The Decision Making Process: Effective Management - Essay Example

?I. The decision making process There are a number of decision making processes that have been cited to aid any decision maker in coming up with an alternative that one deems to work given a set of variables in a particular situation. Some analysts have categorized the decision making models into two major groups: the first group is called the rational decision making model, while the second group involves intuition, hence it is called the intuitive models (McDermott, 2006). Among the common decision making models that fall under the category of the rational group include the decision matrix analysis, the Pugh matrix, the SWOT analysis, Pareto analysis, and the decision trees (McDermott, 2006). Accordingly, these models use logic in the assessment of the alternatives that are expected to produce the desired results. Each alternative is assessed with its advantages and disadvantages (or the pros and the cons), and these are rated and compared, taking into consideration the ones that are closely resulting to the desired results given the circumstances. Rational models are said to be time-consuming and involve a lot of information and data gathering, plus the processing time to convert the data into management information readable to decision makers. Indeed, rational models will require substantial time devoted to prepare the appropriate information needed by decision makers (McDermott, 2006). However, rational models are quite popular and the most sensible models to use. It is popular to decision makers who believe in a systematic and orderly process in doing things. Rational decision making models, while time-consuming, involve a decision process that requires “thinking”, and where “various options are rated according to potential advantages and disadvantages”. Accordingly, the one option receiving the highest score will have to be chosen as the final decision being the “optimum one” (McDermott, 2006). Intuitive models, on the other hand, are those decision making techniques or process based on the intuition, or a hunch, which sounded un-scientific, irrational, or even illogical to the uninitiated. While largely frowned upon and quite unacceptable as a traditional form of a decision making process, it is slowly gaining headway as an alternative choice, given a pattern of experience and results by that someone making a decision who has given more weight on expediency rather than the more logical result of a time-consuming, rational approach to decision making. McDermott (2006) has cited the works of Dr. Gary Klein on intuitive-based decision making model called Recognition Primed Decision Making Model. Such decision making process involves relying on feeling, or “gut feel” coming from past experiences, or a series of events or patterns happening in the past, allowing a conclusion to be formed based on these past experiences. McDermott described it further: His recognition primed decision making model describes that in any situation there are cues or hints that allow people to recognise patterns. Obviously the more experience somebody has, the more patterns they will be able to recognise. Based on the pattern, the person chooses a particular course of action. They mentally rehearse it and if they think it will work, they do it. If they don't think it will work, they choose another, and mentally rehearse that. As soon as they find one that they think will work, they do it. Again past experience and learning plays a big part here.(An overview of decision making models, 2006). In other words, the intuitive model of decision making process can be an acceptable form or process of decision making depending on the person making the judgement. Anyone armed with the knowledge based on experience can be trusted to make a decision that will produce the desired result or effect. Such expertise, should however, be cautioned with discretion, since relevant information that may be readily available may be ignored and sacrificed if one will just rely on past experience as a biblical truth to guide one’s thought and one’s decision making process. While intuitive reasoning and decision making may have some merits, a more rational approach to decision making and problem solving can still prove to be a valuable and reliable approach for reaching a viable alternative or feasible solution to a problem. II. The decision and the action plan The company has operated quite profitably in the last decade and has accumulated a considerable amount of investible funds. Being a conservative investor, it has put-off decisions to expand until recently when the local economy seems to indicate a brighter business outlook. The company has constituted an investment committee to investigate the possibility of business expansion so that it will be guided properly on the decision it has to make on this matter. The company is expecting a recommendation within the next six months. The recommendation will be made based on sound decision criteria drawn from the company’s strategic goals. The recommendation should be able to meet the company objectives, particularly its target growth rate and projected shareholder value within a specified period of time. The company will adopt the decision making model in five steps that has been recommended as a general approach to decision making (www.business-analysis-made-easy.com, 2006). It is general in nature, but also an effective way to approach a decision making challenge. Accordingly, there are five steps in the process, and these are the following: 1. State The Problem - The first and arguably the most important step in the decision making model in five steps is to identifying the problem. Until you have a clear understanding of the problem or decision to be made, it is meaningless to proceed. If the problem is stated incorrectly or unclearly then your decisions will be wrong. 