DECISION MAKING PROCESS, Study notes of Business Administration

Download DECISION MAKING PROCESS and more Study notes Business Administration in PDF only on Docsity! DECISION MAKING PROCESS Decision making is the cognitive process leading to the selection of a course of action among alternatives. Business, managers seem to make decisions and afterwards look for ways to justify the decisions. Why business is conducted this way? What is the process for decision- making?. A numbers of decision making areas currently are receiving attention in global business. The way in which decision making is carried out will be influenced by a number of factors including the culture. In general the following sequences are used to make decisions. 1. Problem Recognition Managers in master-of-destiny cultures tend to perceive most situations as problems to be solved, and they seek improvement through change. On the other hand, managers in fatalistic Societies tend to accept situations as they are, and they are, and they do not seek improvement or change; they believe that fate or God‘s will intervene in decision making. The United States society is an example of the master-of-destiny culture. 2. Information Gathering Decision makers in some cultures rely on hard facts and data as bases for a decision. The non programmed approach to decision making would therefore be applied in these cultures. In many cultures, however, decision makers do not place a high premium on factual information and data; instead, they rely more on their instincts as a basis for decision making. Since decision makers in these cultures rely on their intuition, they would not be highly receptive to the application of the non programmed decision making process. 3. Choice and Implementation 124 In some cultures such as the United Kingdom and Canada, the choice and implementation tactics are determined either by the highest ranking member of the decision making team or by a majority vote. But in collectivist cultures such as Japan and Africa, to maintain harmony and unity, decisions are made by consensus. When group consensus is required, decisions normally take a long time to make. The process of obtaining consensus is often more important that the choice itself. In contracts, choice and implementation decisions in individualistic societies are normally made quickly because decision makers tend to be autocratic and make decisions by themselves. (The ensuing sections will discuss this more thoroughly). Furthermore, decision makers in individualistic cultures are likely to select the most economically efficient choice. On the other hand, decision makers in collectivist societies are likely to select a choice that does not offend members of the group. Thus, in troubles times, an American Corporation might lay off employees as a way of dealing with the problem, whereas a Japanese corporation would not – it would seek to maintain group harmony and therefore seek other solutions. In some cultures, decision makers are very methodical, and they carefully evaluate numerous alternative choices before making a selection; in other cultures, decision makers use an incremental approach – they discuss alternatives in a preplanned sequence, making decisions as they go along. Furthermore, as will also be discussed in the ensuing sections, individuals in some cultures take greater risks than individuals in other cultures. For instance, in deciding on a foreign market entry strategy, decision makers in the lower risk taking cultures may select the safer exporting approach; decision makers in the higher risk taking cultures may select a riskier approach, such as producing aboard. III- INTERNATIONAL AND GLOBAL OPERATION The term international operations management is used in a very broad sense to include all functional aspects related to the conduct of international business. Operations 3. Formulation of goals 126 1. External environmental assessment Business does not exist in a vacuum; it exists within an external environment consisting of the actions of other players who are outside the business. The external environment consists of: F 0 B 7F 0 2 0Competitors F 0 B 7F 0 2 0The economic system F 0 B 7F 0 2 0The social system F 0 B 7F 0 2 0The monetary system F 0 B 7F 0 2 0the political/legal system F 0 B 7F 0 2 0The environmental system. The success of environmental assessment depends on the ability of managers to take an international perspective and to ensure that their sources of information and business intelligence are global .The analysis of the external environment involves two activities: information gathering and information assessment. These steps help to answer two key questions. What is going on in the exte5nal environment? How will theses developments affect out company?‖. One of the most common ways in which this is done is through competitive intelligence, which is the use of systematic techniques for obtaining and analyzing public information about competitors. These data are particularly useful in keeping MNEs alert regarding likely moves by the competition. 127 different niches and to attempt to market successfully in each of these geographic areas. The information is also critical to those firms that will be coming under attack. b) Information assessment Having gathered information on the competition and the industry, MNEs will then evaluate the data. One of the most common approaches is to make an overall assessments based on the five forces that determine industry competitiveness – buyers, suppliers, potential new entrants to the industry, the availability of substitute goods and services, and rivalry among the competitors. The porter‘s 5 forces tool is a simple but powerful tool for understanding where power lies in a business situation. With a clear understanding, you can take fair advantage of a situation of strength, improve a situation of weakness, and avoid taking wrong steps. This makes it an important part of your planning toolkit Five Competitive Forces (Porter) i) Bargaining power of buyers MNEs will examine the power of their buyers because they will want to predict the likelihood of maintaining these customers. If the firm believes buyers may be moving 129 their business to competitors, the MNE will want to formulate a strategy for countering this move. For example, the company may offer a lower price or increase the amount of service it provides. ii) Bargaining power of supplier: An MNE will look at the power of the industry‘s suppliers to see if it can gain a competitive