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Business Exam
Unit 1: Business organization and environment
1.1 Introduction to business management
1.2 Types of organizations
1.3 Organizational objectives
1.4 Stakeholders
1.5 External environment
1.6 Growth and evolution
1.7 Organizational planning tools (HL only)
Unit 2: Human resource management
2.1 Functions and evolution of human resource management
2.2 Organizational structure
2.3 Leadership and management
2.4 Motivation
2.5 Organizational (corporate) culture (HL only)
2.6 Industrial/employee relations (HL only)
Unit 3: Finance and accounts
3.1 Sources of finance
3.2 Costs and revenues
3.3 Break-even analysis
3.4 Final accounts (some HL only)
3.5 Profitability and liquidity ratio analysis
3.6 Efficiency ratio analysis (HL only)
3.7 Cash flow
3.8 Investment appraisal (some HL only)
3.9 Budgets (HL only)
Unit 4: Marketing
4.1 The role of marketing
4.2 Marketing planning (including introduction to the four Ps)
4.3 Sales forecasting
4.4 Market research
4.5 The four Ps (product, price, promotion, place)
4.6 The extended marketing mix of seven Ps (HL only)
4.7 International marketing (HL only)
4.8 E-commerce
Unit 5: Operations management
5.1 The role of operations management
5.2 Production methods
5.3 Lean production and quality management (HL only)
5.4 Location
5.5 Production planning (HL only)
5.6 Research and development (HL only)
5.7 Crisis management and contingency planning (HL only)
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Unit 2: Human resource management
2.1 Functions and evolution of human resource management
Assessment objectives (AOs)
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Explain the role of HR management (AO2)
Analyze internal and external factors that influence HR planning (AO2)
Suggest the reasons for resistance to change in the workplace (AO3)
Discuss HR strategies for reducing the impact of change and resistance to change
(AO3)
i. Role of HR management
Definition: HR: people that constitute the workforce of an organization.
HR management: business function that organizes people maximizing efficiency.
Roles of HRM:
1. Efficiency, making sure employees are productive
2. Minimizing risk, HR planning prepared
3. Staff retention, ability to prevent the number of people who leave their job in a
certain period, either voluntarily or involuntarily. (opposite of staff turnover)
4. Developing organizational structure, creating organization charts that help
employees understand where they belong in the company.
5. Develops employees via professional development (PD), like training.
6. Keeps Employees motivated by designing rewards (financial or no financial).
7. HRM helps to drive change smoothly.
8. Is in charge of recruitment and selection.
9. Redundancies and dismissals.
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ii. HR planning
Definition: HRP: is the systematic process of anticipating the staffing needs of an
organization. Not only expansion, but downsizing through redundancies and dismissals.
If a company wants to achieve a goal HRP acts as a link of that strategic goal.
Two main tools:
workforce plan: number and skills of
workers required over a
future time period.
workforce audit: a check on
skills of all employees.
Two main strategies:
1. Forecasting the number of employees required
2. Forecasting the skills required
Labour turnover: measures the rate at which employees are leaving an organization. It is
measured by:
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 𝑙𝑒𝑎𝑣𝑖𝑛𝑔 𝑖𝑛 1 𝑦𝑒𝑎𝑟
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑒𝑜𝑝𝑙𝑒 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
𝑥 100
To calculate the average workforce, add together the number in the workforce at the
start of the period with those at the end and divide by 2.
​
✏
Worked example
Leavers = 120
Workforce at the start of the year = 1250
Workforce at the end of the year = 1150
​
LTO=1201200×100=10% staff turnover.
LTO=
1200
120
​
×100=10% staff turnover.
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Pros of high Labour turnover:
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New ideas (new workers)
Low skilled staff might be leaving
If the business plans to reduce staff
high labor turnover will do this
Cons of high Labour turnover:
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Cost of recruiting, selecting and
training new staff
Staff vacancies
Difficult to establish loyalty
Difficult to establish team spirit
Recruitment process:
1. Nature of job vacancy, draw up a job description (key points about the job)
2. Person specification (skills that the worker has to have)
3. Job advertisement (using 1 and 2): Internal or External recruitment
4. Shortlist of applicants
5. Conduct interviews
Training: can be expensive. It can also lead to well-qualified staff leaving (poaching). But,
untrained staff is worse and training is a motivator.
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On-the-job: at the place of work, cheaper and controlled by the business. Induction
training (introducing new employees to the workplace)
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Off-the-job: away from the place of work, to introduce new ideas, used to introduce
technical knowledge.
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Cognitive training: improve person’s ability to understand and learn information
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Behavioral skills: helps employees to communicate and to interact with others in a
constructive way.
Employee appraisal: motivators (Herzberg) process of assessing the effectiveness of an
employee judged against objectives.
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Formative: formal and informal, to gather feedback to monitor progress and guide
improvements.
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Summative: at the end of a project or contract period, measures level of success
through predetermined and discussed with employees benchmarks. The outcome
could be used to improve employees' pay.
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360-degree feedback: uses feedback from as many people as the employee comes
in contact, is usually to assess training and development needs.
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Self-appraisal: self-evaluate employee’s performance. They may identify personal
training needs.
Employee patterns and practices: traditional employment practices vs alternative working
practices.
Advantages of part time and flexible
contracts for the business
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employees can work at busy times,
reducing overhead costs
more quantity of employees to call if
something happens (sickness)
efficiency can be measured before
offering full-time
Disadvantages of part time and flexible
contracts for the business
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Advantages of part time and flexible
contracts for the workers
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ideal for busy people
workers can combine two jobs
teleworking allows one´s own
organization
more employees to manage
effective communication is more
difficult
motivation levels may be affected
because part-time workers feel less
committed than full-time
teleworking could lower productivity
Disadvantages of part time and flexible
contracts for the workers
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earning less than full-time
paid at a lower rate
security conditions (health) is worse
than full-time jobs
teleworking implies less social
contact
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Outsourcing, offshoring and re-shoring as HR strategies:
Definitions: Outsourcing: make a third business operate some functions of your own
business, sometimes they are specialized.
Offshoring: relocation of a business process in another country
Re-shoring: reversal of offshoring.
Usually in HRM core activities are located “in-house” (change management, hr planning,
redundancies), while non core activities are outsourced (payroll, training, hr it system).
Benefits of outsourcing
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Cost benefits (- overheads)
Access to HR specialists
Disadvantages of outsourcing
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iii. Factors that influence HR planning
Internal factors:
1. Leadership styles.
2. Strategies & objectives.
3. Finance, as company operations are limited.
External factors:
Not necessarily cheap
Experts don-t know about the
corporate culture inside the
business
Lack of integration between HR
functions
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1. Demographic change
2. Labor mobility: geographic (moving around the country) or occupational
(career changes individually)
3. Professional immigration. (increases the pool of potential employees, but
also the cultural diversity).
4. Flexitime. (flexible schedule as a trend)
5. Gig economy (commitment is not that serious, short/term contact)
Both types of factors implied, disadvantages and advantages for a business.
iv. Change
Definition: Change at workplace: alteration of current work practices.
2.2 Organizational structure
Assessment objectives (AOs)
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Analyze changes in organizational structure (AO2)
Apply different types of organizational charts (AO2)
Suggest how cultural differences and innovation impact in communication (AO3)
Discuss the appropriateness of different organizational structures given change in
external factors (AO3)
Draw different types of organizational charts (AO4)
i. Key principles of organizational structure
Definitions: Organizational structure: internal and formal framework of a business, shows
how management and authority is organized.
Levels of hierarchy: a stage of the organizational structure at which everyone has an equal
status and authority.
Span of control: number of subordinates reporting to manager.
Chain of command: route in which authority is passed down.
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Organizational structure chart: Displays:
● who has responsibility for decision making
● formal relationships
● accountability and authority through the organization
● number of subordinates
● formal channels of communication
Tall organizational structure
Flat organizational structure
Many levels of hierarchy and narrow spans
of control .
Few levels of hierarchy and wide spans of
control.
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Slow communication
Lower levels demotivated (less
control)
More costly
“us and them” culture
Bureaucracy (excessive procedures)
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Better communication
Managers: lack of control
lower managerial cost
ii. Delegation and accountability
Definitions: Delegation: passing on tasks from managers to subordinates. (win-win:
managers focus on strategy, employees feel trusted)
Centralisation: concentration of power, works well in crisis, added pressure in managers,
demotivation (no initiative)
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Decentralization: more employees engaged, motivating, high admin costs, time-consuming,
less-power.
2.3 Leadership and management
2.4 Motivation
2.5 Organizational (corporate) culture (HL only)
2.6 Industrial/employee relations (HL only)
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Unit 3: Finance and accounts
3.1 Sources of finance
Assessment objectives (AOs)
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Analyze the role of finance for businesses: capital expenditure; revenue
expenditure (AO2)
Internal sources of finance (AO2)
External sources of finance (AO2)
Evaluate The appropriateness of sources of finance for a
given situation (AO3)
i. Introduction
Start up capital: capital used by entrepreneurs to finance their new company.
