IB Business and
Management
Course Review Guide
Dear Student,
This guide is designed to help you pass the IB Business and Management
examinations. It covers all the information you will need from the SL
syllabus and tries to put all the information in bare-bones terminology.
For example, the word “BUSINESS” is shown as “B.”
This guide also gives some hints on how to answer questions…a major
stumbling block for many students! When answering the questions, one
must keep in mind the command word being used as well as how one is
supposed to answer the question! This may take practice, but it is well
worth it!
Finally make sure that you know everything in this guide without having to
think about it. This is going to take a lot of study time on your part.
Good luck – it is now up to you!
Miss Menelao
How to Structure Your Answers
EVEN IF YOU KNOW THE CONTENT 100%, YOU MAY NOT SCORE HIGH WITHOUT
STRUCTURING THE ANSWER PROPERLY!!
Key Points:
1. Structure your answer to meet all the marking criteria in as few words as
possible.
2. Answer what was asked and not what you think was asked when reading the
question quickly: this affects more than half of the answers!
3. Write legibly…if the examiner cannot read your writing, you may not receive
points. They know the “write small or messy” trick of trying to cover up an answer
of which you are unsure!
4. Use headings to help focus your answer on the Question.
5. Make sure you use OCR numbers 1, 2, 3, 4, 5, 6 (etc.) to number
each question.
6. Start each part of the answer (a, b, c, d, etc.) on a new line of the paper. This
ensures the examiners find your answers and gives you extra space in case you
want to add information later.
7. Leave a line between each paragraph or question so each concept is easily
distinguishable by the examiner.
An easy formula to remember:
T EL
T = Tell
your information!
What point are you making? Tell the main issue in 1 sentence.
EL = Explain + Link to story
Explain in detail until you are
unable to ask “Why?” or “So what?” any more. As you do this, use as many business
terms as possible!!
Hints for answering SL Questions
Define ………. (2 points) = TEL
Examine …………. (5-6 points)
Advantage (or whatever heading matches the question)
TEL
Disadvantage (or whatever heading matches the question)
TEL
Conclusion
A one-sentence TELL and JUSTIFY
Analyze………. Evaluate …………. (7-8 points)
Advantage (or whatever heading matches the question)
TEL
TEL
Disadvantage (or whatever heading matches the question)
TEL
TEL
Conclusion
A one-sentence TELL and JUSTIFY
Comment on …………. (4 points) often asked after a calculation!
Quantitative considerations (MEASURABLE):
TEL
Qualitative considerations (NOT MEASURABLE):
TEL
To what extent ………. Evaluate …………. (9-10 points)
Advantage (or whatever heading matches the question)
TEL
TEL
TEL
Disadvantage (or whatever heading matches the question)
TEL
TEL
TEL
Conclusion
A one-sentence TELL and JUSTIFY
General Question Answering Advice
 READ ALL PARTS OF ALL QUESTIONS before you decide which questions
to answer…or you may start a question and realize that you cannot
complete it!
 Use this type of number (1, 2, 3, 4, 5, 6, 7, 8, 9, 10)
when numbering each question.
 Layout
o Start a new section on the answer sheet for each new part of a
question (a, b, c, d)
o Leave a blank line between every TEL you do so examiner may
visually see that you are making distinct points.
o Leave a blank line between each part of a question as well as
between questions themselves.
 DO NOT USE:
o Any “emotion” words (good, bad, happy, unhappy, sad, etc.)
o “I” unless asked for your personal opinion
o Don’t, can’t, isn’t, won’t, wouldn’t, get, got
o “To” when starting an answer or a sentence
o “Feel” shows touching…you “believe” information
o Slang
o Conjunctions at the start of sentences (And, Because, So)
 Use “will” with extreme caution: a better choice is to use “may”
 Write large enough to be easily read…unreadable = NO POINTS!!
 ANSWER WHAT THE QUESTION IS ASKING!!!! Read the question at least
3 times and CIRCLE
key words. Many responses do not answer
the actual question asked!!
How to Set Out Calculations




Write out the equation in words first
Put the numbers directly under the words
Keep equal signs in a straight line down the page
Leave a blank line between each line of the calculation so the examiner
may clearly see what you did. If the examiner cannot track mistakes
and count them, you may earn no points!
 Check all calculations (No one is perfect!!)
Example:
Market share =
=
=
Ice cream value sold by Fred
Total ice cream value sold in market
x 100%
1,500,000 x 100%
2,000,000
75%
 Repetitive calculations should be done on a TABLE. Headings on the
table should indicate how the values have been calculated.
 If calculations you normally put on one table are in different parts of the
question, do a new table for each part of the question!
