BUSINESS STUDIES A
LEVEL NOTES 9609
Page 0 of 66
Contents
1 Business & its environment ......................................................................................................................................2
1.2 Business structure ...............................................................................................................................................2
1.3 Size of business ..................................................................................................................................................3
1.6 External influences on business activity .............................................................................................................4
2 People in organisations .......................................................................................................................................... 13
2.3 Human resource management (HRM) ............................................................................................................. 13
2.4. Organisational structure .................................................................................................................................. 18
2.5 Business communication ................................................................................................................................. 23
3 Marketing ................................................................................................................................................................ 28
3.4 Marketing planning ........................................................................................................................................... 28
3.5 Globalisation & international marketing ........................................................................................................... 32
4 Operations & project management ......................................................................................................................... 36
4.2 Operations planning ......................................................................................................................................... 36
4.4 Capacity utilisation ........................................................................................................................................... 36
4.5 Lean production & quality management .......................................................................................................... 38
4.6 Project management ........................................................................................................................................ 42
5 Finance & accounting ............................................................................................................................................. 45
5.3 Costs ................................................................................................................................................................ 45
5.6 Budgets ............................................................................................................................................................ 46
5.7 Contents of published accounts ....................................................................................................................... 48
5.8 Analysis of published accounts ........................................................................................................................ 50
5.9 Investment appraisal ........................................................................................................................................ 52
6 Strategic management ............................................................................................................................................ 54
6.1 What is strategic management? ...................................................................................................................... 54
6.2 Strategic analysis ............................................................................................................................................. 55
6.3 Strategic choice ................................................................................................................................................ 58
6.4 Strategic implementation.................................................................................................................................. 61
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Vishakha Mirchandani
1 Business & its environment
1.2 Business structure
1.2.1 Local, national, & multinational businesses
❖ main differences between local, national, & multinational businesses
-
Local business: a business which provides goods &// services to a limited & specific area of one country
i.e., a village / town. E.g., small building & carpentry firms, single-branch shops & hairdressing businesses.
National business: a business that provides goods / services to many different regions of one country.
E.g., car-retailing firms, retail shops w/ many branches & national banking firms.
Multinational business: a business that has its headquarters in one country but operates in at least one
country other than its home.
❖ the growing importance of international trading links & their impact on business
activity
-
-
Free trade: no restrictions / trade barriers exist that might prevent / limit trade between countries.
https://youtu.be/r4US7okMBb8
Protectionism: using barriers on free trade to protect a country’s own domestic industries.
https://youtu.be/LfP9geym9cc
Tariffs: taxes imposed on imported goods to make them more expensive than they would otherwise be.
Quotas: limits on the physical quantity / value of certain goods that may be imported.
Voluntary export limits: an exporting country agrees to limit the quantity of certain goods sold to one
country (possibly to discourage the setting of tariffs/quotas).
Globalisation: the increasing freedom of movement of goods, capital, & people around the world.
https://youtu.be/w3ohMzkTdpk
The World Trade Organisation – countries committed to freeing the world from trade restrictions. They
hold meetings to discuss the reductions in tariffs & quotas & these must be agreed on by all its members.
Free-trade blocs – countries, usually geographically grouped, that have arranged to trade w/ each other
w/o restrictions.
https://youtu.be/MuZXCvA24_8
• NAFTA (North American Free Trade Association – USA Canada & Mexico)
• ASEAN (Association of South East Asian Nations)
• EU (European Union)
Advantages & disadvantages of international trading links to businesses
Advantages
A larger market – global market
Fewer restrictions placed on import/export
Lower import duties by the participating governments
Growth of a business
Economies of scale
Beneficial sharing of expertise
-
Disadvantages
Higher competition = pressure on price = less profits
More consumers = more variety = less economies of scale
Developing countries have lower wages = exported products are
cheaper = loss of jobs in other countries
Not all goods are acceptable for sale = alcohol, weapons, etc;
business should be aware
Advantages & disadvantages of free trade to nations
Advantages
Consumers are offered a more variety
Imported raw materials = produce output = industrialisation
Countries can specialise = economies of scale = higher standard
of living due to higher income due to better quality
Disadvantages
Lack of efficiency = cannot compete = loss of jobs in firm
Conflict between countries = issues to import (specialisation)
Transition to specialisation may lead to job losses
New business may face challenges
Importer may sell good below cost to eliminate competition
If imports exceed exports, there will be loss in foreign exchange.
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1.2.2 Multinationals
❖ benefits & disadvantages of a multinational.
To the business
https://youtu.be/lhCNnJQDD3Q
Advantages
Closer to main markets = lower transport costs
Disadvantages
Communication links w/ headquarters may be poor
Government grants & tax incentives to encourage
industrialisation
Language, legal & cultural differences lead to
misunderstanding
Close to main markets = viewed as local company = gain
customer loyalty
Poor coordination w/ headquarters = conflicting marketing
policies
Lower labour rates
Cheaper rent & site costs
Close to main markets = more market information
Avoid import restrictions by producing in local country
Cost of training programmes due to high skill levels
To the host country
Access to local natural resources; not available in host
country
Foreign currency exchange
Employment opportunities
Local firms will receive orders from multinationals
Competition will force better quality & efficiency in local firms
Increased tax received by government
Increase output, thus increased GDP
Management expertise in community will improve
Exploitation of local workforce
No/lower business for local firms
Pollution from firms, higher than allowed in other countries
Advertisements = imposing of western culture = reduced
cultural identity
Profits may be sent back to country of origin
Extensive depletion of limited natural resources
1.2.3 Privatisation
❖ advantages & disadvantages of privatisation in each situation.
-
Privatisation: selling state-owned & controlled business organisations to investors in the private sector.
Advantages
Greater efficiency due to profit motive
Quicker decision making than state-owned
Direct involvement & control = higher motivation for managers
Unconstrained by the government on growth
No politics involved; decisions are taken for commercial reasons
Sale of business = government raises funds for other projects
Access to stock markets = increased capital investments
Disadvantages
Does not consider the needs of the society
Difficult to achieve coordinated policy for the entire country
The business is no longer accountable to the government
Can exploit customers w/ high prices
Smaller business = reduced opportunities for economies of scale
1.3 Size of business
1.3.1 External growth
❖ the different types of merger & takeover
-
-
https://youtu.be/PEjcLTjBXdk; https://youtu.be/Hf1izQ1R-Eg; https://youtu.be/P5VYUXuQmYg
Merger: an agreement by shareholders & managers of two businesses to bring both firms together under a
common board of directors’ w/ shareholders in both businesses owning shares in the newly merged
business.
Takeover: when a company buys more than 50% of the shares of another company & becomes the
controlling owner of it – often referred to as ‘acquisition’.
Horizontal integration – integration w/ firms in the same industry & at same stage of production
Vertical integration forward – integration w/ a business in the same industry but a customer of the
existing business
Vertical integration backward – integration w/ a business in the same industry but a supplier of the
existing business
Conglomerate integration – integration w/ a business in a different industry
Hostile takeover: a business, who wants to remain independent, being taken over w/o consent.
Friendly takeover: a business taken over w/ the agreement of both parties.
Synergy: literally means that ‘the whole is greater than the sum of parts’, so in integration it is often
assumed that the new, larger business will be more successful than the two, formerly separate, businesses
were.
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Vishakha Mirchandani
❖ impact of a merger/takeover on the various stakeholders
Stakeholder
Positive
Negative
Customer/consumer
-
Cheaper prices due to economies of scale
Closer relationship w/ customers
-
Customer choice may be reduced.
Monopolies may occur limiting innovation
Employee
-
New opportunities for training & promotion
Access to new work practices & ideas
-
Reduced job security as redundancies may occur.
Changes in practices may cause dissatisfaction
Shareholder
-
Increased economies of scale increase profits
Greater share of the market increases the
customer base
-
Diluted share ownership
Increased risk of investing in a business in
instability
Government
-
Increased investment into key/growing industries
-
Reduced employment increases welfare payment.
Increased (monopolistic) power of businesses
Competition
-
Less competition leads to focused marketing.
Streamlines product portfolios w/ less diverse
options
-
Increased strength of single competitor
Larger competitor may have a larger brand
presence & investment into product development
Suppliers
-
Large orders due to the increased business size
Less capital expenditure on administration due to
simpler buying channels
-
More risk of losing customer to competitor.
Increased customer power reduces unit prices
reducing unit profits
❖ why a merger/takeover may / may not achieve objectives e.g., synergy.
-
Compatibility & culture – there may be differences in culture & ethical views.
Focus on objectives – there may be differences in objectives.
Workforce dissatisfaction – the workforce may be dissatisfied because their needs may not be
considered, / they may not be consulted on the change process.
Customer acceptance – the customers may not accept the brand because it may not meet expectations /
may face the impact of the merger/takeover.
Exploitation of opportunities – the opportunities may not be exploited because a professional approach
may not be adopted by the management to track progress.
❖ the importance of joint ventures & strategic alliances as methods of external growth
-
Joint venture: a business agreement between two / more organisations who develop a new
business/project but retain their own separate Identities.
Strategic alliance: agreements between organisations to commit resources to achieve agreed, common
objectives.
Some key reasons why joint ventures & strategic alliances are important for external growth are:
• Cost & risk of investment are shared – lower risk of business failure in the event of product failure.
• Exploitation of key strengths – each business will have a strength which complements the other & the
final product is more valuable than the sum of the two parts.
• Protection of the overall brand – a joint venture may minimise the parent companies' risk of brand
failure.
• Incompatible management styles – minimises the risk of organisational failure due to the businesses
focusing only on their areas of expertise.
1.6 External influences on business activity
1.6.1 Political & legal
❖ how a government might use the law to seek to control
-
https://youtu.be/zDOZJpWXQr0; https://youtu.be/crMRgS2LyV0
Recruitment, employment contracts & termination of employment
• A written contract of employment: pay, working conditions & disciplinary procedures.
• The length of the maximum working week is controlled.
• Holiday & pension entitlements are usually guaranteed by legal regulations.
• Protection of health & safety of employees
• Minimum pay / wage levels
• Unfair dismissal & redundancy arrangements
• Prevention of discrimination based on, i.e., disability, age, religion, gender, & sexual orientation.
• Parenting rights & workplace harassment/bullying
• Membership of trade unions
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Vishakha Mirchandani
-
-
-
-
Health & safety
• Equip factories & offices w/ safety equipment.
• Provide adequate washing & toilet facilities.
• Provide protection from dangerous machinery & materials.
• Give adequate breaks & maintain certain workplace temperatures.
Marketing behaviour
• It is illegal to quote misleading prices.
• Goods are not faulty; are safe & fit for the purpose they are sold.
• Goods & services provided are as described.
• Weights, measures, & sizes are accurate.
• Food products are safe to eat & prepared in hygienic conditions.
• Advertising gives accurate descriptions & does not exploit anyone, i.e., children.
Competition
• Prevent price fixing & price agreements.
• Prevent information-sharing agreements.
• Prevent producers refusing to sell to retailers unless minimum prices are set.
• Prevent sole supplier arrangements – suppliers only supply if no competitors are allowed.
• Predatory pricing
• Banning cartels (an association of manufacturers / suppliers w/ the purpose of maintaining prices at a
high level & restricting competition)
• Investigate monopolies to make sure that these are not acting against consumer interests.
• Investigate proposed mergers & takeovers to make sure they will not result in unfair monopoly power.
Location decisions
• Control where business can locate.
• Restrictions on pollution i.e., noise pollution.
• Ensure businesses are not exploiting natural resources.
• Ensure proper disposal of waste & storage of harmful chemicals.
❖ how international agreements might have an impact on businesses.
International agreement
Carbon emissions
Positive impact
More energy efficient = reduces costs
Negative impact
Increases cost of other ways of energy usage
International trading
opportunities
Larger markets across the world = larger
revenue streams
Increased competition from multinational
businesses
Accounting standards
Allows for comparison on accounting records
globally
Interpretation may vary between countries &
may not reflect local practices
Labour issues
Increases the mental & physical safety of
employees which increases motivation
Increases the cost associated w/ health & safety
& other labour issues
1.6.2 Economic constraints & enablers
❖ how the state might intervene to help & constrain businesses (small & large)
Methods of intervention
Helpfulness
Constraints
Lowered = increased investment & profitability
Increased = limit sales of demerit goods /
services
Tax breaks for start-up businesses
Limit inflationary business practises
Laws including
environmental, employee &
consumer protection
Can be relaxed to within international constraints
to give an advantage to key industries
Minimum standards increase business costs
which can decrease productivity & profit
Information support
Organisations to enable start-up advice, growth,
& export
May be difficult to access / may be too generic
for all industries
Grants & subsidies
Direct financial support to essential services /
key industries w/ poor initial cash-flow
Strict rules & regulations to the awarding of
grants & subsidies, may exclude smaller
businesses w/ less experience
Awarding government
contracts
Capital investment into infrastructure projects
awarded to ‘local’ businesses
Often require long term investment & strict
adherence to profit reducing regulations
Taxation
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Vishakha Mirchandani
❖ how the state might deal w/ market failure
-
Market failure: when markets fail to achieve the most efficient allocation of resources & there is under- /
overproduction of certain goods / services. In these cases, it is unlikely that a privately-owned business will
be able to provide these facilities & make a profit:
• Education for all
• Roads, railways, ports, & airports
• Streetlights
• A legal system & police force
• Consumer protection & labelling
• Defence & national security
• Medical & hospital services for all
• Public open spaces
<
Market failure
Fluctuating prices
Shortage of appropriate
labour
Shortages of goods/services
Market dominance
(monopoly power)
Solution
Possible consequences
+ Reduced volatility
- Increased speculation
- Reduction of suppliers if costs rise / profits fall
Set quotas
Increase/decrease taxation
Increase training opportunities / grants for
training
Offer favourable packages for skilled immigrants
Import products/services from abroad
Reduce laws / restrictive economic barriers
Legislation & regulation of monopoly power
Restriction of takeovers/mergers
+ Long term increase in skilled labour pool
- Short-term fix only
- May cause social unrest due to exchanging
demographics
+ Reassured customer & businesses
- Long term issues due to reduction of domestic
produce
+ More consumer choice
- Businesses may relocate to states w/ less
restrictions
- Reduction in business investment
Extreme market failure
Business taken into state ownership
+ Short term stability & confidence
- Shareholders lose investment & financial costs
of support
Inefficiency
Reduction in laws, control, & regulation to
minimise costs
+ Increased productivity & profitability
- Longer term problems associated w/
deregulation & business self-regulation
<
❖ the key macroeconomic objectives of governments
-
-
Macroeconomic objectives: concerned w/ large scale, country wide economic factors rather than
individual components.
https://youtu.be/GjX9f7Hem-4
Economic growth: increase in a country’s productive potential measured by an increase in its real GDP.
• Advantages & disadvantages of high economic growth rate to an economy
<
Advantages
higher tax revenue = spending on public services
Increases employment opportunities for the people
Businesses experience higher sales & profits
Improvement in the standards of living
Disadvantage
It leads to the depletion of natural resources
Can lead to resource shortages
Decrease in current consumption
•
Gross domestic product (GDP): the total value of goods &
services produced in a country in one year – real GDP has
been adjusted for inflation.
• Business investment: expenditure by businesses on capital
equipment, new technology & research & development
• Business cycle: the regular swings in economic activity,
measured by real GDP, that occur in most economies, varying
from boom conditions (high demand & rapid growth) to
recession when total national output decline.
https://youtu.be/RnbFk_YNooA
• Is a recession always bad?
▪ Recession: a period of six months / more of declining real GDP.
▪ Capital assets, i.e., land & property, may be cheaper & firm can invest in hope of economic recovery.
▪ Demand for ‘inferior’ goods could increase due to lower income.
▪ Risk of job losses may lead to better employer & employee relations, leading to increased efficiency.
▪ Closures = business ‘leaner & fitter’ = business can take advantage of future economic growth.
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Key phase
Conditions & characteristics
▪
▪
▪
▪
▪
Fast economic growth w/ rising incomes & profits.
Inflation rises due to very high demand for goods & services,
Shortage of key skilled workers lead to high wage increases.
Economy’s goods become uncompetitive as profits are hit by higher costs.
The government / central bank often increases interest rates to reduce inflationary pressure.
▪
▪
▪
The effect of falling demand & higher interest rates.
Real GDP growth slows & may even start to fall.
Incomes & consumer demand fall & profits are much reduced – some firms will record losses & some will go
out of business.
Slump
▪
▪
Prolonged recession - real GDP falls substantially & house & asset prices fall.
More likely to occur if the government fails to take corrective economic action e.g., 2009
Recovery /
growth
▪
▪
▪
▪
Recession eventually leads to a recovery when real GDP starts to increase again.
Corrective government action starts to take effect.
Rate of inflation falls.
The country’s products become competitive once more & demand starts to increase.
Boom
Recession
Type of producer
Producers of luxury
goods & services –
e.g., cars
Producers of
normal goods &
services – e.g.,
tinned food
Producers of
inferior goods &
services – e.g.,
very cheap clothing
-
Period of economic growth
▪
▪
▪
Add extra value to product – better
ingredients/improved packaging.
Brand image may attract exclusive tag.
Do nothing – sales not much affected anyway
▪
▪
▪
Lower prices
Promotions
Do nothing – sales not much affected anyway
Attempt to move product upmarket.
Add extra value to the product – e.g., higher
quality.
Extend the product range to include more
exclusive / better-designed products
▪
▪
▪
Promote good value & low prices.
Free consumer tests
Increase range of distribution outlets
▪
▪
▪
▪
Increase the range of goods & services.
Raise prices to increase profit margins.
Promote exclusivity & style.
Increase output
▪
▪
▪
▪
▪
▪
Period of recession
May not reduce prices for fear of damaging longterm image.
Credit terms to improve affordability.
Offer promotions.
Widen product range w/ lower-priced models
▪
Price inflation – the rate at which consumer prices, on average, increase each year.
• Inflation: increase in the average price level of goods & services – results in fall in the value of money
https://youtu.be/Y9X_tJ4U7eI
• Deflation: a fall in the average price level of goods & services.
https://youtu.be/rdYO-GWWIv4
• How to measure inflation
▪ An index number can be used to record average changes in many items.
▪ Each month, government statisticians record the prices of items that feature in an ‘average’
household’s budget.
▪ These prices are compared to the previous month & the changes are ‘weighted’ to reflect the
importance of each item in household budgets.
▪ All the weighted price changes are then averaged & given an index number.
▪ This index number is easy to compare w/ past time periods, because the series of index numbers
will have started from a base period, given a value of 100.
• Causes of inflation.
▪ Demand-Pull Inflation – occurs when governments / consumers / businesses try to purchase more
output than the economy can produce.
▪ Cost-Push Inflation – due to decreases in supply, primarily due to increases in production cost.
Demand-pull inflation
Causes
▪
▪
▪
Unnecessary printing of more note & coins by the central bank
Excessive government expenditure
Supply shortages
Solutions
▪
▪
▪
Reduce government expenditure & increase taxation (fiscal policy)
Central bank raises interest rates & reduce the supply of notes & coins in the economy (monetary policy)
The government works on supply bottlenecks
Reduction in demand
▪
▪
▪
High interest rates will discourage investments.
Aggregate demand will fall, & the firms may decide to relocate to other countries.
Businesses may begin to offer less expensive goods
Cost-push inflation
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Causes
▪
▪
▪
▪
Increase in wages.
Increase in the world price of imported raw materials.
Lower exchange rate pushing up prices of imported raw materials.
Increase in the cost of production
Solutions
▪
▪
▪
▪
▪
High exchange rate policy (revaluation of domestic currency)
Discourage high wages by limiting trade union powers.
Come up w/ cheaper local resources.
Reduce indirect taxation.
Provide subsidies to firms
Reduction in demand
▪
▪
▪
High interest rates will discourage foreign direct investments.
High exchange rate will make exports less competitive on the world markets.
Workers become less productive when the wages are reduced
,
•
Types of inflation
Creeping Inflation – when prices rise 3% a year / less. It benefits economic growth & makes
consumers expect that prices will keep going up which boosts demand. Consumers buy now to beat
higher future prices.
▪ Walking Inflation – between 3-10% a year. It is harmful as it heats-up economic growth too fast.
People start to buy more than they need to avoid tomorrow's much higher prices. This increased
buying drives demand even further so that suppliers cannot keep up. More important, neither can
wages.
▪ Galloping Inflation – 10% / more. Money loses value so fast that business & employee income
cannot keep up w/ costs & prices. Foreign investors avoid the country, depriving it of needed capital.
The economy becomes unstable, & government leaders lose credibility.
▪ Hyperinflation – more than 50% a month (rare). In fact, most examples of hyperinflation occur when
governments print money to pay for wars.
▪
Business strategies in period of inflation
Try to reduce labour costs
Avoid excessive borrowing
Sale goods on cash basis
Reduce the credit period to customers
Avoid unnecessary expansion programs
Try to reduce labour costs
-
Business strategies in period of deflation
Sale goods on credit basis
Borrow more money for expansion
Increase the repayment period to credit customers
Low rate of unemployment
https://youtu.be/5Upb3buctBM
• Working population: all those in the population of working age who can work.
• Unemployment: when members of the working population can work, but are unable to find a job
• Factors that cause unemployment & solutions
Factors
Cyclical unemployment: unemployment resulting from
low demand for goods & services in the economy during
a period of slow economic growth / a recession.
Structural unemployment: unemployment caused by
the decline in important industries, leading to significant
job losses in one sector of industry
Frictional unemployment: unemployment resulting
from workers losing / leaving jobs & taking a substantial
period to find alternative employment.
Solutions
-
Training is needed to give the unemployed workers new skills.
