Making Rational Trade-Offs in Business Decisions

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  • 0:03 Background on Business…
  • 0:57 What Are Trade-Offs?
  • 1:45 Eliminating Choices
  • 2:31 Choosing the Best
  • 3:35 Lesson Summary
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Lesson Transcript
Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

Making business decisions is not always an easy yes or no. In this lesson, we'll learn that the best decisions usually involve giving up some things. Many times, there will be goals that are partially met.

Background on Business Decisions

All businesses have decisions to make when it comes to projects and other issues. Usually, these decisions have more than one goal involved. For example, when it comes to choosing the right manufacturing equipment for products, a hat company called Hats All Day may have all these goals:

  • The equipment can make 1,000 items per day.
  • The equipment is easy to operate.
  • The equipment only requires one or two employees to work it.
  • The equipment's cost is less than $100,000.
  • The equipment does not have complicated maintenance procedures.

Because business decisions involve more than just one goal to consider, making a business decision is not always an easy yes or no. The goals have to be considered, and each piece of equipment may need to be scored based on how well the equipment meets the goals.

What Are Trade-Offs?

When a decision is made, there will usually be trade-offs. We define trade-offs as compromises, meaning that something must be given up in order to make the best decision. This is because each choice will meet some of the goals, but not all of them. In our example, Hats All Day might have these choices to pick from in choosing equipment:

  • The Ultimate Hat Maker
  • Hat Maker 1000
  • HatsRUs 2000

Each machine will meet some of the goals spot on, but will not meet other goals very well. To ensure that they make a good decision, the company decides to create a table listing each piece of equipment and how well it meets each goal.

Equipment # items Operation Workers needed Cost Maintenance
Ultimate 800 1 hour set up 3 $80,000 Once a month
Hat Maker 1000 30 minute set up 2 $100,000 Twice a month
HatsRUs 1500 15 minute set up 1 $120,000 Once a year

Looking over this table, it becomes easier to see which piece of equipment meets which goals.

Eliminating Choices

With the table in place, Hats All Day can now begin to eliminate the choices that just won't do. To do this, Hats All Day needs to decide which goals are firm and which are somewhat flexible. The company needs to fulfill 1,000 orders per day, so the equipment must be able to produce 1,000 or more hats per day. This goal is not a flexible one. This being the case, the company can immediately eliminate the first choice. The Ultimate Hat Maker is eliminated because it produces less than 1,000 hats per day. Now the company is left with two choices that can both make the required number of hats per day. The company decides that the price can be flexible. If the company needs to go over budget, it will, but it would prefer not to.

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