Organisation Depends upon Managerial Decisions - Essay Example

? Managing Decisions Contents Managing Decisions 1 Contents 2 2 Introduction 3 3 Frameworks used for structuring business decisions 3 4 Critical analysis of the decision making approaches used for managing decisions 7 4.1 Analysis of the various decision making tools and techniques 7 4.2 Combinations of various methods of managing decisions 9 5 Decision making in business environment 10 6 Conclusion 10 7 Reference 12 2 1 Introduction Decision making is an important aspect of every business enterprise. The success of the organisation largely depends upon the managerial decisions. Therefore it is very important to efficiently manage the decision making. The whole organisation starting from the recruitment of the human resource, planning for the production and manufacturing of products, planning for the projected business, demand forecasting, planning of the activities to be done in the organisation, budgeting, forecasting of the revenue, target customers, etc are very important for success of the organisation. Therefore, the managerial decisions are very important and have a great impact on the overall performance of the company. If any decisions regarding planning of the organisational activities or the short term targets set for the company are not done efficiently then the company can be severely affected in long run. This project is aimed at identifying and analysing the various approaches which are used for managing the decision making. This paper encompasses the various aspects of the methods which are used for assessing the various aspects of projects and are used to make various decisions regarding the business. The various approaches of managing decisions have been critically analysed to identify the most relevant technique or the mix of techniques which can be used for managing decisions efficiently. 3 Frameworks used for structuring business decisions Decision making is an important aspect which forms the foundation of the business organisation. In this section the various approaches which are used to structure the decision making in a business organisation have been discussed. Normative model: The normative model of decision making is one of the oldest methods of managing decision. This method is based on the premise that the decisions which are taken on the basis of relevant assumptions which are made after considering for all types of situations and consequences which the organisation can face in future. As per this model there are seven basic steps which are taken while managing decisions. First of all, the main problem should be defined and analysed in order to assess the future situation which the company may face due to the problem. The second step is to identify and analyse all the alternative solutions of the problem. The third step is to analyse all the merits and demerits of the identified alternatives. Once all the alternatives have been assessed the fourth step is to rank all alternative solutions as per their strengths. Ranking helps to identify the optimal alternative solution which can maximise the satisfaction level, thus identification of the optimal solution id the fifth step of this model. Sixth step is to implement the chosen alternative. Once the alternative is implemented follow ups are done to assure that every thing is going as decided, this is the seventh step in normative model (Swansburg and Swansburg, 2002, p.256). Decision tree: The uncertainty aspects of the future events make the decision making more crucial and vital for every organisation. One of the most popular and common quantitative technique which is used to manage decisions regarding uncertain activities is decision tree. Thus decision tree can be defined as the graphical representation of various sequential decisions and the various expected values of those decisions. The decision tree helps to assess each decision as per their sequence in analysing the expected value of the given alternatives. The expected values are the probable value of the outcomes of various activities. These are considered after considering the probability of the positive as well as the negative outcome of the given activity. Decision tree not only helps to assess the probable outcome of various activities but also helps in assessing the various consequence of the expected value of different sub activities of the alternative (Burton and Thakur, 2006, p.120). Influence diagram: Influence diagram are also one of the improved and essential tool which is used to manage decision regarding analysing and assessing the risk of the projected activity. Influence diagram is quite similar to the flow chart diagram. The decision problem can be represented and can be analysed on a glance through influence diagrams. Therefore these are also known as knowledge maps. The relationships among the various variables used in the activity along with their probability are included in the influence diagram in order to assess the problem. Thus the influence diagram can be both qualitative and quantitative (Aitken and Davison, 2004, p.62). Thus in other words it can be said that the influence diagram helps to identify and analyse the relationships of the internal activities of the organisation which in turn helps in assessing the risk. Project planning: Project planning is one of the important and popular methods of managing decisions. Project planning is mainly use to plan and take various decisions regarding a project. Many steps are taken to plan the project. First of all the goals and objectives of the projects are assessed and identified. This includes identifying the stakeholders of the project like the customers, users, project managers etc. Secondly, the requirements of the project along with the timing of each requirement are identified. Thirdly, the scheduling of the project is done. This includes preparation of the Gantt charts, identifying the critical path, slack time etc. once the scheduling is done other supportive plans like plans for human resource, communication, finance and risk management etc are be done (Haughey, 2010, p.1-3). Financial models: There are many financial models which assists managers in their decision making like payback period, discounted payback period, profitability index, net present value etc. among all the techniques the most common and popular techniques used by managers while decision making is the net present value of the project business. The net present value is computed on the basis of the projected cash