The importance of analysis and analitical skills to the manager making decisions in business - Essay Example

?The Importance of Analysis and Analytical Skills to the Manager Making Decisions in Business The success of organisations heavily relies on the decision making processes undertaken by managers. Organisations are complex, and thus present complex problems or contexts in which the manager makes decisions. Monahan (2001, p. 1) argues that sound decision making brings positive results while poor decision making can prove deleterious to an organisation. The author also states that although management involves a variety of functions, decision making is a central managerial function as all others entail its use (1-2). A good decision making process will result in good decisions and thus success in business, while a flawed process underlying conception of decisions will have the opposite effect. This study seeks to discuss the importance of analytical skills in decision making by managers in the business sense. To meet this aim, this study will review two analytical approaches to decision making; project plan and modelling, in terms of their underlying concepts, pros and cons and overall effectiveness in making sound decisions by managers. The use of these decision making approaches together will be analysed in terms of how managers apply them in an integrated manner. Managerial Decision Making, Problem Solving and the Structured Analytical Approach According to Yates (2003, p. 25), a decision refers to the act of making a commitment to undertake an action that will yield satisfactory results to the beneficiaries of that action. From this definition, it is clear that a decision has three fundamental aspects. First is the resolution to execute an action, deliberateness/intention-where the manager purposefully decides so as to achieve specific objectives, and lastly, the satisfaction of those affected by the decision-the beneficiaries. Decision making, thus, implies the process used to arrive at a decision which translates to the different approaches adopted by different business managers. Russell-Jones (2006, p. 9) argues for the importance of the underlying decision making process, stating that a robust, consistent and analytical approach leverages the elements of complexity, uncertainty, objectives, trade-offs, consensus and flexibility among others. This results in the making of sound decisions that can consistently bring about business success. On a closely related note, managers increasingly find themselves having to undertake problem solving. Hicks (2004, p. 8) details the concept of problem solving, explaining that it entails the manager seeking ways to move from a present situation to a more desirable one. A problem arises when a there is a disparity between what is and what should be. It also represents a situation in which the decision making individual- manager- has alternative courses of action, all with significantly different effects and thus accompanied by doubt about the best choice (9). A number of approaches can be adopted to make managerial decisions and/or solve problems. Monahan (2001, pp. 2-3) explains the dynamics that affect decision making processes; including availability of information, scarcity of resources, and psychological factors. The author also discusses uncertainty in the process of decision making. Deterministic models of managerial decision making activities are used in the absence of uncertainty, while probabilistic models are for cases where business decisions have to be made under uncertainty. One of the most highlighted approaches to effective decision making is the structured analytical approach. Saaty and Vargas (2006, p. 258) explain that structuring the process through analogies and attribute association helps establish a new perspective to a problem and create an environment in which controllable and distinct alternatives can be generated. Gustafson (2006, p. 12) states that an analytical approach to decision making deconstructs a problem into logical, sequential and distinctive elements which can be assessed separately before recombining the components to arrive at the decision. Grunig and Kuhn (2009, p. 46) are of the opinion that situations or problems must be well structured before the analytical approach can be applied. This study explores two analytical approaches to decision making; the project plan and financial modelling. Project Plan Approach to Decision Making A discussion of the project plan should rightfully be preceded by a discussion of what projects entail. According to project management literature and different bodies of knowledge, “projects entail endeavours in which human capital, materials and economic resources managed in order to execute a unique piece of work or specification within cost and time constraints” (Lock 2007, pp. 1-2). At the heart of project management is project planning, which is indispensable in achievement of the project objectives (72). Kerzner (2009, p. 19) adds weight to the importance of planning in project management, arguing that it is the central determinant to success of the project and lies within the manager’s responsibility. A project plan involves studying the projects objectives and mission, specifying the tasks and generating work breakdown structures, setting key performance indicators and the criteria for these, project conclusion and review/appraisal. According to Lock (2007, pp. 76-77), a solid project plan entails a number of elements; it should include all known key project tasks, be drawn in enough detail to generate work to do lists and place different project tasks in their logical, chronological sequences. It should also take into account the different inter-dependencies that exist in the project, indicate the project milestones and draw feasible and achievable duration estimates. Besides, it should identify urgent and high priority tasks and account for available resources. Other project planning considerations include its flexibility and adaptability, ease of comprehension and visual effectiveness, day-to-day review and appraisal mechanisms and satisfaction of stakeholders among others. In the context of decision making, the project plan involves considerable trade-offs during its designing and thus entails decision making. The project plan can be adopted as an approach to decision making since it allows for analysis, an attribute that makes suitable