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Lesson#16

ANALYTICAL TOOLS

After reading this lecture you will be able to know that how analytical tools affects the firms internal
decisions.

Research and Development

The fifth major area of internal operations that should be examined for specific strengths and
weaknesses is research and development (R&D). Many firms today conduct no R&D, and yet many
other companies depend on successful R&D activities for survival. Firms pursuing a product
development strategy especially need to have a strong R&D orientation.
The purpose of research and development are as follows:
. Development of new products before competition
. Improving product quality
. Improving manufacturing processes to reduce costs
Organizations invest in R&D because they believe that such investment will lead to superior product or
services and give them competitive advantages. Research and development expenditures are directed at
developing new products before competitors do, improving product quality, or improving
manufacturing processes to reduce costs.

One article on planning emphasized that effective management of the R&D function requires a
strategic and operational partnership between R&D and the other vital business functions. A spirit of
partnership and mutual trust between general and R&D managers is evident in the best-managed firms
today. Managers in these firms jointly explore; assess; and decide the what, when, why, and how much
of R&D. Priorities, costs, benefits, risks, and rewards associated with R&D activities are discussed
openly and shared. The overall mission of R&D, thus, has become broad-based, including supporting
existing businesses, helping launch new businesses, developing new products, improving product
quality, improving manufacturing efficiency, and deepening or broadening the company's technological
capabilities.
Every organization tries to finance as much project as they can. Therefore, R & D budget is important.
What are the bases for the budget?
. You can try as many products as you can
. You can use percentage of sales method
. Budgeting relative to competitors
. Deciding how many successful new products are needed
The best-managed firms today seek to organize R&D activities in a way that breaks the isolation of
R&D from the rest of the company and promotes a spirit of partnership between R&D managers and
other managers in the firm. R&D decisions and plans must be integrated and coordinated across

R&D budgets
Financing as many
projects as possible
Use percentage-of-sales
method
Budgeting relative to
competitors
Deciding how many
successful new
products are needed

Research and Development

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departments and divisions by sharing experiences and information. The strategic-management process
facilitates this new cross-functional approach to managing the R&D function.

Internal and External R&D

Cost distributions among R&D activities vary by company and industry, but total R&D costs generally
do not exceed manufacturing and marketing start-up costs.
Four approaches to determining R&D budget allocations commonly are used:
(1) Financing as many project proposals as possible,
(2) Using a percentage-of-sales method,
(3) Budgeting about the same amount that competitors spend for R&D, or
(4) Deciding how many successful new products are needed and working backward to estimate the
required R&D investment.
R&D in organizations can take two basic forms:
(1) Internal R&D, in which an organization operates its own R&D department, and/or
(2) Contract R&D, in which a firm hires independent researchers or independent agencies to develop
specific products.
Many companies use both approaches to develop new products. A widely used approach for obtaining
outside R&D assistance is to pursue a joint venture with another firm. R&D strengths (capabilities) and
weaknesses (limitations) play a major role in strategy formulation and strategy implementation.
The focus of R&D efforts can vary greatly depending on a firm's competitive strategy. Some
corporations attempt to be market leaders and innovators of new products, while others are satisfied to
be market followers and developers of currently available products. The basic skills required to support
these strategies will vary, depending on whether R&D becomes the driving force behind competitive
strategy. In cases where new product introduction is the driving force for strategy, R&D activities must
be extensive. The R&D unit must then be able to advance scientific and technological knowledge,
exploit that knowledge, and manage the risks associated with ideas, products, services, and production
requirements.

Research and Development Audit Checklist of Questions

Questions such as follows should be asked in performing an R&D audit:
1. Does the firm have R&D facilities? Are they adequate?
2. If outside R&D firms are used, are they cost-effective?
3. Are the organization's R&D personnel well qualified?
4. Are R&D resources allocated effectively?
5. Are management information and computer systems adequate?
6. Is communication between R&D and other organizational units effective?
7. Are present products technologically competitive?

Management information systems
:
MIS is a general name for the discipline covering the application of information technology to
business problems.
As an area of study it is also referred to as information technology management. The study of
information systems is usually a commerce and business administration discipline, and frequently
involves software engineering, but also distinguishes itself by concentrating on the integration of
computer systems with the aims of the organization. The area of study should not be confused with
computer science
which is more theoretical in nature and deals mainly with software creation, or
computer engineering
, which focuses more on the design of computer hardware. IT service
management
is a practitioner-focused discipline centering on the same general domain.
In business, information systems support business processes and operations, decision-making, and
competitive strategies.

The functional support role
Information systems support business processes and operations by:
. Recording and storing accounting records including sales data, purchase data, investment data, and
payroll data.

