Tag: Decisions

  • What is Consumer Decision Making Process?

    What is Consumer Decision Making Process?

    Consumer Decision Making Process Meaning, Definition, Types, and Stages. The purchaser selection-making method includes the shoppers figuring out their needs, gathering information, evaluating alternatives, and then making their shopping decision. Consumer behavior may additionally decide with the aid of monetary and psychological elements and influenced using environmental elements like social and cultural values.

    Here are the articles to explain, the Meaning, Definition, Types, and Stages of the Consumer Decision Making Process.

    Consumer decision making behavior is a complicated technique and includes a whole lot beginning from hassle attention to post-purchase activities. Every patron has extraordinary wishes in their everyday lives and these are these wants that make to make one-of-a-kind decisions.

    Decisions can be complex, comparing, evaluating, and choosing as properly as buying from a range of merchandise relying upon the opinion of a customer over a precise product. This renders perception and realization of the fundamental hassle of the client selection-making technique for entrepreneurs to make their merchandise and offerings specific to others in the marketplace.

    Meaning and Definition of Consumer Decision Making Process:

    The buying process begins when customers recognize an unsatisfied need. Then they seek information about how to satisfy their need- what, products might be useful and how they can buy them. Customers evaluate the various alternative sources of merchandise such as stores, catalogs, and the Internet and choose a store or an Internet site to visit or a catalog to review. This encounter with a retailer provides more information and may alert customers to additional needs.

    After evaluating the retailer’s merchandise offering, customers may make a purchase or go to another retailer to collect more information. Eventually, customers make a purchase, use the product, and then decide whether the product satisfies their needs. In some situations, customers like Sania spend considerable time and effort selecting a retailer and evaluating the merchandise. In other situations, buying decisions stand made automatically with little thought.

    The types of Consumer Decision Making Process:

    The three types of customer decision-making processes are:

    1. Extended problem solving,
    2. Limited problem solving, and
    3. Habitual decision making.

    Extended Problem Solving:

    Extended problem solving is a purchase decision process in which customers devote considerable time and effort to analyzing alternatives. Customers typically engage in extended problem solving when the purchase decision involves a lot of risk and uncertainty. There are many types of risks. Financial risks arise when customers purchase an expensive product. Physical risks are important when customers feel a product may affect their health or safety.

    Social risks arise when customers believe a product will affect how others view them. Consumers engage in extended problem solving when they are making a buying decision to satisfy an important need or when they have little knowledge about the product or service. Due to high risk and uncertainty in these situations, customers go beyond their knowledge to consult with friends, family members, or experts.

    They may visit several retailers before making a purchase decision. Retailers influence customers engaged in extended problem solving by providing the necessary information in a readily available and easily understood manner and by offering money-back guarantees. For example, retailers that sell merchandise involving extended problem solving provide brochures describing the merchandise and its specifications; have informational displays in the store (such as a sofa cut in half to show its construction); and use salespeople to make presentations and answer questions.

    Limited Problem Solving:

    Limited problem solving is a purchase decision process involving a moderate amount of effort and time. Customers engage in this type of buying process when they have had some prior experience with the product or service and their risk is moderate.

    In these situations, customers tend to rely more on personal knowledge than on external information. They usually choose a retailer they have shopped at before and select merchandise they have bought in the past. The majority of customer decision-making involves limited problem-solving.

    Retailers attempt to reinforce this buying pattern when customers are buying merchandise from them. If customers are shopping elsewhere, however, retailers need to break this buying pattern by introducing new information or offering different merchandise or services.

    For example;

    Sania Mirza’s buying process illustrates both limited and extended problem-solving. Her store choice decision was based on her prior knowledge of the merchandise in various stores she had shopped in and an ad in the San Francisco Chronicle. Considering this information, she felt the store choice decision was not very risky, thus she engaged in limited problem solving when deciding to visit Macy’s. But her buying process for the suit stood extended. This decision was important to her, thus she spent time acquiring information from a friend and the salesperson to evaluate and select a suit.

    One common type of limited problem solving is impulse buying. Impulse buying is a buying decision made by customers on the spot after seeing the merchandise. Sania’s decision to buy the scarf was an impulse purchase.

    Retailers encourage impulse buying behavior by using prominent displays to attract customer attention and stimulate a purchase decision based on little analysis. For example, sales of a grocery item are greatly increased when the item stands featured in an end-aisle display when a “BEST BUY” sign stands placed on the shelf with the item, and when the item stands placed at eye level (typically on the third shelf from the bottom), or when items stand placed at the checkout counter so customers can see them as they wait in line.

    Supermarkets use these displays and prime locations for the profitable items that customers tend to buy on impulse, such as gourmet food, rather than commodities such as flour and sugar, which are usually planned purchases. Impulse purchases by electronic shoppers are stimulated by putting special merchandise on the retailer’s home page and by suggesting complimentary merchandise.

    Habitual Decision-Making:

    Habitual decision-making is a purchase decision process involving little or no conscious effort. Today’s customers have many demands on their time. One way they cope with these time pressures is by simplifying their decision-making process.

    When a need arises, customers may automatically respond with, “I’ll buy the same thing bought last time from the same store.’ Typically, this habitual decision-making process is used when decisions aren’t very important to customers and involve familiar merchandise they have bought in the past.

    Brand loyalty and store loyalty are examples of habitual decision-making. Brand loyalty means that customers like and consistently buy a specific brand in a product category. They are reluctant to switch to other brands if their favorite brand isn’t available. Thus, retailers can only satisfy these customers’ needs if they offer the specific brands desired. Brand loyalty creates both opportunities and problems for retailers.

    Customers stand attracted to stores carrying popular brands. But since retailers must carry high-loyalty brands, they may not be able to negotiate favorable terms with the supplier of the popular national brands. Store loyalty means that customers like and habitually visit the same store to purchase a type of merchandise.

    All retailers would like to increase their customers’ store loyalty. Some approaches for increasing store loyalty are selecting a convenient location, offering complete assortments and reducing the number of stockouts, rewarding customers for frequent purchases, and providing good customer service.

    Stages of Consumer Decision Making Process:

    The buying behavior model stands as one method used by marketers for identifying and tracking the decision-making process of a customer from the start to the end. The process stands categorized into 5 different stages which stand explained as follows:

    Need Recognition:

    Need recognition occurs when a consumer exactly determines their needs. Consumers may feel like they are missing out on something and needs to address this issue to fill in the gap. When businesses can determine when their target market starts developing these needs or wants, they can avail the ideal opportunity to advertise their brands.

    An example who buys water or cold drink identifies their need as thirst. Here; however, searching for information and evaluating alternatives are missing. These consumer decision-making steps stand considered to be important when an expensive brand is under buying consideration such as cars, laptops, mobile phones, etc.

    Problem Recognition:

    The buying process begins when consumers recognize they need to satisfy. This stands called the problem recogni­tion stage. Imagine leaving class to find that high winds had blown one of the oldest trees on campus directly onto your car. You need your car to get to school, work, and social events with your friends and family.

    Because your current car stands destroyed, you would immediately recognize that you need a new type of transportation. In this case, due to a lack of pub­lic transportation and the distance you must travel to meet your day-to-day obligations, you need to purchase a new car.

    Information Search:

    The information search stage in the buyer decision process tends to change continually as consumers require obtaining more and more information about products that can satisfy their needs. Information can also obtain through recommendations from people having previous experiences with products.

    At this level, consumers tend to consider risk management and prepare a list of the features of a particular brand. This is done so because most people do not want to regret their buying decision. Information for products and services can be obtained through several sources like:

    • Commercial sources: advertisements, promotional campaigns, salespeople, or packaging of a particular product.
    • Personal sources: The needs are discussed with family and friends who provided product recommendations.
    • Public sources: Radio, newspapers,s, and magazines.
    • Experiential sources: The own experience of a customer of using a particular brand.

    Information searches fall into two main categories- external and internal.

    External Information Search:

    When consum­ers seek information beyond their knowledge and experience to support them in their buying deci­sion. They are engaging in an external information search. Marketers can help consumers fill in their knowledge gaps through advertisements and prod­uct websites. The Internet has become an increasingly powerful tool. Because it provides consumers with on-demand product information in a format. That offers them as much or as little detail as they prefer.

    Many firms use social media to empower consum­ers’ external information search. For example, Ford uses Facebook, Twitter, YouTube, Flickr, and Scribd to communicate information and deepen relationships with customers. Ford combined paid advertising and content on Facebook by placing a sponsored video about the Ford Mustang on the Facebook logout page. Over 1 million people viewed the video in just one day. Allowing Ford to provide external information about the Mustang to a large audience of consumers.

    The consumer’s friends and family serve as perhaps the most important sources of external information. Think about the example of buying a new car and what those in your life might say about different brands or types of vehicles. You might be impressed by the salespeople and commercials for a certain type of car. But if your parents or friends tell you about a bad experience they had with it. Their opinions probably carry more weight.

    The power of these personal external infor­mation sources highlights why marketers must establish good relationships with all customers. It’s impossible to predict how one consumer’s experience might influence the buying decision and information of another potential customer.

    Internal Information Search:

    Not all purchases require consumers to search for information externally. For frequently purchased items such as – sham­poo or toothpaste, internal information often provides a sufficient basis for making a decision. In an internal information search, consumers use their past experi­ences with items from the same brand or product class as sources of information. You can easily remember your favorite soft drink or vacation destination. Which will likely influence what you drink with lunch today or where you go for spring break next year.

    In our car example, your experience with automobiles plays a significant role in your new car purchase. If you have had a great experience driving a Ford Escape or Toyota Camry. For example, you may decide to buy a newer model of that same car. Alterna­tively, if you have had a bad experience with a specific car, brand, or dealership. You may quickly eliminate those automobiles from contention.

    Evaluation of Alternatives:

    This step involves evaluating different alternatives that are available in the market along with the product lifecycle. Once it has been determined by the customer what can satisfy their need. They will start seeking out the best option available. This evaluation can be based upon different factors like quality, price, or any other factor which are important for customers.

    They may compare prices or read reviews and then select a product that satisfies their parameters the most. Once consumers have acquired information. They can use it to evaluate different alternatives, typically with a focus on identifying the benefits associated with each product. Consumers’ evaluative criteria consist of attributes that they consider important about a cer­tain product.

    For example, you would probably con­sider certain characteristics of a car. Such as price, warranty, safety features, or fuel economy, are more important than others when evaluating which one to buy. Car marketers work very hard to convince you that the benefits of their car, truck, or SUV reflect the criteria that matter to you. Marketing professionals must not only emphasize the benefits of their goods or service. But also use strategies to ensure potential buyers view those benefits as important.

    A company marketing an extremely fuel-efficient car might explain that you can use the several thousand dollars a year you will save on gas to pay off credit card debt or fund a family vacation. In contrast, a company marketing a giant SUV with poor fuel efficiency might tell you about the vehicle’s safety fea­tures and how it can protect your family or the flexibility it will give you to take more family members on trips.

    Purchase Decision:

    When all the above stages have been passed, the customer has now finally decided to make a purchasing decision. At this stage, the consumer has evaluated all facts and has arrived at a logical conclusion. Which is either based upon the influence of marketing campaigns or upon emotional connections or personal experiences, or a combination of both. After evaluating the alternatives, a customer will most likely buy a product. Usu­ally the marketer has little control over this part of the consumer decision-making process. Still, consumers have several decisions to make at this point.

    For example, once you have decided on the car you want, you have to decide where to buy it. Price, sales team, and experience with a specific dealership can directly impact. This decision can finance terms such as lower interest rates. If you decide to lease a car rather than buy one, you would make that decision during this step.

