As we suggested in earlier chapters, the organization makes relatively independent price and output decisions. There are loose connections between the two decision areas, but for the most part decisions are made with reference to different goals and different stimuli. Although we will want to elaborate the goals of the organization somewhat when we turn to specific decision rules, we can describe two general goals that the department pursues: (1) a sales objective ; the department expects (and is expected by the firm) to achieve an annual sales objective; (2) a mark-up objective ; the department attempts to realize a specified average mark-up on the goods sold. Organizational decision making occurs in response to problems (or perceived potential problems) with respect to one or the other of these goals. In this sense it is clear that the behavior of the department is problemoriented and conforms to the general problem-solving decision model suggested earlier.
1. Sales goal
The general flow chart for decision making with respect to the sales goal is indicated in Fig. 7.1. The organization forms sales “estimates” that are consistent with its sales goal and develops a routine ordering plan for advance orders. These orders are designed to avoid overcommitment, pending feedback on sales. As feedback on sales is provided, results are checked against the sales objective. If the objective is being achieved, reorders are made according to standard rules. This is the usual route of decisions, and we will elaborate it further below.
Figure 7.1 General form of reaction to sales goal indicators.
Suppose, however, that the sales goal is not being achieved. Under such circumstances a series of steps is taken. First, the department attempts to change its environment by negotiating revised agreements with either its suppliers or other parts of its own firm or both. Within the firm, it seeks a change in the promotional budget that will provide greater promotional resources for the goods sold by the department. Outside the firm, the department seeks price concessions from manufacturers that will permit a reduction in retail price. If either of these attempts to relax external constraints is successful, reorders are made according to appropriately revised rules.
Second, the department considers a routine mark-down to stimulate sales generally and to make room for new items in the inventory. As we will indicate below, the department ordinarily has a pool of stock available for mark-downs and expects to have to reduce the mark-up in this way on some of the goods sold. It will attempt to stimulate all sales by taking some of these anticipated mark-downs. Once again, if the tactic is successful in stimulating sales, reorders are made according to slightly revised rules.
Third, the department searches for new items that can be sold at relatively low prices (but with standard mark-up). Most commonly such items are found when domestic suppliers are eliminating lines or are in financial trouble. A second major source is in foreign markets.
In general, the department continues to search for solutions to its sales problems until it finds them. If the search procedures are successful, all goes well. In the long run, however, it may find a solution in another way. The feedback on sales not only triggers action, but also leads to the re-evaluation of the sales goal. In the face of persistent failure to achieve the sales goal, the goal adjusts downward. With persistent success it adjusts upward.
2. Mark-up goal
The flow chart in Figure 7.2 outlines the departmental reaction with respect to the mark-up goal. The reactions are analogous to those shown in Fig. 7.1, but have a somewhat different impact. On the basis of the mark-up goal (and standard industry practice), price lines and planned mark-up are established. Feedback on realized mark-up is received. If it is consistent with the goal, no action is taken and standard decision rules are maintained.
If the mark-up goal is not being achieved, the department searches for ways in which it can raise mark-up. Basically, the search focuses on procedures for altering the product mix of the department by increasing the proportion of high mark-up items sold. For example, the department searches for items that are exclusive, for items that can be obtained from regular suppliers below standard cost, and for items from abroad. Where some of the same search efforts led to price reduction (and maintenance of mark-up) when stimulated by failure on the sales goal, here they lead to maintenance of price and increase in mark-up. At the same time, the organization directs its major promotional efforts toward items on which high mark- ups can be realized. In some instances, the department has a reservoir of solutions to mark-up problems (e.g., pressure selling of high mark-up items). Such solutions are generally reserved for problem solving and are not viewed as appropriate long- run solutions. Finally, as in the case of the sales goal, the mark-up goal adjusts to experience gradually.
A comparison of Figs. 7.1 and 7.2 with Fig. 6.1 will suggest the similarity between this part of the department store decision process and our basic concepts. Those parts of the basic decision process that are not represented in the present case study (e.g., negotiation with environment to resolve uncertainty, revision of search rules) seem to us in all probability present but not easily detected in a relatively brief period of observation. Certainly our observations within the organization suggest that the motivations to avoid uncertainty through negotiation and to search where previous search was successful are present.
Figure 7.2 General form of reaction to mark-up goal indicators.
We think the general processes reflected in Figs. 7.1 and 7.2 correctly represent the decision process in the firm under examination. They do not, however, yield specific, precise predictions. Detailed models of the major price and output decisions need to be developed and compared with results from the organization studied. This task is undertaken in Section 7.2.
Source: Skyttner Lars (2006), General Systems Theory: Problems, Perspectives, Practice, Wspc, 2nd Edition.