Challenges of Management - Essay Example

? Challenges of Management Managers face a multitude of challenges when they run their businesses, including pricing issues and operational problems. Predatory pricing may take place when a firm wants to monopolize a certain market in an effort to eliminate competition. A managed care system may attempt to monopolize a segment of health care. Problems arising from management information systems (MIS) include the accumulation an overabundance of information that is irrelevant to the decision making process, limited time to train personnel in the use of MIS and its interference with various decision making processes. Business leaders may want to overprice their products in an effort to cover their costs. However it can result in declining sales for businesses. While all business leaders want their businesses to grow, uncontrolled growth of business can lead to failure for an organization. Adverse selection involves a situation where a buyer or seller of a product or service is unaware of the quality or state of the product or service. This allows them to approximate what they feel is an accurate price. Because of this lack of information sellers are less likely to offer quality goods and services. Managers face a multitude of challenges when they run their businesses. Some of these challenges include pricing techniques and operational problems. If these problems are not managed effectively and /or resolved it could lead to various problems for the organization. Predatory pricing can be defined as “an anti-competitive measure employed by a dominant company to protect market share from new or existing competitors”. (“Predatory Pricing”,n.d.) The gradual reduction of the price of a product may indicate predatory pricing. A firm may want to have a monopoly over a certain market so it sells its products at prices below the firm’s costs of production. It is believed that this low pricing results in the elimination of competition because their competitors are likely to be put out of business as a result of this practice. “The predator becomes a monopolist tomorrow by charging "excessively" low prices today.” (Boudreaux, 1994, para. 2) While customers benefit from the current low prices they would eventually be charged higher prices because the firm monopolizes the market. Certain health care systems may engage in predatory pricing with health plans not in their network in order to prevent smaller hospitals from becoming fully fledged competitors. This practice results in a managed care system monopolizing an aspect of health care. In 2011 the United States Department of Justice stated that United Regional Health Care System had participated in predatory pricing practices with certain managed care plans to eliminate Kell West Regional Hospital as competition. “DOJ (has alleged ) that United Regional’s managed care contracts with non- Blue Cross plans harmed competition by excluding Kell West from the payer’s networks in exchange for increased discounts on all services at United Regional.” (Argue , n.d., para. 2) Other health care providers may engage in predatory pricing in an effort to prevent new competitors from participating in a certain health care market. “Management information systems (MIS) are a set of procedures to collect important business information for making management decisions.” (Vitez, 2012, para 1) While technology has made the implementation of MIS simpler there are still some disadvantages. Management personnel may spend a great deal of time designing, reviewing, implementing and controlling the MIS. This can result in the hindrance of the decision making process of managers. This poses challenges to MIS theorists since some MIS tend to not be adaptable.” (Nowduri , 2007,p.8) Company leaders may not be able to effectively perform their duties if too much time is spent focusing on MIS. It can also be a very complicated system.MIS processes may be disruptive to business operations if the system accumulates an overabundance of information that is irrelevant to the decision making process. This can lead to a management problem known as the “paralysis of analysis” “ This management theory is based on the principles of so much information is gathered that it leads to the inability of making a decision.” (Vitez, 2012,para. 4) Manager must have current relevant and accurate information in order to make effective business decisions. Too much information can also hinder the decision making processes of an organization. It can be difficult for companies to implement a MIS or new MIS procedures if there is an older system in place. Technology is constantly changing so businesses need to have current hardware and software systems in their organization. The costs of these new systems can add up quickly. If management fails to cover these costs the company may take a big loss that can adversely affect other aspects of their operations. (Vitez) It can also be time consuming to train managers and employees on how to use MIS. If too much time is spent on training purposes there may be the possibility of declining profits especially if the company needs to close to accommodate training. Overpricing of a product is not the best idea for businesses because consumers will always look at competitor’s prices resulting in businesses losing sales. “Prices set too high can impact revenue as it prevents interested customers from purchasing a product.” (“Importance of pricing”,n.d., para.4, ) Business leaders may want to overprice their products in an effort to cover costs such as payroll ,overhead and leasing costs. In order to beat the competition and keep up with technology companies will want to provide increasing amounts of goods and services. To do this they will generate simple and complex products. When there are a large proportion of non-unit level activities, the company’s general overhead rate and departmental overhead rates will result in inaccurate costing. The simpler products are more likely to be overpriced. As a result of the overpriced products the company to close its production unit due to decreased demand and the company loses profits. (“Importance of Price”, n.d.) Overpricing of products can result in the business being driven out