The government to invest in declining industries
-
Increase government expenditure & reduce taxation (fiscal policy)
Increase the supply of notes & coins & reduce interest rates (monetary policy)
Maintain a competitive exchange rate so that the demand for exports does not
fall (exchange rate policy)
-
Improve the flow of information by setting up job centres / employment
agencies.
Reduce the unemployment benefits
-
•
Effect of high unemployment:
▪ Decrease in the output of goods & services in the economy.
▪ Lower living standards for the unemployed
▪ Increase in social problems e.g., crime & other social ills.
▪ The government must give the jobless people unemployment benefits.
▪ The skills of the unemployed people become increasingly outdated.
• Reducing demand pull inflation will lead to cyclical unemployment & reducing cyclical unemployment will
lead to demand pull inflation.
• Stagflation – a period where there is a high rate of inflation & high rate of unemployment.
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-
Exchange rate stability – the government will try to prevent wild swings in the external value of the
currency in terms of its price compared w/ other currencies.
https://youtu.be/vsZEaI80PD0; https://youtu.be/D2G51WsQNn4
• Exchange rate: the price of one currency in terms of another.
• Exchange rate depreciation: a fall in the external value of a currency as measured by its exchange
rate against other currencies. If $1 falls in value from €2 to €1.5, the value of the dollar has depreciated
in value.
• Exchange rate appreciation: a rise in the external value of a currency as measured by its exchange
rate against other currencies. If $1 rises from €1.5 to €1.8, the value of the dollar has appreciated.
• Imports: goods & services purchased from other countries.
• Exports: goods & services sold to consumers & business in other countries.
• Freely floating exchange rate – the exchange rate determined by the forces of demand & supply.
Equilibrium exchange rate is determined where the demand is equal to the supply of the currency.
• The effects of exchange rate changes on business
Effect on exporters
Effect on importers
Exchange rate
appreciates
▪
▪
▪
Export price rises.
Sales volume falls
Sales value decrease depends
on price elasticity of demand
▪
▪
▪
Import price falls.
Import quantity rises.
Sales value increase depends
on price elasticity of demand
Exchange rate
depreciates
▪
▪
▪
Export price falls
Sales volume rises.
Sales value change depends
on price elasticity of demand
▪
▪
▪
Import price rises.
Import quantity falls.
Sales value change depends
on price elasticity of demand
•
-
▪
▪
▪
Prices of imported goods fall.
Lower cost of import materials
Increased competition for
domestic producers
▪
▪
Higher import prices
Higher cost of import raw
materials.
Decreased competition for
domestic producers
▪
Factors that determine the demand for & supply of a currency:
Demand for the currency
Foreign buyers of domestic good & services
Foreign tourists spending money in the country
Foreign investors
-
Effect on domestic market
Supply of the currency
Domestic businesses buying imports
Domestic population travelling abroad
Domestic investors abroad
Wealth & income transfers to reduce inequalities. Some governments – but not necessarily all –
attempt to reduce extreme inequalities of personal income & wealth, usually by using the tax system.
Balance of payments – a long-term difference between the value of goods & services bought from other
countries (imports) & the value of the goods & services the country sells to other countries (exports)
• Balance of payments (current account): this account records the value of trade in goods & services
between one country & the rest of the world. A deficit means that the value of goods & services
imported exceeds the value of goods & services exported.
• Large & persistent deficit on BOP can lead to:
▪ A fall / depreciation in the value of its currency’s exchange rate
▪ A decline in the country’s reserves of foreign currency
▪ An unwillingness of foreign investors to put money into the economy.
• Ways of correcting a BOP deficit:
▪ Tariffs/Custom Duties – tax on imported goods to increase their prices & reduce their demand in
the domestic economy.
▪ Quotas – physical limit on the quantity of goods to be imported.
▪ Embargo – total ban of the imports
▪ Devaluation – an attempt by the government to reduce the external value of domestic currency.
▪ Subsidising local firms – this will make the production of domestically produced goods cheaper.
• The business importance of these problems is likely to be most serious if:
▪ The exchange rate depreciation (/ frequent fluctuations in the exchange rate) make importing &
exporting too risky.
▪ The government takes corrective actions by, e.g., limiting foreign exchange transactions & putting
substantial controls on imports, i.e., tariffs & quotas. However, the policy could lead to retaliation by
other countries by reduced export demand. Also, import controls are serious for firms that depend on
imported supplies.
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❖ typical conflicts in achieving objectives.
-
Achieving low unemployment may mean high growth but also high inflation.
Transferring wealth from rich to poor may mean it is not worth low-income groups working, so
unemployment rises.
Achieving low inflation may mean low growth & high unemployment.
Stabilising exchange rates may mean low growth.
❖ how these macroeconomic objectives can have an impact on business activity.
Objective
Impact
Low employment levels
-
Easier recruitment practises
Less upward wage pressure
Increased consumer spending power
Low inflation
-
Less pressure for higher wages
Stable pricing & cost structures
Greater investment certainty
Economic growth
-
Increased customer base & demand
Increased investment due to higher returns
Increased pressure for higher wages
Stable exchange rates
-
Easier to import & export.
Increased foreign competition.
Stable planning
❖ how a government might place a different emphasis on macroeconomic
objectives from time to time
-
-
Reducing / increasing corporation taxes / VAT/ GST – reduces / increases the selling prices & demand,
which may influence the rate of inflation & economic growth.
Reducing / increasing government regulations – restricts / enables businesses, i.e., reducing labour
laws may increase employment therefore reaching the macroeconomic objective of increasing employment
levels.
Joining/leaving trading blocs – can increase the ability of the country to meet international markets &
increase exports & possibly decrease imports.
❖ policy instruments used to achieve macroeconomic objectives.
-
Fiscal policy: concerned w/ decisions about government expenditure, tax rates & government borrowing –
these operate largely through the government’s annual budget decisions.
https://youtu.be/We2pJBtkTsM
• Government budget deficit: the value of government spending exceeds revenue from taxation.
• Government budget surplus: taxation revenue exceeds the value of government spending.
-
Monetary policy: concerned w/ decisions about the rate of interest & the supply of money in the economy.
Exchange rate policies – altering interest rates can affect the value of a currency in relation to another.
Governments can also link their currency to a stronger currency, i.e., the US Dollar.
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❖ how changes in macroeconomic performance & policies may affect business
behaviour.
Macroeconomic
objective
Possible policy
Monetary –
lower interest
rates / increase
money supply
Higher
employment /
economic
growth
Fiscal policy
Monetary – raise
interest rates
Lower inflation
Effect of policy
-
Loans become cheaper.
Households spend more as borrowing
becomes cheaper & more spending money
is available.
Exchange rate rises as foreign money
leaves banks
-
Lower income tax so households spend
more, especially on luxury products
-
Lower sales taxes so prices fall
-
Lower profit taxes
-
Higher government spending leads to an
increase in consumer demand &
government contracts
-
Possible business behaviour
-
More investment
More borrowing
Production increases to meet extra demand.
More employees are hired.
Exporters face higher prices.
Importers face lower prices
-
Increased production to meet demand.
Producers of luxury goods increased
production
-
Increase production to meet demand
Lower prices
Production increases to meet demand
Production increases, especially of
government contractors
Businesses move to see government
contracts
-
Borrowing becomes expensive.
Households spend less as borrowing gets
more expensive & less spending money is
available
-
Production falls
Marketing increases.
Prices are reduced.
Search for new markets
-
Higher income taxes so households spend
less
-
Prices fall to encourage purchases.
Production falls
Marketing increases.
New products
Search for new markets
-
Higher sales taxes because price rises
-
Higher profit taxes
-
Lower profits
Cost cutting
Profits fall.
Investment falls
Cost cutting
Relocation to lower tax country
-
Decreased government spending causes
less consumer demand & government
contracts
-
Profits fall.
Redundancies/rationalisation in government
suppliers
Search for new markets
Fiscal policy
-
1.6.3 Social
❖ the impact of & issues associated w/ corporate social responsibility (CSR)
-
-
https://youtu.be/aS3_tauT_WE
Corporate social responsibility: this concept applies to those businesses that consider the interests of
society by taking responsibility for the impact of their decisions & activities on customers, employees,
communities, & the environment.
Social audit: a report on the impact a business has on society – this can cover pollution levels, health &
safety record, sources of supplies, customer satisfaction & contribution to the community.
These can include:
• Accurate accounting procedures that reflect the true value of assets & cash flows.
• Not paying incentives (bribes) to win contracts.
• Paying a fair wage & providing healthy & safe working conditions.
• Buying raw materials from sustainable sources.
• Acting to reduce pollution beyond the legal requirements.
• Making suppliers confirmed to an ethical code of conduct.
• Not outsourcing to poorly paid / child workers / where health & safety standards operate
• A social audit CSR report of stakeholder objectives, establishing CSR indicators, measuring these
regularly reporting on them.
Benefits
Can be a marketing advantage in brand image & reputation
Limitation
Expensive & raises costs & prices
Better financial performance as customers attracted & costs are
looked at carefully
May make businesses uncompetitive, especially in a global
marketplace
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Lower costs – e.g., recycling / reducing waste
Customer loyalty
Stakeholders cannot agree on ethical / socially responsible
behaviour
A luxury in a time of recession
It is a fashionable, cynical way to market a business
❖ why businesses consider the needs of the community including pressure groups.
-
-
https://youtu.be/ByC99NTqXVw
Pressure groups: organisations created by people w/ a common interest / aim who put pressure on
businesses & governments to change policies so that an objective is reached.
Pressure groups try to achieve these goals in several ways:
• Publicity through media coverage
• Influencing consumer behaviour
• Lobbying of government
Pressure groups want changes to be made in three important areas:
• Governments to change their policies & to pass laws supporting the aims of the group.
• Businesses to change policies so that, e.g., less damage is caused to the environment.
• Consumers to change their purchasing habits so that businesses that adopt ‘appropriate’ policies see
an increase in sales, but those that continue to pollute / use unsuitable work practices see sales fall.
1.6.4 Technological (including the Internet)
❖ problems of introducing technological change.
-
-
-
-
https://youtu.be/XI67trbbRoE
Information technology: the use of electronic technology to gather, store, process & communicate
information.
Innovation: creating more effective processes, products, / ways of doing things in a business.
Computer-aided design: using computers & IT when designing products.
Computer-aided manufacturing: the use of computers & computer-controlled machinery to speed up the
production process & make it more flexible.
https://youtu.be/IEdPVdNp2QQ
There are also potential limitations/problems w/ applying technology to business.
• Costs – high capital costs, labour training costs regularly w/ further technological development, &
redundancy costs if staff are being replaced by the technology.
• Labour relations – These can be damaged if the change is not explained & presented to workers in a
positive way w/ justified reason. After job losses, remaining workers may suffer from reduced job
security & reduced motivation levels.
• Reliability – Breakdowns can lead to the whole process being halted. There may be teething problems
w/ new systems & the expected gains in efficiency may take longer to be realised than forecast.
• Data protection – The right to hold data on staff & customers is controlled by national laws & the
business must keep up to date w/ these legal constraints on its use of IT.
• Management – Managers may not be very computer literate, thus may take time in adjusting. Managing
the technological change process requires a great deal of management skill.
The implementation process of technology
Usage of technology of in different areas
Production
-
Product design based on market research information using IT & the internet.
Computer-aided design & manufacturing using robotics & 3D printers.
Fracking to product previously unobtainable gas supplies
Genetically modified plants & animals
Operations
-
Enterprise resource planning
Electronic POS system to link sales, stock & ordering.
Access to online information & data
Communications
-
Mobile computing, home working & video conference
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Vishakha Mirchandani
-
Marketing
Databases to sell to identified groups / individuals.
Email & social networks to communicate w/ customers directly.
Ecommerce – global online sales outlets
1.6.5 Other businesses
❖ how businesses are constrained by & rely on other businesses
Suppliers
May only be able to provide a limited quantity of products & prices may be affected by
market conditions, e.g., scarcity.
Customers
May have demands which increases costs & time of production & quality of product
Financial institutions
May place restrictions on the amount & uses of the finance offered.
1.6.6 Demographic
❖ how a business might react to a given demographic change
-
Demography: the study of population structure (age, gender, ethnicity, education level) & its changes
Demographic change: describing the changes in the makeup of the population of a region / a country.
Demographic change
Impact
Reactions
Increasing age of population
Change in focus from fashionable to family related
products
Changing product line to focus on quality &
practicality.
Increasing role of women in
the workforce
Increased need for flexible working & maternity
leave
Greater product focus on female market w/
disposable income.
Increase in multiculturalism
Change in demand for food, fashion styles & working
patterns. Increased workforce w/ lower (/ higher)
financial expectations.
Change in the product line to reflect the multicultural
mix of the population & a change in workforce
remuneration & conditions.
1.6.7 Environmental
❖ how (physical) environmental issues might influence business behaviour.
•
•
•
•
Governmental
Pressure groups
International targets
Sets laws regulating disposal of waste & use of natural materials.
Can Impose fines & restrictions on those who Ignore laws.
Highlights positive & negative ethical & social issues that can influence customer behaviour.
Can be used for marketing & promotional activities if positively reviewed
• Targets i.e., carbon emissions can affect the use of polluting methods of power generation.
• Increases the manufacturing costs
2 People in organisations
2.3 Human resource management (HRM)
2.3.1 Approaches to HRM
❖ the difference between ‘hard’ & ‘soft’ HRM
-
-
https://youtu.be/-SCGHnqrMDM
Hard HRM: an approach to managing staff that focuses on cutting costs, e.g., temporary, & part-time
employment contracts, offering maximum flexibility but w/ minimum training costs.
The hard approach might save money on peripheral workers’ costs in the short term, but:
• It could increase recruitment & induction training costs in the long term as temporary workers must be
frequently recruited.
• Demotivated workers w/ little job security might be unproductive & this could reduce company efficiency
& profitability.
• Bad publicity regarding the treatment of workers – especially the ‘them & us’ division between core &
peripheral staff – might lead to negative consumer & pressure group actions against the company.
• Hard HRM ignores the research findings of Maslow, Mayo & Herzberg as workers are not offered job
security, esteem, / job enrichment.
Soft HRM: an approach to managing staff that focuses on developing staff so that they reach self-fulfilment
& are motivated to work hard & stay w/ the business.
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❖ flexibility, e.g., zero hours contracts & part-time against full-time workers
-
https://youtu.be/esb9Hp6-Bww
Part-time employment contract: employment contract that is for less than the normal full working week
of, say, 40 hours, e.g., eight hours per week.
Temporary employment contract: employment contract that lasts for a fixed time, e.g., six months.
Flexi-time contract: employment contract that allows staff to be called in at times most convenient to
employers & employees, e.g., at busy times of day.
Outsourcing: not employing staff directly but using an outside agency / organisation to carry out some
business functions.
Teleworking: staff working from home but keeping contact w/ the of ice by means of modern IT
communications.
Zero-hours contract: no minimum hours of work are offered, & workers are only called in – & paid – when
work is available.
Advantages & disadvantages of a part-time & flexible employment contract:
Advantages
Disadvantages
For business
Employees can work at busy periods of the day but not during the
slower periods.
Zero hours contracts – no fixed cost element in a worker’s pay – a
wage is only paid if the worker is called in for a few hours.
Real competitive advantages - can give good customer service w/o
cost increases.
More staff are available should there be sickness / other causes of
absenteeism.
Efficiency of employees can be assessed before offered a full-time
contract.
Teleworking - savings in overhead costs i.e., smaller office
buildings.
There will be more employees to manage than if they were all fulltime.
Effective communication more difficult – more staff in total &
impossible to hold meetings w/ all the staff at any one time. Greater
reliance on written communication.
Demotivation - part-time staff may feel less involved. Difficult to
establish a teamwork culture if staff never meet due to different
working hours.
Workers may have multiple zero hours contracts w/ different
employers – may not be available immediately if called.
Lower overhead costs to a business.
For workers
Ideal for certain types of workers e.g., parents w/ young children,
students / more elderly people who do not wish to work a full week.
They may be paid at a lower rate than full-time workers
They will be earning less than full-time workers.
They may be able to work w/ different firms - greater variety to their
working lives.
Lower security of employment & other working conditions than fulltime workers.
-
Differences between full time & part time contracts
Full-time contacts
A contract for a full week’s work
Usually, 37-40 hours per week
Stable, trained workforce
Highly skilled, difficult to recruit & motivated staff
Employees likely to be motivated & loyal
Expensive, especially in period of recession
Part-time contracts
A contract for less than a full week’s work
Often less than 20 hours per week
Specific workforce for times
Projects & seasonal jobs
Employees like to be highly skilled & motivated
No security of employment / income
❖ the measurement causes & consequences of poor employee performance.
-
-
Staff appraisal: a regular review to evaluate an employee’s skills, achievement growth / lack thereof.
Useful for feedback in relation to measuring & rewarding performance & success.
Different methods of measuring employee performance are:
• Planned interviews – discussion w/ managers regarding targets, training, / other issues.
• Observation – managers observe employees & measure against pre-set targets & benchmarks.
• Productivity – like observation. However, the rate of work output is measured against pre-set targets.
Benefits of staff appraisal.
• During appraisal interviews / observation, training need can often be identified.
• New ideas can come out from the discussion for the benefit of the business.
• It can allow pay levels to be adjusted.
• It can confirm the extent to which employees are meeting targets which can then be used as the basis
for bonus payments.
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Vishakha Mirchandani
-
Causes & consequences of poor employee performance:
Causes
Poor employee motivation
Lack of effective leadership
Lack of skills/ experience
Absenteeism
Poor morale
Consequences
High labour turnover
Disciplinary action
Low output
Poor-quality output
Loss of orders
High levels of wastage
Effects
Increased recruitment & training
costs
Increased cost of defective products
Dismissal & lack of workforce
-
https://youtu.be/610qIGxW_DM; https://youtu.be/iRcpBCL85oc
Labour productivity: the output per worker in each time.
-
Labour productivity =
-
Absenteeism: measures the rate of workforce absence as a proportion of the employee total.
-
Absenteeism (%) =
-
Labour turnover: measures the rate at which employees are leaving an organisation.
-
Labour turnover =
𝑡𝑜𝑡𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡 𝑖𝑛 𝑡𝑖𝑚𝑒 𝑝𝑒𝑟𝑖𝑜𝑑 𝑒,𝑔,𝑜𝑛𝑒 𝑦𝑒𝑎𝑟
𝑡𝑜𝑡𝑎𝑙 𝑤𝑜𝑟𝑘𝑒𝑟𝑠 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 𝑎𝑏𝑠𝑒𝑛𝑡
𝑡𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠
× 100
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 𝑙𝑒𝑎𝑣𝑖𝑛𝑔 𝑖𝑛 𝑜𝑛𝑒 𝑦𝑒𝑎𝑟
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑒𝑜𝑝𝑙𝑒 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑑
× 100
❖ strategies for improving employee performance.
-
-
https://youtu.be/I5l8yX0J2iY; https://youtu.be/AWNau0xDwGY
There are several reasons why labour productivity might increase over time:
• Improved staff motivation & higher levels of effort
• More efficient & reliable capital equipment
• Better staff training
• Increased worker involvement in problem solving to speed up methods of production, e.g., kaizen &
quality circles.
• Improved internal efficiency, e.g., no waiting for new supplies of materials to arrive.
Methods for improving employee performance:
Empowerment
Settings goals
Access to resources
Responsibility
Communication
Verbal
Non-verbal
Two-way
Feedback
Celebratory
Areas of improvement
Comments
Procedures
Disciplinary
Promotional
Grievance
❖ Management by Objectives (MBO) – implementation & usefulness
-
-
Management by objectives: a method of coordinating & motivating all staff in an organisation by dividing
its overall aim into specific targets for each department, manager, & employee.
Implementation of MBO:
• Agreed between the employees & their manager / set by management w/o discussion w/ the employee.
• Individual / for a whole department.
• Direct from senior management / part of a departmental target.
Objectives should be:
• SMART to be effective.
• In line w/ overall business objectives.
• Can be monitored & measured so that action can be taken if targets are likely to be missed.
• Recognised if met so that reward can be given to encourage employees.
Usefulness
Employees feel involved when objectives are discussed & agreed.
Disadvantages
Time consuming
Having specific objectives to achieve can be motivating.
Business may not want to discuss some overall objectives w/ all
employees
Employees are more likely to be committed to objectives that they
have been involved in setting.
Employees may suggest very easy targets to ensure that financial
rewards will be achievable.
Employees know what is expected of them & how they are
contributing to the business objectives.
Targets that are too difficult to achieve may demotivate – forecasts &
targets must be realistic.
Employees may be motivated by having their training needs &
potential for promotion recognised.
Can be inflexible due to changes in external environment, i.e.,
recession – changes may be required.
Discussion of training needs – employees feel inadequate /
unrealistic expectations of promotion.
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2.3.2 Labour legislation
❖ the need for labour legislation & the broad principles that often underlie it.
-
The two main objectives are to:
• Prevent exploitation of workers by powerful employers by, e.g., laying down minimum levels of health &
safety & minimum wage rates.
• Control excessive use of trade union collective action.
Issue
Content
Hours of work
Maximum hours of work allowable per week
Remuneration issues including
minimum wage
National minimum wage: how & when employees should be expected to be paid & rate of overtime.
Discrimination issues
Prevent discriminations for reasons of gender, race, religion, sexual orientation, trade union
membership, political affiliation, / being HIV positive.
Health & safety
Employment contracts
Holiday entitlement
Ensures a safe & healthy working environment
Required details of employment contract; how & when they may be terminated
Minimum holiday entitlement: incentives are allowed if minimum is met
Employment relations
Covers the right to be a member of trade union; bargaining agreements; type of actions workers can
take
Minimum age issues
Limit the type of work that can be done below a stated age; all work is prohibited below a certain age
2.3.3 Cooperation between management & workforce
❖ how cooperation between management & the workforce can benefit both
-
-
The benefits of cooperation
• Employees & managers might learn to respect & understand each other.