TOPIC 1: BUSINESS ORGANIZATION AND ENVIRONMENT
Business needs…
Land + Labor + Capital + Enterprise
Used in goods/services
Used in processes (L+C+E)
Business Functions
Production (Operations)
Marketing (Product, Price, Place, Promotion…4Ps!)
Finance
Human Resources (Personnel)
Sectors of the Economy
Primary
extract/catch/grow raw materials from the Earth
Secondary
process raw materials/other secondary goods
Tertiary
services (shops, restaurants, etc.)
If the economy grows/develops:
Primary reduces; Secondary & Tertiary expand
This is due to:
*More profit to be made in secondary and tertiary
*Increased education
people look for higher-paid jobs
Producer goods/services = for other businesses
Consumer goods/services = for individual people (consumers!)
Wants & Needs
Needs (limited)
Wants (unlimited)
= food, water, shelter/warmth, clothing
= everything else
Scarcity means a CHOICE is needed
When there is a choice, there is an OPPORTUNITY COST (next best
option)
1.2
Types of Organizations
Public Sector
Owned by government
Aim: to support the economic, social and political stability of
Country by providing basic services.
Funded from taxes
May not aim to make a profit
Often regulates private sector businesses
Private sector
Owned by private individuals
Aim: often aims to make a profit (but not always. Ie. Charities).
May do work for public sector (public sector is biggest spender in an
economy.)
Reasons to set up a business = $$, power, fame, interest, boredom doing
nothing, desire to help, no job, opportunity presents itself, etc.
Identify market opportunity
Market niche = special hole in market
Identified by: chance, primary research, secondary research
Problems faced by startups
 Lack of $$
 Lack of knowledge or experience
 Slow build-up of customer base (run out of working capital)
 Need to fund asset purchase/stocks/wages & salaries/debtors and
cannot get finance; not trusted by banks or trade creditors. No track
record.
 Sometimes the product/service is product-driven rather than market
driven
 Location factors
Processes to start up
 Tell IRS
 Establish legal documents (except sole traders)
 Do a Business Plan (see later)
 Set marketing strategy (4Ps)
 Do budgets and cash flow forecasts
 Find finance
 Find location
 Find suppliers/supply chain
 Set up distribution chain
DIFFERENT TYPES OF BUSINESSES
Sole trader = 1 person (+ employees, maybe!)
NEGATIVE
POSITIVE
Unincorporated
The owner is legally the business, Keeps all profit
so may be sued personally
Unlimited liability
Everything owned is at risk
Own boss
Long working hours
Easy to set up
Lack of expertise
Limited borrowing ability
Possible lack of finance?
Partnership = (2-20 people; maximum depends upon country)
*May sign a Deed of Partnership: who does what & how profits are split
*Split profits equally unless Deep of Partnership says otherwise
NEGATIVE
POSITIVE
Unincorporated
More expertise??
Unlimited liability
More capital??
May disagree
Split work??
Special partnerships (ie. Farmers, Co-Ops)
a) Buyers Cooperative (buy supplies in bulk at lower price)
b) Sellers Cooperative (sell goods in bulk to bigger buyers)
Private Limited Company (plc) = owned by shareholders (family/friends)
*DO NOT CONFUSE WITH PRIVATE COMPANIES (PRIVATE SECTOR)
NEGATIVE
Small cost to legally register
Shares & control may be sold
Ownership diluted
Split/share profits
POSITIVE
Shares sold privately
Limited liability
Incorporated
Quick to set up
More shareholders = more capital $$
Can keep P&L and BS private
Public Limited Companies = shares sold on stock exchange to general
public
*DO NOT CONFUSE WITH PUBLIC SECTOR (GOVERNMENT OWNED)
NEGATIVE
Have to freely give P&L and BS free
to anyone who asks
Need to be large with good track
record to “go public”
Takeover more readily possible
Slow and expensive to do
POSITIVE
Incorporated
Limited liability
Access to huge $$
Financial economies of scale (bank
loans may be cheaper)
Franchises (included in 1.7 Growth) = right to sell another business’s
goods (ie. McDonalds, 5 Guys)
Franchisor = business that owns the franchise (big guy)
Franchisee = business that buys the franchise (little guy)
The deal from the point of view of the franchisee
NEGATIVE
POSITIVE
Franchisee pays fees
Idea proves successful
Franchisee takes $$ risk
Established name/brand
Cannot buy supplies inexpensively
Training given
Freedom is limited
Franchisor does advertising
The deal from the point of view of the franchisor
NEGATIVE
POSITIVE
May damage brand name
No $$ needed to expand
Little control over franchisee
Little risk
Increased market share
Up-front fee
Steady income
Non-Profit Organizations aka Not-for-Profit Organizations (ie. Charities,
pressure groups)
Many are Non-Governmental Organizations (NGOs) = registered business
with no governmental representation
1.3 Organizational Objectives
Learn in correct order:
VISION STATEMENT = ideal hopes for distant future
MISSION STATEMENT = declares underlying purpose
AIMS = Broad, general LONG TERM (LT) goals
STRATEGY = plan of how to achieve LT Aims
STRATEGIC OBJECTIVES* aka CORPORATE OBJECTIVES = LT (1+ year)
TACTICAL OBJECTIVES* = ST (< 1 year). Tactics are things you plan to do.
