Question

How can production managers use hypothesis testing to evaluate different theories and their impacts business performance?

Answer 1

Hypothesis testing is discerns the effect of one factor on another by exploring the relationship's statistical significance. For example, one may be interested in how much rainfall affects plant growth. In a business context, a hypothesis test may be set up in order to explain how much an increase in labor affects productivity. Thus, hypothesis testing serves to explore the relationship between two or more variables in an experimental setting. Business managers may then use the results of a hypothesis test when making management decisions. Hypothesis testing allows managers to examine causes and effects before making a crucial management decision.

As hypothesis testing is purely a statistical exercise, data is almost always needed before performing a test. Data may be obtained from economic research agencies or management consultancy firms, who may even carry out the hypothesis testing on behalf of the business. Data are compiled for a given hypothesis. So if a business wishes to explore how economic growth affects a firm's profits, the management consultancy will likely collect data concerning gross domestic product growth and the profit margins of the company over the past 10 or 20 years.

When the management consultancy has collected an adequate amount of data, an equation is set up, which would look something like y=ax+b. Using the same example of economic growth and profits, "x" would denote economic growth while "y" would denote company profits. This is because the company wishes to test the effect of "x" on "y." The parts of the equation the represent real interest is that of "a" and "b." The y-intercept is represented by "b" and the slope of the equation is represented by "a." The hypothesis test focuses on how big "a" is. If "a" were large, then a small change in economic growth would greatly affect company profits. If it were equal to zero, then there would be no effect. The testable hypothesis, or the "null," would be if "a" equals zero. Rejecting the null would imply that economic growth does in fact affect profits.