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3
3.9
Budgets (HL only)
Practice question
To
answer
the
question
below
effectively,
see
Unit
6
pages
398–402.
3.9 Budgets (HL only)
EEB
The
EEB
is
a
small,
reservation
pride
in
well-known,
service.
their
customer
EEB
work.
service.
reputable
employees
EEB
Due
has
to
an
and
are
received
increase
nancially
highly
global
stable
motivated
recognition
in
for
its
demand,
online
and
take
changes
in
technology,
the
nance
director,
Maia,
has
pupa
hotel
great
Key terms
By the end of this chap ter, you should be able to:
high-quality
greater
competition
Explain the
and
decided
Budget
dierence bet ween cost and prot centres
to
a quantitative nancial plan
upgrade
EEB’s
computers
and/or
Analyse the role of cost and prot centres
software.
that estimates the revenue
Maia
has
two
Construct and comment on a
options:
budget
and expenditure over a
Option
A:
purchase
new
software
new
computers,
called
“Book-Fast”
from
a
Calculate and analyse
local
specied future time period
variances
larva
designer.
Explain the
stnuocca dna ecnaniF 3
B:
purchase
with
installed
software
called
impor tance of budgets and variances in decision-making
Budget holder
stnuocca dna ecnaniF 3
software
Option
“Global
a person involved in the
Reach”,
from
a
manufacturer
abroad.
budget
Option A
Cost
$20,000
24 hours onsite at
a
expenditure
Option B
Technical suppor t
is
for
$40,000
quantitative
over
individuals,
a
for
nancial
specied
future
governments,
plan
time
or
for
that
estimates
period.
any
revenue
Budgets
type
of
can
be
formulation and achievement
and
prepared
of a budget
organization.
Cost centre
EEB
24 hours online
Budgets
help
in
setting
targets
and
are
aligned
with
the
main
objectives
of
a section of a business
Further payments payable:
the
organization.
the
specied
They
enable
the
efcient
allocation
of
resources
within
where costs are incurred and
Employees
No change
At the end of their contract 15% of
Training cost
On-the-job: free
Intensive: $12,000 in year 1
Maintenance cost
Free
$1,000 per year
Insurance cost
$500 per year
$1,000 per year
time
period.
recorded
employees to be made redundant,
The
person
involved
in
the
formulation
and
achievement
of
a
budget
Prot centre
cost: $15,000 in year 2
is
known
as
the
budget
holder .
The
budget
holder
is
responsible
for
larva
ensuring
used
that
budgets
the
are
specied
sales
budget
revenue
allocations
budgets
and
are
cost
being
met.
Commonly
a section of a business where
both costs and revenues are
budgets.
identied and recorded
Cost and prot centres (HL only)
The
estimated
return/total
The
average
rate
of
return
(ARR)
of
Option
A
is
46.25%.
To
revenue
in
$
per
year
be
able
Maia
is
considering
carrying
out
an
investment
appraisal
on
each
below.
last
for
Each
four
account
for
the
revenues
generated
and
costs
incurred,
option.
different
shown
will
to
is
parts
of
a
business
are
divided
into
cost
centres
or
prot
centres
option
years.
EEB
employees
favour
Option
A,
even
though
some
of
their
competitors
Cost centres
using
Option A
Option B
Year 1
10,000
14,000
Year 2
12,000
16,800
Book-Fast
security
more
will
Year 3
17,000
23,800
Year 4
20,000
28,000
issues.
have
give
of
Maia
sophisticated
EEB
volume
reported
However,
up-to-date,
also
global
a
problems
has
with
chosen
and
competitive
hotel
secure
the
software,
Option
B,
which
reservation
advantage
and
an
including
will
system
ability
to
provide
software.
handle
a
It
large
reservations.
This
Cost
can
a)
Dene
the
term
investment
is
appraisal .
[ 2
Calculate
the
payback
period
for
Option
A
(show
working).
[
2
marks
[
2
marks
be
By
Calculate
the
(show
your
average
rate
of
return
(ARR)
for
Option
working).
divided
For
both
Option
A
and
Option
B,
calculate
the
help
of
a
business
managers
collected
and
advertising,
into
cost
department
human
–
to
centres
where
collect
recorded
and
in
examples
net
resources,
product
product
phones,
d)
section
costs
wages,
costs
and
in
some
of
are
use
these
insurance,
the
incurred
cost
data
sections
among
following
and
recorded.
effectively.
include
other
costs.
Businesses
–
a
include
where
business
each
nance,
ways:
production,
department
producing
several
is
a
marketing,
specic
products
could
cost
centre.
ensure
that
B
each
all
or
can
of
all
and
your
c)
part
marks
By
b)
a
centres
Examples
electricity,
present
value
these
is
a
cost
televisions,
products
centre.
For
computers,
could
be
cost
example,
and
centres
many
Samsung
more
because
produces
products.
costs
are
mobile
Each
incurred
of
in
their
KFC has outlets all round the world
(NPV)
using
a
discount
rate
of
4%
(show
all
your
working).
[
4
marks
production.
(these two are in the Netherlands
e)
Explain
f)
Examine
the
one
NPV
advantage
method
of
and
one
investment
disadvantage
for
EEB
of
using
appraisal.
By
[
4
marks
10
marks
geographical
Cola
Company
geographic
Maia’s
choice
of
Option
B.
[
location
are
areas
located
that
they
more
in
businesses
different
are
located
such
parts
in
as
of
could
KFC
the
be
or
The
world.
cost
Coca-
Each
centres.
of
the
and Thailand) – each geographical
area could be treated as a
cost centre
219
218
For
–
information,
visit:
http://w w w.oxfordsecondar y.com/ib -business/
Need
help?
Contact
your
local
educational
consultant:
www.oxfordsecondary.com/contact-us
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Loykie Lominé
Mar tin Muchena
Rober t A. Pierce
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reproduce
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following
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extracts
who
and
have
given
adaptations
of
Data
material:
available
8
7
6
5
4
3
2
from
with
Adapted
7
6
5
4
3
2
used
made
from
in
the
production
of
this
book
is
a
natural,
recyclable
recycling’
bio-bean
published
by
bio-bean
Limited.
Limited.
from
the
blog
published
by
‘The
story
Bridge
of
India
micronance
on
25
March
in
India’
2020.
by
Used
Jhanvi
with
wood
grown
in
sustainable
forests.
The
by
Bridge
from
the
article
to
the
environmental
‘How
Kenya
created
the
world’s
most
successful
manufacturing
mobile-payments
conforms
India.
product
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process
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from
1
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Paper
article
permission
(ebook)
Sonakia,
8
the
(print)
1
978-1-38-201687-2
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10
images/Alamy
Photo;
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9
Stock
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Stock
Stock
Stock
Stock
p363
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Enquiries
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University
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organization.
the
Press,
work
any
Cataloguing
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Geopix/Alamy
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Crupi/Shutterstock;
copyright
Data
archive/Alamy
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Mick
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British
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Photo;
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You
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permitted
reproduction
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service’
by
Andrea
Esther
Barry,
published
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of
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Reprinted
by
permission
of
the
Author.
origin.
Adapted
Printed
in
China
by
Golden
Cup
Printing
Co
from
by
Corporate
publisher
their
would
photographs
like
and
to
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the
following
for
permission
to
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artworks:
Y
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Extract
QBS
pvii:
of
from
is
CFI
the
Sold
Accounting
Ethics?’,
published
Education,
Used
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article
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of
‘Future
of
Liquidation’,
Residents
published
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by
Staff
Real
Secured
Business
as
Care
Rescue.
from
article
‘Overview
of
sustainable
nance’,
published
by
Learning
European
Photos:
is
(https://corporatenanceinstitute.
Images
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Artworks:
‘What
Institute
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Home
Cover:
article
Finance
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The
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Ltd.
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Studios/Shutterstock;
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Commission’.
©
European
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1995-2021.
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under
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ravel
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adym
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Contents
Introduction
iv
Introduction
to
concepts
Introduction
to
the
4.1
Introduction
to
4.2
Marketing
4.3
Sales
4.4
Market
4.5
The
4.6
International
marketing
227
v
Business
planning
235
Management
toolkit
forecasting
(HL
only)
251
vii
Introduction
to
Theory
Introduction
to
inquiry
of
Knowledge
(TOK)
x
What
is
a
research
seven
Ps
of
256
the
marketing
marketing
(HL
mix
270
only)
308
xii
Unit 5: Operations management
Unit 1: Introduction to business management
1.1
Unit 4: Marketing
business?
1
5.1
Introduction
to
operations
management
1.2
Types
of
business
1.3
Business
entities
313
14
objectives
5.2
Operations
5.3
Lean
methods
1.4
Stakeholders
52
1.5
Growth
59
1.6
Multinational
production
management
and
320
34
evolution
companies
(MNCs)
5.4
Location
5.5
Break-even
5.6
Production
5.7
Crisis
and
(HL
quality
only)
327
338
76
analysis
planning
349
(HL
only)
362
Unit 2: Human resource management
2.1
Introduction
to
human
and
contingency
resource
management
2.2
management
planning
(HL
5.8
Research
and
5.9
Management
only)
374
80
Organizational
2.3
Leadership
2.4
Motivation
2.5
Organizational
structure
and
management
(HL
only)
378
information
102
systems
and
development
94
demotivation
(HL
only)
385
111
(corporate)
Unit 6: Assessment
culture
(HL
only)
131
External
2.6
Communication
2.7
Industrial/employee
Internal
(HL
Assessment
396
139
Assessment
403
relations
only)
144
Index
407
Unit 3: Finance and accounts
Access
3.1
Introduction
to
nance
to
3.2
Sources
of
3.3
Costs
3.4
Final
3.5
Protability
3.6
Debt/equity
3.7
Cash
3.8
Investment
3.9
Budgets
your
nance
the
student
website
workpoints,
for
the
toolkits
answers
and
152
practice
and
support
149
revenues
questions
here:
166
www.oxfordsecondary.com/9781382016834
accounts
and
170
liquidity
ratio
analysis
ow
ratio
(HL
analysis
only)
187
194
202
appraisal
(HL
only)
210
219
iii
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INTRODUCTION
This
book
is
a
companion
Management
Diploma
the
IB,
DP
regarding
and
learning,
the
It
IB
of
(the
strategy,
IB
approaches
regarding
the
the
curriculum
but
Learner
to
by
also
the
Prole)
teaching
importance
Some
will
follows
published
syllabus
(the
Business
Baccalaureate
rigorously
Guide
assessment
(the
and
students
DP).
philosophy
especially
concepts
(IB
only
the
pedagogy
for
International
Management
not
educational
and
the
Programme
Business
content)
IB
in
IB
This
if
plan
you
business.
to
we
work
structure,
of
do
not
this
book
to
help
business
management,
and
also
to
to
become
a
lifelong
learner,
giving
to
make
around
sense
of
the
dynamic
you
business
In
course,
you
will
study
a
organizations,
and
both
not-for-prot
many
topics,
for-prot
ones,
from
and
diverse
marketing
to
will
learn
nance,
you
and
this
to
resources
to
operations.
You
the
concepts
of
change,
and
will
creativity,
business
develop
explore
and
help
tomorrow.
local,
case
they
can
management
adapt
to
of
understand
it
is
and
contexts,
to
IB
“In
it
teaching
fully
and
Even
management
own
business,
Management
its
if
you
at
this
book
course
understand
the
world
will
around
give
to
you
valuable
whatever
knowledge
vocation
calls
and
skills
you.
book
we
also
make
(TOK),
many
which
is
at
links
the
to
theory
core
Programme.
TOK
can
help
of
you
Business
the
of
sources
Management
knowledge
we
(for
have
in
example,
our
in
turn
Business
Management
can
subject),
help
it
you
TOK
aims
to
you
achieve
This
will
and
of
critical
in
thinking.
of
will
book
Business
examples
organizations,
what
and
world
as
understand
how
higher
even
will
help
you
Management,
level,
better
and
IB
it
will
as
at
you
study
standard
also
help
IB
DP
level
you
or
at
become
an
learner!
environments.
cooperation
ensure
business
your
understand
The
The
necessary
understand
discover
the
and
skills
and
at
own
from
ethics
international
business
their
today,
Regarding
national
studies
us
as
your
ones
terms
sustainability
the
up
about
better
how
up
resource
management
operations.
Business
better
Diploma
and
human
foundational
set
book
learn
range
(commercial)
you
and
study
set
knowledge
the
of
you
the
to
world
you.
your
gives
to
organization
DP
a
in
want
the
of
During
or
IB
applicable
keys
want
functions
to
as
business
you
also
an
act
will
inspire
you
you
can
activities
you
you
help
study
if
and
and
study
or
plan
your
you
to
It
in
university
wrote
questions
book
university,
and
contexts).
educators,
the
more.
and
As
of
challenge
with
aligns
IB”
with
logo
signies
current
IB
the
content
curriculum
and
authors
in
this
offers
textbook
high
has
quality
been
reviewed
guidance
and
by
the
support
IB
for
learning.
iv
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INTRODUCTION TO CONCEPTS
Concepts
of
a
(Chapter
belong
and
IB
can
specic
4.5)
DP
dened
and
are
Business
and
For
as
big
ideas
example,
to
not
Business
specic
reach
such
(Chapter
Management.
to
Management
that
topics
“benchmarking”
exclusively
creativity
ethics
be
subject.
Business
has
four
as
beyond
“social
5.3)
are
boundaries
marketing”
subject-specic:
However,
big
Management:
key
the
media
concepts:
ideas
they
such
they
as
ethics
are“concepts”.
change,
creativity,
sustainability.
Dening the four key concepts
There
below
the
is
no
universally
gives
you
denitions;
concepts,
both
a
solid
what
in
accepted
starting
matters
general
is
and
denition
point.
that
in
You
you
of
these
are
not
terms,
understand
Business
but
expected
these
the
to
table
memorize
four
key
Management.
Concepts
Initial denitions
Change
Change refers to modication or transformation from one form, state or value to another, over time or across places.
In Business Management, change is usually the result of internal or external inuences. For example, externally,
new competitors and new trends in consumer behaviour may lead an organization to adapt its objectives and opera-
tions; internally, the arrival of a new CEO may lead to a shift in the priorities of the organization’s strategic plan.
Creativity
Creativity refers to the process of generating new ideas and considering existing ideas from new perspectives. It
includes the ability to recognize the value of ideas when developing innovative responses to problems. In Busi-
ness Management, creativity may lead to the incremental or radical improvement of a business idea, of a product
or of a process, in order to be more successful or more competitive. For many organizations, a key challenge is
bringing innovation and managing the process of improvement in a sustainable way that does not create conict.
Ethics
Ethics refer to the moral principles and values that form the basis of how a person or an organization conducts their
activities. In Business Management, it is impor tant to realize that every decision may have moral implications,
impacting on internal and external stakeholders and the natural environment. Ethics is present throughout the orga-
nization, from marketing communication to operations, and from recruitment of new sta to accounting practices.
Sustainability
Sustainability refers to the ability of the present generation to meet its needs without compromising the ability of
future generations to meet their own needs. It can be enhanced by conserving resources, nding more ecient
ways to produce or discovering new resources. In Business Management, decisions should consider the triple
bottom line of people, planet and prot, and their resulting impact, taking into account not only nancial aspects,
but also communities and the natural environment.
Why learn about the four key concepts?
There
key
1.
are
several
reasons
why
it
is
important
to
learn
about
the
four
concepts.
The
of
four
key
Business
topics
relate
concepts
to
one
and
development,
You
could
the
course
make
another.
product
otherwise
are
these
enable
Management
have
you
as
a
For
to
gain
whole
example,
development,
the
disconnected,
impression
but
they
a
by
are
better
understanding
realizing
creativity
and
how
the
connects
promotional
different
research
activities.
that
the
elements
not:
the
concepts
constituting
enable
us
to
links!
v
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2.
The
four
key
concepts
will
help
you
make
connections
to
other
As IB learners we strive to be:
IB
subjects.
For
example,
ethics
is
one
of
the
four
TOK,
and
creativity
components
of
KNOWLEDGE ABLE
the
We develop and use conceptual
of
understanding, exploring
knowledge
all
can
knowledge across a range of
literature
help
you
framework
in
and
endeavour.
learn
“knowledgeable”
artistic
across
disciplines,
attribute
of
the
IB
Thinking
which
is
Learner
is
at
the
through
a
key
heart
concepts
aspect
of
the
Prole.
disciplines. We engage with
3.
Your
conceptual
understanding
is
assessed
in
your
internal
issues and ideas that have local
assessment
(IA),
where
you
write
about
an
organization
from
a
and global signicance.
conceptual
viewpoint,
ie
from
the
perspective
of
one
of
the
four
Source: IB Learner Prole
key
concepts.
chosen
5marks
4.
Your
you
(one
ability
with
about
The
way
organization
fth
to
concepts
and
framework
you
and
in
the
themselves.
focus;
social
analyse
so
the
chosen
concept
criterionA,
and
worth
your
up
to
IAscore!).
reason
even
your
through
total
sustainability,
to
connect
assessed
your
exams,
entrepreneurship
change
of
think
your
the
is
conceptually
absence
For
the
a
example,
enterprise
four
scenario
of
of
is
key
the
will
direct
Paper
about
has
ethics,
concepts
exam
3
also
help
question
give
a
social
creativity,
you
a
paper.