*Objectives should be:
Specific
Measurable
Achievable
Realistic
Time-specific
ETHICAL OBJECTIVES = moral values set up to protect the world’s scarce
resources or people.
Analyze + and – of setting them
Discuss impact of implementing them
CORPORATE SOCIAL RESPONSIBILITY (CSR) = Ethical & Environmental
impact on decisions impacting stakeholders.
Different ethics in different countries
Different ethics of same business in different countries!
Why it changes over time
Analyze value of social/environmental audits (independent checks on
what they are doing)
Why businesses choose different CSR strategies
1.4 Stakeholders = any person or business with any interest in this
business
Internal = employees, shareholders, managers
External = suppliers, customers, SIGs (Special Interest Groups),
competitors
Discuss areas of conflict between stakeholders
1.5 External Environment
ANALYSIS:
P
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T
L
E
O
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T
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A
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C
O
N
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M
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C
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A
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N
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A
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V
I
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N
M
E
N
T
A
L
S
W
O
T
trengths
eaknesses
pportunities
hreats
INTERNAL
EXTERNAL
Evaluate impact on objectives in a PEST factor
Analyze/explain impact of external opportunities/
threats
1.6 Organizational Planning Tools
Business Plans
 Background/history of business
 Ownership
 Management
 Marketing: 4Ps, market outlook, major competitors, suppliers, R&D
 Vision Statement, Mission Statement, Aims, Objectives …
 Financial Plans: BS, P&L, cash flow forecast, financing, project
projections, etc.
Ansoff’s Matrix
Source: www.12manage.com
Apply as a decision-making tool
1.7 Growth and Evolution
Economies of Scale KNOW THIS!!!!!!!!!!!
6 INTERNAL Economies of Scale
 Purchasing (bulk purchase discounts)
 Marketing (advertising less per unit)
 Managerial (one manager, many employees)
 Financial (loan interest rate may be lower
 Technical (big machines cut unit costs)
 Risk-bearing (range of products into different markets)
4 EXTERNAL Economies of Scale (when big businesses locate close to each
other)
 Suppliers locate near customers
transport cost down
 Local skilled workforce shared
training costs down
 Support from local council/government
ie. Build roads
 Area gains good reputation for X
ie. Swiss watches
3 DISECONOMIES OF SCALE
The bigger the business:
Harder to manage
Greater the demotivation
The decisions take longer
Small vs. Large Businesses
Why grow?
 Economies of scale
 Diversification: not all eggs in one basket
 Financial: big business is less likely to go bankrupt
 Personal: vanity/desire for power
 Domination of market
INTERNAL GROWTH (aka Organic Growth)
 Sell more of current products
 Sell current product to new markets
 Develop new product (diversify) or extend live
NEGATIVE
May take a long time to grow
POSITIVE
Already good at what is done
Inexpensive
EXTERNAL GROWTH (aka Integration)
Merger (join); Takeover (one business buys another)
NEGATIVE
POSITIVE
Less than 50% successful
Instant growth
Conflict of corporate culture
Synergy
Diseconomies of scale
Extend geographic
Management styles differ
Product diversification
Redundancies
tension
Complementary products
demotivation
Extend expertise
Economies of scale
Instant local experts
Types of mergers/takeovers:
Horizontal:
Two competitors join
Forward vertical:
Business takes over a customer
Backward vertical:
Business takes over a supplier
Lateral/conglomeration: Business takes over other business with
nothing in common in order to achieve
diversification
Joint Ventures
Two businesses set up a new, jointly-owned business split risk, costs, &
control of a big project.
Ie. Ericsson (Sweden) + Sony (Japan)
Sony Ericsson
Strategic Alliances = same as joint ventures except no new business is
established and two businesses retain their own identities.
Franchises (see under types of businesses)
1.9 GLOBALIZATION
= Growing integration and inter-dependence of the world’s economies,
ideally with free trade of goods and service
towards single world
economy with similar habits and tastes.
