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Organizational Tools planning

THE FINANCE

- Proposed sources of finance to show how the business will be funded.- Break-even analysis to proiect

the firm's break- even level of sales.- Steps to be taken to deal with cash flow problems- Financialguarantee that can be offered to lenders in case the borrower defaults on

the loan

- A cash flow forecast showing the proiected earnings from sales and the expectedmonthry cash payments for the ongoing costs of the business.

- A projected profit and loss account showing the estimated profit/oss at the end ofthe first year.

- A projected balance sheet for the end of the first year showing the firm,s assets andliabilities.

-For&ast rate

of return for investors of the business venture..\

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THE PERSONNEL

- The number and positions of the workers rikery to be employed- organizational chart showing the internal structure of human resources.- Details of payment systerns such as \irage ratet salaries and remuneration packages.

THE MARKETING

- Details of the promotional mix that will be used to reach customers and make sales- The distribution plan, detailing where the products will be sold- Evidence of whether any market research has been carried out.- Any unique selling point that the business can use to differentiate itself from its

competitors.

(HL} INTERNAL AND EXTERNAL CONSTRAINTS

lnternal Constraints

- The factor that hinder decision rnaking but are within the control of the business.- Dominated by the rures, poricies and curture of the business.- To identify : SWOT analysis

- To deal : Cause-and-effect framework

External Constraints

- Barriers that hinder decision making but are uncontrolled by the business.- To identify: pEST factors.

- To deal : Cause-and-effect frarnework

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Organizational Tools PlanninS

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3.6

SWOT ANALYSIS

A simple but extremely useful decision-making tool

StrcrryEls

The intern*lffrrtors that ere Fssitiye

mmparedtocompetiton.

Tlmsc a&rantages hepde hxfrressto

Oppmhxdtier

The extamal pocsih{Eties and praapects f*rfutr.rre devebprnent.

. Srrygesint'!B E{te@ hgilt+Fs-{-iilr:.,.,,

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Decision-ltllaking Frameworks

9ost-bsnefi t analvsis {CBAI

Examines the financial costs and benefits of a decision

It is used when both costs and benefits can be guantifiable

E.g: Break-even analysis and investment appraisal

CBA methods ignore the non-financialaspects of decision-making

SixThinkins Hats

It is important to look at decisiorts from 6 different perspective-Edward De Bono

This will allow managers to make better decisions by forcing them to mare away from their

normal way of thinking

6 different hats:-

il White hat fuctualinformationii) Red hat: thinking based on emotions+feelings

iiil Black hat negative poins of decision

iv| Yellow hat: all the benefits of a decision

vl Green hat creative solution to a problem

vif Blue hail neutralthinking

The model helps managers to better understand the comphxities of different decisions and

to 'think outside the bot'

Force Field aQatvsis

A technique for examining the forces for and against a decision

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Driving forces: advantages of implementing the decision

Restraining forces: limitations/disadvantages of the decision

These forces affecting change are then weighted aecording to the level of importance

Decision-makers can plan to strengthen the driving forces and reduce the impact of the

restraining forces

ParetoAnahsis

A technique that identifies the decisions that will provide the greatest benefits or the most

important problems that need to be solved

A score or weighting is applied to each decision/problem faced by the business

The problem/decision with the highest score is the 1't decision to undertake because this

will generate the greatest benefits if solved

The decisions with the lowest scores may ignored if it is not worth\\.

The5Whns 4,.

A simple pro."tilt asking, five times, why an issues or concern has happened to get the

root cause{s} ofthe problem

The failure to determine the source of problem will result in a firm having the same

problems time after time

Note that the actual numbers of Why's does not matter so long as the root cause is

discovered

Higher Level Extension: Scientific Versus Intuitive DecisiortMaking Process

Seientifi$.D-pcisioryUlakinir

o The decisions are made objectively on the basis of following a formal and prescribed

procedure

o Decision are based on guantifiable facts and evidence rather than being based on subjective

opinions, past experiences, feelings or intuition

o Decisions are made rationally and logically

r Simpler to justif,, as they are based on factual evidence

o Easier to communicate to the workforce

r Reduces the risks involved in taking a decision

lntuitive Decision:Makine

o The decisions are based on a person's beliefs, perceptions, instincts and gut feelings

o Entrepreneurs are risk takers as they often have to make decisions that are based on their

intuition

r Might be due to a lack of time to collect data and evidence, information not being available

o Highly experienced managers will use this approach since decision-making is quicker and less

expensive

o Risks of using this decision-making is likety to be higher

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Organizational Tools flannine

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6.6

Decision Trees

A quantitative decision*making toolDiagrammatic representation of the different opUons that are available to a business in thedecision making process, showing their probable outrcmes

Allow managers to calculate the expcted value of each decision in order to identify the best

option

U Rules used tocorrstnrct aod interoret deciskm trees

Constructed from left to right

5lo Decision ift{es are shown in squares. Used when there is a decision to be made.

