Business 101: Principles of Management

We will be discussing the formal decision making process for managers. The process will show you how to look at a problem and use a series of steps to address that problem. It is a key element of managerial decision making and one that is very practical for the business environment.

Decision Making

Decisions, decisions, decisions - seems like we have to make them all day, every day. What to wear, what we have to do at work, what do to with the children when we pick them up from school and so on and so on… let's face it - our lives are full of decisions.

Some we can make on autopilot as they are simply not that involved, while others take careful planning and thought processes to ensure we make the best decision possible. Usually this is because the decision that needs to be made is one that has significant impact if we make the incorrect one. Having said that, let us take a look at the decision making process associated with management.

Defining the Problem

The first step is to define the problem, or we could say, 'What are we trying to fix?' For our purposes, we will use someone who wants to purchase their first home, a pretty big step in a person's life and something that we have to give a lot of thought to in order to make sure we pick the right house.

Just wanting to purchase your first home is not really a problem; thus, the problem needs to be defined more. So, in this case, the problem is we are tired of renting an apartment and want a place of our own so we can get some equity and not just pay rent each month and get nothing from it.

Identifying Limiting Factors

Next we have to identify limiting factors. For this step, we need to review all the factors that could stop us from actually solving the problem - basically, things that would get in our way to stop us from fixing the issue that we want to fix.

It is important to understand that, at times, we come across a limiting factor that stops our process dead in its tracks. For example, if you had no money to put down on a house as a down payment, then you would not be able to move forward, as you have to put something down in order to purchase the house. For our purposes, we will assume you have the money to put down and are ready to become a homeowner.

Now, let's say we have the following limiting factors:

• You can only afford $600.00 a month for a mortgage payment.
• You do not own a car and have to take the bus to work, so the house needs to be near a bus station.
• You need three bedrooms and two bathrooms.

Develop Potential Alternatives

Now that we have the limiting factors, we have to develop potential alternatives. Here you will be looking at what alternatives are available to help you get to your goal. Since we know our limiting factors, we can now develop alternatives to help us address those factors and help us with our problem.

For example, we could review the following potential alternatives:

• Stay where you are and not buy a home (though that's really not solving the problem or dealing with alternatives).
• If the house you really like is more money than you can afford, you can cut back on other expenses or get a roommate to help pay the monthly mortgage.
• You could purchase a bike and ride to the bus stop if it's not close enough and take your bike to work with you if you find a home you like and can afford that is not near a bus stop.
• Reduce your desire to only two bedrooms with the thought that a smaller home will be less money.

Now you would use those criteria to look for homes that take into account your limiting factors but also take into account the alternatives you've thought through. You are weighing your limiting factors against your alternatives to see how they blend together to get you the home you want the way you want it.

Analyze the Alternatives

Now you have to analyze the alternatives. You will take each alternative you have and try to determine, in order, what is the most feasible to the least feasible. Looking at these alternatives, there are none really that are deal-breakers. However, as I said, we need to be realistic about these. Thus:

• You might not be able to find a roommate you can actually live with.
• You might realize that two bedrooms is simply not going to work for the space you need.
• Cutting back on expenses is something you could do and work with while you find ways to solve the other issues as time goes by.

Thus, if you start looking for homes and realize the one you want that fits all your criteria except for monthly mortgage is higher than you would like, your best alternative is to cut back on your expenses to afford the home. Thus, you have selected the best alternative, or the alternative that best suits your problem and helps you solve it.

Implement the Alternative

Now that you have made a decision, you need to implement the alternative (your decision). In this step, just like it sounds, you implement the decision that you decided upon. Now you begin to look at where you can cut back to make that mortgage payment work. You would look at your expenses and see what you can cut out or cut back on to make the payment for the house you want that fits all the other criteria you set forth. It would be close to a bus stop and have the number of baths and bedrooms you wanted. However, the price could be higher than your $600.00 limit, and that is why you are working with the alternative that addresses limiting factors.

Establish a Control and Evaluation System

It is important to establish a control and evaluation system for your decision. In this step, you establish ways to monitor and control the decision you made. For our example, the best way to do this is to set up a budget that includes the higher mortgage payment, take out or reduce some of your expenses, and regularly analyze if you are staying within the budget you developed. You would develop controls (a budget) and an evaluation system (weekly review of the budget) to see if your decision is working.

Lesson Summary

It is important to understand that this process is fairly straightforward:

1. You have defined a problem that you have to fix (you define the problem)
2. You define all the aspects that would stop you from fixing that problem (limiting factors)
3. Work through those limiting factors to come up with as many alternatives as you can to address them (define alternatives)
4. Then, you decide which alternative is the best (analyze the alternatives)
5. Make your decision about which is best (implement the alternative)
6. Monitor if you are successful with your decision (establish a control and evaluation system)

These steps happen in business all the time, and it's a very simple process to work through. That is not to say each time you'll be correct, but at least you followed a process that made sense and is proven, and you have information to back up why you made the decision in the first place. That is always better than just purely guessing. Remember, you will never know if you made the right decision until after you've made it.