Research and Analysis of Business Problems
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decision_lectures_6a.pdf
BA 301
Research & Analysis of Business Problems
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Problem Solving Framework 2
Context & Background
Problem Analysis & Description
Solution Development
Evaluation & Decision- Making
Communication & Implementation
Problem Solving Framework 3
Context & Background
Problem Analysis & Description
Solution Development
Evaluation & Decision- Making
Communication & Implementation
Cost Benefit Analysis 4
Cost Benefit Analysis Details
A Cost Benefit Analysis (CBA) is a technique for
assessing the monetary costs and benefits of an
investment project over a given period of time.
It can be used as a decision tool if comparing the net
benefit of a number of different options.
It can be used to help sell the project after a decision has
been made.
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How Do You Do It?
What are the costs?
What are the benefits?
Is there a net benefit?
What’s the timeframe?
Tangible versus intangible?
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Tangible Versus Intangible
In the simplest form, you only use financial costs and
financial benefits.
A more sophisticated approach attempts to include
intangible costs and benefits:
Stress free travel
Aesthetics
Environmental impact
Intangibles are subjective, and sometimes more art
than science.
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Other Issues
Costs can be one-off, or ongoing.
Benefits are often received over time.
Build this in by considering payback time.
We often look for payback over a fixed period of
time.
Discounting the future value of benefits.
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Small Business Decision 9
What’s The Decision?
He’d like to close at 9 PM on Monday through Friday.
Should he do it?
What data & information does he need to do a Cost
Benefit Analysis?
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Operational
costs for that
last hour
Revenue for
that last hour
Tangible Costs 11
Tangible Benefits
TOTAL
Tangible Fixed Costs
TOTAL
NET
Tangible Costs 12
Tangible Benefits
Profit (460 * $0.05) $25.00
TOTAL $25.00
Tangible Costs
TOTAL
NET
Tangible Costs 13
Tangible Benefits
Profit (460 * $0.05) $25.00
TOTAL $25.00
Tangible Costs
Power $3.00
Wages $20.00
TOTAL $23.00
NET
Tangible Costs 14
Tangible Benefits
Profit (460 * $0.05) $25.00
TOTAL $25.00
Tangible Costs
Power $3.00
Wages $20.00
TOTAL $23.00
NET BENEFIT +$2.00
What Are Some Intangibles?
Employee satisfaction – Assistant Manager can be
with family at night.
Employee safety – higher crime at night.
Customer satisfaction – occasionally a key customer
needs copies at night.
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Another Example
Scenario:
A sales director is deciding whether to implement a new
computer-based contact management system.
He doesn’t have many computers and his salespeople
are not that computer literate.
He knows that he can increase contact numbers and
give better customer service with the system. Efficiency
will be improved.
What should he do?
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Tangible Costs 17
Computer Equipment
Computers $10,000
Printers $2,500
Cabling/Installation $3,000
Software $10,000
TOTAL COSTS
Tangible Costs 18
Computer Equipment
Computers $10,000
Printers $2,500
Cabling/Installation $3,000
Software $10,000
Training
Computers (8 @ $400) $3,200
Keyboards (8 @ $400) $3,200
Software (12 @ $700) $8,400
TOTAL COSTS
Tangible Costs 19
Computer Equipment
Computers $10,000
Printers $2,500
Cabling/Installation $3,000
Software $10,000
Training
Computers (8 @ $400) $3,200
Keyboards (8 @ $400) $3,200
Software (12 @ $700) $8,400
Other Costs
Lost Time (40 @ $200) $8,000
Lost Sales $20,000
Lost from inefficiency $20,000
TOTAL COSTS
Tangible Costs 20
Computer Equipment
Computers $10,000
Printers $2,500
Cabling/Installation $3,000
Software $10,000
Training
Computers (8 @ $400) $3,200
Keyboards (8 @ $400) $3,200
Software (12 @ $700) $8,400
Other Costs
Lost Time (40 @ $200) $8,000
Lost Sales $20,000
Lost from inefficiency $20,000
TOTAL COSTS $88,300
Tangible Benefits 21
Benefits
TOTAL BENEFIT
Tangible Benefits 22
Benefits
More Mail Campaigns $40,000 per year
Sustain Telesales Campaigns $20,000 per year
Better Follow-Up $30,000 per year
Improved Customer Service $20,000 per year
Better Customer Information $10,000 per year
Better Sales Management $20,000 per year
TOTAL BENEFIT
Tangible Benefits 23
Benefits
More Mail Campaigns $40,000 per year
Sustain Telesales Campaigns $20,000 per year
Better Follow-Up $30,000 per year
Improved Customer Service $20,000 per year
Better Customer Information $10,000 per year
Better Sales Management $20,000 per year
TOTAL BENEFIT $140,000 per year
Payback Time: $88,300/$140,000 = 0.62 (about 8 months)
What Are The Intangibles?
Personnel discomfort with a new system.
General organizational disarray with new
procedures and processes.
Happier, more organized salespeople.
Employee attitudes about management investment
in personnel.
Others?
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BA 301 Fall 2013 - Build
Cost/Benefit Summary
Cost/Benefit analysis is a powerful, widely used
and relatively easy tool for deciding to implement
a decision.
First, work out how much the decision will cost (don’t
forget opportunity costs).
Where costs or benefits will be received over time –
work out the time it will take for the benefits to
outweigh the costs.
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BA 301 Fall 2013 - Build
Measuring Intangibles 26
Measuring Intangibles 27
Measuring Intangibles 28
Option 1 – Fix the problem
12.5 million cars at $11/car $137.5 million
Option 2 – Pay for the injuries/deaths
180 deaths @ $200,000/death $36 million
180 injuries @ $67,000/serious injury $12.1 million
2100 burned out vehicles @ $700/vehicle $1.5 million
TOTAL $49.6 million
Intangibles?
Feasibility Analysis 29
Feasibility Analysis 30
Economic
Organizational
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