NOTE: Buiin&s has at least SOME control over decision nodes.

o Chance nodes are shown in circles. Used to show the different possible outcomes of a

decision. Typical outcomes include criteria such as 'failure or success'and

'improvernents or deteriorations'.NOTE: Business DO NOT have direct control over chance nodes-

o For each chance node, there will be two or more routes (outcornes). These show theprobability of the different outcomes for each chance node. Probabilities must add up to

ONE.

r The actual values of each outcome are stated at the end of each branch.

REMEMBER: Costs of each option must be deduced priorto writing down this figure.

o Unwanted branch of decision tree iscut-off (reieaed) by drawing in two parallellines-

2) tlow to dralr decision tree?

You start a Decision Tree with a decision that you need to make. Draw a small square torepresent this towards the left of a large piece of paper.

From this box draw out lines towards the rightfor each possible solution, and write thatsolutircn along the line. Keep the lines apart as far as possible so that you can expandyour thoughts.

At the end of each line, consider the results. lf the result of taking that decision is

uncertain, draw a small circle. lf the resutt is another decision that you need to make,

draw another sguare. Write the decision or factor above the square or circle. lf you have

completed the solution at the end of the line, just leave it blank.

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Organizational Tools Planning

Starting from the new decision squares on your diagram, draw out lines representing the

options that you could select. Frorn the circles draw lines representing possible

outcomes. Again make a brief note on the tine saying what it meam Keep on doing thisuntil you have drawn out as marry of the possible outcomes and decisions as you can see

leading on fiom the siginal decisions-

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3) Howtoaraluatedecision tree?

Start by assigning a cash value or score to each possible outcome. Estimate how much you

think it would be worth to you if that outcome came about.

l,lext look at each circle {representing an uncertainty pornt} and estimate the probabiliU ofeach outcorne. lf you use percentaget the total must come to 10O96 at each circle. lf you use

fractions, these must add up to 1. lf you have data on p6t events you may be able to make

rigorous estimates of the probatlilities. Othenrise write down your best guess.

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Organizational Tools nlanninS

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8.6

Figure 2

Example Decision Tree:ShouH urc develop e newproduct or co*solidate?

m<rrket reoction

$1,000.000

+s0.D00

$2.ffi

o,od

ir,ffi,m

I50,om

s2,00o

$400.000

s:o.mri

$d.0ofl

$2n,oco

^nUgu-

s?.000

4) How to calorlate vah{eg of qlrance nodes?

Where you are calculating the value of unaertain outcornes (circ-les on the diagram), do this by

multiplying the value of the outcomes by their probability. The total for that node of the tree is thetotal of these values.

ln the example in Figure 2, thevalue for'new product, thorough development'is:

0.4 (probability good outcome) x S1,000,0OO {value} =

0.4 {probability moderate outcorne} x S50,O@ (value} =

0.2(probability poor

outcome)x 52,000(value)

=

5400,0m

s20,fi)o

Saoo

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Organizational Tools elanning | 9.6

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$4ZO/|OO

Figure 3

Example Bgcielnr Tres:

Shorid vv* rk'vcl4 a ne*produci 6r @nididata? martelreoction

ir.000.ffi0

$ss.Bo0

$?,ffio

i{00.800

gr&.EDs

fd.00$

*.*x?t}.ffiS= l?.ffis.{x 3.fiC**

n"ffi

Note that the values calculated for each node are shown in the boxes.

5l How to c?lculalevqluesof decishn nodes?

When you are waluating a decision node, write down the cost of each option along each decision

line. Then subtract th€ cost from the outcome value that you have already calculated. This will give

you a value that represents the benefit of that decision.

Note that amounts already spent do not @unt for this analysis - these are 'srnk 6sts' and (despite

emotional counter-arguments) should not be factored into the decision-

When you have calculated these decision benefits, choose the option that has the largest benefit,

and take that as the decision made. This is the value of that decision node.