Reasons
 Deregulation of trade
 Removal of trade barriers
 Technological progress ie. Communication
 Increasingly similar world tastes
 Increasing use of English
International businesses = based in country A
countries
export to other
Multinational companies (MNEs) = operate in several countries
Role of Multinationals in globalization
 Technology transfer
 World networks of super-businesses
 Culture transfer
Problems created by globalization
 Increased completion
price wars
bankruptcies
 Small businesses find it hard to compete
unemployment
 LDCs cannot compete with efficiencies of big business
 Rich countries cannot sell labor
employment
 Mass traffic of goods across the world
use oil
Regional Trading Blocs (RTBs)
Aim: free trade of goods, services, labor, capital
Often: have barriers to imports from outside the bloc
Different RTBs manage this to varying extents
Examples:
EU
= European Union
EEA European Economic Area = EU + EFTA (Iceland, Norway, Lichtenstein,
Switzerland)
NAFTA
= North American Free Trade Association
ASEAN
= Association of South Eastern Asian Nations
TOPIC 2: HUMAN RESOURCES
2.1 HR PLANNING
Demographic changes:
 Birth rate
 Migration rate
 Retirement age
 Unemployment
 Mobility of workers
discuss significance
 Flexibility of workers
 Education level of workers
 Women working/returning to work
 Ageing population
Handy’s Shamrock Organization (2003) = management theory of ideal,
flexible business structure
1/3 core staff
1/3 part-timers
1/3 professional contractors
HR Roles
Workforce planning (anticipating demand for workers) based on:
 Historical trends
 Technology/capital intensity
 Work study
 Fashion trends in demand
 Natural wastage (people leaving of own accord)
 Staff turnover = people leaving
total workforce X 100%
 Need for certain skills
The HR Cycle:
Workforce Planning
Work Study
Job Analysis
 Job Description (duties, hours, pay)
 Person Specification (qualifications and attributes)
 Recruitment
Shortlist
Interview
Selection
 Job Offer
Job Contract (within 3 months)
 Induction
Appraisal
 Training (Internal/external, on-the-job, off-the-job)
 Pay/performance analysis
$$/non=$$ benefits
 Union relations/negotiations (collective bargaining)
 Dismissal (something illegal or 3 written warnings)/redundancy/
layoff/retrenchment (job no longer exists)
2.2 ORGANIZATIONAL STRUCTURE
Delegation = passing on AUTHORITY (power) and RESPONSIBILITY
(ACCOUNTABILITY = who is to blame)
Chain of command = line of authority/who reports to whom
Levels of Hierarchy = people on same report level in business
Span of Control = how many people report to someone
Flat Organizational Structure = 1 person has authority & responsibility
NEGATIVE
Overwork of manager
Delays due to long lines to see manager
Few new ideas
Bureaucracy
POSITIVE
Fast decisions
Better control/direction
Tall Organizational Structure = (decentralized) many levels of hierarchy
NEGATIVE
Loss of control
More mistakes
Needs good communication
POSITIVE
Motivation up
Promotion possibilities
Worker input more likely
Faster decisions
MINTZBERG: Business can only be successful if it has a flexible structure,
able to adapt to rapid change.
PETERS: “In Search of Excellence”, 1992
 Flatter structures adapt faster to change.
 Matrix teams allow more adaptability
 Less bureaucracy allows faster change.
ROLE AND IMPORTANCE OF INFORMAL ORGANIZATION = social “top dog”
and social “pecking order”. Sometimes the informal organization and
views conflict with the formal.
WAYS OF DIVIDING THE HIERARCHY:
1. Geography 2. Role/function (HR, Marketing, Finance, Production)
Analyze the positives and negatives for a business described in a case
study!
HR FUNCTIONS ARE MIGRATING …outsourcing/offshoring (payroll,
recruitment)
2.3 COMMUNICATION
Effective communication is 2-way with feedback that is understood!
Communication Media: oral, written, visual, formal, informal
Barriers to communication (this topic comes up a lot on exams!!)
 Language
 Distance
 Technical difficulties
 Time differences
 Long chain of command
 Wide span of control
2.4 LEADERSHIP AND MANAGEMENT
MANAGEMENT = Plan + Control + Coordinate + Motivate (PCCM)
Leadership Styles
Autocratic/dictatorial = 1 person decides
NEGATIVE
POSITIVE
LT demotivating (long term)
Fast decisions
Effective in crisis
Democratic = All discuss; all decide
NEGATIVE
POSITIVE
Slow
Many ideas
Ineffective in crisis
Laissez Faire = manager lets workers so as they like
NEGATIVE
POSITIVE
Lacks control
Lacks bureaucracy
LT demotivating
Situational Leadership = takes over in a particular situation (may not be
the formal leader
NEGATIVE
POSITIVE
LT demotivating (long term)
Fast decisions
Effective in crisis
Possible expertise
2.5 MOTIVATIONAL THEORIES
TAYLOR’S Theory of Scientific Management
 Studied factories in early 1900s
 Believed workers were basically lazy, and motivated by $$
 Did time & motion studies…studied individual tasks
o Found most efficient way to do task
o Said managers should be appointed to ensure task was done
exactly as planned
o BUT…workers were bored and productivity declined
MASLOW’s Hierarchy of Needs
McGREGOR’s Theory X and Theory Y
Theory X: Workers lazy, dislike work, lack ambition, motivated only
by $$, need to be controlled by managers
Theory Y: Workers can take pride in and responsibility for their jobs.
