Decision Management In tomorrows Business Ecosystem

February 12, 2014 Dr. Paritosh Basu

www.innoventionians.com

Flow of Discussion
Revisit Decision Management Decision Management - Guiding Principles and Building

Blocks for Value Creation

Behavioural Finance & Decision Management Approaches

and Orientation
Six Cs and Ten Commandments

Approaches and Hierarchical Analyses

Heuristic Issues Traps, Bounded Rationality and Ethics

The Trio of Critical Imperatives Boundaries of Corporate Governance Enterprise Risk Management Sustainability

Case Study on Discount Management

Decision Variables & Tools for Evaluation
When future looks hazy, it is time to go back to basics

Reach Apex

Revisit Decision Management

Bite the Source

What is Decision Making

Decision making is the process by which managers respond to opportunities and threats by analysing options and making decisions about goals and course of actions Opportunities = Ways to improve organisational performance

Threats

= Occurs when the organisation is affected by adverse impacts of events

Learning points

Doing what is right is not hard - Knowing what is right is. Lyndon B Johnson
Once you have made your marks watch out for erasers.
Will Rogers The story of a kid on a winter morning in a hill station Make best use of environment and save inputs Crisis is a wonderful opportunity to waste - Remain in a state of readiness
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Findings from a Study of IBM

Participants in India believe that industry / sector pressures will increase challenges and opportunities over the next three years

Major Changes and Challenges Over the Next Three Years

Imperatives of a Growing Economy
Need for faster decision making Product/Service Demand Growth Pressure to reduce cost base Demand for external transparency (e.g., Board, shareholders, taxpayers, regulators) Ability to atract and retain talent Access to short term liquidity/long-term capital
39% 53%

India

Top Challenges

Global
74%

83%

79%

61%

77%

78%

75%

69%

56%

40%

0%

20%

40%

60%

80%

100%

0%

20%

40%

60%

80%

100%

Source: IBM Institute for Business Value, 5 The Global CFO Study 2010

As a result of these factors, a majority of Indian Finance organizations believe that they have to make major changes to respond.

Corner Stones of Decision Making for Value Creation

4Rs - Right Task at Right Time with Right Process and for Right Value Dramatic improvements in systems and procedures for (Seven Seas) Quality - Competitive differentiation of products and services Cost - Leadership in products lifecycle management Volume - Competitive advantage besides being the first mover Relation - Delight of both internal and external customers Speed - Respond to changes in market, and environment - Turnover of resources, Supply-chain Flexibility - Peaks and troughs and multidirectional expansion Sustainability - Develop enduring substance to sustain all above Discrete modelling of performance linked incentives

Will Tomorrows Business Ecosystem Demand Decisions for ??

Source: faculty.css.edu/dswenson/web/Powerpoints/ChangeDrivers.ppt

Commandments for Changing Ecosystem

Make decision takers aware of What may go wrong Be aware of organisational realities - Quick fix solutions may yield only short term results Prophesise for long run and bring in Collective Wisdom Converge towards the framework of Enterprise Risk Management (ERM) Treat every single Information as Strategic Asset Throw away Executive Summaries, critically examine Details Be dispassionate for what is to be dropped, including people, yet ring fence talents Do not ignore Small operations / Products and wastages And the list goes on for specific realms of organisations

Sustained value generation skill and not ownership is the ultimate criteria for occupying the Drivers Seat

Decision Management - Guiding Principles and Building Blocks for Value Creation

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Value Creation - The Other Name of Decision Management

Value has a value only if its value is valued.^

Maximisation of Value Additions & Innovention*

Pre-assess impacts of seeds in the Womb of Time

Increase in Shareholders Wealth

*Innovention =
Innovative and Inventive Value Creation ^ Bryan Dyson, former CEO of Coca Cola

How to approach Decision Management

1. Half filled with water 2. Half empty 3. The glass is full - half filled with water and half with air. Successful decision making presupposes positive attitude and proactive approach

Source: Unknown

Business Ecosystem A Qucik Recapitulation

Exposure to sever global competition even on home ground Direct impact of global events Coupling and destabilising effects Technology explosion leading to faster delivery at customers ease Consumerism and manifold options to choose from Transformation from protective confidentiality to total transparency