    An effective marketing strategy should seek to encourage ritual consump­tion. Ritual consumption refers to patterns of consumption that are repeated with regularity. These patterns can be as simple as buying the same soft drink or stopping at the same place for breakfast every morn­ing. These types of repeat purchases often provide firms with higher profits and a steady stream of cus­tomer sales.

    Post Purchase Behavior:

    The purchase of the product is followed by a post-purchase evaluation. Which refers to analyzing whether the product was useful for the consumer or not. If the product has matched the expectations of the customer, they will serve as a brand ambassador. Who can influence other potential consumers which will increase the customer base of that particular brand? The same is true for negative experiences; however, they can halt the journey of potential customers toward the product. Post-purchase evalua­tion is even more important to marketers today because of the power of customer reviews available on the Internet.

    Such reviews can become critical factors in the firm’s ability to win over new customers. Though the decision-making process provides marketers with a framework for understanding how consumers decide to purchase a product, consumers don’t always follow the orderly stages discussed. Marketers should not assume that because their strategy succeeds at one stage of the consumer decision-making process it will succeed at the next.

    For example, a car company might do an excel­lent job of providing external information to help interest you in its car but still not receive your business. Because of your inability to secure financing or the objections of your family members. Numerous situational influences like these can occur at various points in the decision-making process and change the customer’s path.

    Meaning Definition Types and Stages of the Consumer Decision Making Process Image
    Meaning, Definition, Types, and Stages of the Consumer Decision Making Process; Photo by Francois Le Nguyen on Unsplash.

    Reference;

    • It is retrieved from https://www.yourarticlelibrary.com/consumer-behaviour/consumer-decision-making/99878 and https://www.marketingtutor.net/consumer-decision-making-process-stages/
    • Image Source from https://unsplash.com/photos/X6rUQ4lH40I
  • Consumer Buying Decisions Internal External Influences

    Consumer Buying Decisions Internal External Influences

    Internal and External Influences on Consumer Buying Decisions. Consumer behavior is the finding out about how humans buy, use, gather, and dispose of agency items and services. What is the consumer buying decision? Consumers can buy items and services, however, they can additionally achieve them via bartering, lending, or leasing. Once items stand purchased, the client can then use them in a range of ways.

    Here are the articles to explain, What are the Internal and External Influences on Consumer Buying Decisions?

    Product bumped off one time like bloodless ingesting or it should use over time as a cell phone. The shopping for conduct of others can additionally affect by using how lots you use it. Positive opinions can be a way for relaxed clients to advocate the product to others. Conversely, sad shoppers can make complaints and inspire different shoppers now not to purchase that brand.

    Consumer behavior additionally consists of the movements that appear after a product has stood used. Some organizations make investments in a lot of cash to make merchandise that can recycle. These groups are extra famous with buyers who care about the surroundings and are greater in all likelihood for them to promote their merchandise and services. We can usually say that important elements impact customer behavior.

    These elements decide whether or not a goal purchaser buys a product or not. These are Psychological, Cultural, Economic, Social, and Personal factors. Individuals or groups, such as a family, can additionally make shopping choices for items and services. The buy selection is a procedure and several human beings work collectively to affect the buy choice in such an instance. Each man or woman may additionally play a section in the decision-making process.

    Throughout the discussion of internal and external influences. It can say that every condition and influence is different and it also varies from one consumer to another. Some influences can change by marketers whereas some can only handle when they occur. Understanding these influences is essential as with this marketers’ can assist consumers in their purchase decisions. US coffee marketers can also resolve their troubles related to selling coffee by identifying specific internal and external influences on consumer buying decisions that are as follows:

    Consumer Buying Decisions Internal Influences:

    What is the Internal Influence on Consumer Buying Decisions? Internal influences come from consumers’ lifestyles and ways of thinking. These are consumers’ thoughts, self-concepts, feelings, attitudes, lifestyles, motivation, and memory. These internal influences can also know as psychological influences. Internal influences depict the ways through which consumers interact with the universe around them, identify their feelings, collect and examine information, develop ideas and beliefs, and take some specific action. These internal influences can also use by US coffee marketers to better understand the specific buying behavior of their consumers.

    Several internal influences affect consumers at the time of buying coffee which subsequent are very important and need to understand by US coffee marketers:

    Personal Needs & Motives:

    The most substantial internal influence that affects consumer purchase decisions is his personal needs and motives. The need of a consumer can define as a lack of something or the difference between his desired and actual state. Motive is an individual’s inner state that encourages him to satisfy his specific need. This could also understand with an example like an individual may be hungry or thirsty. Which is his actual state and he also has a desire to be well fed which is his desired state. This need would motivate him to discover a restaurant or hotel to satisfy his need. All needs of consumers are not possible to define but throughout significant research, consumers’ needs are classified.

    By identifying these needs and motives of consumers, US coffee marketers can easily influence their consumer buying decisions. The most substantial need identification model that can use by US coffee marketers to motivate their consumers is Maslow’s Need Theory. This theory gives by Abraham Maslow an American psychologist. According to this theory, consumers’ needs are classified in this order that if understood and used to influence consumers can be very helpful:

    Purchase decisions;

    Understanding these needs is very essential to direct consumers’ unfulfilled needs toward purchase decisions. With this, US Coffee marketers can identify the consumers’ different needs related to buying a coffee. Like, a consumer may purchase coffee to satisfy his thirst, whereas others may purchase it for discussion with friends or business class people. As well, some others may have different reasons to purchase it like students or office going just want it to get relaxed. And some youngsters want to have fun and get together at a coffee shop with some snacks.

    So, every consumer has different needs that may be his basic or psychological needs so before selling coffee to a target market it is essential to identify the needs of different segments of the target market. Identification of consumers’ different needs related to buying coffee will significantly assist a coffee marketer in segmenting its target market and serving them most effectively.

    Attitudes:

    The next substantial internal influence that affects consumer buying behavior is their attitude. Attitude pertains to what an individual feels or thinks about something. It stands always reflected in individuals’ acts as well as in their buying patterns. Once a person’s attitude forms it is very hard to change. If a consumer has some kind of negative attitude towards a specific product or issue, it will not be easy to change that belief. It is a long-lasting general evaluation of consumers about a product, service, or company.

    Attitudes inform marketers about their consumers and how well they establish in the overall marketplace. Identification of these attitudes can also assist coffee marketers in knowing about their consumers and their perceptions of coffee sellers. US coffee marketers need to keep in mind that in the modern era, consumers expose to several advertisements and information and they don’t remember all of them. However, in this exposure, if they find something conflicting with their attitudes screen easily.

    Advertisement;

    So, coffee marketers need to design advertisements in an appropriate manner that does not conflict with US consumers’ attitudes. The attitudes of consumers learn as they stand shaped by their own experiences and as well as influenced by their ideas and personality. As well, individuals’ attitudes stand also influenced by their friends & family members and extensive media coverage. For operating successfully, it is essential to influence consumers’ attitudes which can stand done by creating and establishing an effective perception in their minds.

    Serving coffee with all essential facilities, a good environment, and high quality will assist coffee marketers in selling coffee to US consumers. Some of the coffee companies are doing well in the US like Starbucks and it is due to their positive image in the minds of their customers in every aspect of their business and as well towards society. The creation of a positive image is essential to influencing consumers’ attitudes and this can only stand done by serving them effectively in an all-inclusive manner.

    Consumer Buying Decisions External Influences:

    What is the External Influence on Consumer Buying Decisions? At the time of buying a product or service, all of us confront several external influences that involve our own culture, subculture, household structure, and groups. These associations of individuals know as external influences because the source of influence usually occurs from the exterior to an individual despite his or her inside influences. External influences also known as socio-cultural influences, as grow from the individual’s formal and informal relationships with his friends, family, and other individuals.

    Understanding these external influences is essential to affecting consumers buying decisions. Although almost all of the described external factors are essential to understanding the most fundamental external factor. What influences consumer purchase decision is his/her culture which is as follows:

    Culture:

    An individual’s values, attitudes, beliefs, and opinions shape by his culture. This in turn also forms people’s attitude toward buying specific products or services. The culture of an individual also gratifies his several emotional needs and due to this. They try to protect their cultural values and beliefs. This culture of protection reflects in individuals’ behavior as consumers. This could also understand with an example of McDonald’s that served Indian consumers in a way it used to serve American consumers. This act of the company made a negative effect on Indian consumers due to their specific vegetarian culture values.

    Culture can develop a consumer need and as well as can also affect the gratification of that need. In this way, culture depicts how an individual satisfies or fulfills his needs that if identified by coffee marketers can assist them in serving US consumers in a much more effective way. By serving coffee in a way that resonates with the priorities of US culture, US coffee marketers can increase their chances of consumer acceptance and success. They should try to serve coffee with high quality and different kinds of environment according to the needs of US consumers.

    Collect information;

    Business-class people should serve coffee at esteemed and premium prices in a peaceful environment. Whereas youngsters should serve coffee at reasonable prices in a fun-loving environment. Before serving consumers, US coffee marketers must collect information about their specific target markets’ cultural values. It can stand done by analyzing their family, religious establishments, and education associations.

    These specific values taught by US culture can stand identified easily that in turn can use to serve customers. The culture and value-related information can stand considerably used by coffee companies marketing managers to create messages and advertisements that are more likable and tempting to attract consumers.

    Segmentation:

    With the help of a discussion of internal and external influences on US consumer buying behavior. They can segment based on demographic, psychographic, and location & culture. Regarding demographic segmentation, US consumers can segment based on factors like age, income, gender, and education level. In psychographic segmentation target market can segment based on attitude towards drinking coffee, attitude towards going out for coffee, attitudes towards coffee price, opinion about coffee shops, etc. In concern to culture or location, the market can segment into different locations.

    Based on different types of segmentation approaches, the primary customer segments for coffee marketers in the United State are:

    The Students: 

    This segment mainly involves students from the university, college, and post-college from urban cities. It includes students within the 16-22 age range. This segment of consumers has lower income and is very price sensitive to consumer goods such as coffee.

    The Leisure: 

    This segment includes people from family and friends that love to have coffee for enjoying a good conversation. The age of this group people varies from 16-65. It involves people from different income and education levels. So it is a broad group to serve by US coffee marketers.

    Business People: 

    This segment represents busy business class professionals that stand normally aged between 22 and 55, with moderate to high income and education levels.

    Target Market:

    Among the above-discussed market segments, the most appropriate target market. That can stand selected by US coffee marketers in starting is the students. It is easy to understand the situations and factors that influence students. As well, the number of students in the country is increasing because of all kinds of institutions. Targeting, this market will be easy, and positioning an effective image in the minds of students will assist coffee marketers in extending their image in the minds of other target customers.

    The selected targeted market can affect positively by offering them coffee at low prices with additional services. Some of the students require a peaceful environment or some of them love to have fun or gossip. Designing coffee shops with both kinds of environments will effectively serve their needs. This target market’s interest in going out for coffee directs by the need for social interaction and concentrated study.

    The students who like coffee once will visit a coffee shop again. Sometimes they may visit a coffee shop for peace or sometimes for having fun with friends. Their needs can stand fulfilled easily so, it is better to serve this target market first and after attaining success in this, US coffee marketers can proceed to other market segments.

    Recommendations:

    With the above discussion, it becomes clear that internal/external influences affect consumer buying decisions. For attaining success in this kind of environment, marketers must design. Their product and marketing-related strategies by identifying specific internal and external influences. U.S. Coffee marketers can also attain success in the US by making use of the above-discussed internal and external influences that affect consumers’ coffee purchase decisions.