• It can produce a useful exchange of ideas.
• It helps to remove the feeling of ‘them & us.
• Less confrontation & fewer strikes
Cooperation can be achieved:
• Using worker participation
• By recognising the value of input from employees, leading to a more motivated workforce
Cause of conflict
Common management view
Common employee view
Business change, e.g., relocation / new
technology
Change is necessary to remain competitive
& profitable
Change can lead to job losses
Rationalisation & organisational change
Business needs to cut overheads & be
flexible to deal w/ competition
Always seem to fall on employees - reduced
job security & lower motivation
2.3.4 Workforce planning
❖ reasons for & role of a workforce plan
-
-
Workforce planning: analysing & forecasting the numbers of workers & the skills of those workers that will
be required by the organisation to achieve its objectives.
Workforce audit: a check on the skills & qualifications of all existing workers/managers.
What does workforce planning involve?
Avoids having too many employees, resulting in wasted human resource.
Improves the potential for the business to run efficiently because the right number of workers w/ the right
skills are employed.
Provides a clear idea of what is to be achieved to determine accurately what workforce is needed.
Determines whether the employees have the skills required to meet the business objectives.
Factors that influence the number of employees recruited & the skill level of employees required.
• Forecast demand of the firm’s product.
• The productivity levels of the staff
• The objectives of the business
• Changes in the law regarding workers’ rights
• Labour turnover & absenteeism rate
What steps can be taken if the business does not have enough employees w/ the right skills?
• Recruit more staff – permanent / temporary, full- / part-time.
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-
• Retrain existing stuff.
What steps can a business take if it has too many employees?
• Make some existing workers redundant.
• Do nothing - workers might leave / retire & reduce the workforce to the desired size naturally.
• Make sure that the employees needed by the business are kept - persuade them to stay.
2.3.5 Role of trade unions in HRM
❖ the benefits of trade union involvement in the workplace.
-
Trade union: an organisation of working people w/ the objective of improving the pay & working conditions
of their members & providing them w/ support & legal services.
Trade union recognition: when an employer formally agrees to conduct negotiations on pay & working
conditions w/ a trade union rather than bargain individually w/ each worker.
Purpose & value of trade unions:
• Represented members at meetings w/ business representatives.
• Seek changes for businesses requiring its employees to work outside legal guidelines - e.g., to
regularly exceed the number of hours that should be worked.
• Work to resolve grievances between workers & their employers.
Benefits to employees
Skilled representation w/ negotiating experience
Benefits to the employers
External bodies can mediate when in dispute w/ employee bodies
More power than on an individual level
Ensure members follow legislation & intervene when infractions
made
Legal representation when in dispute w/ management
Up to date information regarding employment legislation
Employers can discuss issues w/ a few impartial representatives,
saving time due to not meeting all employees
-
Collective bargaining: the process of negotiating the terms of employment between an employer & a
group of workers who are usually represented by a trade union official.
Terms of employment: include working conditions, pay, work hours, shift length, holidays, sick leave,
retirement benefits & health care benefits.
Single-union agreement: an employer recognises just one union for purposes of collective bargaining.
No-strike agreement: unions agree to sign a no-strike agreement w/ employer in exchange for greater
involvement in decisions that affect the workforce.
Industrial action: measures taken by the workforce / trade union to put pressure on management to settle
an industrial dispute in favour of employees.
Factors determining the strength of:
Trade union
Most workers belong to one union
All workers agree to take industrial action
Industrial action costing the employer large sums of money
Rate of inflation increasing
Labour cost is a low proportion of total costs
Demand for the product labour helps to produce is inelastic
When productivity increases
Employer
Unemployment is high
Profits are low
Threats of relocation to low cost countries
Demand for the product is elastic
When the rate of inflation stable
Productivity of workers did not change
<
-
Types of industrial action:
By trade unions
Strike – employees refuse to work
By employers
Negotiations − to reach a compromise solution
Picketing – employees stand outside the workplace & prevent the
smooth functioning of the firm. E.g., may stop movement of lorries
Public relations – using the media to try to gain public support for
the employer’s position in the dispute
Work to Rule – employees refuse to do any work outside the
precise terms of the employment contract.
Threats of redundancies
Go slow – employees work at a very slow pace.
Changes of contract
Non-cooperation – workers refusing to follow a new procedure/rule.
Closure – closure of the business / the factory; leads to redundancy
& no profit for the business owners
Overtime ban – employees refuse to work overtime
Sit-in/ Sit down strike – employees report for duty, but they just sit
in their offices
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Vishakha Mirchandani
2.4. Organisational structure
2.4.1 Relation between objectives, people & organisational structure
❖ purpose & attributes of an organisational structure
-
https://youtu.be/d-0BAO_EhR4;
Organisational structure: the internal, formal framework of a business that shows the way in which
management is organised & linked together & how authority is passed through the organisation.
Organisational structure provides a framework for decision-making, allowing flexibility, growth,
development, & a structure for meeting the needs of a business. An organisational structure:
• Illustrates who is responsible for whom & who is accountable to whom within a business.
• Allows employees to know which task should be their priority when given work from more than one
person.
• Shows who are the decision makers in an organisation
• Shows the official chain of command.
• Illustrates the official channels of communication.
• Can also show the different functional departments / divisions within a large business.
• Gives employees some idea of the promotion / progression route within a business.
2.4.2 Types of structure: functional, hierarchical (flat & narrow), matrix
❖ advantages & disadvantages of the different types of structure
-
https://youtu.be/AQcjYAFEsfc;
Functional structure
• Functional structure – organised in terms of functional areas / departments of the business. Each
department may have their own hierarchical structure outlining who should report to whom.
• There are eight functional areas in a normal business set up, namely:
▪ General management
▪ Finance
▪ Human resources
▪ Marketing
▪ Public relations
▪ Production
▪ Administration
▪ Purchasing
Advantages
Specialists will be employed for each functional area
Clear hierarchy & chain of command in each department
Employees know contribution to business structure
Simple lines of control
Disadvantages
Communication between department can breakdown
Lack of coordination & a duplication of effort
Decisions concentrated at the top which damages motivation level
departments compete for resources, costly for the business
<
-
Hierarchical structure
• Hierarchical structure – demonstrates the levels of authority in a business, w/ those w/ the most
authority at the top of the structure & those employees w/ least authority & responsibility please start the
bottom.
Advantages
The role of each employee is clear & well defined
Disadvantages
Remote one-way communication
Employees are given responsibilities, proper rules to follow &
procedures to follow
Managers are generally accused of having tunnel vision / narrow
vision
Specialisation & economies of scale can be achieved
Clearly defined chain of command
It is a proper departmental structure
Lack of coordination can occur because of fewer horizontal links
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Vishakha Mirchandani
a. Narrow & tall structure
• Narrow & tall structure – many levels, usually in bureaucratic & traditional organisations w/ a narrow
span of control
Advantages
There are different levels w/ delegated decision-making
Employees can progress in towards higher levels of responsibility
Senior management delegate decision making to managers below
Disadvantages
Some loss of control by senior managers
Poor decisions may be made at lower levels
Communication through several levels - slow & time consuming
The ideal span of control depends on the skill of the employees &
the type of work being undertaken. Highly skilled workers tend to
need less supervision than unskilled workers & therefore could work
under a wide span of control
Higher levels of management can become distance from lower
levels- unaware of issues, lower motivation levels in lower line staff.
Some communication is ineffective - lack of contact &// some
duplication of effort / lack of coordination
b. Flat structure
• Flat – fewer levels w/ a wide span of control, often in new business / those who have delayered to
save time / cost.
Advantages
Closer link between senior managers & lower levels
Disadvantages
There are limited opportunities for promotion
Information & decisions passed through fewer levels hence less time
consuming
Wider span of control - difficult to directly communicate w/ many staff
Greater motivation as more trust is placed on employees
Decision-making responsibility rests w/ a smaller number of
managers - great burden
Less supervision of employees - lower costs
Quality maintenance is difficult
-
Matrix structure
• Matrix structure: an organisational structure that creates project teams that cut across traditional
functional departments.
Advantages
Disadvantages
The best team will be chosen for a project
Employees will find it difficult to prioritise that work - working on more
than one project at a time
Improves cooperation & communication between departments
Power struggle - conflict between different project leaders in terms of
priority
Effective use of skills within business
Costly to implement
Flexibility - business is more responsive to changes
Problems of control - employees answerable to more than one
leader
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❖ why some organisations are structured by product & others by function /
geographical area.
a. Organisations structures by product
• Cost & profit centres for each product, w/ each product having its own organisational structure &
specialist teams to support it.
Advantages
Disadvantages
People working in each division will be specialised in that specific
product
Costs & revenues can be clearly allocated to that product
There can be some duplication of effort. E.g., each product might
have a marketing department & the finance department
<<
b. Organisation structures by geographical region
• Useful for businesses who provide products for different regions.
Advantages
More likely to understand the needs of local customers
Disadvantages
May not benefit from economies of scale
Specialised products can be produced / provided
Local influences may lead to contradictions in marketing messages /
brand image
❖ the reasons & ways structures change e.g., w/ growth / delayering.
-
Factors influencing choice of organisational structure.
• Functional activities taking place - production finance human resource management & marketing. Each
department has a clear function & its own internal hierarchy.
• Product groups are geographical regions depending on the nature of the business involved. A multiproduct business might have a structure for each product, whereas a business operating in several
geographical regions may have separate structure for each region.
• Size of the business - larger businesses tend to need functional departments.
• Aims & objectives of a business, e.g., if the business objective is growth, the organisational structure
must allow growth to take place w/o sacrificing any level of efficiency.
The reasons & ways structures change:
-
Change
Reason
Method of change
Internal
Change in the style of
management
Changing to a more Democratic style to increase
worker input & motivation
Delayering is one method, as well as changing lines
of communication
Delayering
Decrease costs & increase speed of communication
Reducing the number of supervisory managers &
increasing the autonomy of workers
Expansion into new
geographically markets
An increase in the number of departments &
products leads to an increase in the scale of
operation
Increasing the layers of management & changing the
structure from matrix to a geographical structure
External
Growth of market
Increase in demand leads to an increase in
production to maximise profit opportunities
Changing to a product oriented / geographical
structure to maximise product availability & suitability
https://youtu.be/sRQcrFQw8YU; https://youtu.be/xUISnC0P9CE; https://youtu.be/Ob4P79graGY
Delayering: removal of one / more of the levels of hierarchy from an organisational structure.
-
Advantages
Reduces business costs
Shortens chain of command & improves communication
Increases motivation due to less remoteness from top
management
Increases span of control & opportunities for delegation
•
•
•
•
Disadvantages
May make managers redundant - redundancy costs
Increases workload for managers - stress
Production in the sense of security of the whole workforce - fear of
redundancies - Maslow’s needs
Consequences of poor organisational structure
Low motivation & morale
•
Ineffective decision making
•
Lack of co-ordination & control
Poor communication
•
Duplication of activities
Poor implementation of organisational
objectives
Inability to respond to changing conditions.
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2.4.3 Formal & informal organisations
❖ features of a formal structure.
-
Informal organisation: the network of personal & social relations that develop between people within an
organisation.
Advantages
Lighter workload for management
Workgroup satisfaction
Improved communication
Forces management to plan
Greater cooperation
-
-
Disadvantages
Resistance to change
Interpersonal an intergroup conflict
Features of a formal structure:
• Clear & distinct levels of hierarchy, responsibility, & authority
• Processes & procedures in place to ensure consistency & order.
• Reduced responsibility at lower levels of hierarchy
• Delegation of tasks whilst retention of control & responsibility
• High levels of control & authority in position of trust
Chain of command: this is the route through which authority is passed down an organisation – from the
chief executive & the board of directors.
2.4.4 Delegation & accountability
❖ relationship between delegation & accountability
-
https://youtu.be/9tipp7Jm2Vw; https://youtu.be/Fhv32O_fg1A
Delegation: passing authority down the organisational hierarchy.
Delegation & accountability
At each level in the organisation tasks are delegated from chief executive officer at the top of the
organisation down to the employees on the very bottom level, but if anything happens that causes the
organisation to perform less well it is the chief executive who will ultimately have to answer to the
shareholders.
❖ processes of accountability in a business
❖ advantages & disadvantages of delegating
Advantages
Senior managers more time to focus on strategic roles
Shows trust in subordinates - motivate & challenge
Develops & train staff for more senior positions
Staff achieve fulfilment through their work (self-actualization)
Disadvantages
Inadequate training - low rate of success
Unsuccessful if insufficient authority is given to subordinate
Managers may only delegate boring jobs - demotivating
❖ the impact of delegation on motivation
-
Delegation can be a part of job enrichment & exposes employees to a wider range of more complex tasks.
Employees feel trusted & might begin to believe that they could be promoted. This increases their selfesteem.
Delegated tasks can also lead to an employee gaining respect of their colleagues, therefore meeting their
need for the esteem of co-workers.
2.4.5 Control, authority, & trust
❖ relationship between span of control & levels of hierarchy
-
https://youtu.be/XwwsY84EcB8;
Level of hierarchy: stage of organisational structure at which personnel have equal status & authority.
Span of control: the number of subordinates reporting directly to a manager.
The greater the number of levels of hierarchy, the longer the chain of command. This will affect:
• Communication effectiveness
• Spans of control – smaller in tall organisations.
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•
•
•
Delegation – when spans of control are narrow, managers are more able to control the work of the few
people, so delegation is likely to be limited.
Motivation levels of junior staff – as far from senior management, delegation will be limited.
Business costs – managers are expensive to employ & they take up very costly office accommodation.
❖ difference between authority & responsibility
-
Responsibility - clear accountability for tasks regardless of who carries out / gives orders for the task.
Authority - the power to give orders & make decisions regarding tasks.
Authority & responsibility
Authority can be passed down & responsibility cannot. Thus, the authority to perform a task can be passed
to a lower-level employee but the final responsibility for the successful execution of the work remains w/
the manager who delegate work. It is the manger’s responsibility to ensure that the employee has the
required skills & experience.
❖ conflicts between control & trust that might arise when delegating.
-
Delegation requires an element of trust. Trust on the part of the manager that their employee will carry out
the work as required. Trust on the part of the employee that the manager will not interfere once the work
has been delegated. When a manager performs a particular task, themselves they have complete control
about how & when it is done & the standard to which it is done. They must accept that they lose some
control over the work if it is delegated to one of the employees in the hierarchy. If the manager checks
constantly how the work is done, the employee may sense lack of trust & may no longer be willing to
undertake the task. However, if the manger does not keep checking, how do they know that the work is
being done & is being completed to the required standard. This a dilemma faced by people who delegate
some of their work to others.
2.4.6 Centralisation
❖ advantages & disadvantages of centralisation for stakeholders
-
https://youtu.be/ZsJ6Rbg6SWU; https://youtu.be/tnLOEmJlsmo; https://youtu.be/vPLaoJaPYa4;
https://youtu.be/M1sV6YhxQD8
Centralisation: keeping all the important decision-making powers within head of ice / the centre of the
organisation.
Advantages
Greater control - employees & use of resources
Disadvantages
No new ideas are brought in the management system
Decision will be made consistently across all departments /
divisions
Prevents personal development for managers lower down the
hierarchy
Image can be maintained due to consistency
Easier communication due to limited involvement of employees
Employees working towards common goal
Delays in decision making
Business may not quickly adjust to unexpected change
-
Decentralisation: decision-making powers are passed down the organisation to empower subordinates &
regional/product managers.
Advantages
Decisions are made by managers who are ‘closer to the action’
Managers feel more trusted & get more job satisfaction due to
delegation
Decisions can be made much more quickly
The business can adapt to change more quickly
Disadvantages
Loss of control
Development of narrow departmental view
2.4.7 Line & staff
❖ distinctions between line & staff management; conflict between them
-
https://youtu.be/ViGC-ewNAIA
Line managers: managers who have direct authority over people, decisions, & resources within the
hierarchy of an organisation.
Staff managers: managers who, as specialists, provide support, information, & assistance to line
managers.
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Example of line manager
departmental manager
Supervisor
Line worker
Example of staff manager
IT specialist referred to marketing department
IT specialist is not managed / controlled by the marketing manager
IT specialist offers advice only & is not able to instruct
<<
-
Functional Authority – it is a right to give orders in a department other than your own. E.g., on specific
projects some specialists can be hired. For instance, calling a finance person to supervise a project.
2.5 Business communication
2.5.1 Purposes of communication
❖ situations in which communication is essential.
-
-
https://youtu.be/8hsxaP3MJ-E;
Effective communication: the exchange of information between people / groups, w/ feedback.
Key features of effective communication
• Sender (/ transmitter) of the message
• Clear message
• Appropriate medium (way in which the message is sent)
• Receiver
• Feedback to confirm receipt & understanding.
Reasons why effective communication is important to a business:
• Staff motivation
• The number & quality of ideas generated by the staff.
• Speed of decision-making
• Speed of response to market changes
• Reduces the risk of errors.
• Effective coordination between departments
To communicate w/ employees
To communicate w/ customers
To coordinate business activities
Give instructions
Advertising informs & encourages new &
existing customers to purchase products
Communication between different
departments
Allow employee input into decision making &
work practises
Process orders & allow dialogue for special
orders
Communication w/ external suppliers to
ensure a constant supply of raw materials
Increase motivation & morale
Ensure customer feedback is received &
action to allow further business opportunities
Share organisational aims & objectives to
unify business practises
2.5.2 Methods of communication
❖ standard methods of communication: interpersonal, general to & within groups;
spoken, written, electronic, visual.
-
Communication media: the methods used to communicate a message.
Information overload: so much information & so many messages are received that the most important
ones cannot be easily identified & quickly acted on – most likely to occur w/ electronic media.
What can affect the choice of methods of communication?
• The importance of a written record
• The advantages to be gained from staff input / two-way communication.
• Cost - electronic media can often require expensive capital resources.
• Speed - electronic means can be quick.
• Quantity of data to be communicated.
• Whether more than one method should be used for clarity & to be sure that the message has been
received
• Size & geographical spread of the business
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❖ strengths & weaknesses of the different methods of communication
Method
Advantages
Written communication
-
Letters – they are used when applying for a
job, requesting for something, informing
employees of any impending redundancies
etc
Reports – formal means of communication,
they are used in schools’ colleges to give
information about the progress of the
student. Some are issued by companies i.e.,
annual reports. Some are used when a
manager wants a stubborn employee to
narrate his / her case
-
-
Provides records & references. The
receiver can re-read.
Message can be carefully drafted &
directed to large audience through mass
mailing.
It promotes uniformity in policy &
procedures.
Reports can be very detailed & can
include diagrams to illustrate some
information.
Provides a permanent record of
information.
Information is provided in a logical way
Disadvantages
-
-
Notice boards – used for a planned social
event / meeting. It also includes posters
-
The information is available to many
people at the same time.
It is cheaper to use
-
Emails – it is a quick means of
communicating both internally & externals
-
Websites – many businesses convey
information about their activities on a
business website. The business can display
mission, products offered, jobs, prices on the
website.
-
Social media – may include Facebook,
twitter. Many people invite people to follow
them on social media so that up-to-date
information can be given out about business
activity
-
A fast way of communicating regardless
of where in the world the sender &
recipient.
Supporting documents can be attached
so that a lot of information can be
transmitted quickly
A lot of information can be made
available on a website.
If the website is very professional &
sophisticated the business can project a
good image
A website is a relatively low-cost form of
communication for businesses once the
site has been established.
It allows businesses to contact people
who they are not yet in formal contact
w/
Faster communication w/ people
outside the business
Immediate reaction from people can be
obtained through responses posted on
social media.
Such interaction between the business
& its customers might allow the
business to be more responsive to the
needs of its customers
-
-
-
It may create mountains of papers.
May be poorly expressed by ineffective
writers.
It may long time to receive & properly
understood.
Information can be misinterpreted
Some information might not be read if
the report is too long.
Information can be misinterpreted
There is no guarantee that the intended
recipients will see the information.
The reactions of people to the
information will be unknown.
The information cannot be targeted at a
specific group of people.
May provide no immediate feedback.
Some open their emails after a long
time
Information overload where too many
emails are sent.
It may long time to receive & properly
understood.
Can lead to cyber related crimes.
The illiterate cannot use the internet
The information made available on a
website is accessible to everyone who
visits the site. Thus, competitors can
have information which can be used to
their advantage.
There is the potential for malicious
individuals to gain access to the website
& to add harmful information /
comments
There is a danger that information might
be released through social media that
was not intended for public knowledge.
The target market of the business might
not be in the section of the population
that habitually uses social media.
Someone within the business will have
to allocate time to manage the facebook / twitter communications
Oral Communication – includes one to one conversation, interviews, appraisal sessions, group meetings / team briefings.
Meetings
-
Telephone/ Mobile phone
-
Visual Communication – usually includes
diagrams, pictures, charts, & pictorial
representation of the message.
-
It allows two-way communication &
feedback.
It encourages motivation.
It is fast & feedback can be received
instantly.
The message can be reinforced w/ the
proper use of body language.
It allows two-way communication &
feedback.
It is fast & feedback can be received
instantly.
Employees can be in contact 24 hours a
day, 7 days a week.
Messages can be send/ received, &
they will act as a record
Easy to understand & retain the
information.
May be more interesting than simple
written communication.
-
-
-
Body language of both the sender &
receiver may have a negative impact.
It may be unsuitable for information
which is technical in nature.
Meetings can be time consuming
There is no record of what was said.
The body language of the people
involved cannot be seen.
There is no guarantee that the person
on the other end of the phone is
listening & paying attention to what is
being said
It is not always clear, & they may be
misinterpreted by the receiver.
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Video Conferencing – can be held between
two / more people in a variety of locations
-
Saves time because do not need to
travel to meetings.
