deducting the costs linked to each option
- Explain how **risk**, **reward**, **uncertainty** and **opportunity cost** affect decisions
- Identify the main influences on decision making, including **mission**, **objectives**, **ethics**, **the external environment including competition**, and **resource constraints**
- Assess the usefulness and limits of decision trees in real business contexts

## Test Your Knowledge

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, look more closely at that area during your revision._

1. What is the difference between decision making based on data and decision making based on intuition?
2. How do you calculate expected value in a decision tree?
3. Why is net gain not always the same as expected value?
4. What is meant by opportunity cost in business decision making?
5. Name three influences on management decision making.

## Introduction

Management decision-making is about choosing between options in order to achieve business objectives. Managers do this constantly: deciding how to use staff, whether to change prices, whether to expand, whether to launch a product, or whether to respond to competition in a new way.

In AQA Business, this topic matters because it combines **AO1 knowledge**, **AO2 application** and **AO3/AO4 analysis and evaluation**. You need to do more than define terms or complete calculations. You must explain what a result means for a business, how reliable the evidence is, and whether the final decision fits the firm’s aims and situation.

> **Key Term: management decision-making**
> The process of selecting from available options in order to use business resources effectively and achieve objectives.

### Decision making based on data and on intuition

Managers can make decisions in two broad ways. One approach is to gather evidence, analyse it and choose the most rational option. The other is to use judgement, experience and instinct.

Decision making based on data is often called **scientific decision making**. This uses numbers, research and models. A manager might study sales trends, forecast costs, estimate likely demand and compare likely outcomes before acting. This can make decision making more logical and easier to justify.

> **Key Term: scientific decision making**
> Decision making based on gathering and analysing data in a logical and systematic way.

A scientific approach has several strengths:

- it gives managers evidence to support their choices
- it can reduce guesswork
- it allows comparison between options
- it is useful in larger businesses where decisions often need to be justified to others

However, it also has limits. Data may be old, incomplete or based on forecasts. A calculation may look precise while still depending on weak assumptions. If managers trust the numbers too much, they may ignore important qualitative issues such as brand image, employee morale or ethics.

Decision making based on intuition is different. A manager may rely on previous experience, knowledge of customers, or a hunch about what will work. This can be useful when there is little time, when data is poor, or when the manager knows the market extremely well.

Intuition can be especially helpful in small firms. An owner-manager may understand customer behaviour closely and respond quickly without lengthy analysis. But intuition also carries danger because it may be biased, overconfident or based on limited experience.

A strong exam answer usually avoids saying one method is always better. Better responses explain that the right approach depends on the business context. A large plc making a costly strategic choice may need detailed data. A small local business facing a fast-moving problem may rely more on judgement.

> **Test Tip:** If a question asks you to assess data-based decision making, do not stop at “it is more accurate”. Develop the chain: better data may reduce risk, improve forecasting, support profit decisions and make a choice easier to justify to investors or senior managers.

### Risk, reward, uncertainty and opportunity cost

Every business decision involves possible gains and possible downsides. Managers are not choosing in perfect conditions. They are choosing under pressure, with incomplete information, and with limited resources.

> **Key Term: risk**
> The chance that the actual outcome of a decision will be worse than expected.
>
> **Key Term: uncertainty**
> A situation in which managers cannot predict outcomes with confidence because information is limited or conditions may change.

Risk and uncertainty are linked, but they are not identical. Risk suggests that managers can at least estimate possible outcomes and their likelihood. Uncertainty is wider and harder to measure. For example, a business may estimate the risk of low demand for a new product, but a sudden change in government policy or a sharp recession creates uncertainty that is much harder to predict.

Managers usually accept risk because of the possibility of reward.

> **Key Term: reward**
> The potential benefit from a decision, such as higher profit, stronger growth or greater market share.

A business that enters a new market may face high risk, but the reward could be large. A safer option may protect cash flow but lead to lower growth. This is why exam answers often need a balanced view: higher risk may be justified if the potential gain is high and the business has the resources to cope.

Managers must also think about **opportunity cost**.

> **Key Term: opportunity cost**
> The value of the next best alternative that is given up when a choice is made.

If a business invests £2 million in a new factory, it cannot use that same money to open stores, reduce debt or improve technology. Even if the factory project succeeds, the firm still gives up other possible uses of the funds. This matters because resources are scarce.

A good way to analyse decisions is to ask:

- What could the business gain?
- What could it lose?
- How certain are the forecasts?
- What alternative has been sacrificed?

These questions move an answer beyond description and into analysis.

### Decision trees: how to calculate and interpret them

A **decision tree** helps managers compare options where outcomes are uncertain. It shows the possible choices, the possible outcomes from each choice, the probability of each outcome, and the likely financial result.

> **Key Term: decision tree**
> A diagram used to show decision options, uncertain outcomes, probabilities and financial results in order to support decision making.

In a decision tree:

- a square shows a **decision node**
- a circle shows a point where chance takes over
- branches show options and possible outcomes
- probabilities on each set of chance branches should add up to **1**
  > **Key Term: expected value (EV)**
  > The weighted average outcome of a decision, calculated by multiplying each possible outcome by its probability and then adding the results.
  >
  > **Key Term: net gain**
  > The expected value of an option minus any associated cost of choosing that option.

The formula for expected value is:

EV = (probability 1 × outcome 1) + (probability 2 × outcome 2) + ...

