Improving Management Decision Making
Critically evaluate the extent to which insights from behavioural economics may improve strategic decision-making in organisations
©2013
Essay
11 Seiten
Zusammenfassung
The aim of this essay is to evaluate the extent to which insights from behavioural economics might
improve strategic decision-making in organisations. In order to see how this works in practice, this
essay will consider one of the largest airline companies in Germany. Within the airline company,
the most important question is this: What is the best way to make decisions in a large company like
this? In the current economic environment, competition is tougher than in previous years. As a
result, a wrong decision can lead to greater losses than before. Some airline companies might lose
their market leadership position through a wrong decision or by being unprepared for a specific
situation. Because of this, strategic planning becomes a key factor in a company’s decision-making
process. Avoiding mistakes and wrong decisions by improving the decision-making process within
the company should be the aim of any firm that tries to defend or increase its market share.
improve strategic decision-making in organisations. In order to see how this works in practice, this
essay will consider one of the largest airline companies in Germany. Within the airline company,
the most important question is this: What is the best way to make decisions in a large company like
this? In the current economic environment, competition is tougher than in previous years. As a
result, a wrong decision can lead to greater losses than before. Some airline companies might lose
their market leadership position through a wrong decision or by being unprepared for a specific
situation. Because of this, strategic planning becomes a key factor in a company’s decision-making
process. Avoiding mistakes and wrong decisions by improving the decision-making process within
the company should be the aim of any firm that tries to defend or increase its market share.
Leseprobe
Inhaltsverzeichnis
II
I. Introduction
... 1
II. Preview
... 1
III. Conclusion
... 7
IV. References ... 8
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Improving Management Decision Making Assignment
I.
Introduction
The aim of this essay is to evaluate the extent to which insights from behavioural economics might
improve strategic decision-making in organisations. In order to see how this works in practice, this
essay will consider one of the largest airline companies in Germany. Within the airline company,
the most important question is this: What is the best way to make decisions in a large company like
this? In the current economic environment, competition is tougher than in previous years. As a
result, a wrong decision can lead to greater losses than before. Some airline companies might lose
their market leadership position through a wrong decision or by being unprepared for a specific
situation. Because of this, strategic planning becomes a key factor in a company's decision-making
process. Avoiding mistakes and wrong decisions by improving the decision-making process within
the company should be the aim of any firm that tries to defend or increase its market share.
II.
Preview
The paper will present a wide range of strategic and decision-making tools that are used - or could
be used - in the decision-making process. Solutions for improving the decision-making process are
also presented. It focuses mainly on the most common analytical tools such as SWOT (Strengths,
Weaknesses, Opportunities and Threats) analysis, Porter's Five Forces, the PESTE (Political,
Economic, Social Technological and Environmental) Framework and DOE (Defensive/Offensive
Evaluation). While analysing these different options for Enterprise Risk Management (ERM), this
paper will give examples and provide a critical statement how decision-making can be perfected
and what insights from behavioural economics might improve strategic decision-making in
organisations. By using these tools, decision-making in the airline industry in the past might have
been undertaken much more efficiently and savings could have been made.
International companies are obliged to use scenario thinking in a decision-making process in order
to be prepared for any kind of situation. Scenario thinking offers a way for individuals and groups
to face up to the threats and opportunities of the future and their potential impact on the
organisation. (Wright & Cairns, 2011). The managers of these companies know that every
economic environment contains opportunities and risks for the company, but by making good
decisions these opportunities can be exploited that might bring greater success for the company. In
the current market situation, strategic planning appears to be more significant than ever before.
