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|A strategy is a way of achieving an objective|
Businesses of all sizes have to make many decisions each day - some are fairly simple and routine, whilst others are more complex and require significant management time and effort. Some examples of decisions that all businesses need to make are:
- Where should we locate the business?
- What goods should we produce?
- What price should we charge?
- What should we do if a supplier fails to deliver on time?
- Which job agency should we use to provide us with some temporary workers?
- Which employee appraisal system should we use?
Decision-making is the basic task of all managers in all departments of the business, and both in the private and the public sectors. These decisions are, effectively, designed to influence the actions of other people.
A strategic decision is one which is very high-risk and is likely to influence the overall long-term policy and direction of the business. As such, it is likely to be dealt with by senior management (e.g. what new products to develop).
A tactical decision is a fairly routine, predictable, short-term decision, which is normally handled by middle management (e.g. what price to charge for products). Other decisions which are repetitive, day-to-day and fairly risk-free are handled by lower-level management, and are generally referred to as operational decisions (e.g. how long should tea-breaks be?).
Businesses have to make decisions in order to achieve their objectives.
There are eight key stages involved in the traditional decision-making process:
- Set objectives. The decision-making process cannot proceed without an achievable, realistic and identifiable target to be met.
- Gather data. Use market research to collect as much information as possible from inside and outside the business, so to enable the decision-makers to have the necessary data with which to make an effective decision.
- Analyse the data. Look at the different courses of action and decide which ones look the most achievable and realistic to meet the objective.
- Make a decision. This stage is vital to the whole process. The decision-makers must ensure that they follow the correct course of action and do not reject a better alternative.
- Communicate. This to the whole organisation. The relevant people, both inside and outside the organisation, need to be informed about the decision and how it may affect them.
- Implement the decision. The course of action that has been decided upon is implemented, using the available resources of the business.
- Look at the results. Obtain as much feedback as possible concerning the recently implemented decision, from as many sources as possible.
- Evaluate the outcome. Did the decision work ? Was it the best course of action ? How can it be improved next time? What went wrong?
Businesses can rarely carry out their decision-making in a totally open and risk-free environment, and there are often many constraints which exist, that will limit the possible options available to a business. These constraints can be internal (such as the lack of available finance, or the lack of a multi-skilled workforce) and external (such as a rise in interest rates, a new competitor entering the market, or new legislation which restricts the activities of the business).
There are many tools available to a business that will help it limit both the risk involved and the chance of failure, when making a vital decision (such as launching a new product, taking over a competitor, or breaking into foreign markets). Three types of decision making tools are shown below:
A decision tree is a diagram that sets out the different options that are available to a business when making decisions and it also shows the chance (or probability) of their occurrence. It sets out the actual values to be expected should a particular course of action be followed. These can then be multiplied by the relevant probability of that event happening, to give an expected value, which represents the average pay-off if the decision was taken many times.
For example: Mr. Smith owns a piece of land and he wants to sell it to raise some money for his ailing business. He has been informed that he has just two options open to him:
1.He could sell the land now for a guaranteed price of £250,000, with associated selling costs of £5,000.
2.He could wait for 12 months for the market price to hopefully rise and he could then sell it, with associated selling costs of £7,000. An estate agent has informed him that the chance of receiving a higher price for the land is 0.6, while the probabilities of the price remaining the same or worsening are 0.3 and 0.1 respectively. If the market price does rise, then the land is likely to be valued at £325,000. However, if the price deteriorates, then it is likely to be valued at £200,000 in 12 months.
The decision-tree below illustrates the above scenario:
Calculation of expected value at node B:
£325,000 x 0.6 = £195,000
£250,000 x 0.3 = £75,000
£200,000 x 0.1 = £20,000
Total expected value = £290,000
The tree diagram points in favour of delaying the sale of the land for 12 months, since it predicts that IF THE DECISION WAS TAKEN MANY TIMES then Mr.Smith would ON AVERAGE receive £283,000 (£290,000 minus £7,000 costs), instead of the £245,000 (£250,000 minus £5,000 costs) that he would receive by selling the land now. There are several points to note from the diagram:
1. The tree diagram is laid out from left to right.
2.Node A is represented as a square and it is called a decision node (i.e. at this node, the decision-maker can only choose one branch to follow).
3.Node B is represented as a circle and is called a chance node (i.e. there are several possible outcomes from this node, one of which will definitely happen).
4.Each event stemming from a chance node has a probability attached to it (these probabilities must always add up to 1).
5.The actual values are always listed at the end of each branch.
In order to calculate the expected value at a chance node (e.g. node B) then the decision-maker must calculate along the branches from right to left, by multiplying the actual value by the probability and adding the results. Hence, £325,000 is multiplied by 0.6, the £250,000 is multiplied by 0.3, and the £200,000 is multiplied by 0.1. These are then all added together to give the expected value of £290,000 at node B.
The cost associated with each branch is written beside it, and these costs have to be deducted before a decision can be made.
