Business Decision-Making and Analysis Sample

Question 1

Executive summary

This report is an overview of the problems faced by The Conroy Manufacturing Company relating to the process of decision-making in which the company is considering undertaking either of the two prospective production sites to get the maximum benefits out of the project with the minimum cost. For this purpose quantitative analysis has been conducted and an analysis of the Net Present Value as well as the excepted values of the two production sites taken into consideration. In addition to this, a qualitative analysis of the other relevant factors has been done along with the implementation of SMART decision making to facilitate the process of goal setting in the organization. Lastly after the evaluation of the facts and figures a conclusion has been drawn and recommendations suggested on the course of action that the given company should undertake.

Introduction

This report has been prepared to help The Conroy Manufacturing Company which is located in Melbourne in decision-making purposes regarding the acquisition of a new production site at Campbell Field or the adoption of an existing site in Laverton. The company wants to acquire a new production site to start the production of new electric lawnmowers so as to increase its sales volume and consequently sales revenue and give tough competition to the rivals in the market. In order to arrive at a conclusive decision the company has conducted a financial analysis ascertainment of expected value from the two individual sites and the net present value analysis of the projects. For the purpose of conducting the quantitative analysis the existing market conditions have been taken into consideration as they play a crucial role in determining the revenue generation potential in a given year. The cost and benefits associated with the two production sites are therefore going to be reflected from the undertaken quantitative analysis which is going to help The Conroy Manufacturing Company in evaluating both the prospects. In addition to this, decision-making techniques like SMART have also been implemented to understand and evaluate the qualitative factors associated with the production site to alleviate the problem faced by the company.

Overview

The Conroy Manufacturing Company which was established in 1960 is considering and is operating in several product groups namely Industrial machinery, consumer goods, paint, building materials, etc. To develop of gardening tool, the company is now considering two alternatives and the costs as well as the pros and cons related to those (Götze etal. 2015). As per the chief engineer of the company, the market design of the proposed plan would cost $2.5m and the entire cost of research and development would amount to $8m. Along with that it is also assumed that if the target is not met within the specified time then the proposal would be reviewed and the modification cost would be $6.4m. Two locations have been considered for this project the Campbell field site is a new site while the Laverton site is an existing and unused site that can be converted for production. The acquisition cost of the Campbell field site would be $6m and for equipping the mill, another $4m would be required. This site has a production capacity of approximately 50000 lawns every year and has good warehousing and transportation facilities available along with the availability of a local skilled labor force. The location of this site is about 30 km from the Melbourne Port.

On the other hand, the Laverton site has a production capacity of 166000 lawns every year and is located about 20 km from the Melbourne Port. To boost sales exclusive advertising campaigns have been considered to be undertaken and for that purpose, extensive market research has been conducted and the market conditions have been divided into good and poor. The conversion of this site for production would require $24m. As the volume of production in the Campbell field is relatively smaller therefore this site would not be affected by market conditions. To analyze the profitability and to take decisions relating to the adoption of the project the expected values of the project form \both locations can be calculated. Expected value is the anticipated value which is derived from a given investment. For the calculation of the expected value, the market condition probabilities are multiplied with the cash inflows from those impacts. In addition to expected values, net present value of the project can also be calculated and the outcomes analyzed to draw conclusions on the recommended course of action. For the purpose of calculation of the present value the initial cash outflows which have been invested in a project is subtracted from the present value of the cash flows generated every year from the project. If the amount of total outflows is seen to be smaller than the inflows then the project is usually adopted whereas if the inflows are seen to be smaller than the outflows then the project is dropped (Salci and Jenkins, 2016). This decision-making in case of The Conroy Manufacturing Company is also influenced by other factors like the production capacity of the mills, location of the site, availability of transportation facilities and human resources etc.

Assumptions and analysis

This study has been conducted to help The Conroy Manufacturing Company with the decision-making process. To facilitate this expected values and the net present values of the project for both the locations i.e., the Campbell field as well as the Laverton site has been calculated (DeFusco et al.2015). It has been estimated that if The Campbell field site is being disposed off then it is expected to have a selling price of $6m. For this study it has been assumed that the cost of capital of the company is 10% and the cash flows occur at the end of every year. Important factors like development grants and taxation have been ignored.