The costs involved in travelling to
meetings are saved.
People working in different parts of the
world can hold regular meetings in this
way.
The cost of equipment is small
compared to the costs saved.
It allows for some eye contact to be
made & for body language & tone of
voice to be observed
-
It is difficult to judge the body language
of those participating.
Any time lag can disrupt the fluency of
the discussion.
High Installation costs
It can be difficult to assess who wants to
have an input if the group is large.
Physical sampling of products of new
products i.e., new chocolate bar / a new
blend of tea is not possible
2.5.3 Channels of communication
❖ how communication works within an organisation
-
Channels of communication often follow the chain of command. There can be times when the usual
channel of communication will not be followed – e.g., if an employee wishes to make a formal complaint
about his / her line manager. Most businesses require communication to occur both vertically &
horizontally.
❖ Comparison & differences
-
One way communication – information moves in one direction only, usually from the top to the bottom of
the organisation.
• Bureaucratic businesses w/ tall structures generally rely on one way communication: decisions are
made at the top of the organisation & cascade down to the employees at the bottom of the structure.
• Employee involvement, responsibility & trust is minimal.
Two-way communication – information moves both up & down the organisation & originates at all levels.
• Often found in flatter structures which rely on the skills & ability of their employees, two-way
communication allows for decisions to be made at any level of the organisation & can be cascaded
both up & down in the hierarchy of the business.
• Employee involvement, trust & responsibility is critical within this type of organisation.
Vertical communication – communication between different levels of the hierarchy
• Communications are likely to stay within one functional area.
• Typically found in organisations that have separate cost centres & operations.
Horizontal communication – communication at the same level of hierarchy
• Communications are likely to cross between different functional areas.
• Typically found where there is close cooperation & collaboration between all departments.
-
-
-
❖ problems associated w/ different channels of Communication.
Vertical
Horizontal
One-way
Two-away
No inter-department cooperation
The outlook & objective of
different departments could
conflict
Does not allow the receiver to
question the message
Time consuming - time spent on
discussing problems
Ideas can remain one
dimensional
Different departments may not
understand the culture, ways of
working, objectives, problems, /
technical language of the others
No assurance that message has
been received understood &
acted upon
Inappropriate for some
messages that give clear
information that cannot be
argued w/
Formal procedures put in place
may be overlooked
Employee motivation & lack of
interest
Too much feedback - waste of
time
2.5.4 Barriers to communication
-
Communication barriers: reasons why communication fails.
Feature
Sender
Problems
•
•
•
•
•
The sender may use to technical language / may use ‘jargons’ which are difficult to understand.
The sender may speak too quickly which makes it difficult to interpret what he is saying.
The sender initiates a wrong message.
The message send by the sender may be too long & due to this the main point to be emphasized may get lost.
The sender may have a wrong opinion / perception of the receiver & may not put effort to put across the
message in an effective way.
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Medium
•
•
•
•
The message may be lost while transmitting.
Using an inappropriate medium may result in the less effective communication.
A longer channel of communication will result in distortion of the message & it may lose its original meaning.
There is lots of physical disturbances in channel of communication used.
Receiver
•
•
•
The receiver might not be paying attention & thus the message may lose its impact.
In many cases, the sender might not be trusted by the receiver & may not act in the intended way.
The receiver may not have the necessary skills to understand the message.
Feedback
•
The feedback may be missing / distorted.
<
2.5.5 The role of management in facilitating communication.
❖ communication networks
-
-
-
-
-
Formal communication networks: the official communication channels &
routes used within an organisation.
Chain network – one person, at the top, starts of the communication message
& this is passed on to the next person on the lower level. This is designed for
authoritarian leaders.
• It does not encourage either two-way communication / horizontal
communication.
• Individuals at the end of the chain can feel isolated & demotivated.
• Gives the leader control & allows an overview, from the top of the
organisation, of the communication system.
Vertical network - the boss/owner communicates w/ subordinates directly.
• Individually – there is no group network here.
• Used in a small department / any situation w/ a narrow span of control.
Wheel network - leader is at the centre, there could be two-way
communication between the leader & each of the other parts of the wheel.
• Horizontal communication is poor. The leader is in control & can limit formal
contact between the others.
• This network might represent the situation of a regional manager
communicating to each of the branch / site managers.
Circle network – each person / department can communicate w/ only two
others. Tt is a decentralised network – there is no obvious leader.
• It might be difficult for all members of the circle to agree a new strategy
between them, because of the slow rate of communicating w/ the whole
group.
• These methods do not allow the receiver to question the message, to ask
for further explanation / to discuss it w/ the sender.
• There is no assurance for the sender that the message has been received,
understood, & acted upon.
Integrated / connected network – allows full two-way communication
between any group members – / w/ all of them.
• It is typical of team meetings / brainstorming sessions.
• It allows a participative style of decision-making.
• It could assist in solving complex problems where input from all group
members is needed.
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❖ the role of informal communications within a business
-
Informal communication: unofficial channels of communication that exist between informal groups within
an organisation.
Advantages
Disadvantages
Employees may understand instructions better when explained by
other workers informally
Maintaining secrecy is impossible
Informal system covers the gap / shortcomings of formal
communication system
It is very much difficult to control the information
Improved relationships – Issues between the workers & the
management can be solved
The original information may be transformed to wrong information
(i.e., spread rumour)
Increases efficiency - employees discuss their problems openly &
solve it, work is done properly
No one can be held responsible as not possible to find the supplier
of wrong information in case of an enquiry
Problems can be easily & quickly identified. New ideas, suggestions,
opinions may come out through such communication as people can
express their feelings w/o fear
Can be time wasting
Flow of information is fast & is suitable for emergencies
Can create conflicts between employees
<
❖ ways in which communication can influence the efficiency of a business.
-
Managers can make sure that the people who need information have the correct information.
Effective communication can minimise the time wasted in decision making.
Time & money can be saved by ensuring that the most appropriate means of communication are used.
Interdepartmental communication can prevent the duplication of effort & increase the level of coordination.
Giving relevant information to employees can raise their level of motivation because they feel involved in
the business.
❖ ways of improving communication in each situation.
-
Ensure message is clear & precise.
Keep the communication channel as short as possible.
Ensure channels of communication clear to all involved.
Build in feedback to the communication process.
Establish trust between senders & receivers.
Ensure that physical conditions are appropriate.
Feature
Steps to overcome barriers
Sender
•
•
•
•
•
Message should be as brief as possible & to the point.
Main points of the message should be highlighted.
Language used should be understood by the receiver.
Avoid using technical jargons.
Use of appropriate facial expression while delivering verbal messages.
Medium
•
•
•
Select appropriate channel for communication.
Medium used should be free from distortions i.e., telephone failure etc.
Use the shortest possible channel to avoid distortion.
Receiver
•
•
•
Feedback should be asked from the receiver.
Trust between the sender & receiver is an important requirement.
Receiver should pay attention to the message received.
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3 Marketing
3.4 Marketing planning
3.4.1 Market planning
❖ the detailed marketing plan; associated benefits
-
-
-
Marketing plan: a detailed, fully researched written report on marketing objectives & the marketing
strategy to be used to achieve them.
Each of these must fit together w/:
• Marketing objectives
• Marketing budget
• Each other to create an integrated marketing mix.
The key contents of a typical marketing plan are:
• Purpose of the plan & the ‘mission’ of the business
• Situational analysis – where the firm is now.
• Marketing strategy – where it aims to get to, in marketing terms – marketing objectives & how it plans
to achieve these targets.
• Marketing mix – turning the strategy into the appropriate marketing tactics to be followed.
• The budget required to implement the plan effectively.
• Executive summary & a time frame for implementation of the plan.
The detailed marketing plan:
Stage
-
Components
Analysis of current environment
•
•
Organization, market, & competition
Ability to identify starting position
Setting marketing objectives
•
•
Dependent on corporate objectives
Provides a target for all stakeholders
Deciding target markets
•
•
Identifies specific market segments.
Reduces wastage on advertising spend
Implementing marketing strategy
•
•
Related to budgets & existing abilities.
Minimises risk of cost exceeding revenue & failure
Monitoring & measuring progress
•
•
Identifies any areas of strength / weakness to be exploited / fixed.
Ability to measure progress of campaigns
The benefits & limitations of a detailed marketing plan:
Benefits
Marketing activities contribute to achieving corporate objectives
Limitations
complex, costly, & time-consuming
marketing activities are integrated
small business may not have either the money / the skilled
management
resources are used efficiently in a planned way
In a fast-changing market, the plan could become out-of-date
employees are informed & committed to the plan
marketing managers may become wedded to the plan that they have
devoted so much time & energy to.
the review & monitoring process prepares the organisation for
change
may prevent them from seeing that unseen changes in the external
environment
-
Marketing planning – an evaluation
• A marketing plan is just one key component of a complete business plan. – convince banks & investors
for finance
• Needed to help introduce a new strategy that could determine a business’s future success.
• These provide direction & purpose to future marketing decisions that everyone in the department & the
organisation can understand & support.
3.4.2 Elasticity
❖ usefulness of the concept of elasticity in its various forms
https://youtu.be/DFsgMfmwnsI; https://youtu.be/A6b7KGQ-X4g; https://youtu.be/ZTcsyyFdVGM;
https://youtu.be/KVKzw_2iebc; https://youtu.be/TsqR8Qm1OXk; https://youtu.be/6qH0N1Ircfc
- Price elasticity of demand measures the responsiveness of demand following a change in price.
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Vishakha Mirchandani
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
-
Price elasticity of demand =
-
Income elasticity of demand measures the responsiveness of demand for a product following a change
in consumer incomes.
-
Income elasticity of demand =
-
Promotional elasticity of demand measures the responsiveness of demand for a product following a
change in the amount spent on promoting it.
-
Promotional elasticity of demand =
-
Cross elasticity of demand measures the responsiveness of demand for a product following a change in
the price of another product.
Cross elasticity of demand for good A following a change in the price of good B
-
=
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑑𝑒𝑚𝑎𝑛𝑑 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑐𝑜𝑛𝑠𝑢𝑚𝑒𝑟 𝑖𝑛𝑐𝑜𝑚𝑒𝑠
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑑𝑒𝑚𝑎𝑛𝑑 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑝𝑟𝑜𝑑𝑢𝑐𝑡
%𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑜𝑚𝑜𝑡𝑖𝑜𝑛𝑎𝑙 𝑠𝑝𝑒𝑛𝑑𝑖𝑛𝑔
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑑𝑒𝑚𝑎𝑛𝑑 𝑓𝑜𝑟 𝑔𝑜𝑜𝑑 𝐴
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑜𝑜𝑑 𝐵
Price electricity
Income plasticity
Promotional elasticity
Cross elasticity
Decides the affect a price
change will have on revenue
Decides the effect a change in
income will have on revenue
Decides the affect promotion
will have on revenue
Decides the effect of competitors
price change will have on revenue
Helps to set a price that will
gain maximum revenue
Allow the business to be
responsive to market conditions
Allow the business to maximise
return on marketing expenditure
Allow the business to select the
most proper pricing strategy
<
Perfectly inelastic demand
Zero
Inelastic demand
Between zero & one
Unit
elasticity
One
Elastic demand
Between one an Infinity
Perfectly elastic demand
Infinity
<
3.4.3 Product development
❖ product development as a process from original conception to launch & beyond.
-
https://youtu.be/DF7fwdlt-c0
New product development (NPD): the design, creation & marketing of new goods & services.
Consider existing
products &
market threats &
opportunities w/
objectives
create new ideas
for products from suggestions,
market research /
R&D
develop the idea having
considered the
market, design,
production
possibility &
current products,
the business must
ensure that all
costs can be
covered before
prototype & initial
testing
final testing by
best selling in the
market & market
research
product launch
post launch monitoring the
stages in the life
cycle
❖ sources of new ideas for product development
-
Company’s own research & development (R&D) department
Adaptation of competitors’ ideas
Market research, i.e., focus groups.
Employees
Salespeople
Brainstorming in groups
University & government research centres
❖ the importance of Research & Development
-
https://youtu.be/44XkPcc1xL4
Research & development: the scientific research & technical development of new products & processes
Importance of research & development:
• Design faults can lead to a business being taken to court.
• Falling behind competitors who invest in products & technology.
• Persistent poor quality can ruin a business’s reputation.
• No unique selling point in comparison to competitors
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Spending on R&D
Not spending on R&D
Advantages
Unique selling point
Business can charge premium prices.
Earn higher profit margins
Adapt other businesses’ ideas.
Less risky
Disadvantages
Risky investment
Never be foreseen w/ great accuracy
Can lead to legal battles if product is copied
-
How can government encourage R&D?
• Providing some legal security to inventors & designers by allowing them to ‘patent’ / ‘register’ a design.
This provides protection to the inventor from unauthorised copying of the new idea / design.
• They can provide financial assistance to businesses engaging in R&D. This is usually done either by
providing tax-reduction incentives, / by offering grants to firms / university departments w/ close links to
industry, to be spent on specific projects.
- Factors that influence the level of R&D expenditure by a business:
• The nature of the industry
• The R&D spending plans of competitors:
• Business expectations
• The risk profile / culture of the business
• Government policy towards grants to businesses & universities for R&D
- Why new products fail?
• Changes in economic conditions
• Insufficient / inappropriate marketing efforts
• Inadequate market research
• Distribution problems
• Misleading market research findings
• Unexpectedly high costs
• Defects in the product
• Inadequate sales force
• Activities of competitors
3.4.4 Forecasting
❖ the need to forecast marketing data
-
Sales forecasting: predicting future sales levels & sales trends.
The potential benefits of sales forecasting:
• The production department would know how
many units to produce.
• The marketing department would be aware
of how many products to distribute.
• Human resources workforce plan would be
more accurate.
• Enable a business to determine what
changes are taking place in the market.
•
•
•
•
Finance could plan cash flows.
Detect business opportunities / threats & what
marketing mix may be appropriate for these.
Help pinpoint a product position on the product
life cycle.
Enable the business to analyse the actions of
competitors.
❖ methods of forecasting (qualitative & quantitative)
-
-
Qualitative
• Sales-force composite: a method of sales forecasting that adds together all the individual predictions
of future sales of all the sales representatives working for a business.
• Delphi method: a long-range qualitative forecasting technique that obtains forecasts from a panel of
experts.
• Jury of experts uses the specialists within a business to make forecasts for the future.
• Consumer survey – a form of market research & the questions may either be quantitative in nature
(e.g., asking for likely future levels of demand) / qualitative (e.g., asking for reasons behind future
demand choices)
Quantitative
• Correlation – this method attempts to explain the most important factors causing changes in sales
data.
If a marketing manager considered that the level of advertising expenditure had led, in the past, to
significant changes in sales, then a causal relationship might be established.
• Extrapolation – basing future predictions on past results. When actual results are plotted on a timeseries graph, the line can be extended, / extrapolated, into the future along the trend of the past data.
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Vishakha Mirchandani
•
Moving Averages – more complex than simple graphical extrapolation. It allows the identification of
underlying factors that are expected to influence future sales. These are:
▪ The trend: the underlying movement in a time series.
▪ Seasonal fluctuations: the regular & repeated variations that occur in sales data within a period of
12 months.
▪ Cyclical fluctuations: these variations in sales occur over periods of time of much more than a year
& are due to the business cycle.
▪ Random fluctuations: these can occur at any time & will cause unusual & unpredictable sales
figures – examples include exceptionally poor weather / negative public image following a highprofile product failure.
Advantages
Disadvantages
It is useful for identifying & applying the seasonal variation to
predictions.
It is a complex calculation.
It can be reasonably accurate for short-term forecasts in reasonably
stable economic conditions
Forecasts further into the future become less accurate as the
projections made are entirely based on past data. External
environmental factors can change.
It identifies the average seasonal variations for each time, & this can
assist in planning for each quarter in future.
Forecasting for the longer term may require the use of more
qualitative methods that are less dependent on past results.
❖ calculation & use of moving average method to forecast sales.
-
Inspect past data for regular time related fluctuation.
Decide upon a time – most often four quarters.
Calculate the four quarter totals.
Centre the data by adding the quarterly totals to an eight-quarter total.
Divide by 8 to give the sales trend / moving average for each quarter.
Deduct the trend from the sales for each quarter.
Add all the seasonal variations & divide by their number to achieve the average seasonal variation per
quarter.
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3.4.5 Coordinated marketing mix.
❖ the need for & development of a coordinated marketing mix
-
https://youtu.be/JC8lGW1T1bY; https://youtu.be/_f65-t9vjuI; https://youtu.be/Djx7pAX4vZ0;
https://youtu.be/tAwN1SlkrAg; https://youtu.be/Bb-dX_0Oo_M
Price – needs to reflect the expectations of the target market.
Product – needs to reflect the needs of the target market.
Place – needs to be sold in appropriate locations for the target market.
Promotion – needs to be advertised in appropriate locations & media, considering the requirements of the
customer.
The plan should be integrated w/:
• Finance – to obtain the necessary resources.
• Operations – to discuss the viability of locations abroad & to adapt the product for foreign markets.
• Human resources – to ensure adequate staffing is available.
❖ development of marketing strategies that are focused towards achieving specific
marketing objectives.
-
The 4Ps must be integrated & reinforce each other.
The integrated 4Ps must specifically relate to achieving the marketing objectives.
The marketing mix must take account of position in the product life cycle & market conditions.
There should be research & development for new products to replace older ones.
Marketing strategies should be within their set budgets.
Flexibility to respond to change should be built in
3.5 Globalisation & international marketing
3.5.1 Globalisation
❖ economic globalisation within the context of the broader concept of ‘globalisation’
-
https://youtu.be/w3ohMzkTdpk; https://youtu.be/-loRR8XBeDw; https://youtu.be/r4US7okMBb8;
Globalisation: growing trend of worldwide markets in products, capital, & labour, unrestricted by barriers.
Multinational companies: businesses that have operations in more than one country.
Free international trade: international trade w/o restrictions i.e., ‘protectionist’ tariffs & quotas.
Tarif: tax imposed on an imported product.
Quota: a physical limit placed on the quantity of imports of certain products.
Economic globalisation includes:
• Decreasing barriers to trade
• Increasing ease of moving capital in money across countries
• Increased incentives for foreign direct investment
• Growth of multinational businesses in all countries as there is greater freedom for capital to be invested
from one country to another.
• Freer movement of workers between countries.
❖ the implications for marketing of increased globalisation & economic collaboration
-
-
https://youtu.be/MuZXCvA24_8; https://youtu.be/nFHMm0nElDw
Trading Bloc – refers to an agreement between states, regions, / countries, to increase trade between the
participating regions by removing barriers to trade. It is a grouping of countries w/ formal agreements on
trade. They make it easier for member countries to access the market & very difficult / expensive for nonmembers to sells their goods on the market. Examples of trading blocs:
ASEAN – Association of South East Asian Nations
APEC – Asia Pacific Economic Co-operation
NAFTA – North American free trade agreement
EU – European Union
BRICS: the acronym for five rapidly developing economies w/ great market opportunities – Brazil, Russia,
India, China, & South Africa.
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These are major economic power that are not yet fully developed but are developing at a faster rate. Their
income (GDP) is growing rapidly. They account for over 40% of the world population, 25% of the world
income & production, & have large trade surpluses & foreign reserves. As their economies continue to
grow & attract greater trade, their markets will become increasingly important for the world economy & as
key market opportunities for foreign businesses. They therefore represent major marketing opportunities as
wealth grows & an increasing market share w/ disposable income to spend will be looking for more
opportunities to buy goods & services.
Benefits
Limitations
large increases in money moving between countries & in foreign
direct investment by governments & transnational corporations
Businesses from other countries have freer access to the domestic
market, so they will be increased competition
large increases in trade between countries
Inefficient domestic firms will shutdown
increasingly similar products & services being sold across the world
Businesses are now at risk of foreign takeovers e.g., Land Rover &
Jaguar by Tata.
a large increase in outsourcing to different countries for components
/ services
Anti-globalisation pressure groups may comment negatively about a
multinational company
large increases in international travel & instant communication
across the world
Decrease in profitability for domestic firms when more imports flood
local markets
increasingly similar cultures & attitudes across the world
converging income levels across the world
3.5.2 Strategies for international marketing
❖ the importance of international marketing for a specific business/situation
-
International marketing: selling products in markets other than the original domestic market.
Why a business may sell its products in other countries.
• To maximise profits
• When the home market is saturated
• To reduce risk of failure
• Poor trading conditions in the home market
• Legal differences creating opportunities abroad. Fewer restrictions abroad can create opportunities for
local firms to export goods to those countries.
• To escape competition in the home market
• To meet management goals of growth
Free trade
reduction in tariffs
enlarged markets
economies of scope & scale
faster economy growth
-
Protectionism & trade blocs
increase in restrictions, barriers, & tariffs
increase in bureaucratic procedures
reduction of customer choice
Why international marketing is different?
• Cultural differences
• Legal differences
• Economic & social reasons
• Political differences
• Differences in business practises
❖ international markets – identification, selection & entry
-
https://youtu.be/SGoGJEe-ERk; https://youtu.be/drK_S95gCJU; https://youtu.be/9t61OlAIdDc
Choice must be based on:
• Business objectives of growth, product development & sales
• The business’s attitude to risk
• Availability of resources including finance & personnel.
• Product type - e.g., aircraft have fewer sales possibilities than jackets.
• Market research into:
▪ The size & growth of the market
▪ Economic arrangement including tariffs, exchange rates, laws & regulations, & incentives available.
▪ Market competition
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Vishakha Mirchandani
-
▪ Costs of marketing & distribution
▪ Possibility of partnership agreements
▪ Political & cultural agreements
Market research should be done. SWOT analysis is carried out to get a clear picture of the market.