The four key concepts in this book
C oncep t
The
the
CHANGE
four
rest
them;
key
of
they
drawing
concepts
the
are
your
are
syllabus.
present
not
“extra
Therefore
throughout.
attention
to
topics”
there
In
important
is
that
no
many
would
specic
cases,
conceptual
be
added
chapter
you
links,
will
like
to
about
see
the
boxes
example
Due to changes in their external
in
themargin.
environment (such as new
competitors) and changes in their
However,
these
internal environment (such as
the
concepts
restructuring), organizations may
the
book,
need to modify their objectives
and strategies.
keep
learn
examples of such changes in
links
objectives or strategies.
and
making
Likewise,
Do some research to nd
as
about
to
the
concepts…
(concepts,
boxes
and
the
you
links
you
and
not
learn
discover
in
only
where
As
about
Business
Management,
contents
examples
will
and
and
context,
help
you
Ultimately,
contexts),
as
shown
the
to
by
key
studies,
should
this
link
through
you
should
concepts.
and
keep
understand
three
can
progress
four
case
you
the
you
you
syllabus.
their
This
instances
the
the
contents!
contents,
of
new
issues
concepts.
the
the
more
between
business
key
are
contents
aspects
as
you
identifying
the
are
linked
diagram.
Concepts
(change, creativity,
ethics, sustainability)
Contexts
(Case studies,
real-world examples)
Content
(Business Management:
tools and theories)
vi
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INTRODUCTION TO THE BUSINESS
MANAGEMENT TOOLKIT
The
to
Business
help
in
broadly
•
Management
the
analysis
categorized
Situational
factors
•
while
•
as
a
tools
Despite
this
overlapping
the
course
toolkit
that
the
is
a
the
collection
course.
planning
examining
the
of
tools
These
or
designed
tools
can
be
decision-making
internal
and
tools.
external
tools
assess
the
They
concepts
provide
throughout
the
action
steps
that
businesses
need
to
take
projects.
decision
applications.
content,
in
their
categorization,
boxes
integrated
a
of
situational,
assist
review
Decision-making
before
toolkit
business.
implementing
business
(BM)
evaluation
either
tools
affecting
Planning
and
is
the
tools
provided
should
and
possible
alternatives
facing
a
made.
be
contexts.
suggestions
course,
like
in
used
Each
about
the
this
to
unit
how
one
BM
help
in
the
toolkit
you
learn
this
BM
do
book
tools
have
about
contains
are
below.
BCG matrix
The BCG matrix is a planning and decision-making tool that uses graphical
representations of a rm’s goods or services in order to help the rm to decide
what to keep, sell or invest more in.
How can the knowledge of this tool help businesses to improve their nancial
decision-making?
The
well
tables
as
on
their
the
brief
next
two
pages
show
the
BM
tools
used
in
the
course
as
denitions.
vii
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Table 1 The Business Management toolkit (SL and HL)
Business
Brief denition
management tools
Anso matrix
The Anso matrix is a tool that provides a business with a framework to analyse and plan its
(pages 48, 297)
growth strategies. The four growth strategies it includes are: market penetration, market
development, product development, and diversication.
Boston Consulting Group
The BCG matrix is a tool that evaluates an organization’s por tfolio potential based on relative
(BCG) matrix
market share and industry growth rate factors. It helps in long-term strategic planning and
(pages 215, 276–79)
decision-making with regard to what the organization should invest in, discontinue or develop
in the future. It is a four-square matrix that uses graphical representations to plot the
organization’s oerings.
Business plan
A business plan is a road map that provides a detailed account of a business’s goals and how it
(pages 10, 301, 324)
plans to achieve those goals. It is a guide that lays out a business’s functions from nance, human
resources and marketing to operations and other elements essential to its success. It can be used
to attract investment for the business as well as keep it on track .
Circular business models
Circular business models signify the diverse ways in which goods and services are produced and
(pages 42, 275, 318, 331, 391)
consumed. These models explore how organizations create, oer and deliver value to their stake-
holders while reducing environmental pressure and social costs resulting from economic activity.
In this BM course the following circular business models will be studied:
•
Circular supply models
•
Resource recovery models
•
Product life extension models
•
Sharing models
•
Product service system models
Decision trees
A decision tree is a graphical tool that uses a branching model to demonstrate every possible
(pages 68, 342)
outcome of an organization’s decision. These tree-like branches represent various choices facing
the organization, including costs, results, probabilities or risks. Businesses use decision trees to
determine specic courses of action.
Descriptive statistics
Descriptive statistics are quantitative means that are used to summarize a given set of data. It is a
(pages 91, 98, 121, 126,
process of using and analysing given statistical data. Descriptive statistics help to present a large
168, 369)
amount of quantitative data in a simplied or manageable form. They are broken down into mea-
sures of central tendency and measures of variability. In this BM course the following measures
will be used:
•
Mean
•
Pie char ts
•
Mode
•
Infographics
•
Median
•
Quar tiles
•
Bar char ts
•
Standard deviation
STEEPLE analysis
STEEPLE stands for Social, Technological, Economic, Environmental, Political, Legal and Ethical.
(pages 59–62)
STEEPLE analysis is a useful tool for a business that aims to study its external environment. It pro-
vides a detailed overview of or insight into the various external factors inuencing an organization.
S WOT analysis
SWOT stands for Strengths, Weaknesses, Oppor tunities and Threats. Strengths and weaknesses
(pages 45–48, 83, 192, 303)
are internal aspects inuencing an organization, while oppor tunities and threats are external
factors aecting an organization. In conducting a SWOT analysis, a business must examine all of
these elements as they all have the potential to impact its success or failure.
viii
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Table 2 The Business Management toolkit (HL only)
Business
Brief denition
management tools
Contribution
Contribution in this context refers to a set of tools that are used to aid decision-making in a
(pages 168, 349–50)
business after analysing and evaluating its given revenue and cost situations. Businesses need
to pay par ticular attention to the decisions they make due to their direct impact on their nancial
performance. The contribution tools studied in this case are:
•
Make or buy analysis
•
Contribution costing
•
Absorption costing
Critical path analysis
Critical path analysis is a tool that helps a business to schedule and manage complex and
(page 367)
time-sensitive projects. It is used to map out all impor tant tasks that are essential to complete
a project. It helps to set realistic deadlines for a project and monitor the achievement of project
goals, providing remedial action where required. In this BM course the following will be required:
•
Completion and analyses of a critical path diagram (drawing of the diagram is not expected)
•
Identication of the critical path
•
Calculation of free and total oat
Force eld analysis
Force eld analysis is a tool used by businesses to analyse the forces for and against change to
(page 347)
inform decision-making. It is useful when organizations are planning and implementing pro-
grammes on change management. The force eld analysis diagram provides a comprehensive
overview by illustrating the driving and restraining forces inuencing a given situation.
Gantt char t
A Gantt char t is a graphical tool that helps to plan and schedule project tasks. It shows a given
(page 372)
project schedule, including how the tasks or activities are performed over a set period of time. It
is useful in breaking down complex projects into a simpler display that is easy to understand. In
addition, where large teams of stakeholders are involved, it helps to keep tasks on track .
Hofstede’s cultural
Hofstede’s cultural dimensions is a tool aimed at understanding the cultural similarities and
dimensions
dierences across countries and determining the various ways that business can be conducted in
(pages 109, 311)
these cultures. It is a framework that compares the dierent national cultures and their dimen-
sions as well as examining their impact on a given business setting. Countries can be classied
according to six cultural dimensions: power distance, individualism/collectivism, masculinity/fem-
ininity, uncer tainty avoidance, long-term/shor t-term orientation, and indulgence/restraint.
Por ter ’s generic strategies
Por ter ’s generic strategies explore how a business can obtain a competitive advantage over
(page 246)
other similar businesses across its specied market scope. These strategies help a business to
determine its direction as well as how to beat its competition. The generic strategies include: cost
leadership (producing at a low cost); dierentiation (oering uniquely dierent and value-added
quality products); and focus (selling its product to specialized market segments). Focus is fur ther
subdivided into cost focus and dierentiation focus.
Simple linear regression
Simple linear regression includes a set of tools that describe or predict the relationship between
(pages 253, 254, 351)
two variables. They estimate how changes in an independent variable (the variable used to
predict the value) may aect changes in the dependent variable (the variable being predicted).
The simple linear regression models explored in the BM course are:
•
Scatter diagrams
•
Line of best t
•
Correlation/extrapolation
ix
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INTRODUCTION TO THEORY OF
KNOWLEDGE (TOK)
Every
Diploma
called
Theory
about
critical
about
learning
of
•
is
taught
Through
at
•
a
Through
DP
opportunity
understanding
student
(TOK),
inquiry
body
of
we
must
which
into
the
knowledge.
know
what
complete
is
unique
process
Instead
we
claim
of
it
to
the
to
DP
the
course
IB.
knowing.
explores
TOK
It
the
is
is
not
nature
know.
ways:
hours
level
the
and
how
two
100
standard
the
new
and
in
(DP)
Knowledge
thinking
knowledge
TOK
Programme
of
of
and
tuition
240
subjects
to
of
ask
(compared
hours
for
a
themselves,
questions
to
150
subject
at
as
all
that
they
hours
for
higher
give
contribute
to
a
subject
level).
students
their
overall
TOK.
TOK in this book
TOK links
As
1.
TOK
how
knowing help us in
relevant
predicting?
and
knowledge
TOK
ignite
nature
2.
encourages
To what extent does
of
is
students
to
constructed,
knowledge
classroom
analyse
each
questions.
discussion,
knowledge
and
TOK
knowledge
chapter
They
giving
in
are
claims
this
book
meant
to
opportunities
connections
to
to
Business
and
explore
suggests
illustrate
explore
TOK
the
Management.
How do we know that
our sales predictions are
reliable?
How is TOK assessed?
3.
Is it ethical to knowingly
TOK
is
assessed
in
two
ways:
overpredict?
•
Through
IB
for
second
•
an
each
year
Through
an
internally
essay
(on
one
examination
of
DP
for
by
the
external
exhibition
marked
of
six
session,
titles
submitted
at
issued
the
end
by
of
the
the
assessment).
(normally
the
prescribed
and
teacher
organized
and
in
the
externally
rst
year
moderated
of
DP
,
by
theIB).
For
the
around
that
in
You
connect
the
for
exhibition,
us.
TOK
to
one
of
Chapter
the
Some
conjures
35
of
5.8)
or
up
of
explore
three
Management;
(number29)
(see
select
guide.
Business
students
will
“internal
those
for
of
centres
TOK
manifests
objects
(or
assessment
prompts
example,
images
data
how
specic
have
“Who
copyright
(see
a
in
images
(IA)
direct
owns
world
objects)
prompts”
listed
relevance
knowledge?”
agreements
Chapter
the
of
and
patents
5.9).
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Links between TOK and Business Management
Name of TOK
Brief denition
element
Possible links and applications to
Business Management
Core theme:
The core theme encourages
This core theme can be addressed by discussing what counts (or not)
“K nowledge and the
students to reect on themselves
as knowledge in Business Management; where (and how) we can gain
knower ”
as “knowers”, on what shapes
knowledge in this subject; and who created this knowledge, for what
their views and perspectives,
purposes, with which authority. Notions of values and communities
where their values come from, and
are impor tant, with regard to both the subject knowledge and
how they make sense of the world
the students themselves, within their own sociocultural and
around them.
economic context.
Those themes all have a signicant
The theme “knowledge and technology” is par ticularly relevant to
impact on the world today and
Business Management. For example, Chapter 5.9 considers how
play a key role in shaping people’s
advanced computer technologies (enabling data mining and data
perspectives and identities. You will
analytics) and innovations (such as ar ticial intelligence) may impact
explore two from a list of ve:
decision-making processes in business organizations, and raise ethical
Optional themes
issues, for example about data anonymity and privacy.
•
Knowledge and technology
•
Knowledge and language
•
Knowledge and politics
•
Knowledge and religion
•
Knowledge and indigenous
The theme “knowledge and language” is relevant to Business Management
as some models (such as the seven Ps of the marketing mix (HL only) or
the ve Vs of big data) were coined in English. When translating them into
other languages, we lose the consistency of the initial letters and therefore
societies
the overall coherence of the model. This shows that this knowledge about
the marketing mix and about big data was constructed through the English
language and is linked to that specic language.
Areas of knowledge
The ve areas of knowledge (AOK)
As Business Management is one of the human sciences, it is
are specic branches of knowledge,
interesting to explore how research methods such as questionnaires
with their own nature and methods
are trusted as reliable ways to gain knowledge (eg about a market, a
for producing knowledge:
product or a business), given the challenges around neutral language,
leading questions, or sampling and selection eect. Market research
•
History
•
Human sciences
•
Natural sciences
•
Mathematics
•
The ar ts
is often under taken to help companies increase their prots, so it
could also be wor th examining the purpose and context within which
knowledge is pursued in the human sciences in general, and in
Business Management specically.
K nowledge
This tool helps to explore the
Ethics is particularly relevant as it is one of the four key concepts
framework
themes and the AOK . It is
underpinning the DP Business Management curriculum. The rst aim
composed of four elements:
of the course is “to develop ... condent, creative and compassionate
business leaders, entrepreneurs, social entrepreneurs, and ... change
•
Scope
•
Perspectives
•
Methods and tools
•
Ethics
agents”. Ethical decision-making is relevant in all areas of the curriculum,
from the moral objectives of social enterprises to privacy issues relating
to big data and consumer proling. From a TOK viewpoint, the focus should
be on ethics concerning knowledge, for example about criteria used to
make judgements, who decides, and based on which values.
Perspectives is also relevant, especially as the topic of stakeholders is
recurrent in Business Management, regarding their diering viewpoints,
conicting objectives, and how they are aected by change. It is helpful
to consider the diering perspectives of stakeholder groups in order to
gain a greater understanding of issues as diverse as nancial accounts
and workforce par ticipation.
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INTRODUCTION TO INQUIRY
Inquiry
is
a
key
aspect
of
the
IB
approaches
to
teaching
(ATT)
and
As IB learners we strive to be:
approaches
to
learning
(ATL):
the
principles
that,
according
to
the
IB,
INQUIRERS
can
We nur ture our curiosity,
the
help
ten
you
be
a
attributes
successful
of
the
IB
learner.
IBlearner
Being
an
inquirer
is
the
rst
of
prole.
developing skills for inquiry and
In
Business
Management,
learning
through
inquiry
can
take
different
research. We know how to learn
forms,
especially:
independently and with others.
We learn with enthusiasm and
•
Inquiry
through
research
•
Inquiry
through
“inquiry
•
Inquiry
through
problem-based
sustain our love of learning
questions”
throughout life.
learning
(PBL)
Source: IB Learner Prole
Inquiry through research
Inquiry
IB
DP
carry
out
issues
For
and
research
Business
your
around
instance,
examples
of
campaigns
the
you,
Your
of
internal
necessary
theoretical
topics
the
our
requirements
be
locally,
regarding
the
(IA)
is
throughout
the
covers
studies
nationally
or
about
you.
in
research
activities,
course
to
will
and
help
1.5)
to
or
learn
help
you,
and
to
business
about
about
you
to
link
appreciate
the
media.
The
task
research
you
the
crowdfunding
project.
but
of
of
need
internationally.
also
the
also
examples
research
around
news
syllabus
will
(Chapter
recent
This
world
a
do
the
you
contemporary
should
business
research
book
your
franchising
you
you,
to
to
assessment
nd
interest
course
for
about
near
subject
to
3.2),
that
This
but
regionally,
learning
(Chapter
of
together.
research
franchises
on
contents
relevance
own
after
crowdfunding
go
Management,
has
will
specic
also
contextualize
your
learning.
Inquiry through “inquiry questions”
These
the
open
key
questions
concepts
contexts
(of
Formulating
you
create
thinking
the
skills
help
examples
such
links.
can
you
(sustainability,
that
questions
Answering
and
your
is
a
you
link
will
good
them
writing
to
ethics,
the
nd
also
in
help
of
this
creativity)
through
exercise
will
content
change,
your
itself,
you
to
as
it
textbook,
and
the
research).
makes
develop
your
skills.
xii
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The
table
below
gives
you
some
examples
of
such
inquiry
questions.
Unit in this tex tbook
Examples of inquiry questions
Unit 1
•
How can change lead to conicts between
stakeholders?
Introduction to business
management
•
Is the impact of multinational corporations on
host countries always ethical?
Unit 2
•
How can a democratic style of leadership
encourage creativity in a business?
Human resource management
•
Can fringe payments sometimes be regarded as
not fair and thus not ethical?
Unit 3
•
Why could nal accounts analysis be essential
in changing stakeholder perspectives?
Finance and accounts
•
In some countries, the state subsidizes many
organizations in the creative industries. Does
that mean that they do not need to be nancially
sustainable?
Unit 4
•
How can social media change an organization’s
marketing strategies?
Marketing
•
Unit 5
Are all pricing strategies ethical?
•
Is intellectual proper ty protection only about
ethics and creativity?
Operations management
•
How has digital technology enabled new
business models to ourish?