Working capital: capital needed to pay raw materials, day to day costs and credit for
customers (working capital= current assets - current liabilities).
Capital expenditure: purchase of assets that last for more than a year (buildings and
machinery)
Revenue expenditure: spending on everything other than fixed assets (capital
expenditure).
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ii. Sources of finance
Internal finance: raised from the business assets or retained profit.
External finances: from sources outside the business.
Short term finance (less than a year), Medium term finance (from 1
year to 5 years) or Long term finance (more than 5 years).
a. Internal sources of finance
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Personal finds (for sole traders)
Retained profits
Sale of assets (gives liquidity, established companies with unused assets or
searching for leasing)
Managing working capital efficiently:
Using sources of finance → increasing stock levels or selling goods on credit (debtors)
→ Reducing assets = realising capital
Managing capital:→ cutting current assets (cash)
→ selling stocks
= LOSING LIQUIDITY
→ reducing debts owed to the business
Liquidity: the ability to pay short term debts (less than a year)
INTERNAL SOURCES: have no direct cost to the business, no available for all companies
(new or unprofitable ones)
b. External source of finance
Short term finance (less than a year):
1. Bank overdrafts (bank lends an agreed limit of money when required): flexible
source, high interest charges.
2. Trade credit (delaying the payment of bills for goods or services received): supplier
confidence may be lost if business takes too long to pay
3. Debt factoring : selling goods on credit creates a debtor, longer time more finance
sources. Selling the right to collect the debt to a debt factor for liquidity makes the
company gain only a portion of the debt.
Medium term finance (one to five years):
1. Hire purchase and leasing: usually for fixed assets with medium life span. Hire
purchase: sold assets that belong to the company when payments are done.
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Leasing: paying a rental over a time period, ownership remains to the leasing
company. (no long term capital raised but no ownership)
2. Medium term bank loan
Long term finance (more than five years):
1. Debt: increases liabilities.
→ Long term-loans (not have to be repaid for at least one yr, provide security like an
asset)
→ Debentures (bonds issued by the company to investors, fixed rate of interest )
Advantages:
● Ownership doesn´t change
● Loans will be repaid, no permanent increase in liabilities
● No voting rights at annual general meetings (shareholders)
2. Equity finance: permanent finance raised by the sale of shares. The capital raised
is used to purchase essential assets. Companies can sell a rights issue of shares
(discounted shares for existing shareholders)
3.
4.
5.
6.
7.
Advantages:
● It never has to be repaid, permanent capital.
● Dividends do not have to be paid every year, interest has.
Grants: given by the government, have conditions, are free.
Venture capital: organizations that risk capital in start-ups with profit potential.
(usually tech-companies)
Business angels: individual investors who put their own money in different
businesses, seeking a better return than investments.
Subsidies: governments provide financial benefits to reduce costs and encourage
production. They are offered to businesses which might are big or produce important
products, competing against foreign rivales.
Microfinance: lending small capital loans to entrepreneurs by special finance
businesses.
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iii. Factors to consider when making a financial decision: (table p 246)
1.
2.
3.
4.
5.
6.
Use and time period for which finance is required
Cost
Amount required
Legal structure and possible control of the source
Size of borrowing
Flexibility
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3.2 Sources of finance
Assessment objectives (AOs)
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Analyze and apply different types of costs (AO2)
Total revenue and revenue streams
i. Types of costs
a. Direct costs: can be clearly identified with each unit of production and can be
allocated to a cost center. Costo of the goods being sold
b. Indirect costs: (or overhead costs) cannot be identified to a cost center or within a
unit of production. (eg. cost of cleaning a school) They are classified into:
● Production overheads: factory rent, depreciation of equipment and power
● Selling and distribution overheads: warehouse, packing and distribution
● Administration overheads: office rent, executive salaries.
● Finance overheads: interest on loans
By level of output:
c. Fixed costs: costs that do not vary with output in the short run. (eg, rent)
d. Variable costs: vary with output. (direct costs of materials, electricity)
e. Semi-variable costs: both fixed and variable elements. (commision of someone,
electricity plus cost per unit)
ii. Revenue
Definition: the income received from the sale of a product
Total revenue: total income from the sale of all units of the product= quantity x price
Revenue streams: the income from a particular activity
Benefits from having more than one revenue stream:
● Higher total revenue
● Its a form of diversification
Drawbacks from having more than one revenue stream:
● Each activity needs to be managed and controlled
● Business can lose focus
● Accounts need to be kept separated
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3.3 Break-even analysis
Assessment objectives (AOs)
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Analyze and apply break-even charts and break-even analysis (AO2)
Total contribution and contribution per unit (AO2)
The effects of changes in prices and costs on break-even (AO2)
Evaluate the benefits and limitations of break-even analysis (AO3)
Calculate and construct break-even charts, break-even point, profit,
margin of safety, target: profit, output, price (AO4)
The effects of changes in prices and cost on break-even (AO4)
Break-even: the level of output at which total costs equal total revenue.
total costs = total revenue
Calculating break-even (methods)
● table costs and revenues method
● graphical method
●
formula method
Margin of safety
Definition: the amount by which the output level exceeds the break-even level of output.
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Contribution per unit: amount each unit of production contributes towrds profit and fixed
costs. Contribution is not profit, fixed costs have not been covered.
Total contribution: unit contribution x output. TC < fixed costs = loss
TC > fixed costs = profit
Contribution for break-even:
𝑏𝑟𝑒𝑎𝑘 − 𝑒𝑣𝑒𝑛 𝑙𝑒𝑣𝑒𝑙 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡 =
𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠
𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
Break-even analysis uses:
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Break-even levels of production
Margin of safety
A marketing decision - impact of a price increase
Operations management decision - changes in variable costs by buying new
equipment
Comparing fixed and variable costs
Calculating output to achieve target profit:
Set a fixed rate of return as an objective. Calculate what level of sales will be needed to
achieve this aim.
𝑡𝑎𝑟𝑔𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡 𝑙𝑒𝑣𝑒𝑙 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡 =
𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠 + 𝑡𝑎𝑟𝑔𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡
𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
Calculating target break-even revenue:
Break-even revenue: amount of revenue needed to cover both fixed and variable costs.
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𝑏𝑟𝑒𝑎𝑘 − 𝑒𝑣𝑒𝑛 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 =
𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠
1−(𝑑𝑖𝑟𝑒𝑐𝑡 𝑐𝑜𝑠𝑡/𝑝𝑟𝑖𝑐𝑒)
Calculating target price:
If a business wants to break-even at a level of production of x units each month and direct
costs are x per unit and fixed costs x per month.
𝑏𝑟𝑒𝑎𝑘 − 𝑒𝑣𝑒𝑛 𝑡𝑎𝑟𝑔𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 =
𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠
𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑙𝑒𝑣𝑒𝑙
+ 𝑑𝑖𝑟𝑒𝑐𝑡 𝑐𝑜𝑠𝑡
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3.4 Final accounts
Assessment objectives (AOs)
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Analyze and apply final accounts: profit and loss account and balance
sheet (AO2)
Depreciation methods: straight line and reducing balance (AO2)
Strengths and weaknesses of each depreciation method (AO2)
Evaluate the purpose of accounts to different stakeholders (AO3)
The principles and ethics of accounting practice (AO3)
Calculate and prepare final accounts: profit and loss account and balance
sheet (AO4)
Depreciation methods (AO4)
Accounts: financial records of business transactions, which are indeed to provide
information to stakeholders and groups inside the organization.
Limitations of accounting info to stakeholders:
1. One set of accounts cannot be compared over time, one year´s accounts are of
limited value.
2. Accounts do not measure items which cannot be expressed in monetary terms
(skills, state of technology, reputation)
3. Businesses only publish what is required by law
4. Accounts are not up to date
5. Window dressing
Window dressing
Definition: Presenting accounts in the most favorable way to deceive account users.
Window dressing methods:
1. Recording revenue expenditure (short-term spending related to the day-to-day
running of the business) as capital expenditure (add to the value of an existing
fixed, e.g. upgrading buildings). Capital expenditure can be spread over years
2. Selling assets to appear more liquid.
3. Offering discounts to encourage early debt payments, while delaying payment to
creditors to improve liquidity.
4. Taking loans to improving liquidity
5. Inflating the value of intangible assets (brand name or parents).
The main business accounts
1. The profit and loss account
2. The balance sheet
3. Cash flow statement
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1. Profit and loss account
Definition: it records the revenue cost, and profit (or loss) of a business in a specific
time period.
It is divided in three parts:
Trading account: shows how gross profit (sales - cost) or loss has been made.
Profit and loss section: shows: profit before (net profit), after taxes, and overheads
(indirect costs).
Appropriation account: shows how retained profit is distributed (ej. dividends).
2. Balance sheet
Definition: accounting statement records the value of a business's assets,
liabilities and shareholders equity (assets - liabilities) at one point in time. Usually
at the end of the financial year.