Strengths
•
•
•
•
Strong ethical position
Excellent research facilities
Expansion in new markets
Brand loyalty
Opportunities
•
Increasing incomes & population
•
Growth of the market
•
Buying other companies
•
Foreign government policy
Weaknesses (controllable)
•
Inefficiency due to large size market &
lack of control
•
High advertising budget
•
Inexperienced workers
Threats (uncontrollable)
•
Risk of economic downturn
•
Emergence of competitors
•
Increase in inflation & interest rates.
•
Restrictive laws from governments
<
Method of entry
Advantage
•
•
Foreign direct investment
– refers to constriction of
production facilities / offices
in other countries.
•
•
•
Exports (directly): goods &
services sold to consumers
& business in other
countries.
•
•
•
Exporting (indirectly)
•
•
Franchise: a business that
uses the name, logo, &
trading systems of an
existing successful
business.
Joint venture: two / more
businesses agree to work
closely together on a
particular project & create a
separate business division
to do so.
•
•
•
•
•
•
•
•
Disadvantage
The business will be able to avoid trade barriers.
The business may be able to get government
support especially if they have invested in critical
areas / if they are socially responsible.
There is no agent / joint venture partner to consult
w/ / take joint decisions w/. Thus, all profits after
tax belong to the organisation.
Lower costs e.g., the decrease in transport &
labour costs.
•
•
The company has complete control over the
distribution of goods.
Agents may be having other deals w/ other
companies & as a result may not be fully
committed.
Saves on costs since no commission is given to
the interim
•
The agents have full knowledge about the local
market hence make more sales per given period.
Transport & administrative procedures become the
responsibility of the agent.
Less costly as fewer staff is involved in selling
goods abroad.
•
•
•
•
•
•
•
•
Few start-ups cost.
Fewer chances of new business failing as an
established brand product are being used.
Advice & training offered by the franchisor.
Supplies obtained from established & qualitychecked suppliers.
Franchisors agrees not to open another branch in
the area
Risk is shared between the business & venture
partners.
Sharing of skills, knowledge, & resources
Trade barriers are not relevant
•
•
•
•
•
•
•
Licensing – it involves a
contractual agreement to
distribute the product /
services in return for a fee.
•
•
•
•
This means there is a low initial cost.
Much of the risk is borne by the licensee.
Trade barriers are avoided.
Licensee may have full knowledge of the local
market
•
Acquiring existing foreign
business – the business
can merge / take over a
foreign company
•
•
•
•
Risk of failure is reduced.
Customer relationships are maintained.
A faster way to penetrate foreign markets.
Skilled & experienced staff can be retained
•
•
•
•
The business will be able to avoid trade barriers.
The business may be able to get government
support especially if they have invested in critical
areas / if they are socially responsible.
There is no agent / joint venture partner to consult
w/ / take joint decisions w/. Thus, all profits after
tax belong to the organisation.
Lower costs e.g., the decrease in transport &
labour costs.
The business lacks important knowledge about the
local market.
More hustles of arranging transport & storage
facilities.
The business must employ sales personnel to
deals w/ foreign buyers
Commission should be paid to the agents.
The agents may be having products from other
firms to sell as well & they may not be fully
committed.
Lack of personal touch w/ the foreign customers.
Share of profits / revenue must be paid to
franchisor each year.
Initial franchise fee can be expensive.
Local promotions may still have to be paid by the
franchisee.
The franchisee is forced to get raw materials from
certain suppliers only.
Strict rules over pricing & layout of the outlet
reduces the owner’s control over their own
business.
There may be conflicts between the venture
partners.
There is loss of control.
One business may not have the incentive to be
efficient
The business loses control of the marketing
process.
The business must pay a fee to the licensee.
The contract can be terminated at any time.
Lot of paperwork is involved when merging two
firms.
More capital is required when buying a business
which is already performing well.
<
-
Challenges faced when trying to enter foreign markets.
• Political differences – changes in the governments can cause instability in the country, i.e., wars, acts
of terrorism, threats of civil violence.
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Vishakha Mirchandani
•
•
•
•
Economic differences – some economies have falling GDP & inflation making it difficult for firms to
survive.
Social differences – the structure of the population may differ greatly between the mother country &
the host country.
Legal difference – products allowed in one country may be illegal in other countries.
Cultural Difference – related to religious beliefs & moral values.
❖ pan-global marketing & maintain local differences.
-
https://youtu.be/IjQlJDCvLYM
Pan-global marketing: adopting a standardised product across the globe as if the entire world were a
single market – selling the same goods in the same way everywhere.
Advantages
Disadvantages
saves on costs since the same product can be produced for all
markets
legal restrictions can vary across nations. It is illegal to use
promotions involving gambling in certain countries
a common identity for the product can be established.
brand names do not always translate effectively into other
languages. They might even cause offence / unplanned
embarrassment for the company
setting of the same price in different countries may not lead to profit
maximisation
firms must develop different products to suit cultural / religious
variations.
-
Global localisation: adapting the marketing mix, including differentiated products, to meet national &
regional tastes & cultures.
Advantages
Disadvantages
local needs, tastes & cultures are reflected in the marketing mix of
the business
there will be additional costs of adapting the products to suit cultural
variations
profit & sales maximisation
the business can no longer benefit from the economies of scale
products are made in such a way that they meet certain minimum
quality standards in each country
Factors encouraging pan global marketing
large size & global presence
a technical product w/ high development costs that can be spread
experience of being involved in international marketing
consumer behaviour/segment similar across the world
standard distribution method
Factors encouraging maintaining local differences
small size & limited international markets
little experience in international marketing
varying regulations & cultural attitudes & product area
local distribution methods
❖ choosing a strategy, in each situation, to develop a global market.
Analyse
business
resources,
global
marketplace
including the
competition
set clear
marketing
objectives in
line w/
corporate
objectives
select
possible
countries &
conduct
thorough
market
research,
including
legal, political
& cultural
factors
use the
market
researcher to
site target
market &
segments in
selected
countries
investigate
then select
entry
methods to
markets in
chosen
countries
implement
global
marketing
mix strategy
w/ local
addaptations,
all within
budgets
monitor &
review in
relation to
objectives
❖ factors influencing the method of entry into international markets.
-
Exporting – small businesses benefiting from low trade barriers, home production advantages & easy
distribution.
Licencing – businesses w/ strong property rights & clear knowledge base
Franchising – service industries
Joint ventures – businesses w/ weak expertise in some areas that may be provided by partner business.
FDI – large businesses, often multinational, seeking tax advantages & avoidance of tax barriers, &
pursuing a long-term strategy.
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Vishakha Mirchandani
4 Operations & project management
4.2 Operations planning
4.2.1 Enterprise resource planning (ERP)
❖ main features of an ERP programme
-
-
-
https://youtu.be/A98X_bvX2QA
Enterprise resource planning: the use of a single computer
application to plan the purchase & use of resources in an
organisation to improve the efficiency of operations.
ERP deals w/:
• Supply chain management – ordering of raw materials.
• Production – transforming inputs to outputs.
• Customer relations management – dealing w/ customers’
enquiries, orders & delivery.
Every business involved in production will be able to find out:
• What has been ordered?
• How many components / raw materials / what type are needed.
• Whether raw material is in stock?
• The progress of an order.
• Stocks available to meet orders.
• Whether payment has been requested / paid.
Advantages
Disadvantages
Reduces costs at all stages of the supply chain – materials &
products are electronically tracked at all stages.
Supply only according to demand
Just-in-time ordering of inventories
Improved delivery times & better customer service.
Departments linked more closely together by the system
Management information increased
The costs of the database & computer systems must be considered
The multiple ways of operating in different departments now must be
reduced to one common system
It is estimated that in most businesses the full implementation of
ERP can take one to three years & a lot can happen in business
during this time
❖ how ERP can improve a business’ efficiency
Process
Benefits to efficiency
Inventory control
All departments know exactly how much Inventory is held.
Customer orders can be linked to Inventory to minimise Inventory costs.
ERP system keeps track of the order & can Inform the customer.
Products delivered as soon as they are produced
Costing & prising
Precise costs of each order can be calculated.
Prices can be customised for each Individual order.
Reduces the administrative costs of pricing.
Capacity utilisation
Enables planning of production to ensure that operations are working at / close to full capacity.
By ensuring efficient use of all equipment production costs fall.
Responses to change
Indicates changes in orders so all departments know simultaneously.
Management can react quickly & flexibly to changes.
Reduces the cost of identifying & reacting to change
Management information
Management knows about events as they happen.
Decisions can be based on accurate, up-to-date Information.
Reduces the cost of obtaining information.
4.4 Capacity utilisation
4.4.1 Measurement & significance of capacity
❖ how capacity utilisation can be measured.
-
https://youtu.be/CbZrPY4hh9Y; https://youtu.be/2oo1GdYH1sY; https://youtu.be/ScgBG5fuaDY;
https://youtu.be/kWYTiiRka5Y
Capacity utilisation: the proportion of maximum output capacity currently being achieved.
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Vishakha Mirchandani
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑜𝑢𝑡𝑝𝑢𝑡 𝑙𝑒𝑣𝑒𝑙
-
Rate of capacity utilisation (%) =
-
In manufacturing businesses, it enables the business to know exactly what orders there are, what orders
might be coming in, when the orders must be fulfilled & what materials are needed for them. Because all
departments have this information, production can be planned to ensure that the equipment is being used
as near to full capacity as possible as often as possible, w/ all the materials ordered & stocked to make this
possible. All of this reduces the cost of production, so efficiency is increased.
When utilisation is at a high rate, average fixed costs will be spread out over many units – unit fixed costs
will be relatively low. When utilisation is low, fixed costs will have to be borne by fewer units & unit fixed
costs will rise.
-
𝑚𝑎𝑥𝑖𝑚𝑢𝑚 𝑜𝑢𝑡𝑝𝑢𝑡 𝑙𝑒𝑣𝑒𝑙
× 100
❖ implications of operating under / over maximum capacity.
-
Excess capacity: exists when the current levels of demand are less than the full capacity output of a
business – also known as spare capacity.
Rationalisation: reducing capacity by cutting overheads to increase efficiency of operations, i.e., closing a
factory / of ice department, often involving redundancies.
Full capacity: when a business produces at maximum output.
Implications of under-capacity operation:
Positive
Ability to take & meet sudden large orders quickly
Flexibility in production
-
Negative
Higher unit fixed costs = pressure to increase prices
Under- / unemployed resources, leading to poor motivation
Unsold output, leading to higher inventory costs
Inefficiency in production, leading to higher costs
Implications of over-capacity operation:
• Some customers are disappointed / receive late delivery.
• Quality may fall.
• Employees & managers may become stressed.
• Regular machinery maintenance may be difficult.
• Costs increase because of steps taken to increase production.
4.4.2 Increasing capacity utilisation.
❖ choosing methods of improving capacity utilisation
Long-term over-capacity problems
Advantage
Method
Subcontract – paying
another business to
undertake part of the tasks
required to produce a
product / service.
Capital investment in
expansion of production
facilities
•
•
•
•
•
•
•
No major capital investment is required.
Should be quite quick to arrange.
Offers much greater flexibility than expansion of
facilities – if demand falls back, then the
contracts w/ other firms can be ended
Long-term increase in capacity
Firm is in control of quality & final delivery times.
New facilities should be able to use latest
equipment & methods.
Other economies of scale should be possible
too
•
•
•
•
•
•
•
•
Disadvantage
Less control over quality of output
May add to administration & transport costs.
May be uncertainty over delivery times &
reliability of delivery.
Unit cost may be higher than ‘in-house’
production due to the supplier’s profit margin
Capital cost may be high.
Problems w/ raising capital.
Increases total capacity, but problems could
occur if demand should fall for a long period.
Takes time to build & equip a new facility –
customers may not wait
<,
Short-term under-capacity problems
Advantage
Method
Maintain output &
produce stocks
•
•
•
•
•
Introduce greater
flexibility into the
production process
•
•
No part-time working for staff
Job security for staff
No need to change production schedules /
orders from suppliers.
Stocks may be sold at times of rising
demand
Production can be reduced during slack
periods & increased when demand is high.
Other products can be produced that may
follow a different demand pattern.
Avoids stock build-up
•
•
•
•
•
•
Disadvantage
unsuitable for perishable stocks or those
that go out of date quickly.
stockholding costs can be very substantial.
demand may not increase as expected –
the goods may have to be sold at a
substantial discount.
Staff may be demotivated by not having
full-time, permanent contracts.
Fully flexible & adaptable equipment can
be expensive.
Staff may need to be trained in more than
one product – may add to costs
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Long-term under-capacity problems
Advantage
Method
Rationalise existing.
operations & cut
capacity, e.g., by
closing factory/offices
•
•
•
•
•
•
Reduces overheads.
Higher capacity utilisation
•
•
Research & development
into new products
•
Will replace existing products & make
business more competitive.
If introduced quickly enough, might
prevent rationalisation & the problems
associated w/ this
•
•
•
Disadvantage
Redundancy costs for staff payments
Staff uncertainty over job security
Possible threats of industrial action
Capacity may be needed later if economy
picks up / if firm develops new products.
Business may be criticised for not fulfilling
social responsibilities
May prove to be expensive.
May take too long to prevent cutbacks in
capacity & rationalisation.
Requires long-term planning as new
products introduced in haste, w/o a clear
market strategy, may be unsuccessful
4.4.3 Outsourcing
❖ benefits of outsourcing in each situation.
-
https://youtu.be/RW5VltZI5Fg; https://youtu.be/DcQraUl1Zjg
Outsourcing: using another business (a ‘third party’) to undertake a part of the production process rather
than doing it within the business using the firm’s own employees.
Advantages
Disadvantages
Reduction & control of operating costs – cheaper to ‘buy in’
specialist services as & when they are needed.
Loss of jobs within the business – a negative impact on staff
motivation.
Increased flexibility – fixed costs are converted into variable costs.
Customer resistance
Improved company focus – management can concentrate on the
main aims
Quality issues – internal processes will be monitored by the firm’s
own quality-assurance system.
Access to quality service / resources that are not available internally.
Security – using outside businesses to perform important IT
functions may be a security risk
Freed-up internal resources for use in other areas.
4.5 Lean production & quality management
4.5.1 Lean production
❖ links between lean production & inventory control, quality, employees’ roles,
capacity management & efficiency
-
https://youtu.be/6QRX4OD6ttk; https://youtu.be/PEZGGsi_dDE
Lean production: producing goods & services w/ minimum waste while maintaining high quality.
The seven main sources of waste in industry are:
• Excessive transportation of components & products.
• Excessive inventory holding.
• Too much movement by working people, e.g., to get supplies of components.
• Waiting time – delays in the production process.
• Overproduction – producing ahead of demand.
• Over-processing – making goods that are too complex as they could have been designed more simply.
• Defects – products that do not come up to quality standards & have to be rejected / corrected.
Advantages
Waste of time & resources is substantially reduced / eliminated.
Disadvantages
Employees may require training which can be costly to the business
Unit costs are reduced, leading to higher profits.
The business may not be able to increase the supply of goods when
demand increases
Working area is less crowded & easier to operate in.
There is less risk of damage to stocks & equipment.
New products launched more quickly.
Lean production leads to job loses which may damage reputation
Sometimes employees may be unwilling to take on responsibility.
Employees may be resistant to change.
-
Lean production & links w/ production processes
• Inventory control – low inventory levels using just-in-time.
• Quality – continuous quality assurance using total quality management.
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•
-
Employees’ roles – highly skilled, teamwork, flexible in roles, responsible for quality using cell
production.
• Capacity management – flexible production when require meeting orders using flexible specialism &
time-based management.
• Efficiency – lower costs, lower waste, planned movements of materials.
Lean production methods that increase efficiency
• Cell production: splitting flow production into self-contained groups that are responsible for whole work
units. The cell is responsible for dealing w/ material/component orders, word rotas, quality & use of
equipment. This motivates employees, gives them control & enables better quality.
•
Flexible specialism – flexibility in equipment & employees enables a basic product to be produced w/ a
range of options. Changing from one design of product to another requires flexible working in three
main areas:
▪ Flexible employment contracts that allow non-core workers to be called in / not employed as demand
conditions change.
▪ Flexible & adaptable machinery – often computer-controlled – that can be quickly switched from one
design to another.
▪ Flexible & multiskilled workers able to perform different jobs
on different product ranges.
• The great benefits of this flexible approach will be seen in quicker
responses to consumer demand changes, wider ranges of
products offered to customers, reduced stock holdings as goods
can be made to order, & higher productivity.
• Simultaneous engineering: product development is organised
so that different stages are done at the same time instead of in
sequence. This enables a business to bring a new product to the
market to meet the customers’ demands much more quickly.
4.5.2 Kaizen
❖ Kaizen (continuous improvement) in the context of lean production
-
https://youtu.be/kuLKWKqQQTM; https://youtu.be/F42aOtPkdWM
Kaizen: Japanese term meaning continuous improvement.
Kaizen involves all workers being continuously responsible for making improvements in production
processes that lead to greater efficiency, higher quality & less waste. It relies on workers taking on this
responsibility & managers being prepared to allow them to do so.
Benefits
Improvement in productivity
Less wastage
A lower breakeven level of output
More responsiveness to customer needs
Greater employee motivation & involvement
Costs
Training employees & managers in new attitudes
Setting up teams & empowering employees
Dealing w/ employees who do not want greater involvement
Making sure that all staff are involved
4.5.3 Just in Time (JIT)
❖ JIT in the context of lean production
-
https://youtu.be/AH5Bn8iguNM; https://youtu.be/FMidebp7kaA
Just-in-time: this inventory-control method aims to avoid holding inventories by requiring supplies to arrive
just as they are needed in production & completed products are produced to order.
Just-in-time production can be applied as a tool of lean production to reduce the waste of materials by
ensuring the business holds as little stock as possible & that as soon as products are completed, they are
immediately delivered to customers.
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❖ implications & justification of adopting a JIT approach.
-
Just in time will require:
• Relationships w/ suppliers must be excellent.
• Production staff must be multiskilled & prepared to change jobs at short notice.
• Equipment & machinery must be flexible.
• Accurate demand forecasts.
• Excellent employee–employer relationships.
• Quality must be everyone’s priority.
Benefits
The business can save rent & insurance costs
Limitations
The firm is vulnerable to action taken by employees
As inventory is obtained when needed, less working capital tied up in
stock
Production is very reliant on suppliers, & if deliveries are not on time
the whole schedule can be delayed.
There is less likelihood of products becoming obsolete / out of date
No spare finished product available to meet unexpected orders
Avoids the build-up of unsold finished products that can occur w/
sudden changes in demand
There is little room for mistakes as minimal inventory is kept for
reworking faulty product
4.5.4 Quality control & assurance
❖ quality in terms of what the customer demands
-
-
https://youtu.be/ghR_yZfOqDk; https://youtu.be/JD2Mc6oDcII; https://youtu.be/mN8oudE9HUo
Quality product: a good / service that meets customers’ expectations & is therefore ‘fit for purpose’.
Quality standards: the expectations of customers expressed in terms of the minimum acceptable
production / service standards.
A quality product does not have to be made w/ the highest quality materials to the most exacting standards
– but it must meet consumer requirements for it. This means it is vital to know what the customer is
demanding & to produce this at minimum cost to the business.
The advantages of producing quality products & services are:
• Easier to create customer loyalty.
• Saves on the costs associated w/ customer complaints, e.g., compensation, replacing defective
products & loss of consumer goodwill.
• Longer life cycles
• Less advertising may be necessary as the brand will establish a quality image through the performance
of the products.
• A higher price – a price premium – could be charged for such goods & services. Quality can, therefore,
be profitable.
❖ the importance of quality assurance
-
-
https://youtu.be/P6FcEmQ2BF0; https://youtu.be/0hzqHwu1i_I
Quality assurance: a system of agreeing & meeting quality standards at each stage of production to
ensure consumer satisfaction.
It is often based on the idea that each production process acts as a supplier to an internal customer – the
next stage. This means that faults are picked up during production & quality control is built into production.
Quality assurance is closely linked to Kaizen & is essential for lean production.
Advantages
Greater employee involvement & motivation
Disadvantages
Greater demands on employees may reduce motivation
Lower costs as defects can be corrected as they occur (right first
time)
Not all products need a high standard of quality, so time is
wasted.
Employees are in the best position to detect & correct faults
Business gains accreditation for quality awards
Cost of training & time for checking at each stage
Conflicts w/ focus on levels of output
ISO 9000: this is an internationally recognised certificate that acknowledges the existence of a quality
procedure that meets certain conditions.
To obtain the ISO 9000 certificate the firm must demonstrate that it has:
• Staff training & appraisal methods
• Methods for checking on suppliers.
• Quality standards in all areas of the business
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Vishakha Mirchandani
•
•
Procedures for dealing w/ defective products & quality failures.
After-sales service
❖ methods of quality control: inspection, testing, random sampling, involving the
workforce in quality control.
-
https://youtu.be/tZ6g9UztPb8; https://youtu.be/18cN8MZvJRA; https://youtu.be/oi1cARLWI5c;
Quality control: this is based on inspection of the product / a sample of products.
There are methods to effective quality control:
• Prevention – the product follows the requirements of the customer & allows for accurate production.
• Inspection – quality is checked by inspecting products at the end of the production process.
• Random sampling – quality checks are used during the production process & statistical techniques are
used to record & respond to results.
• Correction & improvement – correcting faulty products & correcting the process.
Advantages
Disadvantages
Not every product has to be checked
Not every product is checked – the method relies of statistical
techniques
Experts check quality
Negative for employees as the focus is on detecting faults
Regular production problems can be highlighted & corrected
No responsibility on employees for quality, so they are less likely to
monitor their production
Faulty products are removed
Wastage as faulty products are only found when finished
❖ the link between quality & training
-
All successful methods of quality assurance / quality control rely on employees who are checking quality
being properly trained & equipped.