Inquiry through problem-based learning (PBL)
PBL
and
is
about
analysing
proposing
management
investment
Beyond
to
the
improve
tools,
options
(Chapter4.5)
a
solutions
will
communication
it,
theories
help
such
and
problem
your
or
the
subject
evaluation,
even
by
teamwork,
pricing
applied
itself,
different
nature
this
you
organization
business
strategies
can
reasoning,
if
an
of
Comparing
different
appreciate
as
faced
knowledge
techniques.
3.8)
Management
skills
skills
you
using
and
(Chapter
Business
other
real-world
to
of
our
also
critical
collaborate
subject.
help
you
thinking,
with
otherstudents.
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INTRODUCTION
1
ssenisub ot noitcudortnI 1
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TO BUSINE SS
MAN AGEMENT
1.1 What is a business?
By the end of this chap ter, you should be able to:
Explain the nature of businesses
➔
and how they combine human,
physical and nancial resources to create goods and ser vices
➔
Dene primary, secondary, ter tiary and quaternary sectors
➔
Outline the nature of business acti vity
in each sector and the
impact
of sectoral change on business acti vity
Examine challenges and oppor tunities
➔
for star ting up a business
The nature of business
A
business
aims
organizations
to
meet
through
●
Producing
crops
●
Creating
product
●
Providing
a
a
businesses
olives
or
focus
manufacture
activities.
For
into
oil
olive
completely
the
extracting
on
sale
a
farm
under
activities
different
one
and
wants
following
raw
of
individuals
or
activities:
materials
activity.
transistors.
example,
for
related
needs
of
from
the
earth
service
Some
several
or
the
any
or
from
its
For
Other
that
grows
own
label.
sometimes
each
example,
businesses
olives
may
Sometimes
even
engage
a
business
engage
in
convert
a
in
may
grow
multiple
the
business
activities
olives
will
that
cluster
are
other.
1
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1
All
of
these
tnemeganam
ssenisub ot noitcudortnI 1
desired
as
“added
and/or
Many
“a
activities
have
water,
needs.
and
are
that
and
different.
that
is
–
all
sense
(such
for
in
by
gaining
would
principles.
resources.
or
generate
the
referred
revenue
we
are
all
wants.
services
not
All
to
(sales)
Thus,
in
need
a
many
for
sense
the
products
to
be
for
charities,
example)
a
business.
basics
provide
Religious
or
consider
organizations
synagogues,
businesses
our
to
(sometimes
need.
clubs)
survive,
many
are
summarized
as
them
value
people
business
provide
they
most
a
mosques
To
provide
on
or
nancial
and
process
adds
rewarded
want
(churches,
shelter
so
is
a
organizations
and
activity
It
various
physical,
and
in
inputs.
under
and
business
satisfying
businesses
clubs
resources
the
organizations
of
wants
Other
Business
for
human,
clothing
want,
the
operate
types
and
charities,
how
organizations
other
Needs
or
input
is
to
recognition
religious
and
This
value”)
business”
must
or
businesses
output.
–
our
food
and
basic
organizations,
that
people
need
businesses.
the
ow
chart
shown
in
Figure
1.1.1.
human
goods
physical
production
nancial
services
enterprise
Resource inputs
Processes to add value
Product outputs
Figure 1.1.1 Summary of business activity
The
●
resource
Human
product
ones,
●
land
require
–
the
space
categorized
quality
the
right
–
the
some
right
make
the
–
often
to
and
quantity
product
follows:
even
the
of
people
if
it
is
of
cash
a
and
highly
one
to
make
the
automated
person.
Others
skillsets.
materials,
product
and
required
even
only
different
quantity
space
or
of
businesses,
with
make
ofce
as
quantity
All
input
quality
required
Financial
and
service.
human
require
to
be
individuals,
businesses
required
can
right
provide
many
Physical
and
the
or
still
require
●
–
inputs
or
machinery,
service.
Even
internet
computer.
other
forms
of
nance
service.
2
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Enterprise
business.
idea
into
It
a
types
with
of
services,
●
in
a
or
relative
and
the
other
involve
Product
car
factory,
home.
–
these
They
agricultural
or
they
such
as
an
take
a
for
can
use
a
many
as
a
term
is
often
dealing
with
exists
in
lawn-mowing
proprietary
equipment
cost
a
forms:
proportion
especially
or
special
with
great
of
labour.
or
qualities
unique
deal
land
Sometimes
features),
due
to
the
the
(land
or
scale
rich
the
of
the
example).
in
use
a
large
relation
involve
to
fairly
categorized
tangible
items
as
products
proportion
land
or
of
labour
machinery.
low-skilled
workers
relative
Labour-
but
can
also
follows:
that
produced
things
made
in
in
we
the
can
extracted
the
physically
primary
from
secondary
sector,
the
take
such
as
environment,
(manufacturing)
sector,
car.
are
the
take
large
inputs,
items
intangible
They
and
is
enterprise
(such
that
Enterprise
businesses
But
for
turn
employees.
be
a
etc.
which
to
manufacturing).
other
or
these
service:
products
be
important
business.
everyday
or
home.
examination,
are
may
be
the
value
processes
products
iPad
–
them
are
might
might
Services
can
thriving
media,
simply
for
especially
skilled
crucially
determination
cutting-edge
brick
have
specialized
operations
highly
outputs
Goods
other
machinery
(a
inputs,
intensive
●
or
or
add
may
Labour-intensive
to
and
social
processes
to
but
the
ideally,
including
to
and
“entrepreneurship”,
services
machinery
operation
●
business,
resource,
land
as
input
idea
and,
high-tech
processes
machinery
●
to
Capital-intensive
land
tangible
smartphones,
laundry
Production
least
business
referred
computers,
all
the
the
functioning
sometimes
associated
–
is
tnemeganam
●
What is a business?
ssenisub ot noitcudortnI 1
1.1
the
and
include,
for
international
retailer
consumers
provides
to
the
buyer
example,
delivery
the
does
a
of
service
not
karate
a
of
physically
class,
package.
having
a
medical
Retail
an
array
sales
of
purchase.
Business functions
All
businesses,
along
the
from
same
small
lines,
by
start-ups
function
–
to
huge
what
is
conglomerates,
to
be
done.
are
There
organized
are
four
key
functions:
●
Human
●
Marketing
●
Finance
●
Operations
The
only
owners
out
the
and
a
(HR)
accounts
management
difference
of
whereas
resources
smaller
larger
between
businesses
business
functions
in
or
small
have
can
separate
production
businesses
to
afford
deal
to
and
with
hire
large
these
ones
is
functions
specialized
that
the
themselves,
managers
to
carry
departments.
3
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1
tnemeganam
ssenisub ot noitcudortnI 1
HR
HR
Finance
Business
and
Marketing
organization
accounts
Finance
Business
Marketing
and
organization
accounts
Operations
Operations
A small business
A large business
Figure 1.1.2 Business functions in a small business and a large business
The role of business depar tments
In
larger
function
Some
businesses,
and
in
examples
“specialized”
doing
are
so
set
help
out
the
managers
business
will
to
focus
achieve
only
its
on
their
overall
objectives.
below.
Table 1.1.1 Business functions
Function
HR
Role
Ensuring that appropriate people are employed to make the product or
service and that they are suitably rewarded for doing so. To accomplish
these goals, the HR depar tment must recruit people, train them, at
times dismiss them, and determine appropriate compensation.
Finance and
Ensuring that appropriate funds are made available to make the
accounts
product or service. To accomplish this goal, the nance and accounts
depar tment must forecast requirements, keep accurate records,
procure nancial resources from various providers, and ensure proper
payment for goods and services acquired to operate the business.
Marketing
Ensuring that the business oers a product or service that is desired by
a sucient number of people or businesses for protable operations.
To accomplish this goal, the marketing depar tment must use
appropriate strategies to promote, price, package, and distribute the
product or service.
Operations
Ensuring that appropriate processes are used in order to make the
management or
product or service, and that the product or service is of the desired quality.
production
To accomplish this goal, the operations management or production
department must control the quantity and ow of stock, determine
appropriate methods of production, and, in today’s competitive world, look
for ways to produce the good or service more eciently.
4
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of
these
functions
department
result
as
a
or
production
degree.
of
That
department
and
type
of
people
with
that
end.
may
or
business
even
HR
of
which
the
of
a
it
are
in
on
the
If
a
a
new
business
might
to
Is
business
the
at
which
the
marketing
differently
management
least
inuence
to
which
the
would
or
in
over
some
the
nance
number
have
is
to
the
business
on
producing
right
rewarded
on
priority,
depends
all
to
be
Initially,
accounts,
geared
diversify
successful,
a
and
marketplace,
plan
very
time.
nance
production
the
may
different
Are
HR,
requirements
business
people
change
with
become
business
the
targeting?
those
if
made
resources,
may
can
survival,
places
market
are.
be
operations
business,
established
particular
is
nancial
redesign
example,
to
processes,
management
is
example,
functions
and
The
the
its
interdependence
focus
business
For
market
require
operations
a
taste,
redesign
For
needs
function.
modications
strength
four
service,
may
departments.
control
the
the
services),
signicant
The
and
Once
change.
goods
of
product
consumer
working
the
a
must
procure.
typically
marketing,
for
redesign
interdependent.
that
in
function
character
businesses
the
changes
must
coordinated
The
are
determines
tnemeganam
All
What is a business?
ssenisub ot noitcudortnI 1
1.1
its
towards
priorities
(produce
each
then
of
the
growth
which
could
other
four
and
require
departments.
how
a
people
successfully
desired
good
producing
appropriately
or
the
(nancially
aligned
service
good
or
and
non-nancially)?
Small
to
businesses
changes
generally
a
have
an
marketplace.
greater
even
become
often
the
have
However,
they
in
advantage
On
resources,
business
complacent,
the
wider
dominating
large
in
other
that
reach,
a
and
market
businesses
they
hand,
can
can
large
more
must
respond
quickly
businesses
name
remain
recognition.
vigilant.
If
fail.
yduts esaC
Thomas Cook
For
178
travel
years,
agency
company
travel
arranged
rst
Europe
Thomas
services
within
and
the
available,
traditional
and
severely
By
the
competition
services.
Though
A
work.
used
from
of
to
world.
became
agency
widely
services
Companies
(like
the
these
Expedia,
the
21st
new
conceived
According
phenomenon
then
entire
need
Kayak,
for
century,
experiencing
company
traditional
150,000
of
was
poorly
the
The
group
agents.
beginning
Cook
and
and
travel
reduced
travel
British.
the
internet
services
Travelocity)
Thomas
to
the
to
threatened.
travel
traditional
UK,
eventually
when
offering
provided
the
individual
However,
were
Cook
for
to
tried
The
a
booking
merger
Guardian,
agency
mass
tourism
stranded
in
number
travel
travellers
signicant
online
2007
of
on
services.
began
with
tactical
the
eve
Finally,
laying
off
MyTravel
moves
of
in
to
Thomas
2019,
22,000
added
retain
its
Cook’s
the
to
Thomas
viability,
collapse,
venerable
employees,
Cook’s
none
only
company
liquidating
of
one
that
its
problems.
them
in
had
assets,
seemed
seven
Brits
created
and
the
leaving
overseas.
5
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1
tnemeganam
ssenisub ot noitcudortnI 1
Primary, secondary, tertiary, and
Key terms
quaternary sectors
Primary sector
Traditionally,
economists
have
grouped
business
activity
into
different
the par t of the economy
sectors,
as
set
out
in
Table
1.1.2,
and
this
activity
can
take
place
in
different
engaged in extraction (such
geographic
areas.
as of minerals or oil) or
Table 1.1.2 Sectors of business activity
production of raw materials
(farming, shing, forestry,
Goods
Primary
All raw materials are acquired in the primary sector. This can be by
raising livestock , and
extraction, mining, farming, shing, hunting, or even trapping. Today,
quarrying)
because of the scarce nature of many resources in the primary
sector or because of the potential to damage fragile environments,
Secondary sector
governments closely monitor activities in the primary sector.
the par t of the economy
Secondary
In the secondary sector raw materials are processed, usually by
engaged in the production
manufacturing. Goods from the secondary sector can take many
of nished goods (ie the
forms, such as consumer durables, non-durable consumer goods,
manufacturing sector of the
and capital goods. For most of the 19th and 20th centuries, much
economy)
secondary sector production occurred in what are referred to today
as “developed” countries. Since the 1970s, however, manufacturers
Ter tiary sector
in developed countries have been facing increasing competition
the par t of the economy
from manufacturing rms located in “developing” countries and
engaged in the delivery of
“emerging markets”.
services, such as banking,
Ser vices
Ter tiary
All services are provided in the ter tiary sector, sometimes using
healthcare and restaurants
manufactured products. These services can be nancial, leisure,
healthcare, education, transpor t, security, and many others. As
Quaternary sector
manufacturing (the secondary sector) has shifted to developing
the par t of the economy
countries, the ter tiary sector has grown in impor tance in developed
engaged in the production,
countries. Services such as banking, insurance, transpor tation,
processing and transmission
retail and wholesale, and consultancy have become especially
of information. Whereas some
impor tant.
consider the quaternary
Quaternary
This sector, a subgroup of the ter tiary sector, provides services
sector a subset of the ter tiary
that are focused on knowledge. Generally speaking, various types
sector, others emphasize that
of e-services and those involving IT, the media, and web-based
quaternary sector activities
services are considered quaternary. This sector is typical of “post-
are based on advanced
industrial” economies and, thus, many businesses in the developed
knowledge and include
world engage in quaternary activities.
information technology
services, consultancy, and
The
four
sectors
are
typically
linked
in
what
is
referred
to
as
the
research and development.
production
steps
chain
through
materials
into
the
a
or
chain
different
consumer
of
production.
sectors
good
that
that
is
have
A
to
chain
occur
of
in
production
order
to
is
turn
the
raw
marketed.
Fishing is an example of an industry in the primary sector
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example,
make
into
plastic
the
many
and
materials
(secondary
types
glass,
of
etc)
raw
are
(secondary
sector).
The
car
material
extracted
sector)
parts
are
(metals,
rubber,
(primary
that
manufacturers
then
used
materials
sector)
on
an
and
turn
to
Student workpoint
processed
into
assembly
car
line
parts
tnemeganam
For
What is a business?
1.1
to
Be a thinker
make
cars
(secondary
sector).
The
cars
are
shipped
(tertiary
sector)
to
car
Think
dealerships,
which
sell
the
cars
to
consumers
(tertiary
sector).
Car
of
some
products
also
typically
provide
after-sale
services
(oil
changes,
tune-ups,
and
repairs),
also
in
the
tertiary
sector.
Sometimes,
before
cars,
service
they
read
records.
magazines
Sometimes
or
this
online
reports
information
is
about
free
car
and
features
for-prot
but
in
other
companies
quaternary
that
cases
sell
this
type
of
provided
information.
information
This
type
of
is
their
use
and
production
by
the
produced
business
is
Consider:
and
●
government,
you
consumers
chain.
buy
that
even
imagine
major
everyday
dealers
ssenisub ot noitcudortnI 1
1.1
by
in
A
cherry
pie
you
purchase
the
●
A
skateboard
●
A
smartphone
sector.
Sectoral change
What
The
size
of
each
sector
of
the
economy
may
change
because,
just
primary,
tertiary,
individuals
or
businesses
grow
and
develop,
so
too
will
and
usually
measure
the
size
of
each
sector
in
terms
of
the
people
employed
by
the
industries
in
that
sector.
The
are
traditional
the
production,
pattern
distribution,
is
set
out
in
Figure
The
related
more
skilled
changing
advanced
businesses
possible
to
to
Thus,
relatively
workers,
the
economies
sectors
thrive.
with
and
marketing
1.1.3.
of
Closely
involved
number
in
of
quaternary
countries.
businesses
Economists
secondary,
as
require
whereas
few
skilled
quaternary
are
more
raw
the
material
workers
sector
complexities
complex
and
relies
social
of
extraction
large
both
on
social
contexts
is
highly
of
products?
contexts.
for
often
numbers
these
Less developed
low-
(low income) economies
skilled
primary
workers
(producers
and
managers
of
information)
and
consumers
–
secondary
people
and
businesses
that
want
and
have
the
ability
to
make
use
of
ter tiary
advanced
information.
Thus,
more
developed
economies
typically
see
quaternary
social
technologies
develops,
social
economies
and
economies
technologies
advance
improve;
as
in
tandem:
social
as
the
technologies
economy
improve,
develop.
Developing
However,
one
area
developments
(for
example
are
not
linear.
computerized
Technological
word
innovation
processors)
and
its
(middle income) economies
in
related
primary
workers
(individuals
knowledgeable
about
operating
word
processors)
secondary
can
make
other
technologies
and
occupations
obsolete,
such
as
ter tiary
typewriters
and
typists.
Thus,
while
some
occupations
become
obsolete,
quaternary
new
ones
emerge
Businesses
do
well,
developed
both
that
even
(which
can
in
anticipate
industries
economies
Canada
are
and
often
or
that
have
adapt
are
moved
Australia,
perceived
to
the
perceived
away
however,
as
skill”).
changing
as
from
two
“high
“in
the
environment
decline”.
primary
primary
sector
In
can
general,
sector.
In
industries
Developed
(high income) economies
have
primary
done
remarkably
well:
organic
farming
in
Canada
and
wine
production
secondary
in
Australia.
Another
example
is
Germany:
as
one
of
the
most
ter tiary
developed
economies
of
the
world,
it
has
a
strong
quaternary
sector.
quaternary
However,
strengths:
German
businesses
high-quality
have
engineering
retained
and
a
two
strong
of
their
long-standing
secondary
sector.