73
. Process such records into financial statements such as income statements, balance sheets, ledgers,
and management reports, etc.
. Recording and storing inventory data, work in process data, equipment repair and maintenance
data, supply chain data, and other production/operations records
. Processing these operations records into production schedules, production controllers, inventory
systems, and production monitoring systems
. Recording and storing such human resource records as personnel data, salary data, and employment
histories,
. Recording and storing market data, customer profiles, and customer purchase histories, marketing
research data, advertising data, and other marketing records
. Processing these marketing records into advertising elasticity reports, marketing plans, and sales
activity reports
. Recording and storing business intelligence data, competitor analysis data, industry data, corporate
objectives, and other strategic management records
Processing these strategic management records into industry trends reports, market share reports,
mission statements, and portfolio models
The bottom line is that the information systems use all of the above to implement, control, and monitor
plans, strategies, tactics, new products, new business models or new business ventures.

The decision support role

The business decision-making support function goes one step further. It becomes an integral part --
even a vital part -- of decision -making. It allows users to ask very powerful "What if…?" questions:
What if we increase the price by 5%? What if we increase price by 10%? What if we decrease price by
5%? What if we increase price by 10% now, then decrease it by 5% in three months? It also allows
users to deal with contingencies:

If inflation increases by 5% (instead of 2% as we are assuming), then
what do we do? What do we do if we are faced with a strike or a new competitive threat? An
organization succeeds or fails based on the quality of its decisions. The enhanced ability to explore
"what if" a question is central to analyzing the likely results of possible decisions and choosing those
most likely to shape the future as desired. "Business decision-making support function" is a phrase
likely to quicken the pulse of no one but an accountant, but, in fact, it is all about turning wonderful
dreams into solid realities.

Management Information Systems Audit

. Do all managers in the firm use the information system to make decisions?
. Is there a chief information officer or director of information systems position in the firm?
. Are data in the information system updated regularly?
. Do managers from all functional areas of the firm contribute input to the information system?
. Are there effective passwords for entry into the firm’s information system?
. Are strategists of the firm familiar with the information systems of rival firms?
. Is the information system user-friendly?
. Do all users of the information system understand the competitive advantages that information
can provide firms?
. Are computer training workshops provided for users?
. Is the firm’s system being improved?

Computer Information Systems

Information ties all business functions together and provides the basis for all managerial decisions. It is
the cornerstone of all organizations. Information represents a major source of competitive advantage or
disadvantage. Assessing a firm's internal strengths and weaknesses in information systems is a critical
dimension of performing an internal audit. The company motto of Mitsui, a large Japanese trading
company, is "Information is the lifeblood of the company."
A computer information system's purpose is to improve the performance of an enterprise by improving
the quality of managerial decisions. An effective information system thus collects, codes, stores,
synthesizes, and presents information in such a manner that it answers important operating and

74
strategic questions. The heart of an information system is a database containing the kinds of records
and data important to managers.
A computer information system receives raw material from both the external and internal evaluation of an
organization. It gathers data about marketing, finance, production, and personnel matters internally, and
social, cultural, demographic, environmental, economic, political, government, legal, technological, and
competitive factors externally. Data is integrated in ways needed to support managerial decision making.
There is a logical flow of material in a computer information system, whereby data is input to the
system and transformed into output. Outputs include computer printouts, written reports, tables,
charts, graphs, checks, purchase orders, invoices, inventory records, payroll accounts, and a variety of
other documents. Payoffs from alternative strategies can be calculated and estimated. Data becomes
information
only when it is evaluated, filtered, condensed, analyzed, and organized for a specific purpose,
problem, individual, or time.
An effective computer information system utilizes computer hardware, software, models for analysis,
and a database. Some people equate information systems with the advent of the computer, but
historians have traced recordkeeping and no computer data processing to Babylonian merchants living
in 3500 B.C. Benefits of an effective information system include an improved understanding of
business functions, improved communications, more informed decision making, analysis of problems,
and improved control.
Because organizations are becoming more complex, decentralized, and globally dispersed, the function
of information systems is growing in importance. Spurring this advance is the falling cost and increasing
power of computers. There are costs and benefits associated with obtaining and evaluating information,
just as with equipment and land. Like equipment, information can become obsolete and may need to be
purged from the system. An effective information system is like a , collecting, categorizing, and
filing data for use by managers throughout the organization. Information systems are a major strategic
resource, monitoring environment changes, identifying competitive threats, and assisting in the
implementation, evaluation, and control of strategy.
We are truly in an information age. Firms whose information-system skills are weak are at a competitive
disadvantage. On the other hand, strengths in information systems allow firms to establish distinctive
competencies in other areas. Low-cost manufacturing and good customer service, for example, can
depend on a good information system.

A good executive information system provides graphic, tabular, and textual information. Graphic
capabilities are needed so current conditions and trends can be examined quickly; tables provide greater
detail and enable variance analyses; textual information adds insight and interpretation to data.

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