Calculation of expected values

Expected value analysis is undertaken to determine the severity of risks. It can be observed that the probability of good market condition in the year 2020 is 0.7 whereas the probability of poor market condition is 0.3. Where market conditions refer to the characteristics of the market like the number of existing competitors, level of competitiveness, the growth rate of the market, etc in which Conroy Manufacturing company is thinking of entering. The more favorable the market condition is higher the chances of improved business performance (Campbell et al. 2015). Hence the cash flows generated every year during good market conditions is $24m whereas the cash flows during poor market conditions amounted to $8m every year. The total expected value has come to $67.20 during good market conditions in the year 2020 whereas the expected values was relatively lesser during poor market conditions and amounted to $9.60. Similarly, the probability of good market conditions during the year 2021 was 0.4% and the chances of a poor market condition were higher and stood at 0.6$ (Heath et al. 2017). As a result of the given market condition the expected value that was generated during favorable conditions amounted to $38.40 and the cash flows from unfavorable or poor market conditions amounted to $19.20. The total expected value in the year 2020 amounted to $$76.8m and the total expected value in the year 2021 amounted to $57.6m. Therefore in terms of business performance the year 2020 is a more favorable year for The Conroy Manufacturing Company as the chances of good market conditions are relatively higher than the year 2021.

Calculations of Net Present Value

Net Present value is an approach that is used to evaluate business proposals as it is based on a sole factor i.e., cash flows. Along with the calculation of the expected values the net present value from both the sites has also been ascertained to draw a better conclusion on undertaking the course of action. The NPV which has been derived from the Campbell filed site is 28.144 after subtracting the initial outlays from the total present values of the cash flows derived from the project (Benamraoui et al. 2017). In the case of the Laverton site which is affected by market conditions like good and poor. The net present value from the Laverton project when the market conditions were good amounted to $37.216m whereas the net present value stood at $(8.928) m during poor market conditions. A negative Net present value depicts that the amount of investment made is greater than the amount of revenues or cash flows generated from the investment. Hence it should not be undertaken by the company.

Therefore as the Laverton site is influenced by fluctuations in the market conditions and as the Net present value during poor conditions has gone down to negative hence undertaking this site can be a risky venture for The Conroy Manufacturing Company even though the net present value during good market conditions is quite high as compared to the Campbell field style. The total net present value from the Laverton after considering both good and bad market conditions is coming to $28.288m which is slightly higher than the net present value from the Campbell field site (Harrison and Lock, 2017). On the other hand, on analysis of the production volume it is seen that the production capacity of the Laverton site is 166000 lawnmowers every year which is 3 times more than the production volume of the Campbell field site. As higher the production higher the sales. Therefore if The Conroy Manufacturing Company undertakes the Laverton site then their sales revenue will significantly increase due to the increase in production volume which is going to help the company in growing and in facing competition from rival firms. In addition to these, the distance of the Laverton site is 20km from the port of Melbourne as compared to 30km in the case of the Campbell field site therefore this alleviates the transportation problem as well as reduces the carrying cost of the company (Richmond, 2018). The estimated value of the Campbell field site at the end of the year 2023 is estimated at $16m which is $32m in the case of the Laverton Site.

Decision Tree

A decision tree acts like a tool for decision support that shows the potential decision paths and consequences by taking into account events like net present values, expected values, and probabilities (Lee et al. 2016).

Value at the end
$16m

Success

Campbell field site Failure

Abandon project $6m

Laverton site $

success $67.20m
0.7
Do not undertake
production Failure $9.60m
Success 0.3

0.4 failure Failure
0.6 $19.20m
$0 $38.40m success $(8.928) m
$37.216m

Figure 1: Decision tree

(Source: Self-developed)

Application of decision-making technique

The adoption of decision-making techniques makes the process of decision-making easier and more convenient for companies. Here in this case Conroy Manufacturing Company can adopt the SMART technique for facilitating the decision-making process of which site to adopt and which site to drop. (Hammond et al. 2015). The SMART is a technique of goal setting that sets Specific, Measurable, Attainable, Realistic, and Timely goals for businesses. Apart from that SMART goals also serve as a way of communication between the line manager and the employees of the organization. If implemented efficiently this method of decision-making can enhance the performance of the organization by setting up the business objectives in a systematic manner (Kaiser et al. 2015).

Specific: The goals set by any business must be specific and should not be vague and meaningless. The Conroy Manufacturing Company is planning to develop gardening tools and equipment and for that, it is required to produce electric lawnmowers (Graditi et al. 2015). For production of the lawnmowers, it is considering possible locations and therefore the goal that has been set by the company is quite specific and should facilitate the decision-making process of the company.