Shareholders equity
Comes from:
● Share capital: Capital raised through the purchase of shares.
● Retained earnings
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Terms
Fixed assets: land, buildings, vehicles and machinery. (tangible assets used for
more than one year)
Current assets: inventories (stocks), accounts payable (debtors) and cash. (assets
that can quickly transform in cash, used for less than a year)
Current liabilities: overdrafts , unpaid taxes, and creditors (accounts payable)
Working capital: current assets - current liabilities
Non current liabilities; long term loans owed by the business. More than a year.
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3. Cash flow (other unit)
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Depreciation of assets
Reasons:
● normal wear and tear thought usage
● technological changes
Straight line method of depreciation
Defined by a constant amount of depreciation each year.
Advantages:
● Easy to calculate
Limitations:
● Leads to estimates that could be inaccurate
● All annual depreciation charges are the same
● No recognition of tech advances, which could make assets redundant
● Maintenance is not consider, as assets costs go up
Reducing balance method
Leads to higher levels of depreciation in the early years and lower depreciation as the asset
ages.
Advantages:
● More accurate than straight line
● More logical, assets are efficient when new.
Limitations:
● More difficult
● Calculating precise devices from the fact that the residual vale and expected lifespan
are estimates.
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3.5 Profitability and liquidity ratio analysis
Assessment objectives (AOs)
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Analyze and apply gross profit margin (AO2)
Net profit margin
Return on capital employed
Current ratio
Acid test ratio
Evaluate strategies to improve these ratios (AO3)
Calculate gross profit margin (AO4)
Net profit margin
Return on capital employed (ROCE)
Current ratio
Acid test ratio
i. Accounting ratios
Profitability ratios
Profit margin ratios: Gross profit and net profit margins are used to assess how good the
business is converting sales into gross and net profit.
Gross profit margin (%):
Net profit margin (%):
𝑔𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡
𝑠𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒
𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡
𝑠𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒
𝑥100
𝑥100
Margins are very variable and depend on a number of issues, when comparing two
companies we may find that one is lower than the other because:
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Low-price strategy or higher cost of sales
Different industries
Overhead costs (net profit)
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Return on capital employed (ROCE)
Assessing profitability of a business, primary efficiency ratio.
ROCE (%) =
𝑛𝑒𝑡 𝑝𝑟𝑜𝑓𝑖𝑡
𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑦𝑒𝑑
𝑥100
Capital employed: (non current assets + current assets) - current or non current liabilities +
shareholders equity.
That is the total capital employed.
● Higher value of ROCE = more return of capital invested in the business
● ??????
Increase ROCE
Increasing net profit:
● Raise prices
● Reduce variable costs
● Reduce overheads
● Invest capital efficiently (e.g. in innovations)
Reduce capital employed
● sell assets that are not efficient
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Liquidity ratios
Measure the ability of the firm to pay short-term debts. Concerned with working capital.
Current ratio
Accountants recommend the ratio from around 1.5 -2, but it depends on the industry. A ratio
of 2 indicates that the company has $2 of current assets to pay $1 of current liabilities.
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
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Ratios of over 2 might suggest that funds are used inefficiently.
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3.6 Efficiency ratio analysis
Assessment objectives (AOs)
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Analyze and apply
Efficiency ratios:
Inventory/stock turnover
Debtor days
Creditor days
Gearing ratio (All AO2)
Evaluate strategies to improve these ratios (AO3)
Calculate Efficiency ratios:
Inventory/stock turnover
Debtor days
Creditor days
Gearing ratio (All AO4)
i. Efficiency ratios
Inventory (stock) turnover ratio
The lower the amount of capital holding inventories the better. Higher turnover ratio= lower
capital tied up in inventories. It is used in product sector fims.
Inventory (stock) turnover ratio:
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𝑐𝑜𝑠𝑡 𝑜𝑓 𝑔𝑜𝑜𝑑𝑠 𝑠𝑜𝑙𝑑
𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑙𝑒𝑣𝑒𝑙
or
𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠
𝑐𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 / 365
The result indicates the number of times inventory turns over in a time period (1 yr)
The higher the number the more efficient in selling inventory (JIT system = high
ITR)
Depends on the industry
26
Debtors days ratio
Calculates the average time it takes a business to recollect money from customers who
bought in credit. The shorter the time the better.
Debtors days ratio:
●
●
●
𝑑𝑒𝑏𝑡𝑜𝑟𝑠 (𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒) 𝑥 365
𝑟𝑒𝑣𝑒𝑛𝑢𝑒
or
𝑟𝑒𝑣𝑒𝑛𝑢𝑒
𝑑𝑒𝑏𝑡𝑜𝑟𝑠 (𝑎𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒)
Depends on the industry and how much cash they use (low ratio)
It could be a management strategy to give extended credit
The value should be around 30 days
Creditors days ratio
Measures how quickly a business pays its suppliers in a year. The higher the longer.
Creditor days ratio:
𝑡𝑟𝑎𝑑𝑒 𝑐𝑟𝑒𝑑𝑖𝑡𝑜𝑟𝑠
𝑐𝑟𝑒𝑑𝑖𝑡 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠
𝑥 365
Gearing ratio
Calculates the degree in which the assets of the business are financed by long term loans.
It is safer to depend less on long term loans. Result over 50% indicates a highly geared
business.
27
Gearing ratio:
𝑙𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝑙𝑜𝑎𝑛𝑠
𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
𝑥 100
or
𝑛𝑜𝑛 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝑒𝑞𝑢𝑖𝑡𝑦 + 𝑛𝑜𝑛 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
●
●
𝑥 100
Higher ratio = greater risk, more interest, possibly low liquidity
Low gearing = safe business strategy, no expansion or investment, slower returns on
shareholders investment
ii. Limitations on ratios
● Comparisons should be made for accuracy. (inter/firm comparison or trend analysis
(other time periods))
● Different industry businesses are less effective to compare
● Economic recessions
● The use of different formulas
● Window dressing and different depreciation methods affect the ratios
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3.7 Cash flow
Assessment objectives (AOs)
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Analyze and apply
Working capital cycle (AO2)
Difference between profit and cash flow (AO2)
Cash flow forecasts
Relationship between investment profit and cash flow
Evaluate strategies to deal with cash flow problems (AO3)
Reducing cash outflows
Improving cash inflows
Additional finance (All AO3)
Calculate Cash flow forecast (AO4)
i. Introduction
Suppliers and creditors need to be paid on time, if not they can force the business into
liquidation (firm ceases trading and assets are sold for cash). The business would be
insolvent (business cannot meet short term debts). Cash flow is very important for startups,
as: they don’t have a trading record, they are offered less time to pay suppliers, and finance
is tight.
ii. Cash and profit
Cash outflows: payments in cash made by the business to suppliers and workers
Cash inflows: payments received by a business from customers (debtors) or the bank
(loan).
iii. Working capital
Not enough working capital = lack of liquidity
Working capital comes from current assets that are: stocks, debtors and cash
Working capital cycle: period of time between spending cash on the production process
and receiving cash payments from customers
29
The longer time period from buying material to receiving payment from customers,
the greater will be the working capital needs of the business.
iv. Cash flow forecasts
They are usually used monthly
Cash inflows:
● Owners capital injection (easy to forecast)
● Bank loan payments (easy to forecast)
● Customers’ cash purchases (estimated)
● Debtors’ payments (estimated)
Cash outflows:
● Lease payment for premises (easy)
● Annual rent (easy)
● Electricity gas water and telephone bills (difficult very variable)
● Labour cost (could vary)
● Variable cost (difficult)
v. Structure of cash flow forecasts
Section 1: Cash inflows
Section 2: Cash outflows
Section 3: Net monthly cash flow and opening and closing balance
Net monthly cash flow: cash inflows - cash outflows
Opening cash balance: cash held by the business at the start of the month
Closing cash balance: cash held by the business at the end of the month
If closing balance is negative, an overdraft will be necessary to finance working capital.
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vi. Causes of cash flow problems
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●
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Lack of planning
Poor credit control (monitoring debts to make customers pay in time)
Allowing customers too much credit
Expanding too rapidly, leads to overtrading (expansion without obtaining necessary
finance > cash flow shortage)
Unexpected events
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vii. Relationship between investment, profit and cash flow
Investment > cash outflow (in the 1 yr of the project)
Cost of the project is NOT recorded at the time of capital expenditure, as the benefits from
the investment will be received over several years. Actual expense is recorded as annual
depreciation of the assets purchased.
viii. Dealing with cash flow problems
Three strategies:
● reducing cash outflows
● improving cash inflows
● sourcing additional finance
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Increasing cash flow:
Reducing cash outflow:
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3.8 Investment appraisal
Assessment objectives (AOs)
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Analyze and apply and calculate
Investment opportunities using payback and average rate of return
(ARR)(AO3 and AO4)
Investment opportunities using net present value (NPV) (AO3 and AO4)
i. Investment appraisal
Definition: evaluation of the profitability of an investment project
Requires:
● initial capital cost of the investment
● estimated life expectancy
● residual value of the investment (literally)
● forecasted net reuters from the project (expected returns - costs)
Methods:
● payback period
● average rate of return
● net present value using discounted cash flows
ii. Quantitative methods of investment appraisal
Payback method:
Payback period: period of time that it takes for the net cash inflows to pay back the original
capital investment. (it should be short)
Annual net cash flow: cash inflow - cash outflows
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Managers can compare projects using this method, or for projects that need specific
conditions.
