I am completing a group assignment, for which you can find the scenario below. I have done a portion of it so far, but my group mates have not been so collaborative. The assigment is due on th e5th of
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Running Head: BMGT 317 PROJECT TWO: DAIGLE, PINDER, VAUGHN, WIEMANN
BMGT 317 - Project 2 & Grading Rubric
The PrOACT model of decision making uses five steps to help make difficult decisions. PrOACT stands for problem, objective, alternatives, consequences, and tradeoffs. You will use the following worksheet to document the steps of the PrOACT model in making Henriette’s decision. You will complete the following steps of the PrOACT model. For each of the items within the steps, you will support the ideas, reasoning and conclusions put forth using the course readings.
Step One: Creating a Decision Statement
Identify the Decision to be made by creating a decision statement. Framing the decision means discerning the reason or cause for a decision to be made and what precisely needs to be decided. Identifying the correct decision to be made is a critical first step. It is important to review the decision to make sure it is not being framed with bias or prejudice.
| Decision Statement |
| Take the risk of investing to expand the business or not? |
| Explanation |
| Albert Einstein was famously quoted as saying that if he had only one hour to save the world he would spend 55 minutes of that hour defining the problem and only five minutes finding the solution (Litemind, n.d.). Einstein’s quote is meant to stress the importance of defining the problem since a potential solution will only be as good as our understanding of the problem. The genesis of a well-structured decision statement is needed for the best possible outcome/solution. The following elements as outlined by Jehangir Mehentee (Mehentee, 2013) in the PrOACT method (Problem, Objectives, Alternatives, Consequences, and Tradeoffs) are key in forming a well-defined decision statement: Process - This step systematically breaks down the decision-making process by identifying ideas from an un-biased holistic viewpoint. This step can also be shared with others in a communal format to obtain feedback. The PrOACT steps for creating a decision statement are broken down into the following five elements:
Bias - After writing down each phase of the steps, it allows them to be reviewed and/or rephrased. This can also allow a person to gain a different point-of-view and/or allow them to share the written steps with others that possibly have different perspectives/ideas. Application of the step to Henriette - what facts combined with the application of the process step led to the decision statement. Decision Statement - Expand the business or not?
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Step Two: Determining the Decision Objectives
The next step is to identify the Decision Objectives. Objectives are those things that you want the decision to accomplish. You could consider them as the “wish list” of end results.
If Henriette could have anything she wanted in making her decision what would it be?
In formulating objectives, it is important to look at everyone who has an investment in the decision. What end results do they wish to see? Thinking through the goals that need to be reached and the end results will allow priorities to be set while moving through the process as well as with implementation. For instance, if you would want to purchase a car that exceeds your budget, then several options might have to be excluded when making alternatives due to budget constraints.
A decision is a means to an end. Ask what is wanted or needed to be accomplished and what are the interests, values, concerns, fears, and aspirations most relevant to achieving the goal. Note that complex decisions will never have just one objective.
| Decision Objectives |
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| Explanation |
| Process - Once a decision has been established, the next step is to specify the objectives for the decision-making process. Objectives are used to help determine what is needed, their level of importance, and they also used to help justify a decision (PrOACT Decision Making Model, n.d., p. 4). Bias - If all objectives are properly outlined, this can help eliminate action-oriented biases, by ensuring that all risks and uncertainties are outlined and all outcomes are considered (Rykrsmith, 2013, p. 2). This step in the process should allow the decision maker to see the bigger picture, and consider all objectives, rather than just feel the pressure to take action and make a decision. Application - Henriette Scovil needs to evaluate the business’s financial status and weigh the risks to expand the business (or not), potential opportunities afforded to her, and the best financial opportunity that meets her goals and objectives. The objectives that have been established to ensure that financial stability is maintained. Her husband has used portions of his 401K to support her business, therefore they must make sure their decision considers their financial stability, which could greatly influence their decision. Henriette will also consider the financial stability of her stakeholders in her decision. Henriette should also consider her health, and whether or not she will be able to reap the rewards of her hard work, or if travel is what she needs to maintain her health, lower her stress levels. She will also want to consider her happiness, and the happiness of her husband. Will her decision make him happy? Also, will her decision make her employees, customers and suppliers happy? |
| Potential Stakeholders |
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| Explanation |
| Process - A stakeholder is a person who will be affected by the outcome of the decision that Henriette Scovil will make. The stakeholders will help contribute to the decision and the outcome, throughout the process (Nordmeyer, n.d., p. 1). Identifying the stakeholders for the objectives is an important part of the process, because the stakeholders are affected by the outcome of the decision and they also contribute to the decision, so they are an important factor to be aware of throughout the decision-making process. Bias - If stakeholders are identified at the beginning of the decision-making process, and considered throughout the entire process, this can help eliminate some decision-making biases. For example, if all stakeholders are identified and considered during the decision-making process, that could help eliminate the self-interest bias for Henriette (Rykrsmith, 2013, p. 2). This will help ensure that Henriette considers the big picture and all of her stakeholders when making a decision, rather than only considering herself. Application of the step to Henriette - what facts combined with the application of the process step led to identifying the stakeholders.
