Business Decision Making - Essay Example

? Business Decision Management Business objective of MPL Manheim Publications Ltd (MPL) is a comparatively new company that has been prospering economically since its inception four years ago. The rate and level of economic prosperity had encouraged the founders Lee Corbusier and Frank Lloyd and they had gone for an issue of 20% shares to local investors. Being a new company, it had concentrated on its primary objective of maximizing profit, as financial prosperity and soundness is the only means through which a fledgling company can wish to survive. It is also an undeniable fact that this financial prosperity has resulted from the founding duo’s correct estimation of nature and quantum of market demand and the ability of MPL to efficiently satisfy that. The company has, it might be said, followed in letter and spirit the Traditional Theory of Firm (Baumol 1959). However, the joint founders wish to expand their level of operations and keeping that in view that had gone for an increase in its capital through issue of shares. Not only that, Lee Corbusier wishes to introduce a new product to increase their footprint in the publishing world and also expand their product portfolio. That objective, when translated in Business Decision parlance, would mean the management of MPL wishes to embark on a growth maximization route. If we analyze the given situation with the help of Marris model for Growth Maximization, we find that the company is facing a dilemma about the potential growth in demand for their new product (Marris 1967). As demand-growth determines anticipated profits, it becomes imperative that MPL does an extensive study about the possible growth in future demand. The situation becomes more complex as the variable costs involved in producing the new product and the associated increase in fixed overhead would be substantial (Adams and Juleff 2003). Further, there would also be one time lump sum promotional expenses related to launching the new product. Though there is an assurance that such promotional activity would increase sales by 20%, still the management needs to factor in the threat from competitors as Hove also plans on the anvil to bring out a similar product. So, MPL faces the uncertainty of several outcomes that could be possible. It has done extensive market analysis and has been able to put measures of probability on the happening of each of the outcomes. However, these are subjective estimates as there is no past data to rely on. What decision the management of MPL finally takes depends a lot on whether they are risk-averse, risk-neutral or risk-loving. That would decide whether they opt for Maximax, Maximin or Minimax course of action (Jones 2004). Effectiveness of Decision Making Structure Decision making by a business organization is largely dependent on the structure of the decision making body. In a sole proprietorship organization, all decisions are taken by a single person. Hence, the entire decision making process is fast without any time consuming meetings and exchange of opinions. But, such decisions could also be incorrect at times as there are usually no inputs from other people. However, in organizations that have more than one owner, decision making is done through interactions between managing partners and quite obviously decision making takes a far longer time than it takes in single owner scenarios. But, one must realize that though it is more time consuming, any decision making process that involves more than one person is better than a single person taking decisions. This is simply because while such decisions are taken, several, often differing, perspectives are considered and this aids in arriving at a more balanced decision (Cyert and March 1992). In case of MPL the decision making process is fairly inclusive and democratic in nature. Other than Lee Corbusier and Frank Lloyd, managers of three separate divisions meet once every month to discuss company strategy, market trends and receive departmental reports. This allows managers to micromanage their individual departments while corporate decisions are taken by the management team. As regards valuable inputs that are a corollary of such democratic decision making, we find that MPL management team has received inputs not only from Lee Corbusier but also the marketing team that has prepared a detailed forecast of anticipated sales of the new magazine that the group intends to publish. Relevant Calculations SWEAT comes to market earlier than HOVE Monthly Sales (in units) 22000 25000 27000 Sales @ ?3/copy 66000 75000 81000 (A) Direct Matl. Cost (@?1/copy) 22000 25000 27000 DVD Cost (@?0.60/copy) 13200 15000 16200 Labour Cost for 2 new workers (?) 3333 3333 3333 Additional Specialist Workers (?) 1000 1000 1000 Total Variable Cost 39533 44333 47533 (B) Contribution (A - B) 26467 30667 33467 Probability 0.2 0.3 0.5 Expected Monetary Value (?) 5293 9200 16733 SWEAT comes to market after HOVE Monthly Sales (in units) 22000 25000 27000 Sales @ ?3/copy 66000 75000 81000 (A) Direct Matl. Cost (@?1/copy) 22000 25000 27000 DVD Cost (@?0.60/copy) 13200 15000 16200 Labour Cost for 2 new workers (?) 3333 3333 3333 Additional Specialist Workers (?) 1000 1000 1000 Total Variable Cost 39533 44333 47533 (B) Contribution (A - B) 26467 30667 33467 Probability 0.3 0.4 0.3 Expected Monetary Value (?) 7940 12267 10040 Decision Tree The best course of action for MPL would be to assume the worst case scenario, or, in other words take a risk-averse approach and prepare for the reality that Sweat reaches market after the rival publication. Under such a situation, it appears that the highest EVM happens to be ?12667 which corresponds to a monthly sale of 25,000 units and a contribution of ?30,667 per month. If these figures are taken into consideration, an additional expense of ?75,000 for a one-off promotional campaign would be recovered within 75,000/30,667 = 2.45 months even if the promised 20% increase in sales is not immediately realized. This is a risk that MPL can quite easily take because a 20% increase, that is an increase by 5,000 copies would result in 100% utilization of the new printing facilities it intends to set up for this new publication. The new printing facility can produce 30,000 copies per month. Recommendations for MPL The crucial issue here is to reach the market before the rival can reach it. It would provide a first mover advantage to MPL and thus it should go all out to launch the new sports magazine. If it can do so, there is high probability that the company would be able to garner substantial contribution, to the tune of ?33,467 per month if the marketing department’s high probability sales projection of 27,000 copies is to be believed. If this figure is actually achieved, then the additional promotional expense of ?75,000 would not be necessary since the production capacity of MPL is only 30,000 copies per month while this promotional activity would raise the demand to 32,400 which would not be possible for the company to satisfy. References Adams, John, and Linda Juleff. Managerial Economics for Decision Making . London: Palgrave Macmillan , 2003. Baumol, William J. Business Behavior, Value and Growth. London: Macmillan, 1959. Cyert, Richard M., and James G. March. Behavioral Theory of the Firm . New York: Wiley-Blackwell, 1992. Jones, Trefor. The Business Economics and Managerial Decision Making . New York: John Wiley & Sons , 2004. Marris, R. The Economic Theory of 'Managerial' Capitalism. London: Macmillan, 1967. Read More