of the market. Companies may set the price of a product high due to the potential benefits of the product. However if there is not strong market for the product too much competition may result possibly leading to decreases in revenue. (Varn, Rownger & Zawada) All business leaders would like their business to grow when they begin operations. However rapid uncontrolled growth of businesses may occur , which can have negative consequences for any organization. “ Uncontrolled growth can lead to failure of what started out as a booming success.” (“Be careful about uncontrolled growth”, n.d.) Some causes of uncontrolled growth may be: An increased rate of employee turnover; Low staff morale; Hiring too many employees; and an increasing backlog of work. One of the main reasons for uncontrolled growth of businesses is if a business owner overextending him/herself financially or in terms of resources. Business owners may drastically increase expenses in the anticipation of increasing demands for its products. If that does not happen investors may pull out and a company could go bankrupt or a company may close prematurely before it has had a chance to prosper (Fotopoulos) . The growth of a business needs to be gradual, with enough time for the various departments of a business to develop. These are just some factors that contribute to profitability. Profitability is more important to a business than its growth. (Frank) According to Bill Rector a former CEO who owns a consulting firm for executives "It's not the revenue you bring in, it's what you keep," (Frank , 2006, para. 4) He further stated that even with continued growth executives need to be aware of profitability. (Frank) With the growth of an organization come challenges for the company’s management team. Managers cannot use standard methods, processes and systems that have contributed to the success of business previously. Decision making will need to increase as time passes. The need for increased delegation, communication and meeting deadlines and targets also increases. Adverse Selection can be defined as “ an inefficient, bad or adverse outcome of a market exchange that results because buyers and/or sellers make decisions based on asymmetric information. (“Adverse Selection”, n.d.) It involves a situation where a buyer or seller of a product or service is unaware of the quality or state of the product or service enabling them to approximate what the individual feels is an accurate cost of the product or service. (Kennon) For example with regard to life and health insurance policies, they may become costlier for healthier individuals who do not engage in risky behaviors (examples: smoking, taking drugs), and cheaper for individuals who are unhealthy and are more prone to illness and injury. Insurance rates are increased to low risk individuals and decreased to high risk individuals. If buyers are more aware of their risks of claiming insurance than the sellers, then insurance would not be profitable. With adverse selection individuals who believe they are risk patients will purchase the insurance while some individuals who have a decreased risk may choose not to purchase it.  Adverse selection can cost the insurance companies large sums of money if the policies are not monitored carefully. (Kennon) "Such adverse selection induces three types of losses: efficiency losses from individuals being allocated to the wrong plans; sharing losses since premium variability is increased; and losses from insurers distorting their policies to improve their mixed of insured's." (Cutler & Zeckhauser ,1997, p.1)Generally adverse selection occurs when the people involved in certain transactions (examples: buyer and seller) have different information about the products or services being sold. "When buyers know less than sellers then adverse selection occurs." ("Adverse selection", n.d., para. 2). Another example of adverse selection would be the market for used cars. There are generally used cars of various conditions. The sellers are essentially aware of the cars that are in good condition and the cars that are in poor condition. Therefore the probability of buyers buying cars in good condition and cars in poor condition is equal.  Moral hazard may also result from adverse selection. "Moral hazard exists when one person undertakes an action that is detrimental to another person after the two people have entered into an agreement." ("Adverse selection", n.d., para.10)  It occurs when the individual with more information about certain actions will intentionally behave callously from the perspective of the individual who is unaware of the other person's actions. For example financial bailouts of banks by governments can result in risky lending in the future if those that take the risks believe that they would not be responsible for future losses. In conclusion there are many problems that business leaders may encounter as a result of certain business practices implemented. They need to be aware of these problems and effectively resolve them. References Argue, D. A Closer Look at Bundled Discounting and Predation at United Regional. (n.d.) retrieved June 7, 2012, from Economists Ink Web Site: http://www.ei.com/vieweconink.php?id=276 Boudreaux D. (1994). Predatory Pricing Laws. The Freeman Ideas on Liberty. 44 (12), 54-55. Cutler, D. & Richard Zeckhauser (July 1997). Adverse Selection in Health Insurance. Forum for Health and Economic Policy, 1(2). Retrieved June 11, 2012, from http://www.nber.org/papers/w6107 Fotopoulos, Dawn (May 1, 2010). Top 10 Reasons Small Businesses and Solopreneurs Fail: Uncontrolled Growth. Retrieved June 6, 2012, from Best Small Biz Help Web Site: http://bestsmallbizhelp.com/2010/05/top-ten-reasons-small-businesses-fail-uncontrolled-growth/... Frank, W. (October 29, 2006). Leaders should beware of uncontrolled growth retrieved June 8, 2012, from Denver Business Journal Web Site: http://www.bizjournals.com/denver/stories/2006/10/30/smallb9.html?page=all... Kennon, Joshua Adverse Selection. (n.d.) retrieved June 11, 2012, from About.com Investing for Beginners Web Site: http://beginners.about.com/od/investingglossary/g/adverse-selection.htm?p=1 Nowduri Srinivas (2007). 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