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Step Three: Creating Alternatives
In creating alternatives, it is best to think outside the box. It is important to avoid the biases and influences that may be limiting the thinking. Ask what if we did this rather than say we cannot do this because of.... Being positive is important and helps to deflect the anchoring bias.
Alternatives require data collection, objectives and a decision-making approach rather than problem solving. Do not initially restrict the number of alternatives. Come up with every possible way the objectives can be met in total or in part.
As part of the process there is a need to clarify the uncertainties associated with collecting data and with the risk associated with the alternatives.
Uncertainties: What could happen in the future and how likely is it that it will occur?
Risk Tolerance: Alternatives involve uncertainties, which means the level of risk associated with the alternative will vary. How much risk is acceptable? Is there a high tolerance for risk, a medium tolerance for risk or a low tolerance for risk?
| Decision Alternative #1 |
| Business Partner Alternative Alternatives are the foundational pillars of decision making. They should serve as the catalyst to any decision. A key function of alternatives is tailoring them to the problem at hand. The four categories of alternatives (process, win-win, information-gathering, and time-buying) are considered by many as the standard when generating a good set of alternatives (Hammond, Keeney, & Raiffa, 1999, p. 56) Henriette could look for a business partner that would handle the business operations while allowing her to maintain her status quo of designing the fabrics. A partner with a background in effectively expanding small businesses could allow Henriette to expand while mitigating potential traveling, health, and other personal plans. Process - The Win-Win category of alternatives is centered around the idea that the alternative needs someone else’s approval (Hammond et al., 1999, p. 57). The purpose is to find out what a stakeholder(s) problem statements is and then provide a solution which fits their objectives and yours. Bias – Proper application of the Win-Win mitigates cognitive bias through the sharing of concerns, ideas, and overall effective communication between all stakeholders. Application of the step to Henriette - The facts surrounding Henriette personal and professional wants and concerns where presented in stark contrast of one another. This narrow mindset of quid pro quo limited Henriette’s ability to effectively generate alternatives. She knows that her husband is looking forward to traveling in the next few years but she has reached a level of demand that warrants a decision. With adding a strategic partner, Henriette could potentially travel and expand her business. |
| Uncertainties Associated with Alternative #1 |
Process - Uncertainties, or the lack of knowledge, can be overwhelming. Simplifying uncertainties through the creation of risk profiles is a great way of mitigating negative consequences. A risk profile captures the essential information about how an uncertainty affects the alternative (Hammond, Keeney, & Raiffa, 1999, p. 113). Bias – Proper application of a risk profile mitigates cognitive bias by exposing key uncertainties, possible outcomes, chances of occurrence, and consequences for the outcomes. Application of the step to Henriette- what facts combined with the application of the process step led to the uncertainties.
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| Risk Tolerance Associated with Alternative #1 |
| Level of risk tolerance (Medium/High) Definition of Risk Tolerance – Risk Tolerances are expression of a person’s willingness to take risk in their quest for better consequences (Hammond et al., 1999, p. 137). What risks does Henriette face with this alternative? Henriette will face a lot of challenges when finding the “right” partner. She will have to find a partner that will have the qualifications, personality traits, shared business view, and professional business background knowledge base to help her achieve her goal. A partner must be willing to play an active role in the business, and understand business processes/procedures to accomplish the goal. If Henriette does not find the right partner, she could risk losing capital, business assets, and time. The “wrong” partner could also cause potential damages and unnecessary liabilities to the company.
