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

1. As a company, agree on what the problem is2. Brainstorm the main categories (6M’s)3. Brainstorm all of the detailed reasons why

problems might occur under each heading4. 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

Manpower

Stage 1

Stage 2

Stage 3

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)1. All options open to a manager2. Different possible outcomes resulting from these

options3. The chances of these outcomes arising4. 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)

Decision Points / Node – Points where decisions have to be made

Outcomes – Points where there are different possible outcomes (Chance / Probability Nodes)

Probability or chance – The likelihood of possible outcomes represented by probabilities. Outcome certain then 1 if there is no chance then 0

Expected Values – Financial outcome of a decision, based on the predicted profit or loss of an outcome and the probabilities

Rejected options

B

C

A

Launch new campaign

Retain old campaign

Success

Success

Failure

Failure

Profit or loss

0.2

0.8

0.4

0.6

$15m

-$2m

$7m

-$1m

Example

A simple decision tree based on a decision whether to retain an existing advertising

campaign or begin a new one

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

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 NEW campaign

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

B

C

A

Launch new campaign

Retain old campaign

Success

Success

Failure

Failure

Profit or loss

0.2

0.8

0.4

0.6

$15m

-$2m

$7m

-$1m

Expected Value

If the initial investment is also displayed you will need to subtract it from the endEG New Campaign – initial investment ($1m) so it would be $1.4m – $1m. Expected value = $0.4m

($0.2m)

($1M)$1.4 - $1 = $0.4m

$2.2 - $0.2 = $2m

You then need to reject the options you will not choose like so…

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

B

C

A

Launch new campaign

Retain old campaign

Success

Success

Failure

Failure

Profit or loss

0.2

0.8

0.4

0.6

$15m

-$2m

$7m

-$1m

$2m

$1m

($1M)

($0.2m)

What do we do now? Which is the best option?

Try doing this now

Calculating NEW expected values

Success Failure

Expected Value = 0.2 X $15m + 0.8 x $2m= $3m + $1.6m = $4.6m= $4.6 minus initial investment of $1 = $3.4m

Expected value of NEW campaign

Expected value of OLD campaign

Success Failure

Expected Value = 0.4 X $7m + 0.6 x $1m= $2.8m + $0.6m= $3.4m= $3.4 minus 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….

STRENGTHS(internal)

WEAKNESSES(internal)

OPPORTUNITIES(external)

THREATS(external)

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

• 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.

What are they?