    Regarding the identified external-internal influences and selected target market, US coffee marketers can develop or alter. Their marketing strategy in the following manner that includes all aspects of a firm’s marketing mix:

    Product:

    Nowadays consumers do not remain loyal to a product. And when it is a disposable product like coffee, it becomes more difficult. Consumers want full value from products like coffee that can only deliver by serving them with a high-quality product. By identifying external/internal influences a product according to target market needs can design. 

    The selected target market is students and they belong to the school and college-going students. Who prefers coffee drinks with baked goods. As well, they also look for a good experience or coffee shop. At the time serving students, US coffee marketers need to keep this in mind. All these aspects as this will assist them in delivering a high-value and quality-oriented product.

    Price:

    Another significant aspect of Coffee companies’ marketing strategy is the price as it affects almost all types of consumers. The US coffee marketers should serve the selected target markets with low-to-mid price coffee products and services. Students do not have high incomes and they belong to different classes. Students buying decisions can direct significantly by considering their internal and external influences. According to their influences, they need to target low to medium-range prices.

    Place:

    Nowadays consumers are highly exposed to retail stores or fast-food chains. They like to go and have fast food in shops that operate in different locations of a city or nation. It is their general attitude and this should be considered by US coffee marketers at the time of undertaking decisions about the locations of their coffee stores. 

    They should at least start their operations with 2-3 coffee stores as it makes a positive impression on consumers’ attitudes and motivates them to experience one specific coffee store. They should try to start with an urban location or a location. That is the hub of students like an area where almost all reputed institutes of the US are running. In this way, students can motivate by specific coffee stores or shops.

    Promotion:

    The last substantial aspect of companies marketing strategy. That can alter substantially by identifying internal/external influences on consumer buying decisions is promotional strategy. For consumer products like coffee, it is not worth making extensive use of active marketing channels like media advertisements. Awareness and promotion of products like coffee can only stand done with extensive passive exposure through its stores and coffee packaging.

    For a drink, consumer-like students can only attract to the visual repetition of its logo and products everywhere and at every time of the day. With the help of logical visual repetition of coffee products packaging. Exceptional awareness can create by US Coffee marketers for its selected target market and as well as for other segments.

    Consumer Buying Decisions Internal External Influences Image
    Consumer Buying Decisions Internal External Influences; Photo by Brooke Cagle on Unsplash.

    Reference;

    • It is Retrieved from https://www.ukessays.com/essays/marketing/internal-external-influences-on-consumer-behaviour-marketing-essay.php?vref=1
    • Image Source from https://unsplash.com/photos/tLG2hcpITZE
  • What are the major factors affecting Production Process analysis Decisions?

    What are the major factors affecting Production Process analysis Decisions?

    The major factors affecting Production Process analysis Decisions is explaining in the 6 points of; 1) Nature of product/service demand, 2) Degree of Vertical Integration, 3) Product/Service and Volume Flexibility, 4) Degree of Automation, 5) Level of product/service quality, and 6) Degree of Customer Contact. Among the factors affecting production process analysis are the nature of product/service demand, degree of vertical integration, product/service and volume flexibility, degree of automation, level of product/service quality, and degree of customer contact.

    Here are the answers – What are the major factors affecting Production Process analysis Decisions? Discussion.

    What is process analysis? Process Analysis can understand as the rational breakdown of the production process into different phases, that turns input into the output. It refers to the full-fledged analysis of the business process. Which incorporates a series of logically linked routine activities. That uses the resources of the organization, to transform an object, to achieve and maintain the process excellence. The following questions and answer – What are the major factors affecting Production Process analysis Decisions? below are;

    Nature of product/service demand:

    Production systems exist to produce products/services of the kind that customers want, when they want them, and at a cost that allows the firm to be profitable. The place to start in analyzing production systems, therefore, is the demand for products and services. Of particular importance are the patterns of demand.

    Patterns of Product/Service Demand;

    First, production processes must have adequate capacity to produce the volume of the products/services that customers want. Forecasting methods help to estimate customer demand for products/services. These forecasts can then use to estimate the amount of production capacity needed in each future period. Seasonality, growth trends, and other patterns of demand, therefore, are important determinants of the production capacity necessary to satisfy demand.

    Seasonality is an important consideration in planning the appropriate type of production process for a product/service. For example, if a product’s demand exhibits great variation from season to season, the production processes and inventory policies must design to allow the delivery of sufficient quantities of products or services during peak demand seasons, and yet still be able to produce products economically in slack demand seasons.

    Similarly, the growth trends of product/service demand have important implications for analyzing production processes. For example, if a service expects to show strong sales growth over five years, provision must make for designing production processes whose capacity can expand to keep pace with demand.

    Some types of processes can more easily expand than others, and the choice of the type of production process will affect by the forecast growth trends of product/service demand. As with seasonality and growth patterns, random fluctuations and cyclical patterns will also have an impact on production process designs. Also, the overall volume of the demand and the prices that can charge for the products/services will affect the type and characteristics of the production processes.

    Degree of Vertical Integration:

    One of the first issues to resolve when developing production processing designs is determining how much of a product/service the company will produce and how much will buy from suppliers. Vertical integration is the amount of the production and distribution chain, from suppliers of components to the delivery of finished products/ services to customers, that is brought under the ownership of a company.

    There are two types of vertical integration, forward and backward. Forward integration means expanding ownership of the production and distribution chain forward towards the market. Backward integration means expanding ownership of the production and distribution chain backward towards the sources of supply.

    Generally, there are three stages of production: component, subassembly, and final assembly.

    For most manufacturers of finished products-such as Ford, Telco, and Maruti that assemble automobiles-the major issue of vertical integration is whether they should enter into supply contracts with suppliers of subassemblies and components, or backward integrate to produce subassemblies and components themselves. On the other hand, firms that are primarily subassembly suppliers. The major issues of vertical integration are whether they should forward integrate and assemble and market their finished products. In either case, the issue of whether to integrate vertically brings both opportunities and risks.

    The amount of vertical integration that is right for a particular firm in one industry could be inappropriate for another firm in a different industry. For companies that would forward integrate towards the market. The predominant factor in such decisions is the ability of the company to market the products.

    It should be clear from points that the decision whether to make products (backward integrate by bringing production of subassemblies and components in-house) or buy them from suppliers is not simple.

    The points of Contention in a Decision Situation:
    • Cost of making or producing subassemblies or components in-house versus buying them from suppliers.
    • The amount of investment necessary to produce subassemblies or components in- house.
    • The availability of funds to support the necessary expansion of production capacity.
    • Effect on return on assets if the production of subassemblies or components undertakes.
    • The present technological capabilities of the company to produce subassemblies or components.
    • The need to develop technological capabilities to produce subassemblies or components to secure future competitive position.
    • Availability of excellent suppliers who are willing to enter into long-term supply relationships, particularly those who can provide high-quality subassemblies and components at low prices. Who are well enough funded to ensure continuity of an adequate supply? And, who can work with the company to continuously improve product and component designs and manufacturing processes?
    • Amount of market share held by the company.

    Product/Service and Volume Flexibility:

    Flexibility means being able to respond fast to customer’s needs. Flexibility is of two forms, product/ service flexibility, and volume flexibility. Product/service flexibility means the ability of the production system to quickly change from producing one product/ service to producing another. Volume flexibility means the ability to quickly increase or reduce the volume of products/services produced. Both of these forms of the flexibility of production systems are determined in large part when the production processes are designed.

    Product/service flexibility requires when business strategies call for many custom-designed products/services each with rather small volumes or when new products must introduce quickly. In such cases, production processes must ordinarily plan and design to include general-purpose equipment and versatile employees. Who can easily change from one product/service to another? The concept of a flexible workforce involves training and cross-training workers in many types of jobs. Although training costs increase, the payoff is work that is perhaps more interesting for workers and a workforce. That can quickly shift from job to job and other products/services with little loss in productivity.

    Volume flexibility:

    Volume flexibility needs when demand is subject to peaks and valleys. And, when it is impractical to inventory products in anticipation of customer demand. In these cases, production processes must design with production capacities that can be quickly and inexpensively expand and contract. Manufacturing operations are ordinarily capital-intensive, which simply means that the predominant resource used is capital rather than labor.

    Thus in the presence of variable product demand, capital equipment in production processes must design with production capacities that are near the peak levels of demand. This translates into either increased capital investment in buildings and equipment or the use of outside subcontractors and some provision for quickly expanding and contracting the workforce. Over time, layoffs or the recall of workers from layoffs, use of temporary or part-time workers on short notice, and permanent overstaffing are options commonly used to achieve the volume flexibility of employees.

    Degree of Automation:

    A key issue in analyzing production processes is determining how much automation to integrate into the production system. Because automated equipment is very expensive and managing the integration of automation into existing or new operations is difficult, automation projects are not undertaken lightly.

    Historically, the discussion of how much automation to use in factories and services has centered on the cost savings from substituting machine effort for labor. Today, automation affects far more than the costs of production; in fact, for many companies automation is seen as basic to their ability to become or remain competitive.

    Automation can reduce labor and related costs, but in many applications. The huge investment required by automation projects cannot justify labor savings alone. Increasingly, it is the other benefits of automation that motivate companies to invest in automation. The need to quickly produce products/services of high quality. And, the ability to quickly change production to other products/services are the key factors that support many of to day’s automation projects.

    The degree of automation appropriate for the production of a product/service must drive by the operations strategies of the firm. If those strategies call for high quality, product flexibility, and fast production of products/services. Automation can be an important element of operations strategy.

    Level of product/service quality:

    In today’s competitive environment, product quality has become the chief weapon in the battle for world markets of mass-produced products. The choice of the production process is certainly affected by the desired level of product quality. At every step of process design, product quality enters into most of the major decisions.

    For many firms, the issue of how much product quality required is directly related to the degree of automation-integrated into the production process. Automated machines can produce products of incredible uniformity. And with proper management, maintenance, and attention, products of superior quality can produce with automated production processes at low production costs.

    What are the major factors affecting Production Process analysis Decisions
    What are the major factors affecting Production Process analysis Decisions? #Pixabay.

    Degree of Customer Contact:

    For most services and some manufacturers, customers are an active part of the processes of producing and delivering products and services. The extent to which customers become involved in the production systems has important implications for the production processes. There is a wide range of degrees of the interaction of customers with the production system.

    For example, at one extreme are barbershops, hair salons, and medical clinics. Here the customer becomes an active part of the production, and the service is performed on the customer. In these cases, the customer is the central focus of the design of production processes. Every element of the equipment, employee training, and buildings must design with the customer in mind.

    Also, courteous attention and comfortable surroundings must provide to receive, hold, process, and release customers. In such systems, service quality, speed of performing the service, and reduced costs can improve with automated equipment. As long as the fundamental nature of the service does not materially affect.

    At the other extreme of customer involvement, the design of production processes affects little because of interaction with customers. Examples of this type of service are fast-food restaurants or backroom operations at banks. In these operations, services are highly standardized, the production volume of services is high, and cost, price, and speed of delivery tend to be predominant in operations strategies.

    Note: Maybe you learn and understand the questions – What are the major factors affecting the production process analysis decisions? If you are not getting your answers them comments below.

  • What is the importance and process of Decision-Making?

    What is the importance and process of Decision-Making?

    Importance and Process of Decision-Making; As a leader, you will make decisions involving not only yourself but the morale and welfare of others. Some decisions, such as when to take a break or where to hold a meeting, are simple decisions which have little effect on others. Other decisions are often more complex and may have a significant impact on many people. Therefore, having decision-making, the problem-solving process can be a helpful tool. Such a process can help you to solve these different types of situations.

