Section two: Management and decision making

What managers do

  • Managers set objectives for their department, and for the people under them. They decide what work needs to be done to meet the objectives, and what resources they need. 
  • Managers analyse and interpret data 
  • Managers make decisions 
  • Managers review the effectiveness of their decisions, and make further decisions based on their conclusions. 
  • Managers appraise their employees' strengths and weaknesses and develop their talents
  • Managers need to be able to lead their staff. 

There is a difference between managing and leading. Managing means telling people what to do and organising resources to get the job done. Leading means motivating people and inspiring them to do things. Managers with good leadership skills can persuade their staff that their decisions are the right ones. 

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Management and leadership styles

Authoritarian or autocratic - the leader (or manager) makes decisions on their own. They identify the objectives of the business or department and say exactly how they're going to be achieved. It's useful when dealing with lots of unskilled workers and in crisis management. This method requires lots of supervision and monitoring - workers can't make their own decisions. This style can demotivate able and intelligent workers. 

Paternalistic - a softer form of the autocratic style. The leader consults the workers before making decisions, then explains the decisions to them to persuade them that the decisions are in their interests. Paternalistic leaders think that getting involved and caring about human relations is a positive motivator. 

Democratic - The leader encourages the workforce to participate in the decision-making process. Leaders discuss issues with workers, delegate responsibility and listen to advice. Democratic leaders have to be good communicators. This style shows leaders have a lot of confidence in the workforce - which leads to increased employee motivation. It also takes some of the weight of decision making off the leader. 

Laissez-faire is a weak form of leadership. Leaders might offer employees coaching and support, but they rarely interfere in the running of the business. This hands off approach would only be appropriate for a small, highly motivated team of able workers. 

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Factors affecting management and leadership styles

Internal factors 

  • Urgent tasks need different leadership from routine tasks. Urgent tasks, like an unexpected large order coming in, may nay need an authoritarian leader to tell employees what to do and how to do it. 
  • A large, unskilled workforce suits authoritarian leadership, whereas a small, educated workforce suits a democratic approach much better. 

external factors 

  • In a recession, a business needs strong leadership to guide it through difficult economic times. Authoritarian or paternalistic leaders can be efficient in times of crisis - they can issue clear, quick commands because they don't have to consult others. 
  • When the economy is growing, managers don't need such a strong leadership approach. Democratic leaders can take the time to communicate with employees. 
  • Increased competition requires democratic leaders who can motivate their employees to adapt to change or expansion. Laissex-faire leaders are more complacent and don't always provide enough leadership to guide their workforce in this situation. 
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The Tannenbaum Schmidt Continuum

The Tannenbaum Schmidt Continuum places managers on a scale ranging from autocratic management through increasing levels of participation in decision making by the workforce. It identifies 7 key types of management style. 

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The Blake Mouton grid

The blake mouton grid assesses managers based on how much they care about their employees and how much they care about production. 

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Scientific decision making

Scientific decision making 

  • Decisions made scientifically are based on data, and their outcomes are compared to the initial objectives. 
  • Making decisions based on data reduces the risk of making expensive mistakes. It is a logical and structured approach which can be adapted if necessary. 
  • However, it can be costly and time consuming because it involves collecting and analysing a lot of data. It also takes away the 'human element' so may be less creative or origingal than a decision based on intuitive. 
  • You also need to make sure you have reliable, up-to-date data. Decisions based on biased or out-of-date data will be unreliable.  
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Intuitive decision making

  • Intuitive decision making means making decisions based on a hunch or a gut instinct
  • Some managers have good intuition - they can sense when a decision is the right one based on past experience. When their intuition is right, it can lead to great business decisions and keep the company ahead of its competition. 
  • Decisions based on intuition can be made quickly - you dont have to spend time collecting and analysing data. If the situation is new or unfamiliar, using data might not be helpful (or there might not be any data available), so managers have to use their inuition. 
  • It's risky to rely on intuition all the time though, because people can make mistakes. Decisions made using gut instinct can be irrational or not based on logical reasons. 
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Opportunity cost

Opportunity cost is the benefit that's given up in order to do something else - it's the cost of the choice that's made. 

It's the idea that money or time spent doing one thing is likely to mean missing out on doing something else. 

it puts a value on the product or business decision in terms of what the business had to give up to make it. 

Businesses must choose where to use their limited resources. Managers compare opportunity costs when making decisions.

In more formal terms, opportunity cost is the value of the next best alternative that's been given up. 

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Management decision making

Factors affecting managers decisions:

Mission - A business's mission will influence the decisions made. All decisions will takw the mission into account. 

Objectives - The objectives are the medium-to long term targets that help a business achieve its mission. Decisions will be made with the aim of achieving the objectives, and are reviewed against the objectives to measure their success. 

