1.6 Organizational planning tools

Business plans






Analyse the importance of the information in the business plan to different stakeholders.

When a business start-up lays out its strategy for achieving various aims and objects, it must do so in a constructive manner. This planning of the business activity must take into account all the potential factors that will contribute or challenge the success of the endeavor. The planning therefore reveals the feasibility of the idea and a road map for reaching the goals identified. A Business Plan is therefore comprises a clear identification of:

1. The business idea and product or service being provided
2. The experience and skills of personnel
3. The external environment of the business
4. A background study of the sector
5. The competition
6. The market and a plan for penetration
7. Financial needs for the start-up and projections for returns
8. Future plans and goals


Business plans are provided to potential stakeholders who make a decision to have an interest in the project. With the assistance and backing from key stakeholders, the business be able to launch itself and enter the market.

Banks and investors are a source of advice and finance and will scrutinize the business plan to ensure the return of their investment. Venture capitalists and Business Angels are also sources of advice and finance willing to take a larger stake in the business for the risk of their investment. In general, the feasibility of the Business Plan and the experience or skills of the personnel will be the primary factors that will determine acceptance by most stakeholders.

Decision-making framework
Apply a formal decision-making framework to a given situation.

All businesses face critical moments when decisions have to be made and managers are held accountable for the results. Inevitably decision can be made based on gut instinct which is a fuzzy feeling in ones stomach. It would, however, be difficult to justify to stakeholders why the fuzzy feeling was wrongly interpreted and turned out to be just gas. Therefore when decisions are made, it becomes relevant to the manager that important decisions are justified and backed-up by data or an acceptable process. In this respect we should come to an understanding of the inherent value associated with the decision-making tools.
Decision-making tools and models are pervasive in the business world and aid decision makers in solving problems and justifying action. There are always a variety of options available to the decision maker, and each decision carries an opportunity cost. This implies that whatever decision is made, the second choice that has been foregone is the opportunity that is now lost. Clearly all courses of action involve some element of risk and advantage or gain. It is this risk that needs to be tempered while elevating the gain in ones advantage.

HL Decision-making
Fishbone

In the Japanese shipyards of the Kawasaki company, Kaoru Ishikawa developed a process by which management could identify relationships between causes and effects and subsequently chart these to arrive at a single output or the result of a problem to be resolved.

The chart or structure is called the fishbone and represents the skeleton of the fish with the causal (root causes) factors leading into the spine of the fishbone as illustrated below.

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Known as the Ishikawa fishbone, the structure would be able to illustrate the causalities arranged according to their level of importance or detail, resulting in a depiction of relationships and hierarchy of events. These lead to a main outcome, which would be the fish-head. This diagramatical and very visual approach could help managers resolve problems by identifying relationships in the fishbone.

Some cause & effect diagrams are arranged in four major divisions as follows:
  • manpower, materials, methods, and machinery (in manufacturing)
  • equipment, procedures, policies, and people (in services).


Another approach to the cause and effect diagram is depicting the design as an inverted tree. The smaller branches or twigs in the branches representing the causes that lead to main the trunk. The main advantage over the fishbone structure is that the tree structure offers a less dispersed representation of causal effects. If you imagined many causal effects in the tree structure, theses would all remain vertically aligned to the branch, while in the fishbone these are all within the same distance and thereby difficult to compare.
Scientific versus intuitive decision-making processes
HL only Compare and contrast scientific and intuitive decision-making processes.


The constraints of all decision-making tools will always be present, however, because the tools eliminate various courses of action they simplify and point to the more appropriate choices.


Intuition or the gut instinct mentioned earlier is the polar opposite of the scientific process. Therefore in considering any method of decision-making that incorporates an approach that is structured in a series of steps, verifiable and capable of being repeated, we can conclude that this is a scientific process.

Decision trees
Internal/external constraints on decision-making

When management is pressed to make a decision that must be justified, consider the consequences of applying intuition and the difficulty involved in trying to explain your reasoning. For this reason tools are available for the management to chose from and justify actions.


HL only Construct and interpret decision trees.


The decision tree is a construct that students can easily master. Once you have become familiar with some of the simple rules and guidelines of the actual framework, how to apply the concepts, interpret and transfer the information and data, the decision tree becomes a wonderful tool to use. You may also find that you subconsciously apply the process!

