GSBS6001: Management - Managing Under Uncertainty - Assessment Answer

Management Assignment

Assignment Task

This observation review is comprised of three sections and requires you to address the following:

Heading One

Summarise a rational business decision made by an individual in a workplace that you have personally observed. In your summary, include clear details of the components of the decision making process (who, when, where, what, influences etc.) and also include the following:

• What the outcome/s of the decision was/were

Note - If you have limited workplace experience, you may focus on a decision you have observed an individual make in another business orientated situation or a decision made by a friend or family member in a workplace

Heading Two

Using quality peer reviewed academic sources apply a decision making process model, OTHER THAN the 8 step decision making model from the course content, to the decision you described under Heading One. Using quality peer reviewed academic sources to support your argument, identify the steps that could be considered rational in part or full and critically evaluate how the steps in the decision process are rational, include any limitations of this type of decision making process.

Heading Three

Rational decision making is a normative concept; however inevitably there are limitations to “perfection” in applied settings. Using quality peer reviewed academic sources to support your argument, critically evaluate aspects of your decision summary from Heading One/Two that COULD have been impacted by bounded rationality.

1. Effective summary writing of the decision making process and its outcome
2. Wide and relevantly researched critical analysis of a business decision using rational decision theory
3. Wide and relevantly researched critical analysis of a business decision using bounded rationality
4. Correct structure, use of English grammar and syntax and academic referencing compliant with APA6th edition referencing style

Rational Business Decision

My uncle runs a chain of three retail stores that provide domestic gardening and farming input. Recently, there occurred an unexpected decline in sales from his three retail stores. This caused him to reconsider the amount of money he spent acquiring stock. Consequently, he identified a need to cut back on purchasing costs in order to maintain a steady profit. This was followed by a series of consultations from fellow retail store managers. From his consultations, he identified two strategies employed by fellow retailers in cutting down acquisition costs. The first strategy identified was making bulk inventory orders from a single supplier so as to take advantage of the economies of scale of bulk buying. The norm was, the more you bought from a single supplier; the higher the amount of discount you received.

The second strategy he identified was the demand driven approach. This involved providing products upon demand by consumers. As per this approach, when the demand for a particular product would arise, the retail store owner would make calls to known suppliers to make orders for the specific object in demand. This meant that there was always very little stock available in the storage rooms of the retail stores. The advantage of this approach was that it ensured that it reduced the cost of holding inventory since majority of what was demanded is exactly what was supplied.

My uncle found this information to be highly valuable. Now he had two options before him: either make use of a single supplier to make bulk delivery or adopt the demand driven approach and only provide what is in demand. My uncle opted for the second option. Once the three shops were up and running under the demand driven approach, the amount of stock in the storage rooms decreased significantly. This made my uncle very happy since it reduced the costs of holding inventory. However, sometimes there were shortages and consumers were often asked to wait or come in at a later date when they would find what they were looking for. This was very inconveniencing and many consumers left feeling dissatisfied. My uncle decided that his old approach was better compared to this one.

The Normative Decision-making Model

Developed by Herbert A. Simon, the normative model of decision making consists of three phases to be implemented systematically. The phases include: intelligence, design and choice (Lunenburg, 2010). The intelligence phase of this process involves familiarizing oneself with the problem through identifying and formulating the problem question. In the aforementioned situation involving my uncle, the problem identified was that of minimizing the acquisition costs in an attempt to stabilize profit margins. This step also involves identifying the possible causes of the identified problem and explaining how it was developed. As per my uncle’s situation, the need to cut back on acquisition costs was prompted by the reduced sales experienced by his three retail stores.

The second step in the normative model- design; involves developing alternative solutions to the identified problem, (Lunenburg, 2010b). This, as per my uncle’s situation, was what he was trying to accomplish when he went out to make consultations with fellow retail store owners. Following the consultations, he identified two possible alternatives, namely: bulk purchasing from a single supplier and the demand driven approach that involved making stock available upon demand. These however were not the only alternative available to him. According to Kumar & Suresh, (2009) there are other possible alternatives to the aforementioned problem, including: inventory control, simplification and value analysis.

