Managerial Economics Chapter 2 – The Nature and Scope of Managerial Economics

Management Decision Problems

7 Steps of the Decision-Making Process
1. Identify the decision. To make a decision, you must first identify the problem you need
to solve or the question you need to answer. Clearly define your decision.
2. Gather relevant information. Once you have identified your decision, it’s time to
gather the information relevant to that choice. Do an internal assessment, seeing
where your organization has succeeded and failed in areas related to your decision.
Also, seek information from external sources, including studies, market research, and,
in some cases, evaluation from paid consultants.
3. Identify the alternatives. With relevant information now at your fingertips, identify
possible solutions to your problem. There is usually more than one option to consider
when trying to meet a goal.
4. Weigh the evidence. Once you have identified multiple alternatives, weigh the
evidence for or against said alternatives. See what companies have done in the past to
succeed in these areas, and take a good hard look at your own organization’s wins and
losses.
5. Choose among the alternatives. Here is the part of the decision-making process where
you, you know, make the decision. Hopefully, you’ve identified and clarified what
decision needs to be made, gathered all relevant information, and developed and
considered the potential paths to take. You are perfectly prepared to choose.
6. Take action. Once you’ve made your decision, act on it! Develop a plan to make your
decision tangible and achievable. Develop a project plan related to your decision, and
then set the team loose on their tasks once the plan is in place.
7. Review your decision. After a predetermined amount of time—which you defined in
step one of the decision-making process—take an honest look back at your decision.
Did you solve the problem? Did you answer the question? Did you meet your goals? If
so, take note of what worked for future reference. If not, learn from your mistakes as
you begin the decision-making process again.
Management Decision-Making Problems
1. Product Selection, Output, and Pricing
Factors in choosing the right product

• Marketability - Before considering what product to sell, determine what market

you want to sell to. Once you know what kind of customer you want, then you'll be
able to determine their needs. If your products only appeal greatly to some people,
it may not be enough to sustain a business. Your product selection doesn't have to
 appeal to all of the population but it should be something you can convince a large
percentage of shoppers they need.
• Profit Margin - When you look at the price of the product, don't forget to calculate
direct and indirect costs (like overhead) of selling your goods. The bestselling
products won't ever earn any real money if your margin is too small.
• Trendiness - When it comes to selecting products to sell based on what's popular,
timing is extremely important. New trends and products can be a great boost to
your business, but you'll need to enter at the beginning of the product lifecycle in
order to be successful. Learning to pick a hot product before it becomes hot is a
valuable skill that comes from knowing your market.
• Competition - Competition is healthy and there are ways other than volume and
price a smaller store can compete with larger retailers. On the other hand, the more
unique the product, the less chance of competition.
• Quality - When deciding which products to sell in your store, ask yourself the
following question. Is this product something I would give my dearest friend? If
not, you may want to keep looking. Product quality is extremely important when
your reputation is on the line.

2. Internet Strategy
- Also known as web strategy, e-marketing, web marketing, or digital marketing.
- refers to strategies that are used to market a product or service online and it
includes:
• website design strategies
• online promotions
• social media
• blogging
• digital advertising
• article marketing
• video / podcasting
- As of Oct 2018, according to the website of Statista, 4.2 B people were active
internet users and 3.4 B were social media users. This gives the business a huge
number of potential customers.

3. Organization Design
- It is a process for shaping the way organizations are structured and run.
- Benefits include: improve communication, increase productivity, and inspire
innovation
- Poor organization design will result in: confusion within roles, a lack of
coordination among functions, and failure to share ideas
6 Elements of Organizational Structure
1. Departmentalization - refers to how the organizational structure groups
the company's functions, offices and teams. Those individual groups are
typically referred to as departments. Departments are usually sorted on the
basis of the kinds of tasks the workers in each department perform.
2. Chain of Command - This helps eliminate inefficiencies by having each
employee report to a single manager, instead of to several bosses. When
employees encounter obstacles or problems, they report back to the
appropriate manager. When necessary, the manager is then responsible for
taking the concern or issue up the chain of command to the next level, and
so forth. This chain of authority or command streamlines corporate
operations and communications for a more efficient and productive
business.
3. Span of Control - An organization’s span of control defines how many
employees each manager is responsible for within the company. There is no
single type of span of control that’s ideal for all companies or even for all
businesses in a specific industry. The optimal span will depend on a number
of factors, including the size of the workforce, how the company is divided
into departments and even the company’s specific business goals and
strategies.
4. Centralization and Decentralization - Centralizing authority in a business
means that middle management typically is left with little to no input about
the goals the company sets. On the other hand, a company could adopt a
more decentralized approach. A decentralized system allows all levels of
management the opportunity to give input on big-vision goals and
objectives.
5. Work Specialization - Work specialization ensures that all employees have
specific duties that they are expected to perform based on each employee's
work experience, education and skills. This prevents an expectation that
employees will perform tasks for which they have no previous experience
or training and to keep them from performing beneath their capacities.
6. Formalization - Finally, organizational structures implement some degree
of formalization. This element outlines inter-organizational relationships.
Formalization is the element that determines the company’s procedures,
rules and guidelines as adopted by management.
4. Product Development and Promotion Strategy
- New product development helps companies diversify target customer ranges and
expand into new market segments. When you’re ready to launch a new product, a
marketing strategy can help you connect your customers to the new products
before they are distributed by building interest and excitement around the
product.
- Whether your company is developing new products or making improvements on
classic designs, your product marketing strategy helps new customers gain
interest. Knowing how your product competes against your competitors, adjusting
your business’s culture around a brand, and allocating funds should all be part of
your marketing strategy.
- Example: Samsung launches a new smartphone. It used traditional marketing
strategies like TV commercials and print ads. Plus, they even used internet
marketing approaches like advertisements on YouTube, posting on social media
and their official website. They are able to reach a wider audience to notify about
their new product.