advantage before. For example, if there are a number of suppliers in the industry, the MNE may attempt to play them off against each other in an effort to get a lower price. Or the company may move to eliminate any threat from the suppliers by acquiring one of them, thus guaranteeing itself a ready source of inputs. iii) New entrants: The Company will examine the likelihood of new firms entering the industry and will tr y to determine the impact they might have on the MNE. Two typical ways that international MNEs attempt to reduce the threat of new entrants are by (1) Keeping costs low and consumer loyalty high, and (2) Encouraging the government to limit foreign business activity through regulation such s duties, tariffs, quotas, and other protective measures. iv) Threat of substitutes: This is affected by the ability of your customers to find a different way of doing what you do. The MNE will look at the availability of substitute goods and services and try to anticipate when such offerings will reach the market. There are a number of steps that the company will take to offset the competitive force, including (1) lowering prices, (2) Offering similar products, and (3) Increasing service to the customer. v) Rivalry: What is important here is the number and capability of your competitors – if you have many competitors, and they offer equally attractive products and services, then you‘ll most likely promising customers to target. You might decide to look at ways of using the Internet to reach customers. And you might start to investigate ways of raising additional investment to overcome your financial weakness. B. STRATEGY IMPLEMENTATION Once formulated, the strategic plan must be implemented. Strategy implementation is the process of attaining goals by using the organizational structure to execute the formulated strategy properly. International strategy implementation is based on the following premises: F 0 A 7 The choice of international strategy influences the extent to which the activities of an international business must be linked or integrated across countries. F 0 A 7 International operational capabilities--defined by the level of coordination, managerial philosophy, and geographic configuration--determine an organization's ability to manage these intraorganizational linkages. F0 A7 The international operational capabilities are created and controlled through three administrative mechanisms: centralization, formalization, and integrating mechanisms. It is then posited that the match or fit achieved among international strategy, operational capabilities, and administrative mechanisms will be associated positively with business unit performance. There are many areas of focus in this process. Three of the most important are location, ownership decisions, and functional area implementation. Strategy implementation provides goods and services in accord with a plan of action. 1. Location consideration: In choosing a location, today‘s MNE have two primary considerations. They are: 1. The country, and 2. The specific local with in the chosen country. 132 Over the past decade MNEs have greatly expanded their international presence. Some of the areas in which they have begun to set up operations include China, the former Soviet Union, and Easter Europe. Location is important for a number of reasons. Local facilities often provide a cost advantage to the producer. This is particularly true when the raw materials, parts, or labor needed to produce the product can be inexpensively obtained close to the facility. Location is also important because residents may prefer locally produced products. For example, many people in the US like to ―buy American‖. In India people uses the mantra of ―be Indian buy Indian‘s‖. Some locations may also be attractive because the local government is encouraging investment through various means such as low tax rates, free land, subsidized energy and transportation rates, and low-interest loans, while imported goods are subjected to tariffs, quotas or other governmental restrictions, making local manufacture more desirable. Finally, the MNE may already be doing so much business in a country that the local government will insist that it set up local operations and begin producing more of its goods there. This is one of the major reasons that Japanese auto manufacturers began to establish operation in the US. Although the benefits can be great, there are a number of drawbacks associated with locating operations overseas. One is an unstable political climate that can leave an MNE vulnerable to low profits and bureaucratic red tape. In Russia, for example, the government has encouraged joint ventures, but because of political and economic uncertainty, many businesspeople currently regard such investments as high-risk ventures. A second drawback is the possibility of revolution or armed conflict. MNEs with operations in Kuwait lost just about all of their investment in the Gulf War, and MNEs with locales in Saudi Arabia and other Middle East countries affected by the Gulf War also withstood losses in the region. 2. Ownership consideration: There are a number of common forms of ownership in international operations. Ownership of international operations has become an important issue in recent years. Many Americans, for example, believe that the increase in foreign-owned business in the US business there. In truth, the real issue of ownership is whether or not the company is 133 134 recently entered into an IJV to jointly develop and build a small fuel efficient car for the European market. The primary benefit for Toyota is the opportunity to expand its model line- up in Europe. The major advantage for Peugeot is that of gaining a new small car for its European product line while sharing the development costs with Toyota. iii) Strategic alliance A strategic alliance or partnership is an agreement between two or more competitive MNEs for the purposes of serving a global market. In contrast to a joint venture where the partners may be from different businesses, strategic partnerships are almost always formed by firms in the same line of business. In recent years these partnerships have become increasingly popular although careful management of these agreements continues to be a critical area of concern A recent example of a strategic partnership is the of Matsushita Electric Industrial and Hitachi, Japan‘s‘ two leading electronics manufacturers. These two companies are now jointly developing state-of-the art