Quality control requires employees to understand sampling methods & statistical tests.
Quality assurance & TQM requires employees to understand the organisation’s quality standards.
Total quality management requires understanding of kaizen & internal customers/suppliers.
Training must be updated as production methods, customer requirements & quality standards change.
4.5.5 Total Quality Management
❖ aims & effectiveness of TQM.
-
https://youtu.be/2PlRGWsJ-EA; https://youtu.be/_DfQ5UORamg
Total quality management: approach to quality that aims to involve all employees in quality-improvement.
Quality circles: voluntary groups of workers who meet to discuss work-related problems & issues.
Benefits
Improves quality through joint discussion of ideas & solutions.
Improves motivation through participation.
Makes full use of the knowledge & experience of the staff.
-
Conditions determining success
Circle members must be committed to improving quality.
Training given in holding meetings & problem-solving.
Full support from management.
Team should be empowered to implement the recommendations.
Internal customers: people within the organisation who depend upon quality of work done by others.
Elements of TQM are:
• Top management commitment & involvement – leadership through quality
• Customer involvement – focus groups
• Design products for quality – designing for robustness.
• Design production processes for quality
• Control production processes for quality
• Developing supplier partnerships
• Customer service, distribution & installation
• Building teams of empowered employees – quality circles
Benefits
Improved customer satisfaction
Repeated sales due to brand loyalty
Costs
Training of staff which may be expensive
Inspection costs may increase
It will be easy for the business to introduce new products in the
future
Stopping production to trace & correct quality problems will disrupt
output
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All a higher price to be charged
The firm will gain a competitive advantage over its rivals
High profits
Avoiding heavy penalties when customers complain
Cut on costs of remaking the product
Promotes teamwork
Resistance to implement TQM from staff
Market research to establish expected customer requirement needs
to be done.
❖ the potential of Kaizen in TQM
-
-
TQM incorporates Kaizen as a part of its plan. TQM demands that all employees:
• Are committed to continuous improvement.
• Share problem solving.
• Are educated & trained to take responsibility for quality.
These are vital components of the kaizen approach to continuous improvement. Methods used to enact
this include quality change of internal supplier / customer relationships & quality circles where group of
employees meet to discuss quality improvement ideas.
4.5.6 Benchmarking
❖ the importance of benchmarking in quality control
-
https://youtu.be/8mY2YrYAE-U
Benchmarking: involves management identifying the best firms in the industry & then comparing the
performance standards – including quality – of these businesses w/ those of their own business.
Successful benchmarking results in an improvement in quality. Being at least equal to the best will mean a
business can present its products as market leader & gain a reputation for reliability & quality.
Stages in the benchmarking process
• Identify the aspects of the business to be benchmarked – ask to customers & find out what they
consider to be most important.
• Measure performance in these areas e.g., Reliability records; delivery records & possibly the number
of customer complaints
• Identify the firm in an industry that are the best – get information from management consultants /
government benchmarking schemes.
• Use comparative data from the best firms to establish the main weaknesses in the business –
obtain data from published accounts, contacting suppliers / customers.
• Set standards for improvement – use / modify standards set by the best firm.
• Change process to achieve the standards set – introduce a new way of doing things.
• Re-measurement – The changes to the process need to be checked to see if the new, higher
standards are being reached.
Advantages
Disadvantages
Encourages the generation of new ideas
It can be expensive when the firm fails to recover all the cost
incurred in the comparison exercise
If workforce is involved in the comparison exercise, then employees
may be motivated by their participation in the program
The business is relying on copying ideas from other firms which then
discourages innovation
Increased market share when the identified problems are solved
It is a faster & cheaper way of solving problems
Benchmarking exercise may be misleading if the information
obtained is not relevant / up to date.
4.6 Project management
4.6.1 The need for projects & project management
❖ projects as a response to the need for change
-
Project: a specific & temporary activity w/ a start & end date, clear goals, defined responsibilities & a
budget.
Project management: using modern management techniques to carry out & complete a project from start
to finish to achieve pre-set targets of quality, time & cost.
Examples of Projects
• Building a new factory
• Organising a staff training day
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Vishakha Mirchandani
-
-
• Rationalising business operations
• Designing a new piece of computer software.
Project management skills required.
• Good communications skills to communicate to people what is being done & what must be done.
• Good people skills to pick the right team & to keep the team working well together.
• Good planning skills to establish what can be done by when & by whom.
• Good management skills to review progress & keep project moving forward.
Business environments are always changing, & projects are often a result of the need to react to change –
e.g., prices change so that a business decides it is worthwhile opening a factory in another country. This
becomes a project.
❖ reasons & impact of project failure, including examples.
-
Here are several reasons why projects may
fail:
• Changes in the business environment
• Poor project management / interference by
other managers
• Weaknesses in the project management
team
• Cost overruns because prices rise
unexpectedly.
• Loss of focus on the business benefits
• Warning signs on lateness / cost overruns
are ignored.
• Inadequate / misleading communication w/
customers
-
Project failure includes one / more of the
following:
• The project is not complete at all.
• The project is not completed in the time
allowed.
• The project costs more than the amount
budgeted.
• Quality is not what was planned for.
- Possible implications of failure include:
• Loss in reputation & possible future business
• Penalty payments for lateness / inadequate
quality
• Loss of profit if cost overrun.
4.6.2 Network diagrams
❖ main elements of a network diagram: activities, dummy activities, nodes
-
https://youtu.be/pRF1GWR1OXQ; https://youtu.be/o5bUSzbl8T4; https://youtu.be/poOyKIt7M1g;
https://youtu.be/NLVlozz_OGs
Critical path analysis: a planning technique that identifies all tasks in a project, puts them in the correct
sequence & allows for the identification of the critical path.
Network diagram: the diagram used in critical path analysis that shows the logical sequence of activities &
the logical dependencies between them – so the critical path can be identified.
Activity – one of the specified tasks involved in completing a project.
Node – identifies the start & finish of an activity. Each is given an identifying number.
Dummy activity – an activity that has a duration of zero & indicates when an activity cannot start until two
other activities w/ the same starting & ending nodes have finished.
Non-critical activity – an activity within a project that can be delayed w/o delaying the overall project.
❖ construction of a network from given data.
-
https://youtu.be/zgITFKJUCyM; https://youtu.be/pCnF3dUODCE
How to contrast a network diagram:
• Draw a start node.
• Draw activities as line, each one starting & ending at a node.
• Make sure that activities that require a completed previous one follow from the correct node.
• Check for any dummy activities & how these as a dotted line.
• Show a finishing node to draw all activities to the conclusion.
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4.6.3 Critical Path Analysis (CPA)
❖ finding the minimum project duration & the critical path & how it might be used in
project management.
-
-
Critical path: the sequence of activities that must be completed on time for the whole project to be
completed by the agreed date. In the example above, the critical path goes via the dummy activity.
Critical activities can be identified by nodes which have EST which is equal to LFT (EST=LFT). In the
example above, activities A, B, C, D & H are critical activities.
Minimum project duration – the shortest possible time in which a project can be completed. In the
example above, the minimum project duration is 30 days.
Earliest start time – the earliest possible time an activity can start relative to the beginning of the project.
Work from left to right & enter the ESTs. Add the EST of the previous node & add the activity duration.
Take the highest EST where there are two routes to a node.
Latest finish time – the latest possible time an activity can finish relative to the beginning of the project.
Work from right to left & enter the LFTs, starting w/ the EST in the finishing node as the LFT at that point.
Deduct the activity duration from the previous LFT. Use the lowest LFT at each node.
❖ calculation of total & free float & interpretation of the results of the analysis of a
network
-
Total float – the maximum time an activity can be delayed w/o delaying the overall project.
Total float = 𝐿𝐹𝑇 − 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛 − 𝐸𝑆𝑇
e.g., total float for activity E = 24 − 4 − 18 = 2, this means that activity E can be delayed for 2 days & the
projects will still finish in 30 days.
Free float – the maximum time an activity can be delayed w/o delaying the next activity in the sequence.
Free float = 𝐸𝑆𝑇(𝑛𝑒𝑥𝑡 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦) − 𝑑𝑢𝑟𝑎𝑡𝑖𝑜𝑛 − 𝐸𝑆𝑇(𝑡ℎ𝑖𝑠 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦)
E.g., free float for activity E = 24 − 4 − 18 = 2, meaning that activity E can be delayed for 2 days until day
20 because H must start on day 24.
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❖ CPA as a management tool
-
-
Calculate project duration, enabling deliveries for supplies & other resources to be planned.
Shows when activities are scheduled to happen, enabling resources to be available at exactly those times,
prioritising the critical activities.
Use EST & LFT to monitor progress & transfer resources from non-critical to critical activities if necessary,
to prevent lateness.
Use total float & free float to help decide which activities might need to be focused on. Those w/ high floats
can spare resources more critical activities.
Decide which tasks can be carried out simultaneously.
Indicate when there might be resource constraints, especially labour. It may be impossible to carry out
several activities at the same time, but will there be enough resources to do this? CPA can show how to
use a minimum of resources for the project.
Programmed into software packages to enable lean production, & good supplier & customer relations.
Use ‘what if’ analysis to judge the effect of different possible scenarios, i.e., the effect of taking more time
for one activity.
❖ Limitations of CPA
-
it relies on accurate data; these may not be available, especially as many projects are new.
It encourages rigid thinking & does not guarantee success.
It needs constant review, monitoring & management to be effective.
It encourages a focus on timing & speed rather than quality of flexibility.
Finance & accounting
5.3 Costs
5.3.1 Approaches to costing: full, contribution
❖ Important concepts
-
-
Cost centre: a section of a business, i.e., a department, to which costs can be allocated / charged.
Profit centre: a section of business to which costs & revenues can be allocated – profit can be calculated.
Overhead costs
• Production overheads – these include factory rent & rates, depreciation of equipment & power.
• Selling & distribution overheads – these include warehouse, packing & distribution costs & salaries of
sales staff.
• Administration overheads – these include of ice rent & rates, clerical, & executive salaries.
• Finance overheads – these include the interest on loans.
Unit cost =
𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑖𝑛𝑔 𝑡ℎ𝑖𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑡
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑
❖ differences between full & contribution costing
-
Full costing: a method of costing in which all fixed & variable costs are allocated to products, services, /
divisions of a business.
Contribution / marginal costing: costing method that allocates only direct costs to cost/profit centres, not
overhead costs. uses & limitations of the full costing method.
Contribution per unit = 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 − 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
Total contribution = 𝑡𝑜𝑡𝑎𝑙 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 − 𝑡𝑜𝑡𝑎𝑙 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡
Uses
Limitations
Full costing is relatively easy to calculate & understand
There is no attempt to allocate each overhead cost to cost/profit
centres based on actual expenditure incurred.
Full costing is relevant for single-product businesses
Arbitrary methods of overhead allocation can lead to inconsistencies
between departments & products.
All costs are allocated (compared w/ contribution costing) so no
costs are ‘ignored’.
The full unit cost will only be accurate if the actual level of output is
equal to that used in the calculation.
Full costing is a good basis for pricing decisions in single product
firms
It is essential to allocate on the same basis over time – otherwise
comparisons cannot be made
The cost figures arrived at can be misleading
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❖ the nature of the technique of contribution costing
-
As a rule of thumb, a product that makes a positive contribution to fixed costs should continue to be
produced so long as there is spare capacity in the firm, it does not take the place of a product w/ a higher
contribution & there is not another option that has a higher contribution. There are many firms that have
excess capacity & hence use contribution-cost pricing to attract extra business that will absorb the excess
capacity.
❖ the difference between contribution & profit
-
Contribution cost per unit = 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 − 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
Profit per unit = 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 − 𝑢𝑛𝑖𝑡 𝑐𝑜𝑠𝑡
-
Unit cost =
𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑖𝑛𝑔 𝑡ℎ𝑖𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑡
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑
/ 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 + 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
❖ limitations of contribution costing
Uses
Overheads not allocated – avoids inaccuracies
Limitations
Focus on contribution – opportunity cost for higher profits
Decisions are made based on contribution to overheads – full cost
may be inaccurate
Contribution costing does not consider that some products &
departments may incur much higher fixed costs than others
Excess capacity is more likely to be effectively used
Qualitative factors may be important too, i.e., the image a product
gives the business.
❖ situations in which contribution costing would be & would not be used.
-
-
Contribution costing can be used in the following situations:
• ‘One-off’ special orders – a firm may be willing to supply a batch of products at a lower price if it has
the spare capacity if regular customers do not find out & fixed costs have been covered by the other
products. What are the dangers in accepting an order below full cost, even if it positively contributes to
fixed costs?
▪ Existing customers may learn of the lower prices being offered & demand similar treatment.
▪ When high prices are a key feature in establishing the exclusivity of a brand, then to offer some
customers lower prices could destroy a hard-won image.
▪ Where there is no excess capacity, sales at contribution cost may be losing sales based on the full
cost price.
▪ In some circumstances, lower-priced goods / services may be resold into the higher-priced market.
• ‘Make / buy’ decisions – business can often choose to manufacture all its products / to buy some of
them from other manufacturers. This choice depends upon contribution costing to compare the price of
production & the cost of purchasing.
• Deciding whether to stop a production of a product – if a product produces positive contribution, it
aids to cover fixed costs.
• When entering a new market – decide on selling price for penetration costing & ensure it covers
production costs.
Fixed costing can be used in the following situations:
• When a business that produces a range of products / services needs to calculate the price it should
charge for specific product / service. the business needs to know the full cost of each product.
• Allocate / apportion overhead / fixed costs to each product / service, this can help w/ decision making &
measuring efficiency.
5.3.2 Solutions to costing problems.
❖ solution of numerical problems involving costing methods.
❖ using contribution costing to help w/ ‘accept/reject’ order decisions.
5.6 Budgets
5.6.1 The purposes of budgets
❖ measuring performance
https://youtu.be/ntSZl24-12g; https://youtu.be/8_1bVLKI6c0; https://youtu.be/3VnOhCr6FHE
Page 46 of 66
Vishakha Mirchandani
-
Budget: a detailed financial plan.
Budget holder: individual responsible for the initial setting & achievement of a budget.
Delegated budgets: delegate authority over the setting & achievement of budgets to junior managers.
Budgets
Sales
Production
Marketing
Financial
Project
Capital expenditure
Master
Explanation
Plans the volume & value of sales over specified period.
Plans production levels & input costs over a specified period.
Plans the finance required for marketing strategies over a specified period.
Plans the need for external sources of finance over a specified period.
Plans the tasks, timings, & costs of a project over a specified period.
Plans the level of capital expenditure over a specified period.
The total of all budgets aggregated into one main budget over a specified period.
❖ benefits & drawbacks from the use of budgets.
Budgets can be useful for ...
allocating resources
monitoring & evaluating business performance
identifying problems before they happen
improving decision-making
motivating employees
managing money affectively
planning
Budgets can present problems if ...
based on unrealistic assumptions
managers unskilled in budgeting
they are over optimistic
there is no previous experience of a project
there is a lack of data available
unrealistic target set
manage are stick rigidly to budgets & cannot adapt to change
❖ how budgets might be produced
1. The most important organisational objectives for the coming year are
established.
2. The key / limiting factor that is most likely to influence the growth /
success of the organisation must be identified, it is most likely to be
sales. Therefore, the sales budget will be the first to be prepared.
3. The sales budget is prepared after discussion w/ all sales managers
of the business.
4. The subsidiary budgets are prepared, which will now be based on
the plans contained in the sales budget.
5. These budgets are coordinated to ensure consistency.
6. A master budget is prepared that contains the main details of all
other budgets & concludes w/ a budgeted income statement &
Statement of financial position.
7. The master budget is then presented to the board – hopefully for the
directors’ approval.
❖ use of flexible budgets & zero budgeting.
-
Incremental budgeting: uses last year’s budget as a basis & an
adjustment is made for the coming year.
Zero budgeting: setting budgets to zero each year & budget holder
must argue their case to receive any finance.
Flexible budgeting: cost budgets for each expense can vary if sales
/ production varies from budgeted levels.
❖ purposes of budgets for allocating resources, controlling, & monitoring of a business.
-
Resource allocation – setting of budgets is likely to encourage a detailed plan of what resources will be
needed & how resources are to be allocated to achieve the best outcome for the business.
Controlling & monitoring
• Inefficient use of resources can be identified & corrected.
• Progress towards achieving corporate / department objectives.
• Over-spending budget holders can be identified & the cause of any over-spend can be investigated (not
all over-spending is unnecessary; circumstances may have changed since the budget was set).
• The performance & progress of a departments / division can be measured against the budget.
• Departments requiring additional funding can be identified.
Page 47 of 66
Vishakha Mirchandani
❖ role of budgets in appraising business
-
-
https://youtu.be/NdnJJgOpwkQ
Variance analysis: calculating differences between budgets & actual performance, & analysing reasons
for such differences.
During the period covered by the budget & at the end of it the actual performance of the organisation
needs to be compared w/ the original targets, & reasons for differences must be investigated.
Analysing these variances is an essential part of budgeting for several reasons:
• It measures differences from the planned performance of each department both month by month & at
the end of the year.
• It assists in analysing the causes of deviations from budget. E.g., if actual profit is below budget, was
this due to lower sales revenue / higher costs?
• An understanding of the reasons for the deviations from the original planned levels can be used to
change future budgets to make them more accurate.
The success of a business can be measured by how well it meets the targets contained in its budgets.
These budgets may be closely related to business objectives. A business that exceeds the expectations in
the budgets would be judged to be successful, while one that continually fails to meet the expectations
outlined in its budgets would need to investigate the reasons for the underperformance. It might be that the
budgets were set at an unrealistic level.
5.6.2 Variances: adverse, favourable
❖ the meaning of variances
-
Adverse variance: exists when the difference between the budgeted & actual figure leads to a lower-thanexpected profit.
Favourable variance: exists when the difference between the budgeted & actual figure leads to a higher
than-expected profit.
❖ calculation & interpretation of variances [but not price/volume variances]
-
-
Variance = 𝑎𝑐𝑡𝑢𝑎𝑙 𝑝𝑒𝑟𝑓𝑜𝑟𝑚𝑎𝑛𝑐𝑒 − 𝑏𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑝𝑒𝑟𝑓𝑜𝑟𝑚𝑎𝑛𝑐𝑒
Expense variances: negative (–) = favourable
positive (+) = adverse
Actual expense higher than budgeted = lower profits than budgeted
Sales variances: negative (–) = adverse
positive (+) = favourable
Actual sales higher than budgeted = higher profits than budgeted
Causes of adverse variances
Lower sales revenue = fewer units sold / lower selling price
(competition)
Higher raw material costs = higher output / cost per unit increased
Higher Labour costs = higher wages (shortage of workers) / more
time taken
Higher overheads = increased rents (more than budgeted)
Causes of favourable variances
Higher sales revenue = higher economy growth / problem w/
competitors’ products
Lower raw material costs = lower output / lower cost per unit
Lower Labour costs = lower wages / less time taken
Lower overheads = reduced advertising rates
5.7 Contents of published accounts
5.7.1 The income statement
❖ amendment of an income statement from given data.
https://youtu.be/IDbQW-xpl_Q; https://youtu.be/or3bOLtAV4s
❖ the impact on the income statement of a given change.
5.7.2 The statement of financial position
❖ amendment of a statement of financial position from given data.
https://youtu.be/CNiUSRw2RGE; https://youtu.be/Syu2sKv05rQ
Page 48 of 66
Vishakha Mirchandani
❖ the relationships between items in the income statement & the statement of
financial position
https://youtu.be/6_sS389oMYk;
Cause of change
Impact on statement of financial position
Impact on income statement
Sale of inventories for cash (sold for
same price is valued in accounts)
Reduced inventories under current assets
Increased cash / account receivable under current
assets
Reduced closing inventory under cost of goods sold.
Increased sales revenue
Increased gross & net profits
Sale of inventories for cash - sold at
higher price & valued in accounts
Value of inventories will fall.
Cash balance of trade receivables will increase
under current assets
Reduced closing inventory under cost of goods sold.
Increased sales revenue
Increased gross & net profits
Depreciation of equipment
Decreased value of non-current assets.
Decreased shareholders’ equity
Increased expenses
Reduced profits
Intangible assets are valued
Increased non-current assets.
Increased shareholders’ equity
Account payable accreditors ask for
speedier payment
Decreased account payables under current assets.
Decreased cash
Additional share sold & share
capital is raised to buy property
Increased shareholders’ equity
Increased noncurrent assets
<
❖ the impact on the statement of financial position of a given change in valuing noncurrent assets / inventories.
5.7.3 Inventory valuation
❖ the difficulties of valuing inventory
-
The price paid for inventory (historical cost) would give a factually correct value but that one was in the
past. The current value may be higher / lower.
Damaged stock is unlikely to sell unless repairs undertaken. This adds to the cost of inventory. Therefore,
the cost of repair must be added to the price paid for the items.
Inventory is valued on one day. The value may be different on every other day due to purchases / sales of
inventory having taken place.
Some items might be never sold, & their value is of little / no benefit to the business.
Incomplete goods / work in progress may have a different value at every stage of production.
The date inventory is checked may not represent other times of the year due to seasonal fluctuations in
sales / unusual circumstances.
❖ the net realisable value method [Note: LIFO & FIFO will not be examined]
-
-
Net realisable value: the amount for which an asset (usually an inventory) can be sold minus the cost of
selling it – it is only used on Statements of financial position when NRV is estimated to be below historical
cost.
NRV = 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 − 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑟𝑒𝑝𝑎𝑖𝑟
Only the lower cost between the historical value & the NRV will be used in the statement of financial
position.
