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Chapter 6: Decision-Making. This chapter will discuss: Understanding the various steps required to objectively make management decisions Appreciating.

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Presentation on theme: "Chapter 6: Decision-Making. This chapter will discuss: Understanding the various steps required to objectively make management decisions Appreciating."— Presentation transcript:

1 Chapter 6: Decision-Making

2 This chapter will discuss: Understanding the various steps required to objectively make management decisions Appreciating the significance of the definition of the critical problem as an initial step in decision-making Focusing on the use of a weight & point system to quantify alternative actions & reach a decision Consider how risk management has affected decision- making Be aware of decision-making issues in the 21 st century

3 Managerial Decision-Making Decision-making should be viewed as a process of thoughtfully investigating all reasonable alternatives Many managers seem to merely choose among alternatives Peter Drucker: leading management thinker on decision-making Steps in the process 1. Definition of the problem 2. Analysis of facts and issues 3. Formulation of alternative actions 4. Do nothing! 5. Analysis of alternative courses of action 6. Recommendation

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 problem The most visible symptoms are usually the least revealing ones E.g., many cost-cutting programs mask inefficient functional design (in engineering, manufacturing or purchasing) Find the functional design problem & fix it Ask: “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 sources Information must be scrutinized for underlying patterns that indicate that the problem has been correctly or incorrectly defined Managers seldom obtain all of the facts about any situation Most decisions are based on incomplete knowledge − either because the data is not available or because it would require too much time or cost to obtain The 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 goals Should always focus on business performance & results, but may require changing established practices Scientific method: a set of procedures for investigating observable activities, acquiring information, or correcting & integrating previous knowledge Requires consideration of various approaches to a problem Companies 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 actions The analyst must specify the consequences of not acting Occasionally the problem will self-correct, & a decision to do nothing may be entirely appropriate Analysis of Alternatives: Based on – The Risk: choose the highest risk/return relationship The Effort: consideration of the investment of time, money & persuasion necessary Timing: “heroic” act take time; what “tactical” actions are possible? Limitations: Who will carry out the action?

8 Step 6. Recommendation The development of a recommendation should logically follow from the complete analysis Always try to select an action that is practicable rather than heroic, particularly given the resources, time & risk constraints faced The 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 action Findings from the analysis Required 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 -- Locations Whether to joint venture with a local partner Who the vendors of food ingredients & supplies will be How to advertise & market the stores Determine which the “must” factors are & which are less important but desirable Assign 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 score Summing effectively makes decision-making relatively objective The 1st-round may result in a prioritization of choices that is not consistent with a priori expectations Managers can then examine the weights & points assigned in the analysis to make adjustments to either affirm or revise the original calculations In addition, it may be necessary after further review to add additional criteria

11 How Managers Make Decisions III A 2nd-Round Decision Matrix-Fast Food Location in China (Selected from Figure 6-2) Locations and Points Assigned Criteria and WeightsBeijingShanghaiGuangzhou Population size (5%)553 Access to vendors (20%)554 Cost/freshness of ingredients (15%)544 Marketing channels available? (15%)443 Criteria & Weighted Points Population size (5%) Access to vendors (20%) Cost/freshness of ingredients (15%) Marketing channels available? (15%) Weighted Points

12 Risk Management & Decision-Making I Risk is the possibility of loss or injury The single most significant issue that confronts companies is risk & uncertainty Traditionally been the frequency of human or property loss in specific categories Managed using insurance, with the policyholder accepting a small certain loss – the premium expense – rather than the possibility of a large catastrophic loss Operational risk -- inherent in business activities as arising from problems with technology, employees or operations Policies & procedures govern the conduct of ongoing activities Assigning 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 due Information reporting risk is the receipt of inaccurate information from a financial institution or vendor Foreign exchange/interest rate/commodity risk involves adverse movements in the price of raw materials or financial instruments Enterprise risk management (ERM): views risk as pervasive in a company & considers a coordinated approach through a formal organizational function

14 Decision-Making & Payoffs ($ in thousands) Competitor’s Reaction Our StrategyNo Reaction Lower Price Policy More Advertising Coupon Offer Introduce new sandwich$100$50$65$40 Do not introduce new sandwich0-$25-$35-$15 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 procedure Figure 6-4: Profit Payoff Matrix for Fast-Food Operation Should 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 sciences Mathematical models that can be used to analyze & optimize complex systems Uses: project planning, factory layout and production scheduling, transportation routing, global supply chain management & pricing Rules on Decision-Making Understand cultural differences Involve the local managers in the decision & use research & marketing tools to determine if your plans are viable Admit failure Real options ( “managerial options”) – the reconsideration of capital investments at future pre-determined decision points Scan 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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