IB BM HL 2.3.1 Decision-making

[Maximum number: 9]

Martin Kimathi faced three major problems. Firstly, he had employee negotiations about the strike. Secondly, there was the issue with Susan Chapman. Thirdly, Martin would soon have his annual meeting with GP to discuss the strategic direction of The Imperial and to set target profits for the coming year. Because GP had rejected the idea of making a major investment in the hotel (Option 1), the discussions would focus on Option 2 (targeting The Imperial at business travellers staying for at least one week) and Option 3 (forming a strategic alliance with KenSafar).

During negotiations with the employee representatives, Martin discovered that they wanted Susan to be dismissed. Otherwise the entire staff would go on strike in December, which would put The Imperial's profits for the year below target. However, Susan had threatened to take legal action, if dismissed. She said she would claim that she was a victim of discrimination.

Option 2 appeared to be the best and Martin wanted to go even further. He had discovered that outsourcing the housekeeping staff would be even cheaper than the initial idea of a 70 % reduction in housekeeping staff (Item 1). His original decision tree (Item 2), when modified to take this lower cost into account, would make Option 2 even better. This could also avoid the problem with Susan: he could say in court that he was making all housekeeping staff redundant, including Susan, as part of a total business reorganization.

Laying-off all the housekeeping staff worried Martin. Unemployment is high in Kenya, and he feared they might not find new jobs. Intuitively he favoured Option 3 which would build on The Imperial's history while linking it to the fastest growing areas of Kenyan tourism.

Item 1: Internal memo from the Finance Office to Martin Kimathi
To: Martin Kimathi
From: Finance Office
Re: Outsourcing the Housekeeping Department

After receiving bids from several cleaning service companies, I am pleased to report that we can reduce the costs of housekeeping by $\$ 150000$ per year by outsourcing this department; this does not include one-time costs related to making all housekeeping positions redundant. This would lower our break-even number of customers as shown below, which assumes single occupancy of each apartment and 150 apartments (all numbers in the table have been rounded to the nearest figure):

	With the current housekeeping staff	With housekeeping outsourced
Average sales revenue per customer per night	$157	$157
Variable costs per night	$17	$17
Fixed costs	$4600000	$4450000
Break-even number of customers	32857	31786
Average occupancy rate	60\%	58\%

Item 1: Housekeeping outsourcing financial data

Item 2: Original decision tree

Item 2: Original decision tree

Item 3: External Memo from GP to Martin Kimathi

To: Martin Kimathi<br>From: GP<br>Re: Target profits for upcoming year
Due to the global economic crisis, the directors of GP have decided that specific properties including The Imperial hotel will have to reach higher target profits than initially planned. The aim is to compensate for poor returns in other investments.

Item 3: Target profits for upcoming year

Capital	Nairobi
Population	43013341
Life expectancy	63.07 years
Literacy rate	$87.4 \%$
Unemployment rate (\% of labour force without a job)	$40 \%$
Population below poverty line	$50 \%$

Item 4: Kenya fact-file

Item 5: Kenya GDP growth rate (World Bank)

Item 5: Kenya GDP growth rate (World Bank)

With reference to Martin Kimathi and The Imperial, compare and contrast scientific and intuitive decision-making processes.

Scientific decision-making refers to various approaches to decision-making undertaken systematically often quantitative. Many of the "decision-making tools" that are in the IB Business and Management Guide are types of so-called scientific processes: decision trees, ratio analysis, force field analysis, etc.

Intuitive decision-making processes are often described as a "feeling" about the best possible course of action, but actually intuitive decision-making is often more rational than typically given credit. Intuitive decision-making often involves prior experience usually made consciously, but sometime subconsciously. Often some of these data do not fit the narrow structures necessary for scientific decision

making models. Intuitive decision makers often described intuitive decisions in affective terms: as "a hunch", a "feel", or intuition.

As a good manager, Martin is well trained in scientific decision-making models: decision trees, break-even analysis, ratio analysis, etc. He uses these types of methods to help him to evaluate options. Even when not formulaic, he uses solid logic and reasoning. For example, in addition to the cost savings from outsourcing the housekeeping staff, Martin is aware that this would provide him with an opportunity to terminate Susan's employment and, at the same time, take away most of her basis for a discrimination law suit.

Martin is also being influenced by intuitive decision-making processes. He senses the importance of Option 3, which would connect with the history of the hotel. He also has some sense of the growing importance to people from developed countries of eco-tourism and he can imagine The Imperial connecting to this global trend. Martin has a certain reluctance to lay-off the housekeeping staff (the employees would probably struggle to find new jobs), despite the cost savings involved. These intuitive processes make him question the value of the scientifically arrived at "best solution".

One point of comparison in the case is between Martin and Susan. Susan relied exclusively on scientific decision-making (and bureaucratic approaches, which often overlaps with scientific decision-making, though they do not necessarily have to). Because of this approach, she was perceived as cold, official and impersonal. She consciously would not let what she considered "non-relevant" information to influence her decisions. Martin, on the other hand, relied on both approaches, which made him more appealing at a human level though, from a certain perspective, left him open to criticism, eg his "laissez-faire" style.

Accept any other relevant comparison or contrast.

If the answer is one sided, award a maximum of [5 marks].
If the answer is unbalanced, award a maximum of [6 marks].
Marks should be allocated according to the markbands on page 5.

IB Business Management HL 2.3.1 Hl Scientific and Intuitive Management Questions

Exam points

IB Business Management HL 2.3.1 Hl Scientific and Intuitive Management Questions question 1