Economics and Statistics in Decision Making
Authored by: Kedisa Johnson November 14, 2010
Abstract This paper will attempt to outline the interrelation of economics and statistics in the decision making process--examining the linkage from a strategic planning and competitive advantage perspective within firms.
Harrison (1999) states that “decisions are the core transactions of organizations. Successful [organizations] ‘outdecide’ their competitors in at least three ways: They make better decisions; they make decisions faster; and they implement decisions more” (Harrison, 1999, p. 6). This three prong outcome constitutes what is known as competitive advantage--“the ability of a firm to have higher rates of profits than its competitors” (Ball, Geringer, Minor, & McNett, 2010, p. 639). Decision making within the context of a firm’s competitive advantage more or less happens during the strategic planning process. This is where managers decide how to increase profits and sales, how to access and enter new markets, how to protect and sustain existing ones, and how to satisfy management’s overall desire for growth (Ball et al., 2010, p. 366). To meet these challenges “managers must understand the company’s strengths and weaknesses and be able to compare them accurately to those of their worldwide competitors. Strategic planning provides valuable tools that help managers address these global challenges” (p. 366). These valuable tools are statistical in nature and more often than not, are used to conduct economic analyses. Such tools include, but are not limited to, trend analysis or timeseries analysis, statistical estimation, forecasting (sales or market), cluster analysis, market indicator, and market factors and “they help ensure that decision makers have a common understanding of the business, the strategy, the assumptions behind the strategy, the external business environment pressures, and their own direction, as well as promoting consistency among the firm’s managers worldwide” (Ball et al., 2010, p. 366). Consider the multinational conglomerate, Wal-Mart. Founded in Arkansas by Sam Walton in 1962, Wal-Mart has developed into “the largest retailer in the world with sales of $379 billion for the 2008 fiscal year. The company has also become a strong competitor in the international retailing industry because it has been able to develop more effective processes for performing critical activities, such as the logistics of tying point-of-purchase data to company’s inventory management and purchasing activities” (Ball et al., 2010, p. 367). Additionally, “competitors have had continued difficulties matching Wal-Marts competencies, enabling Wal-Mart to consistently earn a return on sales that is twice the average of its industry”(p. 367). However, breaking into certain international
markets, like China, wasn’t the easiest for Wal-Mart. The company, before setting up shop in 1996, had to learn how to do business in China. The company employed market indicators--“economic data used to measure relative market strengths of countries or geographic areas”(p. 431) and market factors--“economic data that correlate highly with market demand for a product” (p. 431). As such, Wal-Mart had to eliminate certain products from the shelves in China and source about 85 percent of the Chinese stores’ purchases from local manufacturers because the Chinese government pressured Wal-Mart to do more local sourcing of American brands. Arguably, the interrelation of economics and statistics is most important to strategic planning at the level of which economic forces weigh heavily on the decision making process. “Economic forces are among the most uncontrollable forces for managers and to keep abreast of developments and also to plan for the future, firms need to assess and forecast economic conditions at the national and international level” (Ball et al., 2010, p. 224). Typically, data on the size and rates of change of a number of these economic and socioeconomic factors are essential to successful strategy implementation and execution. These include important economic dimensions such as “GDP, GNI, distribution of income, personal consumption expenditures, private investment, unit labor costs, and financial data. The principal socioeconomic dimensions are total population, rates of growth, age distribution, population density, and population distribution” (Ball et al., 2010, p. 238). Of the various economic dimensions, “unit labor costs attract managers attention for two reasons. First they are investment prospects for companies striving to lower production costs, and second, they may become sources of new competition in world markets if other firms in the same industry are located there”(Ball et al., 2010, p. 224). Additionally, “change in wage rates may also cause a multinational firm that obtains products or components from a number of subsidiaries to change its sources of supply” (p. 224). Take for example, the multinational shoe company, Nike. Nike, which produces none of its shoes it sells in the United States, began using Japanese plants in 1964. When labor costs rose there in the mid-1970s, the company
changed to factories in South Korea and Taiwan later. Later, Nike added Thailand. But as labor costs rose in those countries Nike began buying in over 50 Indonesian factories and in China. Alarmed because its $75 to $100 (retail) shoes were costing as much as $10 to produce and ship to the United States, Nike contracted for production in Vietnam and is also the largest seller of athletic shoes in China1. Doing economic and statistical analyses of this kind enables a firm to assess the impact of the more complex factors that affect a firm’s operations. Some firms, however, are exercising a different approach to the hardcore economic and statistical analyses that is so common in the decision making process to maintain competitive advantage. Shell’s (also known as Royal Dutch) planning director stated that the company “has swung increasingly away from a mechanistic methodology and centrally set forecasts toward a more conceptual or qualitative analysis of the forces and pressures impinging on the industry. What Shell planners try to do is identify the key elements pertaining to a particular area of decision making--the different competitive, political, economic, social, and technical forces that are likely to have the greatest influence on the overall situation” (Ball et al., 2010, p. 385).
1
Case study of Nike as it relates to unit labor costs. Excerpt taken from (Ball et al., 2010, p. 224).
References Ball, D. A., Geringer, M. J., Minor, M. S., & McNett, J. M. (2010). International Buisness: The Challenge of Global Competition (12th Edition ed.). New York: McGraw-Hill Irwin. Harrison, E.F. (1999). The managerial decision-making process, 5th edition. Boston, MA: Houghton Mifflin Company. Photo and Image Credits: Image retrieved from personal istockphoto library