5.7.4 Depreciation
❖ the role of depreciation in the accounts
-
-
https://youtu.be/IKihYinXmIg;
Depreciation: the decline in the estimated value of a non-current asset over time. Assets decline in value
for two main reasons:
• normal wear & tear through usage
• technological change, making asset, / the product it is used to make, obsolete.
Net book value: the current Statement of financial position value of a non-current asset = original cost –
accumulated depreciation.
Page 49 of 66
Vishakha Mirchandani
❖ the impact of depreciation (straight line method only) on the statement of financial
position & the income statement
-
Straight-line depreciation: a constant amount of depreciation is subtracted from the value of the asset
each year.
-
Annual depreciation expense =
-
The value of non-current assets in the statement of financial position will decrease each year according to
the depreciation charge of that period. At the same time, the depreciation value will be included as an
expense in the income statement & will be deducted from the profit. This process will help spread out the
cost of the non-current assets throughout its useful life instead of expensing it in the year of purchase
which will overstate expenses & understate profits.
It is important to remember that depreciation does not affect cash flow of the business. Cash outflow only
occurs when purchasing the non-current asset.
-
𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡−𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒
𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡 (𝑦𝑒𝑎𝑟𝑠)
5.8 Analysis of published accounts
https://youtu.be/GoKIZqSFMIE; https://youtu.be/bmBsYrTzCpw
5.8.1 Profitability ratio
❖ return on capital employed.
-
https://youtu.be/Jbywtc7VqiE; https://youtu.be/wrk_XZJYXy4; https://youtu.be/dY4wX-7-dtI;
https://youtu.be/ROqkmlVuXKU
Profitability ratios – used to measure the performance of a company – &, therefore, by implication the
performance of the management team too.
Return on capital employed (ROCE) – the rate at which assets / capital employed generate profits.
-
Return on capital employed (%) =
-
Capital employed: the total value of all long-term finance invested in the business.
Capital employed = 𝑛𝑜𝑛 − 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 + 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
= 𝑛𝑜𝑛 − 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 + 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟 ′ 𝑠 𝑒𝑞𝑢𝑖𝑡𝑦
-
𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡
𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
× 100
5.8.2 Financial efficiency ratios
❖ inventory turnover, days’ sales in receivables
-
https://youtu.be/OkNNZ1j3ywI; https://youtu.be/rOd4JnPE2wc; https://youtu.be/oIN86FQGmg4
Financial efficiency ratios – indicate of how efficiently a business is using its resources & collecting its
debts.
Inventory turnover ratio – records the number of times the inventory of a business is bought in & resold
in a period. The higher the number, the more efficient the managers are in selling inventory rapidly.
𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
-
Inventory turnover ratio (times) =
-
Day’s sales in receivables =
-
Day’s sales in receivables ratio – measures how long, on average, it takes the business to recover
payment from customers who have bought goods on credit – the trade receivables. The shorter this time is,
the better the management is at controlling its working capital.
𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠
𝑡𝑟𝑎𝑑𝑒 𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑣𝑒𝑖𝑣𝑎𝑏𝑙𝑒
𝑟𝑒𝑣𝑒𝑛𝑢𝑒
× 365
5.8.3 Gearing ratio
❖ gearing ratio, interest cover.
-
https://youtu.be/3offFagEWKg; https://youtu.be/zTy-pAJcdMA; https://youtu.be/nwrutKvKE98
Gearing ratios – examine the degree to which the business is relying on long-term loans to finance its
operations. It reflects a business’s financial strategy.
The greater the reliance of a business on loan capital, the more ‘highly geared’ it is said to be.
-
Gearing ratio =
-
Interest cover ratio – how many times a firm could pay its annual interest charges out of current net /
operating (before tax & interest) profit.
-
𝑛𝑜𝑛−𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠’ 𝑒𝑞𝑢𝑖𝑡𝑦 + 𝑛𝑜𝑛−𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
× 100 =
𝑙𝑜𝑛𝑔−𝑡𝑒𝑟𝑚 𝑙𝑜𝑎𝑛𝑠
𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
× 100
Page 50 of 66
Vishakha Mirchandani
-
The higher this figure is, then the less risky the current borrowing levels are for the business. If the result is
around 1, however, it means that all the operating profits are being used to pay back interest costs – bad
news for shareholders & for the firm’s capital investment plans.
-
Interest cover =
𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡 (𝑏𝑒𝑓𝑜𝑟𝑒 𝑡𝑎𝑥 𝑎𝑛𝑑 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡)
𝑎𝑛𝑛𝑢𝑎𝑙 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑖𝑑
5.8.4 Investor ratios
❖ dividend yield, dividend cover, price/earnings ratio
-
https://youtu.be/8_EF-duWgeg;
Shareholder ratios – used by existing / potential shareholders to assess the rate of return on shares & the
prospects for their investment.
Share price: the quoted price of one share on the stock exchange.
Dividend: the share of the company profits paid to shareholders.
Dividend yield ratio – measures the rate of return a shareholder gets at the current share price.
-
Dividend yield ratio (%) =
-
Dividend per share =
-
Dividend cover ratio – the number of times the ordinary share dividend could be paid out of current profits
after tax & interest – the ‘profit for the year’. The higher this ratio, the more able the company is to pay the
proposed dividends, leaving a considerable margin for reinvesting profits back into the business.
-
Dividend cover ratio =
-
-
Price per earnings ratio – reflects the confidence that investors have in the prospects of the business. In
general, a high P/E ratio suggests that investors are expecting higher earnings growth in the future
compared w/ companies’ w/ a low P/E ratio
Earnings per share: This is the amount of profit (after tax & interest) earned per share.
-
Price/earnings ratio =
-
Earnings per share =
-
𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
× 100
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑠ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒
𝑡𝑜𝑡𝑎𝑙 𝑎𝑛𝑛𝑢𝑎𝑙 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
𝑡𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑖𝑠𝑠𝑢𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠
𝑝𝑟𝑜𝑓𝑖𝑡 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟
𝑎𝑛𝑛𝑢𝑎𝑙 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑠ℎ𝑎𝑟𝑒 𝑝𝑟𝑖𝑐𝑒
𝑒𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒
𝑝𝑟𝑜𝑓𝑖𝑡 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟
𝑎𝑛𝑛𝑢𝑎𝑙 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠
5.8.5 Practical use of ratio analysis
❖ how each of these ratios is used, reasons for the results obtained & strategies that
businesses might adopt to improve ratio results
Ratio
Notes
-
The higher the value of this ratio, the greater the return on the capital invested in the business.
The result can also be compared w/ the return from interest accounts e.g., Bank (5%).
Can be raised by increasing the profitable, efficient use of the assets owned by the business, which were
purchased by the capital employed
-
The ‘normal’ result depends on the industry.
Little relevance for service-sector firms, as they are not selling products.
Efficient management – i.e., Jit system – will give a higher ratio
-
There is no right / wrong result – it will vary between businesses & industries.
High days’ sales in trade receivables ratio may be deliberate to attract sales.
Reduced by giving shorter credit terms – 30 days instead of 60 days – / by improving credit control by
refusing credit terms, interest charges, etc.
Dividend yield ratio
-
Share price rises & unchanged dividend = the dividend yield will fall.
Increased dividend & same share price = dividend yield will increase
Use reserves for dividends when profits are low = higher ratio
Lower annual dividends for higher retained earnings for future investments
Dividend cover ratio
-
Higher dividends + same profits = lower ratio
Low results = low retained earnings (future expansion plans)
-
Shows how much investors are currently willing to pay for each $1 of earnings.
Shareholders in this company will wait 20 years at present earnings levels to receive payback on their
investment in shares
-
A result of over 50%, using the ratio above, would indicate a highly geared business.
Higher risk due to higher borrowing, higher interest charges, lower dividends, cash outflow
Low gearing = safe business = limited growth = lower returns for investors
Reduced by using non-loan sources of finance, i.e., Issue of shares / retained profits
Return on capital
employed
Inventory turnover
ratio
Days’ sales in trade
receivables ratio
Price/earnings ratio
(P/E ratio)
Gearing ratio
Page 51 of 66
Vishakha Mirchandani
❖ comparison of ratios results between businesses.
-
Comparisons can be made w/
Other businesses in same industry
Other investment alternatives i.e., bank interest rates (5%)
Industry averages
Previous years (trends can be identifies)
❖ limitations of these accounting ratios
-
https://youtu.be/UuahUYKvV1k;
The accuracy & usefulness of all the ratios can be influenced by different accounting techniques to
calculate the profit i.e., different methods to calculate depreciation.
Comparisons w/ companies in a different industry are unlikely to be of value.
Comparing ratios of businesses of different sizes can be misleading.
Financial statements may have been adjusted to present a particular financial condition to stakeholders.
Economic conditions may have had an impact on the ratios for the particular year, leading to unrealistic
figures, affecting trends.
Ratios are quantitative & ignore qualitative aspects of business i.e., ethics & environmental friendliness.
Do not provide solution to business problems.
Some ratios have multiple formulas, different formulas will lead to different results.
5.9 Investment appraisal
5.9.1 The concept of investment appraisal
❖ the need for investment appraisal
-
Investment appraisal: evaluating the profitability / desirability of an investment project.
Investment – spending money now w/ the aim of getting a return in the future that is larger than the
original spending. In the business sense it usually means spending money on a major project.
The need for investment appraisal:
• To compare the expected outcomes of competing options
• To estimate the costs, i.e., the costs of new premises, equipment, / training.
• To estimate the revenue in terms of timescale & size of any return
• To assess the possible risk involved / to compare the risks of two / more investment opportunities.
❖ the significance of risk in investment decisions
-
Potential risk can be minimised / avoided if businesses fully explore the implications of their decisions
before embarking on any one course of action.
The business is only able to estimate the costs & revenues associated w/ the project. Investment appraisal
is an attempt to formalise those estimations & compare alternatives.
A sudden economic downturn can change everything that has been predicted – anticipated sales may not
occur, & costs may prove to be higher than expected if a period of higher inflation occurs.
Investment decisions will be based on past information which cannot guarantee that the same trend will
continue in the future.
5.9.2 Basic methods: payback, accounting rate of return (ARR)
❖ the meaning, calculation, & interpretation of payback & ARR
-
https://youtu.be/teg0avCfFfI; https://youtu.be/rZgaogeoynU; https://youtu.be/9ASz21HLqzY;
https://youtu.be/qYsZcElRiX4; https://youtu.be/-ICsKIB6AzI; https://youtu.be/kEsZKO87TlU
Payback period: time it takes for the net cash inflows to pay back the original cost of the investment.
-
Payback period = 𝑥 𝑦𝑒𝑎𝑟𝑠 +
𝑎𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝑛𝑒𝑡 𝑐𝑎𝑠ℎ 𝑖𝑛𝑓𝑙𝑜𝑤 𝑛𝑒𝑒𝑑𝑒𝑑
𝑎𝑛𝑛𝑢𝑎𝑙 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑖𝑛 𝑛𝑡ℎ 𝑦𝑒𝑎𝑟
Benefits
simple
easy to compare many projects
can easily use a range of forecast figures for ‘what if’ analysis
gives an idea of how long it might take to repay if financed by a loan
× 12 𝑚𝑜𝑛𝑡ℎ𝑠
Limitations
does not take account of overall profitability
does not consider cash flows after the payback period
should be used w/ other methods
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-
Accounting rate of return measures the annual profitability of an investment as a percentage of the initial
investment.
-
ARR(%) =
-
average capital cost =
𝑎𝑛𝑛𝑢𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 (𝑛𝑒𝑡 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤)
× 100 =
𝑎𝑛𝑛𝑢𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 (𝑛𝑒𝑡 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤)
𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑐𝑜𝑠𝑡
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑐𝑜𝑠𝑡
𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑐𝑜𝑠𝑡−𝑟𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑣𝑎𝑙𝑢𝑒
× 100
2
Benefits
easy to compare ARR & interest rates
includes cash flows over the life of the project
easy to compare w/ expected rate of return
easy to compare projects
Limitations
more uncertainty further into the future
assumes cash flows have the same value in the future as they do
now (the time value of money)
does not consider timing of net cash flows so be used w/ payback
5.9.3 Discounted cash flow methods: discounted payback, net present
value (NPV), internal rate of return (IRR)
❖ the meaning, calculation, & interpretation of discounted payback & NPV
-
-
-
https://youtu.be/aj20v1P5vRQ; https://youtu.be/r3apah6l5zU; https://youtu.be/vEDEE_h2bMc;
https://youtu.be/2GUVGx2KL-w;
Net present value (NPV): today’s value of the estimated cash flows resulting from an investment.
Net present value = 𝑡𝑜𝑡𝑎𝑙 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤𝑠 − 𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
Discounted payback – recognises the money received in 3- / 4-years’ time will not have the same value
as if the money were in our possession today.
The present value of a future sum of money depends on two factors:
• The higher the interest rate, the less value future cash has in today’s money.
• The longer into the future cash is received, the less value it has today.
The three stages in calculating NPV are:
• Multiply discount factors by the net cash flows. Cash flows in year 0 are never discounted, as they are
today’s values already.
• Add the discounted cash flows.
• Subtract the capital cost to give the NPV.
If discount factor is 10%, decimal form for each year can be found using 1 ÷ (1.10)𝑛 , where 𝑛 = 𝑦𝑒𝑎𝑟
Benefits
Considers timing & size of cash flows
Rate of discount can be varied for different situations
Considers time value of money & opportunity cost
Limitations
Complex to calculate & explain
Result depends on rate of discount - subjective
Comparisons can only be made if initial cost is same
❖ the meaning & interpretation [but not the calculation] of IRR
-
https://youtu.be/b3sZIjkRpak
Internal rate of return (IRR): the discount rate that gives a net present value of zero for a particular
project. Example:
Benefits
Different projects costing different amounts can be compared
Limitations
Calculation is tedious w/o a computer
Can be compared w/ the weight of interest / criterion rate of a
business
Exact results can be misleading & may represent false accuracy
Avoids the need to choose an actual rate of discount
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5.9.4 Qualitative factors in investment appraisal
❖ qualitative factors that might influence an investment decision in each situation.
-
https://youtu.be/tM5cDJOLqI0
Attitude to risk – are the owners of a business ‘risk averse’ / risk takers?
Impact on stakeholders
Changes in the internal & external environment in which the business operates.
Ease & availability of finance
The fit w/ objectives & strategies
Pollution – e.g., if a project will pollute the environment, it would hopefully not be pursued even though it
may be highly profitable.
Employment levels – social considerations are sometimes judged to be important e.g., the negative
impact of employment levels if workers are replaced w/ machinery.
Is the quality of the product likely to be the same?
Will staff training be required?
❖ comparison of the investment appraisal methods, including their limitations.
6 Strategic management
6.1 What is strategic management?
6.1.1 Understanding what strategic management is.
❖ the meaning of corporate strategy, tactics, & strategic
management
-
-
https://youtu.be/icqu2Kl1Imc; https://youtu.be/VcWI3WVXmFk
Corporate strategy: a long-term plan of action for the whole
organisation, designed to achieve a particular goal.
Tactic: short-term policy / decision aimed at resolving a particular
problem / meeting a specific part of the overall strategy.
Strategic management: the role of management when setting long-term
goals & implementing cross-functional decisions that should enable a
business to reach these goals.
The three levels of strategic management
Functional strategy
•
•
specific strategy for functional areas i.e., marketing
decisions on the specific methods of achieving a particular objective
Business strategy
•
•
general strategy for division / area of the business
decisions made to complement the corporate strategy
Corporate strategy
•
•
overall purpose & general direction
is the base for all further strategies & decisions
Strategic decisions
Long-term
Difficult to reverse once made – committed resources
Taken by directors &// senior managers
Cross-functional – will involve all major departments of the business
Tactical decisions
Short- to medium-term
Reversible, but there may still be costs involved
Less work taken by managers & subordinates delegated authority
Impact of tactical decisions is often only on one department
❖ the need for strategic management
-
defines & shares business aims & ethics.
identifies strengths, weaknesses, opportunities, & threats.
enables measurement of progress.
enables informed decisions & planned actions.
relates actions to resources.
coordinate activities of departments & functional areas.
detect & respond flexibly to changes.
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-
evaluate & review progress towards objectives.
❖ Chandler’s assertion that strategy should determine organisational structure.
-
-
-
According to Chandler, strategic management – the
determination of the basic long-term goals & objectives of an
enterprise, & the adoption of courses of action & the
allocation of resources necessary for carrying out the goals.
Organisation structure – the design of organisation
through which the enterprise is administered.
Key findings:
• Strategic management should be decided at the top /
centre of an organisation.
• Individual business units then decide tactics to carry out
the strategy.
• Structure follows strategy.
Structure:
• Corporate strategy was set by top management.
• Product / geographic business units adopted their own
tactics.
• Central management coordinated.
External environment
& its changes
opportunities
in the market
innovation in
technology
threat from
competition
Corporate strategy developed
Organisation structures change to
reflect strategy
❖ how business strategy determines competitive advantage in an increasingly
competitive world
-
-
Competitive advantage: a superiority gained by a business when it can provide the same value product/
service as competitors but at a lower price / can charge higher prices by providing greater value through
differentiation.
Strategic planning can provide planned methods to appropriate objectives linked to a full understanding of
market conditions, internal resources, & possible actions. Moreover, the business will be better prepared
for unforeseen circumstances than competitors, giving them a competitive edge. This is important because
the marketplace is dynamic, especially due to globalisation.
6.2 Strategic analysis
-
Strategic analysis: the process of conducting research into the business environment within which an
organisation operates, and into the organisation itself, to help form future strategies.
6.2.1 SWOT analysis
❖ undertake & interpret SWOT analysis in each situation.
-
https://youtu.be/4Yav51Jz9s0; https://youtu.be/7JmDXDZYx0s
SWOT analysis: a form of strategic analysis that identifies & analyses the main internal strengths &
weaknesses & external opportunities & threats that will influence the future direction & success of a
business.
Strengths
•
Internal factors.
•
Can be controlled to gain competitive advantage.
•
Acts as a building block for expansion/growth.
Weaknesses
•
Internal factors.
•
Can be identified & influenced.
•
Should be removed/fixed/minimised to reduce weakness /
a loss of competitiveness.
Opportunities
•
Outside the business’s control.
•
Can be taken advantage of.
•
Will help the business/product succeed.
Threats
•
Unable to be controlled.
•
Actions can be taken to minimise.
•
May hinder the progress of a business/product if ignored.
Advantages
It is relatively quick, cheap, & easy to understand.
Disadvantages
It may become outdated quickly.
It can generate specific objectives & actions as part of strategic
planning.
Simple conclusions may be misleading - the situation may be more
complex.
It is subjective & depends on the person undertaking it.
<
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Vishakha Mirchandani
❖ development of the outcome of a SWOT analysis into strategic objectives
Problem / decision
identified
Relevant data are
factors identified
• The main reason
for a SWOT
analysis to be
utilised
Potential solutions
listed
• All relevant internal
& external factors
listed & ranked
• Allows for a variety
of choices that
may solve the
problem / dilemma
Most appropriate
solution/choice made
• This will be
developed into an
objective that can
be actioned.
<
6.2.2 PEST / External Environment analysis
❖ undertake & interpret PEST analysis in each situation.
-
https://youtu.be/-8y1aX0yNbw; https://youtu.be/sP2sDw5waEU
PEST analysis: the strategic analysis of a firm’s macro-environment, including political, economic, social,
& technological factors.
Political & legal (government actions)
•
health & safety laws
•
competition policy
•
change of government
Economic
•
taxes
•
changes in household income
•
tariff
Social
•
ageing population
•
changing attitudes to drugs / car use
•
family size
Technological
•
cell phone / tablet developments
•
3D printers
•
more efficient machinery
,
Advantages
relies heavily on secondary data
relatively quick & easy to use
easy to present & understand
can explain & give details to a SWOT analysis
Disadvantages
can become outdated easily
does not respond easily to market changes
simplicity can be misleading
relies on assumptions about future changes
may be subjective due to the views of the author
<
6.2.3 Business vision/mission statement & objectives
❖ evaluation of the role of business vision/mission statements & objectives in strategic
analysis
-
-
https://youtu.be/GMjHDTPBiV0
Mission statement: a statement of the business’s core purpose & focus, phrased in a way to motivate
employees & to stimulate interest by outside groups. An effective mission statement should answer
three key questions:
• What do we do?
• For whom do we do it?
• What is the benefit?
Vision statement: a statement of what the organisation would like to accomplish in the long term.
Advantages
define the real purpose of the business
enable specific objectives to be set to achieve the vision/mission
provide motivation & clarity for employees
enable a strategic planning framework to follow
Disadvantages
can be very general – difficult to develop objectives
takes up time & resources for little benefit if not used in planning
can limit strategic planning - e.g., the shoe manufacturer has
been limited to footwear
Role of vision/mission statements & objectives in strategic analysis
Defines the overall purpose of the organisation
•
identify the reason for the business products / services
Sets the framework for strategic planning
•
allows a benchmark & aim for all organisational outcomes
Shares the vision w/ internal & external stakeholders
•
•
employees can know the guiding principles.
customers know what to expect from a particular business
,
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Vishakha Mirchandani
6.2.4 Boston Matrix
❖ undertake & interpret Boston Matrix analysis on the product portfolio of a business.
-
https://youtu.be/BmambeXCfyg; https://youtu.be/JShTYqdA_d4; https://youtu.be/rW5SOENyq5g
Boston Matrix: a method of analysing the product portfolio of a business in terms of market share &
market growth. This analytical tool has relevance when:
• analysing the performance & current position of existing product portfolios
• planning action to be taken w/ existing products.
• planning the introduction of new products.
High market share
Low market share
High market
growth
Rising star
•
Potential high level of competition.
•
Growth phase.
•
Potential falling unit costs.
•
Potential large revenue & profit.
Problem child
•
Possibly new products.
•
Insufficient marketing / exposure.
•
Negative cash flow; future potential excellent.