Each branch is cut-off as it is rejected (this is represented by two parallel lines cutting through the start of the rejected branch). This leaves just the best alternative option remaining.
There are several advantages of using decision trees to analyse a particular situation:
1.They set out problems clearly and logically.
2.They show the likely amounts of money involved in the decision, and the probabilities of their occurrence.
3.Constructing a decision tree may show possible courses of action which had not been previously considered.
4.They are tangible and therefore people can easily see the issue that they are faced with, rather than attempting to visualise somebody's description.
However, decision trees are not without their faults:
1.The probabilities are only estimates and are, therefore, subject to change.
2.They can only show quantitative data - they do not take account of peoples' feelings, legal constraints, etc.
3.The results can be biased, in order to show just one side of an argument.
4.There can be significant time delays whilst making the decision, and some of the data may be out-of-date by the time the decision is finally made.
This is another method of helping management to reduce the risk involved in making decisions in a dynamic industry. It involves analysing the current position of a product, a department or even the whole organisation, and trying to identify its possible future courses of action, by looking at its Strengths, Weaknesses, Opportunities and Threats.
A strength is a factor which a business currently possesses and which it performs effectively, such as having a strong management team, a profitable portfolio of products, or a loyal customer base.
A weakness is an area in which the business currently performs poorly, such as having a high level of industrial disputes, falling profitability, or falling productivity levels.
An opportunity is a potentially successful or profitable activity that the business could take advantage of in the future, such as the take-over of a competitor, the development of new products, or breaking into new markets.
A threat represents a potential future problem which the business may face in the future, such as new competitors entering the industry, new legislation restricting the use of certain raw materials, or the possibility of being taken-over by another company.
Remember, the strengths and weaknesses are internal factors which the company currently faces. The opportunities and threats are external factors which the company may face in the future.
The S.W.O.T. analysis is represented in a simple four-box diagram, as illustrated below:
Example of a S.W.O.T analysis for a Chocolate manufacturer.
Plenty of R&D, leading to many new product ideas
Achieving economies of scales in production
High level of customer loyalty and repeat purchasing
Several of our products are reaching the end of their life-cycle
Too many marketing personnel are leaving the business
Restricted product range
New markets in Far East
A joint venture with a foreign chocolate manufacturer
Product extensions, such as different sizes of bars
Competitors are threatening a price war
Take-over by domestic rival
New legislation may affect the source of our ingredients
This diagram is simple and easy to follow, and it can provide the basis for discussion of business strategy at meetings. The results of a S.W.O.T. analysis may often identify possible courses of action that had not been considered, as well as categorising and prioritising the problems that the business faces. In most large businesses, the marketing department will carry out a S.W.O.T. analysis as part of its annual marketing audit - this highlights the products which are performing effectively, those which are reaching the end of their lifecycle, potential new markets to break into and the overall effectiveness of its personnel.
Not all the opportunities and events that a business faces will go to plan, and some may prove detrimental to the continuity of the business (such as a huge downturn in demand for their products). Contingency planning means preparing for these unwanted and unlikely possibilities. A business may produce a contingency plan in case of:
1.a severe recession;
2.an environmental disaster;
3.a sudden strike by its workforce.
Contingency plans enable a business to be in a better position to manage a crisis, rather than to try and simply cope with it when it occurs.
Before contingency planning can take place, a business must consider many possible threats and crises that it may face, in order to be able to react to them swiftly and efficiently if they do ever occur. These potential scenarios are often computer-simulated, and they can predict to a high level of accuracy the likely effects of a crisis on the finances and resources of a business.
Crisis management is the response of an organisation to a crisis (e.g. a fire, terrorist activity, natural disaster). Many companies will have some sort of contingency plan to cater for such situations, but it is rare that the actual crisis will go according to plan. It is likely that the person in charge at the time of the crisis will manage the crisis in a very authoritarian fashion, as he needs to make quick and effective decisions without the time for discussion and consultation with others. Effective planning should reduce the impact of a crisis on a business, but nevertheless to overcome any crisis is likely to cost the business a significant amount of time and money.
Some crises will be long-lasting and will affect the whole economy (such as a recession, or a natural disaster), some crises will affect all the businesses in a particular industry (such as the collapse in demand for UK ship building) and others crises will simply affect a single business (such as the Perrier Water contamination scandal, or a strike by a workforce).
Any crisis is likely to have implications for the finances of the business, the effectiveness of personnel and communications and the production patterns. The business must be seen to be acting swiftly when faced with a crisis, and it must try to ensure that the damage to the business (especially to its reputation and its image) is minimised by using which ever resources are at its disposal.
Successful public relations campaigns, adequate finance, strong leadership, rapid action and effective communication (both internal and external) are the key ingredients for a crisis to be solved effectively. Crises will always pose a number of unexpected and unforeseen problems and dilemmas for businesses. However, as long as the business is seen to be limiting the effects of the crisis upon its various stakeholder groups (especially its customers) then its reputation may well remain intact.