Average rate of return (ARR)
Definition: measures annual profitability of an investment as a percentage of the initial
capital invested.
ARR (%) =
𝑎𝑛𝑛𝑢𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 (𝑛𝑒𝑡 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤)
𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑐𝑜𝑠𝑡
𝑥100
Calculating:
1. Add positive cash flows
2. Subtract cost of investment
3. Divide by lifespan
4. Calculate using: ARR (%) =
𝑎𝑛𝑛𝑢𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 (𝑛𝑒𝑡 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤)
𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑐𝑜𝑠𝑡
𝑥100
The result indicates that, on average over the lifespan of the investment, we can expect x%
of annual return. It can be helpful for businesses which want to: compare ARR, have
criterion rates (minimum level for investment appraisal results) and if the business takes
loans (if ARR is less than the interest rate it is not profitable)
iii. Discounting future cash flows (MIRAR VIDEO DE ESTO)
Discounted cash flow (DCF) analysis: is a method of valuing a project, company or asset
using the concepts of the time value of money. DCF is used to calculate the value of future
cash flows in terms of an equivalent value today. All future cash flows are estimated and
discounted to give their present values (PVs).
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Time value of money: money that is given in the future is affected by inflation and other
agents that make it uncertain.
The present value of a future sum depends on:
● The higher the interest rate the less value future cash has in today’s money.
● The longer time into the future cash is received, the less value from today
Net present value (NPV)
Uses discounted cash flows. It is today’s value of the estimated cash flows.
Calculating:
1. Multiply discount factors by the cash flows.
2. Add the discounted cash flow
3. Subtract the capital cost to give NPV
Discount factors =possible interest rate
iv. Qualitative investment appraisal
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Impact on environment and local community - brand image issues
Planning permission - social groups may try to make the project not be carried out
Aims and objectives of the business
36
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Risk
Exam tip: Unless the
question asks only for an
analysis of numerical or
quantitative factors, your
answers to investment
appraisal questions should
include an assessment of
qualitative factors too.
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3.9 Budgeting
Assessment objectives (AOs)
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Know and understand difference between cost centers and profit center
(AO1)
Analyze and apply the importance of budgets (AO2)
Roles of cost centers and profit centers (AO2)
Variances
The role of budgets and variances in strategic planning
Calculate Variances from budgets (AO4)
i. Budgets
Definition: a detailed financial plan for a future time period
They are both for sales revenue and costs, it is usual for costs center and profit center to
have budgets set for the next yr on a monthly basis.
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Helps planning
Effective allocation of resources (business spends what it gas)
Setting targets to be achieved (increases motivation, delegated budgets)
Coordination within departments
Monitoring and controlling
Modifying (easy to change plan if something is wrong)
Assessing performance
ii. Preparation of budgets
Stages in setting budgets
Stage 1: The most important organizational objectives for the yr are established. Based on:
previous performance, external changes, sales forecast based on research and past sales
data.
Stage 2: Identify the key for growth (usually sales). Prepare that budget. Accuracy is
essential
Stage 3: Prepare sales budget after discussion with managers in all departments
Stage 4: Subsidiary budgets are prepared.
Stage 5: Coordinate budgets, budget committee
Stage 6: Master budget with budgeted profit and loss account and balance sheet
Stage 7: Present master budget to board of directors.
Setting budget levels
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Incremental budgeting: uses last year’s budget, departments may only justify changes in
budget
Zero budgeting: setting budgets to zero, so budget holders (responsible for budgets) justify
their cases. Is very time-consuming.
iii. Limitations of budgets
●
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Lack of flexibility
Focused only on the short term
Unnecessary spending to have more margin
Training workers to keep budgets
Cost and profit centers
Cost centers: a section of a business where a cost is allocated. (e.g. products,
departments, factories)
Profit center: a section of a business where both costs and revenue is allocated.
iv. Budgetary control - variance analysis
Variance analysis: process of investigating any differences between budgeted figures and
actual figures
●
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Measures differences from planned performance of each department month by
month and at the end of the year.
Analyses causes for deviations
Favorable variance: when the difference between budgeted and actual figures leads to
higher profit
Adverse variance: when the difference leads to lower profit.
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Unit 4: Marketing
4.1 The role of marketing
Assessment objectives (AOs)
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Know and understand marketing and its relationship with other business
functions (AO1)
Characteristics of the market in which an organization operates (AO1)
Analyze and apply the difference between marketing of goods and
marketing services (AO2)
Market orientation against product orientation (AO2)
The difference between commercial marketing and social marketing (AO2)
Evaluate The importance of market share and market leadership (AO3)
Marketing objectives of for/profit and not-for-profit organizations (AO3)
How marketing strategies evolve in response to changes in consumer
preference (AO3)
How innovation, ethical considerations and cultural differences may
influence marketing practices and strategies (AO3)
Calculate Market share (AO4)
i. Introduction
Marketing: management task that links the business to the customer by identifying and
meeting the needs of customers profitably.
Market characteristics:
Market size: the total level of sales of all producers within a market. Volume sales (units
sold) or value of goods sold (revenue)
Market growth: the percentage change in the total size of a market over a period of time.
Ease of entry: the lack of barriers for new competitors in a market. (number and size of
competitors) (more competitors = easy market)
Differentiated or homogeneous products:
Homogenous products are physically identical for consumers, and cannot be distinguished
even if they came from different suppliers (milk, water, corn).
Segmentation: dividing a market into different groups of customers who have different
interests. Target marketing: focusing marketing in a specific group ≠ Mass marketing:
selling to the whole market using standardized product.
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Differences between marketing goods and marketing services:
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Services are consumed immediately (a hotel should charge low prices in low
seasons)
Service quality needs to be good the first time, as they cannot be repaid or replaced
More difficult to compare services (a lot of factors quality and nature)
People are very important for successful services.
Perceived value (quality of the service = price)
Relationships for services industries: building trust, time for delivering the
services, deliverability of quality results, relationships with customers.
ii. Marketing approaches
Market orientation
Definition: outward looking approach basing product decisions on consumer demand
established by market research.
Benefits:
● Low chances of new products failing the market
● If consumer needs are met it is likely to survive longer and make high profits
● Constant feedback from consumers
Product orientation
Definition: inward-looking approach focuses marketing on the product that can be made
and then how to sell it. (old marketing)
Only exist for pharmaceutical and electronic industries that can create a product of good
quality which can create consumer needs.
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Product oriented businesses find customers to purchase their products
Product oriented businesses concentrate efforts into high quality products
Social marketing
Definition: Considers the effect of the product or service on all members of society.
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Balances company profits, consumer wants, and society’s interests
Social marketing considers long-term consumer wants.
Competitive advantage
Higher prices becoming a USP
ii. Market share and market leadership
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Market share: the percentage of sales in the total market sold by one business. Analyses
success in a marketing strategy in comparison to competitors.
Product highest market share = brand leader
Market share=
𝑓𝑖𝑟𝑚'𝑠 𝑠𝑎𝑙𝑒𝑠
𝑡𝑜𝑡𝑎𝑙 𝑚𝑎𝑟𝑘𝑒𝑡 𝑠𝑎𝑙𝑒𝑠
𝑥 100
Market leadership: Highest market share of all firms in the market.
Benefits:
● Sales are higher than competitors (leading to high profit)
● Best selling brand as advertising
● Good positioning to suppliers and retailers (leading to lower costs and longer credit)
● Recruitment of high class employees
● Easier to finance (investors and banks)
iv. Marketing objectives
The goals in the marketing department set for achieving its overall objectives
For-profit organizations
Marketing objectives could include an increase in:
● market share
● total sales
● customer loyalty
● number of new customers
● customer satisfaction
● brand identity
Effective marketing strategies:
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Fit with business’s mission and aims
Determined by senior management (really important decision)
Be SMART (Specific, Measurable, Achievable, Relevant, and Time-Bound.)
Non-profit organizations
Differences from for profits are: no external investors providing risk capital, no dividends or
profit, organizational objectives are socially good.
Main marketing activities:
● Market research (who donates, public view)
● Identifying best ways to communicate with donors
Objectives:
● Maximizing revenue from trading activities
42
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Increasing recognition
v. Marketing strategies
Marketing should go in hand with changes. As consumers preferences usually evolve
Innovation:
New marketing activities: guerrilla marketing (4.5) and internet marketing (specially social
media)
Ethical considerations:
Ethics should be discussed in marketing strategies.
Cultural differences:
Failing to respond to cultural differences can lead to bad publicity.