Managers should encourage their efforts.
HERZBERG’s Hygiene factors
*Hygiene factors are things that the business has to provide or workers
will be dissatisfied. (Potential demotivators)
*Motivating factors are things which will encourage workers (praise,
advancement, etc.)
Motivating Factors
Financial:
Pay
Bonuses
Piece work
Pension plan
Commission
Profit-related pay
Performance-related pay
Fringe benefits
Non-financial:
Job enrichment (better things to do)
Job rotation (swap jobs)
Job enlargement (more to do)
Flexible working practices
Training
Praise
Empowerment (authority)
Work facilitiesdoot
TOPIC 3: ACCOUNTS AND FINANCE
3.1 Sources of Finance – Always match the period of the need with the
time period to repay!!
Internal Finance
 Retained profits
 Credit control – make customers (debtors) pay sooner
 Sell some fixed assets (but may need them!)
 Run down stocks so you have less $$ tied up in them
 Used saved-up $$
External Finance
Short Term (ST)
(<1 year)
Personal savings (not
for Ltd or PLC)
Medium Term (MT)
(1-5 yrs)
Bank loan (lose
collateral if you don’t
pay)
Friends/family (not for Leasing (pay monthly,
Ltd or PLC)
never own)
Overdraft (OD--draw
Hire Purchase (pay
out more $$ from bank monthly, eventually
account than have in
own--very expensive)
there; flexible but
expensive)
ST Loan (fixed amount EEC loans, government
but cheaper than OD)
loans, local government
Make creditors wait for loans, grants
their $$
Sell receivables
(debtors) to Debt
Factoring Company (at
big discount!)
Long Term (LT)
(5+ years)
Mortgage (property as
collateral)
Issue more shares
(BUT: Interest is
effectively paid after
tax in the form of
dividends; hidden extra
expense)
Debentures (LT IOUs…
sold on market.
Interest rate fixed up
front. Up to 25 years.
BIG PLCs and countries
only.
Factors Affecting Choice
 $$ amount
 Time needed: ALWAYS MATCH TIME!
 Cost of finance (Note: dividends paid after tax so it is hidden cost)
 Size and type of business
3.2 INVESTMENT APPRAISAL
$ in 1,000s
Year
0
1
2
3
Cash Flow
(c)
(100)
50
60
40
50
*From discount tables
Cumulative CF
(100)
(50)
10
50
ARR = Average Rate of Return
= Net Cash Flow/years x 100%
Initial Investment
= 50/3 x 100%
100
= 16.7%
5% discount*
(d)
1
0.9524
0.9070
0.8638
NPV
(c x d)
(100)
47.62
58.20
34.55
40.37
Payback Period – The year number it is last a negative figure on the
Cumulative balance column…plus some months which you work out like
this:
The negative number from above x 12 months
Positive Cash flow the next year
=
=
1 year
and (50)/60
1 year 10 months
x 12 months
3.3 WORKING CAPITAL
Working Capital Cycle: When a business makes things it pays out for
things (raw materials, labor, energy, rent, wages, salaries, etc.)
It has to finance all this money until it gets paid. $$$ tied up in all this is
WORKING CAPITAL.
This is eventually followed by $$ IN when the customer pays
…. Then it starts again = working capital cycle
On the Balance Sheet: Working Capital = CA – CL
CASH FLOW FORECASTS
!!! The secret is in the LAYOUT!!!
$ ’000
Sales
$IN
Cash sales 50%
Debtors (1 month)
Total IN (I)
JAN
20
FEB
10
MAR
80 <=
10
15*
25
5
10
15
40
5
45
$ OUT
Creditors
Rent (1 month)
Salaries
Total OUT (O)
(15)
(10)
(10)
(35)
(10)
(10)
(10)
(30)
(5)
(10)
(10)
(25)
Net Cash Flow (I-O)
(10)
(15)
20
BANK:
Opening
Balance (B)
60*
50
35
50
35
55
Closing
Balance
(I-O) + B
Write in sales to help calcs!!!
*Given in text…so read it VERY carefully to find the numbers you do not
know!!!