flows. Cash flow diagram: One of the important aspects of every business organisation is the cash flow. As cash is the life blood of every organisation which helps it to operate its day to day activities therefore the decisions regarding the cash flows are very important and thus should be managed efficiently. While making any investment decision cash flow diagrams are used to analyse the projected cash flows from various transactions of the project to be undertaken during the course of the project’s life time. Thus cash flow diagram can be defined as the diagrammatic representation of the various cash received or to be received and cash spent or to be spent year wise during the life of the project (Hasting, 2009, p.108). Cash flows diagrams are generally used to assess the financial viability of the project. Sensitivity analysis: Financial decisions are very critical in nature therefore it must be managed with utmost care. The financial decisions are mainly undertaken on the basis of the net present value of the project. The net present value is the excess of present vale of cash inflows over the cash out flows. It is generally considered that if the net present value is positive then the project is financially viable which means that the company will be able to recover all the costs of the projects through its cash inflows and can earn cash profit. But, the cash flows depend upon a number of factors like the sales; cost of production etc. Thus the sensitivity of the cash flow to the main variables of the project is done through sensitivity analysis. As per this method the risk profile of the project is analysed by computing NPV on different situations (Weygand, Kimmel and Kieso, 2010, p.557). It helps to assess how much the returns will vary with the changes of different variable or projected situations. Scenario analysis: Scenario analysis is quite similar to the sensitivity analysis. This method is also used to assess the risk profile of the project. The decisions regarding the risk of the project is often analysed with the help of the technique. In this method the variation of the key elements are specified in terms of probability which helps in depicting the net present value of the project in best as well as worst scenario (Wilkinson, 2005, p.454). Databases: Managers also use different databases which assist them in decision making. These databases include systematic and organised information, which is useful for the managers. 4 Critical analysis of the decision making approaches used for managing decisions In the previous section the various frameworks used for managing decisions have been discussed. In this section the main approaches of decision making have been critically analysed and assessed. 4.1 Analysis of the various decision making tools and techniques Normative model of decision making is one of the oldest and important tools of decision making but this model is not considered viable to be used in the practical context. Thomas. M. Crea has mentioned in his research that the main aspect of this method that the standards and the steps established in this model can be used universally to manage decision in quite absurd because the problems differs from situation to situation and no common steps can be used to every real life situation (Crea, 2007, p.11). On the other hand the approach of decision tree is considered to be quite useful for the managers. Decision tree enables the managers in taking systematic decisions. It also enables the manager in taking decisions after considering all the possible consequences both positive and negative. The financial aspect can be analysed at a glance through the diagrammatic representation. This approach is time consuming and also requires huge investments moreover if additional information crops up while analysing the project then the probabilities have to be revised again which make the process more expensive and time consuming (Beri, 2008, p.38). The influence diagram also helps in managing decisions effectively. The main strength of the influence diagram is the intersection or the relation of various activities which are done or to be done in a project. These intersections enable the managers to identify the relativity of various activities which in turn helps in analysing the impact of the decisions on the various related activities (Bielza, Gomez and Shenoy, 2010, p.26). Though influence diagram is quite useful, but it is also quite complex to prepare the influence diagram and relating all the activities of the complex business organisation. The concept of project planning has been discussed in the previous section. If the projects are planned efficiently as per the process mentioned in the previous section then it helps the organisation in three ways. First of all, project planning enables the managers to decrease the risk of uncertainty to a larger extent. Secondly, project planning helps the employees to understand the project’s objective in a better way. This in turn helps the managers to decide the activities which can be discarded during odd times. Thirdly, project planning also helps in improving the operational efficiency through its scheduling and reducing the idle time (Wysock, 2009, pp.4). Though both sensitivity and scenario analysis are widely used in the business organisations by the managers in decision making but these techniques have also been criticized for its limitations. One of the major limitations of sensitivity analysis is the absence of formal method of setting probabilities. As there is no strict rule of setting probabilities of different expected value therefore the uncertainty regarding the variation of different decision variable could adversely affect the decision. Secondly, in sensitivity analysis the financial aspects of the projects are analysed by changing the expectation of one variable keeping others constant but in practical context many decision variables could change at one time (Arnold and Kumar, 2008, p.210). But, the benefits of sensitivity and scenario analysis especially while analysing the risk profile of the project and assessing the financial viability cannot be ignored. Specific and few resources are needed to conduct the sensitivity analysis which makes the technique less time consuming. The result of sensitivity analysis can be represented tables, charts graphs or in texts which are helpful for the managers while making quick decisions (Fuller and Peterson, 1996, p.8.5). Databases provides a wide range of information to the mangers for decision making but the information in the database is quite limited compared to the variety of situation which require managerial decisions. 