for the structural analytical approach to managerial decision making. In terms of structure, the project plan adopts a multistage approach to execution. First, the project manager formulates suitable project objectives. In decision making or problem solving, this can be equated to determining the result of the decision or the desirable outcome in relation to the present situation as discussed in problem solving. The project manager also undertakes intensive and extensive study of the project environment. In business decision making, the manager here contextualises the problem to the so as to ensure the solution is workable and addresses the relevant concerns. Project planning then next identifies the alternative courses of action, upon which tasks will be generated. This equates to a similar situation where the business manager has to identify the possible alternatives in decision making. The next step is analysis and selection of the best alternative from the various choices in hand. Alternative selection bases on considerations of time, cost and resource availability. The project manager also makes mechanisms for review and solution to project conflicts. The last two stages relate to actions undertaken by the business manager specifically in problem solving tasks (Kerzner 2009, pp. 199-206). The importance of the project plan approach as an analytical model to decision making can be discussed through analysing its strengths, weaknesses and thus its overall effectiveness. One of the major advantages of the project plan approach lies in its ability to handle the complex situations that pervade the contemporary business world. Project management is in itself a complex activity, involving exhaustive planning and thus providing a formidable model to decision making. It is also a modern approach to decision making that can help business managers effectively handle trends such as globalisation, internationalisation, and complex problems such as the recent global financial crises. Besides, the project plan approach uses technology as the presence of applications such as Microsoft Project and work breakdown structures generators help simplify the work. Thus, business managers can utilise the project plan approach without having to worry about the technical aspects involved. It is, however, not an appropriate method for small scale decision making as it bases on the complex nature of project management. Thus, it fails to capture the principal and sizeable category of small scale businesses faced with non-complex yet pivotal day to day decision making situations. Overall, the project plan model of decision making is an attractive and effective approach for business managers since it provides for structures and analysis that enable managers to execute proper decision making. The Financial Modelling Approach to Decision Making Models are abstract representations of complex realities that aid in analysis, evaluation and predictions and, thus, can be applied in aiding decision making. Financial models are a vital category of analytical tools that business managers can apply in decision making. According to Grossman (1999, pp. 1-2), business managers at every level have to make difficult financial decisions on a continuous basis. It is, thus, critical that business managers are capable of applying analytical techniques to deal with their specific financial problems and/or decisions. The author further argues that analytical methods are of immense importance in decision making processes, analysis, planning and control especially in financial management. Financial analysis is a central aspect of the financial decision making process that a business manager must undertake at one point or another. It involves analysis of the various financial problems/situations faced by a firm and using this analysis to arrive at decisions on the best course of action among the options available. There are many different financial models that can be employed in decision making by business managers. Cash flow analysis entails generating and examining cash flow statements for a given period and using these to arrive at decisions. According to Proctor (2010, p. 151), cash flows in a business may be analysed as cash flows from different sources; operating activities, investing activities and financial activities. Cash flow analysis from operating activities involves reconciling the net business incomes with cash provided from the normal course of business operations. The other two bases of cash flow analyses follow similar patterns and thus involve cash flowing from investments and financial undertakings. As a decision making tool, cash flow analysis showcases the structured analytical approach. It involves the steps of identifying the key features of the situation that the business manager faces, evaluating the key determinants as altered by assumptions, predicting effects based on the evaluation and finally arriving at decisions (153). Based on this structure, managers analyse by forecasting, estimating, discounting and adjusting figures. Sensitivity analysis is another notable application of the finance modelling approach to decision making by business managers. Proctor (2010, p. 187) states that sensitivity analysis evaluates the extent to which changes in assumptions and inputs affect the outputs the manager is interested in; including revenue, net incomes and free cash flows. It analyses how sensitive an output financial variable is to an input financial variable. Sensitivity analysis is a higher level of analysis, refining the already discussed cash flow analysis. This is through enhancing accuracy and determining the effects of different financial inputs. Risk analysis is another approach of financial modelling. It involves financial analyses on business risks and uncertainties, providing a basis which business managers can use to support their decision making. Here, a risk model is a statistical analysis tool used to generate distribution indicating portfolio risk factor mapping, multivariate distribution of risk factors and the resolution method (Alexander 2008, p. 311). The author further discusses the concept of scenario analysis, particularly noteworthy in backing decisions or solving problems. For instance, stress scenarios such as market shocks due to financial crises, natural disasters or terrorist attacks can be analysed, thus quantifying the potential losses that may be experienced by