Decision-Making Styles for the 3 Directors of Midland Barometer Company - Essay Example

? Making Management Decisions: Case for Midland Barometer Company Question Decision making styles for the three directors of MBC Decision making is not an easy task within an organization and the management needs to apply various decision making styles based on the nature of the situation. The three directors of MBC William, Imran and Harry depict various decision making styles based on the decisions that they have made in the firm as examined in this section. William Stevenson As an engineer, William is interested in the technical aspects of manufacturing involved by the firm. He approaches business as a conservative risk-averse individual who is unwilling to take any chances thereby being considered as a satisficer. He is open minded and open for consultation on issues affecting the firm as illustrated by the consultation he had with Harry and Imran on staffing issues. After consulting, the three resolved that the firm is able to operate with 25% less employees. Therefore, consensus type of decision making is also his characteristic. William, just like his other two counterparts depicts procrastination style of decision making as he is reluctant to reduce the number of employees due to their emotional and motivation effects and optimism of improved sales. William shows decision making style of consultative input gathering especially when he prompts reactions from his colleagues on the reduction of the capacity of the organization. Lastly, William shows delegation approach to decision making in which he delegates his co-directors to run other departments of the company (Moyer, McGuigan & Kretlow 2001, p. 67). Harry Stevenson Harry is in charge of the firm as the managing director and was responsible for making decision related to marketing the organization. He has been systematic and logical while addressing issues facing MBC. While executing his duties in the company, Harry adopts a consultative approach to decision making in which he consults with William and Imran. This is evident when he leads other directors to consider the competitiveness of the MBC as a market leader in terms of the cost of barometers being sold by the company. The barometers were of the same quality as others imported and sold by its competitors but at a cheaper price. As the managing director of the company, consensus if very important to harry as the company is run by the three directors with decision made based on consensus. In addition to these decisions making styles, Harry stamps authority in his specific roles in the department as he is able to issue directives on what is to be done in the department. Imran Malik He is a graduate of a business school in London although he studied together with William and Imran. He has contributed immensely to the organization as he gambles to reap returns on his investments thereby referred to as a risk loving optimist. Concerning the firm, he is in charge of finance and administration. Just like the other directors, he assumes the decision making style of consensus as he calls for consensus on the best strategy to be undertaken by MBC especially regarding the growth and expansion as he provides two options venture into Europe and continued focus on the UK market (Bierman & Smidt 2003). In his department of finance, Imran shows strong decision making style of unilateral (directive). This is evident as Imran issued a directive to undertake a background survey on the company’s strategy in the next five years. In conclusion, all the three directors show characteristics of unilateral style of decision making in their respective departments while at the firm level they show features of consultative testing and input gathering as decisions are made after consensus. 2. Breakeven Analysis a). Current total breakeven weekly quantity and production capacity utilisation of barometers for MBC. Break even analysis is a tool used by organizations to determine the level of output required by an organization to meet its fixed costs. The organization should always strive to sell production units either equivalent or above the break even units. Breakeven = fixed costs /(unit selling price –variable costs) Unit selling price for household barometers = ?70 ........................(i) Unit variable costs for household barometers = ?35 .......................(ii) Unit selling price for commercial barometers = ?90 ..........................(iii) Unit variable costs for commercial barometers = ?50 .......................(iv) Unit selling price for all barometers = (i) + (iii) above = ?70+?90 = ?160 Unit variable costs for all barometers = (ii) + (iv) = ?35+?50 = ?85 Breakeven = (?5000-?1000) / ((?160-?85)/2) = ?4000/(?75/2) =106 barometers By manufacturing 106 barometers per week, MBC is able to meet its fixed costs. Any point above the breakeven point generates profit for the firm while the company could make losses if it operates at any point below the breakeven point (Cafferky, Wentworth & Jon 2010, p. 55). With a manufacture of 106 barometers per week, MBC operates at a capacity of: =(106/200)*100 = 53% b). The current breakeven weekly quantity and production capacity utilisation of Household and Commercial barometers for MBC Given the capacity of the company, MBC assumes an equal split between commercial and household barometers. Given the above company capacity of 106 barometers per week, an equal split between household and commercial barometers leave each category at a weekly capacity of 53 barometers (106/2). Under normal conditions, MBC is able to manufacture 100 barometers under each category. Therefore, the current capacity of the each barometer category is: =(53/100)*100 = 53% The above diagrams reveal the breakeven points for the manufacture of both categories of barometers sold by MBC. It is evident that the equity policy of the firm concerning the manufacture of the two brands must be upheld in order for the breakeven point to be realized. Therefore, the organization could be able to meet its fixed costs with the manufacture of 53 commercial and