Inventory control involves making a decision on what to order, when to order and how much to order. The outcome from this model should be to minimize all those costs associated with the acquisition of stock, including: acquisition costs, carrying costs and holding costs, (Giunipero et al., 2008). Simplification on the other hand involves those procedures aimed at reducing the variety of inventory with the aim of prompting better control over inventory, (Giunipero et al., 2008b). Finally, value analysis involves those processes that aim to make the most of the available income when making new purchases, (Simchi-Levi et al., 2008). With this, it could be said that one mistake made by my uncle is that he did not explore all the possible solutions as per the problem he identified.

The third step as per the normative model- choice, involves making a selection from the options available. The limitation as per my uncle’s approach, was that he only sought to identify one solution to solve his problem, whereas there were many different combinations that could have been adopted. An example of one combination approach would be to make bulk purchases from a single supplier and also practice simplification, where the variety of stock ordered is limited, to promote better control over inventory. Another combination approach would be obtaining bulk stock from a single supplier while practicing value analysis. Bulk purchase from a single supplier would be taking advantage of discount as a result of economies of scale, while value analysis would help determine what best to buy at any point in time (Ahmed, 2011).

Bounded Rationality

Developed by Herbert Simon, bounded rationality aims to address those limitations associated with the rational decision making approach (Hastie, 2010). The understanding behind bounded rationality is that although the rational decision-making model offers a perfect, step-by-step approach to decision making, it is subject to constrains, circumstance and human error. As a result, there are few scenarios where the rational approach can be applied perfectly, (March, 2010). Bounded rationality aims to take a more realistic approach in to what goes through the minds of decision makers when making decisions.

As per the bounded reality model, Herbert identifies four assumptions made in the decision making process. These include:

1. Managers select the first alternative that is satisfactory.
2. Managers recognize that their conception of the world is simple.
3. Managers are comfortable making decisions without determining all the alternatives.
4. Managers make decisions by rules of thumb or heuristics (Nielsen, 2011).

Following these assumption, it is possible to draw similarity based on the decision making approach adopted by my uncle. For instance, the assumption that managers select the first alternative they find satisfactory directly correlates with my uncle’s approach towards his problem. As soon as he had two alternatives i.e. bulk buying from a single suppler and a demand driven approach, he choose the one he found to be more suitable. Also the assumption that managers are comfortable making decisions without determining all the alternatives correlates to exactly what my uncle did. As mentioned in the previous section, there were a number of alternatives available for selection, but he only chose between the first two alternatives he got. This is a common behavior among decision makers that can be explained with regards to heuristics, (Schoenfeld, 2011).

In psychology, the heuristic approach to problem solving employs a practical, but not necessarily an optimal method, (Towler, 2010).This is to say that the decision made under a heuristic approach will not offer the perfect solution but rather, that which can be applied with the least financial, physical and mental strain. This directly correlates with the approach adopted by my uncle. His decision was partially influenced by the amount of effort that would be required in executing the alternative strategy.

The rule of thumbs is another assumption that adopts a similar ideology. According to Armstrong, (2006) the rule of thumbs is a principle that uses personal experience to providing guidance when selecting the most appropriate behavior a given situation. For example, when my uncle opened his first retail store, he had only one supplier. With time, he got to know more suppliers of the products he needed and he started to compare alternative prices when acquiring inventory with the intention of cutting back on purchasing costs. From then on, this has been his way of doing things. Going by the rule of thumbs model, perhaps this was why my uncle was reluctant to adopt bulk buying from a single suppler as an alternative solution to his problem. Regardless of the discounts offered as a result of bulk buying, adopting this alternative would go against his way of doing business.

Summary

When making a decision under uncertainty, several approaches can be adopted. The rational approach is arguably the most popular approach available and it involves following a series of eight systematic steps. This paper however focuses on an alternative three step model, known as the normative decision making model. The three steps as per this model, include: intelligence, design and choice. The second part of this paper explores the normative decision making model with reference to my uncle’s situation (explained in the first part of the paper). As can be witnessed from the situation involving my uncle, decision making models like the rational approach or the normative model are rarely followed to perfection. The last part of this paper looks in to bounded rationality, a concept aimed at explaining decision making in real life situation. This paper finds that when making decisions, decision makers rarely go for the optimal solution, but rather that solution which can be applied with the least amount of strain.