management-and-decision-making as

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Exam code:7131

The decision-making process

Managers spend much of their working day making decisions, such as choosing how to use money, people and time to meet business goals
Clear, timely decisions keep firms competitive, allow resources to be allocated well and help employees adapt to change
Decisions may relate to any aspect of business operations, such as:
- pricing tactics
- product changes
- recruitment and training plans
- investment in new machinery
- choosing suppliers
- entering new markets

Managers make four broad kinds of decisions
Decisions differ in how often they come up, how risky they are and who normally makes them

These are big, long‑term decisions that set the overall direction of the business, such as whether to enter the Asian market or build a new factory
They use lots of resources and involve high uncertainty
Who makes them: usually senior executives or the board
Why they matter: They shape everything else the firm does and can’t easily be reversed
- Example: Tesla chose to build its first European “Gigafactory” near Berlin to serve EU customers and cut shipping costs

These are medium‑term decisions that turn strategy into reality, such as setting the price for a new product line, launching a six‑month promotional campaign or adjusting staff rotas
Who makes them: middle managers or team leaders
Why they matter: Done well, they improve performance and keep strategy on track; done badly, they waste money or time
- Example: Ford cut the price of its F‑150 Lightning pickup truck by up to £8,000 in July 2023 to boost demand and stay competitive

These are routine, repeat decisions handled by rules or, increasingly, software, such as reordering stock when it falls below a set level and approving staff expenses
Who makes them: often automated or delegated to junior staff
Why they matter: They save time, ensure consistency and free managers to focus on more complex issues
- Example: Toyota’s Kanban system automatically reorders parts the moment an item runs out of stock, without a manager having to think about it

These are one‑off, unfamiliar and high‑risk decisions, such as responding to a data breach, deciding on a merger or making key changes during a pandemic
Who makes them: senior managers or crisis teams using judgement and creative thinking
Why they matter: They can rescue or transform the business but carry a lot of uncertainty, so managers need good information and clear criteria
- Example: General Motors decided to recall every Chevrolet Bolt EV after rare battery fires, an urgent and unplanned — but necessary — decision, which cost over $1 bn

Managers never know the future for certain
Every choice — e.g. launching a new car model, cutting prices or building a factory — involves risk (a chance that something will go wrong), uncertainty (unknown or unpredictable events) and a potential reward (e.g. profit, growth or an improved reputation)
- Risk is measurable using data and probability
- Uncertainty cannot be measured, so good judgement and flexibility may be needed

Bigger rewards usually require bigger risks
- Effective managers identify and quantify risk, then decide whether the reward is worth the risk, given the uncertainties

Example	Explanation
Tesla’s Berlin factory	Risk: Spending €5bn on a new plant near Berlin was a risk; local permits and protests held the project up, so the money could have been wasted Reward: If it works, Tesla can deliver cars faster and gain sales in the important EU market
Boeing 737 MAX update	Risk: Rushing design changes risked safety; two crashes grounded the jet Uncertainty: Boeing set aside $4.9bn to cover legal payouts and potential lost orders
Surprise Guinness shortage	Uncertainty: A Christmas 2024 TikTok craze made Guinness so popular that brewer Diageo had to divert extra stock from Ireland. Sudden demand spikes are hard to predict Cost: Pub chains publicly complained about the beer shortage
$1.2tn EV gamble	Risk: Global car makers plan to spend $1.2tn by 2030 on developing electric cars and batteries Reward: Market leadership in a fast‑growing sector

Opportunity cost refers to the value of the next best alternative that you give up when making a choice
- Due to the problem of scarcity, choices have to be made about how to best allocate limited resources among competing wants and needs
- In simple terms, when you decide to do one thing, you lose the chance to do something else
Every decision forces a choice and an opportunity cost
- The National Health Service must allocate a fixed budget: Spending £1bn on new cancer drugs leaves less for mental‑health nurses, so health leaders weigh which benefits patients more
- A farmer near Norwich can lease land for a solar farm or keep growing wheat; high energy prices push many towards panels, cutting local grain supply
- A student with £50 can buy a gig ticket or new textbooks; whichever they skip is their opportunity cost

For managers making decisions, every choice uses scarce resources
- E.g. when a manager spends £2m updating machinery, the opportunity cost is the project they now can’t fund, such as launching a new product line
Comparing options sharpens managers’ priorities
- Listing what must be given up helps managers rank projects by the value they add to the business
Makes decision trade‑offs clear to stakeholders
- E.g. showing that hiring more staff may mean delaying a marketing campaign helps teams understand why one option wins and may commit them to the final decision