3.5 FINAL ACCOUNTS
(Negative/Subtract)
Sales
(Direct Costs)
Gross Profit
= Mostly Variable Costs
TRADING
= Contribution towards fixed costs
ACCOUNT
(used in marginal costing)
(Expenses)*
= Mostly Fixed Costs *aka OVERHEAD
Net Profit Before Interest & Tax
(Interest)
(Tax)
Net Profit After Interest & Tax
(AKA APPROPRIATION ACCOUNT)
(paid out to shareholders as DIVIDENDS; rest into balance sheet as
RETAINED EARNINGS)
*NOTE ON EXPENSES = mostly OVERHEADS, mostly FIXED COSTS
BUT may also include:
 This year’s DEPRECIATION cost
 GOODWILL costs (when buy a business, you pay more than the asset
cost. The extra bit is Goodwill: not allowed to keep it on balance
sheet…so have to write if off as a cost…not usually in SL)
APPROPRIATION ACCOUNT last bit of the P&L…shows how profits are
used (tax, dividends, rest to Retained Earnings)
Balance Sheet
Traditional Layout – knowing this layout will help you understand the IB
Layout!!
ASSETS (own)
LIABILITIES (owe)
Current Assets (0-1 yr)
Cash
Stock
Debtors (receivables)
Current Liabilities
Overdrafts
ST loans
Creditors (payables)
Medium Term Assets (1-5 yrs)
Equipment
MT Liabilities
MT Loans
Fixed Assets (5+ years)
Big machinery
Land
Buildings
Goodwill (not allowed to stay here!)
LT Liabilities
LT Loan
Mortgages
Debentures
Shareholders’ Funds
Share Capital
Retained Earnings (aka Reserves)
__________________________
___________________________
TOTAL ASSETS
=
TOTAL LIABILITIES &
SHAREHOLDER’ FUNDS
Alternative Layout (IB Way)
Fixed Assets (FA)
Current Assets
(Current Liabilities)
Working Capital (WC)
Net Assets (FA + WC)
= balances with Capital Employed
MTL
LTL
SH Funds
Capital Employed
= balances with Net Assets!!
GOODWILL/BRANDS/PATENTS/COPYRIGHTS
 All are written off like depreciation ASAP!
Stock Valuation
The PRICE of buying stock often changes…so how is the stock left at the
end of the year valued?
Buy 10 @ $2 =>
Buy 15 @ $3 =>
Sell 20
=>
$ Value
20
45
?????
There are 3 ways of working out the $ Value, but you only need to know 2!
Last In, First Out (LIFO) = Costs higher, Profit less, Remaining stock value
less
$ Value
Sell
$ Sold
$ Left
Buy 10 @ $2 20
5
10
10
But 15 @ $3 45
15
45
0
55
10
First In, First Out (FIFO) = Costs lower, Profit higher, Remaining stock value
more
$ Value
Sell
$ Sold
$ Left
Buy 10 @ $2 20
10
20
0
But 15 @ $3 45
10
30
15
50
15
3.6 RATIO ANALYSIS
REMEMBER: P&L and BS figures only tell you what happened in the
PAST…they can guide, but are not a crystal ball to the future!!
PROFITABILITY RATIOS (GP Margin, NP Margin)
General formula =
Profit
Sales
x 100%
This is the proportion of sales kept as profit!
LIQUIDITY RATIOS
Current Ratio
=
CA
CL
x 100% !!Working capital = CA - CL
This is the number of times CLs may be repaid by turning CAs into cash
(liquid form)
Acid Test Ratio =
CA – Stock
CL
This is the number of times CLs may be repaid by turning CAs into cash,
but counting stock as worth nothing. This is because if the business
tries to sell stock in a big hurry, they will probably not get anything for
it.
Efficiency Ratios
These find after how many days the business uses up all its stock (stock
days). It is faster & more efficient.
RETURN ON CAPITAL EMPLOYED (ROCE)
General formula =
Net Profit Before Income Tax
Capital Employed*
x 100%
*CE = shareholders’ funds + LTL
This is the profit of a business in relation to the $$ which has been
invested LT in the business by its shareholders and other LT lenders.
GEARING RATIO
Gearing ratio = LTL
LTL + Shareholders’ Funds
This shows what fraction of LT investments in the business is from
the LT lenders (usually banks). LT lenders do not want to invest
more in the business than the shareholders are prepared to invest.
They may ask the business to sell more shares rather than take
another loan if the gearing is too high.
TOPIC 4: MARKETING
Product
Price
4Ps =
Marketing Mix
Place (!!Distribution method)
Usually used in questions
Promotion
People
Process
Extra Ps
Physical evidence (what it looks like) Packaging
Product Mix = range of products sold by a business
4.1 The Role of Marketing is to:
o Increase Market Share =
Number Sales of Business x 100%
Total number sales in market
o Increase market size
o Increase profit
Market Driven Market (most successful strategy) = Do research to find market niche,
then develop a product to fill wants and needs of market. May target selling to
particular market segments to reduce promotion costs.
Product Driven Market = invent a product then try to sell it.
