In most cases, there is no time for deep analysis on which decisions can be based. Many managers make decision shortcuts, neglecting potential risks. Eventually, such a practice resulted in creating a set of rules that help managers make effective decisions very fast. The main goals of this paper are to discuss this issue, referring to examples from real life and apply specific steps for evaluating the effectiveness of an important decision that is made quickly and frequently.
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What is an Important Decision That Needs to Be Made Frequently and Quickly?
Put prices on food and beverages in restaurants.
What Is the Decision to Be Made?
There is a rule of thumb in restaurant pricing: price on food should be three times higher than its direct cost, beer– four times, and liquor – six times. Also, direct food cost should not be more than thirtypercent of food sales.
How Frequently does This Decision Need to Be Made?
This decision should be made each time when a new item is about to be introduced to clients.
If time was not an issue, this decision would require profound analysis of resources andthe current situation on the market. However, in restaurant business new items appear very often, thus there is no time to conduct in-depth research. Similar rules are applied by many companies in real life situations. There are several examples. Managers in seasonal clothing industry increase the wholesale price by 60% (Schoemaker& Russo, 1993). When it comes to setting production costs, manufacturers multiply the cost of the material by two to cover other expenses. Another example is provided by managers who evaluate acquisitions. Their rules requirepurchasing “if and only if the target’s estimated after-tax earnings in year 3 (after the purchase) exceed 12% of the purchase price” (Schoemaker& Russo, 1993, p. 13). These examples demonstrate decision shortcuts made by different specialists that were more effective and relevant than decisions based on anin-depth analysis.
The Decision Analysis Shortcut
When it comes to putting prices on different items, managers do not need to conduct an in-depth analysis of the existing situation on the market. Using the experience of other restaurants,managers formulated the rule that allows determining the value of food and beverages very fast. If this rule is not used, I would recommend that food cost should be around 30-35%, beer – around 40-45%, and liquor – around 60-65%.
Therule is used in most countries as it is a general rule for pricing in restaurants. Such pricing covers all labor expenses and rent. Therefore, restaurant businesses can remain profitable without overcharging their clients.
However, the rule should be applied only to those public eating houses that meet the specific requirements and might get a restaurant status. Some less fashionable eating places should not use the rule as it will negatively affect customers’ satisfaction. Therefore, if a cafe or canteen would put such prices on their menus, they would lose profits as clients would not come back.
The rule should be improved to avoid such failures. It has to describe requirements not only for pricing but also for the quality of service. It should provide clear explanations and indicators that can help to assess a high-quality service.
It is necessary to test the improved decision analysis shortcut, in order to determine its effectiveness. As the improvements do not change the current rule but complement it, the test should be conducted in several public eating houses. The focus has to be on the comparison of the results of the modified ruleand the previous rule.
Decision shortcuts are very important approaches that allow organizations to keep up with the pace of the fast-developing world. Such decisions are based on the intuition and experience of managers. However, they might often put a company at risk. Therefore, it is necessary to continue research in this area in order to provide more effective solutions.
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Schoemaker, P. J., & Russo, J. E. (1993). A pyramid of decision approaches. California Management Review, 36(1), 9-31.