Students who are studying computer science will easily notice that this tool is part of their curriculum and a method through which computer programming is also developed. For the programming student, a decision tree takes as input a situation described by a set of properties, and outputs a positive or negative decision. Decision trees in this respect therefore represent Boolean functions.
As an aside, Casino Games such as Blackjack, like in the movie 21, can also be interesting areas of application, as we will shortly learn in the examples.







A decision tree seeks to trace the alternative outcomes of decisions and quantify them. Therefore, decision trees represent a quantifiable approach to making decisions. Before we explore how to beat the Casino in Blackjack, lets learn about how Decision trees work.

We will use the following data (which is always provided) to understand the process.


A company wants to know which one of three decisions it should make.

Table 1.
Decision Points
Cost Euros
Probability of a strong economy (80% chance) and the expected value
Probability of a strong economy (20% chance) and the expected value

Invest in New stores
2Million
If the economy is strong 3Million return (probability of a strong economy is 80%)
If the economy is weak 1 million loss (probability of a weak economy is 20%)

Invest in Old stores
150,000
If the economy is strong 1Million return (probability of a strong economy is 80%)
If the economy is weak 200,000 return (probability of a weak economy is 20%)

Do nothing
None
If the economy is strong 200,000 return (probability of a strong economy is 80%)
If the economy is weak 75,000 return (probability of a weak economy is 20%)


The decision that needs to be made is whether to 1) invest in new stores 2) invest in old stores or 3) do nothing

The economy is likely to impact the expected outcome (or value) of the decision.

The main components of decision trees:
1) The decision point is a square. The square represents the origin of different courses of action that the decision maker can chose from.

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Here is the same square above with the three course of action that could be chosen.

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2) The possible outcomes are represented by circles, which are called chance nodes. The chance nodes are possible outcomes based on probability.In the example below the probability to a particular outcome is 90%, which would lead to an expected value, and 10% which would also lead to an expected value.
DecisionProbabilityNode.004.jpg
The total outcome of the probabilities is represented by the total outcome or 100% or 1. There are always different factors that influence the outcome, therefore we must include these in the calculation. In Table 1 above we have a different set of probabilities. If there is an 80% probability of a factor influencing the potential outcome outcome, this is represented by .8 and calculated accordingly. Factors such as the economy might be the cause of a probable outcome. In other words if the economy improves, there would be a 80% probability of an increase in expected value, e.g. Sales Revenue. The 20% difference (to make up 100%) must also be factored into the calculation. Therefore, a 20% probability the the economy will not improve will mean a .2 probability in another expected value. In order to determine the probability of the outcome, back data is relied upon or market based research.
DecisionProbability.003.jpg

4) The rollback technique is used to arrive at the expected value of each node. Therefore, we calculate the expected value by the probability and sum up all the values to the different probabilities together in order to arrive at the expected value of the node.

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5) In the end we must deduct any costs that are associated with the decision in order to arrive at the net value of the decision. By subtracting any extra costs we can compare the values across all decision points and make a judgment based on the quantified outcomes.

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Therefore the decision to Invest in new stores will have a quantifiable value of Euros 600,000.

Lets take a look the decision tree with all the other decision option and probabilities included.

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1) Investing in new stores will have a cost of 2 Million and an expected value of 3 Million if the economy is strong and an expected value of 1 million if the economy is weak.

The probability of the store achieving an expected value of 3 Million is 80% if the economy is strong and of it achieving 1 million is 20% if the economy is weak. Therefore the expected value of this decision node is


3million x .8 = 2.4 Million
1million x .2 = 200,000
Subtotal= 2.6 million
(Minus) 2 million costs
Total for the decision node is 600,000

2) Investing in the old stores will have a cost of 150,000 and an expected value of 1 Million if the economy is strong and an expected value of 200,000 if the economy is weak.

The probability of the store achieving an expected value of 1 Million is 80% if the economy is strong and of it achieving 200,000 is 20% if the economy is weak. Therefore the expected value of this decision node is

1million x .8 = 800,000
200,000 x .2 = 40,000
Subtotal= 840,000
(Minus) 150,000 costs
Total for the decision node is 690,000

3) Doing nothing in the stores will have no costs and an expected value of 200,000 if the economy is strong and an expected value of 75,000 if the economy is weak.
The probability of the store achieving an expected value of 200,000 is 80% if the economy is strong and of it achieving 75,000 is 20% if the economy is weak. Therefore the expected value of this decision node is


200,000 x .8 = 160,000
75,000 x .2 = 15,000
No Costs
Subtotal= 175,000

Total for the decision node is 175,000


HL only Critically evaluate the value of decision trees as a decision-making tool.