4.2









MARKETING PLAN
Marketing audit = where are we now?
Competitor study
Primary research
Marketing budget
PPPP strategy (must be SMART)
Marketing Mix & Product Mix
Ethics in methods & countries
PEST analysis (Political, Economic, Social, Technical)
SWOT analysis (Internal Strengths/Weaknesses + External
Opportunities/Threats
Market Positioning Map – visually graphs consumer perception of price,
corporate image, unique selling point (USP). Compares your product to
others in the market.
Source: carkodeconomics.wordpress.com
Secondary Research (Desk Research) – finding out other people’s research
(web, articles, trade journals, government reports, newspapers, etc.
NEGATIVE
POSITIVE
Questions may not suit this
Instant
business…may be biased
Old?
Cheap
Primary Research – conducting own research. (Survey, Experiment,
Observation)
NEGATIVE
POSITIVE
Disinterested people
Taylor research to suit needs
Individual bias
Product/location specific
On computer—considered “spam”
and deleted
Timely/Costly
4.3 PRODUCT
Product Development Process
 Market research
 Identify market niche
 R&D
 Prototype
 Testing
 Test marketing
 Final product
 Identify distribution network
 Sell
 Market research
 Feedback
 Update, etc.
Product Life Cycle Graph
Saturation
Saturation – Extension
strategies (special offers,
updated product, change
packaging, advertising)
Obsolescence
Source: marketingnetbd.blogspot.com
Pricing Strategy according to Place in Cycle:
Launch: competition, skimming, penetration, cost+, % profit
Growth, Maturity: competition
Saturation: special offers, new product pricing
Obsolescence: low price to sell off
Promotion: amount and type changes based on where you are in cycle
BOSTON MATRIX (aka BCG Matrix)
MARKET SHARE
High
Star
Problem Child
MARKET High
GROWTH
Cash Cow
Low
Dog
Low
! Cash cows give $$ to support problem children
! Dogs are in decline and will eventually be allowed to die (~dead dogs!)
Businesses usually have products at all parts of cycle to ensure a steady stream of new products
for future
Branding (!!Often comes up on assessment!!)
Positive
Logo
Risk reducer
Image enhancer
Sales generator
Some products stay indefinitely
at maturity (ie. Coke)
Puts high barriers to entry for
competitors
Customers identify it easily
Brand loyalty
Premium price
Can reduce price elasticity of demand
No real need to excessively promote
Large market share is hard to infiltrate
4.4 PRICE




Price skimming – price high to start; cover costs early
Penetration pricing – start with low price to establish market position
Competition pricing – going rate
Cost plus – charge cost of item plus specific percentage (ie. Cost + 10%)
Supply and Demand – basically, price follows demand…
For whatever product:
Supply UP or Demand DOWN => price is DOWN
Supply DOWN or Demand UP => price is UP
**Raising price does not always mean more profit!! Costs may rise and eat
up the amount you raised the price.
4.5 PROMOTION (!!Not just advertising!!)
Promotion/promotional mix = Advertising (different media for different
products ) + special offers + sponsorship + product placement (on films) +
PR stunts + free gifts + tastings + money-off coupons + trade fairs + pester
power + personal selling + word of mouth, etc. Great place to use a
diagram to show the promotional mix!
Above-the-line promotion = paid for in mass media
Below-the-line promotion = do not use mass media (trade fairs, personal
selling)
4.6 PLACE (Distribution Chain) – THIS IS NOT LOCATION!!!!!
ie. Manufacturer
Wholesaler*
Retailer
Customer
*Stores goods so manufacturer doesn’t have to, BUT takes a cut of profit
4.7 INTERNATIONAL MARKETING – marketing in foreign countries
!!Don’t confuse with global marketing—same product worldwide (ie.
Coke)
Opportunities of International Marketing
Bigger market
Increase profit potential
Economies of Scale
Increased brand recognition
Spread risk
Extend product life cycle
Threats of International Marketing
Cultural issues
Language
Ethics
Legal issues
Political issues
Social/demographic issues (products want)
Business etiquette (unlucky numbers, dress, greetings, physical contact,
misinterpretation of body language)
4.8 E-COMMERCE
Business to business (B2B)
Negative
High setup $$
Fraud, hackers
Spam
Use info then go buy in shop
Job losses
Slow load of graphics
Not everyone has a computer
More manpower needed for
lots of little orders
Business to consumer (B2C)
Positive
Extend customer base
Extra channel of distribution
Fast response to competitors
Reduce showy packaging
Reduce overheads
Widen customer choice
Speed up transactions
Convenience
TOPIC 5: OPERATIONS MANAGEMENT
Factors of production
(land, labor, capital, enterprise)
Process
**Value added
Output
*aka 4 Ms” manpower, machines, money, management
5.1 PRODUCTION METHODS
Job production = make one completely then make another, etc. (a
painting). Quality, motivation, unique, flexible process
Flow production = split into consecutive standardized processes (beer
production)
Line production = assembly line, often with conveyer belt
Mass production = capital intensive line and flow production
Batch production = use same equipment for a set of same products, then
reuse equipment for different products (different soups)
Negative
Expensive machinery?