0-iaxl.O00.nffi={8.ffS00-itx S,S0= B.DffiO-2x 2.0ffi= ,100

ir20-4m

O.l x l.S).ffi= t$S.(ffiS.tx 56.8&= l$.ffiO.7x 2.ffi= I.{m

B.3x{0B"BEQg tl$,0fffr0"*x 30"000= 8,000

0-3x d,il80s 1,80fr

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Organizational Tools Planning 10.6

Figure4:

E:srnpk Decision Tree:

$hnuld we devehg a nanrproduct or consotid*te?

42S.ilO0 - I 5{i.0ffi = ?78.4{E

- m.m0= 31,400

- 30.000 = ?f,808

+.".-,

13,800-0=12.800

ln this example, the benefit we previously calcutated for'new product, thorough developmenf was

s42O,400. We estimate the future cost of this approach as $150,0fi). This gives a net benefrt ofs270,m-

The net benefit of 'new product, rapid developrnent'was S31,rt00. On this branch we thereforechoose the rnost valuable option, 'new product, thorough development', and allocate this value to

ttrc decision nde.

5) Advaffiages of deckbn treeso Allow managers to set out problems in a clear and logicai numbero Speed upthe decision making process

r Consider the risks invoked in decision-making

o Aid better decision-making since the likely costs of decisions are considered and shown

on a decision treer A visual stimulus and are, therefore, a targible imight to any problem

7l Disafirantages of decision trees

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l,Iainc-ltry

ProblBm oteresulveal {etrec$

Organizational Tools Planning

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Probabilities given are only estimates and subject to forecasting errorBased on quantitative data only, so qualitative issues that affect a decision is ignored

Task of assigning probabilities is rather subjective, so results can be deliberately biased in

order to justif,/ th€ preference of management

Any delays will affect the decision madeDoes not necessarily reduce the amount of risk involved in decision making

rsF{l(lswa's.FrsHPoNq

o Also knownas cause-and-effect diagram

r Graphical representation of the most likely causes and effects of an important decis'CIn

. Used to identifo the root causes of a problem or issue

1) llow tg srccessftrlfu construct a fishbone diaeram?

The problem or issue must be clearly stat€d and agreed upon

Contributors must be concise and to the point. Causes must be identifies rather than

symptoms

For each bone, brainstorm the possible causes and place these onto the node.

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I.7 GROWTH AND EVOLUTION

> INTRODUCTION

Grourth - the expansion in size of a business' operations

> ECONOMIES AND DISECONOMIES OF SCAI.E

Economies of *ale (EoS)

r Refer to lower average cost of production as a firm operates on a larger scale due to an

im provement i n productive efficiency.

r Sometimes known as increosing returnsta scole,

lnternal EoS

Definition: Occur within the firm and within the firm's control

1. Technical economies

produce their products.

reducing the ayerlge costs.

or cost-efficient to buy and use such technology.

Financial economies

smaller rivals because they are seen as less risfu to financial lenders.

ways to measuBe growth of a business: Reasorts why hrsiness gtow:

o Value of the firm's sales turnover

o Firm's market share

o Value of the firm's capital employed

o No. of employees hired by the firm!

o Economies of scale

o Gain a larger market share

o As a means of survival against rivals

o Spread risks

oGain more profit in the lorqg run

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3. Managerial ecctomies

Specialization eoonomle$

worHorce.

. expertise means that there is a boost to the firm's productivity.

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Marketing econom'es

reduced tidie and transaction costs.

campaigns to the world audience)

Monopsony econornies

with their suppliers for huge discounts on their large bulk purchases.

Commercial economies

bulk purchases.

bulk discount may be.

Risk-bcadng economies

products in different markets).

be offset by rnore favourable conditions in other sectors of the business.

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External EoS

Defini$on: occur within the industry and hyond the control of the firrn

1. Technologkdpqrcs

o lncreases the productivity of trading within the industry.

o E.g. : internet

lmprored transportatisr and communkation netnodts

o tlelp to ensure that deliveries arrive on time.' o Customers also want convenience and will prefer to visit retail outlets that are

easily accessible.

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Better trafued labour::,

o Thrdfu[ more government supported tftIining programmes,/ reputable

education.

o This help to cutthe local business costs without compromising productMty

levels.