    Here are explain; What is the importance and process of Decision-Making?

    Within business and the military today, leaders at all levels use some form of decision-making, problem-solving process. There are several different approaches (or models) for decision-making and problem-solving. We would briefly discuss it in this lesson as well. It is beyond doubt that decision making is an essential part of every function of management.

    According to Peter F. Drucker,

    “Whatever a manager does, he does through decision making.”

    Decision making lies deeply embedded in the process of management, spreads over all the managerial functions and covers all the areas of the organization. Management and decision making are bound up and go side by side in every activity performed by the manager. Whether knowingly or unknowingly, every manager makes decisions constantly. Right from the day when the size of the organization used to be very small to the present day huge or mega-size of the organization, the importance of decision making has been there.

    The significant difference is that in today’s complex organization structure, the decision making is getting more and more complex. Whatever a manager does, he does through making decisions.

    Importance of Decision-Making:

    Some of the decisions are of routine and repetitive in nature and it might be that the manager does not realize that he is taking decisions whereas, other decisions which are of strategic nature may require a lot of systematic and scientific analysis. The fact remains that management is always a decision making the process. The most outstanding quality of a successful manager is his/her ability to make sound and effective decisions.

    A manager has to make up his/her mind quickly on certain matters. It is not correct to say that he has to make spur of the moment decisions all the time. For taking many decisions, he gets enough time for careful fact-finding, analysis of alternatives and choice of the best alternative.

    Decision making is a human process. When one decides, he chooses a course alternative which he thinks is the best. Decision making is a proper blend of thinking, deciding and acting. An important executive decision is only one event in the process which requires a succession of activities and routine decisions all along the way.

    Decisions also have a time dimension and a time lag. A manager takes time to collect facts and to weigh various alternatives. Moreover, after decides, it takes still more time to carry out a decision and, often, it takes longer before he can judge whether the decision was good or bad. It is also very difficult to isolate the effects of any single decision.

    What is the process of Decision-Making?

    The following procedure should follow in arriving at a correct decision:

    Process of Decision-Making - List
    Process of Decision-Making – List

    Objectives of Setting:

    Rational decision-making involves concrete objectives. So the first step in decision-making is to know one’s objectives. An objective is an expected outcome of future actions. So before deciding upon the future course of efforts, it is necessary to know beforehand what we are trying to achieve. Exact knowledge of goals and objectives bring purpose in planning and harmony in efforts. Moreover, objectives are the criteria by which final outcome is to measure.

    Defining the Problem:

    It is true to a large extent that a problem well defined is half solving. A lot of bad decisions are made because the person making the decision does not have a good grasp of the problem. It is essential for the decision-maker to find and define the problem before he takes any decision. Sufficient time and energy should be spent on defining the problem as it is not always easy to define the problem and to see the fundamental thing that is causing the trouble and that needs correction.

    Practically, no problem ever presents itself in a manner that an immediate decision may take. It is, therefore, essential to define the problem before any action takes, otherwise, the manager will answer the wrong question rather than the core problem. Clear definition of the problem is very important as the right answer can find only to the right question.

    Analyzing the problem:

    After defining the problem, the next step in decision-making is analyzing it. The problem should thoroughly analyze to find out adequate background information and data relating to the situation. The problem should divide into many sub-problems and each element of the problem must investigate thoroughly and systematically. There can be a number of factors involving any problem, some of which are pertinent and others are remote.

    These pertinent factors should discuss in depth. It will save time as well as money and efforts. In order to classify any problem, we require a lot of information. So long as the required information is not available, any classification would be misleading. This will also have an adverse impact on the quality of the decision. Trying to analyze without facts is like guessing directions at a crossing without reading the highway signboards.

    Thus, the collection of the right type of information is very important in decision making. It would not be an exaggeration to say that a decision is as good as the information on which it is based. Collection of facts and figures also requires certain decisions on the part of the manager. He must decide what type of information he requires and how he can obtain this.

    Developing Alternatives:

    After defining and analyzing the problem, the next step in the decision-making process in the development of alternative courses of action. Without resorting to the process of developing alternatives, a manager is likely to guide by his limited imagination. It is rare for alternatives to be lacking for any course of action. But sometimes a manager assumes that there is only one way of doing a thing.

    Main Points;

    In such a case, what the manager has probably not done is to force himself to consider other alternatives. Unless he does so, he cannot reach the decision which is the best possible.

    • From this can derive a key planning principle which may term as the principle of alternatives. Alternatives exist for every decision problem. Effective planning involves a search for the alternatives towards the desired goal.
    • Once the manager starts developing alternatives, various assumptions come to his mind, which he can bring to the conscious level. Nevertheless, the development of alternatives cannot provide a person with the imagination, which he lacks. But most of us have definitely more imagination than we generally use.
    • It should also note that the development of alternatives is no guarantee of finding the best possible decision, but it certainly helps in weighing one alternative against others and, thus, minimizing uncertainties. While developing alternatives, the principle of limiting factor has to take care of.
    • A limiting factor is one which stands in the way of accomplishing the desired goal. It is a key factor in decision making. If such factors are properly identified, the manager can confine his search for an alternative to those which will overcome the limiting factors.
    • In choosing from among alternatives, the more an individual can recognize those factors which are limiting or critical to the attainment of the desired goal the more clearly and accurately he or she can select the most favorable alternatives.

    Selecting the Best Alternative:

    After developing alternatives one will have to evaluate all the possible alternatives in order to select the best alternative. There are various ways to evaluate alternatives. The most common method is through intuition, i.e., choosing a solution that seems to be good at that time.

    There is an inherent danger in this process because a manager’s intuition may be wrong on several occasions. The second way to choose the best alternative is to weigh the consequences of one against those of the others. Peter F. Drucker has laid down four criteria in order to weigh the consequences of various alternatives.

    They are:

    Risk:

    A manager should weigh the risks of each course of action against the expected gains. As a matter of fact, risks are involved in all the solutions. What matters is the intensity of different types of risks in various solutions.

    The economy of effort:

    The best manager is one who can mobilize the resources for the achievement of results with the minimum of efforts. The decision to choose should ensure the maximum possible economy of efforts, money and time.

    Situation or Timing:

    The choice of a course of action will depend upon the situation prevailing at a particular point of time. If the situation has great urgency, the preferable course of action is one that alarms the organization that something important is happening. If a long and consistent effort is needed, a slow start gathers momentum approach may be preferable.

    Limitation of Resources:

    In choosing among the alternatives, primary attention must give to those factors that are limiting or strategic to the decision involved. The search for limiting factors in decision-making should be a never-ending process. Discovery of the limiting factor lies at the basis of selection from the alternatives and hence of planning and decision making.

    There are three bases which should follow for the selection of alternatives and these are experience, experimentation and research and analysis which are discussed below:

    • In making a choice, a manager is influenced to a great extent by his past experience. He can give more reliance on past experience in case of routine decisions; but in the case of strategic decisions, he should not rely fully on his past experience to reach a rational decision.
    • Under experimentation, the manager tests the solution under actual or simulated conditions. This approach has proved to be of considerable help in many cases in test marketing of a new product. But it is not always possible to put this technique into practice, because it is very expensive.
    • Research and Analysis are considered to be the most effective technique of selecting among alternatives, where a major decision is involved. It involves a search for relationships among the more critical variables, constraints, and premises that bear upon the goal sought.

    Implementing the Decision:

    The choice of an alternative will not serve any purpose if it is not put into practice. The manager is not only concerned with making a decision, but also with its implementation. He should try to ensure that systematic steps are taken to implement the decision. The main problem which the manager may face at the implementation stage is the resistance by the subordinates who are affected by the decision.

    If the manager is unable to overcome this resistance, the energy and efforts consumed in decision making will go waste. In order to make the decision acceptable, it is necessary for the manager to make the people understand what the decision involves, what is expected to them and what they should expect from the management.

    What is the importance and process of Decision-Making - Treasure Map
    What is the importance and process of Decision-Making? Treasure Map #Pixabay

    Main Points;

    In order to make the subordinates committed to the decision, it is essential that they should allow participating in the decision-making process.

    • The managers who discuss problems with their subordinates and give them opportunities to ask questions and make suggestions find more support for their decisions than the managers who don’t let the subordinates participate.
    • The area where the subordinates should participate in the development of alternatives. They should encourage to suggest alternatives. This may bring to surface certain alternatives which may not be thought of by the manager. Moreover, they will feel attached to the decision.
    • At the same time, there is also a danger that a group decision may be poorer than the one-man decision. Group participation does not necessarily improve the quality of the decision, but sometimes impairs it.
    • Someone has described group decision like a train in which every passenger has a brake. It has also been pointing out that all employees are unable to participate in decision making. Nevertheless, it is desirable if a manager consults his subordinates while making a decision.

    Follow-up the Decisions:

    Kennetth H. Killer, has emphatically written in his book that it is always better to check the results after putting the decision into practice.

    He has given reasons for following up of decisions and they are as follows:

    • If the decision is a good one, one will know what to do if faced with the same problem again.
    • If the decision is a bad one, one will know what not to do the next time.
    • The decision is bad and one follows-up soon enough, corrective action may still be possible.

    In order to achieve proper follow-up, the management should devise an efficient system of feedback information. This information will be very useful in taking the corrective measures and in taking the right decisions in the future.

  • What are Factors affecting Plant location decisions?

    What are Factors affecting Plant location decisions?

    The factors affecting Plant location decisions; Decisions regarding selecting a location need a balance of several factors. Hardly there is any location which can be ideal or perfect. One has to strike a balance between various factors affecting plant location. Some factors are crucial in deciding the location of the plant while some other factors are less important.

    Here are explains; What are Factors affecting Plant location decisions?

    In taking the decision of the location of the plant, due regard should give to the minimization of the cost of production & distribution and maximization of profit. The decision of plant location should base on nine M’s, namely money, material, manpower, market, motive power, management, machinery, means of communication and momentum to an early start. Also, want to know what is the five M’s in Business?

    What are Factors affecting Plant location decisions
    What are Factors affecting Plant location decisions? #Pixabay.

    The following are some of the important factors which the management must carefully bear in mind in selecting an optimum site for the plant – 15 factors affecting plant location decisions below are;

    Nearness to Raw Material:

    It will reduce the cost of transporting raw material from the vendor’s end to the plant. Especially those plants which consume raw material in bulk, or the raw material is heavyweight, must locate close to the source of raw material. If the raw materials are perishable, the plant is to locate near the source of the material. This is true of the fruit canning industry.

    Sugar and paper and other industries using weight losing materials are also located near the point of supply. Industries which depend for their raw materials on other industries tend to locate near such industries e.g. the petrochemicals industries are locating near refineries. Similarly, Thermal Power Stations are situated near coal mines.

    Sugar Factory Worker
    Sugar Factory Worker #Pixabay.

    In case the raw material is imported, the unit must establish near the port. When a company uses a number of raw materials and their sources are at a different location, the ideal site for the plant shall be a place where the transportation costs of various raw materials are the minimum.

    Apart from these considerations, a promoter must view the supply of raw materials from the following angles also:

    • If the supply of raw materials is linked with finance, it must be set up where the raw material is available at reduced or concessional rates.
    • Reliability and continuity of the source of supply, and.
    • The security of means of transport.

    Nearness to Markets:

    It reduces the cost of transportation as well as the chances of the finished products getting damaged and spoiled in the way. Moreover, a plant being near to the market can catch a big share of the market and can render quick service to the customers. Industries producing perishable or fragile commodities are also attracted to the market because of savings in time and transportation costs. Industrial units have a tendency to disperse if they find a new market for their products.