Bias- Risk can affect the alternative selection the same way it can objectives. |
| Reiterative Point Revisiting the objectives and alternatives |
| The Business Partner Alternative, allows for Henriette to accomplish majority of her goals/objectives. The goals and objectives will be reviewed for bias and further investigation later on in the PrOACT model. |
| Explanation |
| Process- The business partner alternative allows all objectives to be met. It allows for the potential of increased profits, time, and current business assets. A business partner would allow for a fresh approach to the business for increased technological expansion and innovation to Henrietta’s internet and business storefronts. Without more information, data, and research that the other steps will provide is it unclear at this point if this alternative should replace the main objectives. |
| Decision Alternative #2 |
| Allow/Consider Stakeholder’s vote to expand or not to expand. Process – As outlined in the book Smart Choices (Hammond et al., 1999, p. 56) when tailoring alternatives sometimes the best alternative is a “process” rather than a clear-cut choice. Known as the Process Alternative, addresses choices that are distorted. To ensure a certain level of fairness in decisions involving conflicting interests this method can help preserve and foster the relationships of stakeholders. Bias – Proper application of the Process method mitigates cognitive bias through the understanding and identification of conflicting interests when a decision is not clear. Application of the step to Henriette – Since Henriette is having a hard time deciding by herself, she should allow her part-time employee’s, stakeholders, and her husband vote and make the decision for her. |
| Uncertainties Associated with Alternative #2 |
| Process - Uncertainties, or the lack of knowledge, can be overwhelming. Simplifying uncertainties through the creation of risk profiles is a great way of mitigating negative consequences. A risk profile captures the essential information about how an uncertainty affects the alternative (Hammond, Keeney, & Raiffa, 1999, p. 113). Bias – Proper application of a risk profile mitigates cognitive bias by exposing key uncertainties, possible outcomes, chances of occurrence, and consequences for the outcomes. Application of the step to Henriette- what facts combined with the application of the process step led to the uncertainties.
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| Risk Tolerance Associated with Alternative #2 |
| Level of risk tolerance (Low/Medium) Definition of Risk Tolerance - Risk Tolerances are expression of a person’s willingness to take risk in their quest for better consequences (Hammond et al., 1999, p. 137). What risks does Henriette face with this alternative? Allowing stakeholders to vote will push Henriette to change the ways in which she will have to accomplish her goals. Risks associated with this alternative includes, Stakeholders refusing Henriette’s desire to expand, or a complete change in the ways in which Henriette will have to accomplish her goals. Stakeholders votes can be very time consuming and costly if not performed / organized effectively.
Bias - Risk can affect the alternative selection the same way it can objectives. |
| Reiterative Point Revisiting the objectives and alternatives |
| Henriette has the option to allow her stakeholders, (husband/supplies/customers) to provide input on her decision to expand. Their input can help mitigate unforeseen events and assist Henriette with making a decision to expand. The Stakeholders Vote Alternative will be discussed in depth as Henriette, moves towards the end of the PrOACT model. |
| Explanation |
| Process- The alternative meets some of the objectives, but does not provide further explanation and details into Henriette’s goal for business expansion and growth. Changes should be made to the alternative to consider more in-depth alternatives that will provide clear procedures, guidelines towards Henriette’s goals. Without more information, data, and research that the other steps will provide it is unclear if this alternative should replace main objectives. |
| Decision Alternative # 3 |
| Review the choice from a Capital budgeting NPV perspective. (Utilize Capital Budgeting NPV Techniques) Process – As outlined in the book Smart Choices (Hammond et al., 1999, p. 58) when tailoring alternatives, the Information-gathering alternative dispels some uncertainty surrounding a decision. Bias – The Information-gathering alternative mitigates bias through the collection of quantitative data. Application of the step to Henriette – Capital Budget, also called “investment appraisal”, is a planning process used to determine if a business’s long-term investment (i.e. major capital investments or expenditures) are worth pursuing (Lumen, n.d.). |
| Uncertainties Associated with Alternative #3 |
| Process - Uncertainties, or the lack of knowledge, can be overwhelming. Simplifying uncertainties through the creation of risk profiles is a great way of mitigating negative consequences. A risk profile captures the essential information about how an uncertainty affects the alternative (Hammond, Keeney, & Raiffa, 1999, p. 113). Bias- Proper application of a risk profile mitigates cognitive biases by exposing key uncertainties, possible outcomes, chances of occurrence, and consequences for the outcomes. Application- of the step to Henriette- The major formal methods used in capital budgeting like Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period (PP), Profitability Index (PI), Equivalent Annuity (EA), and Real Options Analysis (ROA) all require some sort of assumed figure within the computation of the formulas.
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| Risk Tolerance Associated with Alternative #3 |
| Using the Net Present Value (NPV) formula is a way to assess risk and determine Henriette’s tolerance. NPV is a central tool in discounted cash flow (DCF) analysis and is a standard method for using the Time Value of Money (TVM) to appraise long-term projects/investments.
Let’s say that Henriette’s Initial Investment amount to expand is $250,000 with a discount rate of 4%. What would be the present-day value of her initial investment amount in four years after taking into account taxes, inflation, and cash flow? Present value for year 1: Present value for year 2: Present value for year 3: Present value for year 4:
Level of risk tolerance (Medium/High) Definition of Risk Tolerance- Risk Tolerances are expression of a person’s willingness to take risk in their quest for better consequences (Hammond et al., 1999, p. 137). What risks does Henriette face with this alternative? Henriette could miscalculate her “potential earnings”/ “profit gains” and lose potential profits, assets, and opportunities.