Through increasing competition and the internationalisation of companies, the airline industry
especially is facing a challenging future. Not all airline companies forecast the sheer numbers of
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nationalised airline companies entering the market in the last 25 years. Most of them did not expect
this growth and so they did not plan for it. But this is what scenario thinking involves: the
forecasting of unknown problems or issues (Schoemaker, 2004). For major companies, it becomes
essential for them to keep their leading market position. And managers of such companies know
that problems that might cause them to lose their market leadership cannot be dismissed, but that
those threats can be managed. Enterprise Risk Management (ERM) is a process, effected by an
entity's board of directors, management and other personnel, applied in strategy setting and across
the enterprise, designed to identify potential events that may affect the entity, and manage risk to be
within its risk appetite, to provide reasonable assurance regarding the achievement of entity
objectives (Steinberg & Everson & Martens & Nottingham, 2004). Years ago, budget airlines
blasted the market with cheap flights and all the major companies had serious difficulties in
handling this situation. With scenario planning, many of the problems could have been prevented,
but no-one thought about giving away airline tickets for free, as Ryanair did. That is why strategic
planning and risk management in particular are fundamental for handling stress and crisis situations
that result from competition. In analysing the problems that the airline industry might face, the first
step is to analyse the field of business itself. Risks can be due to internal and external factors. One
internal factor, for example, is the number of competitors on the market. By 2006, the number of
airlines had grown to over 1.400, including full service airlines, budget airlines, charter operatives,
local carriers and air taxis (Hanlon, 2007). In this respect, there are also many airlines which are
founded by states and have unlimited cash resources to enter the market. External factors include
the highly dynamic environment facing the airline industry (Kangis & O`Reilly, 2003). The
decision-making process is critical to handling these internal and external factors, and the PESTE
framework is a useful tool for understanding the environment. These environmental factors never
affect one company in the same way as they do another. (Johnson & Scholes, 2008) Therefore,
there is no single PESTE framework that fits all airline companies. Each company has to look at its
own environment and build its own PESTE framework. The PESTE framework classifies the
effects of the ecosystem in five categories: Political, Economic, Social, Technological and
Environmental. The influence of these environmental factors might change constantly or never
change at all. It is therefore important to consider the trends. With good scenario thinking, process
problems can be managed. For example, in the airline industry the political factor plays a very
significant role. Governments control where airlines can fly and they participate more or less in
product planning and pricing policies (Shaw, 2007). Some state-owned airlines have been privatised
and some states have established their own airlines to attempt to enter the market. Privatised airlines
are more flexible in their decision-making processes because they are not influenced by national
politics and so are able to think globally. Being in state ownership presents both, opportunities and
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risks. They cannot run out of money but can influence the market by lowering prices to nearly zero,
yet they can also be a strong alliance partner. In fact, they only lower their prices to critical levels in
order to cause serious problems for their competitor companies. A common strategy is to ruin the
market and be the last one to survive. In addition, political agreements such as the "Schengen
Agreement" facilitating travel between different countries also have an effect on the market.
However, there are still political risks such as terrorism and local wars which can have an impact
on the airline industry (Shaw, 2007). But economic factors also play a major role in the airline
environment. One of the most important is the constant economic growth in the BRICS states (i.e.
