BUSINESS DECISION MAKING

Business Decision Making: Understand a Range of Techniques to Analyze Data Effectively for Business Purposes



Business Decision Making: Understand Range of Techniques to Analyze Data Effectively for Business Purposes

Introduction

The process by which businesses make decisions is as complex as the processes which characterize consumer decision-making.

Business draws upon microeconomic data to make a variety of critical choices, any one of which could mean the success or failure of their enterprise. The reliability and currency of the information a business uses, therefore, is of the utmost importance.

What a business does with that data is decided by senior and top management. The major influences on their decisions may entail some or all of the following factors:

logic

what the competition is doing

the state of the economy

a variety of other variable and unknown factors

Logic

Microeconomic data may be reduced to mathematical constructs from which logical decisions may be made. Let's say we have a theoretical company, Firm A, which manufactures and sells clothing. Microeconomic data from this imaginary company has shown that its customers have a preference for navy blue, button-down shirts at a certain price.

The previous year the company sold 50,000 shirts at $20 each. For the sake of argument, let's say that this year the economy has not changed. The gross national product (GNP), unemployment rates, interest rates and the stock and bond markets are all basically the same as the previous year. Logic would dictate that at least another 50,000 navy blue, button-down shirts be manufactured and offered for sale (Trochim 2006, 14-17).

What the Competition Is Doing

Firm B, which competes with Firm A, is selling a shirt this season which is similar in style and quality to the shirts of Firm A. But Firm B's shirt is being offered for sale at $2 less, a 10% discount from Firm A's $20 shirt.

How does Firm A compete now? Microeconomic theory holds that a price reduction should increase demand. If the price of Firm A's shirts is reduced to less than what Firm B's shirts are selling for, then theoretically, Firm A's shirts would outsell the competition.

But how would the reduced price impact the profit margin of Firm A? Would the reduced profit hurt Firm A's ability to pay the interest and principal on its debt? Would there be enough money for marketing and advertising? How would the reduced profitability affect the price of its shares on the market? And if the share price declined, would there be further sales of the stock, bringing down its price even more?

It's reasonable to assume that these are the topics of discussion at the highest management levels of the company, Firm A, when the executives meet to make a decision on this issue. However, another factor is introduced before a final decision is made on the number of shirts to be made and at what price they will be sold for in the market.

Firm A's vice president in charge of marketing and advertisings asks a pertinent question: What if Firm A increases ...