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4.2 Marketing planning
Assessment objectives (AOs)
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Know and understand elements of a marketing plan (AO1)
Analyze and apply the role of marketing planning (AO2)
Four p’s of the marketing mix (AO2)
An appropriate marketing mix for a particular business (AO2)
Difference between target market and market segments (AO2)
Difference between mass market and niche market (AO2)
How organizations target and segment their market and create consumer
profiles (AO2)
Product positioning map (AO2)
Importance of USP (AO2)
Evaluate The effectiveness of marketing mix in achieving marketing
objectives (AO3)
How organizations can differentiate themselves and their products from
competitors (AO3)
Determine and construct an appropriate marketing mix for a product or
business (AO4)
Possible target markets and market segments (AO4)
A product positioning map (AO4)
i. Marketing planning
Definition: process of creating appropriate strategies and preparing marketing activities to
meet marketing objectives.
Main elements are:
● Details of SMART marketing objectives
● sales forecast to monitor plan progress
● marketing budget
● marketing strategies to be adopted
● action plans with tactics to achieve objectives
44
ii. Marketing mix
Definition: the set of actions, or tactics, that a company uses to promote its brand or product
in the market.
Marketing mix 7p’s:
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Product: consumers require the right good or service
Price
Promotion: targeted at the appropriate market. Packaging reinforces it.
Place: refers to how it is distributed.
People
Process
Physical evidence (All three in 4.6)
Appropriate marketing mixes (called coordinated marketing mix) are: based on marketing
objectives, coordinated and consistent with each other (other P’s) and targeted at the right
consumers.
iii. Market segmentation, target market and consumer profiles
Market segment ≠ target market
Market segment: a subgroup of a market made up with consumers with similar interests
Target market: the segment that a business aims at its product.
Consumer profile
Definition: a description of a specific type of consumer showing proportions of age groups,
income levels, location, gender and social class. Businesses need to have a clear picture of
who is part of their target market.
Bases for segmentation:
1. Geographic differences: appropriate to offer different products depending on the
market’s region. (e.g. seasonal clothing items)
2. Demographic differences: age, gender, family size, ethnic background and social
class.
45
3. Psychographic factors: lifestyle, personalities, values and attitudes.
iv. Niche and mass markets
Niche market: small and specific part of a larger market. (can include luxury markets)
Niche marketing: identifying and exploiting this small segment.
Mass market: market for products that are standardized and sold in large quantities
Mass marketing: seeking same products to the whole market (no target market groups)
v. Product positioning
Definition: analyzing how a new brand or product will relate to existing brands in the minds
of consumers.
By preparing a product positioning map:
1. Identify key features of the product for consumers (price, quality, materials, image).
2. Positioning competing products according to consumer perception.
Product positioning:
● Identifies potential gaps in the market
● Identifies niche markets and popular key features of the product
● Helps with repositioning
46
vi. Unique selling point (USP)
Definition: a factor that differentiates a product from its competitors. USP’s can be based on
any aspect of the marketing mix.
Benefits:
● effective promotion could focus on differentiating feature
● potencial higher price
● customer identification
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48
4.3 Sales forecasting
Assessment objectives (AOs)
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Evaluate Benefits and limitations of sales forecasting (AO3)
Calculate moving averages using given data (AO4)
i. Sales forecasting
Definition: predicting future sales levels and sales trends. Sales forecasting reduces risks,
however external factors make sales forecasting not exact. They are based on market
research using primary and secondary data.
ii. Quantitative sales forecasting methods
Based on past sales data, using sales records (time series) to help create predictions.
Extrapolation
Uses past data to extend (extrapolate) sales into the future. This method assumes that
sales patterns are stable.
Moving averages
Identifies underlying factors that are expected to influence future sales. These are the
trend, seasonal variations, cyclical variations and random variations.
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Trend: underlying movement of the data in a time series (lots of business records)
Seasonal variations: repeated variations that occur in a period of a yr or less
Cyclical variations: occurring much more than a year (related to the business cycle)
Random variations: may occur at any time, unusual and unpredictable.
Three period moving average:
Four period moving average:
50
Seasonal variation = 𝑠𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 − 𝑡𝑟𝑒𝑛𝑑 (𝑚𝑜𝑣𝑖𝑛𝑔 𝑎𝑣𝑒𝑟𝑎𝑔𝑒)
Average seasonal variation =
𝑠𝑢𝑚 𝑜𝑓 𝑎𝑙𝑙 𝑠𝑒𝑎𝑠𝑜𝑛𝑎𝑙 𝑣𝑎𝑟𝑖𝑎𝑡𝑖𝑜𝑛𝑠 𝑜𝑓 𝑥 𝑞𝑢𝑎𝑟𝑡𝑒𝑟
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠
Random variation= 𝑠𝑒𝑎𝑠𝑜𝑛𝑎𝑙 𝑣𝑎𝑟𝑖𝑎𝑡𝑖𝑜𝑛 − 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑠𝑒𝑎𝑠𝑜𝑛𝑎𝑙 𝑣𝑎𝑟𝑖𝑎𝑡𝑖𝑜𝑛
Trend Analysis Summary Method
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Plot the actual sales.
Work out the trend by using 8 quarter moving averages.
Add the trend to the original graph.
Extend (extrapolate) the trend.
Calculate average seasonal variations.
Predict actual future by recreating the seasonal variation around the extrapolated
trend.
Read the predicted actual sales for the future period required.
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4.4 Market research
Assessment objectives (AOs)
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Analyze and apply reasons why organizations do market research (AO2)
Methods and techniques of primary and secondary market research (AO2)
Difference between qualitative and quantitative market research (AO2)
Different methods of sampling(AO2)
Results from data collection (AO2)
Evaluate The ethical considerations of market research (AO3)
i. Market research
Definition: process of collecting, recording and analyzing data about customers, competitors
and the market.
Useful for:
● Reduce risk in product launches, is a key part in NPD (new product development)
● Predict future demand changes
● Explain patterns of sales in existing products and market trends
● Asses most favored designs and promotions for a product
ii. Market research process
Primary research data: collection of first hand information directly related to a firm’s needs
(surveys, questionnaires, etc)
Secondary research data: collection of information that already exists. Undertaken before
primary research.
Qualitative research: research into motivations behind consumer habits.
Quantitative research: research that leads into numeral results.
Methods of primary research
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1. Surveys: detailed study of a market to gather data on attitudes and satisfaction
levels of products or businesses. These involve directly asking consumers for
options. Can be qualitative or quantitative.
Important issues of surveys:
● Who to ask: a sample of potential members of the target market.
● What to ask: unbiased and unambiguous questionnaire
● How to ask: online, telephone or written.
● How accurate it is: assessing accuracy and using sampling correctly is crucial
Open questions: those that have wide ranging or imaginative responses.
Closed questions: a limited number of preset answers is offered.
The design of the questionnaire will influence the accuracy and usefulness of the research.
2. Interviews: more sophisticated than questionnaires, interviews are expensive and
require skilled interviewers to avoid bias.
3. Focus groups: Groups where people are asked about their opinions towards a
product, service or any specifics related to both. More accurate and realistic than
interviews and surveys.
4. Observations: qualitative method of collecting data obtained by watching others in
business’s environments (watching people in supermarkets, cookies in computers,
etc). Inexpensive (main cost observer’s remuneration), time consuming.
5. Test-marketing: marketing a new product in a geographical region before a
full-scale launch.
Sources of secondary research
1. Market intelligence analysis reports: detailed reports on individual markets
produced by specialized firms. Very expensive, usually available at local libraries (the
not up to date versions)
2. Academic journals
3. Government publications
4. Trade organizations: they produce regular reports on the market they are
dedicated to.
54
5. Media reports and specialist publications
6. Internal company records: (customers sales record, sales trends, customer
feedback)
7. Internet
Sample size and sampling methods
Sample: group of people selected to be representative of the target market. The larger the
sample, the more accurate.
Sampling error: errors caused in research by using a sample for data collection.
Bigger samples = major costs + more time
1. Quota sampling: This is based on market segmentation using characteristics such
as age and gender. A set number of people (the quota) from each group are
interviewed.
2. Random sampling: every member of the target market has an equal chance of
being selected.
3. Stratified sampling: A sample from a specific sub-group or segment of the
population, using random sampling to select an appropriate number from each
stratum. It is in proportion to their representation in the population as a whole.
4. Cluster sampling: using specific groups to draw samples e.g from a specific region.
Lower costs.
5. Snowball sampling: using existing members to recruit further participants. Cheap but
can be based.