Bias- Risk can affect the alternative selection the same way it can objectives. |
| Reiterative Point Revisiting the objectives and alternatives |
| The NPV Capital Budgeting perspective allows for Henriette to view her company from an objective view point. The NPV model satisfies majority of Henriette’s objectives but will be discussed further in the PrOACT model. |
| Explanation |
| Process- The alternative meets majority of the objectives, but not all of them. The NPV perspective will provide Henriette with “potential” and “estimated” financial returns in the event that she decides to expand her business. This alternative will help shape current business practices and finances to assist with the overall decision to growth and expansion. Unfortunately, this decision could be considered risky, because it does not provide tangible information based off of future market values. Without more information, data, and research that the other steps will provide it is unclear at this point if this alternative should replace the main objectives. |
| Decision Alternative #4 |
| Do Nothing / Do Not Expand the Business In some cases, doing nothing can save time resources and energy. Doing nothing is always an alternative that needs to be considered when conducting any time of activity, including business related decisions. Doing nothing and keeping current “steady” activity can be very rewarding if valued and handled correctly. Process – Doing nothing may come as a blow to Henriette’s pride in the beginning, but will be the most difficult challenge for her to face in this alternative. Accepting that she doesn’t have to expand her current business, and deciding to focus on other ways to generate profit, can be very rewarding. Bias – The potential bias that Henriette will face will come within. She may have many psychological dilemmas that may influence her to continue with her “desire” to expand the business. She will eventually mitigate this bias once she comes to acceptance/understanding. Application of this step requires: Nothing. |
| Uncertainties Associated with Alternative #4 |
| Uncertainties that come along with “doing nothing” can be the loss of potential. Henriette may wonder “what if” she expanded the business, or “how” will she continue to carry on in her current business practices. Henriette may be uncertain of the future in all aspects of her life, but will eventually realize that life is not always “predictable”. Process - Uncertainties, or the lack of knowledge, can be overwhelming. Simplifying uncertainties through the creation of risk profiles is a great way of mitigating negative consequences. A risk profile captures the essential information about how an uncertainty affects the alternative (Hammond, Keeney, & Raiffa, 1999, p. 113). Henriette, may consider evaluating uncertainty by looking at other income generating alternative. Henriette may decide to get another job, or invest her current business profits/income into a savings fund. Henriette will be able to mitigate uncertainty, by considering possible outcomes and being proactive in her business decision: to do nothing. Bias – Psychological bias will affect Henriette’s decision to do nothing. She will desire to expand the business, but will have to focus on other outcomes and possible opportunities to mitigate bias with her decision. Application of this step requires: Nothing
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| Risk Tolerance Associated with Alternative #4 |
| Level of risk tolerance (Low) Definition of Risk Tolerance – Risk Tolerances are expression of a person’s willingness to take risk in their quest for better consequences (Hammond et al., 1999, p. 137). What risks does Henriette face with this alternative? Henriette will be able to save time, money, energy and current resources. She gains the risk of potential “loss of profitable gains”, and “opportunity”, but saves a lot more with this current position. Bias- Psychological Bias. Henriette will continue to feel loss or failure with her current decision, but will eventually come to understanding and acceptance of “doing nothing”. |
| Reiterative Point Revisiting the objectives and alternatives |
| The Alternative (Do Nothing) does not complete many of Henriette’s objectives, but does provide Henriette the time to review some of the other objectives/goals in life. Later the PrOACT model will discuss this alternative more in depth. |
| Explanation |
| Fill in here the elements to discuss: Process- This alternative does not meet all of Henriette needs but allows for her to focus on other areas of her life, to generate income and travel the world with her husband. Although she is not able to gain anything further from her decision, she was also able to save from potential loss and failing victim to a failed business with more debt. Doing nothing is never a complete loss but a mitigation of the potential risks associated with doing something. |
Step Four: Consequence Table
Describe possible Consequences for each alternative. To do this, it is important for Henriette to think about all possible consequences associated with each alternative.
| Alternative Consequences |
| Process- Mehentee’s 2013, video file “Decision Making Toolkit: PrOACT – Lesson 4, Consequences” discusses the steps used to anticipate what will happen to an objective/decision when implementing an alternative. By using accurate and precise measurements, tables, and scales to weigh the pros and cons of a specific alternative, businesses owners and decision makers are able to subjectively/objectively select the appropriate alternative. Bias- By utilizing a common scales, tables, and measurements, consequences individual alternatives are subjectively identified, weighted and compared. The use of precise and accurate measurements allows for business owners to curb bias that may influence business decisions. Business owners will view the pros and cons of each alternative before implementing them in their business objective. List the Consequences for Each Alternative- Utilizing resources from multiple sources below, different consequence (Benefits/Risks) for each alternative were identified below.