    Availability of Labor:

    Stable labor force, of the right kind, of adequate size (number) and at reasonable rates with its proper attitude towards work are a few factors which govern plant location to a major extent. The purpose of the management is to face fewer boycotts, strikes or lockouts and to achieve lower labor cost per unit of production.

    Availability of Fuel and Power:

    Because of the widespread electric power, in most cases, fuel (coal, oil, etc.) has not remained a deciding factor for plant location. It is, of course, essential that electric power should remain available continuously, in proper quantity and at reasonable rates.

    Availability of Water:

    Water is used for processing, as in paper and chemical industries, and is also requires for drinking and sanitary purposes. Depending upon the nature of the plant, water should be available in adequate quantity and should be of proper quality (clean and pure). A chemical, fertilizer, thermal power station, etc. should not be set-up at a location which IS famous for water shortage.

    Climatic Conditions:

    Climate conditions also influence the location decision. Some industries need a special type of climate to run the unit effectively. For example, the cotton industry requires a humid climate and therefore it is mainly localizing at Bombay, Ahmedabad, etc.

    But the scientific development and new inventions have lowered down the importance of the factor. So due to the development of artificial humidification, the cotton textile industry can now start in any region of the county. The question of climate is more important for an agricultural product like tea, coffee, rubber, cotton, etc. even today.

    Government Policy:

    Certain states give aid as loans, machinery, built-up sheds, etc. to attract industrialists. In a planned economy, the Government plays an important role in the location of industry. In India Government follows the policy of balanced regional growth of the country which is very important from the point of view of defense and social problems like a slum, the disparity of income & wealth and optimum use of resources.

    On, the order to implement this policy, the Government offers several incentives to entrepreneurs to locate their industrial units in backward regions or no-industry regions. It offers tax concessions or loan facilities or factory sheds at cheaper rates. Sometimes the Government announces certain disincentives to industries located at a certain place. Thus Government policy plays an important role in the location of industry.

    Land:

    The shape of the site, cost, drainage, the probability of floods, earthquakes (from the past history), etc. influence the selection of plant location.

    Community Attitude:

    The success of Industry depends very much on the attitude of local people and whether they want to work or not.

    Security:

    Considerations like law and order situation, political stability and safety also influence the location decision. No entrepreneur will like to start the industry at a place which is not safe and where there are law and order disturbances off and on.

    Transport Facilities:

    A lot of money is spent both in transporting the raw material and the finish goods. Depending upon the size of raw material and finish goods, a suitable method of transportation like roads, rail, water or air is selecting and accordingly the plant location is deciding.

    Transport Truck
    Transport Truck #Pixabay.

    Transportation costs depend mainly on the weight carried and the distance to cover. In some industries, the weight of the raw material is much higher than that of the finished product. e.g. in a weight loss industry like sugar manufacturing, four to five tons of sugarcanes have to carry per ton of sugar.

    Similarly, in Iron and Steel Industry two tons of iron is requiring to produce one ton of pig iron. Therefore the transport costs can save by locating near the source of materials. In the case of weight gaining industry, location near the market may result in savings in transportation costs. e.g. in soft drink, the weight of the finished product is higher than raw material.

    The momentum of an early start:

    Another factor of some importance has been the momentum of an early start. Some places got localized only because one or two units of that industry start production there. With the passage of time, these places gained importance and attracted other units of the industry. As a place gains importance, certain facilities usually beg in to develop.

    For example,

    • Transport facilities are developing because railways and other agencies find it economical to serve those centers.
    • Specialized firms start to take up repair and maintenance job for such units.
    • Banking facilities are made available, and.
    • Labor possessing various skills are attracting there. These facilities further attract more industries.

    Personal Factors:

    Personal preferences and prejudices of an entrepreneur also play an important role in the choice of location. Economic consideration does not weight much. For instance, Mr. Ford started cars manufacturing motor in Detroit because it was his home town. It must, however, recognize that such location cannot endure unless they prove to be economical enough in the long run.

    Communication Facilities:

    Every business firm requires every type of business information regarding the position of labor, market, raw materials, and finished goods and this facility is available only when communication facilities are there. As communications facilities are not adequately available in rural areas, industries are very much reluctant to start their business there.

    What do we think about Plant location decision - with Different Situations - Power Station
    What do we think about Plant location decision? in Different Situations – Power Station #Pixabay.

    Other Considerations:

    There are certainly other considerations that influence the location decisions which are:

    • Presence of related Industry.
    • Existence of hospitals, marketing centers, schools, banks, post office, clubs, etc.
    • Local bye-laws, taxes, building ordinances, etc.
    • Facility for expansion.
    • New enterprise owned or operated by a single group of companies should be so located. That its work can integrate with the work of the associated establishments.
    • Industries like nuclear power stations, processes explosive in nature. The chemical process likely to pollute the atmosphere should locate in remote areas, and.
    • Historical factors etc.
  • What do we think about Plant location decision? in Different Situations

    What do we think about Plant location decision? in Different Situations

    What is Plant location decision? Location of an industry is an important management decision. Location decision is based on the organizations long-term strategies such as technological, mar­keting, resource availability and financial strategies. Plant location refers to the choice of the region where men, materials, money, machinery, and equipment are brought together for setting up a business or factory.

    Here are explain; What do we think about Plant location decision?

    Plant location decisions are very important because once the plant is located at a particular site then the organization has to face the pros and cons of that initial decision. Why we Comparison of Different Production Systems?

    What is a Plant?

    A plant is a place where the cost of the product is kept to low in order to maximize gains. A plant is a place, where men, materials, money, machinery, etc. are brought together for manufacturing products.

    Identifying an ideal location is very crucial, it should always maximize the net advantage, must minimize the unit cost of production and distribution. The objective of minimization of cost of production can achieve only when the plant is of the right size and at the right place where economies of all kinds in production are available.

    The planning for “where” to locate the operations facilities should start from “what” are organization’s objectives, priorities, goals and the strategies required to achieve the same in the general socio-economic-techno-business-legal environment currently available and expected to be available in the long-term future.

    Unless the objectives and priorities of an organization are clear i.e. the general direction is clear, effective functional or composite strategies cannot design. And, it is these strategies of which the location design is a product.

    When Plant location decision in Different Situations, How to chose perfect?

    The following the different situations below are;

    To select a proper geographic region:

    The organizational objectives along with the various long-term considerations about marketing, technology, internal organizational strengths and weaknesses, region-specific resources and business environment, legal-governmental environment, social environment, and geographical environment suggest a suitable region for locating the operations facility.

    Selecting a specific site within the region:

    Once the suitable region is identified, the next problem is that of choosing the best site from an available set. Choice of a site is much less dependent on the organization’s long-term strategies. It is more a question of evaluating alternative sites for their tangible and intangible costs if the operations were located there. Cost economies now figure prominently at this final stage of the facilities-location problem.

    Location choice for the first time:

    In this case, there is no prevailing strategy to which one needs to confirm. However, the organizational strategies have to be first decided upon before embarking upon the choice of the location of the operating facility/facilities. The importance of long-term strategies can not overemphasize. Cost economics is always important but not at the cost of long-term business/ organizational objectives.

    Location choice for an ongoing organization:

    A new plant has to fit into a multi-plant operations strategy as discussed below;

    Plant Manufacturing Distinct Products or Product Lines.

    This strategy is necessary where the needs of technological and resource inputs are specialized fir distinctively different for the different products/product- lines. For example, a high-quality precision product-line should preferably not locate along with other product-line requiring a little emphasis on precision.

    It may not be proper to have too many contradictions such as sophisticated and old equipment, highly skilled and not so skilled personnel, delicate processes and those that could permit rough handling, all under one roof and one set of managers. Such a setting leads to much confusion regarding the required emphasis and management policies. Product specialization may be necessary in a highly competitive market; it may also be necessary in order to fully exploit the special resource potential of a particular geographical area.

    Instances of product specialization could be many: A watch manufacturing unit and a machine tools unit; a textile unit and a sophisticated organic chemical unit; an injectible pharmaceuticals unit and a consumer products unit; etc. All these pairs have to be distinctively different-in technological sophistication, in process, and in the relative stress on certain aspects of management. The more decentralized these pairs are in terms of the management and in terms of their physical location, the better would be the planning and control and the utilization of the resources.

    Manufacturing Plants Each supplying to a Specific Market Area.

    Here, each plant manufactures almost all of the company’s product. This type of strategy is useful where market proximity consideration dominates the resources and technology considerations. This strategy requires a great deal of coordination from the corporate office. An extreme example of this strategy is that of soft-drinks bottling plants. Manufacturing Plants Divided According to the Product/Product Line being Manufactured, and these Special-Product Plants Located in Various Market Areas.

    Plants Divided on the Basic of the Processes or Stages in Manufacturing.

    Each production process or stage of manufacturing may require distinctively different equipment capabilities, labor skills, technologies, and managerial policies and emphasis. Since the products of one plant feed into the other plant, this strategy requires much-centralized coordination of the manufacturing activities from the corporate office who are expecting to understand the various technological and resources nuances of all the plants. Sometimes such a strategy is using because of the defense/national security considerations. For instance, the Ordnance Factories in India.

    Plants Emphasizing Flexibility in Adapting to Constantly Changing Product Needs.

    This needs much coordination between plants to meet the changing needs and at the same time ensure efficient use of the facilities and resources. The new plant or branch-facility has to fit into the organization’s existing strategy, mainly because the latter has been the product of deep thinking about the long-term prospects and problems, and strengths and weaknesses for the organization as a whole.

    What do we think about Plant location decision - in Different Situations - Power Station
    What do we think about Plant location decision? in Different Situations! Power Station #Pixabay.

    Location for an Industrial Plant:

    The principle of Industrial Plant Location is that the sum of manufacturing and distribut­ing cost should be at a minimum for the best location. The first two factors are related to the transportation cost. One should be clear that a plant may locate near the market as well as near the raw materials site. But in actual practice, many times, due to some other factors, it is not possible to locate an industry near the proximity of the market as well as raw material.

    Explain different parts:

    For economical analysis these factors play an important part:

    Following are the factors when an undertaking is located near the raw material site;

    When the source of raw material is likely the controlling factor. Materials are bulky and of relatively low price. Materials are small and of the high unit price. Raw materials are greatly reducing in bulk during the process of manufacture. Raw materials are perishable and the process makes them less perishable. The examples are processing industries, cement, paper, meat, canning (Fruit), etc.

    Factors responsible for locating an industry near the market;

    When the size or bulk of the product is more. Render it more fragile.
    More subsection about the spoilage. Examples are shoes, furniture, glassware industries.

    While dealing with the economy of labor, the factors responsible are;

    The ratio of labor cost to total manufacturing cost. If the ratio is small then this factor is not important. Possibility of a reduction in labor cost by using better methods or better quality of labor. The type of labor required. For example, the textile industries silk and carpet-making industries, sports goods, etc.

    Now for the economy and availability of power;

    This point is similar to raw material procurement. If power is generating from coal, then coal is a raw material. Hence still steel plants are located near the coal-mines etc.

    Another major factor that influences the availability of finance;

    But the finance can obtain from Government agencies. Banks etc. at any place.

    The following factors also influence the layout;

    An offer of a factory site or an existing plant. Subscriptions of the capital stock of the enterprise. A rebate of taxes and the period for which it will remain available. Non-reference by local or government bodies. The location should not be near the border of the country to safeguard from the risk of war. For smooth going, political interference should not be there.