Earlier formula of Price = Cost + Pre-determined Return is being replaced by market driven realities
Selling Price = Value critically measured by customers for the utility Return Cost = Debt Servicing Costs, Profit, and Retentions for future expansion. Thus = Residue (SP Return) to be shared by other inputs

Target for Value Management is COST Management

13 Manage performance and costs, else move away from competition

Revisit Value Creation Through Decision Management Value creation = Utility Cost, or Result Cost > 1
Maximise Value = Maximise Utility or Minimise Cost

Build organisation around Vision > Mission > Culture, Value

Add value by minimising value destruction Focus on strategic drivers of values Create Balance Score Card for each one in the team Process cross - functional data and use information

Work innovatively and use simple solutions

Develop superior capabilities effective for Customers both in
External, and Internal Environment

The Trend is visible You have no business to be in the 14 business of doing business unless you create sustainable values

The Story of A Ship Repair and Itemised Bill

15

Balanced Scorecard Position in Value Creation Steps

Strategy & Balance Score Card - Steps In a Continuum
Vision What we want to be
VALUES - Whats important to us

Mission Why do we exist SWOT Leads to STRATEGY - Our game plan BALANCED SCORECARD - Implementation & Focus STRATEGIC INITIATIVES - What we need to do PERSONAL OBJECTIVES - What I need to do

For each Step Decision

Satisfied SHAREHOLDERS Delighted CUSTOMERS

Management is essential
Efficient and Effective PROCESSES Motivated & Prepared WORKFORCE

STRATEGIC OUTCOMES

Therefore, critically important requirements

in the process of Decision Management and

Value Creation in tomorrows Business Ecosystem

Are
Building Strategies around

Vision > Mission > Culture > Values > SWOT

Timeliness & Innoventive
TM

Action Plans

Minimising Suboptimialities and Value Destructions

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Target - Where to go from where ??

Zone - A Tomorrow
Business performance management is all about making sense of What is happening now and What should happen in forward path

Yesterday

Today

Zone - B

% age Change in Turnover

Conduct trend analysis > Map present position > Fix strategic intent > Initiate Action

Controllers will be able to create value in the process of DM if they change their role from Score Keeper to Value Integrators

Finance Profiles
High

Finance Efficiency

Low Low High

Business Insight
Source: IBM Institute for Business Value, The Global CFO Study 2010

Let us see a movie movie and repeat repeat it

Behavioural Finance & Decision Management Approaches and Orientation

Decision making is the way of everyones life

Six Cs of Decision Making

Construct - Clear picture of what must be decided Compile - List objectives and requirements to be met Collect - Information on alternatives that meet requirements

Compare - Alternatives that meet requirements Consider - The what might go wrong factor with each alternative Commit - Take a decision and remain committed through it

Factors to be considered for Decision making

Perception Goals Priorities Style

Acceptability Demands Risks Resources Business specific factors Value Judgment

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Ten Commandments for Decision Making

General Management point of view
1. Define objectives and goals to be achieved 2. Define the problem(s) to be resolved 3. Study the internal and external realities 4. Develop alternative courses of actions 5. Critically define and give due considerations to limiting factor(s)

6. Select the appropriate decision making tools

7. Visualise the resource requirements for executing the decision 8. Understand differences between decisions made and to be

executed under projected market conditions with

- Certainty - Uncertainty and / or - Internal and external risks 9. Understand the need and importance for creativity and innovation 10. Evaluate defined alternatives and choose the best one at the right time
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Steps in Decision Making Process

... 2

Financial Management Point of View Should be considered for all decisions 1. Define relevant and irrelevant costs and revenues 2. Understand the importance of qualitative factors 3. Construct statements of RELEVANT costs and revenues for each decision alternatives - with adjustments for qualitative factors 4. Analyse the impact on segment profit vis--vis congruence towards corporate goals 5. Determine the net return to be realised 6. Assess the need for adding risk premium to the return from decision 7. Analyse the conflicts that may arise with other quantitative objectives 8. Conduct sensitivity analysis with variations in volume related and financial variables 9. Determine the total value of cost / return in the time horizon, i. e., life cycle 10. Select the alternative with highest return after satisfying the subjective factors and risk premium
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Approaches for Selecting Decision Alternatives