household barometers. Therefore, the company is manufacturing each category of barometers at a capacity of 53%. This is a reduction from the said 60% capacity of barometers per week (Cafferky, Wentworth & Jon 2010, p. 61). c). Allocation of Fixed Costs in MBC Fixed costs are costs incurred by organization that do not change with the amount of output. The fixed costs of MBC are estimated to be ?5,000. The costs are allocated on every manufactured barometer per hourly basis. This is not an optimal allocation because the company measures its production per week. Therefore, the fixed costs could be allocated to the manufactured barometers on a weekly manufactured units rather than hourly basis (Correia et al. 2007, p. 97). d). Limitations of Breakeven Analysis Despite its benefits of examining the sensitivity of an organization based on its performance, break even has a number of limitations. The method only divides costs into fixed or variable costs yet there are other costs subdivisions such as direct and indirect costs, controllable and non-controllable costs, total costs, marginal costs and average costs among many other types of costs. The problem of using variable costs is that it fluctuates as the volume of output increases or decreases even as fixed costs remain constant over the given volume range. The method assumes that volumetric approach is the only factor that affects costs yet there are other factors that could affect the costs such as the level of supply among others. Lastly, the method assumes a constant efficiency in the use of resources for a given period. However, this may vary (Correia et al. 2007, p. 106). These limitations for breakeven analysis provide an opportunity for MBC and other organizations to utilize other methods of estimation and analysis of sales in conjunction with the breakeven analysis. 3. Strategy Comparison using NPV Option A: Focus on UK market Annual expenditure is ?10,000 and sales forecast is 10% increase each year. Given that the firm manufactures 106 barometers per week, annual barometer manufacture is 52*106 = 5512 barometers. Annual volume increase is 10% = 0.1*5512 = 551 barometers additional annual sales per year. Annual increase in sales revenue 551* unit contribution margin. Unit contribution margin = sales price minus unit variable cost. The contribution margin per unit for Commercial barometers and household barometers respectively are (?90-?50) ?40 and (?70-?35) ?35 respectively. Assuming equal split between commercial and household barometers: = 276*40 =?11,040 =275*35 =?9,625 Total income per year = ?11,040 + ?9,625 = ?20,665 Option 1 Option 2 Period DF PV DF Income PV 0 5512 0 -50000 140000 -50000 1 0.952 6063.2 ?20,665 19673.08 0.943 140000 132020 2 0.907 6669.52 22725 20611.58 0.89 140000 124600 3 0.864 7336.472 25012.5 21610.8 0.84 140000 117600 4 0.823 8070.119 27525 22653.08 0.792 140000 110880 5 0.723 8877.131 30262.5 21879.79 0.747 140000 104580 NPV 56428.32 NPV 539680 From the above table, it is evident that the net present value for option 2 (foreign venture into Europe) is lower than the NPV for option 1 (focus on domestic market) thereby making option 2 the most preferable option for MBC. The company should explore the external market and venture into the EU markets such as France, Belgium and Holland. 4.0 Recommendations for MBC MBC is operating in a competitive apparatus (barometer) industry that is characterised by increased competition. The company manufactures two types of barometers for commercial and household purposes with the two products being sold at different prices. The company is performing poorly as its costs are increasing and the demand for its products is declining. The issues highlighted by the firm calls for several recommendations. The company is experiencing reduced demand for its products thereby resulting in below capacity operation. This calls for the company to cut down on its labour costs. As suggested by the directors of the firm, the interests of individual employees should not come before the objectives of the organization. The management should reduce its part time employees and operate only with full time employees thereby operating with 25% less employees in order to reduce labour costs (Cafferky, Wentworth & Jon 2010, p. 109). The company projects an increase in its future demand for its products. Therefore, the decision on reducing the capacity of the company should not be undertaken. Furthermore, the option on internationalization in Europe is viable and the existing capacity would help the firm capitalize on the strategy. On the same issue, the above NPV analysis reveals that the strategy put forward by Imran to venture into France, Belgium and Holland is more profitable than the focus on the local UK market as it posted a higher net present value. Therefore, the company should undertake an international venture approach in which it will venture into the said market. However, the company needs to undertake a serious market analysis in those countries before undertaking the venture in order to avoid any risks (Peterson & Fabozzi 2002, p. 79). The decision making in the company is good as the company is run by the three directors. However, each director should focus on his or her department and the entire firm as a whole. The projected increase in local demand should stimulate the company to be aggressive in its marketing strategies with use of other strategies such as electronic and print media to market its products. To increase competitiveness, MBC should reduce the price of its products and enhance quality of its brand. List of references Bierman, H & Smidt, S 2003, Financial management for decision making, Beard Books, Frederick. Cafferky, M, Wentworth, J & Jon, W 2010, Breakeven analysis, Business Expert Press, New York. Correia, C et al. 2007, Financial management, Juta and Company LTD, Johannesburg. Moyer, C, McGuigan, R & Kretlow, J 2001, Contemporary Financial Management, (8th edn.), Cincinnati: South-Western College Publishing. Peterson, P & Fabozzi, F 2002, Capital budgeting: Theory and practice, John Willey & Sons, Ney York. Read More