Measurable: One of the most important criteria of a project or prospective investment plan is its measurability quotient. Unless the project is measurable in quantifiable terms it is not possible to ascertain the viability of undertaking the project solely on the basis of qualitative attributes (Prato and Herath, 2017). If a goal is measurable the business will know if they have achieved it and trace any possible deviation that din not let them achieve the goals, if that is the case. In this case the prospective project sites of The Conroy Manufacturing company namely Campbell field and the Laverton is both measurable in quantitative terms as the cost incurred in acquisition and maintenance of the sites as well as the expected cash flows from the two sites have been explicitly mentioned (Mardani et al. 2015).

Attainable: While it is realistic to set high goals for enhancement of the business performance, setting realistic and attainable goals is very important. Setting a goal that is impossible to attain will only affect the morale of the people involved but will also lead to wastage of time, money as well as resources that could have been used to attain realistic goals. In this case the goal set by the company regarding starting new production is quite realistic and therefore the company should make necessary efforts to attain the pre-set goals (Yoe, 2016).

Relevant: Every business organization has multiple goals to achieve, both long-term and short-term goals. All the goals should be smoothly aligned with the overall goals of the business organization to attain the organizational objectives (Bi et al. 2014). In this case, The Conroy Manufacturing Company is thinking of diversifying their line of business and the products they offers to widen the scope of sales and generate more revenue. For this purpose, the company is considering two prospective sites to start production of lawnmowers. To arrive at a decision they are analyzing the cost and benefits associated with both the sites. Therefore in that regards the goals set by the company are relevant to the achievement of the overall organizational goals of The Conroy Manufacturing Company.

Timely: Setting a time frame within which the set goal is required to be achieved is a pre-requisite for the successful attainment of the organizational objectives (Azouzi and Jarboui, 2018). If goals are not met within the pre-set timeline, then often entities are compelled to bear extra cost for such delay. In this case, The Conroy Manufacturing Company wishes to successfully develop the prototype within December 2018. If the target is not met within that time the company will have to bear an additional $6.4m on modifications of the prototype. Therefore it can be said that achieving targets within the pre-set timeframe always facilitates business entities in carrying out business operations more conveniently and without having to bear additional costs on it.

Therefore from the aforesaid points it can be said that if The Conroy Manufacturing Company effectively and successfully implements the SMART decision-making technique in their business, the company’s decision-making capability will get enhanced leading to improved business results (Peters, 2016). The SMART technique sets a proper vision and clear goals that are definite. Such clarity in goals motivates the business entities and allows them to move forward. Along with that, this method facilitates businesses in setting their priorities as per the urgency of the situation and therefore Conroy Manufacturing Company should consider focusing on adoption of the production site on an immediate basis if it wants to achieve the set goals within December 2018. This technique also provides for time management and makes sure that the business considers all the relevant and material information relating to the pros and cons of undertaking a particular investment or project plan. In this case the given company with the help of this technique and other quantitative analysis can come to a clear conclusion on which production site to adopt, in order to facilitate the production of new lawnmowers (ROLLE, 2017).

Recommendations

From the given study it can be concluded that the Conroy Manufacturing Company is facing a decision-making problem regarding the adoption of a production site to initiate the production of new electric lawnmowers (Tan and Anderson 2015). On analyzing the two prospective production sites, one at Campbell Field which is a new site, and another at Laverton which is an existing site it can be seen that both the sites have individual costs associated with in addition to the overall research and development costs of the entire project. On evaluation, it has been observed that the initial investment cost which is associated with the Campbell field site is relatively lesser as compared to the Laverton site and the Laverton site gets affected by favorable and unfavorable market conditions. At the same time, the production capacity of the Campbell field is much less than the laver ton site (Ragozzino et al. 2016). As the main goal of the organization is to increase its sales volume and consequently the sales revenue as the sales of The Conroy Manufacturing Company has been comparatively lesser than other firms of the same industry in the market. Therefore if the production capacity is more the company will be able to generate more revenue by selling in larger quantities. Both the sites on the other hand render almost the same amount of net present value. On considering other factors like transportation and warehousing facilities, distance from the port etc it has been seen that the Laverton site is going to be more convenient for the company. The implementation of the decision making technique SMART has also facilitated the decision making process and it can be concluded that converting the existing site at Laverton will be more valuable for the company (Mardani et al. 2015). Therefore it is recommended that the company should immediately undertake the renovation process and start production at the Laverton site so as to draw maximum benefit from the production of the new electric lawnmower.

