Six Steps of Decision Making
This blog is about how the decision making process evolves and how you can use the process to help solve challenges in your life and business endeavors.
How to Decide
I hope your weekend went well and rest was achieved. Tonight’s blog will encompass our ability to make decisions. The decisions we make on a daily basis have positive and negative implications. Remember, business is like a spider web. There are six steps to decision making:
1. Define the Problem
2. Determine the Objective
3. Explore the Alternatives
4. Predict the Consequences
5. Make a Choice
6. Preform Sensitivity Analysis
I will design a case I hope some of us face in our companies – correctly hiring. In this case, my company has experienced growth and is seeking qualified team members to manage the growth. We will implement the Six Decision Making Steps and learn about the outcome. Thus, let us begin...
PROBLEM
“Company” has experienced a large demand for our new services. Because of this demand, we must recruit individuals who are skilled, which ensures the correct direction for the company. However, finding and hiring skilled and CQ aware team members will cost more.
Step 1: Define the Problem – Growth & Quality Team Members
Our new service proliferated demand. The service is new and in a new industry, thus, there are increased challenges an existing industry does not currently experience. New services creates many challenges, including staffing the company with team members who can assist managing growth. Initially hiring correct team members is critical. Further, the cost of hiring these individuals may generate increased revenue.
Step 2: Determine the Objective – Hire Correct Team Members
The objective: hire skilled team members to meet the demand of the customers. Strategic planning encompasses leveraging educated and experienced team members, which concludes initial growth is achievable and sustainable. Hiring strategically also increases revenue. "In most private-sector decisions, profit is the principal objective of the firm and the usual barometer of its performance" (Samuelson and Marks, 2015, p. 7).
Step 3: Explore the Alternatives – Generate Additional Working Capital Prior To Hiring
The alternative course of action: to wait and retain working capital. Financial longevity is the purpose of this alternative; furthermore, depending on additional working capital if growth failure ensues. The alternative, retaining working capital, reduces risk and promotes successful expansion.
Step 4: Predict the Consequences – Two Outcomes
Immediate expansion to meet the demands of the customers:
a. Expand unstable operations
b. Create unstable revenue
c. Attempt to limit competition
d. Risk missing payroll on qualified team members
Wait to expand
a. Possible loss working capital due to marketing
b. Competition increases market share
c. Loss of customers and revenue
d. Long-term losses
Step 5: Make a Choice – Seek Team Members
"The decision maker could determine a preferred course of action by enumeration, that is, by testing a number of alternative and selecting the one that best meets the objective" (Samuelson and Marks, 2015, p. 10). In our competitive economy, we are forced to maintain our share of the market. By hiring and expanding immediately, we must not forget our target hiring group, individuals trained to handle growth. The choice is to expand right now and seek individuals who can assist in the company's forward momentum.
Step 6: Perform Sensitivity Analysis
"Sensitivity analysis considers how an optimal decision is affected if key economics facts or conditions vary" (Samuelson and Marks, 2015, p. 10). According to our cost analysis and market research, we are able to expand. However, most of our revenue will be allocated towards expansion, which reduces net income. Further, reinvesting portions of our net income back into the business may enhance long-term sustainability. Thus, the return on investment is worth the risk to expand. Marginal cost and marginal revenue can be determined through interpolation. The value maximization is based on extrapolated projections.
Most business owners are familiar with this situation. Sometimes we are forced to grow, and sometimes we can wait. Often, success and failure boils down to personnel. Leverage these Six Decision Making Steps next time you are faced with making a decision.
Respectfully,
Paul Encinias, MBA & GCEL
Reference:
Samuelson, W. & Marks, S. (2015). Managerial Economics.(8th). John Wiley & Sons, Inc. Hoboken, NJ