4.2 Combinations of various methods of managing decisions In the earlier section the various approaches of managing have been analysed and assessed in detail. On analysing the various techniques of decision making it has been found that every method along with its advantages has some or the other limitations. Therefore, instead of using a single technique for decision making it is always better to use a combination of techniques for efficient decision making. Thus combining and interlinking the various tools of decision making would not only increase the efficiency of decision making but will also enable faster decision making. Project planning is an important and efficient method of decision making. Project planning assists the managers to assess the various important aspects of the projects like the time required to complete an activity in a project, the idle time of every activity, the slack time, the correct sequence of the activities of the project which can minimize the idle time and enable in completing the task in predetermined time period. It also helps in increasing the efficiency of the employees and also helps to track all the other related sub activities and helps in relating them with the main objective of the project but the decision regarding the financial viability of the project could not be assessed through project planning. Therefore, financial models should also be used along with the project planning which could enable the managers to take more efficient decisions. On combining the two approaches the manager could decide more efficiently on both the operational efficiency and financial viability of the project. More over the financial model can also be combined with the sensitivity and scenario analysis. This type of combination of decision making techniques will not only assists the managers on deciding the financial viability of the project but will also help to assess the risk profile of the project as per various changes in the projected situation which will in turn help the managers in analysing the financial viability of the project in various scenarios. Thus the various techniques of managing decision can be used together for an efficient and more effective decision making. 5 Decision making in business environment In the earlier sections the various methods of decision making have been described, analysed and assessed in detail. In this section the various ways in which the different approaches of decision making can be used in the actual business environment have been discussed. In the earlier section the various steps of project have been discussed. In actual business environment the various activities involved in a task of the project are first identified along with the time required in complete the activity. After identifying the various activities, Gantt charts and scheduling are done with the help of different software like MS Projects etc. The financial models are used on the basis of projected cash flows. In actual business environment the projected cash flows are computed on the basis of forecasted demand of the product, forecasted expenditure, inflation etc. These items help in generating projected cash flows which are used in various financial models using different software. The expected change in the taxation policies, inflation, cost of factors of productions etc are also considered while analysing the risk and financial viability of the project through sensitivity and scenario analysis. In actual business environment the external and internal analysis of the business environment and the competitor analysis are also done in order to assist the managers while making important decisions. 6 Conclusion Managing decision is very important for every organisation. Right from initiating a business to implementing the planned activities decision making is involved in every aspect of the organisational activities. Thus decisions should be managed very efficiently. There are many techniques which help the managers in their decision making. Some of the methods are quantitative and some are qualitative. Some methods help the managers in taking decision regarding the operational efficiency and on the other hand some methods are used to assess the decisions regarding the financial aspects of the project and the risk profile of the same. Every method has its pros and cons but at the same time relevant in their own field. Thus the best technique is to combine the various techniques of decision making in other words the management should not depend on one technique of decision making but it should practice a variety of decision making tools which would increase the efficiency of decision making process and will also make the decision process faster and effective. 7 Reference Aitken, P. and Davison, T. (2004). Whole Life-Cycle Costing: Risk and Risk Responses. India: John Wiley and Sons. Arnold, G. and Kumar, M. (2008). Corporate Financial Management 3rd ed. India: Pearson Education India. Beri, G. C. (2008). Marketing research 4th ed. India: Tata McGraw-Hill Education. Bielza, C. Gomez, M. and Shenoy, P. P. (2010). A review of representation issues and modelling challenges with influence diagrams. [Pdf]. Available at: http://web.ku.edu/~pshenoy/Papers/Omega11.pdf. [Accessed on: January 2, 2012]. Burton, G. and Thakur, M. (2006). Management today: principles and practice 3rd ed. India: Tata McGraw-Hill Education. Crea, T. M. (2007). Team decision making (TDM): Balancing risk and protective factors through the use of multiple perspectives. USA: ProQuest. Fuller, S. K. and Peterson, S. R. (1996). Life-Cycle Costing Manual for the Federal Energy Management Program. USA: DIANE Publishing. Hasting. N. A. J. (2009). Physical Asset Management. USA: Springer. Haughey, D. Project planning a step by step guide. [Pdf]. Available at: http://www.projectsmart.co.uk/pdf/project-planning-step-by-step.pdf. [Accessed on: January 2, 2012). Swansburg, R. C. and Swansburg, R. J. (2002). Introduction to management and leadership for nurse managers 3rd ed. USA: Jones & Bartlett Learning. Weygand, J. J. Kimmel, P. D. and Kieso, D. E. (2010). Managerial Accounting: Tools for Business Decision Making 5th ed. USA: John Wiley and Sons. Wilkinson, N. (2005). Managerial economics: a problem-solving approach. UK: Cambridge University Press. Wysock, R. K. (2009). Effective Project Management: Traditional, Agile, Extreme 5th ed. USA: John Wiley & Sons. Read More