  • Decision-Making: Nature, Characteristics, and Principles

    Decision-Making: Nature, Characteristics, and Principles

    What does Decision Making mean? Decision-making means to select a course of action from two or more alternatives. A decision may define as “A course of action which is consciously chosen from among a set of alternatives to achieve the desired result.” It represents a well-balanced judgment and a commitment to action. Discussing of Topic; Decision-Making; Explanation of Decision-Making, Meaning of Decision-Making, Definition of Decision-Making, Nature, and Characteristics of Decision-Making, and finally the Principles of Decision-Making.

    Know and Understand the Explanation of Decision-Making; Meaning, Definition, Nature, Characteristics, and Principles.

    Decision-Making is an important function in management since decision-making is related to the problem, effective decision-making helps to achieve the desired goals or objectives by solving such problems. Thus the decision-making lies all over the enterprise and covers all the areas of the enterprise. What does Welfare Economics mean? Measuring and Value decisions!

    It is rightly said that the first important function of management is to take decisions on problems and situations. Decision making pervades all managerial actions. It is a continuous process. Decision-making is an indispensable component of the management process itself. This clearly suggests that decision-making is necessary for planning, organizing, directing, controlling and staffing.

    For example, in planning alternative plans are prepared to meet different possible situations. Out of such alternative plans, the best one (an i.e., plan which most appropriate under the available business environment) is to select. Here, the planner has to take the correct decision. This suggests that decision-making is the core of the planning function. In the same way, decisions are required to take while performing other functions of management such as organizing, directing, staffing, etc. This suggests the importance of decision-making in the whole process of management. The effectiveness of management depends on the quality of decision-making.

    In this sense, management is rightly describing as a decision-making process. According to R. C. Davis, “Management is a decision making process.” Decision-making is an intellectual process which involves selection of one course of action out of many alternatives. Decision-making will follow by the second function of management called planning. The other elements which follow planning are many such as organizing, directing, coordinating, controlling and motivating.

    Meaning of Decision-Making:

    Decision-Making is an important function in management since decision-making is related to the problem, effective decision-making helps to achieve the desired goals or objectives by solving such problems. Thus the decision-making lies all over the enterprise and covers all the areas of the enterprise.

    Scientific decision-making is the well-tried process of arriving at the best possible choice for a solution with a reasonable period of time. The decision means to cut off deliberations and to come to a conclusion. Decision-making involves two or more alternatives because if there is only one alternative there is no decision to make.

    Decision-making has priority over planning function. According to Peter Drucker, it is the top management which is responsible for all strategic decisions such as the objectives of the business, capital expenditure decisions as well as such operating decisions as training of manpower and so on. Without such decisions, no action can take place and naturally the resources would remain idle and unproductive. The managerial decisions should be correct to the maximum extent possible.

    Definitions of Decision-Making:

    According to Trewatha & Newport,

    “Decision-making involves the selection of a course of action from among two or more possible alternatives in order to arrive at a solution for a given problem.”

    R.S. Davar defined decision making as,

    “The election based on some criteria of one behavior alternative hum two or more possible alternatives. To decide means ‘to cut off’ or in practical content to come to a conclusion.”

    Henry Sisk and Cliffton Williams defined,

    “A decision is the election of a course of action from two or more alternatives; the decision-making process is a sequence of steps leading lo I hat selection.”

    George Terry defines,

    “As the selection of one behavior alternative from two or more possible alternatives.”

    In the words of D. E. Mcfarland,

    “A decision is an act of choice wherein an executive forms a conclusion about what must be done in a given situation. A decision represents behavior chosen from a number of alternatives.”

    Nature and Characteristics of Decision-Making:

    Nature of Decision-Making: A decision is always related to some problem, difficulty or conflict. Decisions help in solving problems or resolving conflicts. There are always differences of opinions, judgments, etc. The managerial decision helps in maintaining group effectiveness. All problems may not require decision- making but merely the supply of information may be sufficient.

    For example, when will different groups report for re-orientation? The supply of information about the training program may be enough. Decision problems necessitate a choice from different alternatives. A number of possibilities are selected before making a final selection. Decision-making requires something more than a selection. The material requiring a decision may be available but still, a decision may not reach.

    A decision needs some sort of prediction for the future on the basis of past and present available information. The effect of a decision is to be felt in the future so it requires proper analysis of available material and a prediction for the future. If decision premises do not come true, then the decision itself may be wrong. Sometimes decisions are influenced by adopting a follow-the-leader practice.

    The leader of the group or an important manager of concern sets the precedent and others silently follow that decision. Whatever has been deciding by the leader becomes a guide for others and they also follow suit. The decisions may also emerge from answers to pertinent questions about the problem. Such answers try to narrow down the choice and help in making a decision.

    Now discuss the Characteristics of Decision-Making:

    The following Characteristics below are;

    Continuous activity/process.

    Decision making is a continuous and dynamic process. It pervades all organizational activity. Managers have to make decisions on various policy and administrative matters. It is a never-ending activity in business management.

    Based on reliable information/feedback.

    Good decisions are always based on reliable information. The quality of decision-making at all levels of the organization can improve with the support of an effective and efficient management information system (MIS).

    Time-consuming activity.

    Decision making is a time-consuming activity as various aspects need careful consideration before making the final decision. For decision-makers, various steps are required to complete. This makes decision-making a time-consuming activity.

    Needs effective communication.

    Decision-taken needs to communicate to all concerned parties for suitable follow-up actions. Decisions taken will remain on paper if they are not communicating with concern persons. Following actions will not be possible in the absence of effective communication.

    Responsible job.

    Decision making is a responsible job as wrong decisions prove to be too costly to the Organization. Decision-makers should mature, experienced, knowledgeable and rational in their approach. Decision-making need not treat as routing and casual activity. It is a delicate and responsible job.

    Decision making implies choice.

    Decision making is choosing from among two or more alternative courses of action. Thus, it is the process of selection of one solution out of many available. For any business problem, alternative solutions are available. Managers have to consider these alternatives and select the best one for actual execution. Here, planners/ decision-makers have to consider the business environment available and select the promising alternative plan to deal with the business problem effectively.

    It is rightly said that “Decision making is fundamentally choosing between the alternatives”. In decision-making, various alternatives are to consider critically and the best one is to select. Here, the available business environment also needs careful consideration. The alternative selected may be correct or may not be correct. This will decide in the future, as per the results available from the decision already taken.

    In short, decision-making is fundamentally a process of choosing between the alternatives (two or more) available. Moreover, in the decision-making process, information is collecting; alternative solutions are deciding and consider critically in order to find out the best solution among the available.

    Every problem can solve by different methods. These are the alternatives and a decision-maker has to select one alternative which he considers as most appropriate. This clearly suggests that decision-making is basically/fundamentally choosing between the alternatives. The alternatives maybe two or more. Out of such alternatives, the most suitable is to select for actual use. The manager needs the capacity to select the best alternative. The benefits of correct decision-making will be available only when the best alternative is select for actual use.

    Decision-Making Nature Characteristics and Principles
    Decision-Making: Nature, Characteristics, and Principles, #Pixabay.

    Principles of Decision-Making:

    The effective decision involves two important aspects—the purpose for which it is intending, and the environmental situation in which it takes. Even the best and correct decision may become ineffective if these aspects are ignored; because in decision-making, there are so many inside and outside chains of unavoidable reactions. If certain principles are following for decision-making, such multidimensional reactions can mostly be overcome.

    These principles as follows below are:

    Subject-matter.

    Decisional matters or problems may divide into groups consisting of programmed and non-programmed problems. Programmed problems, being of routine nature, repetitive and well-founded, are easily definable and, as such, require a simple and easy solution. The decision arrived in such programmed problems has, thus, a continuing effect. But in non-programmed problems, there is no continuing effect because they are non-repetitive, non-routine, and novel. Every event in such problems requires individual attention and analysis and its decision is to arrive at according to its special features and circumstances.

    Organizational Structure.

    The organizational structure, having an important bearing on decision-making, should readily understand. If the organizational structure is rigid and highly centralized, decision-making authority will remain confined to the top management level. This may result in a delayed and confusing decision and create suspicion among the employees.

    On the contrary, if the organizational structure provides scope for adequate delegation and decentralization of authority, decision-making will be flexible and the decision-making authority will be close to the operating centers. In such a situation, decision-making will be prompt and expect to be more effective and acceptable.

    Objectives and Policies.

    Proper analysis of the objectives and policies is the need for decision-making. The clear definition of objectives and policies is the basis that guides the direction of decision-making. Without this basis, decision-making will be aimless and unproductive.

    Analytical Study of the Alternatives.

    For decision-making, analytical study of all possible alternatives of a problem with their merits and demerits is essential. This is necessary to make out a correct selection of decision from among the alternatives.

    Proper Communication System.

    Effective decision making demands a piece of machinery for proper communication of information to all responsibility centers in the organization. Unless this structure is built up, ignorance of decision or ill-inform decision will result in misunderstanding and lose coordination.

    Time of Sufficient.

    Effective decision making requires sufficient time. It is a matter of common experience that it is usually helpful to think over various ideas and possibilities of a problem for the purpose of identifying and evaluating it properly. But in no case a decision can delay for an indefinite period, rather it should complete well in advance of the scheduled dates.

    Study of the Impact of a Decision.

    The decision is intending to carry out for the realization of the objectives of the organization. A decision in any particular area may react adversely in other areas of the organization. As all business activities are inter-related and require coordination, it is necessary that a study and analysis of the impact of any decision should precede its application.

    Participation in the work of the decision-maker.

    The decision-maker should not only be an observer while others will perform as per his decision. He should also participate in completing the work for which decision was taken by him. This experience will help him in decision-making in the future. The principle of participation in the work of the decision-maker will enable him to understand whether the decision take is practical and also guide him in forthcoming decisional matters.

    The flexibility of Mind for decision.

    This is essential in decision-making because decisions cannot satisfy everybody. Rigid mental set-up of the decision-maker may upset the decisions. The flexible mental disposition of the decision-maker enables him to change the decision and win over the co-operation of all the diverse groups.

    Consideration of the Chain of Actions.

    There is a chain relationship in all the activities of any organization. Different activities are tied up in a chain sequence. Any decision to change a particular work brings change in other related works also. Similarly, decision-making also proceeds following the chain of action in different activities. Therefore, before taking a decision one should consider the chain relationship among different activities.

  • What does Welfare Economics mean? Measuring and Value decisions!

    What does Welfare Economics mean? Measuring and Value decisions!

    Welfare Economics is a normative branch of economics that is concerned with the way economic activity ought to be arranged so as to maximize economic welfare. The hallmark of welfare economics is that policies are assessed exclusively in terms of their effects on the well-being of individuals. Welfare economics has been defined by Scitovsky as “That part of the general body of economic theory which is concerned primarily with policy.” So, what is the question of the topic we are going to discuss; What does Welfare Economics mean? Measuring and Value decisions!

    Explain about Welfare Economics mean, Measuring Welfare, and their Value decisions!

    Accordingly, whatever is relevant to individuals well-being is relevant under welfare economics, and whatever is unrelated to individuals well-being is excluded from consideration under welfare economics. Economists often use the term utility to refer to the well-being of an individual, and, when there is uncertainty about outcomes, economists use an ex-ante measurement of well-being, so-called expected utility.

    Welfare economics employs value judgment s about what ought to be produced, how production should be organized, the way income and wealth ought to be distributed, both now and in the future. Unfortunately, each individual in a community has a unique set of value judgments, which are dependent upon his or her attitudes, religion, philosophy and politics, and the economist has difficulty in aggregating these value judgments in advising policymakers about decisions that affect the allocation of resources (which involves making interpersonal comparisons of utility).