The Partnering Initiative (n.d.) discuss the benefits and risks of partnering in a company. Business partners have a lot of influence, and can be costly for a business. Business partners consequences (positive and negative) rely heavily on the characteristics of the individual and what they can bring to the company. By answering the questions below with “yes” or “no” Henriette is able to decide if a business representative is an effective alternative. If Henriette hires, an efficient and proficient business partner with all the characters below, she will have “overall” profitable consequences to this alternative. Summarized below are some consequences Henriette may face. Consequences: (Benefits/Risks) -Cost/ Pay Salary for Business Partner/Representative. -negative/inevitable -Influence/ Needs to be Knowledgeable / Are they business proficient and efficient? -Influence/ Trustworthy / Do they have an honest desire to benefit the company? -Influence /Same Business View as Henriette: Are they effective business partner? -Innovation/ Are they innovative and technologically savvy? -Long Term Stability (Longevity)/ Do they create longevity for the company to mitigate Henriette’s age factor? -Impact/ Are they increasing profit sales / assisting with growth and expansion? -Reputation/ Do they have a positive reputation? Do they bring a positive reputation to the company? All of these characteristics can be positive or negative and relies heavily on the personal characteristics on the individual. This alternative can have high/low returns for the business.
There are multiple benefits to allowing stakeholders to make a decision through voting. Although this decision is generally “positive” in terms of reducing personal liabilities and risk for large companies, it does not provide a clear and cut view on “how” Henriette will accomplish her goals (small mom and shop company). As discussed in Tenenbaum’s 2015 article, “Legal Duties of Association Board Members”, alternatives can be voted on and discussed, but they must be “presented” first before discussed. As an alternative to Henriette’s business expansion dilemma the consequences are discussed below. Consequences: (Benefits/Risks) -Time Consuming / Stakeholders must be present to vote; less time for Henriette and Husband. -Costly / Can be costly to pay for ideas and expansion -Innovative / Allows for discussion of ideas/alternative/implementation -Current / Capital Growth – Allows for discussion but does not actually implement. -Implementation/Expansion – Does not show a clear-cut view on “how” to implement growth and expansion.
Henriette’s use of the NPV model allows her to review the current financial situation in the long run. In the event that Henriette, used the $250,000 loan to calculate her potential profitable returns, NPV provides an example of her potential profit returns. There are many different consequences associated with this alternative but they rely heavily on the characteristic of Henriette’s current financial/business trends, and the rate of return in the business market today. Using Boundless’ “Advantages to the NPV Method”, Investopedia’s “Capital Budgeting”, and Thomason, K’s (2017). “Advantages and Disadvantages of Net Present Value in Project Selection” a list of consequences were able to be identified for the following alternative. Consequences: (Risk and Benefits) -Dollar-To-Dollar Analysis / Looks at the net worth of the business today and after expansions -Cost of Capital Comparison / Provides details on the cost it will take to fund large projects -Lack of Information / Henriette, may not be able to get an accurate analysis based off of the lack of information for the current market. Cash flows and discounts can also be difficult to calculate, and other metrics are hard to “estimate”. -Easy Comparison / Can be easy to calculate if you want to use a mathematical equation to “estimate” earnings. -Inappropriate Analysis Tool / Use of another analysis tool may be required in order to make an actual decision. NPV provides a great approach and wide view perspective, but more information may be required.