The advantages:
A quantified decision will provide management with a stronger defense for actions taken.
A visual analysis will allow for decision that may not otherwise have been noticed.

The disadvantages:
The date used to calculated probabilities may be dated/old and thereby unreliable.
The accuracy is also thereby questionable.
Non-quantifiable factors may not be included and therefore become a source of miscalculation.
Creating a complex decision tree may be time consuming.
The decision tree may be subject to manipulation by management for a desired outcome.

Overall decision trees are valuable for management but have limitations and shortcomings that must be weighed before application.


SWOT Analysis

Strategic formulation and planning is a long-term proposition for business. In order to develop a sound approach the most widely used tool for scanning the external and internal environment is the SWOT analysis. SWOT is an acronym for Strengths, Weaknesses, Opportunities and Threats. It is used to analyse the Internal (Strengths and Weaknesses) situation in a company as well as the External (Opportunities and Threats) that the company faces.

The SWOT is also at times referred to as TOWS in a matrix strategic managers use to generate business strategies.

The SWOT analysis as previously mentioned is widely used and has proved to be an enduring analytical tool. However it does have some short-comings which are:

1) Lack of weights or priorities
2) Factors could be placed in two categories, e.g. Strengths may sometimes be placed as Weaknesses
3) No link to strategic implementation
4) Data or analysis is not verified
5) A long or lengthy list could be generated


Prepare a SWOT analysis for a given situation.

In order to apply the SWOT a situation will have to be presented to you. Let us assume that your school director has asked you to prepare a SWOT analysis of your school.

The Internal Strengths could be:
1) Excellent teachers
2) A diverse student body
3) Good facilities

The Internal Weaknesses could be:
1) An inexperienced or ineffective administration
2) A poorly coordinated board of directors

The External Opportunities could be:
1) International companies and families in the region
2) Government and community sponsorship

The External Threats could be:
1) New international schools
2) A slowing economy

It is highly important to again note that the Strengths and Weaknesses are Internal or physically within the business or institution. This means that you need to look at what within the boundaries of the business or as above, the school, are a sources of strength or weakness.

In this respect the Opportunities and Threats are External and therefore you need to ask yourself, what outside of the walls of the business as above in the school, are a Threat or Opportunity.


Analyse an organization’s position using a SWOT analysis.

Analysing the SWOT analysis is a process or determining if the Strengths and Weaknesses outweigh the Opportunities and Threats.

The SWOT has evolved to what is called the EFAS (External Factors Assessment Summary) and the IFAS (Internal Factors Assessment Summary), both of which are quantified and weighted tables.

Without weights and quantification, we are left to determining what decisions management should take based on the values we place on our list of factors identified.

For example in our SWOT of a school as above, we could determine that, based on

The Internal Strengths:
1) Excellent teachers
2) A diverse student body
3) Good facilities

We should seek to retain the teachers and exploit the strengths of the student diversity and facilities through learning approaches and advertising.

An analysis of the weaknesses will reveal that:

The Internal Weaknesses:
1) An inexperienced administrator
2) A poorly coordinated board of directors

The administration must be trained or replaced and board must also be trained or replaced.

When we look at the external factors:

The External Opportunities:
1) International companies and families in the region
2) Government and community sponsorship

We should focus on targeting companies for recruitment and the government for community fundraising.

When we look at the external Threats:

The External Threats:
1) New or other international schools
2) A slowing economy

Working on our strengths may resolve the threat of new or other international schools, while a slowing economy may be resolved by recruiting from the local community.

The desired outcome of a SWOT analysis is to identify how a company can best exploit its core competencies or strengths in a particular market. As a market changes so to must the strategic planning.

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Decision Trees

1) Something unlike the Movie 21

The blackjack dealer draws a card from the pack. If you draw a heart you will earn $200. If you draw a diamond you pay $50. If you draw a club you pay $60. If you draw a spade you pay $60. Would you win if you played?

Create a decision tree of the above by yourself and write explain your answer int he discussion above. If someone has a different or similar outcome, respond to them as well.


2) Complete the following SWOT or Business Plan assignment and submit it.

Prepare a SWOT analysis of your school. Provide an analysis of the school on the basis of the SWOT tool.

or

3) Prepare a fictitious Business Plan for a business idea that you may have. Use the following link to help you create one! Business Plans


IB Corner


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Assess any business using a SWOT analysis.

If you are a Bank officer, how is a business plan useful in helping you reach a decision on providing loans as business start-up capital?