Boredom (fall in efficiency,
absenteeism, job switching
Process inflexible when set up
Production up (extra storage
needed)
Positive
Economies of scale
Low cost, unskilled workers
Standard quality
Reduce average fixed costs per unit
Labor intensive – needs lot of manpower
Capital intensive – big cost of machines
How to avoid boredom & motivate:
Cell production (aka team production) = process done by a team
Swap jobs => less boring => may waste time/be less efficient
5.2 COSTS AND REVENUES
Fixed Costs (aka Overheads)
Do not change with number produces. Mostly INDIRECT costs (ie.
EXPENSES on P&L; ie. Management salaries are fixed, overheads, indirect
and included in expenses on P&L)
Variable Costs
Change In line with number produced. Mostly DIRECT costs (aka Cost of
Goods Sold (COGS) ie. Worker wages are variable according to hours
worked [time-based pay] or number produced [if piece work paid], direct,
COGS).
Revenue aka Sales aka Turnover aka Sales Turnover
!! May include grants and donations!!
Contribution = Gross profit (GP) = (Sales – direct costs) = $$ contributing
towards paying the overheads (expenses)
Marginal cost = Gross profit
Number made
= cost of making one more
5.3 BREAK-EVEN (BE) ANALYSIS
!! This can be tricky…first calculate the BE point then you know if the
graph is looking correct or not !!
Calculating Break-Even (BE):
If n = number of items business needs to sell to break even…
At BE point:
IN
Price x n
=
=
OUT
FC + (VC x n)
Then put the numbers in and find n…and then check that your BE chart
is correct
Margin
of
Safety
Essentials:
1. Label EVERYTHING IN SIGHT and put in TITLE!!
2. Put calculations on the chart
3. Put arrow pointing at the corresponding chart point (see BEP above).
4. Check the BEP by calculation
Abbreviations to use:
TC = Total Costs
Margin of Safety = maximum number – BE number
FC = Fixed Costs
TR = Total Revenue
VC = Variable Costs
Drawing the Total Revenue (TR) line:
1. Number of sales => zero income
2. Max sales = number x selling price per item
Drawing the Fixed Costs (FC) line:
Draw a horizontal line at the FC level
Drawing the Total Costs (TC) line:
1. If sales are zero => total costs = FC
2. If sales are maximum, TC = FC + (VC x max number)
5.4 QUALITY ASURANCE
Quality = appearance, reliability, durability, fit for purpose, safe, customer
service => BUSINESS REPUTATION!!!
Quality assurance = plan, do, check, improve
Lean production = waste as little as possible (materials, labor, time)
Total Quality Culture (TQM)
Aims for:
Results in:
Zero defects
Reputation up
Less waste
Happy customers
Reduce inefficiencies
Costs down
BUT: can be costly, time-consuming and bureaucratic
5.5 FACTORS OF LOCATION
Raw materials
Market
Land available
Transport
Cost
Customers
Industrial inertia = too much bother to move
Personal preference
Climate
Laws
Labor availability
Government incentive
5.7 PRODUCTION PLANNING
Stock Control
Just-in-case = keep a bit extra on hand in case it is needed
Just-in-time = order supplies to arrive only when it is needed & only make
product when business can deliver it to a firm sale
Negative:
Risky if timing is wrong
Reputation falls if late
May run out of raw materials &
have workers doing nothing
Positive:
Less storage space, less $$ spent
Lower working capital
Outsourcing = buying a product from other businesses
Subcontracting = ask other businesses to do the service for you
Negative:
Hard to control quality
You will be blamed for
problems you didn’t create
Positive:
May be cheaper (supplies, staff, salary)
Other business may be more specialized
Avoids redundancy by having to keep
staff on hand in case of a big order
SL ASSESSMENT
Paper 1 = Case study: 50 marks, 1 hour 15 minutes, 35% of IB Grade
Section A: Complete 2 of 3 questions
30 marks
Section B: Complete 1 set of questions.
15 marks
Includes EVALUATION question!
Paper 2 = Case study: 60 marks, 1 hour 45 minutes, 40% of IB Grade
Section A: Complete 1 of 2 questions
20 marks
Section B: Complete 2 of 3 questions. (20 marks each)
40 marks
Written Commentary: 15 hours, Max 1500 words
25% of IB Grade
Based on 3-5 documents about a problem facing a real business. This
is a commentary, not a research project!