Organizational Tools planning

2.6

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

the loan

Financialguarantee that can be offered to lenders in case the borrower defaults on

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

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

of

A projected balance sheet for the end of the first year showing the firm,s assets and

liabilities.

For&ast rate of return for investors of the business venture. .\

\
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 : Cause-and-effect frarnework

deal

Organizational Tools PlanninS

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 futr.rre devebprnent.

f*r

Srrygesint'!B E{te@

hgilt+Fs-{-iilr:.,.,,

OrganizationalTools nhnninS

+.5

|
Decision-ltllaking Frameworks

1.
a a a a

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

L
a

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 ii)
iiil
iv|

vl
vif

White hat fuctualinformation Red hat: thinking based on emotions+feelings Black hat negative poins of decision Yellow hat: all the benefits of a decision Green hat creative solution to a problem Blue hail neutralthinking

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

to 'think outside the bot'

3.
a

Force Field aQatvsis

A technique

for examining the forces for and against a decision

Organizational Tools RlanninS

|
I

5.5

a
a

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

a a

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

restraining forces 4.
a

ParetoAnahsis
A technique

that identifies the decisions that will provide the greatest benefits or the most problems that need to be solved important

a a

:
5.
a

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
A score or weighting is applied

\
The5Whns
A simple

\. 4,. asking, five times, why an issues or concern has happened to get the

pro."tilt

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 o o r o r o o r o o

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

procedure
Decision are based on guantifiable facts and evidence rather than being based on subjective opinions, past experiences, feelings or intuition Decisions are made rationally and logically Simpler to justif,, as they are based on factual evidence
Easier to communicate to the workforce Reduces the risks involved in taking a decision

lntuitive Decision:Makine
The decisions are based on a person's beliefs, perceptions, instincts and gut feelings

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

intuition Might be due to a lack of time to collect data and evidence, information not being available Highly experienced managers will use this approach since decision-making is quicker and less
expensive
Risks

of using this decision-making is likety to be higher

a+

Organizational Tools flannine

6.6

Decision Trees

t
a

A quantitative decision*making

tool

Diagrammatic representation of the different opUons that are available to a business in the decision making process, showing their probable outrcmes Allow managers to calculate the expcted value of each decision in order to identify the best

option

Rules used tocorrstnrct aod interoret deciskm trees

Constructed from left to right

o o

5l

Decision
NOTE:

ift{es are shown in squares. Used when there is a decision to be made. Buiin&s has at least SOME control over decision nodes.

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 r o
2)

For each chance node, there will be two or more routes (outcornes). These show the

probability of the different outcomes for each chance node. Probabilities must add up to
ONE.

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.

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

tlow to dralr decision tree?

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

to

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

your 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.

Organizational Tools Planning

7.6

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 this until you have drawn out as marry of the possible outcomes and decisions as you can see leading on fiom the siginal decisions-

Hgrn l: :romef Dcctaorltr: gloddn(lGf,aopan

ry

Fdlctaeo.rtorcb?

m'f,fii8?tAqClSa

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 of each 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.

rf

Organizational Tools nlanninS

8.6

|
Figure 2 Example Decision Tree: ShouH urc develop e new product or co*solidate?

m<rrket reoction

$1,000.000
+s0.D00

$2.ffi

ir,ffi,m
I50,om
s2,00o

$400.000 o,od

s:o.mri
$d.0ofl

$2n,oco
^nU gu-

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 the

total 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

1r1

Organizational Tools elanning | 9.6

I

$4ZO/|OO

Figure 3
Example Bgcielnr Tres: Shorid vv* rk'vcl4 a ne*

produci 6r @nididata?

martelreoction

0-iaxl.O00.nffi={8.ffS0

0-itx S,S0= B.Dffi O-2x 2.0ffi= ,100

ir20-4m

ir.000.ffi0
$ss.Bo0

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

O.l x

$?,ffio

i{00.800
gr&.EDs

B.3x{0B"BEQg tl$,0fffr

fd.00$

0"*x 30"000=

0-3x d,il80s

8,000
1,80fr

s.{x 3.fiC**

*.*x?t}.ffiS= l?.ffi

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 decisionWhen 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.