Henriette decision to continue with normal operations and focus on other alternatives leaves her with a multitude of opportunities to focus on her husband and other business endeavors. Coggle’s (n.d.) article “How Doing Nothing Helps Get More Done” explains the multitude of benefits of doing absolutely nothing. Listed below is a brief list of consequences that will occur in regards to Henriette’s decision to do nothing. Consequences: (Benefits/Risks) -Increased Time / To relax, travel, brainstorm other ideas, and spend time with husband -Saves Resources / Prevents the loss of current assets and resources -Prevents Loss / Prevents the potential loss of assets and resources -Prevents Debt / Prevents occurring start-up costs and other financial debt that comes from business expansion and growth -Healthy Alternative / Allows for Henriette to focus on her health and maintaining comfort. Reduces stress levels -Potential Profit Loss / Henriette will not be able to gain the “potential” profits from expanding her business. -Attention to Thoughts / More time to focus and think about other alternatives and activities that may generate income. |
| Objectives | Alternative #1: Business Partner / Assistant | Alternative #2: Allow Stakeholders to Vote | Alternative #3: Review from Capital Budgeting NPV Perspective | Alternative #4: Do Nothing / Do NOT Expand Business |
| Invest in Expanding the Business | 3 / Meets Objective Well | 2 / Meets Objectives | 3 / Meets Objective Well | 1 / Not Meeting Objectives |
| Increase Husband’s Retirement | 2 / Meets Objective | 1 / Not Meeting Objectives | 2 / Meets Objective | 1 / Not Meeting Objectives |
| Increase Husbands Travel Time | 3 / Meets Objective Well | 1 / Not Meeting Objectives | 2 / Meets Objective | 3 / Meets Objectives |
| Increase or Maintain Current Assets Capital / Business Liquidity for Expansion | 2 / Meets Objective | 2 / Meets Objectives | 2 / Meets Objective | 2 / Meeting Objectives |
| Implement/ Expand Business Storefront | 2 / Meets Objective | 1 / Not Meeting Objectives | 2 / Meets Objective | 1 / Not Meeting Objectives |
| Implement / Expand Business Online | 2 / Meets Objective | 1 / Not Meeting Objectives | 2 / Meets Objective | 1 / Not Meeting Objectives |
| Implement / Expand Business Storefront & Online | 2 / Meets Objective | 1 / Not Meeting Objectives | 2 / Meets Objective | 1 / Not Meeting Objectives |
Table/ Key
1 = to represent the alternative not meeting the objectives
2 = meeting the objectives well
3 = as meeting the objectives very well
Step Four (Cont.): Trade Offs
Not all alternatives are a good fit. The question then becomes how to choose the best alternatives. One way to do so is to try to look for ways of equalizing the alternative. Trade-offs help! Trade-offs focus on two things:
(1) The consequences the decision maker is willing to accept and
(2) the advantages the decision maker is not willing to give up by choosing an alternative.
Using Mehentee’s (2013) video “PrOACT- Lesson 5 Trade Offs” Henriette is able to review and measure, the advantages and disadvantage of each consequences associated with their specific alternative. Deciding to compare all the alternatives with each other and selecting the two most practical alternatives utilizing practical dominance techniques, Henriette is able to select the two remaining alternatives. Listed below is a table measuring the value of each alternative, and the two most practical options for Henriette.
| Objectives (Trade Offs) | Alternative #1: Business Partner / Assistant | Alternative #2: Allow Stakeholders to Vote | Alternative #3: Review from Capital Budgeting NPV Perspective | Alternative #4: Do Nothing / Do NOT Expand Business |
| Invest in Expanding the Business | 3 / Meets Objective Well | 2 / Meets Objectives | 3 / Meets Objective Well | 1 / Not Meeting Objectives |
| Increase Husband’s Retirement | 2 / Meets Objective | 1 / Not Meeting Objectives | 2 / Meets Objective | 1 / Not Meeting Objectives |
| Increase Husbands Travel Time | 3 / Meets Objective Well | 1 / Not Meeting Objectives | 2 / Meets Objective | 3 / Meets Objectives |
| Increase or Maintain Current Assets Capital / Business Liquidity for Expansion | 2 / Meets Objective | 2 / Meets Objectives | 2 / Meets Objective | 2 / Meeting Objectives |
| Implement/ Expand Business Storefront | 2 / Meets Objective | 1 / Not Meeting Objectives | 2 / Meets Objective | 1 / Not Meeting Objectives |
| Implement / Expand Business Online | 2 / Meets Objective | 1 / Not Meeting Objectives | 2 / Meets Objective | 1 / Not Meeting Objectives |
| Implement / Expand Business Storefront & Online | 2 / Meets Objective | 1 / Not Meeting Objectives | 2 / Meets Objective | 1 / Not Meeting Objectives |
| Overall Alternative Ratings | 16/21 | 9/21 | 15/21 | 10/21 |
After narrowing her alternatives, Henriette is forced to make trade-offs between two remaining alternatives to make a measurable and logical decision.
Trade-offs facilitate elimination by creating equality between objectives and their consequences. Henriette will do more in-depth review of the consequences associated with the remaining alternatives; listing the consequences in the chart below. She will then strike out all evenly weighted/common consequences and focus on the remaining differences between two alternatives.
