Book Report on "Decision-Making in Business"

Book Report 9 pages (2592 words) Sources: 9 Style: Harvard

[EXCERPT] . . . .

Decision Making in Business

Recommendations for Onetech

Onetech is a publicly funded organization, specialized in the provision of development services for the staffs employed in the Information Technology sector. The organization is currently considering a transition from its current form of public funds to self-funding. The principle of this new business model would be that of client firms paying an annual membership fee, based on which they would continue to benefit from the services provided by Onetech.

The dilemma raised at this level is however represented by the nature of the services to still be provided by the firm, the downsizing processes which would intervene and the size of the membership fee. The following three alternatives have been forwarded by Tom Bale:

The maintenance of the same services and the request for a £6,000 membership fee per year

The reduction of the services provided and the request for a membership fee of £4,000 per annum, and last

The provision of specific services as required by the customers and the charge based on the services provided.

Aside from the services component, the organization must also decide on the effective means of implementing the change process and the budgetary concerns of such an action. Three options have been devised in this sense, and they are presented and analyzed below:

Option 1 -- Moving to a more cost effective facility:

Costs associated with the movement: £10,000

Organizational savings per year: £100,000 in rent (current rent of £120,000 minus new rent of £20,000)

No downsizing

Additional costs with marketing, research and other expenses: £150,000

Investment would be recuperated through sponsorship and the revenue structure is as follows:

£900,000 in an optimistic scenario, with a probability rate of 30 per cent

£600,000 in a medium revenue scenario, with a probability rate of 60 per cent

£300,000 in a pessimistic scenario, with a probability rate of 10 per cent.

Option 2 -- Moving to an even slammer premise:

Costs associated with movement: £10,000

Saving from rent: £120,000 -- £10,000 = £110,000

Staff costs: reduced by £60,000 initially, with a prospect of reduction by half

Additional costs with marketing, research and other expenses: £100,000

Investment would be recuperated through sponsorship and the revenue structure is as follows:

£600,000 in an optimistic scenario, with a probability rate of 30 per cent

£400,000 in a medium revenue scenario, with a probability rate of 60 per cent

£200,000 in a pessimistic scenario, with a probability rate of 10 per cent.

Option 3 -- Massive downsizing:

30 per cent of the current staffs would be retained

Initial outlay of £100,000

Additional costs with marketing, research and other expenses: £200,000, which can be covered through sponsorships

The revenue structure for this third option is as follows:

£720,000 in an optimistic scenario, with a probability rate of 30 per cent

£3600,000 in a medium revenue scenario, with a probability rate of 60 per cent

£140,000 in a pessimistic scenario, with a probability rate of 10 per cent.

In order for the analysis to be conclusive, it has to be conducted on two specific directions. The first is that of assessing the three alternative options, and the second direction is that of assessing the revenue structures for the most desirable alternative. The analysis of the three alternative courses of action is conducted on a systematic model of revealing the pros and cons of each alternative solution.

Option 1 -- Moving to a more cost effective facility:

Pros:

Maintaining the same staff structure and not as such impacting employee morale

Reducing costs by moving to a more cost effective region

Cons:

Losing a central location, which is easily reachable

Potential disturbances in the relationship between firm and customers due to the change in location, as the new location might make it more difficult for the firm to be found by its customers.

Option 2 -- Moving to an even smaller premise:

Pros:

Additional savings with rent as well as with the elimination of redundancies

Emphasis on operational efficiency through the elimination of redundancies (Cologon and Cohen, 2008)

Decreased costs with marketing, research and other adjacent expenditures (the lowest costs of all alternatives)

Cons:

The location would be even smaller that that in the first alternative option

It implies downsizing of the staff members, which impacts both employee morale, as well as the perception of stakeholders. In such a setting, stakeholders such as business partners or customers might perceive Onetech as less stable and as such less trustworthy (Jacobs, 2000).

Increased marketing and adjacent costs.