2l

Organizational Tools Planning

10.6

Figure4:

E:srnpk Decision Tree:

$hnuld we devehg a nanr product 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 of

s270,mThe net benefit of 'new product, rapid developrnent'was S31,rt00. On this branch we therefore choose the rnost valuable option, 'new product, thorough development', and allocate this value ttrc decision nde.

to

5)

Advaffiages of deckbn trees Allow managers to set out problems in a clear and logicai number

o o r o r

Speed upthe decision making process Consider the risks invoked in decision-making Aid better decision-making since the likely costs of decisions are considered and shown on a decision tree A visual stimulus and are, therefore, a targible imight to any problem

7l

Disafirantages of decision trees

Organizational Tools Planning

11.5

a
a
I

Probabilities given are only estimates and subject to forecasting error Based 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 made Does not necessarily reduce the amount of risk involved in decision making

rsF{l(lswa's.FrsHPoNq o r .
Also knownas cause-and-effect diagram 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

l,Iainc-ltry

ProblBm resulveal {etrec$

ote

tcy'c

1) llow tg srccessftrlfu
a a

construct a fishbone diaeram?

The problem or issue must be clearly statd 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.

Organizational Tools Planning

o o r o o o o .

For each branch on the diagram, try

to identify the root cause

Consider eithercombining rather empty branches or scrapping them altogether Consider sepamting overcrowded nodes

Considerwhich root cause(s) that maV warrant further investiBation by circlingthese onthe diagram Discuss how each circled item affects the problem investigated

&4Yentages:

Easyto use and understand Allow decision-makers to brainstorm ideas in a systematic, holistic and logical way

D.raWbacks:

Rather too simplistic for some real world problem

\.

.\r .,\

I.7 GROWTH AND EVOLUTION

>
Grourth

INTRODUCTION

- the expansion

in size of a business' operations

a business:

ways to measuBe growth of

Reasorts why hrsiness gtow:

o o o o

Value of the firm's sales turnover Firm's market share Value of the firm's capital employed No. of employees hired by the firm
!

o o o o o

Economies of scale Gain a larger market share As a means of survival against rivals Spread risks Gain more profit in the lorqg run

>
r r
lnternal

ECONOMIES AND DISECONOMIES OF SCAI.E

Economies of

*ale

(EoS)

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

provement i n productive efficiency.

Sometimes known as increosing returnsta scole,

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.

3.

Managerial ecctomies

Specialization eoonomle$

worHorce.

.
i.

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

Marketing econom'es
reduced tidie and transaction costs.
campaigns to the world audience)

5. Monopsony econornies

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

7. Commercial economies

bulk purchases. bulk discount may be.

8. Risk-bcadng economies
products in different markets).

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

3t

External EoS

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

1.

Technologkdpqrcs

o o
2.

lncreases the productivity of trading within the industry.

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.
n

,.

Better trafued labour ::,

Thrdfu[ more government supported tftIining programmes,/ reputable

education.
This help to cutthe local business costs without compromising productMty levels.

o
4.

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

reputation for producing a particular

gd

service.

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

jewellery and chandeliers.

Diseconomies of scale {DoS}

r .
Eernal

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

Sometimes known as&creasing returnsta scole.

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. Workers in larger organization may feel alienated and this will harm the staff morale.
Also can add to total costs.

.f. Slow dorrn the decision-making.

3q

7.

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

+ " A

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

have to do repetitive tasks.

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 r r r o

Too many businesses locating in a certain area will make land becoming scarce and thus causing the market rents to increase.
This will add to the fixed costs of a business and thus increasing the unit costs.

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

Deliveries are likely to be delayed due to the overcrowding.