Figure 1.1.3 Size of sectors
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1
The
process
tnemeganam
ssenisub ot noitcudortnI 1
economy
primary
can
to
of
a
sector
produce
sector
an
fewer
production
often
often
do
too,
can
weak,
more
and
such
be
well.
in
as
As
to
for
an
the
human
not
economy
against
in
environment
sectors
sector,
be
sector
or
be
tangible
rms
may
one
tertiary
of
economy
resources.
that
from
will
protections
an
secondary
skills
the
(they
manufacturing
damage
as
weighting
from
the
diverted
mainly
other
on
specialist
services
as
(shifting
based
resources
occur
and
will
based
intangible
legislation
proportional
resources,
require
physical
of
one
weighting
on
economy
strains
from
economy
may
resources,
require
sector,
an
strains
Finally,
are
to
businesses
Financial
Other
shifting
different
for
the
example)
short
supply.
another.
quaternary
needed
an
on
Secondary
in
to
in
based
as
sectors
much
in
will
the
goods).
shifts
to
the
secondary
environmental
developing
than
damage
countries
manufacturing
in
developedeconomies.
Challenges and opportunities for starting
up a business
Reasons for star ting up a business or enterprise
People
Each
start
of
businesses
these
reasons
for
many
presents
reasons,
an
as
summarized
in
Table
1.1.3.
opportunity.
Table 1.1.3 Reasons to star t a business
Rewards
Working for someone else means that you do not get to keep
all the rewards yourself. Although some criticize this aspect of
capitalism, one central element is that those who put their capital
at risk (the business owners) get the rewards, whereas those
who do not put their capital at risk (employees) receive wages or
salaries that are typically less than the return on capital is to the
owners. Many millionaires own “boring” small businesses.
Independence
Working for yourself means that you are your own boss and not
following someone else’s rules. Individuals with an entrepreneurial
spirit sometimes feel constrained by bosses, policies, and
procedures in large organizations. Star ting your own business
means that you can set and change the policies and procedures
as you see t.
Necessity
Sometimes businesses are star ted by individuals whose positions
were made redundant or who could not nd work . The necessity of
having an income leads them to star t a small business.
Challenge
Some people just want to see whether they can “make it”
themselves. Star ting a small business typically requires one
person to perform all functions of the business (HR, marketing,
accounts and nance, and operations management or
production). Over time, if the business is a success, the business
owner then has to learn new skills as his or her role changes to
accommodate a larger and more complex operation.
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Many interesting businesses are set up by people with a passion
for something who want to just keep doing what they enjoy doing.
C oncep t
tnemeganam
Interest
What is a business?
The business producing Hawaiian Tropic suntan lotion was star ted
by a high-school chemistry teacher who liked spending time at the
CRE ATIVITY
beach. Many specialty shops – guitar stores, lamp stores, ballet
clothing stores, rare books stores, etc – allow their owners to work
Creativity can be dened as the
in an area for which they have a passion.
process of generating new ideas,
ssenisub ot noitcudortnI 1
1.1
or of considering existing ideas
Finding a gap
Businesses may see or nd an untapped oppor tunity in order to
from new perspectives. Setting
achieve “rst-mover advantage”. Sometimes businesses, large or
up a business involves creativity
small, stumble into oppor tunities that they were not looking for.
in numerous ways. For example,
The idea of Post-its, one of the most successful products of the 3M
entrepreneurs must be creative,
Company and which revolutionized interoce communications,
with the initial business idea itself,
was stumbled across by accident by Dr Spender Silver, a scientist
and also to prepare a business
working at 3M.
model with limited resources,
Sharing an idea
If you really believe in something, you may want to sell the idea to
to get the initial nance for their
others. Yoga studios, for example, are typically owned by people
star t-up costs, or even to invent the
name of the business.
who themselves do yoga and want to spread the idea that yoga
enhances quality of life. Marketing the idea helps their business,
Can you think of other areas where
but often the original motivation to open a yoga studio is to spread
the idea.
creativity is a key element of
entrepreneurship? This may give
you ideas for your IA.
The process of starting up a business
Two
features
●
The
●
Planning
are
business
The
business
will
do,
or
or
can
be
idea
worth
or
successful
to
the
something
start-ups:
fundamental
basic
sophisticated
–
that
service-driven,
of
business
whether
product-driven,
the
entrepreneur
many
refers
is
more
or
all
must
(such
(such
is,
as
activity
as
a
means
convince
the
manufacturing).
determined
which
that
by
that
others
business
house-cleaning
the
in
that
The
needs
some
the
service)
business
of
the
sense
the
product
or
market
service
purchasing.
Regardless
the
it
market-driven
product–
entrepreneur
is
to
idea
whether
something
idea
common
risks
the
new
business
entrepreneur
should
associated
must
carefully
with
plan
starting
up
is
basic
have
the
a
a
or
sophisticated,
basic
business
business
in
order
market-
idea.
to
or
Then
reduce
the
business.
4 Establishing
1 Organizing
2 Researching
3 Planning
5 Raising the
6 Testing the
nance
market
legal
the basics
the market
the business
requirements
Figure 1.1.4 Steps for star t-ups
1.
Organizing
must
be
based?
be
its
a
the
address
What
legal
sufcient
suppliers,
basics.
several
will
the
structure?
business
potential
The
basic
entrepreneur
questions:
entrepreneur
What
will
be
infrastructure
customers,
and
its
to
starting
Where
call
is
the
the
new
business?
operational
make
a
the
going
What
structure?
business
government
business
business
Is
to
will
there
feasible
–
services?
9
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1
2.
Rening
the
tnemeganam
ssenisub ot noitcudortnI 1
entrepreneur
is
feasible,
will
they
business.
precise
in
If
of
and
the
the
in
in
States,
for
the
case,
difcult
that
market
broad
research
businesses
are
short-lived
United
that,
others
were
new
through
market
from
failure
so
do
that
However,
rates
small
rates
itself
obvious.
idea
determined
should
distinguish
market
so
business
has
very
Rarely
be
elude
example,
are
how
a
to
many
detection
in
between
50
the
concept
the
gap
start
failure
as
Once
business
is
easy
high
determine,
they
the
determine
would
have
to
to
market.
it
research.
outline,
business
in
a
rates.
the
successful
While
business
surveys,
and
are
failure
80%
in
the
1
rst
four
another
Thus,
then
will
once
do
will
basic
and
they
Can
the
to
fail
failure
business
research
idea
new
in
market
is
How
year
also
the
its
will
Who
In
Europe,
business
market
some
will
concept?
the
the
precise
answer
alone.
high.
determined,
must
test
rst
are
research?
business
(USP)?
the
rates
determine
entrepreneur
conduct
the
25%
economy,
proposition”
consider
grocery
basic
very
necessities
revealing.
the
for
grocery
organic
market.
the
basic
a
example
The
of
A
human
market
Thus,
business
of
is
the
be
must
segment
basic
What
business
may
(high
or
idea
(a
attractive.
have
the
it
questions:
target
will
be
its
“unique
communicate
low
specialized
grocery
store
many
reveal
the
meats)
store)
to
offers
a
food
market
for
a
is
has
wants
all,
to
is
with
niche
where
organic
is
the
may
be
segment
may
and
signicantly
a
the
of
be
market
there
narrowed
either
or
example)
small
enter
one
research
competitors,
cost,
that
market
that
who
After
However,
too
volume,
might
researching
grocery
entrepreneur
very
existence.
research
products
speciality
specialized
idea
market
Market
the
idea:
the
business.
saturated.
as
operation;
market?
Let’s
of
the
market
market?
selling
of
developed
target,
How
the
years
a
(such
gap
in
rened
more
precise
products
and/or
meats.
Student workpoint
1.2
Be a researcher
Imagine
that
you
are
an
Market research could lead an entrepreneur to sell only local, organic groceries
entrepreneur
start
a
seeking
for-prot
to
social
3.
enterprise.
Develop
Planning
the
entrepreneur
basic
business
plan
for
with
which
make
a
a
social
prot
all
business
a
the
concept
business
plan,
has
been
which
is
narrowed,
a
the
document
the
issues
that
need
to
be
planned
before
that
operations
plan
will
be
of
use
to
multiple
stakeholders,
begin.
especially
and
potential
full
Once
write
you
The
could
should
a
addresses
business
business.
a
owners
of
the
business
and
nancial
institutions
(banks,
purpose.
lending
companies)
that
may
provide
capital.
1
http://www.statisticbrain.com/star tup-failure-by-industry/
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composition
people
starting
elements
the
has
its
the
–
laws
specic
These
sole
of
example
various
from
the
abusiness
raise
cash
certain
that
it
to
must
be
the
not
tax
in
countries
the
as
business,
determine
entities
in
the
them.
even
from
corporations,
must
they
can
the
for
accordance
businesses
with
have
operate.
costly.
requirements
income
paid,
that
registered,
before
and
only
be
be
established
countries,
of
well
–
nanciers,
address
separate
business
and
operate
as
or
specic
indicates
organization
inspections
must
government,
as
practices,
of
the
investors
businesses
extensive
include
of
trying
legally
must
entrepreneur
such
unemployment
as
and
of
taxes,
for
the
but
also
employees’
sickness
benets,
insurance.
Once
written,
nance
take
tax
is
businesses
many
be
For
legal
not
investigate
would
nance.
plan
business
often
the
In
can
must
All
types
that
pass
payroll
medical
Raising
the
and/or
and
the
are
Other
country.
taxes
of
issues
countries,
(which
the
most
condence
operational
entities
business
sorts
even
its
most
host
These
pensions
and
requires
through
operate.
some
inuence
requirements
the
will
requirements.
can
legal
the
plan
think
potential
business).
licences
country.
then
In
to
provide
traders
the
are
of
legal
Finally,
its
that
practices,
are
operator
or
legal
obligations.
they
business
business
can
foreseen
laws
labour
tax
if
have
the
business
the
plan
Establishing
that
5.
how
business
business
4.
of
of
the
tnemeganam
The
What is a business?
ssenisub ot noitcudortnI 1
1.1
–
until
years.
money
it
can
(Even
requirements
the
and
–
to
sustain
if
the
may
basic
legal
business
get
the
greater
is
from
the
been
the
rened,
business
started
and
prots,
which
protable
than
has
met,
business
operations
business
be
idea
requirements
from
prots.)
to
the
must
support
can
beginning,
Any
investor
or
Student workpoint
lender
must
have
condence
in
the
accounting
and
auditing
procedures
1.3
of
the
business.
external
to
the
Who
will
business,
prepare
will
accounts
verify
that
in
they
the
are
business
and
who,
accurate?
Be a thinker
The
the
business
must
entrepreneur,
provides
equity
attract
or
start-up
other
capital,
it
monies.
investors
means
may
that
Some
be
or
all
required.
person
is
a
may
come
When
partial
from
someone
owner
of
Choose
Most
entrepreneurs
who
start
up
a
business
do
not
want
control
investment
business.
6.
Testing
How
the
will
shares
the
market.
that
to
business,
selling
Who
the
will
“pilot”)
of
–
occur?
test
so
–
lenders
The
Will
consumer
some
but
be?
nal
the
of
some
What
stage
is
business
reaction?
the
of
capital
the
kind
the
of
on
will
be
may
terms
launch
begin
What
will
capital
a
the
of
in
be
will
the
small
the
to
Local
for
●
the
pilot
be?
In
some
types
of
business,
especially
Manufacturer
new
want?
●
respond
to
the
initial
market
launch
reactions
is
in
extremely
only
a
expensive
limited
After-school
and
and
slow
the
way.
of
business
easily,
by
–
restaurants,
changing
the
for
menu,
example
changing
–
can
often
recipes,
of
the
in
groups
challenges
or
respond
purpose
received
discuss
face
that
when
you
opening
other
such
a
business.
business.
of
testing
the
market
is
to
verify
that
the
business
idea
well
enough
by
consumers
to
suggest
that
the
business
down
at
least
will
ve
be
to
and
quickly
changing
Write
The
club
rm
up
aspects
sports
Other
would
and
hairdresser
beautician
opportunities
types
a
success
the
can
of
drink
capital-intensive
Work
manufacturing,
energy
Travelling
and
(a
●
of
delicatessen
café
of
the
business.
scale
criteria
form
loans
they
the
to
and
lose
of
businesses:
the
●
business.
one
following
challenges
and
ve
has
opportunities.
a
reasonable
chance
of
success.
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1
Even
tnemeganam
ssenisub ot noitcudortnI 1
Challenges that a new business may face
a
when
high
what
had
on
the
they
did
problems
unable
properly
not
If
a
the
1.4
funds
has
stems
from
cases,
it
is
of
to
All
a
these
good
may
inability
the
to
its
or
or
fail.
in
recruit
business
For
products
or
can
and
the
services
a
the
failure
with
were
a
the
it
were
not
had
sales
did
fail.
business
from
Other
right
of
business
based
and
to
strong
results
have
poor,
business
business
develops
accurately
the
was
unsuccessful
cause
still
because
requirements
marketplace.
labour
cannot
so
example,
and/or
was
start-ups
do
planning
legal
kept
launch
idea
often
research,
Sometimes
name
fail
opened.
poorly
the
followed,
lenders,
problems
business
still
business
because
were
operate,
of
are
that
even
market
investors
accounts
the
the
business
organization,
convince
business
recognition
the
above
Businesses
poor-quality
satised,
start-up
outlined
failure.
basic
or
materialize.
plan,
Student workpoint
in
to
insufcient
steps
of
before
insufcient
was
six
probability
skills.
anticipate
a
lack
times
In
the
of
failure
other
reactions
Be an inquirer
of
Go
to
Kiva
or
one
competitors
competitors).
the
other
sites.
Find
certainly
a
businesses
start-up
generally
cannot
have
control
less
the
capital
to
actions
rely
on
of
if
its
the
businesses
that
interesting
weakens.
When
a
business
is
put
under
stress,
often
problems
three
between
nd
New
micronance
economy
lending
(and
of
you
the
managers
business
were
or
executives
operating
surface
successfully.
which
would
Therefore,
not
many
be
present
things
if
outside
a
and
business’s
compelling.
What
about
businesses
is
control
can
cause
it
to
fail.
it
Table 1.1.4 Reasons why star t-ups fail
that
these
interests
you?
Why
Organization
do
be
you
think
they
successful?
consider
donation
Would
making
to
one
a
of
●
The location of the business was inappropriate.
●
The structure of the business did not work .
●
Supplies were unreliable.
●
The market research was poor.
●
The target market wasn’t appropriate.
●
The test was too optimistic.
●
Channels of communication were weak .
●
The business plan did not convince.
●
Goals were too vague or contradictory.
●
Labour laws were not addressed.
●
Registration was too dicult.
●
Tax obligations were not addressed.
●
The accounts were not kept properly – cash ow,
could
you
small
these
Market research
businesses?
TOK discussion
Business plan
1.
Is business management
an ar t or is it a science?
Legal requirements
2.
As a business can
operate in more than one
sector, why do we need
the categories called
Finance
“sectors” (primary sector,
in par ticular, was a problem.
secondary sector, etc)?
3.
To what extent can
●
Raising star t-up capital was too dicult.
●
Raising medium-term to long-term nance was dicult.
●
The launch failed.
●
The pilot was inconclusive.
●
Success was limited – the product failed to inspire.
entrepreneurs know in
The market
advance the challenges
they may encounter when
star ting up a business?
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What is a business?
Revision checklist
Businesses
goods
✓
and
Human
combine
resources
product
✓
✓
The
are
the
Physical
Financial
or
Business
physical
and
nancial
resources
to
produce
services.
organization.
materials.
human,
tnemeganam
✓
people
resources
resources
needed
include
include
to
carry
out
buildings,
the
money
the
aims
machinery
needed
to
of
the
and
raw
make
the
ssenisub ot noitcudortnI 1
1.1
service.
activity
primary
is
categorized
sector
into
generally
one
of
involves
four
the
main
sectors:
acquisition
of
raw
materials.
✓
The
secondary
create
✓
a
✓
The
tertiary
✓
The
quaternary
Business
offers
businesses.
the
✓
sector
sector
market,
A
business
new
to
control
where
processing
and
the
in
might
the
which
starting
new
face
of
service
services
opportunities,
testing
some
most
provides
involved
planning
nance,
is
sector
many
Steps
raising
able
involves
raw
materials,
usually
to
product.
up
business,
the
a
businesses
that
is
focus
why
so
business
sit.
on
knowledge.
many
people
include
establishing
legal
start
researching
requirements,
market.
challenges
at
challenges
each
but
stage.
not
all
of
The
business
will
be
them.
Practice question
To
answer
the
question
below
effectively,
see
Unit
6
pages
398–402.
Starbucks
Starbucks,
States,
other
has
a
a
has
large
been
resources.
large
regarding
coffee
store
protable
Starbucks
population
foreign
for
chain
years
wants
and
is
businesses
a
with
and
to
its
open
has
coffee
potentially
operating
headquarters
thus
in
large
the
in
the
considerable
shops
in
market.
country
India,
The
United
cash
laws
present
and
which
an
of
India
obstacle
to
Starbucks.