Option 3 -- Massive downsizing:

Pros:

Ability to start over in terms of personnel needs

Focus on operational efficiency

Massive savings with the elimination of redundancies.

Cons:

Loss of credibility

Loss of human and intellectual capital

Loss of capabilities and abilities to complete operational projects, including the provision of services

Demise of the organizational reputation in the eyes of various stakeholder categories, such as business partners, customers, current and potential employees, the public and so on (Hage, 2007).

The costs associated with the second and third options are more than Onetech can bare and the advantages of the first alternative are required to ensure a successful transition. It is as such recommended for the firm to focus on moving into a more cost effective facility, preserving its staff and their intellectual capitals and striving to consolidate itself.

Based on the analysis previously conducted, it becomes obvious that the best alternative for Onetech is that of preserving its current staff structure and moving to a more cost effective region in order to restructure itself. Still, as this decision is made, the process moves on to the revenue structure to be implemented throughout the change process.

The table below analyses the three options through the lenses of optimism, pessimism and regret.

£900,000

£600,000

£300,000

Optimistic

Low levels of probability

Unrealistic and unsuitable

Feasible, still constraints are possible

Most accessible to customers, would impact the volume of demand

Pessimistic

Not sustainable and not attainable

Not sustainable, low chances of materialization

Feasible and attainable, yet unable to support organizational profitability

Regret -- the best decision compared to the actual decision (University of Baltimore)

The risks associated with the highest revenue structure

The loss of the possibility of generating higher revenues (£900,000)

The loss of the possibility of generating higher revenues (£600,000)

The revenue structure of £600,000 seems the most pertinent one, representing a medium value between the optimistic and pessimistic values. The largest problem with the optimistic revenue structure of £900,000 was that of attracting customers.

£900,000 / £6,000 = 150 customers

£600,000 / £6,000 = 100 customers

£300,000 / £6,000 = 50 customers

By selecting a fixed membership fee of £6,000 within the first option, the company would have to:

Attract 150 customers in order to attain its £900,000 revenues target

Attract 100 customers in order to attain its £600,000 revenues target

Attract 50 customers in order to attain its £300,000 revenues target

£900,000 / £4,000 = 225 customers

£600,000 / £4,000 = 150 customers

£300,000 / £4,000 = 75 customers

By selecting the fixed membership fee of £4,000, Onetech would have to:

Attract 225 customers in order to attain its £900,000 revenues target

Attract 150 customers in order to attain its £600,000 revenues target

Attract 75 customers in order to attain its £300,000 revenues target.

All of these alternatives are difficult to assess due to the variables of uncertainty, the relative lack of business experience of the firm and the changing economic conditions. Still, in the context so far assessed, it is believed that the more suitable solution is for the company to implement a medium revenues target of £600,000, by requesting an annual fee of £4,000.

Such a strategy would require the firm to attract 150 customers, which is a relatively high number. Still, such an objective could be attained through marketing efficiencies (Wreden, 2007), as well as the emphasis on the smaller membership fee. The smaller retail price helps customers to make their decisions in favor of purchasing the services offered by Onetech (Tybout and Calder, 2010).

From a financial standpoint, the strategy is expected to generate a profit of £320,000, estimated based on the following:

Sales = 0.3 x 900,000 + 0.6 x 600,000 + 0.1 x 300,000 = 270,000 + 360,000 + 30,000 = 660,000

Direct service costs = 300,000

Indirect costs = 50,000

Profit = Sales -- Direct costs -- Indirect costs = 660,000 -- 300,000 -- 50,000 = 310,000

This strategy of company movement, staff retention and medium revenues targets would be a temporary solution allowing the firm to complete the transition from publicly funded to self-funded. This transition period is expected to spread throughout a duration of no more than two years. After the transition is completed, Onetech would reassess its position and make new decisions based on the context and situations raised and observed throughout the transition. While this recommendation would still be further addressed in the future, it is at this stage believed that the firm should implement a pricing structure based on the… READ MORE

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