technology in three areas; smarts cards, home network systems, and recycla ble and energy-efficient consumer electronics. In the past both firms have developed their own products, but now they are turning to a strategic partnership in order to save money and to shorten development time. Another example of strategic partnership agreement, for the next decade IBM will provide outsourcing services to NTT, Japan‘s dominant telecommunications carrier. In turn, IBM will provide outsourcing services to NTT, Japan‘s dominant telecommunications carrier. In turn IBM will be able to use NTT Com ware staff in outsourcing and obtaining computer – services contracts with other customers in Japan. v) Franchising: Franchise is a arrangement under which one party allows another to operate an enterprise using its trade mark, logo, product line and other methods to operation in return for a fee. A franchisor provides training and the operations in the international market. Franchising provides participants new economies and many companies are examines the benefits and 135 regions. Japanese auto firms send car parts to the US for assembly and then sell some of the assembled cars in Canada, Mexico, and South America, Whirlpool builds appliances worldwide with operation in Brazil, Canada, Mexico, the Netherlands, and seven other countries. Such production and assembly operations have to be coordinated carefully. Finance: Financial strategies used to be formulated and controlled out of the home office. However, in recent years MNEs have learned that this approach can be cumbersome, land because of fluctuating currency prices, costly as well. Today overseas units have more control over their finances than before, but they are guided by a carefully constructed budget that is in accord with the overall strategic plan. They are also held to account for financial performance in the form of return on investment, profit, capital budgeting, debt financing, and working capital management. The financial strategy often serves both to lead and lag the other functional strategies. In the lead position, finance limits the amounts of money that can be spent on marketing (new product development, advertising, and promotion) and manufacturing (machinery, equipment, quality control) to ensure that the desired return on investment is achieved. In the lag position, the financial strategy is used to evaluate performance and to provide insights regarding how future strategy should be changed. IV - ALIGNING STRATEGY Today‘s business climate is characterised by unprecedented changes in technology and globalizations, as well as by complex business relationships and the unrelenting drive for competitive success. In this highly stressful environment, it is essential for project managers to think and act strategically. How does an organisation formulate a strategy to achieve competitive success? Globalisation has become very expensive process, particularly where a firm must co-ordinate research and development and other functional operation. To cope- up the situation many firms seek partners to share these operations and costs. The strategies used by the organizations for the collective work can be called as aligning strategies. In the New economy Aligning strategies enable business to gain 137 competitive advantage through access to a partner's resources, including markets, technologies, capital and people Aligning strategies are partnerships between two or more firms that decide they can better pursue their mutual goals by combining their resources – financial, managerial, and technological-as well as their existing distinctive competitive advantages. Alliances-often called cooperative strategies-are transition mechanisms that propel the partners‘ strategy forward in a turbulent environment faster than would be possible for each company alone. Alliances typically fall under one of these categories: i) Joint Ventures: Joint ventures are a popular method of expanding business. Major corporations and mid- sized companies are getting together, and small companies can, too, on a less formal basis. At the international level these practices gradually picking up. Joint ventures widely used by companies to gain entrance into foreign markets. Foreign companies form joint ventures with domestic companies already present in markets the foreign companies would like to enter. The foreign companies generally bring new technologies and business practices into the joint venture, while the domestic companies already have the relationships and requisite governmental documents within the country along with being entrenched in the domestic industry. An example is the Nuumi Corporation, created as joint venture between Toyota and General Motors, which gave GM access to Toyota‘s manufacturing expertise and provided Toyota with a manufacturing base in U.S. A joint venture may be appropriate if: F 0 A 7 The parties intend a long-term alliance; F 0 A 7 The alliance will require a significant commitment of resources by each party; F 0 A 7 The alliance will require significant interaction between the parties; F 0 A 7 The alliance will require a separate management structure; or F 0 A 7 Building credibility in the industry and brand awareness F 0 A 7 Providing added value to customers 139 F 0 A 7 Establishing technological standards for the industry that will benefit the firm iii) Non equity strategic alliances: Non equity strategic alliances-in which agreements are carried out through contract rather ownership sharing. Such contracts are often with a firm‘s suppliers, distributors, or manufacturers, or they may be for purpose of marketing and information-sharing, such as with many airline partnerships. iv) Contractual arrangement: The simplest form of strategic alliance is a contractual arrangement. Contractual-based strategic alliances generally are short-term arrangements that are appropriate when a formal management structure is not required. While the specific provisions of the contract will depend upon the business arrangement, the contract should address: F 0 A 7 The duties and responsibilities of each party. F 0 A 7 Confidentiality and non-competition. F 0 A 7 Payment terms. F 0 A 7 Scientific or technical milestones. F 0 A 7 Ownership of intellectual property. F 0 A 7 Remedies for breach; and termination. Examples of contractual strategic alliances are license agreements, marketing, promotion, and distribution agreements, development agreements, and service agreements. v) Global strategic alliances: 140