Global Country

Experimentation
Corporate

Reliance on the past

How to select from alternatives

Choice made with right perspective

Creative

Research and analysis

Intuitive

Source: Management - A Global Perspective, Wheirich & Koontz

Avoid falling into Decision Traps while adopting any of the approaches
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Levels of Decision Making Programmed & Non-programmed Decisions

Organisational Level Nature of Problem Unstructured Nature of Decision Non-programmed

Structured

Programmed
Source: Management - A Global Perspective, Wheirich & Koontz

Review organisational philosophy, principles and practices

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Eight Traps - Heuristic Issues in Decision Management

1. Anchoring - Disproportionate weight to the first information 2. Statuesque - Biases towards present situation 3. Sunk Cost - Leads to perpetuate past mistakes 4. Confirming evidence - Leads to seek information supporting an existing preference and to discount opposing information 5. Framing - Errors in statement while framing a problem on which a decision is to be taken 6. Overconfidence - Leads to over estimation about accuracy in forecasting decision variables 7. Prudence - Leads to over cautiousness while evaluating impacts of uncertainties 8. Recallability - Leads to give undue weight to recent dramatic events

The best way to avoid all the traps is awareness - forewarned is forearmed
Hammond J. S. , Keeney R. L. and Raiffa H. Harvard Business School, Boston, MA USA 26

Bounded Rationality
People show bounded rationality while taking decisions It means ability to make rational choices is bounded by

Insufficient information about the problem Relevant criteria Constraint of time and cost Quality and amount of data Mental constraint to solve the problem
As a result people Compromise on the best possible solution Go for something which is acceptable to the leadership team Satisfies rather than optimise
Laureate Herbert Simon
Source: Indian Management, December, 2010

Human biases can affect strategic business decisions

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Six Cs of Decision Making

Construct - Clear picture of what must be decided Compile - List objectives and requirements to be met Collect - Information on alternatives that meet requirements

Compare - Alternatives that meet requirements Consider - The what might go wrong factor with each alternative Commit - Take a decision and remain committed through it

Factors to be considered for Decision making

Perception Goals Priorities Style

Acceptability Demands Risks Resources Business specific factors Value Judgment

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Ethics & Decision Making Want Self vs. Should Self

Ethical decision making today faces a challenge between Want Self - Part of we the Professionals (I want it this way!!) - Emotional, Impulsive, Hot-headed - Exercises a relative disregard for ethical considerations Should Self - Contrast to want self - Rational, Cognitive, Thoughtful and Cool-headed - Encompasses ethical intentions and beliefs

- Weaves around ethical values and principles,

Recommendation of the Author Cultural changes within the organisation should aim at bringing decision making closer to our ethical viewpoints.
Developed from thoughts of Max H. Bazerman Straus Professor at the Harvard Business School

Introspect and get to know how do you conduct yourself

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The Trio of Critical Imperatives in Decision Management by Controllers

ERM, Governance and Sustainability

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Decisions within Boundaries of Corporate Governance

Risk and Performance Management

Disclosure and Transparency

Align strategic oversight role with Risk Intelligence and Congruated Goals

Legal and Regulatory Boundaries

Corporate Governance

Independence and Value Orientation Business Practices and Ethics

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Enterprise Risk Exposure Profile for Decision Management

Create and Review the Risk Register

External Risks Reforms, Market, Technology, Competitor, Natural, Legal & Regulatory, Political
Action - Map every Cash Generation Unit vs. Risks and Mitigation Steps

Currency Exchange

Financial

Credit

Planning

Customer Success
Human Resource Secrecy

Operational and Environmental Strategic

Goal Congruence
Health & Safety

Fraud
Info. Reliability

Cost of Capital

Leadership, Product Profile, Product Image Life Cycle, Business Portfolio, Business Erosion Model, Communication, Org. Structure, Business Alliances

R&D

Liquidity

Image Product / Service Erosion Pollution Failure GAAP Conversion

Brand Compliance Erosion

32 Direct and Indirect Taxes

External Reporting

Sustainability Management Key to Management of Long Term Business Performance

Four P Approach for Sustainability

Sustainability Management - Revisited

Questions to ponder over
1. Is the Earth finite or infinite?