Conclusion

From the above study it can be concluded that The Conroy Manufacturing Company can mitigate the issues it is facing relating to decision-making by making correct evaluation of the financial analysis of the two production sites it is considering namely the Campbell field and the Laverton site. The result from the analysis of the Net Present value and the Expected value analysis would help the company determine which production site would meet all its current requirements and produce the best results. Along with that, certain qualitative factors must be taken into account as well so as to draw an accurate conclusion. In addition to financial analysis the implementation of the SMART decision-making technique by The Conroy Manufacturing Company makes the goal-setting process more systematic in the organization as it ensures that relevant and measurable goals are set and measures taken to achieve those. Though this technique is simpler in nature, still relying solely on this method for setting goals in the organization may result in the goals lacking some critical and intricate details. In addition to that the goal can also turn out to be very rigid, therefore repelling creative ideas and flexibility that might be needed to make adjustments in the existing plans so as to achieve an even better outcome and get improved business results.

Question 2

Strengths and limitations of the analysis

On evaluating the strengths and limitations of the analysis undertaken by The Conroy Manufacturing Company in the context of the problem it is facing it has been noticed that both the quantitative analysis methods like Net Present Value and expected value analysis as well as the decision-making technique that has been implemented has got some inherent advantages and disadvantages (Watkiss et al. 2015). One of the major advantages of the Net present value method is that it indicates the ability of a prospective project to create value for the company by taking into consideration the fact that the worth of a penny in the future is going to be less than it’s worth today. In addition to that it considers the cost of capital and therefore facilitates the decision-making process in quantitative terms. At the same time one of the major limitations of this method of analysis is that it often assumes the entities’ cost of capital and if the cost of capital is assumed to be too low then that will lead to suboptimal investment whereas if it is taken to be too high that will lead to letting go of good investment opportunities. Also if the projects ar of two different sizes the Net Present Value method is not very useful (Bora, 2015).

The expected value analysis has a major advantage as it takes into account the calculated risks as and when required as per its association with the project. In the case of The Conroy Manufacturing Company, the prospective site at Laverton gets impacted by both favorable as well as unfavorable market conditions. Therefore probabilities have been assigned and those have been taken into account while ascertaining the expected values of both the production sites. But at the same time this method of analysis has some inherent drawbacks as well as it fails to provide the requisite guidance on limiting or restricting the downside exposure. It does not always take into account the magnitude of money which is exposed to chances of loss (Nanda and Rhodes-Kropf, 2016)

Along with the quantitative analysis to arrive at a conclusive decision The Conroy Manufacturing Company has also adopted a decision-making technique called SMART which facilitates the company in alleviating its decision-making issues. The technique however has some inherent pros and cons. The major advantages of adopting such a technique in decision-making are that creates an increased awareness in the organization by setting the goals right and within a pre-determined time frame. It also makes sure that there is perfect alignment of individual project goals with that of the overall organizational objectives (Bernardo et al. 2015). In this case The Conroy Manufacturing Company is interested in opening a new production site so as to increase its production volume and achieve its overall organizational goal of earning higher revenue from sales.

Along with the strengths the limitations which are associated with SMART techniques of decision making is that these goals are set by the managerial personnel’ of the organization. Therefore personal biases can often cloud over management decisions which may affect the entire organization as a whole as personal judgment is influenced by a number of factors (Rubin and Patel, 2017). This kind of bias often arises due to a lack of harmonization between individual goals of the goals of the organization and often leads to goal-setting failure. Another drawback of the analysis is the assumption of the cost of capital which if not exact can negatively impact The Conroy Manufacturing Company by altering the calculation of the Net Present value from the two production sites. Also, the fact that development grants and taxation have not been taken into account, makes the entire analysis very unrealistic. Therefore if the information on the amount of taxes had been there that would have improved the analysis (Sundararajan and Tseng, 2017).

References

Journals

Azouzi, M.A. and Jarboui, A., 2018. Managerial Optimism Level and Investment Decision: Decision Tree Analysis Int'l J. Soc. Sci. Stud., 6, p.107.

Benamraoui, A., Jory, S.R., Boojihawon, D.R. and Madichie, N.O., 2017. Net Present Value Analysis and the Wealth Creation Process: A Case Illustration The Accounting Educators' Journal, 26.

Bernardo, A., Fabisiak, A. and Welch, I., 2015. Capital Structure with Endogenous Liquidation Values.

Bi, Z., Da Xu, L. and Wang, C., 2014. Internet of things for Enterprise Systems of modern manufacturing IEEE Transactions on Industrial Informatics, 10(2), pp.1537-1546.