2. Identify Alternatives - Sometimes your only alternatives are to do it or don't do it. Most of the time you will have several feasible alternatives. It is worth doing research to ensure you have as many good alternatives as possible. 3. Evaluate The Alternatives - This is where the analysis begins. You must have some logical approach to rank the alternatives. Two such logical approaches are … Example Of A Decision Matrix and Sample SWOT Analysis. It is important to realize that these analysis methods are only one of the five steps in the decision making model. 4. Make A Decision - You have evaluated your alternatives. Two or more of your high ranked alternatives may be very close in the evaluations. You should eliminate all of the alternatives that were low ranked. Now it is time to go back and examine the inputs you made to evaluation criteria for the close high ranked alternatives. Do you still feel comfortable with the inputs you made? When you have made any changes it is time for some subjection. You have eliminated the alternatives that do not make logical sense. Now it is time to let your subconscious work. Review all the details of the remaining high ranked close alternatives, so they are completely clear in your mind. Completely leave the project alone for a few days. When you return to the project, the decision will likely be very clear in your head. This only works if you have done your homework! 5. Implement Your Decision - A decision has no value unless you implement it. If you are not good with implementation, then find someone that is. Part of the implementation phase is the follow up. The follow up ensures that the implementation sticks. (www.business-analysis-made-easy.com, 2006) The decision making process in five steps is therefore a systematic approach to decision making. It clearly spelled out the steps to be undertaken, in a logical and sequential manner. It provides a methodical approach as a guidance to decision makers towards a more disciplined conclusion to the decision making challenge. The use of the decision making process in five steps is being recommended by the website author as it is said to provide the “structured discipline” that can lead its users to the ultimate objective of making a good decision. This being the end-goal, the process will keep its users from being “sidetracked” by some unimportant elements that one is bound to encounter during the decision making process (www.business-analysis-made-easy.com, 2006). This could therefore save decision makers valuable time in the process, arriving at a conclusive decision in a timely manner. This is very important especially in the world of business where time is a very valuable resource. III. Decision to engage in business expansion Confronted with a decision to recommend how to utilize the company’s investible funds to maximize its growth, the committee assigned to the task decided to engage in environmental scanning to screen possible investment opportunities. This is to be done using a decision-making tool called the SWOT analysis, which is used to evaluate the company’s internal and external environments and eventually identify various entry points for company investments. In the SWOT analysis, a matrix with four quadrants was used to analyze company profile which represented the internal environment (strengths and weaknesses), and the external environments where the company operates (opportunities and threats). Strengths Weaknesses Opportunities Threats To arrive at a decision whether the company has to expand by engaging in more investments, the SWOT was used. This was done by taking into consideration the company’s areas of expertise, its competitive advantage, its assets and resources, and measured these against the company’s perceived or inherent weaknesses, and the overall assessment of the external environment in relation to potential growth for the company. Among the variables that were considered in using the SWOT analysis were: Strengths: company asset and resources, technology, goodwill, management Weaknesses: personnel turn-over, inventory management Opportunities: attractive market, growing population, increasing tourists and visitors, popular and profitable business prospects Threats: competition, petty crimes A confluence of factors pointed to a decision recommendation to have the company engage in a food retail business to be located within the city of Hull. This decision has been chosen after analyzing the opportunities for growth in the food retail market given the vibrant and growing economy of the city of Hull, and considering the overall company strengths in the area of food business. IV. Decision which business to engage in: Franchise or own business concept The company would like to invest in a restaurant to be located in the downtown area where there is heavy foot traffic from urban city dwellers. The company is studying which franchise to buy for this purpose. It has thought of famous international