    Definition of Welfare Economics:

    The branch of economics called welfare economics is an outgrowth of the fundamental debate that can be traced back to Adam Smith, if not before. It is the economic theory of measuring and promoting social welfare.

    In The Wealth of Nations, Book IV, Smith wrote:

    “Every individual necessarily labors to render the annual revenue of the society as great as he can. He generally indeed neither intends to promote the public interest nor knows how much he is promoting it…. He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

    J. De V. Graff,

    “The proof of the pudding is indeed in the eating. The welfare cake, on the other hand, is so hard to taste, that we must sample its ingredients before baking.”

    R.W. Emerson, Work and Days,

    “The greatest meliorator of the world is selfish, huckstering trade.”

    The literature on welfare economics has grown rapidly in recent years. The utilitarians were the first to talk of welfare in terms of the formula, ‘the greatest happiness of the greatest number’. Vilfredo Pareto considered the question of maximizing social welfare on the basis of general optimum conditions.

    Marshall and Pigou, the neo-classical economists, concentrated on particular sectors of the economic system in their postulates of welfare economics. It was Professor Robbins’ ethical neutrality view about economics that led to the development of welfare economics as an important field of economic studies. Kaldor, Hicks, and Scitovsky have laid the foundations of the New Welfare Economics with the help of the ‘compensation principle’ avoiding all value judgments.

    On the other hand, Bergson, Samuelson, and others have developed the concept of the Social Welfare Function without sacrificing value judgments. In the discussion that follows we shall refer to certain basic concepts of welfare economics and then pass on to Pareto’s welfare conditions for an understanding of modern welfare economics.

    Explanation of Welfare Economics:

    Economists have tried for many years to develop criteria for judging economic efficiency to use as a guide in evaluating actual resource deployments. The classical economists treated utility as if it was a measurable scale of consumer satisfaction, and the early welfare economists, such as Pigou, continued in this vein so that they were able to talk in terms of changes in the pattern of economic activity either increasing or decreasing economic welfare.

    However, once economists rejected the idea that utility was measurable, then they had to accept that economic welfare is immeasurable and that any statement about welfare is a value judgment influenced by the preferences and priorities of those making the judgment. This led to a search for welfare criteria, which avoided making interpersonal comparisons of utility by introducing explicit value judgments as to whether or not welfare has increased.

    The simplest criterion was developed by Vilfredo Pareto, who argued that any reallocation of resources involving a change in goods produced and/or their distribution amongst consumers could be considered an improvement if it made some people better off (in their own estimation) without making anyone else worse off. This analysis led to the development of the conditions for Pareto Optimality, which would maximize the economic welfare of the community, for a given distribution of income.

    Pareto optimality is thus a dominance concept based on comparisons of vectors of utilities. It rejects the notion that utilities of different individuals can be compared, or that utilities of different individuals can be summed up and two alternative situations compared by looking at summed utilities. When ultimate consumers do not appear in the model, as in the pure production framework, a situation is said to be Pareto optimal if there is no alternative that results in the production of more of some output, or the use of less of some input, all else equal.

    Obviously saying that a situation is Pareto optimal is not the same as saying it maximizes GNP, or that it is best in some unique sense. The Pareto criterion avoids making interpersonal comparisons by dealing only with uncontroversial cases where no one is harmed. However, this makes the criterion inapplicable to the majority of policy proposals that benefit some and harm others, without compensation. There are generally many Pareto optimal.

    However, optimality is a common good concept that can get common assent: No one would argue that society should settle for a situation that is not optimal because if A is not optimal, there exists a B that all prefer. Nicholas Kaldor and John Hicks suggested an alternative criterion (the compensation principle), proposing that any economic change or reorganization should be considered beneficial if, after the change, gainers could hypothetically compensate the losers and still be better off.

    In effect, this criterion subdivides the effects of any change into two parts:
    • Efficiency gains/losses, and.
    • Income‐distribution consequences.

    As long as the gainers evaluate their gains at a higher figure than the value that losers set upon their losses, then this efficiency gain justifies the change, even though (in the absence of actual compensation payments) income redistribution has occurred. Where the gainers from a change fully compensate the losers and still show a net gain, this would rate as an improvement under the Pareto criterion.

    Where compensation is not paid, then a second-best situation may be created where the economy departs from the optimum pattern of resource allocation, leaving the government to decide whether it wishes to intervene to tax gainers and compensate losers. In addition to developing welfare criteria, economists such as Paul Samuelson have attempted to construct a social welfare function that can offer guidance as to whether one economic configuration is better or worse than another.

    The social‐welfare function can be regarded as a function of the welfare of each consumer. However, in order to construct a social‐welfare function, it is necessary to take the preferences of each consumer and aggregate them into a community preference ordering, and some economists, such as Kenneth Arrow, have questioned whether consistent and noncontradictory community orderings are possible.

    Despite its methodological intricacies, welfare economics is increasingly needed to judge economic changes, in particular, rising problems of environmental pollution that adversely affect some people while benefiting others. Widespread adoption of the ‘polluter pays’ principle reflects a willingness of governments to make interpersonal comparisons of utility and to intervene in markets to force polluters to bear the costs of any pollution that they cause.

    How to Measuring Welfare?

    There are mainly two concepts for measuring welfare. The first relates to a Pareto improvement whereby social welfare increases when society as a whole is better off without making any individual worse off. This proposition also includes the case that when one or more persons are better off, some persons may be neither better off nor worse off. It is, thus, free from making interpersonal comparisons.

    Hicks, Kaldor and Scitovsky have explained social welfare in the Paretian sense in terms of ‘the compensation principle’. In the second place, social welfare is increased, when the distribution of welfare is better in some sense. It makes some persons in society better off than others so that the distribution of welfare is more equitable. Also study, Why Entrepreneurs Required the Capital? to Pursue Business!

    This is known as distributional improvement and relates to the Bergson social welfare function. Dr. Graaf, however, refers to another concept which he calls the paternalist concept. A state or a paternalist authority maximizes social welfare according to its own notion of welfare without any regard to the views of individuals in society.

    Economists do not make use of this concept to measure social welfare because it is related to a dictatorial regime and does not fit in a democratic set-up. Economic welfare, thus, implies social welfare which is concerned primarily with the policy that leads either to a Pareto improvement or distributional improvement, or both.

    What does Welfare Economics mean Measuring and Value decisions
    What does Welfare Economics mean? Measuring and Value decisions! Image credit from #Pixabay.

    Value Decisions in Welfare Economics:

    The following Value Judgments or Decisions below are:

    Alt ethical judgments and statements which perform recommendatory, influential and persuasive func­tions are value judgments. According to Dr. Brandt a judgment is a value judgment if it entails or contradicts some judgment which could be formulated so as to involve any one of the following terms in an In ordinary sense: “Is a good thing that” or “Is a better thing that”, “Is normally obligatory”, “Is reprehensible”, and “Is normally praiseworthy”.

    Value judgments describe facts in an emotive way and tend to influence people by altering their beliefs or attitudes. Such statements as “This change will increase economic welfare”, “Rapid economic development is desirable”, “Inequalities of incomes need be reduced”, are all value judgments. Welfare is an ethical term. So all welfare propositions are also ethical and involve value judgments.

    Such terms as “Satisfaction”, “Utility” are also ethical in nature since they are emotive. Similarly, the use of a highly emotive word as “social”, “community” or “national” in place of “economic” is ethical. Since welfare economics is concerned with policy measures, it involves ethical terminology, such as the increase of “social welfare” or “social advantage” or “social benefit”. Thus welfare economics and ethics cannot be separated.

    They are inseparable, according to Prof. Little, “because the welfare terminology is a vague terminology. Since welfare propositions involve value judgments, the question arises whether economists should make value judgments in economics.” Economists differ over this issue. The neo-classical were concerned with the measurability of utility and the inevitable interpersonal comparisons of utility.

    Pigou’s income-distribution policy, based on Marshall’ postulate of equal capacity for satisfaction, implied that interpersonal comparisons of utility were possible. Robbins, in 1932, led a frontal attack against this view. He maintained that if economics was to be an objective and scientific study, economists should refrain from making interpersonal comparisons, for policy recommendations tend to make some people better off and others worse off.

    It is, therefore, not possible to make interpersonal comparisons, i.e. the welfare of one person cannot be compared with that of another. The majority of economists agreeing with Robbins switched over to the Paretian ordinal method in order to avoid interpersonal comparisons of utility. Kaldor, Hicks, and Scitovsky formulated the ‘compensation principle’ free from value judgments.

    Accordingly, economists can make policy recommendations on the basis of efficiency considerations. The objective test of economic efficiency is that the gainers from a change can more than compensate the losers. But this test of increased efficiency implies a value judgment because the gainers from a change are able to compensate the losers.

    The very idea of compensation involves value prescriptions. So even the formulators of the ‘New Welfare Economics’ have not been successful in building value-free welfare economics. Prof. Bergson also agrees with Robbins that interpersonal comparisons involve value judgments. But he along with Samuelson and Arrow holds that no meaningful propositions can be made in welfare economics without introducing value judgments.

    Welfare economics, thus, becomes a normative study which, however, does not prevent economists from studying it scientifically. Even the Paretian general optimum theory is not value-free. It states that an optimum position is one from which it is not possible to make everyone better off without making at least one person worse off, even by re­allocation of resources. This welfare proposition contains certain value judgments.

    The Paretian optimum is related to the welfare of the individual. In order to attain the optimum position every individual act as the best judge of his welfare. If any re-allocation of resources makes at least one person better off without making others worse off, then the welfare of the society is said to have increased. These are all value judgments which Pareto could not avoid despite the fact that he used the method of ordinal measurement of utility.

    Boulding’s view merits consideration in this controversy:

    “Whatever may be the case in the Elysian Fields of pure economics, the social fact is that we make… interpersonal comparisons all the time, and that hardly any social policy is possible without them, for almost every social policy makes some people worse-off and some better-off. The Paretian optimum itself is a special case of a social welfare function, for if we assume this to be a social ideal it implies that nobody should ever be made worse-off, whereas most societies have defined certain groups (e.g., criminals or foreigners) who should be made worse off…”

  • Meaning, Nature, and Importance of Capital Expenditure Decisions

    Meaning, Nature, and Importance of Capital Expenditure Decisions

    It is the planning, evaluation, and selection of capital expenditure proposals, the benefits of which are expected to accrue over more than one accounting year. Capital expenditure decisions are just the opposite of operating expenditure decisions. Decisions involving the acquisition of machinery, vehicles, buildings, or land are examples of such decisions. So, what is discusses are: Meaning, Nature, and Importance of Capital Expenditure Decisions.

    The Concept of Capital Expenditure Decisions is explaining in Meaning, Definition, Nature, Objectives, Difficulty, and Importance.

    What is Capital Expenditure? A capital expenditure is the use of funds by a company to acquire physical assets to improve its value or increase its long-term productivity. Also known as capital expenses, capital expenditures include purchases such as buildings or warehouses, new equipment such as machinery or computers, and business vehicles. Many companies strive to maintain their historical capital expenditure levels in order to show investors that managers are investing adequately in the business.

    Much of the discussion has focused on decisions relating to near-term operations and activities. But, managers must also ponder occasional big-ticket expenditures that will impact many years to come. The decision on long-term investments is quite pivotal due to many reasons. It is a part of the duties of an entity’s key management to affect most accurate the decision with respect to the long-term investments. The question of decisions is: What is the concept of financial decisions?