To
get
Tata
around
Coffee,
involved
In
is
in
addition
grown.
a)
With
of
a
this
legal
major
aspects
to
Its
of
coffee
labour
reference
businesses
the
physical
services.
that
business
Coffee
these
Starbucks
goods
and
Tata
on
combining
resources,
Starbucks
company
coffee
shops,
force
to
in
obstacle,
Indian
and
resources,
Tata
of
or
considering
its
besides
also
farms
two
is
has
is
owns
coffee
and
shops
with
and
is
farms
where
coffee
knowledgeable.
explain
following:
nancial
working
coffee
retail.
trained
Coffee,
the
own
the
role
human
resources
to
create
[4
marks]
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1
tnemeganam
ssenisub ot noitcudortnI 1
1.2 Types of business entities
By the end of this chap ter, you should be able to:
➔
Distinguish between
the pri vate and the public sectors
➔
Outline the main features of the following types of organizations:
●
sole traders
●
par tnerships
●
pri vately held companies
●
publicly held companies
Key terms
Outline the main features of the following types of for-prot social
➔
enterprises:
Private sector
the por tion of an economy
●
pri vate sector companies
●
public sector companies
●
cooperati ves
not controlled or owned by
the government
Public sector
Outline the main features of the following type of non-prot social
➔
those por tions of the
enterprise:
economy owned or controlled
non-governmental organizations (NGOs)
●
by the government, such as
government services, public
schools, and state-owned
Dierence between the private and public sectors
corporations
Public
sector
refers
to
those
parts
of
the
economy
controlled
by
the
Sole trader
government.
a business owned and
meaning
operated by one person.
education)
No legal distinction exists
implications.
between the business and
usage.
the owner. Thus, the owner
types
has unlimited liability for the
companies,
A
of
any
The
term
type
that
is
of
“public
activity
run
by
However,
public
public
sector
sector
and
the
in
sector”
(including
business,
is
companies
be
the
government
company
public
can
that
include
in
military,
and
“public
one
used
has
sector”
the
a
broad
police,
and
meaningful
generally
government
utilities,
sense,
public
economic
a
narrower
owns.
has
Common
telecommunications
transport.
liabilities of the business, and
Private
sector
refers
to
those
parts
of
the
economy
not
controlled
by
the
the business ceases to exist
government.
The
private
sector
is
managed
by
individuals
and
companies
when the owner dies.
that
are
not
owned
by
the
government.
Most
private
sector
businesses
are
for-prot.
Par tnership
a business owned and
operated by two or more
Main features of the most common types of
people. No legal distinction
prot-based (commercial) organizations
exists between the business
Prot-making
businesses
come
in
various
types
of
legal
organization,
but
and the par tners, each of
the
most
common
are:
whom are legally responsible
for 100% of the liabilities of
●
Sole
traders
●
Partnerships
the par tnership.
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Privately
●
Publicly
One
The
of
the
held
held
companies
main
prots
a
companies
aims
of
business
all
revenues,
received
costs
by
incurred
revenue
simple
often
the
and
that
=
in
are
suggests,
corporations
corporations
these
can
total
types
be
or
“sales
specied
in
the
measured
but
for
of
business
shown
using
revenues
“sales”
a
business
expenses
formula
of
called
business
by
or
receives
Prots
Total
or
is
now
total
of
time.
period
actually
the
generate
of
are
all
Total
time.
more
simple
to
following
prot.
formula:
costs
revenue”,
period
same
is
the
tnemeganam
●
Types of business entities
the
costs
(The
complex
form
is
ssenisub ot noitcudortnI 1
1.2
income
are
all
way
than
the
that
this
enough.)
Sole trader
Most
people
budget
and
choose
to
which
Being
being
is
a
their
The
●
the
sole
main
The
and
sole
form
fullls
No
legal
trader
of
own
a
typically
Facing
these
(sometimes
business
many
seeing
In
of
gap
to
the
in
product,
The
the
savings
family
have
or
be
called
reasons
the
begin
with
constraints,
a
sole
a
limited
they
often
proprietor),
organize.
why
market
serving
of
the
The
the
people
and
start
wanting
community,
is
a
to
or
business:
respond
just
living
each
service
The
the
sole
time,
except
the
and,
(such
Here,
for
from
use.
as
trader
traders
make
may
some
of
the
decisions
is
the
refers
sole
all
of
as
the
the
a
a
the
lawsuit).
money
personal
loan
traders
savings
nancial
because
to
from
such
sole
personal
money
the
for
outcome
come
sources,
other
and
liable
liability”.
can
their
and
to
business
thus,
Regardless,
because
Sole
management
nance
It
other
bank.
following:
business.
geographically
small
business
Sole
which
larger
tax
has
make
“unlimited
banks,
sole
often
a
trader
the
business
is
basis,
sole
a
either
friends,
customer.
than
claims
have
or
from
the
business
limited.
trader
business.
empowered
between
other
the
for
the
from
typically
are
limited
institutions
of
the
high
may
failure
businesses.
usually
individual
the
the
those
include
themselves
available
or
lend
start-up
is
traders
nance,
business
trader
with
sole
to
exists
or
has
family,
reluctant
runs
traders
usually
friends
limited
business
responsibility
sole
is
and
trader
business
and
of
sole
business
words,
because
rate
the
sole
trader
including
distinction
nance
that
sole
owns
ultimate
the
other
a
people,
but
The
of
of
trader
other
have
debts
●
sole
their
features
trader.
●
a
boss,
creating
business
dream.
decisions,
●
as
trader
own
organization.
simplest
own
employ
●
their
simple
operate
their
quickly,
starting
a
traders
allows
get
them
close
allows
to
to
to
the
know
the
sole
their
provide
a
customer.
trader
to
customers
more
A
sole
interact
on
an
personalized
businesses.
has
traders
privacy
do
not
authorities,
made
that
for
tax
and
have
which
limited
to
declare
want
purposes.
to
accountability.
their
know
Sometimes
nances
how
sole
to
much
traders
Most
of
anyone
prot
the
borrow
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1
money
tnemeganam
ssenisub ot noitcudortnI 1
or
or
lessors
sole
enter
may
traders
have
Registering
●
for
types
paperwork
and
–
a
nancial
to
see
high
degree
of
legal
out
and
therefore
do
not
have
generally
le.
as
a
lease),
In
and
general,
lenders
however,
privacy.
Although
to
(such
statements.
as
a
Sole
relatively
laws
sole
organizations.
ll
for
of
operating
to
consensus
is
quick.
and
contract
nancial
business
and
starting
other
a
the
inexpensive
country,
into
need
trader
Sole
traders
devote
vary
time
is
make
and
country
generally
traders
to
easy
from
usually
all
have
decisions
discussion
to
simpler
and
than
less
legal
themselves
to
building
decisions.
Monique owns and runs her own
café business – she is a sole trader
Advantages of sole traders
One
of
the
greatest
the
business
the
owner
from
traderinclude
●
Complete
●
Flexibility
changes
Privacy,
●
Minimal
●
Close
the
the
to
in
sole
business.
of
being
trader,
Other
a
as
sole
no
trader
legal
advantages
is
that
all
distinction
of
prots
from
separates
operating
as
a
sole
over
terms
of
all
the
important
working
hours,
decisions.
products
and
services,
and
operations.
as
sole
legal
ties
the
following:
control
to
●
advantages
belong
to
traders
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do
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need
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information.
formalities.
customers,
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competitive
advantage.
Disadvantages of sole traders
The
success
of
enthusiasm,
can
falter.
businesses
and
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health
operating
of
the
sole
traders
also
have
against
established
as
sole
traders
other
traders
depends
themselves.
disadvantages,
on
Any
of
which
the
drive,
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●
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●
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sole
traders
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to
to
stay
all
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yourself
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of
potential
often
seek
advice
continuity
the
business
scope
ineffectiveness
with
for
limited
from
in
the
itself
time
because
to
make
the
sole
them
trader
and
others.
event
may
expansion
of
not
as
a
serious
accident
or
continue.
the
owner
spends
all
their
business.
will
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limited
focus
will
than
liability
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of
capital,
be
which
more
looking
the
on
to
owner
may
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the
for
also
create
sufcient
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burden
cash
for
future.
any
faults,
debts,
or
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to
have
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to
operations
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want
and
limited
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unlimited
mistakes
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lack
business.
day-to-day
●
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death
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stress
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opportunity
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on
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manage
sole
small
trader
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and
businesses
retires
allows
worry
or
them
about
the
to
and
dies.
typically
make
many
the
Sometimes,
a
decent
complexities
business
sole
living
of
comes
traders
and
not
operating
on
a
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larger
scale.
Sole
traders
often
have
a
niche
in
the
market
and
Types of business entities
see
no
need
When
Their
are
sole
too
sole
traders
prots
are
great.
traders
want
not
Just
give
to
large
expand,
enough
surviving
up
or
fail
may
the
to
be
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challenges
support
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the
chief
rst
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years
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risks
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trader:
tnemeganam
toexpand.
great.
growth
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existence.
ssenisub ot noitcudortnI 1
1.2
Par tnerships
An
is
alternative
formed
or
by
people
with
professional
lawyers,
The
●
similar
features
Decisions
the
business
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partnerships
legal
only
●
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All
is
into”
than
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sole
●
to
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as
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as
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with
doctors,
following:
who
own
people,
own
by
the
number
20
of
but
and
run
they
business,
the
make
each
of
the
one
person.
getting
increases.
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the
business
and
and
debts
legally
debts,
even
the
and
can
if
a
other
be
called
partner
owns
business.
capital
one
partners
partnership’s
liability
available
than
to
usually
person.
more
than
unlimited,
partners.
partnership’s
the
more
technically
between
which
a
popular
willing
up
means
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to
partnership
for
start
a
banks
trader
business
there
provide
is
sole
the
is
and
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nance
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business.
or
to
capital
nancial
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than
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share
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nance
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partners” ,
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and
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business
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law,
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lawyers
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civil
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legally
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as
sole
the
is
a
partnership
trader.
product
especially
lawyers
specializing
in
or
or
service
true
doctors.
criminal
can
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in
law,
offer
offerings
the
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often
partners
case
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example,
commercial
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more
bring
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business
partnerships
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law
law,
rm
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international
law.
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than
than
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service
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●
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provide
expect
●
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managed
all
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in
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by
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rms.
include
other
type
associates,
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partners ,
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to
the
more
usually
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unlimited
of
business,
are
2
for
of
contribute
provided
as
exists
100%
are
consultancy
employ
This
friends,
ownership.
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have
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qualications,
partners
liable
percentage
the
institutions
of
difcult
are
by
decisions.
partnership.
business
may
between
usually
partners
“buy
more
for
small
Finance
jointly
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a
could
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business
partnership
Partners
pay
skills.
even
owned
have
of
They
related
number
who
obligations.
to
related
percentage
is
that
have
distinction
partners,
upon
a
is
people.
made
having
agreement
No
or
a
together.
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●
of
are
or
who
management
partner
The
business
more
accountants,
main
all
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or
people
business
●
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two
typically
trader.
required
to
have
Although
draw
up
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a
in
greater
most
deed
of
degree
countries
of
accountability
partnerships
partnership,
are
partnerships
not
oftendo.
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1
Having
tnemeganam
ssenisub ot noitcudortnI 1
a
a
legally
deed
of
binding
partners.
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includes
■
responsibilities
■
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■
division
■
liabilities
■
procedures
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a
of
deed
for
of
disagreement
have
a
help
●
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within
are
will
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it
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all
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of
the
and
of
a
major
traders
up
a
and
deed
business,
the
that
person
allocated
to
may
are
the
are
to
partner
partners
that
prots
according
one
partnership’s
are
rights
likelihood
than
of
out
partners”,
drawings
prots
the
of
but
it
will
term.
business.
the
the
stable
share
and
“sleeping
their
and
registering
long
nance,
or
know
continuity.
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the
than
with
salaries
determined,
rights
reduces.
more
of
the
of
determining
percentage
partners
allocated
amount
partnerships
partners
down
ownership
agreed-upon
business
the
about:
partnership,
necessarily
are
substantial
in
out
circumstances.
typically
slow
not
prots
percentage
the
likelihood
organization
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Usually,
changing
partnership,
higher
partnership
good
sets
information
between
Partnerships
makes
that
prots
responsibilities
●
partnership
document
equally.
each
has
expect
allocated.
active
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after
addition,
may
get
for
the
according
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greater
expenses
Then,
partners
a
partners
considered
prot.
partner’s
provided
to
the
prot
their
ownership.
Advantages of par tnerships
Partnerships
●
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partners
have
more
division
●
In
have
of
general,
certain
often
advantages
bring
efcient
different
production
compared
skills
as
a
and
result
to
sole
traders:
qualities,
of
the
partnerships
specialization
may
and
the
labour.
partners
bring
more
expertise
to
a
business
than
one
personcan.
●
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partnerships
they
generally
●
Partners
can
●
Partnerships
necessarily
are
perceived
have
help
in
have
end
if
access
to
as
having
more
emergencies
more
one
chance
partner
or
of
greater
stability
and
lower
risk,
nance.
when
others
continuity
as
are
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ill
or
on
business
holiday.
will
not
dies.
Disadvantages of par tnerships
Partnerships
●
Each
is
partner
legally
any
also
of
has
certain
disadvantages:
unlimited
responsible
other
deed
have
partner.
for
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partnership,
a
all
one
liability,
of
the
which
exception
partner
or
means
business’s
to
certain
this
debts
that
or
liability
partners
are
each
the
is
partner
actions
when,
declared
in
of
the
“limited
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limited
Although
partners
specied
in
Compared
●
the
to
partnerships
nancial
An
has
●
Prots
●
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up
In
of
to
nance
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to
also
country,
limited
in
general,
control
(both
to
nance
companies
loans
can
have
and
among
which
banks
prevent
making
complete
goodwill
the
in
often
for
(corporations),
from
of
and
a
other
business
from
prots.
control
over
the
business
others.
partners.
the
worst
case
could
lead
to
the
break-
partnership.
partnerships
than
have
as
access
not
work
disagree,
but
opportunities
does
shared
according
operate
less
Limited
the
organizations.
partnerships
that
have
partner
on
vary
liability
partnership).
maximizing
rely
may
summary,
and
or
must
the
complex
of
businesses
usually
individual
and
deed
laws
limited
institutions.
expanding
●
the
have
tnemeganam
partners”.
Types of business entities
ssenisub ot noitcudortnI 1
1.2
sole
traders,
have
more
a
are
As
and
greater
chance
to
safer
than
multiple
because
chance
expand
sole
partners
of
if
of
traders
can
the
greater
surviving
the
but
they
typically
inherent
changing
conditions
are
raise
are
more
more
stability,
market
conditions
right.
yduts esaC
Brown Brothers Harriman
Brown
is
one
Brothers
of
private
the
banks
Unusually,
a
in
the
partnership.
organized
usually
as
the
a
ofces
and
has
in
New
the
in
the
States.
operates
small,
around
of
United
as
legally
partnership
revenue
owners
(BBH)
oldest
Businesses
relatively
and
and
bank
headquartered
the
Harriman
largest
are
but
BBH,
York
City,
world.
excess
of
business
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approximately
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$1.3
have
in
billion.
decided
1931,
the
Despite
to
6,000
bank
this
remain
a
employees
has
growth
grown
and
size,
partnership.
Companies or corporations
The
main
America)
categories
are
similarities
You
can
after
its
of
privately
and
companies
held
differences
recognize
a
(also
companies
are
company
called
and
examined
as
it
may
“corporations”
publicly
held
in
North
companies.
Their
below.
have
the
following
abbreviations
logo:
●
INC
–
Incorporated
●
LLC
–
Limited
●
PLC
–
Private
●
LTD
–
Limited
●
SA
–
Sociedad
●
SA
–
Sociedades
(USA/Canada)
Liability
or
Public
Company
Limited
Company
Anónima
(USA)
Company
(UK)
(various)
(Latin
Anônimas
America
(Brazil,
except
Brazil
and
Mexico)
Portugal)
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1
tnemeganam
ssenisub ot noitcudortnI 1
●
SpA
–
●
AB
●
Bhd
●
GIE
●
GmbH
–
Società
per
Aktiebolag
–
Berhad
–
Azioni
(Finland,
(Malaysia,
Groupement
–
(Italy)
Sweden)
Brunei)
d’Intérêt
Gesellschaft
mit
Economique
beschraenkter
(France)
Haftung
(Austria,
Germany,
Switzerland)
Other
used,
a
countries
this
limited
be
type
have
of
liability
called
a
other
designations
designation
company.
“company”
means
This
the
type
(corporation)
of
to
and
abbreviations.
same
thing:
business
is
that
the
distinguish
it
Whichever
the
only
from
business
one
the
that
other
is
is
can
types
ofbusiness.
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business
the
can
business
liability
of
Another
owning
equity
The
the
feature
a
business
in
–
taxes.
from
their
decide
in
Unlike
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to
pay
all
of
Shareholders
discretion
of
determined
company
€600,000,
owner
share
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of
Often
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In
the
case
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might have hundreds of thousands
person
of shareholders
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of
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legal
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of
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and
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multiple
shares
existence
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–
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of
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in
its
business
company
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it.
owners,
(shares
own
and
the
prots
of
each
stock
right.
or
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workers
who
or
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laws
of
the
companies
owners
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has
the
partnerships,
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proportion
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prot
of
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to
land
keep
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present)
and
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one
person
theory
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the
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large
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of
100%
of
and
the
prots
shareholders)
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only
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be
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shareholders
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shares,
it
20,000
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a
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100,000,
€6
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pay
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shares.
rare
For
gure
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have
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group
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it.