brands in the areas of coffee shops/bakery products market, whose brand names are well known and will assure the target returns on investments in a short period of time. The top three choices are the American Starbucks Coffee, the Australian Gloria Jeans Coffee, and the Singapore-based Bread Talk bakery which is a current hit in the upscale Asian market. However, there is also an option to create its own restaurant business concept. It can actually conceptualize its own business model that reflects the local colour, combining local culture with modern, urban concepts to create an entirely new brand image. There are advantages and advantages to both options available for the company. A decision tree was used to choose which alternative the company would consider in its investment decision. It has to choose between two business models: operating a food retail franchise, or establishing and conceptualizing its own food retail business. A decision tree is considered a useful decision making tool when choosing between alternatives. It is characterized by “visual representation of alternative courses and their probable outcomes” (Harvard School of Business, 2006). The decision tree of the company can be represented as follows: Alternative A Franchise business Alternative B Own business With the aid of the decision tree, the company was able to visualize the characteristics of the two alternatives. Considering the probability or chances of occurring of those characteristics, it was decided that the company would be better off engaging in franchise of a retail food business. This is also in consideration of the company objectives for steady income, and the company’s usual aversion to risk. The risk of putting its own restaurant and develop its own technology proves to be untenable for the company. It knows very well that “untried path carries with it higher costs of breaking new trails and greater risks in venturing into the unknown” (Gunther, 2008). The company decided to bring into the city a foreign franchise that would appeal to the multi-cultural population of the City of Hull, particularly its coffee and bread loving segment of the population. While tea drinkers are definitely in the majority, the company saw potential in introducing an alternative experience to a growing population of young, hip crowd who are willing to experiment on something new or novel experience. Such target segments comprise the younger set of the demographics including university students, professionals, tourists, immigrants, or just the ordinary working guy wanting to have a new and different experience in the area of coffee/tea/bread eating experience. After the strategic planning session conducted to determine the long term goals of the company, a decision has been reached that it will engage in the retail business of coffee/bread shops. The three alternatives have been identified, i.e. Starbucks, Gloria Jeans, Bread Talk, and the decision has to be made which of the three franchises will be pursued. The three alternatives have been short-listed from a long list of financial investment options that the company can undertake. The three were arrived at after being rated as having the most potential to deliver maximum returns on the investments that the company will shell out. Using various decision making models to determine which among the three alternatives will result in maximum wealth for the company, the investment committee will have to recommend the final decision in an investment meeting called for such purpose. Being the leader of the group, I will have to make the presentation, explaining the decision model used and the process undertaken to arrive at the recommended decision and the plan of action to pursue to implement the decision. V. Decision on final options to consider The company wants to achieve an eight percent growth rate from the current five percent in the next three years after undertaking the investment decision to engage in retail restaurant business. Three franchises are being considered on the table. These franchises are foreign brands with global appeal, thus an assured market would not be hard to come by. Due considerations will have to weight on the cost of the franchise, the terms and conditions set by the franchise owners, and the potential size of the market being targeted in order to determine the realizable growth prospects of the investment. The top three choices for the investment options are Starbucks, Gloria Jeans, and Bread Talk. These are global names with an appeal to the young and the hip market, but also offer a wide array of products to cater to other segments of the market. Each alternative has the following unique business proposition and features: The Starbucks Option: Expect More Than Coffee We’re not just passionate purveyors of coffee, but everything else that goes with a full and rewarding coffeehouse experience. We also offer a selection of premium Tazo® teas, fine pastries and other delectable treats to please the taste buds. And the music you hear in store is chosen for its artistry and appeal. It’s not unusual to see people coming to Starbucks to chat, meet up or even work. We’re a neighborhood gathering place, a part of the daily routine – and we couldn’t be happier about it. Get to know us and you’ll see: we are so much more than what we brew. Gloria Jean’s Coffee Option: Partnership Based on Integrity and Trust Gloria Jean’s Coffees' success around