Ethics - The firm's ethics have an effect too. 

External environment - The external environment is all the outside factors that affect a business. It includes things like competition, trends, the economy and environmental concerns. 

Resource constraints - Resource availability is also a factor. Resources include money, people, time and raw materials. 

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Decision trees

The expected value (EV) of an outcome is the probability of the outcome occuring, multiplied by the pay-off the business can expect to get. To work out the EV of a course of action, you add the EVs of the different outcomes together. 

Net gain is the financial gain after initial costs of the decision have been subtracted. 

Net gain = EV - initial costs 

Advantages of decision trees

  • Decision-tree analysis makes managers work out and think about the probability and the potential pay-off of each outcome of their chosen action. Managers have to come up with real numerical values for these - much better than vague statements 
  • Decision trees are a nice visual representation of the potential outcomes of a decision. 
  • Decision trees allow managers to compare options quantitatively and objectively, rather than going for the fashionable option or the option they thought of first. 
  • Decision trees are useful in familiar situations where the business has enough experience to make accurate estimates of probabilities and benefits.
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Decision trees

Disadvantages of decision trees 

  • Decision trees are quantitative. Qualitative data includes things like the employee's opinions about business decisions, and businesses should take qualitative data into account before deciding on a course of action. 
  • Probabilities are very hard to predict accurately. Estimated pay-offs are also assumed to be accurate - in real life things may work out differently. If either of these estimates are based on dodgy information, the decision is flawed too. 
  • In reality, there's a wider range of potential outcomes than the decision tree suggests. 
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Stakeholders and decision making

Internal stakeholders 

  • Owners - Most important stakeholders. They make a profit if the business is successful and decide what happens to the business. In a limited company, the shareholders are the owners. Shareholders usually want high dividends ad a high share price. 
  • Employees - Interested in their job security and promotion prospects. They also want to earn a decent wage and have pleasant working conditions. Managers have extra concerns - they'll probably get some of the blame if the company does badly, and some of the credit if things go well. 

External stakeholders 

  • Customers - They want high quality products and services at low prices. 
  • Suppliers - Will want to be paid a fair price, and be paid on time
  • The local community - They will gain if the business provides local employment and sponsors local activities but they will suffer if the business causes noise and pollution, or if the business has to cut jobs. 
  • The government - Gets more taxes when the business makes good profits.
  • Creditors - Those who the business owes money to. E.g. banks will want loans paid on time. 
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Stakeholders objectives

Stakeholders all have their own objectives, which are often conflicting. 

Businesses have to strike a balance to try and keep all their stakeholders as happy as possible. 

An important balance when making big decisions is between short-term profit and social responsibility. 

  • Profit is important - It keeps different groups of stakeholders happy. It means employees can be paid well, suppliers have reliable business, stakeholders can expect dividend payments, etc. 
  • One way to increase profit is to cut labour costs. A firm might be able to do this by relocating production abroad, where labour is cheaper. This decision might satisgy shareholders if profit increases but the loss of UK jobs would obviously be bad news for employees and probably suppliers too. The negative impact on the local community could damage the image of the company with its customers. 

The company must try to satsify as many groups as possible and still survive financially. If it can't keep everyone happy, the company needs to decide which group to prioritise. Stakeholders dont always disagree though - sometimes their interests overlap. 

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Stakeholder mapping

Managers have to think about which stakeholder group is most important to them. Stakeholder mapping helps identify how much interest in and power (or influence) over the business different stakeholders have. 

A stakeholder map helps a business decide how to best manage its stakeholders. Each group is mapped to one of four quadrants, which determines how much communication is needed and how much attention is paid to their views when making decisions. 

Stakeholders with high levels of power and high levels of interest in the business need to be managed most closely, as their satisfaction is vital to the business. This group requires the most effort. 

Stakeholders with little power and little interest in the business require monitoring but are less important to the business. 

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Stakeholder mapping

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Relationships with stakeholders

As well as power and interest, other factors can influence a business's relationship with its stakeholders. For example, during a recession, the business is focusing on not going bankrupt so many not be abe to fund projects in the local community. They may have to cut wages and not pay dividends as well. 

Businesses need to manage their relationships with stakeholders. If they focus on satisfying one stakeholder at the expense of another, it could result in staff leaving or going on strike, which will damage the business. Managing these relationships can prevent this from happening. 

One way of managing relationships is by consulting key stakeholders before making any major decisions. Stakeholders are more likely to feel valued if their opinions are considered. If the stakeholders have specialist knowledge, this will benefit the business as well. 

Good communication is vital in managing relationships with stakeholders. For example, keeping employees informed about any changes to the business will make them feel included. Businesses can use social media and their website to communicate with customers. 

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