6. Convenience sampling: using a representative group because of their easy access.
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4.5 The four P’s
Assessment objectives (AOs)
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Analyze and apply Product: the relationship between the product life cycle
and the marketing mix (AO2)
Product: relationship between product life cycle, investment profit and cash
flow (AO2)
Product: aspects of branding: awareness, development loyalty and value
(AO2)
Promotion: Aspects of promotion: above and below the line; promotional
mix (AO2)
Place: the importance of place in the marketing mix (AO2)
Evaluate Product: extension strategies to the product life cycle (AO3)
Product: Boston Consulting Group matrix (BCG matrix) (AO3)
Product: The importance of branding (AO3)
Product: The importance of packaging (AO3)
Price: The appropriateness of pricing strategies (AO3)
Promotion: The impact of changing technology on promotional strategies
(AO3)
Promotion: Guerrilla marketing and its effectiveness (AO3)
Place: The effectiveness of different types of distribution channels (AO3)
Construct: Product: Product life cycle (AO4)
Product: Boston Consulting Group matrix (AO4)
i. Product
Consumer durables: manufactured products that can be reused and have a reasonably
long life.
ii. Product life cycle
Definition: pattern of sales recorded by a product from launch to withdrawal from the
market.
First three stages:
Introduction: product has just been launched, sales are low and are beginning to increase
slowly.
Growth: if the product is effectively promoted, sales should grow significantly.
Maturity or saturation: increasing competition changes in technology or consumer habits
may lead to this stage. Sales fail to grow but don’t decline either.
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Decline: sales will fall, the only possible option now is replacement. New competitor’s
products are most likely to cause this.
Extension strategies
These are marketing plans that extend the maturity stage of the product, e.g. export
markets, new uses for existing products and relaunching.
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Product life cycle and investment:
Investments are made during the end stages of the product’s life, to come up with a new
launch. Investing capital in R&D is crucial for this.
Product life cycle and profit
High profit margins are likely during the growth and maturity stage, towards the maturity
stage prices need to be more competitive, leading to lower margins. At decline prices hit
gross profit margin.
Product life cycle and cash flow
Cash flow is strongly linked with product life
cycle. During development cash flow is
negative. Introduction, promotion costs are high.
As sales increase so does cash flow. Maturity
stage has positive cash flow, sales are high
and promotion is limited. Decline = reduces cash
flow.
iii. Boston Consulting Group matrix (product)
Definition: a method of analyzing a product portfolio in terms of market share and market
growth.
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Low market growth - high market share “cash cow”:
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Well established product in a mature market
Positive cash flow and profitable
Cash from this product can be injected into other products
Businesses will want to maintain this type of product for as long as possible.\
High market growth - High market share “star”
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Successful product
In an expanding market
They will be able to maintain the market position
Promotional costs will be high
Generates high amount of income
As the star matures they will be cash cows
High market growth - low market share “problem child”
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Consumes resources but generates little return (in the short-term)
If it's a new product = heavy promotional costs
Potential
Analyze if they are worth developing
Low market growth - low market share “dog”
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Offer little to the business
Probably need to be replaced
BCG matrix and strategic analysis
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Building: supporting problem children with advertising.
Holding: continuing support for star products.
Milking: positive cash flow should be reinvested in the portfolio.
Divesting: identifying worst performance dog and stopping production.
iii. Branding
Brand: an identifying name, symbol, image that distinguishes the product from its
competitors.
Establishing a new brand, is crucial to invest in:
Brand awareness: extent in which a brand is recognised by potential customers
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Brand loyalty: the faithfulness of consumers to a particular brand (shown by repeat
purchases)
Brand development: measures the infiltration of a product's sales usually per thousand of
population.
Brand value (or equality): amount of money that customers will pay for a branded product
in comparison to a generic one. “Premium”
Importance of branding
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Instant recognition
Differentiates the company from competitors
Employee motivation (can become committed to the brand)
Customers know what to expect
Emotional attachment = customer loyalty
Increases value of the business above its assets (Brand value)
Types of branding
Family branding: selling several related products under one brand name (dove soap, dove
shampoo, dove cream). Benefits: marketing economies of scale by promoting the brand,
easier product launches. Limitations: poor quality of one product damages all.
Product branding: each product is given its own name and image. Benefits: each product
is disconnected but is from the same company. Limitations: loses image of a strong brand
Company or corporate branding: company name is attached to all products (disney
products). Benefits and Limitations: (same as family branding).
Own-label branding: retailers create their own brand name and identity for a range of
products. Benefits: Cheaper, each label applies to different customers, little spent on
advertising. Limitations: consumers perceive a low quality image.
Manufacturer’s brands: establishes brand image under the company’s name (with
differences) (Cocacola, levis). Benefits: unique personality of the product creates premium
prices. Limitations: brand has to be always protected.
Importance of packaging
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Protection from possible damage
attracting consumers
Promotion and information
Differentiation and brand support
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i. Price
Price level determines: the added value, influences profit, and reflects marketing objectives
and brand image.
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Factors determining price
Cost of production
Competitive conditions
Competitors prices
Marketing objectives
Price elasticity of demand
New or existing product
ii. Pricing strategies
Cost-based pricing
Cost of producing/supplying + added costs
Cost-plus pricing: Adding a fixed percentage of the unit price to a product.
Market-based pricing strategies
Penetration pricing: usually for mass
marketing, in intention large market share.
Setting a relatively low price with strong
promotion to have high volume sales.
Market skimming: high price for a new unique
product (usually exclusive). Aiming to maximize
short term profit.
Psychological pricing: setting prices taking account of customers' perceptions of value. (to
appear lower 99.9).
Loss leaders: products sold at a very low price to encourage customers to buy other
products. (supermarkets selling milk at prices below cost to encourage consumers to buy
other goods).
Price discrimination: selling the same product to different consumers at different prices.
(selling low price tickets to children or elders)
Promotional pricing: low prices or promotions to gain market share (2x1)
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Price leadership
Usually when a company is a dominant firm in the market, other firms set the same prices.
Predatory or destroyer pricing: undercutting competitors’ prices to try and force them out
of the market. In the long term the company that wins this price war will have a monopoly.
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i. Promotion
Definition: use of advertising to inform consumers and persuade them to buy.
Communicating with actual and potential consumers. All forms of promotion are part of the
‘promotion mix’.
Objectives:
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Increases sales by raising consumer awareness
Remind consumers of an existing product
Attract new consumers
Compete
Reinforce brand image of the brand and/or product
Correct misleading reports
ii. Above-the-line promotion
Definition: Mass market promotion that boosts brand awareness while promoting certain
products and services.
Advertising
Informative advertising: give information to potential customers.
Persuasive advertising: creates a brand identity or distinct image for the product.
Type of media should be chosen by: Costs, Target market, Type of product, Law and
cultural differences.
iii. Below-the-line promotion
Definition: the firm has direct control, made to reach a small, targeted audience. BTL
includes marketing activities such as brochures, direct mail, flyers, sponsorships and email
campaigns.
Sales promotion: special offers directed to consumers or retailers to achieve short-term
sales. E.g. discounts, loyalty reward programs, coupons, BOGOF, sponsorships, etc.
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iv. The promotion mix
Definition: combination of promotional techniques to communicate benefits of the product.
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Internet marketing :
Benefits
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Limitations
Improves audience reach
Targets market
Interactivity with consumers
Performance metrics
Speed of transmission
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Lack of skill for new small
businesses
Time investment into managing the
account
Possible negative feedback
Security isssues
Viral marketing: the use of social media to increase brand awareness or sell products. E.g.
flash games, video clips, influencer promotions.
Guerrilla marketing: unconventional way of performing marketing activities on a low
budget.
i. Place
Channel of distribution: chain of intermediaries a product passes through unit the final
consumer.
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Consumers need easy access to a product
Manufacturers need outlets
Retailers will sell produces’ goods
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Factors influencing distribution channel:
● Type of product
● Target market and its geographical dispersion
● Level of service
● Value of the product
● Number of potential consumers
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4.6 The extended marketing mix of seven Ps
Assessment objectives (AOs)
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Analyze and apply the seven Ps models in a service based market (AO2)
Evaluate The importance of people and employee customer relationships
in marketing (AO3)
The importance of delivery process in marketing (AO3)
The importance of tangible physical evidence in marketing (AO3)
i. People
Definition: Refers to employees and managers of a business and their relationships with
customers. They are crucial in service related firms, where relationships are notorious.
Good services = customer loyalty
ii. Process
Definition: procedures and policies to provide a service or product to a consumer. This is
determined by: speed, efficiency and consistency. Services need to be efficient to create
customer loyalty.
It is important to stay competitive by changing processes, to more effective and faster
services. E.g. online shopping.
iii. Physical evidence
Definition: refers to the ways in which the
business and its products are presented.
E.g. where the service is being delivered,
the appearance of retail shops, the look of
employees, etc. Can be used to support
high prices and/or positive consumer
experience.
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4.7 International marketing
Assessment objectives (AOs)
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Analyze and apply methods of entry into international markets (AO2)
Evaluate opportunities and threats posed by entry into international
markets (AO3)
Strategic and operational implications of international marketing (AO3)
Role of cultural differences in international marketing (AO3)
Implications of globalisations on international marketing (AO3)
i. International marketing:
Definition: selling products in markets other than the original domestic market. Only large
businesses will do this as it is very risky and expensive.
ii. Methods of entry into international markets
Exporting: selling directly to a foreign customer or indirectly through an export intermediary.