2. Is the capacity of the Earth limited?

3. Is it possible to restore or reform its capacity? 4. Will growth in this Earth be limited to its capacity? 5. Can an organisation ignore such questions and grow?

Who will take lead to answer the last question - the CEO, CFO or CXO?
Four P Approach Sustainable Product, Planet, People and Profit

Sustainability Management - Revisited .. 2

The process of Development that meets the needs of the present without compromising the ability of future generations to meet their own needs. is Sustainable Development
World Commission on Environment and Development (The Brundtland Commission), 1987

Sustainable Management Direct the course of a company in ways that restore and enhance all forms of capital to generate stakeholders value and contribute to the well-being of current and future generations Integrate environmental, social and governance issues into business strategy Build value by defining, evaluating and reporting on indicators beyond financial performance
Set priorities for Bottom Line - Profit, People, Planet and / or Product

Controllers Questions for Sustainable Value Creation in Planning, Budgeting and Execution Process

What are the plans, action points, capital and revenue expenditure for Reducing material intensity Utility audit and reducing consumption of power, fuel, steam, water, etc.

Optimisation and substitution of raw natural resources

Minimising dispersion of toxic substances Green logistics for renewable and used products

Recycling of scrap, wastage and spoilage

Prolonging product life at minimum differential price Increasing service intensity to reduce frequency
All CXOs to ensure viability and growth after absorbing all these expenditure

Similar points are also to be ensured by vendors

A Case Study Strategic Decision Management

The Story of a Win-Win Game of Five Business Stake Holders

37

Case Study on Strategic Working Capital Management

Loan of Bank turned NPA

E-0

E-2
Supply of Materials Raw Matl. Manufacturer

Fin. Goods E - 1 Manufacturer (1) P. O. for Fin. Goods E-3

Fin. Goods

20% of Bill Paid

E-6
@ 15% Disc.

Common Bank Escrow A/c

10%

Material Supplier & F. G E - 5 Manufacturer (2)

70%

retained by Bank

Payment of Invoice of Mfr (1)

Purchaser Fin. Product

E-4

Confirmation for Payment to Escrow A/c

E-5 E = Event of Transaction

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Decision Variables and Tools for Evaluation

39

What Are Decision Variables?

Decisions variables are those factors which are essential for
Determination of the objectives and its quantification

Definition of the problem to be resolved or tasks to be accomplished

Quantification and measuring of impacts of subjective elements

Evaluation of alternative courses of action

Assess and anticipate the requirements and realities during the process of execution and

Selecting the best alternative course of action

Importance Direct or Indirect Primary or Secondary Immediate or Futuristic and Internal or External

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Tools for Evaluation of Decision Variables Ongoing Activities

Relative Analysis of Variables (Ratio Analysis e.g. Contribution on Sales)
Marginal Cost vs. Marginal Revenue Profitability Index Internal Rate of Return (IRR) Cost Volume Profit Relationship (e.g. Break Even Point) Differential Cost vs. Differential Revenue

Equivalent Unit Approach

Activity Based Costing

Cost is the value of any kind sacrificed to create a product or another value

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Tools for Evaluation of Decision Variables 2

Ongoing Activities (contd.)

Balance Score Card

Economic Value Addition
Market Value Addition Sensitivity Analysis Risk modelling with Certainty Equivalent Approach

Right selection of the tool leads to the right decision

42

Tools for Evaluation of Decision Variables 3

Future Activities Life Cycle Costing Relative Analysis of Variables (e.g. ROI, ROCE, etc.) Discounted Cash Flow Net Present Value Pay-back Period Sensitivity Analysis Social Cost Benefit Analysis Economic Rate of Return Domestic Resource Cost

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The Great Enrichment

If I have one Dollar and if you have one Dollar and we exchange We have one Dollar each

but
If I have one Idea and if you have one Idea and we exchange We have two Ideas each Millions saw the apple falling, Newton asked why
This is the foundation of Sustainable Business Performance Management
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Further Thoughts

The essence of management lies in dropping the last letter and make it Manage Men! It is still better to drop the last two letters and make it Manage Me!
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Thank You