•
Launch/introduction phase
Low market
growth
Cash cow
•
Steady in positive revenue stream.
•
Likely to be a mature product; future decline.
•
Past marketing & R&D spending.
•
Customer loyalty & advertising to maintain.
•
Used to fund/compensate other products
Dog
•
•
•
•
•
Sales revenue likely to be low.
products in decline phase (extension strategy)
Outdated products / high competition.
May be profitable if production efficient.
May be discontinued in future.
Advantages
It is simple & easy to use & pinpoints the position of products
Disadvantages
Market situations may change quickly
It indicates possible appropriate actions to maintain cash flows &
decide on portfolio composition
Using it might lead to simplistic thinking – the model indicates
possibilities. It does not lay down set answers to situations.
6.2.5 Porter’s Five Forces
❖ use Porter’s Five Forces analysis as a framework for business strategy.
-
https://youtu.be/YAKEjmiqA7c; https://youtu.be/8l-P6X-8ag8; https://youtu.be/cm9SsMa56r4
Porter’s Five Forces analysis – analysis framework to analyse the level of competition from five external
influences to influence business marketing strategy.
The four forces / factors outlined influence how competitive a market is likely to be:
• Threat of new competitors – new competitors arriving in a market will increase the competition &
reduce the possible profits for existing businesses by increasing marketing costs &// by price reductions.
• Threat of substitute products – substitute products will reduce prices & increase the price elasticity of
demand for all existing products.
• Bargaining power of customers – many customers will mean a more attractive market than if there
are a few customers who have a high potential buying power.
• Bargaining power of suppliers – if suppliers of materials, components, communication, / distribution
systems have power, their prices will be high & so will business costs. This makes competition much
less likely.
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Forces
Action to take if high
Threat of new competition
Increase brand loyalty.
Develop new products.
Develop dedicated distribution
Threat of substitute products
Develop new products.
Re-market existing products
Bargaining power of customers
Produce products w/ no substitutes.
Forward vertical integration
Bargaining power of suppliers
Backward vertical integration
Cooperation w/ others to buy bulk
Reasons for
Assess existing position / potential for entry into a new market
Assess the chances of survival / growth
Highlights external threats and opportunities
Problems
Market changes quickly leading to redundant analysis
Difficult to reduce all influences on five forces
Competition & customers are not simple
Best for simple markets
6.2.6 Core Competencies
❖ Prahalad & Hamel’s Core Competencies as a framework for business strategy.
-
-
-
https://youtu.be/M9Rot4AWOWY
Core competence: an important business capability that gives a firm competitive advantage.
Core product: product based on a business’s core competences, but not necessarily for final consumer /
end user.
To be of commercial & profitable benefit to a business, a core competence should:
• Provide recognisable benefits to consumers.
• Not be easy for other firms to copy, e.g., a patented design.
• Be applicable to a range of different products & markets.
The use of core competencies
• Focus efforts on customer requirements.
• Utilise business strengths.
• Develop complementary resources.
• Identify reasons for purchasing decisions.
• Outsource non-core activities.
Three factors used to decide on core competencies.
Market access
Focused brand identity
Marketing / customer relationship skills
Uniqueness
Difficulty in copying
Level of product differentiation
Customer perception
Customer awareness
Customer trust
<
-
Downside/criticism of core competencies:
• Over-enthusiastic outsourcing has damaged business competitiveness.
• Difficulty to identify core competencies that are genuinely unique.
• Possible for a business to become overconfident about its core competencies.
6.3 Strategic choice
6.3.1 The Ansoff Matrix
❖ the structure & how it analyses the link between business strategy & risk.
-
https://youtu.be/OhqMt_3A2WY; https://youtu.be/B3AGqrdDR4Q; https://youtu.be/CMFXsJxi05U
Ansoff’s matrix: a model used to show the degree of risk associated w/ the four growth strategies of
market penetration, market development, product development & diversification.
Market Penetration:
achieving higher market
shares in existing markets
w/ existing products.
New Product
Product Development: the
development & sale of new
products/new developments
of existing products in
existing markets
Less Risk
Existing
Market
Existing Product
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Vishakha Mirchandani
New Market
Diversification: the process
of selling different, unrelated
goods / services in new
markets
Less Risk
More Risk
Market Development: the
strategy of selling existing
products in new markets
More Risk
Advantages
it is simple & easy to draw up
clear choices & associated levels of risk are shown
it allows strategic choice w/ strategic planning framework
Disadvantages
it is simplistic & ignores many relevant factors
indications of risk are general guidance only
❖ use of it to analyse & evaluate different business strategies in each situation.
Methods
•
•
•
•
increasing frequency of purchase
finding different new customers
brand loyalty & repeat purchases
taking sales from competitors
Factors for success
Market Penetration
•
•
•
an unsaturated market
low competition
growing size of market
Advantages
•
•
Disadvantages
already know &
understand the market.
may increase
efficiencies
•
customer knowledge but
untested product
expands the product
range utilising existing
customers
•
product knowledge but
unknown customer base
expands the customer
base meaning less
reliance
•
potential new markets &
revenue streams
expanded product &
customer portfolio
spread risk
•
•
lead to increased
competition.
reliance on limited
market
Product Development
•
•
Altering existing products to appear
new.
producing new products
•
•
•
thorough market research
strong brand identity & customer
loyalty
•
•
extensive R&D costs for
new products
market research also
required
Market Development
•
•
•
a new use of the product
a new area for sales
targeting a different type of
customer / consumer
•
•
•
thorough market research
core competencies are linked to the
product
•
a real driving force for diversification
exists, i.e., a failing existing market,
/ management growth objectives.
Total market research & advice from
product/market experts
flexible organisation culture & high
resource availability
•
•
large market research
costs
increased spending on
advertising an unknown
brand
Diversification
•
•
The use of R&D linked to market
research.
Integration w/ another business
•
•
•
•
•
No experience of
customers / markets
huge investment into
product development &
market research
6.3.2 Force Field Analysis
❖ Force Field Analysis as a means of making strategic choices in each situation.
https://youtu.be/ltzNGzfzuzM; https://youtu.be/oLU8COXdIVI; https://youtu.be/X9ujAtYAfqU
Force-field analysis: technique for identifying & analysing the positive factors that support a decision
(‘driving forces’) & negative factors that constrain it (‘restraining forces’).
- Conducting a force-field analysis:
• Analyse the current situation & the desired situation.
• List all the factors driving change towards the desired situation.
• List all the constraining factors against change towards the desired situation.
• Allocate a numerical score to each force, indicating the scale / significance of each force: 1 = extremely
weak & 10 = extremely strong.
• Chart the forces on the diagram w/ driving forces on the left & restraining forces on the right.
• Total the scores & establish from this whether the change is really viable – is it worth going ahead? If
yes, then the next stage is important.
• Discuss how the success of the change / proposed decision can be affected by decreasing the strength
of the restraining forces & increasing the strength of the driving forces.
- Possible management strategies include:
•
Staff could be trained (increase cost by 1) to help eliminate fear of technology (reduce staff concern
about new technology, −2).
•
Show staff that change is necessary for business survival (add a new force in favour, +2).
-
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Vishakha Mirchandani
•
•
•
Show staff that new IT equipment would introduce new skills & interest to their jobs (add a new force in
favour, +1).
Raise wages to reward staff for higher productivity (higher cost, +1, lower cost by loss of staff, −2).
More energy efficient IT machines could be selected (environmental impact of new technology, −1).
Advantages
it is simple to carry out & easy to understand
it identifies clearly the forces acting on a decision
it enables drivers to be strengthened & restrains to be reduced
Disadvantages
some forces may be omitted
scores are subjective & could be inaccurate
simplistic edition of scores ignores other factors
6.3.3 Decision trees
❖ construction of simple decision trees from information given.
-
-
https://youtu.be/1Px2U0rprSs; https://youtu.be/k29jDYV7JvQ; https://youtu.be/n4oYw0kEsvA;
https://youtu.be/90UehqeK6sY
Decision tree: a diagram that sets out the options connected w/ a decision & the outcomes & economic
returns that may result.
Decision trees enable a choice between possible actions to be made, especially when there are:
• alternative choices
• numerical costs & benefits of the choices
• probabilities of success / failure for each choice
Working from left to right, a decision tree is drawn by setting out:
• a square decision note showing that decision to be taken.
• option choices indicated by lines ending in a decision note / outcome.
• outcomes indicated by a circle (chance node) followed by probabilities of possible outcome.
• the expected money value (EMV) of the outcome
❖ calculation of the expected monetary values from decision trees & use of the results
to assist in selecting the most appropriate strategy.
-
Expected value: the likely financial result of an outcome obtained by multiplying the probability of an event
occurring by the forecast economic return if it does occur.
The following decision tree shown deals w/ whether to buy a new / a second-hand packaging machine:
• Calculations are made from right to left.
• Expected value = 𝐸𝑀𝑉 × 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 (𝐴)
• Add the expected values for each option (B)
• Add the expected values for each outcome (chance node – C)
• Expected value minus cost of each option (D)
• Highest possible return (E)
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<
-
The new machine has a higher return ($235,000) then second hand one ($176,000), so the analysis
recommends this option. There may be other quality factors involved that also affect the decision. In this
case, these may be the condition of the second-hand machine, maintenance levels & relative lifespans.
Other factors may include:
• availability of finance
• how the options relate to business objectives
• accuracy of monetary information & probabilities
• external economic environment
❖ the usefulness of decision trees and an assessment of the accuracy of the data
Advantages
They demand detailed & thorough research into costs & benefits.
They set out choices & their value in money terms clearly.
They take account of the risk & probability of an outcome.
They demand clear thinking & analysis.
Disadvantages
The use of data may disguise poor / faulty research.
They require reliance on accurate data & forecasts.
They may become out of date.
They may not consider all relevant factors.
6.4 Strategic implementation
❖ understand the meaning of strategic implementation.
-
Strategic implementation: the process of planning, allocating & controlling resources to support the
chosen strategies.
It involves ensuring that all the following factors are in place:
• an appropriate organisational structure to deal w/ the change.
• adequate resources to make the change happen.
• well-motivated staff who want the change to happen successfully.
• a leadership style & organisational culture that allow change to be implemented w/ wide-ranging
support.
• control & review systems to monitor the firm’s progress towards the desired final objectives.
6.4.2 Business plans
❖ key elements of business plans
-
https://youtu.be/SMcMwpL8C8E; https://youtu.be/O0lXFwG5o3w
Business plan: a written document that describes a business, its objectives & its strategies, the market it
is in & its financial forecasts.
Executive summary
•
•
business name, history, legal structure & basic introduction to product / services
a brief statement of objectives & aims
Product / service
•
•
detailed outline of the main / core products / services
focus on how the product / service meets a market need & any differentiation
Market analysis
•
•
size of market, competition, target customer & trends.
Indication / outcome of market research
Marketing plan
•
•
the marketing mixes.
explanation of how the customer needs will be met
Production plan
•
•
patents / licences held.
goals & outline of premises, equipment, employees, & suppliers required
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Organisational plan
•
•
the people in the business & their roles
organisational structure
Financial plan
•
•
cash flow & profit & loss forecasts
outlines current & future borrowing needs & returns
Summary of long-term ambitions
•
•
reason for investment
future objectives & plans for growth & expansion
❖ the value of business plans for large & small, established & start-up businesses.
-
-
Whatever the size of the business, the plan enables:
• Close checking that an idea will be successful, indicating how to overcome possible problems.
• Successful applications for a loan, grant, subsidy, / other finance
• Detailed examination of the financial & organisational implications of a proposal based on research.
• Detailed assessment of the internal & external resources needed for success.
• A focus & sense of direction
• Constant review of progress
Disadvantages of business plans:
• The cost of producing them & the possibility of inaccurate forecasts.
• They may become inflexible if they are followed slavishly w/o being adapted to changing conditions.
❖ key elements & purpose of corporate plan
-
-
Corporate plan: this is a methodical plan containing details of the
organisation’s central objectives & the strategies to be followed to
achieve them.
Key elements of a corporate plan:
1. The overall objectives of the organisation within a given time
frame. These could be:
• profit target
• sales growth
• market share target.
2. The strategy / strategies to be used to attempt to meet these
objectives.
3. The main objectives for the key departments of the business derived from the overall objective.
Advantages
Managers have clear focus on future targets & methods to be used
Can be used to communicate this to staff
Comparisons can be made to measure business performance
Managers consider internal & external strengths & weaknesses
Disadvantages
Made obsolete by rapid unexpected internal / external changes
Consideration on how to respond to unforeseen events
Plans should be adaptable & flexible
Time consuming
Internal
Operating capacity – sufficient if expansion plans approved?
Culture of the organisation
Managerial skill & experience – if diversification is chosen.
Staff numbers & skills – workforce planning key in success of plan
Financial resources – can the proposed strategies be afforded?
External
Macro-economic conditions – expansion on hold during recession.
Central bank & government economic policy changes.
Technological changes – could make best plans outdated rapidly.
Competitors’ actions
<
6.4.3 Corporate culture & strategic implementation
❖ different types of corporate culture i.e., power, entrepreneurial & task
-
https://youtu.be/5PeRdftWwEQ; https://youtu.be/iEgb1u-bhDY; https://youtu.be/MfL_0ko4T3o;
Corporate culture: the values, attitudes & beliefs of the people working in an organisation that control the
way they interact w/ each other & w/ external stakeholder groups.
Role culture: each member of staff has a clearly defined job title & role. Typically:
• Most associated w/ bureaucratic organisations
• Power & influence come from a person's position in the organisation.
Advantages
Will defined organisational structure
Everyone has a clear delegated authority
Disadvantages
Operate within the rules, show little creativity
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-
Person culture: when individuals are given the freedom to express themselves fully & make decisions for
themselves.
Advantages
Most creative
-
Disadvantages
Conflict between individual goals & those of the whole organisation
Power culture: concentrating power among just a few people. Typically:
• Leadership is autocratic.
• Decision-making is centralized.
• Organisation structure is narrow & tall.
• Communication channels are defined in a hierarchy.
Advantages
Decisions are made quickly & clearly
Decisions are put into practise exactly
Appropriate for
Products w/ a long life
Prospects for expanding internationally
A great deal of competition
Disadvantages
Creativity is limited, little group / teamwork.
Some employees are unmotivated as they have little control.
Less suitable for
Markets w/ an emphasis on high & new technology for new products
<
-
Entrepreneurial culture: this encourages management & workers to take risks, to come up w/ new ideas
& test out new business ventures. Typically:
• Leadership is democratic / laissez-faire & empowering.
• Decision-making is delegated.
• Organisation’s structure is flat, wide / a matrix, & able to change.
• Communication channels are informal & fast.
Advantages
Many ideas, quick to react to change
Many employees are highly motivated
Appropriate for
An emphasis on high & new technology for new products
High growth
A great deal of competition
-
Disadvantages
Time & resources are wasted & unworkable ideas
Little control over employees
Less suitable for
Products that have a long life
Task culture: based on cooperation & teamwork. Typically:
• Leadership is democratic & empowering.
• Decision-making is delegated.
• Organisation structure is flat, wide / a matrix.
• Communication channels are informal.
Advantages
Creativity is high
Many employees are motivated by responsibility & team working
Appropriate for
Markets that have an emphasis on high & new technology for new
products
Disadvantages
Slow decision making & team rivalry
Changing teams is costly & disruptive
Less suitable for
Markets that are growing, / face a lot of competition
Products are long lived
Where there is a change of international expansion
❖ strong and weak culture
Strong culture
employees understand and follow culture
employees agree on values and behaviours
Weak culture
employees do not understand culture; need procedures and rules
different ideas about culture; conflict
<
❖ importance of corporate culture in strategic implementation in each situation.
-
The culture of an organisation gives it a sense of identity & is based on the values, attitudes & beliefs of the
people who work in it − especially senior management. Values, attitudes, & beliefs have a very powerful
influence on the way staff in a business will act, take decisions, & relate to others in the organisation. They
define what is ‘normal’ in an organisation. So, it is possible for the same person to act in different ways in
different organisations. What we do & how we behave – in society in general & in business in particular –
are largely determined by our culture.
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6.4.4 Developing a change culture.
❖ importance of developing a change culture to allow effective implementations.
-
-
-
https://youtu.be/XjGYTXleY28; https://youtu.be/cYsdcMPN_rA; https://youtu.be/BZM5nRT30ac
Businesses employees, markets, suppliers, competitors, & the economic environment are always
changing. It is vital that a business also changes to adapt w/ this process, whether dealing w/ foreseen /
unpredicted change. Flexibility must be built into the existing corporate culture. Processes for effective
implementation of new strategies are crucial - the corporate culture should include culture of change to
deal w/ unforeseen situations.
Possible reasons for changing culture:
• Respond to new market conditions.
• Prevent bankruptcy.
• Changing methods of production
• Raise more finance by changing legal status / structure of business.
• Recently privatised business would need a more profit-oriented & customer-based approach.
• Cope w/ merger/takeover
Problems of changing culture:
• It can take several years for the culture to be completely accepted by staff & ‘converted’.
• Resistance from employees due to insecurity & fear of the impact on them
• A slow uptake of new products, techniques & markets that may cost a business market position.
• Increased costs associated w/ a slow & difficult change.
6.4.5 Managing & controlling strategic change.
❖ the importance of leading & managing change.
-
https://youtu.be/9yysOwXbzRA?t=550
W/o effective management, leadership & communication, the employees will be unlikely to accept change.
W/o acceptance & management, strategic change is unlikely to achieve organisational objectives.
This will overcome resistance natural in any change situation by engaging in effective communication.
Effective leaders & management can communicate the reasons & need for change involving all employees.
Reasons for resistance to change:
• Fear of the unknown
• Fear of failure
• Losing something of value
• False beliefs about the need for change
• Lack of trust
• Inertia – many people suffer from reluctance to change & try to maintain the status quo.
❖ techniques to implement & manage change successfully.
-
Change management: planning, implementing, controlling, & reviewing the movement of an organisation
from its current state to a new one.
Understand
what change
means
-
recognise the
major causes
of change
understand
the stages of
the change
process
lead change,
not just
manage it
project
groups /
teams
project
champions
Project champion: a person assigned to support & drive a project forward, who explains the benefits of
change & assists & supports the team putting change into practice.
Project champions are effective in implementing change. Champions must have real status w/ the
workforce, a commitment to change & people skills to allow interaction w/ different types of employees.
Project groups: these are created by an organisation to address a problem that requires input from
different specialists.
❖ techniques to promote change.
-
Create urgency – all employees need to know there is a need for change & expected to come.
Create a change team – prepare committed & respected managers are leaders at all levels.
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Create a vision – decide on new values & beliefs contained in vision/mission statements & objectives.
Communicate the vision – use all the communication channels in all functional areas.
Empower people & remove obstacles – identify reasons for resistance to change & minimise these using
leaders / project champions. Restructure & reward those working for change.
Create short term gains – small steps for change mean all employees can see benefits & progress.
Build on change – continue the process of change after each small step.
Anchors change into corporate culture – build change into whatever culture there is by getting leaders
to support change, telling success stories, inducting staff into change & rewarding change.
Create urgency
create a change team
create a vision
Communicate the vision
empower people &
remove the obstacles
create short term gains
build on the change
anchor change into
corporate culture
❖ development of a strategy to manage change in each situation.
-
Allow time for preparation & acceptance.
Ensure sufficient resources available.
Clear, communicated vision.
Involve all layers of hierarchy.
Provide training & support for new methods & procedures.
Allow time for preparation & acceptance.
Managers can help employees talk about their fears.
Managers can give reasons for change.
6.4.6 Contingency planning & crisis management
❖ importance of contingency planning & crisis management
-
https://youtu.be/w2kOqmaSJj8
Contingency plan: preparing an organisation’s resources for unlikely events.
Identify the potential
disasters that could affect
the business
assess the likelihood of
these occurring
Advantages
quick response
reassure stakeholders
helps senior managers generate favourable public relations
maintains confidence
minimise the potential
impact of the crisis
plan for the continued
operation of the business
Disadvantages
uses valuable time & resources in preparing & training
cost of reviewing procedures
may lead to less planning to avoid disasters
likely never to be used, so could be a waste of resources
<
Revision & how to answer questions.
-
https://youtu.be/uRfTzecyOfY
https://youtu.be/3715wJqyPzM
https://youtu.be/6ZJsFnrSKA4
https://youtu.be/KGETsGWUUEs
https://youtu.be/yBIL4gNVqcA
-
https://youtu.be/WzEuiHbW9gY
https://youtu.be/T32Yotp3J-0
https://youtu.be/2Y3zfbe5fBU
https://youtu.be/s1uWf8PXz_Y
https://www.caiebusiness.com
Credits
-
Z Notes – Business 9609 AS Level - https://znotes.org/caie/as/business-9609/theory
-
CIE Notes - https://www.cienotes.com/as-and-a-level-business-studies-notes-9609/
-
Notes for CIE - https://sites.google.com/site/notesforcie/as/business-studies
-
Cambridge International AS and A Level Business: Coursebook with CD-ROM Third Edition
Publisher: Cambridge University Press
Author: Alistair Farquharson and Peter Stimpson
ISBN: 9781107677364
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Vishakha Mirchandani
-
Exam Success in Business for Cambridge AS & A Level
Publisher: OUP Oxford
Author: Peter Joyce, John Richards
ISBN: 9780198412809
-
Cambridge International AS and A Level Business Studies Revision Guide
Publisher: Hodder Education
Author: Sandie Harrison, David Milner
ISBN: 9781444192056
-
Cambridge International AS and a Level Business Studies
Publisher: Hodder Education Group
Author: Malcolm Surridge, Andrew Gillespie
ISBN: 9781444181395
-
Compiled by: Vishakha Mirchandani (mirchandanivishakha@gmail.com)
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Vishakha Mirchandani