IB Business & Management

IB Business & Management Topic 1 – Business Organisation and Environment ORGANISATIONAL PLANNING TOOLS

Learning Objectives • Apply a formal decision making framework to a business situation • Prepare a SWOT analysis for a business situation • Analyse an organisations position using a SWOT analysis • HL - Apply decision making processes and planning tools • HL - Compare and contrast scientific and intuitive decision making processes • HL - Construct and interpret decision trees and evaluate this technique

Decision making approaches and techniques • Fishbone Diagram • Decision Tree • Swot Analysis

Fish Bone Diagram • Visual identification of many potential causes of a problem • Also known as the cause and effect diagram or the Ishikawa diagram • 6 “bones” on the fishbone diagram • 6M’s • Methods • Machines • Manpower • Materials • Measurement • Mother Nature

Stages in the fishbone process • As a company, agree on what the problem is • Brainstorm the main categories (6M’s) • Brainstorm all of the detailed reasons why problems might occur under each heading • Analyse the findings Once the process has been completed the business can put strategies in place to remove the most likely causes of the problem

Fishbone Diagram Stage 2 Stage 1 Stage 3 Manpower

Task • Complete a fishbone diagram • The effect is that not a lot of people use your company website

Decision Tree • Diagram that sets out the options connected with a decision and the outcomes and economic returns that may result • Diagram represents 4 main features of a business decision (benefits) • All options open to a manager • Different possible outcomes resulting from these options • The chances of these outcomes arising • Financial returns By comparing the likely financial results, manager can minimise risk involved and maximise potential returns

Constructing decision trees • Features • Constructed left to right • Each branch represents an option and shows outcomes and chances (chances are represented by a circle – chance node)

Outcomes – Points where there are different possible outcomes (Chance / Probability Nodes) Decision Points / Node – Points where decisions have to be made Probability or chance – The likelihood of possible outcomes represented by probabilities. Outcome certain then 1 if there is no chance then 0 Rejected options Expected Values – Financial outcome of a decision, based on the predicted profit or loss of an outcome and the probabilities

Profit or loss Example A simple decision tree based on a decision whether to retain an existing advertising campaign or begin a new one Success $15m 0.2 B Launch new campaign Failure -$2m 0.8 A Success $7m 0.4 C Retain old campaign Failure -$1m 0.6

Calculating expected values • What should the business decide? • It needs to work out the expected values of each decision, taking into account the expected profit or loss and the probabilities Can you identify them on the following example?

Calculating expected values Expected value of NEW campaign Success Failure Expected Value = 0.2 X $15m + 0.8 x (-$2m) = $3m - $1.6m (We ONLY minus here because it has provided us with a negative figure ) = $1.4m = $1.4 minus initial investment of $1 = $0.4 Expected value of OLD campaign Success Failure Expected Value = 0.4 X $7m + 0.6 x (-$1m) = $2.8m - $0.6m (We ONLY minus here because it has provided us with a negative figure ) = $2.2m = $2.2 minus initial investment of $0.2 = $2m With these figures, the business should continue with the existing campaign because the expected value is higher. NOTE: We minus here because there are negative figures

Expected Value Profit or loss Success $15m Launch new campaign 0.2 B ($1M) Failure $1.4 - $1 = $0.4m -$2m 0.8 A Success $7m Retain old campaign 0.4 C ($0.2m) Failure -$1m 0.6 $2.2 - $0.2 = $2m You then need to reject the options you will not choose like so… If the initial investment is also displayed you will need to subtract it from the end EG New Campaign – initial investment ($1m) so it would be $1.4m – $1m. Expected value = $0.4m

Key points when you create a decision tree • Marks are awarded for the following: • Displaying a key with your decision tree • Drawing neatly • Rejecting all the options you don’t chose • Getting it right!

But what if they are all positive figures? Lets use the same example as before Try doing this now What do we do now? Which is the best option? Profit or loss Success $15m 0.2 B Launch new campaign ($1M) Failure $2m -$2m 0.8 A Success $7m 0.4 C Retain old campaign ($0.2m) Failure $1m -$1m 0.6

Calculating NEW expected values Expected value of NEW campaign Success Failure Expected Value = 0.2 X $15m + 0.8 x $2m = $3m + $1.6m = $4.6m = $4.6minus initial investment of $1 = $3.4m Expected value of OLD campaign Success Failure Expected Value = 0.4 X $7m + 0.6 x $1m = $2.8m + $0.6m = $3.4m = $3.4minus initial investment of $0.2 = $3.2m With these figures, the business should STILL continue with the existing campaign because the expected value is STILL higher.

But what if they are all positive figures? Then you add up all the successes and minus the initial investment. That is your answer, then choose the most profitable and reject the others. Try doing this example. Work out the expected values and create a decision tree

Main advantages of decision trees • Forces management to consider all options • Easy to follow and construct diagram • Encourages logical thinking and discussion amongst managers But its all based on probability

Decision Trees – An Evaluation • Main limitation concerns accuracy • Estimated economic returns may be accurate when they concern projects where experience has been gained from similar decisions • Otherwise they are based on market demand or “guestimates” • Decision trees aid the decision making process but they cannot replace risk • Decision trees allow a quantitative consideration of future risks to be made – they don’t eliminate them

Task • Page 92 of Geoff’s textbook – Question 1

SWOT Analysis • SWOT– a strategic analysis that identifies and analyses a business and its environment • It is the first stage of planning and helps marketers to focus on key issues

So what does SWOT mean? • strengths • weaknesses • opportunities • threats • Strengths and weaknesses are internal factors • Opportunities and threats are external factors

Easy grid to use….

So what could be a company’s Strengths? For example: A strength could be: • Your specialist marketing expertise • A new, innovative product or service • Location of your business • Quality processes and procedures • Any other aspect of your business that adds value to your product or service

So what could be a company’s Weaknesses? For example: A weakness could be: • Lack of marketing expertise • Undifferentiated products or services (i.e. in relation to your competitors) • Location of your business • Poor quality goods or service. • Damaged reputation

So what could be a company’s opportunities? For example: An opportunity could be: • A developing market such as the Internet • Mergers, joint ventures or strategic alliances • Moving into new market segments that offer improved profits • A new international market • A market vacated by an ineffective competitor

So what could be a company’s threats? For example: A threat could be: • A new competitor in your home market • Price wars with competitors • A competitor has a new, innovative product or service • Competitors have superior access to channels of distribution • Taxation is introduced on your product or service

Simple rules for successful SWOT analysis • Be realistic about the strengths and weaknesses of your organisation when conducting SWOT analysis • SWOT analysis should distinguish between where your organisation is today, and where it could be in the future • SWOT should always be specific. Avoid grey areas • Always apply SWOT in relation to your competition i.e. better than or worse than your competition • Keep your SWOT short and simple. Avoid complexity and over analysis • SWOT is subjective

Marketing Objectives, Strategies & Tactics What are they? • Marketing objectives are the goals of the marketing department which must ‘fit’ with the overall company objectives. • Marketing strategies are long term and medium term plans set by management, designed to achieve the marketing objectives. • Marketing tactics are short term marketing measures adopted to meet the needs of a short term threat or opportunity. Ideally they should be in line with the marketing objectives, but this might not always be the case.

IB Business & Management