The formula for net gain is:

Net gain = expected value − cost of the option

#### Worked example

A business is choosing between two options:

- **Option A: increase advertising**
  - 50% chance of £10m return
  - 50% chance of £2m return
  - cost of option = £4m

- **Option B: cut prices**
  - 80% chance of £8m return
  - 20% chance of £3m return
  - cost of option = £1.5m

Step 1: Calculate EV for Option A

EV = (0.5 × £10m) + (0.5 × £2m)  
EV = £5m + £1m  
EV = **£6m**

Step 2: Calculate net gain for Option A

Net gain = EV − cost  
Net gain = £6m − £4m  
Net gain = **£2m**

Step 3: Calculate EV for Option B

EV = (0.8 × £8m) + (0.2 × £3m)  
EV = £6.4m + £0.6m  
EV = **£7m**

Step 4: Calculate net gain for Option B

Net gain = EV − cost  
Net gain = £7m − £1.5m  
Net gain = **£5.5m**

On the basis of these figures alone, the business should choose **Option B**, because it has the higher net gain.

> **Test Tip:** Students often stop after calculating expected value. In many AQA questions, you must then subtract the cost to get **net gain**. Read the wording carefully.

A manager using rollback works from right to left: calculate the value at each chance node, then compare the decision options.

But the option with the highest net gain is not always automatically best. The manager should still ask:

- How reliable are the probabilities?
- How large is the downside if things go wrong?
- Does the option fit the firm’s objectives?
- Can the business afford the cost?
- Are there ethical or brand issues?

For example, if Option B has the higher net gain but could trigger a price war, damage brand positioning or upset retailers, the business may still prefer Option A.

#### Common student errors with decision trees

- forgetting that probabilities at each chance node must total **1**
- confusing **expected value** with **net gain**
- failing to subtract the initial cost
- choosing the higher number without discussing risk or data quality
- giving a generic judgement with no context

### Influences on management decision-making

Managers do not choose in a vacuum. Even if a calculation suggests one option is best, the final decision may be shaped by wider business factors.

Mission and objectives matter first. A business focused on survival may reject a risky project with high possible returns. A business focused on growth may accept lower short-term profit to gain market share. A firm with an ethical mission may turn down a profitable option that harms its reputation.

> **Key Term: mission**
> The overall purpose of a business and the broad direction it aims to follow.

Objectives make decisions more specific. For example:

- a profit objective may favour the highest expected financial return
- a survival objective may favour the safest option
- a growth objective may support market expansion despite uncertainty

Ethics can also shape decisions. A business may avoid moving production to a cheaper supplier if labour conditions are poor. That may reduce short-term profit, but it may protect brand image, customer trust and employee morale.

The external environment is another major influence. Competition, inflation, interest rates, consumer income and economic conditions can all alter the likely result of a decision. A project that looks attractive during economic growth may become much riskier during a downturn.

Resource constraints are often decisive. A business may identify a profitable option but still lack the finance, skilled labour, time or production capacity to carry it out.

> **Key Term: resource constraints**
> Limits on the finance, staff, time, materials or capacity available to a business when making decisions.

This is where strong AQA evaluation comes in. Do not treat the calculation as the final answer. Instead use the “on the one hand / on the other hand / it depends on” structure.

On the one hand, decision trees and other quantitative methods improve the quality of decision making because they force managers to think clearly and compare options systematically. On the other hand, they depend heavily on estimates, and a small change in assumptions may change the result. It depends on the reliability of the data, the scale of the decision, and the firm’s attitude to risk.

### How to structure an evaluative answer

For 16-mark and 25-mark questions, you need more than a list of advantages and disadvantages.

Start with the evidence. Use the numbers from the case: expected values, costs, likely profit impact, scale of risk, or financial constraints. Then explain what those figures mean for the business. For example, a higher net gain may improve profit, but only if the assumptions are realistic.

Next, bring in non-financial factors. These may include brand image, staff reaction, customer loyalty, speed of response, ethics, strategic fit and market conditions.

Then discuss limitations. Avoid vague points like “it depends”. Say what it depends on. For example, the usefulness of a decision tree depends on whether the probabilities are based on strong market research or just guesswork.

Finish with a justified judgement. The best judgement is conditional and case-based. For instance, “Decision trees are useful for a large retailer because they provide a clear, evidence-based method for comparing risky options, but they should only guide the final choice if the market research is reliable and the option fits the business’s long-term objective of premium positioning.”

## Key Point Checklist

_This article has covered the following key knowledge points:_

- Management decision-making means choosing between options to achieve business objectives
- Managers may use scientific decision making based on data or intuition based on experience and judgement
- Scientific decision making is logical and evidence-based, but its quality depends on the quality of the data
- Intuition can be useful in fast-moving situations or small firms, but it may be biased
- Risk is the chance of a poor outcome, while uncertainty means outcomes are difficult to predict confidently
- Opportunity cost is the value of the next best alternative that is given up
- A decision tree shows decision options, uncertain outcomes, probabilities and financial payoffs
- Expected value is calculated by multiplying each outcome by its probability and adding the totals
- Net gain is found by subtracting the cost of the option from the expected value
- Probabilities at a chance node should add up to 1
- Decision trees are useful but depend on forecasts and should not be used alone
- Mission, objectives, ethics, the external environment and resource constraints all influence final decisions

## Key Terms and Concepts

- management decision-making
- scientific decision making
- risk
- uncertainty
- reward
- opportunity cost
- decision tree
- expected value (EV)
- net gain
- mission
- resource constraints


Management, leadership and decision-making - Management decision-making