Henriette will then utilize the even-swap method to come to the “most logical” decision for her objective. Using even-swaps between the two opposing alternatives below Henriette is able to make a measurable and logical decision. She will begin striking out rows/objectives that share even values (common benefits) between the remaining alternatives. She will then conduct an even swap between two characteristics listed below.
| Objectives (Trade Offs) | Alternative #1: Business Partner / Assistant | Alternative #3: Review from Capital Budgeting NPV Perspective |
| Invest in Expanding the Business **Cost to Implement Alternative | Required Wage (Costly) -Allows Expansion -Does Not Review Current Finances | Self-Administered (Cheaper) -Could Potentially Allow Expansion -Reviews Finances -Forecast / Could Be “Wrong” |
| Increase Husband’s Retirement **Effects on Money | Increase or Decrease Retirement -Based off of Business Health | No Significant Change Reviews Current Finances Focuses on Saving Money |
| Increase Husbands Travel Time **Effects on Time | Allows More Spare Time -Partner Does Work | Utilizes Spare Time to Conduct |
| Increase or Maintain Current Assets Capital / Business Liquidity for Expansion **Effects on Current Business | Increases/Decrease “Potential” Capital Increases Current Assets (Workers/Ideas) | Maintains Current Assets Reviews “Potential Capital & Current Assets / Forecast Loss / Gain |
| Implement / Expand Business Storefront & Online **Effect on Expansion Capabilities | Increased Manpower / Ideas | No Significant Change |
| Overall Alternative Rating (After Trade Off/Even Swaps) | 2/5 | 3/5 |
Tradeoffs
A salary must be paid to her business partner. Henriette currently does not have enough money to cover the cost of a business partner. Reviewing her current business practices from a NPV (Capital Budgeting) Perspective will allow her to fix current business finances to allow for business expansion.
It cost money to expand and Henriette’s husband will have to dedicate more money from his retirement in order to get the business up and running. The NPV (Capital Budgeting) Perspective, causes no significant impact on their retirement.
A business partner allows more time for Henriette’s husband to travel if the business, goes well. Reviewing current finances and conducting NPV budgeting will be time consuming and will take away for travel.
A business partner increases current assets for the company, but the decision to expand could be costly. Deciding to review the decision to expand from an NPV (Capital Budgeting) perspective does not cause any significant changes to the current assets. The NPV perspective will allow Henriette to focus on forecasted gains/losses, and ways she will be able to expand or make money in the future.
Making a decision to expand (storefront/online) requires increased manpower and ideas. Utilizing the NPV (Capital Budgeting) perspective does not impact this decision. A business partner will facilitate expansion capabilities and allow ideas to flourish within the company.
| Reiterative Point |
| In conclusion, conducting trade-offs and even swaps allow Henriette to make a decision. Based off the chart Henriette should make a decision to review her decision to expand from a Capital Budgeting NPV Perspective, for further guidance on “how” and “if” she should expand. |
| Explanation |
| Process- Using Mehentee’s (2013) video “PrOACT- Lesson 5 Trade Offs”, Henriette was able to conduct a series of eliminations and even swaps to measure the differences between to alternatives and their consequences. Analyzing trade-offs and the different consequences of the dominating alternatives (practical dominance), Henriette was able to make a decision to use the NPV capital budgeting perspective, before expanding her business. |
Step Five: Decision Matrix
When you have equalized the objectives using trade-offs, one final step that will help in the decision making is to weight the objectives to the alternatives. This step puts some subjectivity back into the process. It allows the decision maker to identify one objective as more important than another and thus perhaps satisfy a value that is not met by equalizing all the objectives. To do this, this Decision Matrix tool is used.
Part 1: Table One (Unweighted):
| Objectives (Horizontal) Alternatives (Vertical) | Invest in Expanding the Business | Increase Husband’s Retirement | Increase Husbands Travel Time | Increase or Maintain Current Assets Capital / Business Liquidity for Expansion | Implement/Expand Business Storefront or Internet | Total |
| Alternative 1 Hire Business Partner / Assistant | 11 | |||||
| Alternative 2 Allow Stakeholder to Vote | ||||||
| Alternative 3 Review from NPV (Capital Budgeting) Perspective | 10 | |||||
| Alternative 4 Do Nothing / Do Not Expand | ||||||
| Table: 0: Does Not Meet 1: Meets Very Little 2: Meets 3: Meets Very Well | ||||||
Part 2: Table Two (Weighted):
| Objectives (Weighted) (Horizontal) Alternatives (Vertical) | Invest in Expanding the Business (x2) | Increase Husband’s Retirement (x5) | Increase Husbands Travel Time (x4) | Increase or Maintain Current Assets Capital / Business Liquidity for Expansion (x3) | Implement or Expand Business Storefront/Internet (x1) | Total | |
| Alternative 1 Hire Business Partner / Assistant | 3x2=6 | 1x5=5 | 3x4=12 | 2x3=6 | 2x1=1 | 30 | |
| Alternative 2 Allow Stakeholder to Vote | 0x2=0 | 0x5=0 | 0x4=0 | 0x3=0 | 0x1=0 | ||
| Alternative 3 Review from NPV (Capital Budgeting) Perspective | 2x2=4 | 3x5=15 | 2x4=8 | 2x3=6 | 1x1=1 | 34 | |
| Alternative 4 Do Nothing / Do Not Expand | 0x2=2 | 0x5=0 | 3x4=12 | 0x3=0 | 0x1=0 | 14 | |
