Proactive Decision Making
8 Pages Posted: 23 Jun 2009
This note explores the differences between situations amenable to routine decision rules and those requiring proactive decision making. It suggests that proactive decision making seeks a rich set of alternatives, questions assumptions about structure and assessments, and considers diverse performance measures.
PROACTIVE DECISION MAKING
Several weeks ago a real-estate broker with whom you had previously worked approached you, inquiring of your interest in a 1,100-acre tract of gently rolling woodlands on the perimeter of the Washington, D.C., metropolitan area. The site was ideal for the development of a mid- to upscale residential community, and the timing of the query was ideal. Your firm, which specializes in residential land development, was just completing a moderately sized project and was seeking a new venture to take its place, particularly a project that would enhance the firm's reputation.
Preliminary investigations of Potomac Manors, as the site had become known within the firm, were encouraging. The site was zoned R3 for low-density residential housing. The zoning stipulated a minimum lot size of three acres and spelled out, among other things, specific requirements for lot dimensions, roads, septic systems, and public spaces. Your design team had arrived at a preliminary plan that carved out 300 three-acre lots, each with at least one very attractive marketing feature. The 200 acres that were not being used for lots were devoted to roads and public space. It was estimated that the lots would sell for an average price of $ 150,000. It was also estimated that the development and selling costs would be $ 8,000 per acre and miscellaneous expenses, such as permits and legal fees, would total $ 400,000.
The property was being offered at $ 23,000 per acre. The broker had allowed you two weeks to explore the opportunity and was expecting a response within the next few days. Is Potomac Manors a profitable project? Should you put forward the required $ 250,000 in earnest money to secure the property or should you let it go back on the open market?
The Potomac Manors decision is stereotypical of the decisions managers must make. There are alternatives (to buy the property or not); there is a performance measure (profits); there are assumptions (the links between the selling price, costs, and profits; the estimation of the average selling price and the costs). In addition, the decision must be made in a timely fashion and cannot be procrastinated, for as the maxim says, “Not to decide is to decide.” This note explores the various aspects of situations that make proactive decision making challenging and that make analysis valuable.
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Keywords: decision making
Suggested Citation: Suggested Citation
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Proactive Decision Making
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