5. Worker Hiring and Training

- The key to having competent employees is implementing an effective recruiting
and training process.
Steps in Recruiting or Hiring Process
a) Review your company practices. Before recruiting competent employees,
make sure your company focuses on competency. Your company should
exude professionalism, from its advertisements to marketing on social-
networking sites. For example, posting information with grammatical
errors on a social-networking site is likely to make competent candidates
question how well you run your company.
b) Advertise for candidates through professional outlets. Advertise for
candidates through professional outlets. Competent candidates know how
to get recognized. They sift through and post their resume on professional
websites, show up at job fairs and make an attempt to meet and mingle
with employers.
c) Assess a candidate’s resume. Dismiss candidates whose resumes do not
match the criteria you’re looking for. Only invite candidates to an interview
if you believe they can make a substantial impact in your company.
d) Conduct a thorough interview. Ask open-ended questions and make sure
the candidate possesses the skills and knowledge required for the job. In
this way, you get to test their communication skills as well.
 Guidelines in Training Employees
a) Give new employees a manual that fully covers the job they’ve been hired
to do. The manual should consist of guidelines, requirements and tips to
help the employee effectively complete his tasks.
b) Provide hands-on training. Hands-on training places employees in the
position they’ve been hired for and helps them understand how to
accomplish their daily tasks and diagnose problems they’ll likely encounter.
c) Delegate the training process to seasoned and effective employees,
managers, or supervisors. Competent trainers create competent
employees. Make sure whoever is training new employees fully
understands the role the employee is taking on. The trainer must possess a
wealth of knowledge about both the company and the employee’s position.
d) Promote self-training. After getting a feel for the position by reading the
provided manual and being helped by veteran employees or managers, new
employees should take on their daily tasks themselves. Do not
micromanage; let new employees learn through their mistakes. Competent
employees do not need to be spoon-fed.

6. Investment and Financing

- Investment revolves around spending capital on assets that will yield the highest
return for the company over a desired time period. It is the decision about what to
buy so that the company will gain the most value.
Factors in Affecting Investment Decision

• Cash flows of the project - The series of cash receipts and payments over the
life of an investment proposal should be considered. There must be some
regular cash flow within the venture to help it sustain.
• Profit - The most critical criteria in choosing the venture are the rate of return
it will bring for the organization in the nature of profit for, e.g., if venture A is
getting 10% return and venture В is getting 15% return then one must prefer
project B.
• Investment criteria - The various investment proposals are evaluated on the
basis of capital budgeting techniques. Which involve calculation regarding
investment amount, interest rate, cash flows, rate of return. These procedures
are applied to the investment proposals to choose the best proposal.
- Financing involves when, where, and how should a business acquire funds. There
are two ways in raising money from external funders: either taking on debt or
selling equity.
Factors in Affecting Financing Decision

• Cost - The cost of raising funds from various sources differ a lot. The cost of
debt is payment of interest. The cost of equity includes commission and other
fees. The most cost-efficient source should be selected.
• Risk - The dangers of starting a venture with the funds from various sources
differ. Larger risk is linked with the funds which are borrowed, than the equity
funds.
• Cash flow position - Good or bad cash flow position gives confidence or
discourages the investors to invest funds in the company.
• Control - In the situation where existing investors need to hold control of the
business then finance can be raised through borrowing money, however, when
they are prepared for diluting control of the business, equity can be utilized for
raising funds.
• Condition of the market – This involves the boom and bust cycle. Boom Period
(economic expansion) is when the economy is rapidly growing. Bust Period
(depression period or recession) is the opposite of boom, wherein the
economic growth is decreasing rapidly.
During boom period, finance can easily be raised by issuing shares (because
stock prices increased in this period) but during depression period, raising
finance by means of debt is better (because stock prices decreased).