4. Regionelspeciafization

o Means that an area I country may have a highly regarded and trustworthy

reputation for producing a particular gd / service.

o E.g. : Murano in Venice, ltaly famous for its glass products such as vases,

jewellery and chandeliers.

Diseconomies of scale {DoS}

r Refer to higher unit costs as a firm contirrues to increase the size of its operations.

. Sometimes known as&creasing returnsta scole.

Eernal DgS

Defnition: Occur within the firm and within thc firm's control

L. ladtontrol and coordination

+ Managers lack control and coordination as span of control increase and causing

problems for management.

Slow dorrn the decision-making.

Workers in larger organization may feel alienated and this will harm the staff

morale.

Also can add to total costs.

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Poorer working relationship

* With larger worHorce, senior management become sepacfed with those lower

down, hence makingthem feel alienated..:. This negatively affects communication flows and the morale of staff.

Bored and slackirg

+ Speeialization and division of labour cause worker to become bored as they

have to do repetitive tasks.

A With largerworHorce, there might also slack {ineffieiency and procrmtination}

" among the workforce.

Bureaucracy

{.. Arnount of bureaucracy {administration, paperwork and company policies}\.-

incneqses..\.!. This makes decision-making time consuming and add to the costs of business,

* Also make communication more difficult.

5, Complacency

.3 Reduce productivity and raise unit costs.

E4efna! DoS

Definition: occur within the industry and beyond the control of the firm

1. lncreasing market rents

r Too many businesses locating in a certain area will make land becoming scarce

and thus causing the market rents to increase.

r This will add to the fixed costs of a business and thus increasing the unit costs.

2. Trafficcorgestion

r This results from too many businesses being located in an area.

r Deliveries are likely to be delayed due to the overcrowding.

o This will increase the transportation cost of a business and herrce increasing the

unit costs.

3. Higherwage

. Supply of local labour may increase due to the opportunities being offered by

rivals located in the same area.

r As workers have choice to be employed by whom, businesses may haveto offer

higher wages and financial rewards in order to attract new workers to them

rather than to the rivals.

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Dealinswith DoS

ra* Reduce the firm's level of outputr? lntroduce measures to remove productive inefficiencies

> SMATL VS IARGE ORGANtrANOHS

The size of the market can be measured by several ways:

1. Market share - a firm's sales as a percentage of the industny's total sales

_ revenuq

Z. Totat rev&que - the annuat sales of a business

3. Size of therrt\tforce - the total numbers of employees hired by the business

4. Profit -the value of a firm's annual profits

5. Capital employed -the amount of capital invested in the business

6- Market value - measured by balance sheet valuation / stock market valuation

lf any of the values above increase it rneans the business is getting larger.

La@r business mry bencfit in ways like ctated bdw:

Large organization may also benefit from Economies of a Scale {EOS) which iswhen it becomes cheaper to produce a range of related products

Large bus has brand recognition which allows them to market their products to a

wider consu rtler range.

Larger firm tend to be more trusted as they have a well known reputation orimage and a record of reliability.

Larger bus can give customers more conveniences as they have the resources toprovide a wider ranBe of facilities to attract customers and potential customers.

Because large firms have EOS they can offer larger discounts and this rnay lead tocustomer loyalty to the product.

More choices can be offered by large bus and this will give the customer topurchase a variety of products or sewices; it can avoid or reduce boredom of

choice for the customers.

Due to barriers of entry (i.e. hish cost of entryl rnany firms are prevented from

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becoming larger businesses-

Well-established firms would have many advantages over small and less

established firm i.e. large firms would have more financial resources to do R&D tokeep competitive.

Smell ffrms can aloof,ourish due to severel Fcffioos:

Cost coirtrol - small bus may want to avoid higher unit costdue to control, coordination

and communication problems as their org grow. Expansion may require borrowing or a

Financial risk- s*i:(l bus mean less financial risk compared to large bus thus mass loss

can be avoided. Owners of small bus can better manage and controltheir org and retain

all decision-making power

Government aid - financial supports are offered to small bus like grants, subsidies and

funds for training to help them start up and manage their bus.

Local monopoly power- small bus may bethe only firm in a particular area or location.

Thus the locals would be a loyal source of customers. Large firrns tend to be reluctant to

locate in remote areas thus the small bus get the opportunity to establish itself in thearea.