Bora, B., 2015. Comparison between net present value and internal rate of return International Journal of Research in Finance and Marketing, 5(12), pp.61-71.

Campbell, J.D., McQueen, R.B., Libby, A.M., Spackman, D.E., Carlson, J.J. and Briggs, A., 2015. Cost-effectiveness uncertainty analysis methods: a comparison of one-way sensitivity, analysis of covariance, and expected value of partial perfect information Medical Decision Making, 35(5), pp.596-607.

Götze, U., Northcott, D. and Schuster, P., 2015. Analysing Investment Programmes Under Uncertainty. In Investment Appraisal (pp. 299-321). Springer, Berlin, Heidelberg.

Graditi, G., Di Silvestre, M.L., Gallea, R. and Sanseverino, E.R., 2015. Heuristic-based shiftable loads optimal management in smart micro-grids IEEE Transactions on Industrial Informatics, 11(1), pp.271-280.

Heath, A., Manolopoulou, I. and Baio, G., 2017. A review of methods for analysis of the expected value of information Medical Decision Making, 37(7), pp.747-758.

Kaiser, M.G., El Arbi, F. and Ahlemann, F., 2015. Successful project portfolio management beyond project selection techniques: Understanding the role of structural alignment International Journal of Project Management, 33(1), pp.126-139.

Lee, C.F., Lee, J., Chang, J.R. and Tai, T., 2016. Statistical Decision Theory. In Essentials of Excel, Excel VBA, SAS and Minitab for Statistical and Financial Analyses (pp. 685-698). Springer, Cham.

Mardani, A., Jusoh, A. and Zavadskas, E.K., 2015. Fuzzy multiple criteria decision-making techniques and applications–Two decades review from 1994 to 2014 Expert Systems with Applications, 42(8), pp.4126-4148.

Mardani, A., Jusoh, A., Zavadskas, E.K., Khalifah, Z. and Nor, K.M., 2015. Application of multiple-criteria decision-making techniques and approaches to evaluating of service quality: a systematic review of the literature Journal of Business Economics and Management, 16(5), pp.1034-1068.

Nanda, R. and Rhodes-Kropf, M., 2016. Financing risk and Innovation Management Science, 63(4), pp.901-918.

Peters, L., 2016. Comparison of Real Options Analysis and Other Methods. In Real Options Illustrated (pp. 17-25). Springer, Cham.

Prato, T. and Herath, G., 2017. Role of multi-criteria decision making in natural resource management. In Using multi-criteria decision analysis in natural resource management (pp. 17-26). Routledge.

Ragozzino, R., Reuer, J.J. and Trigeorgis, L., 2016. Real options in strategy and finance: Current gaps and future linkages Academy of Management Perspectives, 30(4), pp.428-440.

Richmond, A., 2018. Direct net present value open pit optimisation with probabilistic models. In Advances in Applied Strategic Mine Planning (pp. 217-228). Springer, Cham.

ROLLE, C., 2017. Management and Application of Decision and Risk Analysis in Du Pont Decision Science, 22(6), p.115.

Rubin, G.D. and Patel, B.N., 2017. Financial Forecasting and Stochastic Modeling: Predicting the Impact of Business Decisions Radiology, 283(2), pp.342-358.

Salci, S. and Jenkins, G.P., 2016. Incorporating Risk and Uncertainty in Cost-Benefit Analysis.

Sundararajan, S.K. and Tseng, C.L., 2017. Managing Project Performance Risks under Uncertainty: Using a Dynamic Capital Structure Approach in Infrastructure Project Financing Journal of Construction Engineering and Management, 143(8), p.04017046.

Tan, B. and Anderson Jr, E.G., 2015. 10 Using Decision Trees to Value Managerial Real Options Analytical Methods for Dynamic Modelers, p.307.

Watkiss, P., Hunt, A., Blyth, W. and Dyszynski, J., 2015. The use of new economic decision support tools for adaptation assessment: A review of methods and applications, towards guidance on applicability Climatic Change, 132(3), pp.401-416.

Books

DeFusco, R.A., McLeavey, D.W., Pinto, J.E., Anson, M.J. and Runkle, D.E., 2015 Quantitative investment analysis. John Wiley & Sons.

Hammond, J.S., Keeney, R.L. and Raiffa, H., 2015 Smart choices: A practical guide to making better decisions. Harvard Business Review Press.

Harrison, F. and Lock, D., 2017 Advanced project management: a structured approach. Routledge.

Yoe, C., 2016 Principles of risk analysis: decision making under uncertainty. CRC press.

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