    Such capital expenditure decisions relate to the construction of new facilities, large outlays for vehicles and machinery, embarking upon new product research and development, and similar items where the upfront cost is huge and the payback period will span years to come. A number of business factors combine to make business investment perhaps the most important financial management decision.

    Meaning of Capital Expenditure Decisions:

    The capital expenditure decision is the process of making decisions regarding investments in fixed assets which are not meant for sale such as land, building, plant & machinery, etc. Thus it refers to long-term planning for proposed capital expenditures and includes raising of long-term funds and their utilization. The key function of the finance manager is the selection of the most profitable project for invest­ment. This task is very crucial because any action taken by the manager in this area affects the working and profitability of the firm for many years to come.

    Definition of Capital Expenditure Decisions:

    Former is generally termed as ‘current’ expenditure and is ex­pected to result in benefits in a short period of less than a year. The latter is termed as ‘capital’ expenditure, and is expected to result in benefits in the future period of one or more years and is also known as capital budgeting decisions. Capital Expenditure Decisions Managers in all organizations periodically face major decisions that involve cash flows over several years. Decisions involving the acquisition of machinery, vehicles, buildings, or land are examples of such decisions.

    Although the tendency is to focus on the financial dimensions, such decisions are made even more complex because they usually involve a number of nonfinancial components as well. Thus, the final decision may involve consideration of architectural, engineering, marketing, regulatory, and numerous other variables.

    These types of decisions involve considerable risk because they usually involve large amounts of money and extended durations of time. In addition, capital expenditure decisions (also called capital budgeting) are usually accompanied by a number of alternatives from which to choose. Sometimes, an option that is best in the long term may be the least desirable in the near term and vice versa.

    Nature of Capital Expenditure Decisions:

    Capital expenditure decisions involve the acquisition of assets that have a long life span and which provide benefits spread over a long period of time.

    The nature of capital expenditure decisions can be explained in brief as under:

    • Irreversible Decision: Capital expenditure decisions once approved represent long-term invest­ments that cannot be reversed or withdrawn at any time. Withdrawal or reversal of such decisions may lead to considerable financial losses to the firm.
    • Maximization of Shareholder’s Wealth: It helps protect the interest of the shareholders as well as of the firm because it avoids over-investment and under-investment in fixed assets.
    • Substantial Investments: Capital expenditure decisions involve large amounts of funds. Such decisions have its effect over a long span of time.
    • Estimation of Future Cash Inflows: Preparation of capital expenditure budget involves forecast­ing of cash inflows over several years for evaluating the profitability of projects.

    Objectives of Capital Expenditure Decisions:

    Financing decisions are one of the most crucial and critical decisions of a firm as they have a significant impact on the profitability of the firm.

    There is the number of objectives of capital expenditure decisions, some of which are:

    • Cost Reduction: The existence of a firm depends on profitability, which in turn depends on the production of goods or services at a reasonable price. This is possible if over/under-investment in fixed assets is avoided.
    • Providing Contemporary Goods: Consumer tastes change every day. To satisfy the new demands from customers, either proper utilization of existing facility or installation of the latest machinery is necessary—which is not possible without proper capital expenditure decision.
    • Increasing Output: An output may be increased by utilizing the existing facility or through expansion by installing new plant and machinery.

    The Importance of Capital Expenditure Decisions:

    Here are understand about the importance of Capital expenditure and also know their Difficulty.

    The following importance is:
    • Effects in the Long Run: the consequences of capital expenditure decisions extend into the feature. The scope of current manufacture activities of a company governed largely by capital expenditures in the past. Likewise, current capital expenditure decisions provide the framework for future activities. Capital investment decisions have an enormous bearing on the basic character of a company.
    • Irreversibility: The market for used capital equipment, in general, is ill-organized. Further, for some types of capital equipment, custom-made to meet the specific requirement, the market virtually be non-existent. Once such equipment is acquired, reversal of decision may mean scrapping the capital equipment. Thus, a wrong capital investment decision cannot be reversed without incurring a substantial loss.
    • Substantial outlays: Capital expenditures usually involve substantial outlays. An integrated steel plant, for example, involves an outlay of several thousand million. Capital costs tend to increase with advanced technology.
    The following difficulty is:
    • Measurement problems: Identifying and measuring the costs and benefits of a capital expenditure proposal tends to be difficult. This is more so when a capital expenditure has a bearing o some other activities of the company like cutting into sales of some existing product or has some intangible consequences like improving the morale of workers.
    • Uncertainty: A capital expenditure decision involves costs and benefits that extend far into the future. It is impossible to predict exactly what will happen in the future. Hence, there is usually a great deal of uncertainty characterizing the costs and benefits of a capital expenditure decision.
    • Temporal Spread: The costs and benefits associated with a capital expenditure decision are spread out over a long period of time, usually 10-20 years for industrial projects and 20-50 years for infrastructural projects. Such a temporal spread creates some problems in estimating discount rates and establishing equivalence.

    Capital Expenditure Decisions Managers in all organizations periodically face major decisions that involve cash flows over several years. Decisions involving the acquisition of machinery, vehicles, buildings, or land are examples of such decisions. Other examples include decisions involving significant changes in a production process or adding a major new line of products or services to the organization’s activities.

    Decisions involving cash inflows and outflows beyond the current year are called capital-budgeting decisions. Managers encounter two types of capital-budgeting decisions. Acceptance-or-Rejection Decisions In acceptance-or-rejection decisions, managers must decide whether they should undertake a particular capital investment project. In such a decision, the required funds are available or readily obtainable, and management must decide whether the project is worthwhile.

    Meaning Nature and Importance of Capital Expenditure Decisions
    Meaning, Nature, and Importance of Capital Expenditure Decisions. Image credit from #Pixabay.

  • The Factors Influencing and Importance of Financial Decisions!

    The Factors Influencing and Importance of Financial Decisions!

    The Concept of Financial Decisions, The Factors Influencing Financial Decisions: 1. External Factors, and 2. Internal Factors, Fully Explain It by PDF and Free Download, and What is the Importance of Financial Decisions? Definition: The Financing Decision is yet another crucial decision made by the financial manager relating to the financing-mix of an organization. It is concerned with the borrowing and allocation of funds required for the investment decisions. Also learned, The Factors Influencing and Importance of Financial Decisions!

    Learn and Understand, The Factors Influencing and Importance of Financial Decisions! 

    The financing decision involves two sources from where the funds can be raised: using a company’s own money, such as share capital, retained earnings or borrowing funds from the outside in the form debenture, loan, bond, etc. The objective of financial decision is to maintain an optimum capital structure, i.e. a proper mix of debt and equity, to ensure the trade-off between the risk and return to the shareholders.

    The Concept of Financial Decisions:

    Financial decisions refer to decisions concerning financial matters to a business concern. Decisions regarding the magnitude of funds to be invested to enable a firm to accomplish its ultimate goal, kind of assets to be acquired, the pattern of capitalization, pattern of distribution of firm’s income and similar other matters are included in financial decisions.

    These decisions are crucial for the well-being of a firm because they determine the firm’s ability to obtain plant and equipment when needed to carry the required amount of inventories and receivables, to avoid burdensome fixed charges when profits and sales decline and to avoid losing control of the company. Financial decisions are taken by a finance manager alone or in conjunction with his other executive colleagues of the enterprise. In principle, the finance manager is held responsible to handle all such problems as involve money matters.

    But in actual practice, he has to call on the expertise of those in other functional areas: marketing, production, accounting, and personnel to carry out his responsibilities wisely. For instance, the decision to acquire a capital asset is based on the expected net return from its use and on the associated risk. These cannot be given values by the finance manager alone. Instead, he must call on the expertise of those in charge of production and marketing.

    Similarly, the decision regarding allocation of funds as between different types of current assets cannot be taken by a finance manager in the vacuum. The policy decision in respect of receivables—whether to sell for credit, to what extent and on what terms is essentially financial matter and has to be handled by a finance manager. But at the operating level of carrying out the policies, sales may also be involved since decisions to tighten up or relax collection procedures may have repercussion on sales.

    Similarly, in respect of inventory, while determining types of goods to be carried in stock and their size are a basic part of the sales function, a decision regarding the quantum of funds to be invested in inventory is the primary responsibility of the finance manager since funds must be supplied to finance inventory.

    As against the above, the decision relating to the acquisition of funds for financing business activities is primarily a finance function. Likewise, the finance manager has to take a decision regarding the disposition of business income without consulting other executives since various factors involved in the decision affect the ability of a firm to raise funds. In sum, financial decisions are looked upon as cutting across functional, even disciplinary boundaries. It is in such an environment that a finance manager works as a part of total management.

    The Factors Influencing Financial Decisions:

    A finance manager has to exercise a great skill and prudence while taking financial decisions since they affect the financial health of an enterprise over a long period of time. It would, therefore, be in the fitness of things to take the decisions in the light of external and internal factors. We shall now give a brief account of the impact of these factors on financial decisions.

    External Factors:

    External factors refer to environmental factors within which a business enterprise has to operate. These factors are beyond the control and influence of the management. A wise management adopts policies that will be most suited to the present and prospective socio-economic and political conditions of the country.

    The following external factors enter into decision-making process:

    • The State of Economy.
    • Structure of Capital and Money Markets.
    • State Regulations.
    • Taxation Policy.
    • Requirements for Investors, and.
    • Lending Policy of Financial Institutions.
    Internal Factors:

    Internal factors refer to those factors which are related with internal conditions of the firm such as nature of business, size of business, expected return, cost and risk, asset structure of business, structure of ownership, expectations about regular and steady earnings, age of the firm, liquidity in company funds and its working capital requirements, restrictions in debt agreements, control factor and attitude of the management.

    Within the economic and legal environment of the country finance manager must take the financial decision, keeping in mind the numerous characteristics of the firm.

    Impact of each of these factors upon financial decisions will now be discussed in the following lines.

    • Nature of Business.
    • Size of Business.
    • Expected Return, Cost, and Risk.
    • Asset Structure of the Firm.
    • Structure of Ownership.
    • Probabilities of Regular and Steady Earnings.
    • Age of the Firm.
    • Liquidity Position of the Firm and Its Working Capital Requirements.
    • Restrictions in Debt Agreements, and.
    • Management Attitude.

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    What is the Importance of Financial Decisions?

    These decisions are relatively more important because of the following reasons:

    (1) Long-term Growth and Effect:

    These decisions are concerned with long-term assets. These assets are helpful in production. Profit is earned by selling the goods so produced. It can, therefore, be said the more correct these decisions are, the greater will be the growth of business in the long run. In addition to that, these affect the future possibilities of the business.

    (2) Large Amount of Funds Involved:

    Decisions regarding fixed assets are included in the preview of capital budgeting. A large amount of capital is invested in these assets. If these decisions turn out to be wrong, there occurs the heavy loss of capital which is a scarce resource.

    (3) Risk Involved:

    Capital budgeting decisions are full of risk. There are two reasons for it. First, these decisions refer to a long period, and as such expected profits for several years are to be anticipated. These estimates may turn out to be wrong. Second, because of the heavy investment involved, it is very difficult to change the decision once taken.

    (4) Irreversible Decisions:

    Nature of these decisions is such as cannot be changed so quickly. For instance, if soon after setting up a cotton mill, it is thought of changing it, then the old machinery and other fixed assets will have to be sold at the throwaway price. In doing so, the heavy loss will have to be incurred. Changing these decisions, therefore, is very difficult.

    The Factors Influencing and Importance of Financial Decisions - ilearnlot