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small
business.
not
In
still
therefore,
is
to
at
dividends
dividend
part
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the
stock.
shareholders
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dividends
of
that
percentage
and
the
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owned
companies,
the
will
receive
own
as
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smaller
With
and
of
person
majority
company
shares.
own
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shares
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shareholders
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prots
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stock
owned.
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€1,000,000
payout
of
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proportion
issued
very
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portion
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a
shares,
case,
shareholder
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the
but
are
typically,
partnerships,
activities
share
individual
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person
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simple
operations.
company,
the
each
the
–
community:
sole
stock
outstanding
from
that,
company
and
the
their
makes
shares
is
a
business
company.
receive
by
of
distinct
company
or
by
the
dividends.
the
of
of
executives
business
form
is
the
traders
in
company
company
the
the
responsibilities
pay
a
day-to-day
sole
a
owners
of
employs
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like
of
fraction
company
Just
the
company
shares)
handle
become
and
to
own
all
uncommon
of
family
or
for
a
one
members
shares.
20
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Types of business entities
Advantages of being a shareholder
●
The
the
in
are
price
practice),
so
individual
●
of
same
The
the
are
they
that
company,
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example,
not
limited
total
a
is
company
may
In
of
its
company
in
three
increase
theory
based
value
the
have
to
the
of
the
they
regular
has
a
all
no
to
in
(though
on
its
ways:
value
not
prots.
shares.
should
if
always
As
prots
Therefore,
increase
in
value
at
sale
or
new
small.
paid
income
With
in
the
that
depends
companies,
large,
regularly
invest
as
receives
–
once
every
company
comes
with
partly
share
liability ,
in
of
in
any
a
which
is
owning
one
stock
partnership,
way
for
can
the
of
in
the
a
shareholders
company’s
lose
is
single
company.
their
in
debts.
a
If
investment
the
in
more.
goes
banks,
any
the
dividend
benets
of
assets
into
and
those
receivership
other
debts.
of
are
a
the
in
last
business;
(bankruptcy)
companies,
The
(However,
shareholders
of
often
shareholders
investment.
the
small
relatively
partners
the
With
are
prots
company.
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or
company
shareholder
individuals
limited
company
pay
their
are
and
responsible
but
if
–
the
each
own.
or
particular
then
of
money
paid
individuals,
company,
from
hold
company
in
in
well.
dividends
features
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fails,
to
not
proprietors
are
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millions
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portion
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want
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sole
business
a
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important
company
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of
shareholder
Unlike
stock
amount
often
months
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the
companies,
ownership
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of
issues
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number
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share(s)
value
shares
established
three
investing
performing
should
company
the
for
rate.
dividends
●
is
too
dividends.
on
the
company
increase,
the
rewarded
tnemeganam
Shareholders
ssenisub ot noitcudortnI 1
1.2
the
shareholders’
the
event
party
all
to
of
will
liability
is
liquidation
receive
debts
owing
shareholders
be
any
of
monies
paid
rst).
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●
costs
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the
the
to
the
price
value
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pay
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support
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only
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in
follows:
value
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if
theory
declines,
dividends
cash
on
the
of
to
also
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rarely
value
if
it
so
does
Companies
hand
rapidly
investment
too
be
able
need
the
to
money
equipment
or
not
that
never
and
pay
investment
is
value.
of
the
mean
say
in
shares
that
an
of
(MC)
outstanding
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company,
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decisions
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and
as
above,
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reasons.
companies
Mitsubishi
billion
noted
prots.
fraction
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shares.
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are
company
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that
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well.
measurement
or
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not
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own
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entire
the
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on
funds
in
hold
individual
choose
may
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they
based
of
need
growth
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upon
is
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capital).
investing
performing
value
may
poorly
of
share(s)
not
company
will
dividends.
dividends.
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a
is
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doing
working
●
the
company
have
are
of
company
(typically)
●
shareholders
about
in
shares
the
Japan
of
stock.
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Anindividual
tnemeganam
ssenisub ot noitcudortnI 1
have
of
no
the
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from
as
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enhanced
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has
a
shares
a
status
is
have
of
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die,
death
of
a
in
the
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does
say
to
a
in
become
to
who
a
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the
own
$606
as
a
speaking,
even
1%
executives
million
company
have
owners,
practically
MC.
because
separate
legal
shareholders
are)
dollars.
the
existence
rather
than
liability.
becoming
being
as
approximately
the
limited
for
1%
would,
such
business
giving
source
increases
a
company:
company
is
generally
recognition
that
of
nance
stability
from
business
can
its
a
business,
of
cause
(if
the
especially
business,
owners.
continues.
shareholder
rm)
for
one
requirements.
the
separate
major
shares
successful.
good
the
a
of
working-capital
executive
business
thus
100
company
choose
want
existence
shareholders
the
initially
company
legal
thus
reasons
has
growing
owning
giant
partners,
other
business
with
●
or
a
investment
personally,
also
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●
an
business
trader
are
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the
in
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businesses
them
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all
require
of
sole
investor
at
company
would
owners
say
that
some
In
If
the
a
case
person
is
disruption.
as
a
company
shareholder
of
small
also
an
or
businesses,
active
Nevertheless,
the
continue.
Key terms
Companies
●
Privately held company
an incorporated business
oering limited liability to
the owners. Owners’ liability
is limited to their investment
especially
Achieving
business.
until
exist
have
from
company
Up
questions
typically
loans,
status
the
about
is
point
the
improved
nancial
often
that
a
survival
chances
institutions
a
turning
business
of
the
of
gaining
and
point
in
becomes
business
further
nance,
governments.
the
a
and
evolution
company,
its
of
a
some
continuity
andgrowth.
in the company. In most
As
with
any
legal
organization
of
a
business,
the
choice
to
become
a
countries, shareholders of
company
has
advantages
and
disadvantages.
To
take
full
advantage
of
privately held companies
becoming
a
company,
a
business
will
have
multiple
investors
and
thus
a
cannot sell their shares unless
major
infusion
of
capital.
However,
when
this
occurs,
the
original
business
they have rst been oered
owner
loses
some
control
over
the
business
and
could
even
lose
personal
to existing shareholders; the
involvement
in
the
company.
When
a
business
becomes
a
company,
its
shares cannot be traded on
new
owners
(the
shareholders)
may
hire
executives
to
make
all
major
a stock exchange; and there
decisions.
The
original
business
owner
(as
sole
trader
or
partner)
may
now
are limits on the number of
be
merely
an
investor.
shareholders.
Publicly held company
Privately held companies and publicly held companies
an incorporated business
When
oering limited liability to
of
a
these
business
types
of
reorganizes
as
a
company,
it
can
choose
to
become
either
organization:
the owners. Owners’ liability
●
Privately
●
Publicly
held
company
is limited to their investment
in the company. The shares
held
company
of the company are traded
The
main
difference
between
the
two
forms
of
company
is
that
the
on some public exchanges,
privately
held
company
can
only
sell
shares
in
the
company
privately:
and publicly held companies
to
people
known
to
the
owners
(such
as
friends,
family,
and
associates).
must disclose or make public
Although
the
number
of
shareholders
permitted
in
a
privately
held
considerable information
company
varies
from
country
to
country,
generally
it
is
low
(around20).
As
about the company, including
a
result,
becoming
a
privately
held
company
limits
the
amount
of
nance
audited nancial information.
available
but
allows
more
control
to
be
maintained.
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have
difference
less
onerous
companies.
nancial
the
a
not
business
typically
in
do
used
public
“the
place,
online.
For
2012,
offering”
opens
example,
(IPO),
or
a
year,
held
privately
held
requirements
companies
whereas
become
as
a
the
FTSE,
the
a
in
publicly
going
must
many
exchange
Wall
sale
of
acquired
of
in
companies
than
publicly
produce
countries
held
audited
privately
shares
of
the
held
or
the
offer
major
its
phrase
shares
nancial
Singapore),
sums
from
public.
(and
to
or
theNikkei.
large
billion
the
has
Nasdaq,
securing
to
it
Shanghai
the
$16
company
then
one
Tokyo,
Street,
possibility
held
public”),
Frankfurt,
Facebook
rst
is
stock
York,
up
countries,
reporting
to.
to
New
example,
public
for
most
and
company
such
(London,
in
publicly
once
have
decides
is
centres
Going
that,
example,
statements
companies
If
For
is
disclosure
tnemeganam
Another
Types of business entities
ssenisub ot noitcudortnI 1
1.2
its
More
of
capital.
“initial
In
public
recently
in
2020,
The shares of a publicly held
for
example,
Airbnb
acquired
$3.51
billion
from
its
“initial
public
offering”
company can be bought by
(IPO),
or
When
a
its
rst
sale
of
shares
to
the
public.
anyone through a stock exchange
company
companies
become
who
The
●
have
open
buys
main
The
to
their
to
of
Their
the
business
small
to
sell
The
are
the
details
country
of
A
for
the
do
have
the
be
of
etc),
of
itself
Publicly
held
accounts,
has
no
or “over the counter ”, via a
which
control
dealer network
over
Assessment ad vice
following:
the
privately
who
run
nance,
also
the
but
day-to-day
normally
the
to
owners
Do not confuse the term
otherwise
running
traded
serve
as
“public sector ” with “publicly
of
held company”, or “private
companies
sector ” with “privately
managers).
employed
of
to
make
held company”.
all
the
of
the
shares
form
a
the
are
in
entities.
business.
in
the
legally
the
The
The
company.
distinct,
company
are
legally
company,
drawn
which
can
the
decide
up
varies
and
in
recorded
owners
of
registered
name
from
and
the
with
the
country
to
documents):
–
this
external
example,
of
investment
formation
To
association
the
separate
debts
whatsoever.
agency,
and
the
their
documents
names
the
owning
record.
two
legally
of
(shareholders)
reason
the
objectives
document
activities
of
memorandum
of
the
business
records
the
will
and
the
company
provide
record
basic
the
share
required.
association
of
are
any
limited
–
this
internally.
the
rights
and
document
For
executives
responsibilities
and
for
company’s
regulated
organization
areas
their
necessarily
small
are
owners
any
For
on
initially
Articles
will
see
provides
shareholders
government
created.
capital
the
into
very
person
public
information
■
is
characteristics
being
to
privacy.
business
not
input
are
liable
the
Memorandum
key
do
shares
managers
the
not
and
of
must
(as
of
little
of
liability
shares
appropriate
the
include
but
they
change.
matters
business
■
have
and
are
business
can
some
decisions.
shareholders’
owners
own
number
business
the
lose
investors
Further,
company
professional
shareholders
As
a
(unless
management
The
does
potential
purchase
shareholders
a
it
shares.
shareholders
Instead,
●
allow
the
with
public,
everyone.
features
business.
●
goes
(chief
example,
of
the
species
it
will
company,
executive
responsibilities
with
ofcer,
of
each
how
explain
chief
the
the
their
company
initial
titles
nancial
and
ofcer,
shareholder.
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1
●
Greater
nance
tnemeganam
ssenisub ot noitcudortnI 1
represents
business
the
and
●
A
sells
company
a
its
is
of
must
the
is
capital
receives
the
to
provide
a
raise
high
are
are
of
more
degree
separate
their
seen
as
audited
quarterly
annual
■
an
annual
general
■
an
extraordinary
initial
the
to
offering
business.
paid
at
losses)
the
in
unless
IPO.
price
the
of
Once
shares
the
Thereafter,
are
to
company
the
issues
capital.
of
accountability.
entities,
the
so
from
held
and
so
The
time
shareholders
investment,
being
provided
unaudited
(or
only,
information
condition
generally
to
The
to
price
gains
shareholders
published,
■
of
future
shares
management
company
it
company
the
available.
injection
any
held
the
understand
and
and
additional
and
generally
shares,
cost)
company
owners
its
shares
(or
is
one-time
sells
initial
benet
a
so
that
accountable.
to
time
that
the
the
they
can
company
Information
on
by:
company
reports
(and
in
some
countries,
reports)
meeting
general
(AGM)
meeting
open
to
(EGM)
all
if
shareholders
called
by
the
shareholders.
●
Compared
have
to
greater
shareholder
death
of
a
company.
replaced
ever
The
by
dies
by
oldest
sells
it
is
to
a
or
the
is
in
sale
Buddhist
the
of
temple.
of
A
is
In
has
partial
companies
continuity.
no
to
direct
owner
can
of
When
operate.
impact
the
on
the
business
theoretically
a
The
is
last
for
shareholders.
a
in
Japanese
578
2006,
Kongo
of
continues
company
the
world
shares
shares
one
founded
organizations,
chance
company
of
owner.
the
was
the
that
independent
which
business
higher
shares,
partial
company
a
of
and
happens
another
acquired
continues
or
that
Gumi,
building
Group
forms
shareholder
All
because
Kongo
other
stability
CE
the
Gumi,
construction
and
began
Takamatsu
which
company,
operations
Construction
nonetheless
operate.
Advantages of companies
Advantages
●
of
Finance
operating
is
more
partnerships.
risk
●
lower
and
institutions
The
the
shares
in
many
their
The
risks
has
limited
spread
number
also
those
small
of
to
can
By
than
loans
up
to
this.
to
a
can
and
and
stability
nancial
lose
only
numbers
build
up
is
of
the
value
shares
relatively
limited,
safe
and
thus
companies.
Many
the
traders
Individuals
investment
many
following:
companies.
small
can
the
greater
banks
Investors
(individuals
add
and
owning
However,
sole
having
partnerships.
investors
from
include
for
as
invest,
individual
among
benet
investors
company
liability.
investors
shares).
and
to
make
else.
Each
out
a
perceived
likely
companies,
“small”
small
are
traders
nothing
as
available
likely
portfolios.
are
of
sole
more
more
and
companies
number
are
different
investment
readily
than
are
investor
of
business
Companies
and
institutions
a
or
sum
large
companies
institutions
of
the
have
that
a
investment
amount
of
huge
own
of
a
very
all
nance.
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There
is
continuity.
shareholder
Companies
off
to
pay
dies
can
off
companies
or
go
the
have
The
sells
business
their
bankrupt
liabilities),
a
greater
will
shares,
and
be
thus
not
or
if
necessarily
any
liquidated
terminating
chance
of
of
the
(with
their
continuity
end
if
a
directors
all
the
leave.
assets
operations.
than
a
sole
tnemeganam
●
Types of business entities
sold
However,
trader
orpartnership.
●
There
are
possibilities
opportunity
to
expand
more
to
nance.
access
money
in
equipment,
opportunities
and
An
Often
This
do
not
stability
with
individuals
of
to
help
and
with
a
business
many
take
they
to
grow,
efforts,
small
last
or
it
new
often
of
more
and
needs
activities.
businesses,
advantage
have
longer
With
including
business
have
to
invest
fewer
sole
traders
opportunities
to
can.
change
the
structure
every
business
suppliers
expertise
the
Companies
generally
organizational
can
performance
cannot
have
customers
expansion.
marketing
companies
established
workers
For
nance,
partnerships,
expand.
●
for
for
because
ssenisub ot noitcudortnI 1
1.2
It
can
individual
exists.
a
develop
alike.
for
time
Managers
shareholder
long-term
also
allow
positions
sells
and
shares.
relationships
the
who
business
will
to
hire
enhance
the
business.
Disadvantages of companies
Disadvantages
●
Setting
of
up
money
to
a
and
●
le
Selling
not
sold
papers
be
company
●
Owners
a
or
company,
if,
during
they
case
has
●
can
gone
have
is
a
loss
Many
others
future
of
of
IPOs
give
the
or
small
great
owners
control
public”,
and
a
of
out,
does
nance
business
has
as
a
risk.
of
the
business.
control
their
of
retain
(other
of
the
lled
business
for
can
percentage
a
especially
still
of
company,
amount
control
some
a
paperwork
reorganizing
involves
of
as
deal
Whether
agencies.
unsuccessful,
Thus,
up
a
“goes
intended
owners
of
business
required
company
loss
new
loss
a
company,
former
to
very
a
cost
government
are
cash.
entire
must
privacy.
legal
has
A
people
publishing
been
weak
performance
publicly
obligations,
business
dislike
performance
the
a
the
following:
be
a
51%
publicly
business.
of
the
the
shares
Even
shares,
shareholders).
signicant.
If
held
In
the
Original
after
the
rm
public.
number
with
if
and
the
requirements.
legally
company
companies,
full
publicly.
or
answer
time
starting
have
become
owners
There
a
a
incorporation,
still
or
include
legal
desired
little
up
partial
public
owners
the
Sometimes
to
take
appropriate
especially
decides
must
of
the
starting
the
can
lawyers,
relatively
risk
business
company
necessary
that
raised.
for
a
company
with
shares,
itself
a
retain
guarantee
will
the
into
must
as
company
full
reorganizing
owners
operating
can
be
company
accounts.
sales
are
further
down
is
publishing
unaccustomed
their
–
held
including
to
its
sharing
Further,
or
required
if
prots
jeopardized.
information
the
are
Some
to
accounts
company’s
negative
–
customers
A publicly held company’s
may
not
want
to
purchase
from
or
do
business
with
a
weak
company,
accounts can be scrutinised by
a
situation
that
can
be
particularly
damaging
to
those
businesses
that
those outside the business
offer
product
warranties
or
after-sales
service
on
products.