Personalization services - small bus tend to be more devoted to their customers thus

knowing them better in terms of needs and demands. Due to mor€ attention the

customers may feel appreciated and have a certain degree of loyaltyto the Broducts

due to the treatment given by the bus.

Flexibitity - small bus tend to be more flexible and adaptive to changes which make

them better survivor if mass changes was to occur.

Small market size - due to the small bus limited size of the market large firms see them

as less of a treat thus they find it not financially worthwhile to compete against;

allowing the small bus to thrive and continue.

The optimum size for a bus depends on its internal structures, aim and objectives. lf a

firm operates beyond its optimum size diseconomies of scale may be experienced

dilution of ownership and control

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> TNTERNAL {ORCANTC} GROWIH

Detrnidon: Organic growth occurs when the bus. grows intemally, using its own resources to

increase the scale of its operations and sales revenue. lt is typically financed thro.€h the profits

ofthe bus.

Busfrrse Gan Eruu oqlrunc*y ht:

/D Changing pdce - customers tend to buy more at lower prices; it depends on theprice elasticity of demand its producr.

\/r Advertisinb{ pr*oting- the more informed, reminded and persuaded about

the benefits of the products is the more the customers are to purchase it.

rt Producing irnproved or ktter pro&rc6 - method such as market research,

innovation, and new product design, a more appealing product can be more

attractive. Thus increasing its sales.

l4 Wider distribution - selling in different location will make it more available and a

more customer base can be achieved

t* Ofier preferential credit payment terms - rnore purchase may be due to theability given to the customers to 'buy now pay later ", this will attract more

customers ts the market.

r1& lncreasing apital expnditure {investment} - can be in the form of expanding todiff location or introducing a new production process and tech to improveproductive efficiency.

rt lmproving training and development - employees with skill can help the bus tobe more efficient, plus it motivates them making them feel valued to the bus.

This all can contribute to an increase in sales and revenue

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BenefrB of Aryanic Cffinlh:

. Better ontlol ard coordination -easierto grow internally thanextemally, Growth internally meansthe firm retains its control andownership of the bus.

. Relatively inexpensive - the main

source of this growth comes fromretained profits. Less risk is involvedas the amount of capital involved is

lower than external growth.

r Maintains c"orporate culture - there

is no problems related to corporateculture clash ai-urhat may happen inrnerge rs and ab{Sisitions.

Whymerge??

- Expanding its product

line

- Gaining excess todistribution channels

- Achievingcompetitive EOS

- Expanding thecompany geographic

reach

LimiEtiom of Oryaak Gronr$r:

. Diseconomies of scale (DOS) -higher unit costs of productionarising from intemafexternalgrowth

o Overtrading- bus growing beyondits means. Unable to control its costor manage its human resources

. A need to restructure - whengrowth occur the firm need torestructure. This requires time,effort and money.

r Dilution of control and ownership

-if a firm changes its status then theowner has to share decision-makingwith the other owner andstakeholders. Decision making can

be prolonged and conflicts mayoccur.

Occurs through dealings with outsideorganizations @ Occurs when a firm

invested its size by taking over or mergingwith other firm (intergration)

Faster method ofincreasing size

- Strategic Alliance & Joint Venture

- Mergers & Takeovers

General bendts,..

- Much taster wayto grow andevolve

- Quick wayto reduce

competition in market andallow new largerfirm to have

greater market power.

- Help firm to evolve, therebyspreading risks

- Bring greater market share

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Jointventurcs

l. A joint venture ocarrs wleri 2 or ryxrre hsinesss decide to s$it the cost, risks, control

and rewards of a business project.

ll. lt is the long-term commitrnent of furds, failiths and services bV two or more legally

sepacrte interests, to a snb{red erterpise futpir mutual beneFs.

lll. The parties involved agreetoset upa newlegal entfi.. Eg : Japan's Sony & Sweden's Ericsqt - tsony Ericson)

Strategic Goal. Synergies

. Transfer of technology/skills

. Diversification

. Build on compant's strergths

r Spreadirs costs and risks. lmprwirE aaessto financial resource. Economic of scale and advantages of size

r Atressto rEutdrnologies and customerso Accessto inrpvative managerial practices

lntetqalReasoh

r lnfluencir€ structural evolution of theindustry

. Defemive response to blurring industryhoundaries

r Creation of stronger competitive unitsr Speedto market

.lmprovederlrty

CompetitiveGoal

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