Brazil, Russia, India, China and South Africa) and in developing countries. Asia especially is an
important market. These markets offer great opportunities for the airline industry, but also many
threats in terms of political factors. Nevertheless, if the economy grows rapidly in a particular year,
the demand for air travel will increase (IATA, 2008a). In addition to these specific factors, the
airline industry has adapted its products to different types of customers, such as older people and
female business travellers (Shaw, 2007). A technological factor is the huge improvement in the
electronic industry in the past ten years. More and more online services are offered by airlines, such
as online check-in and online booking options. Furthermore, the technical improvements have been
massive and fuel-saving aircraft have been built. These features might improve the process and save
on cash and time. For example, an airline that needs fewer staff than before can save money, but it
also can lead to poor service and reduce the number of customers it attracts. Moreover, concerns
about the environment are a huge factor. Airlines have to be more concerned about this factor than
in previous times and be more aware of pressure and lobby groups (IATA, 2008b). The PESTE
method is a very good strategic tool for understanding the external environment. However, one
point of critique when working with a PESTE analysis is that this analysis is not socially
constructed and it just describes current conditions (Metcalfe, 2006). It is still a very common
strategic and analytical tool, however. In addition, the PESTE framework only covers external
factors, but it is very important to look at the company's own Strengths, Weaknesses, Opportunities
and Threats. The so-called SWOT analysis is a planning instrument for organisations to understand
their own situation in a difficult market setting. It is used widely in firms and classrooms; frequently
it is the centrepiece of situation assessment (Day 1984). With this analysis tool, it is possible to
analyse the inner and exterior environment of a business. A business can grow only if it achieves a
proper position between itself and its competitors as well as the market. But there are also problems
with SWOT analysis. One is that SWOT analysis does not go further than the model. Although this
assertion is highly plausible, Strength, Weaknesses, Opportunities and Threats analysis also rests on
somewhat shaky ideas. SWOT analysis assumes that every tactically meaningful item of a business
internal and external context can be categorised neatly as favourable or unfavourable. The SWOT
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tool was developed at a time when business and other strategies were not as complex as they are
today (Haberberg & Rieple, 2006). Notwithstanding its acceptance and permanence, SWOT
analysis can give predictable or misleading results so frequently that Hill and Westbrook (1997)
recommended not using it. Nowadays, as business matters become more and more compounded, the
SWOT analysis is not as helpful as it has been. For example, does Southwest Airlines' lack of
customary in-flight meals constitute a strength or a weakness (Porter 1996)? From one vantage
point, no meals puts Southwest at a disadvantage (Porter 1996). However, serving meals would
diminish Southwest's key advantage, low cost. Aside from raising out-of-pocket cost, it would
increase opportunity cost because more time would be used to service planes, leaving less revenue-
generating flying time (Porter 1996). A further example is where market-share leadership is listed as
a strength in Kotler's (2003) checklist. Calling it a strength may seem apt because frontrunners must
be doing something right; studies have shown direct correlations between market share and earnings
(Buzzell, Gale, and Sultan 1975); and advantages rooted in network externalities and scale and
experience economies are contingent on market-share leadership (Arthur 1996; Ghemawat 1986;
Grant 2002). Nevertheless, reflexively equating market-share leadership with competitive
advantage or strength is imprudent because the implied causal relationship between volume and
advantage may no longer exist or may never have existed (Jacobson and Aaker 1985). Alongside
the SWOT analysis, industries and segments that are part of the operational environment could be
observed by using Porter's five forces, which allow an analysis of the competitive situation
(Oelsnitz 2000). This model is founded on the important information - that a corporation tactic has
to be connected to its environment. In this framework, Porter identified five different competitive
forces which appear in every market. Those five forces are substitutes, buyer power, supplier
power, barrier to entry and rivalry. The features of these strengths determine the concentration of
competition in a sector of industry and therefore its effectiveness and attraction (Johnson et al.,
2008). To understand the competitive forces and their essential causes, it is important to reveal the
backgrounds of an industry's effectiveness (Porter 2008), providing a framework for anticipating
and influencing competition over time (Porter 2008). A healthy industry structure should be as
much a reasonable concern to strategists as their company's own position (Porter 2008).
Understanding industry structure is also essential to effective strategic positioning (Porter 2008).
For a new competitor, for example, it is quite difficult to enter the market because without enough
cash, credits or loans it is nearly impossible. In the current climate, though, the European Central
Bank is lending money very cheaply, so large loans are not as expensive to service as they were
some years ago. Therefore the probability of a new competitor entering the market is very high. A
good overview of the difficulties in a market situation through Porter's five forces is given by
Investopedia. The clients are the key for each business. Competition for clients has increased over
Details
- Seiten
- Erscheinungsform
- Originalausgabe
- Jahr
- 2013
- ISBN (eBook)
- 9783956363405
- Dateigröße
- 152 KB
- Sprache
- Englisch
- Institution / Hochschule
- Durham University – Durham Business School
- Erscheinungsdatum
- 2014 (September)
- Note
- 2
- Schlagworte
- Improve Management Company Development Airline