International franchising: foreign franchisees operate firm’s activities abroad.
Joint ventures: agreements between two companies to own and operate new businesses.
Licensing: business allowing another firm in the country to produce goods in their license.
Involves strict control over quality.
Direct investment in subsidiaries: setting up company subsidiaries in foreign countries
can achieve higher success rates.
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Entry to international markets:
Opportunities
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Develop marketing operations in
expanding markets when the
domestic market is mature
Potential to increase profits because
of growth in GPDs
Spreading risks between different
markets
Poor trading conditions, less
competition
Economies of scale in production
and marketing
Threats
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Different consumer needs and
wants
Differences in legal environment
High levels of competition with
national producers
Growth of gray market in
international markets, undermine
reputation of well known global
brands
iii. Strategic and operational implications of international marketing
Pan-global marketing: adopting a standardized product across the globe. Important for
exclusive brands and mass appeal brands (Apple, Nike, Coke)
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Advantages
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Product with a common identity
(customer recognition)
Cost reduction (same product)
Disadvantages
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Does not acknowledge cultural
differences
Differences in legal environment
Brand names could not translate
Setting same price fails to take into
account different income levels
Global localisation: adapting the marketing mix to meet national and regional tastes.
Advantages
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Local needs and culture reflected in
marketing
Meet local requirements
Less local opposition
Disadvantages
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Economies of scale reduces
The international brand could lose
identity
More costs
iv. The role of cultural differences in international marketing
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Promotion: advertisements are different for each culture.
Product: need to meet taste and cultural requirements
Price: Average income levels vary across the globe
Place: some places don't have internet (no ecommerce)
v. Globalization in international marketing
Multinational companies: businesses that have operations in more than one country.
Opportunities
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Opening new markets outside,
which didn’t reach saturation
Increased competition gives the
incentive of being internationally
competitive
Global brand identity (pan global)
Wider choice of locations
Threats
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Increased competition
Pan global strategies may fail
Communication problems
Risk of foreign takeovers
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4.8 E-commerce
Assessment objectives (AOs)
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Analyze and apply features of e-commerce (AO2)
Effects of changing technology and e-commerce on the marketing mix
(AO2)
Different types of e-commerce (AO2)
Evaluate costs and benefits of e-commerce to firms and consumers (AO3)
i. E-commerce
Definition: buying and selling goods and services over the internet
Features:
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Global reach
Ubiquity- available at all times and all locations.
Interactivity: two way communication between business and customer
Personalisation: more targeted marketing
More information can be delivered
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ii. Types of e-commerce
Business to business (B2B): transactions between suppling and purchasing businesses.
Business to consumer (B2C): directly between business and consumers.
Consumer to consumer (C2C): consumers trade with each other. (eBay)
Advantages and disadvantages of ecommerce to businesses:
Advantages
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Inexpensive
Worldwide audience
Consumers leave data that can be
used in target marketing
Lower fixed cost
Disadvantages
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Some countries don’t have good or
any internet
No testing in goods
Increase in product returns
Internet security
International competition
Expensive IT infrastructure
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Advantages and disadvantages of ecommerce to customers:
Advantages
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Convenient
Open 24/7
Prices often lower
Disadvantages
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No testing in goods
Concern over credit security
Delays in receiving goods
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Unit 5: Operations Management
5.1 The role of Operations Management
Assessment objectives (AOs)
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Know and understand operations management and its relationship with
other business functions (AO1)
Analyze and apply operations management in organizations producing
goods and services (AO2)
Evaluate operations management strategies and practices for ecological,
social and economic sustainability (AO3)
Definition: refers to the use of resources called inputs (land, labor and capital) to provide
outputs (goods and services).
Key points:
● Efficiency of production (low costs)
● Quality
● Flexibility and innovation ( develop and adapt new processes)
i. The production process
The added value of the inputs depends on:
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Design of the product or nature of the service (high quality?)
Efficiency of combination of the input resources (lowering costs)
Convincing consumers to pay more
ii. Resources
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Land
Labour: quality of labor impacts on output. Can be improved by training
Capital: refers to the tools, machinery and equipment that businesses use to produce
outputs.
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iii. Ecological, social and economic sustainability
Planet, people and profit, known as the triple bottom line businesses need to assess their
impact on these three things.
Ecological sustainability: capacity of ecosystems to maintain their essential processes in
the long-term. This can be done by: reducing waste, using less energy, designing
environmentally conscious products, etc.
Social sustainability: ability of a community to develop processes that meet the needs of
actual and future generations. This can be done by: designing safe workplaces, creating jobs
in low income areas, cutting harmful pollution, etc.
Economic sustainability: using assets efficiently to continue generating profits over time.
This can be done by: managing operational assets, increasing efficiency production,
improving business competitiveness, R&D, etc.
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5.2 Production methods
Assessment objectives (AOs)
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Analyze and apply the production methods (AO2)
Evaluate most appropriate production methods for a given situations (AO3)
i. Types of production
Job/ customized production: producing one-off items specially designed for each
customer. Each individual product has to be completed before starting a new one. One
product is currently being made at a time.
Batch production: producing limited numbers of identical products. Separated groups for
each product. Production process involves different stages. Individual batches are not free to
pass through the process, they have to wait for each other.
Flow/mass production:
Flow production: producing items continually moving in the production line. Often produced
24 hours a day continuously (automatized). For industries where demand is high and
consistent, produce large quantities in a short time. Low labour costs.
Mass production: producing large quantities of a standardized product. Low labor costs
(automatization).
Process production: Standardized goods in bulk quantities using continuous inputs.
Usually these inputs (heat, time and pressure) undergo a chemical conversion for the final
product. The product cannot be disassembled. E.g. Oil refineries.
Mass customization: use of computer systems to produce items that meet individual
preferences at mass production costs. (job production + mass production). Technology:
Computer aided manufacturing (CAM) and Computer aided design (CAD).
Cell manufacturing: lean method of producing using a group of team members. It is a form
of flow production, the production line is divided into several mini production units. Each cell
produces a unit of the final product (e.g. washing machine motor).
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ii. Factors influencing production methods
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Size of the market
Amount of capital
Availability of resources
Market demand
Most firms use more than one method.
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5.3 Lean production and quality management
Assessment objectives (AOs)
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Know and understand features of lean production: less waste, greater
efficiency (AO1)
Features of quality control and quality assurance (AO1)
Analyze and apply features of cradle-to-cradle design and manufacturing
(AO2)
The importance of national and international quality standards (AO2)
Methods of lean production (AO2)
Methods of managing quality (AO2)
Evaluate the impact of lean production and TQM on an organization (AO3)
i. Lean production
Definition: producing goods and services efficiently, minimum waste of resources and high
quality.
Seven main sources of waste:
1. excessive transportation
2. excessive stock holding
3. too much worker movement
4. delays in production
5. overproduction (producing ahead)
6. making complex goods
7. defects
Efficiency: business is measured by comparing ratio ‘inputs to outputs’, this indicates
productivity. E.g output per worker power time period.
ii. Methods of lean production
Simultaneous engineering: essential design,
market research, costing and engineering are
done simultaneously. New products can be
quickly released.
Flexible specialism: short production runs that
change from one design to the other. Requires:
flexible employment contracts, flexible machinery
(switches designs), and multiskilled workers.
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Responds quickly to consumer demand and changes.
Continuous improvement (kaizen): All workers contribute something that can improve
business operations. Workers may know more than managers. It is the responsibility of each
member to improve the
standardized procedure and
eliminate errors from within the local
environment.
Conditions necessary:
● Management should involve
staff
● Team-working, discussing
problems
● Each group can take
decisions
● ALL workers need to be
involved
Just in time (JIT): avoiding holding stock by delivering every product that its finished to the
customer.
Conditions necessary:
● Excellent relationship with suppliers (short notice)
● Multi-skilled staff that are prepared to change jobs at short notice.
● Flexible machinery (prepared for changes)
● Accurate demand forecast
● Latest It equipment for accurate data
● Excellent employee relationships
● Quality as a priority
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Kanban: manufacturing system in which production of the next batch is not started until the
user signals a need, enabling the firm to hold only a minimal buffer stock(large supply of a
commodity). The signal can be cards, empty containers, flags or computer screens
authorizing production. Usually part of the JIT system.
Andon: manufacturing term system that notifies management of a quality or process
problem. (usually visual displays)
Cradle to Cradle (C2C): creates production techniques that are waste-free and sustainable.
Inputs and outputs are seen as: technical resources (can be recycled or reused) or biological
resources (composted).
iii. Managing quality
A quality product (good or service that meets customers expectation) does not necessarily
have to be made as best as possible.
Quality products give:
● Customer loyalty
● Saves consumer complaints and costs that are related
● Longer life cycles
● Less advertising
● Higher price could be charge
iv. Features of quality control and quality assurance
Quality standards: minimum acceptable production standards to keep up with customer
expectations.
