2 This chapter will discuss: Understanding the various steps required to objectively make management decisionsAppreciating the significance of the definition of the critical problem as an initial step in decision-makingFocusing on the use of a weight & point system to quantify alternative actions & reach a decisionConsider how risk management has affected decision-makingBe aware of decision-making issues in the 21st century
3 Managerial Decision-Making Decision-making should be viewed as a process of thoughtfully investigating all reasonable alternativesMany managers seem to merely choose among alternativesPeter Drucker: leading management thinker on decision-makingSteps in the processDefinition of the problemAnalysis of facts and issuesFormulation of alternative actionsDo nothing!Analysis of alternative courses of actionRecommendation
4 Step 1. Definition of the Problem What is the critical problem? In other words, what is that thing which must be changed or altered before anything else can be changed?Too often, we focus on symptoms of the problem & not the underlying problemThe most visible symptoms are usually the least revealing onesE.g., many cost-cutting programs mask inefficient functional design (in engineering, manufacturing or purchasing)Find the functional design problem & fix itAsk: “What will happen if nothing is changed?” & “What could have improved the situation when the problem first appeared?”
5 Step 2. Analysis of Facts and Issues Data should be assembled from the company’s internal records & is available from print/Internet sourcesInformation must be scrutinized for underlying patterns that indicate that the problem has been correctly or incorrectly definedManagers seldom obtain all of the facts about any situationMost decisions are based on incomplete knowledge − either because the data is not available or because it would require too much time or cost to obtainThe thoughtful manager will determine which data are missing in order to judge the risk of a decision
6 Step 3. Formulation of Alternative Actions Determine the conditions for a solution to the critical problem based on the company's missions and goalsShould always focus on business performance & results, but may require changing established practicesScientific method: a set of procedures for investigating observable activities, acquiring information, or correcting & integrating previous knowledgeRequires consideration of various approaches to a problemCompanies are particularly difficult to subject to the scientific method because of the many variables that can affect a situation
7 Steps 4 & 5. Do Nothing! Analysis of Alternative Courses of Action Do nothing: To take no action is a decision fully as much as to take specific actionsThe analyst must specify the consequences of not actingOccasionally the problem will self-correct, & a decision to do nothing may be entirely appropriateAnalysis of Alternatives: Based on –The Risk: choose the highest risk/return relationshipThe Effort: consideration of the investment of time, money & persuasion necessaryTiming: “heroic” act take time; what “tactical” actions are possible?Limitations: Who will carry out the action?
8 Step 6. RecommendationThe development of a recommendation should logically follow from the complete analysisAlways try to select an action that is practicable rather than heroic, particularly given the resources, time & risk constraints facedThe organization needs a plan for implementation or “road map” as a guide to the correct actions; too often this element is missing from the process.The recommended actionFindings from the analysisRequired implementation step(s)
9 How Managers Make Decisions I Scenario analysis for Chinese fast-food business (in Chapter 5)Now the company must decide on --LocationsWhether to joint venture with a local partnerWho the vendors of food ingredients & supplies will beHow to advertise & market the storesDetermine which the “must” factors are & which are less important but desirableAssign weights to each criterion and point values for each alternative (perhaps on a 1 to 5 scale, with 5 as the highest)Important factors: population at the location; accessibility of vendors; cost and freshness of ingredients; availability of marketing channels; the potential pool of management & food service workers; issues with regard to local regulations & licenses
10 How Managers Make Decisions II Weight each criterion (including “musts”) and multiply times the point value to provide a weighted scoreSumming effectively makes decision-making relatively objectiveThe 1st-round may result in a prioritization of choices that is not consistent with a priori expectationsManagers can then examine the weights & points assigned in the analysis to make adjustments to either affirm or revise the original calculationsIn addition, it may be necessary after further review to add additional criteria
11 Locations and Points Assigned How Managers Make Decisions III A 2nd-Round Decision Matrix-Fast Food Location in China(Selected from Figure 6-2)Locations and Points AssignedCriteria and WeightsBeijingShanghaiGuangzhouPopulation size (5%)53Access to vendors (20%)4Cost/freshness of ingredients (15%)Marketing channels available? (15%)Criteria & Weighted Points0.250.151.000.800.750.600.45Weighted Points4.404.453.85
12 Risk Management & Decision-Making I Risk is the possibility of loss or injuryThe single most significant issue that confronts companies is risk & uncertaintyTraditionally been the frequency of human or property loss in specific categoriesManaged using insurance, with the policyholder accepting a small certain loss – the premium expense – rather than the possibility of a large catastrophic lossOperational risk -- inherent in business activities as arising from problems with technology, employees or operationsPolicies & procedures govern the conduct of ongoing activitiesAssigning specific duties states the company’s position on responsibilities, sets a charter for responsible corporate behavior & assesses penalties should violations occur
13 Risk Management & Decision-Making II Finance-based risks include:Credit risk concerns the failure of customers to pay amounts owed & due in a timely manner.Liquidity risk is a company’s inability to pay obligations as they come dueInformation reporting risk is the receipt of inaccurate information from a financial institution or vendorForeign exchange/interest rate/commodity risk involves adverse movements in the price of raw materials or financial instrumentsEnterprise risk management (ERM): views risk as pervasive in a company & considers a coordinated approach through a formal organizational function
14 Decision-Making & Payoffs Structured problems: familiar, easily defined and subject to decision rules (often called programmed decisions)An unstructured problem has ambiguous (unclear) information with no rule or standard procedureFigure 6-4: Profit Payoff Matrix for Fast-Food Operation($ in thousands)Competitor’s ReactionOur StrategyNo ReactionLower Price PolicyMore AdvertisingCoupon OfferIntroduce new sandwich$100$50$65$40Do not introduce new sandwich-$25-$35-$15Should introduce the sandwich because all outcomes provide positive results as long as we cover our costs
15 Decision-Making Considerations Advanced techniques known as operations research, management science or decision sciencesMathematical models that can be used to analyze & optimize complex systemsUses: project planning, factory layout and production scheduling, transportation routing, global supply chain management & pricingRules on Decision-MakingUnderstand cultural differencesInvolve the local managers in the decision & use research & marketing tools to determine if your plans are viableAdmit failureReal options ( “managerial options”) – the reconsideration of capital investments at future pre-determined decision pointsScan the environment – to notice unexpected but potentially damaging events and develop a quick-response mechanism
16 Discussion & Review Questions What are the steps in a comprehensive decision-making process?Once a decision is reached, what is a required document to assure that the decision will proceed successfully? What are the necessary components in this document?How can a point & weight matrix can assist decision-makers in arriving at a thoughtful result?How is risk management integrated into the decision-making process?How can a profit payoff matrix support the decision-making process?What are the essential rules to improve current-day decision-making?
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