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.

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.

3s

Dealinswith DoS

ra*

Reduce the firm's level of output

r?

lntroduce measures to remove productive inefficiencies

>

SMATL VS IARGE ORGANtrANOHS

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

1. Market

share

_
Z.

a firm's sales as a percentage of the industny's total

sales

3.

4.

revenuq Totat rev&que - the annuat sales of a business Size of therrt\tforce - the total numbers of employees hired by the business 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 is

when it becomes cheaper to produce a range of related products

Large bus has brand recognition which allows them

to market their products to

wider consu rtler range.

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

or

Larger bus can give customers more conveniences as they have the resources to provide 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

to

customer loyalty to the product. More choices can be offered by large bus and this will give the customer to purchase 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

becoming larger businessesWell-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 to keep 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

dilution of ownership and control

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

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

Small market size

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

3a

>

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; price elasticity of demand its producr.

it depends on the

/r rt

\
Advertisinb{

the more informed, reminded and persuaded about products is the more the customers are to purchase it. the benefits of the
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.
Wider distribution - selling in different location will make it more available and a more customer base can be achieved

pr*oting-

l4 t*

Ofier preferential credit payment terms - rnore purchase may be due to the ability 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 to diff location or introducing a new production process and tech to improve
productive efficiency.

rt

lmproving training and development - employees with skill can help the bus to be more efficient, plus it motivates them making them feel valued to the bus. This all can contribute to an increase in sales and revenue

33

BenefrB of Aryanic Cffinlh:

LimiEtiom of Oryaak Gronr$r:

coordination easierto grow internally than extemally, Growth internally means the firm retains its control and ownership of the bus. . Relatively inexpensive - the main source of this growth comes from retained profits. Less risk is involved as the amount of capital involved is lower than external growth. r Maintains c"orporate culture - there is no problems related to corporate culture clash ai-urhat may happen in
Better
rnerge rs and ab{Sisitions.

ontlol ard

Diseconomies of scale (DOS) higher unit costs of production

arising from intemafexternal

growth

Overtrading- bus growing beyond its means. Unable to control its cost or manage its human resources . A need to restructure - when growth occur the firm need to restructure. This requires time, effort and money. r Dilution of control and ownership if a firm changes its status then the owner has to share decision-making with the other owner and stakeholders. Decision making can be prolonged and conflicts may occur.
o

Occurs through dealings with outside organizations @ Occurs when a firm invested its size by taking over or merging

Faster method of increasing size

- Strategic Alliance & Joint Venture

with other firm (intergration)

- Mergers & Takeovers

Whymerge??
- Expanding its product

General

bendts,..

line
- Gaining excess
- Achieving

- Much taster wayto grow and

evolve

to

distribution channels competitive

EOS

- Quick

wayto reduce

competition in market and allow new largerfirm to have greater market power.
- Help firm to evolve, thereby spreading risks

- Expanding the

company geographic reach

- Bring greater market share

Jointventurcs

l. ll. . lll.

joint venture ocarrs wleri 2 or ryxrre hsinesss decide to s$it the cost, risks, control
is the long-term commitrnent of furds,

and rewards of a business project.

failiths and services bV two or more snb{red erterpise futpir mutual beneFs. The parties involved agreetoset upa newlegal entfi. Eg : Japan's Sony & Sweden's Ericsqt - tsony Ericson)
lt
sepacrte interests, to a Build on compant's strergths r Spreadirs costs and risks . lmprwirE aaessto financial resource

legally

. .

lntetqal
Reasoh

Economic of scale and advantages of size

r Atressto rEutdrnologies and customers o Accessto inrpvative managerial practices

r lnfluencir structural evolution of the

industry

Competitive
Goal

Defemive response to blurring industry houndaries r Creation of stronger competitive units

r Speedto market .lmprovederlrty

. Synergies

Strategic Goal

. Transfer of technology/skills

Diversification

4o