Quality control: inspection of the product or a sample of products
Quality assurance: system agreeing and meeting quality standards at each stage of
production.
Quality control techniques:
1. Prevention: quality should be designed into the product.
2. Inspection (high costs)
3. Correction and improvement: correcting processes and products improving future
quality.
Quality assurance
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Based on quality standards.
Puts emphasis on prevention, rather than inspecting (control)
Reduces chances of lots of faulty products
Standards in each stage
Checks components when they arrive
Considered: Product design, Quality of inputs, Production quality, Delivery systems
and Customer service.
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v. Methods of managing quality
Benchmarking
Definition: Identifying best firms in the industry performance standards and comparing with
their own ones.
Quality circles
Definition: groups of employees that meet regularly to improve their quality in their
department.
Total quality management (TQM)
Definition: philosophy that involves all employees in the quality improvement process. Often
involves a change in culture of the organization. Every employee is responsible for the
quality of the final product. Employees should be empowered.
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vi. Impact of lean production and TQM
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●
Finance: technology and multi skilled staff is not cheap, but in the long term costs will
go down.
HR: changes in traditional working conditions.
National and international quality standards:
ISO is the largest developer of international product and services standards. ISO 9000: is a
recognised certificate that acknowledges the existence of a quality procedure that meets
certain conditions.
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5.4 Location
Assessment objectives (AOs)
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Analyze and apply the reasons for a specific location of production (AO2)
●
Evaluate ways of reorganizing production, nationally and internationally
(AO3)
i. Location
Optimal location: a business location that gives the best combination of quantitative and
qualitative factors.
Location decisions key characteristics:
● Strategic in nature: long term, impact on the whole business
● High relocation costs
● Taken by highest management levels
Optimal location balances:
● high fixed costs of the site with convenience for customers and potential revenue
● low costs of remote site with limited qualified labor
● quantitative factors (financially measurable) with qualitative ones
ii. Factors influencing location
Quantitative factors:
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Techniques to assist in the location decision:
1. Profit estimates
Comparing estimated revenues and costs of each location, with highest annual potential
profit.
2. Investment appraisal
The payback method, estimates the return of the original investment. Also calculating the
annual profit as a percentage of the original cost of each location is useful.
3. Break-even analysis
Qualitative factors
These cannot be measured in financial terms: safety, room for expansion, managers
preferences, ethical considerations, environmental concerns and infrastructure
(transportation and communication links).
Multi-side locations
iii. Outsourcing, offshoring and subcontracting
Outsourcing: using a third part to take part of the production process.
Subcontracting: business hires an outside individual or organization to perform a
specialized task that cannot be completed internally.
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Business-process outsourcing (BPO): uses a third party that takes responsibility for
complete business functions.
Advantages:
● Reduces operating costs (contracting professionals all time is more expensive)
● Increases flexibility
● Improves company focus on core activities
● Access to quality services or resources that are nor available internally
Disadvantages:
● Loss of job security for employees
● Quality issues (less control)
● Customer resistance (criticism)
● Security (IT related)
Offshoring: relocation of a business process to another country
Advantages:
● Low-costs countries offer benefits
● Potential for higher profits
● Labour wages
● Easy recruitment to developing countries
Disadvantages:
● Communication barriers
● Cultural differences
● Level of services and control
● loss of control over quality and reliability of delivery
● Ethical considerations
iv. Insourcing
Definition: reverse of outsourcing, undertaking a business function within the business
Inshoring: ending offshoring contracts
Reasons:
● Chinese labor costs rising
● Quality control issues
● Less transportation expenses
● Ethical issues
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5.5 Production planning
Assessment objectives (AOs)
●
Analyze and apply the reasons for a specific location of production (AO2)
●
Evaluate ways of reorganizing production, nationally and internationally
(AO3)
Main elements of managing supply chain and stock levels:
●
●
Cost minimization
Consistent and reliable supply of products
i. Supply chain
Definition: every business that comes in contact with a product. It encompasess all the
steps from supplier to customer. An optimized supply chain = lower costs.
They need to:
● Reduce costs
● Minimize transportation
● Eliminate bottlenecks (congestion in a workflow)
● Maximize customer value
ii. Stock control
JIT (in time) vs
JIT minimizes stock
JIC (in case)
JIC helds at a sufficient level
Traditionally businesses rely on the JIC principle. All businesses hold stock in some way.
Manufacturing business will hold:
● Raw materials and components
● Work in progress (not finished goods)
● Finished goods
iii. Stock holding costs
1. Opportunity costs: it could be put in another use
2. Storage costs: secure warehouses (could require refrigeration,etc)
3. Risk of obsolescence
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Costs of not holding enough
stocks
1.
2.
3.
4.
Lost sales
Losing time
Expensive special orders
Small order quantities.
Optimum order size
The optimal order size differs from every firm
and kind of stock. The economic order
quantity is the optimal order that meets
demand while minimizing its total costs.
iv. Stock control charts
Use by businesses using JIC strategy to monitor stock levels.
1. Buffer stocks: minimum stocks that should be held. More uncertainty about delivery
times or production levels, more buffer stock.
2. Maximum stock level: limited by space or financial costs
3. Re-order quantity: influenced by economic order quantity (optimal order), its the
number of units ordered each time.
4. Lead time: normal time between ordering new stock and its delivery.
5. Re-order stock level: the level of stocks that will trigger a new order to be sent to
the supplier
v. Capacity utilization
Calculated by:
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑜𝑢𝑡𝑝𝑢𝑡 𝑙𝑒𝑣𝑒𝑙
𝑚𝑎𝑥𝑖𝑚𝑢𝑚 𝑜𝑢𝑡𝑝𝑢𝑡 𝑙𝑒𝑣𝑒𝑙
𝑥 100
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Definition: the proportion of maximum output capacity currently being achieved. If a firm is
working at full capacity it is achieving 100% capacity utilization.
When capacity utilization is at a high rate average fixed costs will be low.
Excess capacity: current levels of demand are less than the full capacity output.
Capacity shortages: demand exceeds current output capacity
vi. Productivity
Definition: ratio of outputs to inputs during production. Its a relative measure.
Productivity ≠ Level of production
Level of production: number of units produced in a time period.
Measures of productivity
𝑙𝑎𝑏𝑜𝑟 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 (𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑝𝑒𝑟 𝑤𝑜𝑟𝑘𝑒𝑟):
𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦:
𝑡𝑜𝑡𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡
𝑡𝑜𝑡𝑎𝑙 𝑤𝑜𝑟𝑘𝑒𝑟𝑠
𝑜𝑢𝑡𝑝𝑢𝑡
𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
All firms are trying at all times to increase productivity. Increasing productivity = decreasing
costs
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Raising productivity levels:
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Improve training of employees raising skill levels (expensive, time consuming and
risky)
Improve employee motivation (no needed to increase pay)
Purchase technology and advance equipment (automatization)
More efficient management
vii. Deciding to make versus buy:
Figures that should be consider:
● Expected volume
● Fixed and overhead costs (making product)
● Unit Direct costs of making product
● Unit Costs from external supplier
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5.6 Research and development
Assessment objectives (AOs)
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Analyze and apply the importance of developing goods and services that
address customers’ unmet needs (AO2)
Distinctions between product, process, positioning and paradigm
innovations (AO2)
The difference between adaptive creativity and innovative creativity (AO2)
Evaluate the importance of research and development for a business
(AO3)
How different factors influence the research and development strategies in
an organization (AO3)
Definition: scientific research and technical development of new products and processes
i. Importance of R&D
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Competitive advantage
Possible intellectual property rights
Customer loyalty
High prices
Free publicity
Possible lower costs
ii. Limitations
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Expensive
Does not always lead to invention or discovery
Opportunity costs
Competitors may result in even more successful products
Ethics
iii. Intellectual property rights
Definition: creations used in business that have legal property rights over possession and
use. They are intangible.
Advantages:
● Differentiation and USP
● Can be sold or licensed (revenue stream)
● Branding
● Increase net assets
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iv Types of innovation
Product innovation: new marketable products
Process innovation: new methods can be more effective or just innovative
Positioning innovation: relocating customers' perception about a product.
Paradigm innovation: a change in nature of the goods or services
v. Factors influencing impact of R&D in an organization
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Nature of the industry
R&D spending plans of competitors
Business expectations (recession or economic growth)
Culture of the business
Finance
Ethics
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5.7 Crisis management and contingency planning
Assessment objectives (AOs)
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Analyze and apply the difference between crisis management and
contingency planning (AO2)
Factors that affect effective crisis management (AO2)
Advantages and disadvantages of contingency planning (AO2)
Contingency planning: planning immediate steps to be taken when a crisis occurs
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Crisis management: steps taken by an organization to limit the damage from an event
Effective crisis management:
● Transparency (open about crisis)
● Communication
● Speed (time to respond)
● Keeping control (image of calm and confidence) (rehearsals of crisis could help)
Key steps in Contingency planning
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Identify potential crises
Asses likelihood of these occurring
Minimize potential impact
Plan for next operations of the business