1.6 Organisational planning and decision making

1. 1.6 Organisational planning and decision making By the end of the lesson, you should be able to: Analyse and interpret business plans Compare and contrast scientific and intuitive decision-making processes Apply a formal decision-making framework to a given situation Big Picture: • Business Plans • Decision-making framework • Decision trees

2. Business Plans Task – List stakeholders, comment on how each will be interested in a company’s business plan. The purpose of a business plan: • Support the launch of a organisation or business idea • Attract new funds from bank, grant providers or venture capitalists • Support strategic planning • Identify resource needs • Provide focus for development • Work as a measure of business success. Risk of new business failure is high – up to 80% in some sectors. Business plans are likely to contain the following: • Purpose of business – aims, objectives, mission statements • What will be sold, to whom? • Market research, primary and secondary • List of key personnel and recruitment needs • Financial plans, budgets, forecasts • Marketing projections indicating expected sales and market share predictions • Complete marketing mix • Outline of business operations – locations, facilities and management information systems.

3. Decision making framework • Every decision is associated with a risk. Although risk can never be removed, the purpose of using business tools and techniques is to try to minimize that risk. • Decision making is likely to include on, or a combination, of: • Experience • A hunch • Scientific data or facts Discussion – What are the advantages and disadvantages of each? TOK – What is intuition?

5. How do you decide a scenario such as this? • Success of product A will increase profit by £20 million. • Success of product B will increase profit by £30 million. • Failure of product A will lead to a loss of £2 million. • Failure of product B will lead to a loss of £6 million. • Product A has an 80% chance of success • Product B has a 70% chance of success

7. Launch A (£10m) • Constructed from left to right • Events laid out in the sequence in which they occur • 2 elements in the diagram • Squares represent decision points, which are under the control of the business. The lines that come out of each square show all the available options that can be selected at that decision point. • Circles represent probability or chance nodes. These show various circumstances that have uncertain outcomes. The lines that come out of each circle denote possible outcomes that uncontrollable circumstance (shown in either a % or a decimal eg 80% or 0.8). All the probabilities must add up to 100% or 1, Launch B (£15m) 80% success 20% failure

8. Success of product A will increase profit by £20 million. • Success of product B will increase profit by £30 million. • Failure of product A will lead to a loss of £2 million. • Failure of product B will lead to a loss of £6 million. • Product A has an 80% chance of success • Product B has a 70% chance of success • So what is the estimated value of launching product A or product B? 80% £20 million success Launch A (£10m) 20% (£2 million) failure 70% £30 million success Launch B (£15m) 30% (£6 million) failure

9. Decision trees • Examiners really like decision tree questions • Also two obvious follow-up questions • Advantages and disadvantages of using decision trees • Examine non-numerate or additional information, other than that on the decision tree, which can be used to support a decision

10. Advantages and limitations of decision trees Advantages: • Requires a formal and thorough examination of an issue (options, probabilities and consequences). • Forces managers to quantify outcomes. • Presents visual representation of decision options. • Logical planning process. • Improves communication between departments. • Can generate new ideas. Limitations: • Time consuming and expensive. • Can be inaccurate as the process relies on estimates. • External environment constantly changing. • Quantitative information, no qualitative factors such as motivation. • Not all alternatives may be identified.

11. Task • An oil exploration company has £100m available in cash. • It can invest the money in a bank at 10% yielding a return of £150 m over 5 years (ignore compound interest). • Alternatively it can invest in a oil project, of which there are 2 available: • Project A has a 0.5 chance of the project being successful yielding £200 million, and a 0.5 chance of being unsuccessful leading to a loss of £50 million (over the 5 year period). • Project B has a 0.6 chance of success yielding £300 m and a 0.4 chance of the project failing leading to a loss of £20 m (over the 5 year period).

12. Extension – More than one decision point • See handout.