the world is built not only on our passion to offer the best quality coffee but in realising that to be loved and respected you must first respect the cultures and needs of others. That’s why we understand that no matter where you visit us around the world it’s important that our signature experience also has a touch of local culture and taste. So in Turkey we serve traditional Turkish coffee, we have developed a special Lucuma Chiller in Peru made from a local fruit and even in Australia we offer drinks made with popular local treats like Tim Tam chocolate biscuits. So from Kalgoorlie, in Western Australia to Kazakhstan, in Eastern Europe, we aim to make all our guests feel truly at home. Bread Talk: More Bread Business At BreadTalk, we are totally committed to quality, innovation and customer service. Backed by our strong brand, successful retail concept and our shared commitment to continually whip up delicious range of breads that make your day, our franchisees will share rewarding careers while making a real difference to the people in their communities. We are rapidly expanding our franchise network in the Asia Pacific region, currently seeking compatible enterprises to be part of our growth.BreadTalk has forged partnerships currently in Indonesia, China, Malaysia, the Philippines, Kuwait, Oman, India, Hong Kong, Thailand, Korea, Vietnam, Bahrain, Saudi Arabia, Sri Lanka, Jordan, Lebanon and Qatar. Given the above experts from their respective company profile found on the company websites, one could glean the global appeal of the brand with its commitment to product excellence and quality. Hence, it is no doubt that each brand will definitely be a good investment option to undertake, considering its unique product features and its brand appeal. How to make the decision which franchise to pursue is the challenge at hand. The problem has already been defined, i.e., the company has to make a decision on what investment to undertake in order to meet its strategic goals in the short-run period (within five years). This is the first step in the decision making process in five steps. The alternatives have been identified, and the preliminary evaluation has narrowed down the long list of alternatives into three options, i.e., engage in a retail food service through the acquisition of foreign franchise either that of Starbucks, Gloria Jean’s Coffee, or Bread Talk. This is the second step in the decision making process in five steps. Evaluating the alternatives is the third step in the process. In this step, a decision making tool has to be used to perform the evaluation of the alternatives in a systematic and methodical manner. This is also the phase of the process where more time will be devoted gathering additional information to establish facts and project trends, sift through and process raw data from the field, and process the information into usable forms which management can use to analyse thoroughly the alternatives on hand. Investment decision tools From the financial standpoint, the investment options that have been earlier identified through preliminary investigation can be evaluated using popular investment decision making tool called capital budgeting. Investopedia.com defines capital budgeting as “The process in which a business determines whether projects such as building a new plant or investing in a long-term venture are worth pursuing. Oftentimes, a prospective project's lifetime cash inflows and outflows are assessed in order to determine whether the returns generated meet a sufficient target benchmark.” (www.investopedia.com, 2012)  Capital investment decisions are made when evaluating several investment options (Dysan, 2008). Companies that are posed to make strategic investment decisions rely heavily on financial measures to arrive at a decision. This is due to the company’s interest in alternatives that are likely to produce the most financial values to its shareholders (Harvard Business School, 2006). Capital budgeting as a tool to evaluate investment alternatives includes methods such as Net Present Value (NPV), Internal Rate of Return (IRR), discounted cash flow (DCF), and the payback period method. These methods have been used by financial analysts and have proven to be useful in evaluating investment options being considered by investors. NPV is said to be the “most powerful and useful decision tools available to managers” (Harvard Business School, 2006). With the exception of the payback period, these methods are considered as sophisticated financial decision tools since it considers the element of time value of money in the decision making process, i.e., the streams of cash flows over a period of time, usually in a ten-year period, are discounted to reflect opportunity cost, and compared to the present value of the cost of the initial investment. NPV - The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project. http://www.investopedia.com/terms/n/npv.asp#ixzz1smx58g8B IRR - The discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project. As such, IRR can be used to rank several prospective projects a firm is considering. Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first. http://www.investopedia.com/terms/i/irr.asp#ixzz1smxcNPma DCF - A valuation method used to estimate the attractiveness of an investment opportunity. Discounted cash flow (DCF) analysis uses future free cash flow projections and discounts them (most often using the weighted average cost of capital) to arrive at a present value, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one.   http://www.investopedia.com/terms/d/dcf.asp#ixzz1smy8yKD5 Payback Period - The length of time required to recover the cost of an investment. The payback period of a given investment or project is an important determinant of whether to undertake the position or project, as longer payback periods are typically not desirable for investment positions. http://www.investopedia.com/terms/p/paybackperiod.asp#ixzz1smybiK3u The technical process that goes with the evaluation of the investment options is highly structured and methodical enough to give a conclusive decision as to which option will be the best alternative for the company. Hence, these methods are always expected to produce key parameters with which future performance are predicted to likely occur, and in which investors and shareholders are always looking at when evaluating investment alternatives. In evaluating the three options for the company, the capital budgeting tools will be used to be able to recommend a financially viable investment. Key financial parameter will be measured to find out acceptable investment performance in the next ten years of business engagement. These parameters will be ranked, and the best indicator of a viable business will be chosen as the best option to be recommended for the company to undertake. The information that will be required to be able to complete the financial evaluation includes, but not limited to, the following: Initial investment cost, which includes franchise fee, capital outlay, and working capital Sales projection, which is dependent on the estimated size of the target market Operational costs including interest rates Prevailing cost of money and the desired rate of return on investments by company owners and investors These information will be gathered from various sources, such as the franchise owners through the pro-forma contracts to be provided along with the specific terms and conditions stipulated in the franchisor-franchisee agreement, real estate companies for the business location information, supplier of equipment and other major tools, furnishing, and/or machines needed in the business, research firms for market intelligence including inputs o sales projection, and various quotations and price estimates from suppliers and service providers for the operational costs to run the business. Information will also come from the banks, local governments, business bureaus and associations. The food/beverage/quick service restaurants industry will also be a good source of information with regard to acceptable level of the cost of money to be utilized by the business, other industry parameters and industry averages, and other related information such as overall business profile and future growth prospects. These information will have to be obtained by the investment group in order to come up with a decision framework based on facts and sound financial projections. The information will be assembled and organized in order to come up with a reality picture in the field where decisions will have to be based. When the required information are ready, an analysis will be done by filling the information into the various methods and tools to evaluate the investment options. The resulting data will then be used to rank the alternatives, and to eventually pick up the best investment option that will meet the profit objective of the company. This is how the investment decision recommendation will be made using the rational decision making method as explained earlier. After the alternatives have been subjected to the decision making tools and the best option has been determined, the last step to undertake to complete the decision making process is the implementation of that decision. In the case of the company at hand, the decision which of the three global franchises will be undertaken has been made. The last step, therefore, is making that decision arrived at into a recommendatory advice to the company officials as to the best option the company has to meet its strategic goals in the coming years. References BreadTalk Group Ltd. 2012. More bread business. [Online] Available at http://www.breadtalk.com/franchising.html [Accessed on April 20, 2012] Business Analysis Made Easy. 2012. Decision making models. [Online] Available at http://www.business-analysis-made-easy.com/Decision-Making-Models.html [Accessed on April 20, 2012] Dyson, J. (2007) Accounting for non-accounting students. 7th ed. Harlow: Financial Times Prentice Hall Gunther, R. (2008) The truth about making smart decisions. New Jersey: Pearson Gloria Jeans Coffees. 2012. Our brand. [Online] Available at http://www.gloriajeanscoffees.com/corporate/OurStory/OurBrand.aspx [Accessed on April 20, 2012] Harvard Business School. 2006. Decision making: 5 steps to better results. Boston: Harvard Business School Publishing. Investopedia ULC. 2012. Capital budgeting. [Online] Available at http://www.investopedia.com/terms/c/capitalbudgeting.asp#axzz1sp3HgfEi Accessed on April 20, 2012] McDermott, D. (2006). An overview of decision making models. [Online] Available at http://www.decision-making-confidence.com/decision-making-models.htm [Accessed on April 20, 2012] Starbucks Corporation. 2011. Our company. [Online] Available at http://www.starbucks.com/about-us/company-information [Accessed on April 20, 2012] Read More