BUSINESS AND MANAGEMENT MODULE 1 BUSINESS ORGANIZATIONS & ENVIRONMENT

Decision Making Frameworks The core of any business lies in decision making Decisions are made in order for businesses to meet their organizational objectives A framework is a systematic process dealing with problems, concerns or issues in order to make the best decision

Decision Making Process Identify the problem Gather sufficient data and information Analyze the data to produce a list of options Assess the consequences of each option Select a favourable option Communicate this option to staff Review and evaluate the outcome

Cost Benefit Analysis (CBA) Examines the financial costs and benefits of a decision Costs and benefits must be quantifiable CBA ignores the non-financial aspects of decision making and thus should be used in combination with others b/e analysis and investment appraisal are two examples

Six Thinking Hats Get decisions from 6 different perspectives Factual Emotional Bad points Good points Creative Neutral

Force Field Analysis Driving forces refer to the advantages of implementing a decision Restraining forces are the limitations of the decision These forces are then weighted according to the level of importance

Pareto Analysis 80% of a country’s wealth was owned by 20% of the population Became known as the Pareto principle (or 80/20 rule) This analysis identifies outcomes that will provide the greatest benefits or the most important problems that need to be solved

5 Why’s Ask (5 times) why an issue or concern has happened in order to get to the root cause of the problem If the root problem is not identified, the problem will come back

Scientific vs Intuitive Decision making One benefit of scientific models is that decisions are made rationally and logically thus they are easy to justify and easier to communicate Intuitive decision making is based on beliefs, perceptions, instincts and gut feelings

Decision Trees Quantitative decision-making tool showing different options that are available to the business, including probable outcomes The diagram is constructed from left to right Decision nodes (squares) – used when there is a decision to be made Chance nodes (circles) – show different probably outcomes; for each chance node there are two or more possible outcomes All probabilities must add up to one When a decision is rejected, 2 parallel lines are drawn in the branch

Decision Tree example Donald Trump is deciding to sell his apartment in New York. If he sells this year, he would get $500,000. However if he waits until next year when the housing market is expected to pickup, he could sell at a higher price At the current market price ($500,000), $8,000 in real estate costs are incurred Next year there is a 70% chance of a higher return (estimated value is $550,000); estimated costs = $10,000 10% chance the market declines and a 20% chance of the market remaining stable (if the market drops Mr. Trump would clear $450,000)

Decision Tree A B Sell property this year $492,000 Property value rises Property remains unchanged Property prices fall $378,000 $98,400 $45,000 Chance node B 70% chance of earning $550,000 less costs (.7 x $540,000 = $378,000) 20% chance of maintaining current levels ($492,000 x .2 = $98,400) 10% chance of property declining ($450,000 x .1 = $45,000) Sum of Chance node B = $521,400

Advantages Problems are set out in a clear and logical manner All options are seen at the same time Consider the risks involved Likely costs are shown Tangible insight to the problem, rather than a person’s gut feeling

Disadvantages Probabilities are only estimates Based on quantitative data only Assigning probabilities is largely subjective Actual delays may void the data being used The amount of risk used in making a decision is not always reduced

Your Turn Probability Costs/Revenues ($) Pakistan Costs 250,000 ABC Company is considering a move to an overseas market, and a decision must be made regarding two locations. Advise the company on their best option. Probability Costs/Revenues ($) Pakistan Costs 250,000 High return .60 400,000 Low return .40 South Korea 175,000 .75 300,000 .25 180,000

Continued… Explain how the example on the previous slide is an example of opportunity cost Construct a decision-tree to show which of the two options is the best one Evaluate the value of this decision-making tool for ABC Company

Fishbone Model Also known as a cause and effect diagram Graphical representation of the most likely causes and effects of an important decision It is useful when a problem has several root causes

Fishbone Diagram

Example

Conclusion When the entire diagram is complete, discussion takes place to decide on the most likely root cause of the problem being looked at Which problem can be targeted for improvement Easy to understand and ideas can be brainstormed Model however is often too simplistic for modern business problems Better to be used with other models

Internal and External Constraints Factors that hinder decision-making but are within the control of the business Rules, policies, culture SWOT analysis may help identify these External Barriers that hinder decision-making and are uncontrollable by management PEST analysis may help identify these