a business as a result of the occurrence within the risk horizon. Such a predictive risk analysis can then be used to make managerial decisions (357). Aven (2003, pp. 95-97) argues that the primary purpose of risk analysis in a business is to support decision making through a predictive approach to risk and uncertainties. It can be used solely or as part of a multi-attribute analysis to provide a holistic decision support tool. This translates to using risk analysis alongside other financial models such as cash flow and sensitivity analysis to ensure informed decisions based on insightful evidence (98). This is because before making management decisions, the decision support information has to be analysed and related to the values and goals. The important considerations that business managers have to make when undertaking risk analyses include the decision alternatives available, the performance measures established and their criteria, difficulties in assessing values for cost, benefits and uncertainties and lastly, the fact that the figures generated are model figures rather than world reality (101). Analysis of the effectiveness of models based on financial analyses as supports for decision making can also be based on their pros and cons as done for project plans. The main advantages of using finance models lies in its abstract representation of reality and thus eradication of vagueness that may cloud decision making. The fact that such decision making bases on financial considerations ties the business manager’s decisions to the financial results of the company. Thus, the primary objectives of business (profit generation) take centre stage. The model presentation of the given situation simplifies the problem and aids comprehension of the complex world situations. On the flipside, the considerable accounting skills that accompany the use of models may prove inhibitory to their use by individuals engaging in business while in lack of such skills. Not all business people may possess the skills for financial analyses, while hiring may add to costs of running a business. Figure 1: Example of a financial model that can be applied to support decision making (Source: ESONIM 2007). Complementary Analytical Approaches to Decision Making The structural analytical approaches discussed can also be used together to achieve better decision making. Here, their advantages synergistically improve the process of decision making and help cancel their disadvantages. A project plan traditionally involves financial considerations such as budget making, costs analysis, risks analysis, procurement and how keeping or not keeping to time schedules affects the costs of executing the project. Thus, a business manager may incorporate cash flow analyses, sensitivity analyses and risk analyses into the project plan approach to making decisions. The integration of financial models in the project will ensure that trade off analysis among various causes of actions is properly and soundly undertaken. Implementing the project plan along the financial models enables determination of the various multi-aspect factors at play in a given scenario. Besides, implementing an integrated approach to decision making including project plans, finance models and other tools such as diagrams enhances the structures and analysis that altogether make the analytical approach to business decision making attractive. This is through simplified representation of multivariate business situations, multi-aspect analyses, increased involvement of the relevant stakeholders and exhaustive critique of all available alternatives before one can be settled upon. The result is better decision making in a world in which business managers have to make decisions in a complex business setting. Conclusion Decision making is a central role of managerial functions since good decisions translate to better business outcomes and solutions to problems. Conversely, poor decisions may result in unenviable results. Good decisions are largely dependent on the underlying decision making process. A flawed process to decision making will in the long term mainly produce poor decisions with the opposite being true. Hence, an analytical approach to decision making is an effective and formidable approach for business managers to generate good decisions. Several forms of analytical decision making tools are in existence. One of these is the project plan approach, where business managers follow the structured concept of project planning to leverage business multi-factors, trade off alternatives and thus arrive at sound decisions. This approach enables business managers to make decisions in complex situations and is thus attractive. Use of models, in this case financial, is another approach used to provide support for managerial decision making. Cash flow, sensitivity and risk analyses are crucial in backing up decisions as they represent actual situations in the simplest terms possible. Integration of the two approaches increases the effectiveness of the analytical approach by making the process more exhaustive and removing vagueness. Altogether, the analytical approach to managerial decision making is a significant factor to business success. References Alexander, C 2008, Market risk analysis: Value-at-risk models, John Wiley, UK. Aven, T 2003, Foundations of risk analysis: A knowledge and decision oriented perspective, John Wiley, England. ESONIM 2007, WP4 financial models, viewed 2 December 2011, Grossman, SD 1999, A manager’s guide to financial analysis, AMA, NY. Grunig, R & Kuhn, R 2006, Successful decision making: a systematic approach to complex problems, Springer, London. Hicks, MJ 2004, Problem solving and decision making: Hard, soft and creative approaches, Thomson Learning, UK. Saaty, TL & Vargas, LG 2006, Decision making with the analytic network process, Springer, Pittsburgh. Kerzner, H 2009, Project management a systems approach to planning, scheduling, and controlling, John Wiley, UK. Lock, D 2007, Project management, Gower, UK Monahan, GE 2001, Management decision making: Spreadsheet modeling, analysis and applications, Cambridge University Press, UK. Proctor, KS 2010, Building financial models with Microsoft Excel: A guide to business professionals, John Wiley, Canada. Russell-Jones, N 2006, Decision making pocketbook, MPL, UK. Yates, JF 2003, Decision management: How to ensure better decisions in your company, John Wiley, UK. Read More