25
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1
A
●
company
fall,
has
which
no
can
control
damage
over
the
the
image
stock
of
the
market.
company.
Share
Such
prices
a
loss
of
C oncep t
tnemeganam
ssenisub ot noitcudortnI 1
may
share
value
anything
can
sometimes
wrong,
but
occur
simply
not
because
because
of
an
the
business
external
has
factor:
an
done
election,
CHANGE
negative
news
in
the
A
company
about
economy,
or
a
another
natural
business
in
the
same
industry,
a
downturn
disaster.
Business entities sometimes
change the legal status of their
●
has
limited
control
over
who
buys
its
shares.
For
business. The common examples
example,
a
competitor
may
want
to
take
over
the
business.
If
the
are a sole trader who decides
shareholders
are
willing
to
sell
their
shares,
the
company
cannot
to register as a privately held
prevent
a
takeover.
Companies
are
especially
vulnerable
to
being
taken
company, or a privately held
over
if
their
share
price
falls,
which,
as
noted
above,
sometimes
occurs
company that “goes public”
through
no
fault
of
the
business
itself.
(becomes a publicly held company
and sells its shares in a public
In
general,
privately
held
companies
are
smaller
than
publicly
held
place, like a stock exchange).
companies.
Do some research to nd
privately
examples of such changes of legal
status – in the case of sole traders
However,
held
many
companies
manufactures
many
privately
held
company
Mars
multinational
small
are
huge.
different
with
public
companies
Mars,
types
of
annual
exist,
Incorporated
sweets,
food
revenues
in
–
and
the
and
some
which
petcare
billions
–
of
is
a
dollars.
and privately held companies, it
is
a
enterprise
and
one
of
the
larger
companies
may be businesses around you.
headquartered
in
the
United
States.
yduts esaC
Tsuen Tea
Tsuen
Tea
Founded
building
Uji
in
in
it
Kyoto,
1160
operates
Bridge.
which
The
is
legal
is
the
Tea
not
is
of
thirteenth
is
the
Yusuke
generation
business
is
Tsuen
in
Currently,
twenty-fourth
house.
Japan,
CE,
over
800
original,
Tsuen
the
as
the
a
the
family
private
company
old.
location
manages
Tsuen
organized
oldest
years
to
is,
just
business.
run
in
Though
the
company,
east
He
shop
one
Japan.
the
is
of
the
the
and
tea
feature
of
continuity.
For-prot social enterprises
The
term
standing
settled
“social
in
on
a
enterprise”
enterprise”
different
universally
refers
to
a
agreed
form
purpose”
generally
social,
environmental
or
Although
social
professional
nevertheless
maximizing
for-prot
For-prot
want
to
means
sales,
slightly
denition.
business
the
different
and
In
that
meaning
business
general,
has
a
organization
people
the
social
aims
to
or
legal
have
term
not
“social
purpose.
“Social
improve
human,
well-being.
should
over
making
and
legal
reporting
priority
or
a
Scholars
(regarding
structure,
takes
of
that
enterprises
standard
management
has
countries.
typically
existence,
procedures,
any
prots,
other
are
–
operate
proper
etc),
aim
which
do
the
such
social
as
typical
to
a
accounts,
aim
growth,
objectives
of
organizations.
social
enterprises
maximize
prots
if
aim
to
doing
make
so
a
prot.
However,
compromises
their
they
social
do
not
purpose.
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Types of business entities
Private sector companies
Key terms
of
enterprises
one
of
the
company).
vary
three
Some
in
their
models
legal
organization.
examined
for-prot
social
above
(sole
enterprises
Some
take
trader,
operate
in
the
form
partnership,
the
private
tnemeganam
Social
Social enterprise
or
sector.
a business that advances a
social purpose in a nancially
One
example
of
a
for-prot
social
enterprise
organized
as
a
company
and
sustainable way. While aiming
operating
in
the
private
sector
is
TOMs.
For
every
pair
of
shoes
that
TOMs
ssenisub ot noitcudortnI 1
1.2
to do social good, social
sells,
the
company
donates
one
pair
of
shoes
to
underprivileged
children
in
enterprises rely on business
developing
countries
and
emerging
markets.
models, have sales revenue,
Public sector companies
and reinvest what prots they
make in the business. Social
Some
social
enterprises,
typically
organized
as
companies,
operate
in
the
enterprises generally do not
public
sector.
Examples
are
for-prot
companies
that
make
meals
and
depend on philanthropy.
deliver
them
unable
to
to
older
prepare
people
their
who
own
for
meals.
nancial
Such
or
physical
for-prot
social
reasons
are
enterprises
bid
for
For-prot social enterprise
contracts
with
local
or
regional
governments.
an organization with many
Another
public
common
sector
is
area
where
services
for-prot
related
to
social
enterprises
operate
in
the
similarities to a normal social
recycling.
enterprise, except that it
often earns a prot, some of
Cooperatives
which might be distributed to
Some
a
social
form
of
enterprises
partnership
“members”.
Unlike
the
of
number
are
organized
where
the
cooperatives.
business
partnerships,
partners,
as
which
cooperatives
is
in
owned
most
typically
A
and
cooperative
run
countries
have
by
all
have
many
is
owners. The primary aim of a
the
limits
members.
for-prot social enterprise is to
on
provide a social service.
Each
Cooperative
member
participates
actively
in
the
running
of
the
business.
business organization owned
Cooperatives
can
take
many
forms:
and operated by its members,
●
A
nancial
social
the
aims
case
lower
than
may
be
●
A
that
of
of
banks
or
provide
able
to
to
housing
the
nance
or
the
(loans)
entitled
and
is
rent
is
social
institution
prots.
aims
to
its
mean
non-lending
Or
members
with
ethical
Sometimes,
might
institutions.
to
its
run
for
to
one
provide
private
owning
cooperative,
building
over
providing
cooperative
is
nancial
a
nancial
at
who share any prots.
example
lending
services
who
for
and
a
money
lower
in
at
cost
Cooperatives exist in many
industries but are common in
agriculture.
cooperative
otherwise
might
not
money.
providing
the
a
nancial
cooperative
“member”
in
interest
other
is
precedence
unions,
borrow
housing
through
take
credit
rates
opposed
a
cooperative
an
apartment
housing
own
the
operation,
housing
landlords).
unit
in
building,
so
costs
for
its
the
members
common
building
and
to
A
in
building.
individual
which
The
surpluses
(as
activity
are
of
each
members,
reinvested
members
arelower.
In
addition,
become
and
the
●
A
a
conditions
cooperatives
thereby
and
thus
typically
ensuring
increase
the
that
have
all
control
members
likelihood
of
over
agree
social
who
to
can
rules
harmony
in
building.
workers’
by
housing
member,
the
cooperative
workers
workers
are
Often,
workers’
a
Workers,
is
themselves,
similar.
fearful
a
Providing
cooperative
of
losing
business
and
the
that
wages
employment
emerges
their
jobs,
is
of
to
when
take
owned
the
workers
a
over
and
operated
managers
is
business
the
a
is
and
the
priority.
about
business,
sack
to
fail.
the
27
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1
managers
tnemeganam
ssenisub ot noitcudortnI 1
in
A
●
the
(or
producer
in
drastically
business
certain
common
(rather
cooperative
stages
in
of
With
of
an
press
producer
a
large
facility,
piece
a
Thus,
groups
Producer
as
grape
olive
and
out
reinvest
as
of
producers
cooperatives
farmers
producers
all
of
the
prots
dividends).
having
having
a
collaborate
are
a
particularly
cooperative
cooperatively
oil.
of
not
when
scale.
or
pay),
them
where
cooperatives,
could
achieved
is
such
produce
expensive
themselves
be
to
their
paying
production.
agriculture,
wine-production
owned
reduce
than
often
the
equipment
afford.
stage
many
of
At
other
the
aim
that
is
times,
maximize
cost
production
producers
to
individual
pool
efciencies
process
their
the
members
is
can
carried
resources
to
utilization
by
only
out
on
obtain
the
costefciencies.
A
●
consumer
also
part
cooperative
owners
common
type
of
of
Individual
can form a producer cooperative
purchase
groceries
together
for-prot
grocery
many
cases,
cooperative
price
as
consumers
are
in
business
having
a
too
but
the
●
main
to
and
its
involves
at
United
certain
which
often
consumers
the
grocery
entitles
lower
who
States,
them
prices
are
a
stores.
to
than
lowering
cooperative
not
Thus,
is
the
runs
the
its
to
features
their
of
main
to
to
make
prot.
typically
members.
risk
of
or
a
generally
at
Rather,
as
close
However,
failure
products
weather
cooperatives
not
not
services
costs
updating
cushion
is
or
by
not
services),
difcult
aim
to
if
cost
its
reinvesting
or
period
make
the
to
not
or
an
some
prot,
aim.
for-prot
social
enterprises
include
following:
Prot
need
is
important
to
prots
A
The
degree
local
signify
a
desire
companies
good
market
This
to
of
work
for
is
the
or
both
by
more
the
devise
from
rely
lower
social
survival
and
maximize
aims
social
take
enterprises
growth
prots
but
of
the
to
earn
business.
between
For-prot
between
recognize
a
the
social
the
need
democratic
In
business
and
enterprises
business
being
spirit
of
social
aggressive
also
support
wages,
or
or
and
usually
community
met
by
to
aid
other
social
and
ordinary
enterprises,
from
landlords
the
willing
is
(such
decision-
style
of
typically
as
to
to
take
prots).
nature
others
for-prot
This
which
strategies
maximize
from
typical
enterprises,
transparent.
business
stems
or
than
for-prot
consultative
competitors
on
to
–
for-prot
government.
more
be
and
the
not
exists.
governance
often
ensure
organizations.
to
priority
vary,
cooperation
are
not
share
the
collaboration
reects
and
style
which
or
tends
governance
do
of
activity
to
sustain
because
Cooperatives
making
to
for
not
may
however,
community
government
business
but
aims
prots
aim,
sufcient
high
the
These
generate
business.
●
priority
products
nancial
prot
common
service
“members”,
cooperative,
its
thus
expense.
precedence.
●
the
(and
maximizing
The
thereby
low,
a
Europe
stores.
offers
signicant
unexpected
the
In
cooperative
become
cooperative’s
or
possible,
prices
the
the
sells
at
provides
business.
consumer
Grape farmers and wine producers
In
the
of
(such
to
lease
social
as
enterprises,
workers
properties
willing
at
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spirit
be
●
and
rates).
Consultation
generate
greater
and
transparency
willingness
on
the
convey
part
of
the
social
stakeholders
to
tnemeganam
discounted
Types of business entities
supportive.
The
business
For-prot
operates
social
production,
marketing,
business.
some
more
In
care
than
the
enterprises
HR,
respects,
other
same
are
functions
businesses,
and
nance
areas
of
businesses,
the
as
and
any
must
decisions,
business
which
often
other
attend
just
have
have
as
to
in
be
business.
to
any
run
greater
other
with
ssenisub ot noitcudortnI 1
1.2
prots
andprotability.
Advantages of for-prot social enterprises
Advantages
traders,
●
A
of
favourable
activities
legal
in
of
those
shareholders
A
strong
high
with
for
a
of
activities
exists.
employees
sense
of
or
enterprise
knowing
that
liable
or
prots).
enterprises
often
doing
The
to
accountable
stakeholders
Employees
are
in
individuals
social
other
they
engage
(maximizing
For-prot
purpose.
sole
environment.
allows
interests
and
traditional
can
the
personally
business
identity
Anyone
society,
being
to
following:
working
report
a
something
society.
stakeholder
many
community
stakeholders,
and
services.
for-prot
environmental
help
social
without
satisfaction,
the
achieved.
traditional
common
help
because
is
compared
include
humans,
motivated
The
products
for
for-prot
with
highly
degree
positive
status
good
a
enterprises
companies
communal
have
together
social
and
legal
are
to
often
●
that
structure
engage
●
for-prot
partnerships,
reduce
They
social
may
the
help
enterprises
problems
problems
benets.
including
in
that
the
a
For-prot
direct
the
social
beneciaries
government
typically
government
tackle
is
not
enterprises
of
their
more,
human,
social,
addressing,
or
and
so
community.
Disadvantages of for-prot social enterprises
Disadvantages
traders,
●
of
a
long
time
and
to
which
can
the
limit
Capital
are
to
rely
retained,
provide
with
the
size
social
on
for
of
may
may
case,
of
healthy
the
capital
in
as
business.
struggle
to
for-prot
to
In
enterprises
parties
growth.
be
are
sole
being
often
involved
take
with
decision-making
margins
Without
for
The
sufcient
property,
and
large
the
time
the
and
model
long
much
of
prots,
a
Most
which
equipment,
requirements
for
term.
and
increase
for-prot
social
expand.
nancial
prot
because
business
in
prots,
plant,
capital
and
lower
businesses
traditional
business.
survive
have
social
extended
working
insufcient
tend
this
not
prot
to
these:
time-consuming.
many
for
may
investment
be
the
insufcient
enterprise
enterprises
traditional
the
and
If
compared
include
for-prot
decisions.
often
working
enterprises
Capital
is
be
social
enterprises
complex
effectiveness
may
businesses
is
social
companies
transparent,
make
decision,
for-prot
●
and
Decision-making
consultative
●
for-prot
partnerships,
strength.
margins
they
often
For-prot
and
try
prots
to
make
than
their
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1
products
tnemeganam
ssenisub ot noitcudortnI 1
social
and
services
enterprises
them
to
survive
as
tend
a
inexpensive
not
to
recession
have
or
a
as
possible.
nancial
times
when
As
a
result,
strength
nance
is
that
less
for-prot
can
help
available.
Non-prot social enterprises
Key terms
The
Non-prot social enterprise
an organization with many
are
●
similarities to a normal social
main
as
features
Some
businesses
prots
enterprise, except that it is
main
less willing to (and often does
of
non-prot-based
(commercial)
organizations
(NPOs)
follows:
at
all.
aim
social
is
operating
These
for
a
social
enterprises
in
the
businesses
in
purpose
that
they
private
are
also
–
do
but
not
sector
social
they
aim
are
to
do
not
aim
enterprises
different
make
any
–
to
make
that
from
is,
their
for-prot
prots
whatsoever.
not) earn a prot or surplus.
●
Though
these
social
enterprises
are
run
as
businesses,
they
generate
(or
The primary aim of a non-prot
aim
to
generate)
surpluses
rather
than
prots.
A
surplus
(sometimes
social enterprise is to provide
referred
to
as
surplus
revenue)
is,
conceptually,
very
similar
to
a
a social service.
prot.
However,
business,
Non-governmental
the
organization (NGO)
the
business
rather
surplus
was
set
non-prot organizations,
A
surplus
is
any
often with a humanitarian
A
surplus
is
calculated
extra
is
than
used
being
to
distributed
advance
the
to
the
social
owners
purpose
of
for
the
which
up.
revenue
as
generated
after
subtracting
an
NPO’s
costs.
follows:
or social purpose. NGOs are
surplus
independent of government,
=
total
revenues
total
costs
but they often receive
government grants or
Many
funding and cooperate
and
non-prot
with government.
Foundation,
Red
examples.
most
and
These
Social
1.5
between
the
categories
of
enterprises
are
Mohammed
Calouste
very
bin
Gulbenkian
and
large:
Rashid
Al
United
Foundation
many
other
Way,
Maktoum
large
are
Red
Cross
Knowledge
just
NPOs,
a
few
are
bigger
than
businesses.
enterprises
them
the
organizations,
traditional
Student workpoint
social
Crescent,
can
can
take
be
many
subtle
non-prot
possible
(and
social
forms,
confusing).
enterprises
and
the
differences
Nevertheless,
exist:
two
broad
non-governmental
Be a researcher
organizations
Look
at
the
two
NGOs
and
one
Make
they
–
one
do,
“NGO”
when
established,
they
and
the
news
was
common
social
Can
articles
you
nd
about
and
of
these
are
between
is
to
a
by
the
variety
support
a
United
of
Nations,
social
cause
that
and
enterprises.
is
it
has
The
considered
since
aim
of
socially
become
these
a
various
desirable.
are
with
a
concerned
broader
with
a
spectrum
single
(such
issue
as
(such
as
Save
Greenpeace).
the
Some
any
no
political
afliation
or
agenda
(such
as
the
Aga
Khan
Development
their
main
and
the
used
while
others
have
political
aims
(such
as
the
National
Rie
organization?
the
similarities
rst
describe
NGOs
others
Association).
What
to
enterprises
Network),
funding
term
about
have
information
a
way
Whales);
them.
charities.
any
Some
recent
and
Non-governmental organizations (NGOs)
local
about
(NGOs)
for
international.
notes
were
work
websites
organized
or
A
common
run
by
any
element
of
all
these
NGOs
is
that
they
are
not
government.
differences
two
NGOs?
Charities
Charities
possible
is
on
are
for
a
specic
those
in
philanthropy
Some
charities
emergency
aid
are
for
form
need.
and
a
of
NGO
Charities
desire
to
single-event
specic
whose
differ
help
those
charities
natural
aim
from
who
that
disasters
is
to
provide
other
NGOs
cannot
provide,
or
wars
as
in
help
for
(such
much
that
relief
their
as
focus
themselves.
example,
as
Saba
Relief).
