- Most decisions in business are based on hard, numerical evidence and therefore are scientifically made.
- However, some of the most important decisions are intuitive - a combination of experience and a feel for the future.
Putting Scientific Decision-making Into Context...
- Modern managers like to base decisions on numerical evidence. As a result, more and more tactical decisions are made by computers.
- For example, a McDonalds store manager is sent details of how many staff should be employed for every hour next Saturday.
- This decision is made using a 'sales forecast' using data from last year and recent weeks.
Taylor's View on Scientific Decision-making...
- Taylor believed in 'time and motion' studies that measured when workers completed simple tasks.
- Once you start measuring things in the workplace, staff pay more attention and start behaving differently.
- Therefore, he believed that 'measurement was management'.
Influences on Decision-making:
- Mission - good business decisions generally contribute towards the mission of the organisation. Therefore, making decisions that may go against the company objectives, perhaps because of ethics come into play.
- Objectives - especially for middle managers, decision-making is based upon objectives they have been set.
- Ethics - this is key for large organisations as they may receive bad publicity if they sell products that are not ethical.
- External Environment - see A Level work (PESTLE).
- Resource Constraints - before making decisions it is key to consider resource implications. Any attempt to expand without sufficient resources is likely to lead to 'over-trading' (expanding more rapidly then your resource base allows).
Definition of Opportunity Cost:
The cost of missing out on the next best alternative when making a deicision.
- For example, the opportunity cost of not going to university may be to risk missing out on £200,000 of extra lifetime earnings.
Definition of Trade-Offs:
These look at what you have to give up in order to get what you want the most.
- They may not be expressed as a 'cost'.
- For example, exchanging cheapness for quality to some degree.
Introduction to Opportunity Cost...
- At the heart of every business. E.g. for a start-up business a launch party may reduce the budget for training staff.
- For a new business the two most important resources are money and time as they both have an opportunity cost. E.g. time spent by an entrepreneur creating a pretty website could mean too little time left for recruiting staff.
New Business' Opportunity Cost Issues
- Do not tie up too much capital in stock (inventory) as this cash could be used more productively elsewhere in the business.
- Do not overstretch yourself: good decisions take time.
- Take care with every deicision that uses up cash.
Personal Opportunity Costs
- The first opportunity cost of an entrepreneur starting up a business is the loss of their previous regular salary they would be earning annually.
- Starting a business is a very time consuming and absorbing activity - depriving family members of attention may be considered as another personal opportunity cost.
Deciding between oppotunities (factors)...
Estimating the potential sales that could be achieved by each idea: Sales estimates via the use of market research or expertise of the entrepreneur must be generated.
Considering carefully the cash requirements of each idea: inital costs of start up are always key to consider.
Deciding whether the time is right: changing consumer tastes and trends must be considered along with the changing market conditions.
Deciding whether the skills needed fit your own set of skills.