| Table: 0: Does Not Meet 1: Meets Very Little 2: Meets 3: Meets Very Well | Weights 5: Very Important 4: Important 3: Significant 2: Little/No Significance 1: Not Important | ||||||
| Explanation of Rating and Weighting |
| Process- In this process we were able to identify the importance of each alternative, by weighing the importance of the objectives. By weighting the importance of the objectives, we were able to determine by numerical values the best or most desirable alternative for Henriette. Bias- This step curbs bias, because it focuses on the actual numerical values of each alternative. By highlighting the importance of the objectives with weighted values, and measuring them to alternatives ability to satisfy the objective, we are able to compare and contrast the alternatives, based on objectivity and performance. Application of the step to Henriette- The weights were applied in order of importance to Henriette. Henriette’s desire to expand the business is based off the desire to grow her husband’s retirement and increase his travel time. If Henriette did not desire to increase her husband’s travel time, and pay back his retirement, the order of importance would have changed dramatically. Due to their old age and the desire to have fun, and solidify financial wellness, the level of importance was weighted as shown above. |
Step 6: Linked Decisions: (Decision Made Today/Influence Tomorrow)
Before the selection of an alternative one other consideration to be assessed is that of linked decisions. A consideration of linked decision seeks to examine the possible need to make decisions after implementation of the alternative.
| Linked Decisions |
Bias- If all linked decisions are considered, in relation to each alternative, the decision maker will have the ability to consider all possible outcomes, before making a decision. Proper application of linked decisions mitigates cognitive biases by exposing linked decisions that may arise. |
Step Seven: The Decision
| The Decision |
| Capital Budgeting Utilizing the NPV Method. Utilizing capital budgeting, also known as investment appraisal, has been shown to be the best alternative throughout this process. This come as no surprise since capital budgeting is a planning tool and process used to determine which of an organization’s long-term investments, major capital, or expenditures are worth pursuing (Lumen, n.d.). As is the case with Henriette’s desire to expand, capital budgeting’s NPV method will provide a forecast of revenues and expenditures while constructing a model of how the expanded business might perform financially. The premise of NPV states that, the higher the NPV, the more attractive the investment proposal. Simply stated, when NPV > 0, then the investment would add value to the company so the project should be accepted. As seen within the mathematical equation in step three, Henriette’s NPV is $37,545.52. Taking this into account, along with this being the only alternative rooted in quantitative facts, the choice for Henriette was clear. This alternative meet most of Henriette’s objectives while providing her with tangible facts that an expansion of her business could be done. |
| Recommendation/Review of Second Alternative: The second-best alternative was the alternative in which Henriette adds a business partner. The reasoning behind not choosing this alternative over capital budgeting was that this alternative did not have any quantitative data to support the objectives. While this alternative ranked almost as high as NPV, in regards to meeting her objectives, this alternative simply does not provide Henriette with any factual numbers. Having too many uncertainties, Henriette was unwilling to risk her husband’s retirement and dreams of traveling, with so little facts to support her expansion. |
Step 8: Does the Decision Make Sense? One Last Review
Earlier the point was made that the decision-making process needs to be reviewed during the work and at the end of the work. Reflection assures that bias and influence are weeded out as well as the fact that the best decision is made.
| Reiterative Point |
| Framing of the Right Decision The decision is properly framed because Henriette’s main conflict is deciding whether to expand her business or not, based on the limited information she currently has.
|
| Objective Completion The key objectives are correctly identified since she is concerned about her and her husband’s late age and are very close to retirement eligibility. Henriette also wants to be sure that her and her husband are financially secure enough for their retirement plans to be able to travel and enjoy their retirement. The objectives to maintain or increase her financial assets will be met and allow her the ability the options to maintain her status quo or execute her business expansion options when and if deemed suitable to assume the lowest risk possible while meeting her overall objectives. |
| Objective Satisfaction Are you satisfied with the alternative chosen? If so, why and if not, why not? Satisfaction has been met by the chosen alternative that allows Henriette to maintain a safe level risk at her and her husband’s ages and be able to maintain a stable financial outcome to support the desired objectives. A different alternative may have been considered and chosen should they both have been much younger and had more time to consider the financial risks associated with the other options. |
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Adapted Concepts From:
Smart Choices, Hammond, Keeney & Raiffa
“A Practical Guide to Making Better Decisions”
Harvard Business Press, 1999
References
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