Decision Making – Alternative Courses Of Action.
Business involves decision-making. Decision making means the process of selecting one out of two or more alternative courses of action. The question of choice arises because the basic resources such as capital, land, labour and management are limited and can be employed in alternative uses. The decision-making function thus becomes one of making choice and taking decisions that will provide the most efficient means of attaining a desired end.
A scientific formulation of the business problem and finding its optimal solution requires that the business firm is equipped with a rational methodology and appropriate tools. Business Economics or Managerial Economics is the application of economic theory and methodology to business. Different aspects of business need attention of the owner or the chief executive. He may be called upon to choose a single option among the many that may be available to him. It would be in the interest of the business to reach an optimal decision- the one that promotes the goal of the business firm.
Optimizing Solutions
Business economics serves as a bridge between the theoretical and the practical decision-making part of business. It consists of the use of economic modes of thought to analyse business situations. The integration of economic theory with business practice for the purpose of facilitating decision-making and forward planning by management is the purpose of business economics.
Business Theories
Traditionally, economic theories were developed along two lines- normative and positive. Normative focussed on establishing rules aimed at attaining the specified goals of business. Positive focussed on describing the manner in which the economic system operates. Business economics seeks to establish rules which help business firms attain their goals. If the firms are to establish valid decision rules, they must thoroughly understand their environment.
Demand Analysis and Forecasting
Demand analysis and forecasting provides the essential basis for business planning and occupies a strategic place in a business owner’s schedule. A business is an economic organisation which transforms productive resources into goods to be sold in the market. A major part of business decision making depends on accurate estimates of demand. A demand forecast can serve as a guide to management for maintaining and strengthening market position and enlarging profits. Demand analysis helps identify the various factors influencing the product demand and thus provides guidelines for manipulating demand.
Five main pillars of a successful business are value creation, customer demand, transactions, value delivery and profitability. A business cannot run without these. Other important factors are market research and marketing. Market research involves surveying the market to know what people are interested in. Marketing is making them aware of the product that your business can offer, attracting their attention and making them interested in buying it. As discussed in my post Business Development – Clients and Competitors, try to find out what are the projects your competitors are targeting within your market segment, assess if you can develop an offering that can win those businesses from them. Since you are still new to the industry, competitors do not know you yet. Use that to visit your competitors’ showrooms, if any, anonymously, like any regular customer and collect valuable input to use in your research. Do not think this as unethical, after all, we all learn from watching.
Cost and Production Analysis
A study of costs, combined with the data drawn from the firm’s accounting records, can yield significant cost estimates which are useful for management decisions. An element of cost uncertainty exists because all the factors determining costs are not known and controllable. Discovering costs and the ability to measure them are the necessary steps for more effective profit planning, cost control and sound pricing practices. It is important for a small business owner to know the estimates of their business, to be able to make quicker and more appropriate decisions for the business.
Production analysis is narrower, in scope, than cost analysis and frequently proceeds in physical terms rather than monetary terms.
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Keep coming back for more on managerial economics and its role in a small business owner’s life. Don’t forget to share your experiences and leave your comments in the message section!