30
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with
charities
regular
International
strong
USA).
any
focus
NGOs,
Red
political
With
all
government
Finally,
one
because
taxes.
of
or
a
single
and
and
Red
that
it
with
all
the
idea
in
between
status
other
no
as
and
Save
interest
is
the
(such
that
private
NGOs
and
are
Children).
politics
as
the
Catholic
business
of
charities
not
are
can
as
the
have
Charities
is
not
the
from
run
by
economy.
exists:
exempt
exempt
As
(such
Others
sector
philanthropy,
businesses,
the
in
Movement).
preferences
operates
distinction
(such
have
Crescent
charities,
charitable
as
issue
may
particular
these
clear
their
NGOs,
Cross
ties
of
on
charities
tnemeganam
Other
Types of business entities
charities,
from
ssenisub ot noitcudortnI 1
1.2
paying
taxes.
Common features of non-profit social enterprises
In
addition
common
to
the
common
features
of
features
non-prot
of
social
social
enterprises
enterprises
mentioned
include
the
above,
The surplus generated from a
charity’s business activities, such
following:
as this second-hand clothes shop,
●
Prots
are
not
generated
–
instead,
these
businesses
generate
is used to advance the social
surpluses
and
surpluses
are
used
to
advance
the
social
purpose
of
the
purposes of the organization
business.
Sometimes
a
similar
fashion
to
the
organization.
the
goods
and
non-prot
retaining
Typically,
services
for
social
prots,
the
enterprises
for
the
surpluses
which
the
retain
capital
are
used
non-prot
surpluses,
requirements
directly
social
to
in
of
provide
enterprise
wascreated.
●
Donations
are
government
revenues
cases
has
●
comes
(the
do
Novo
–
large
There
unclear
is
organizations?
Who
large
How
The
selects
issue
of
executive
is
ofcers
NGO
multinational
skillset,
These
all
are
kinds
kinds,
handled
of
and
of
have
and
for-prot
questions
be
a
the
Should
for-prot
say
To
attract
corporate
routinely
source
of
the
executives
salaries
plague
and
board
need
want
–
and
organizations.
these
of
who
operation
directors?
contribute
than
others?
compensation?
requires
same
provide
in
owns
contentious
the
their
some
non-prots
individuals
in
of
In
organization
those
the
companies.
paid
all
Who
appropriate
especially
the
individuals
management
be
for
on
on
part
individuals.
virtually
sits
rely
large
endowment
control.
is
a
example),
the
from
larger
so
from
services
who
What
charity
company?
can
is
its
major,
or
and
decide
selected?
huge,
and
members?
compensation
multinational
and
should
money
for
from
donations
ownership
managers
organization
a
of
goods
cannot
income,
Nevertheless,
more
board
of
donations
proceeds
small
Who
new
amounts
are
and
businesses
Foundation,
the
revenues.
welcome
these
forms
voluntary
and
provide
–
other
Nordisk
ongoing
more
or
from
endowments
reliable
to
important
funding
when
the
Should
amount
of
the
the
skills
the
as
of
head
the
of
CEO
necessary
a
of
calibre
necessary?
non-prot
discontent
organizations
among
stakeholders
of
if
not
effectively.
Advantages of non-prot social enterprises
Non-prot
of
●
the
social
businesses
They
help
discussed
people
governments
local
enterprises
people
rarely
and/or
or
have
above.
causes
have
a
number
These
in
need.
sufcient
communities.
of
advantages
compared
to
any
include:
Individuals,
resources
Non-prot
to
organizations,
solve
social
all
the
needs
enterprises
and
of
cannot
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1
address
tnemeganam
ssenisub ot noitcudortnI 1
causes
all
crucially
●
They
may
●
can
in
They
can
to
In
live
foster
allocation
of
a
of
people
and
better
and
to
causes.
including
philanthropic
helping
turn,
and
the
various
in
the
the
specic
social
groups
or
enterprises
noted
have
working
is
information,
government
the
and
and
can
to
of
make
it
a
solve
all
the
contributing
and
carry
about
organizations,
non-prot
distant
individuals
agencies,
can
community
individuals,
for
People
constructive
businessclimate.
actions
local
socially
community
resources
The
about
a
in
above,
sufcient
individuals
in
community.
foster
general
discussions
As
the
can
attitudes
communities.
better
for
non-prot
which
improve
information
With
of
spirit
others,
positive
can
rarely
and/or
can
work
valuable.
informed
enterprises
lead
Nevertheless,
the
resources.
governments
local
and
about
general.
place
either.
supported,
foster
good
better
and
needs
are
important
feel
views
the
that
needs
social
to
them
problems,
issues,
organizations,
out
more
informed
decision-making.
●
They
can
creative
–
solutions
innovate.
to
–
surpluses
try
new
because
and
Employees
ideas
and
non-prot
therefore
do
or
members
tactics
social
not
have
to
are
address
enterprises
funds
for
often
“forced”
problems
often
do
and
not
to
be
nd
generate
reinvestment.
Disadvantages of non-prot social enterprises
TOK links
Non-prot
any
1.
of
the
social
enterprises
businesses
have
discussed
a
number
above.
of
These
disadvantages
include
the
compared
to
following:
As non-prot
●
Intense
lobbying
from
non-prot
social
enterprises
can
lead
organizations can make
to
socially
undesirable
goods.
For
example,
High
North
Alliance
in
a prot (called “surplus”)
Norway
lobbies
for
Arctic
coastal
communities
and
seeks
to
protect
the
and prot-making
1
rights
of
whalers.
In
effect,
it
supports
consumption
of
whale
meat.
organizations can operate
Two
non-prot
lobbying
groups
in
the
United
States,
the
National
at a loss (not making any
Rie
Association
and
Gun
Owners
of
America,
are
powerful
enough
to
prot), what is the point
effectively
lobby
state
and
national
legislatures
to
prevent
meaningful
of the notion of “prot”?
2.
As dierent countries
restrictions
on
and
weapons.
assault
gun
ownership,
Both
including
gun
the
ownership
possession
and
of
hand
gun-related
guns
deaths
are
2
have dierent legal
far
higher
in
the
United
States
than
in
other
industrial
countries.
frameworks, how useful
●
Sometimes
the
employees
of
non-prot
social
enterprises
have
is it to create a universal
a
passion
and
zeal
that
ill
serve
the
organization
or
its
cause.
classication of types of
Greenpeace
employees,
for
example,
have
at
times
taken
direct
action,
organizations?
acting
3.
as
pirates
by
boarding
whaling
ships,
which
is
illegal
and
can
lead
Is the term “social
to
loss
of
support
for
the
organization
or
business.
enterprise” an oxymoron?
●
Funding
very
can
reliant
be
on
irregular.
donations,
Non-prot
which
can
be
social
a
enterprises
problem
in
are
generally
economic
recessions.
1
Doyle, A. March 2008. “Eat whale and save the planet”. Reuters; Bjørnseth, S. September 2020. “Demand
for whale meat in Norway rising after years of decline”. The Guardian
2
Aizenman, N and Silver, M. August 2019. “How the US compares with other countries in deaths from gun
violence”. NPR
32
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Types of business entities
Revision checklist
Businesses
or
✓
groups
in
of
Businesses
the
Sole
in
trader
individual
business
the
✓
A
liable.
also
✓
a
sole
business,
✓
so
For-prot
A
a
this
owned
and
controlled
by
individuals
are
owned
and
controlled
by
a
owned
debts
is
owned
be
made
can
of
the
are
no
and
and
and
different
a
single
incur.
person.
The
Registering
a
easy.
managed
jointly,
bring
have
business
owners
they
social
a
quick
by
might
by
all
more
than
partners
kinds
of
are
one
equally
expertise
and
may
nance.
corporations
When
managed
business
relatively
business
should
and
the
multiple
has
themselves
longer
enterprises
are
liable
have
a
owners
registered
as
legally
for
a
–
usually
company
separate
or
from
the
debts.
social
mission,
but
they
still
aim
to
prot.
social
Any
are
any
sources
and
corporation,
for
partners
extra
Companies
make
is
Multiple
bring
sector
trader
Decisions
shareholders.
✓
public
liable
partnership
person.
are
authorities.
businesses
is
as
sector
individuals.
governmental
✓
private
tnemeganam
✓
ssenisub ot noitcudortnI 1
1.2
mission
money
is
the
made
is
main
called
aim
of
non-prot
surplus.
Most
social
NGOs
and
enterprises.
charities
fall
into
category.
Practice question
To
answer
the
question
below
effectively,
see
Unit
6
pages
398–402.
Off2SchoolSupplies
Off2SchoolSupplies
exclusively
where
never
O2S
tried
companies.
grow
year
With
sales
the
to
was
to
supplies
offset
the
reach
public
a)
With
the
for
of
reference
company
companies
which
the
worked.
O2S
had
or
company
for
in
strong
government,
The
that
located
years
the
sold
region
relationships.
large
saw
its
publicly
sales
O2S
held
revenue
decades.
internet,
online
supply
held
with
More
growth
sector
public
ofce
schools,
two
the
from
slowing
and
state
growth.
ofce
an
approached
year
arrival
revenue
to
is
privately
located
sell
O2S’s
on
(O2S)
small,
however,
and
more
sellers.
in
the
To
O2S
small
generate
private
has
experienced
companies
now
additional
sector,
O2S
has
slowing
purchase
sales
their
revenue
started
trying
to
to
organizations.
to
sectors.
O2S,
distinguish
between
the
private
and
[4
marks]
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1
tnemeganam
ssenisub ot noitcudortnI 1
1.3 Business objecti ves
By the end of this chap ter, you should be able to:
Explain the denitions and roles of
➔
vision statements
and
mission statements
Examine common business objectives, including
➔
protecting shareholder value
growth, prot,
and ethical objecti ves
➔
Explain strategic and tactical objecti ves
➔
Describe corporate social responsibility (CSR)
Vision and mission statements
Key terms
Successful
Vision statement
of
businesses
purpose
identity,
that
all
have
a
clear
stakeholders
communicate
these
identity,
identify
values,
shared
with.
and
To
values,
create
maintain
and
or
focus
a
sense
reinforce
on
the
this
purpose,
a philosophy, vision or set of
many
businesses
produce
mission
and
vision
statements.
Some
businesses
principles which steers the
will
have
one
of
these,
others
both.
When
done
properly,
both
types
of
direction and behaviour of
statement
can
help
a
business
to
reach
its
loftiest
aims
and
stay
focused
day
an organization
to
day.
Mission statement
Mission
states a company’s purpose
and
different
and explains why the
speaks
business exists. A mission
A
statement generally includes
to
the
mission
objectives
the business’s aims and,
the
vision
purposes.
statements
The
long-term
statement
to
vision
achieve
is
aims
more
the
are
sometimes
statement
and
highest
grounded
mission:
is
an
in
confused,
more
aspirations
the
but
forward
aim
of
intermediate
of
a
they
looking
have
and
business.
accomplishing
step
on
the
way
to
vision.
whether expressly stated or
The
two
statements
should
complement
each
other,
with
the
vision
implied, indicates its most
statement
being
produced
the
statement
rst.
Less
specic
than
a
mission
statement,
impor tant values.
vision
serves
as
a
guiding
principle
or
principles.
Table 1.3.1 Comparison of vision and mission statements
Vision
Mission
Concept
What do we want?
Why are we doing what we are doing?
Purpose
A vision statement points to the future. It is what the
A mission statement, based upon where the business is now,
business would like to see itself as.
communicates what needs to be done in order to achieve
the vision.
Audience
Change
To internal stakeholders, the vision statement inspires
To internal stakeholders, the mission statement provides a
and motivates employees.
means for accountability by dening key performance indicators.
For external stakeholders, the vision statement binds
For external stakeholders, the mission statement measures how
them to the business by giving a sense of shared beliefs.
successful the business is at achieving its vision.
As an expression of the business’s core values, the vision
A mission statement may change: in a world of dynamically
should never change.
changing external environments, a mission statement may need
to be modied to meet new circumstances.
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you
are
two
examples
probably
know
Microsoft:
●
“A
of
(and
the
vision
whose
personal
statements
products
computer
in
you
every
of
major
might
home
corporations
that
use):
running
tnemeganam
Here
Business objectives
Microsoft
software.”
Toyota
●
in
In
both
are
cases,
high
sense
of
and
“To
the
long
be
the
vision
term.
condence
companies
home
USA:
most
successful
and
respected
car
company
America.”
or
are
not
Toyota
America),
they
in
at
their
this
USA
will
statements
They
are
place
the
give
They
yet
most
up
brief
and
inspirational.
purpose.
lofty
being
not
are
also
they
have
aspirations
statements
convey
(Microsoft
successful
until
express
Both
the
running
and
that
software
respected
reached
that
convey
sense
car
ssenisub ot noitcudortnI 1
1.3
if
in
a
the
every
company
in
theiraspiration.
Student workpoint 1.6
Be reective
Here
are
Oxfam:
the
“A
Amazon:
to
build
they
a
vision
just
“Our
place
might
statements
world
without
vision
is
where
want
to
of
to
be
people
buy
two
large
Key terms
organizations:
poverty.”
earth’s
can
Business objectives
most
come
to
customer
nd
and
centric
discover
company;
anything
online.”
the ar ticulated, measurable
targets that a business must
meet to achieve the aims
or long-term goals of the
What
do
the
statements
reveal
about
the
aims
and
attitudes
of
the
business. It is critical that
organization?
Look
carefully
at
the
words
that
each
statement
uses
–
objectives are specic and
what
affect
do
they
have
on
you?
measurable.
Strategic objectives
Aims, objectives, strategies, and tactics
Businesses
strategies
these
may
and
terms
another.
distinguish
tactics.
All
(including
Figure
1.3.1
of
between
these
vision
and
attempts
to
aims
and
concepts
are
mission
too)
show
their
objectives
and
are
linked
relationship
in
the long-term goals of a
between
interdependent
and
some
with
all
of
way
each
or
other.
business that indicate how
the business intends to
full its mission. Strategic
objectives usually include
performance goals, such as
vision
increasing market share or
improving protability.
Tactical objectives
shor t- to medium-term targets
that, if consistently met,
strategies
mission
will help a business reach
its strategic goals. Whereas
tactics
strategic objectives are
typically set by the board of
strategies
directors with top executive
management, tactical
objectives are usually set
by executive management
objectives
aims
working with middle-level
Figure 1.3.1 The vision and mission statements – relationship between aims,
management.
objectives, strategies, and tactics
35
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1
The
tnemeganam
ssenisub ot noitcudortnI 1
Student workpoint
the
1.7
aims
of
future.
year
aim
a
business
An
through
might
the
be
are
example
of
its
an
production
more
focused
long-term
aim
of
on
goals
might
tasty,
the
be:
–
what
“We
high-quality
delivery
of
it
want
the
wants
to
meat
be
to
achieve
protable
products.”
service:
“We
in
every
Another
aim
to
deliver
Be reective
consistently
Think
about
your
life
goals.
Write
vision
a
personal
products
through
a
helpful
vision
statement
is
a
summary
of
these
aims
(sometimes
sales
literally
of
these
aims,
at
other
times
with
modiedwording).
contrast
to
aims,
objectives
are
the
medium-
to
short-term
goals
mission
linked
to
clarify
how
the
business
will
achieve
its
aims
and
reach
its
vision.
these
A
life
The
sum
that
statement,
garden
statement,
In
and
and
a
the
personal
plant
longstaff.”
term
high-quality
mission
statement
summarizes
these
objectives.
goals.
Common business objectives
Business
their
objectives
most
leadership
believe
increasing
sales
focus
are
on
protect
the
prots
more
to
least
For
are
the
not
to
Business
can
to
to
the
Tactical
middle
–
in
can
its
for
to
are
of
or
with
the
its
and
to
to
set
to
many
as
by
aims
sufciently
to
to
benet,
of
to
be
or
at
prot.
ethical
Ethical
setthem.
objectives”–
managers
its
a
treated
businesses
“global
met,
making
Another
senior
short-term
objectives.
when
honesty.
achieve
to
aims.
objectives
set
by
objectives.
day-to-day
workers
process
and
leadership
path
ethical
that,
employees
referred
strategic
the
the
and
longrun.
objectives:
respect
medium-
corporate
middle
favouritism.
direction
the
are
in
share
organizations
looking
the
corporate
market
environmental
objectives
right
A
organizations,
and
Other
the
but
in
of
some
behaviour
activities
sometimes
achieve
of
even
types:
sometimes
tactical
all
or
three
objectives
(and
social
and
future.
category
of
the
prots.
there
codes
range
long-term
objectives
managers
reach
in
is
For
directors
gaining
now
environment
aim
of
board
prots
value
some
the
the
immediate
customers
come
company
managers
where
different
whole
to
enhance
making
might
objectives
Operational
run,
the
board
organization,
harassment,
treat
a
medium-
the
a
organization.
The
established
or
business
cover
in
provide
society
be
the
shareholder
on
to
grow.
long
by
establish
objectives
Strategic
guide
●
a
might
objectives
are
value
discrimination,
objective
●
hurt
the
prots
based
business
example,
without
●
often
to
protability,
ensure
goals
is
growing
in
on
shareholder
Businesses
allow
or
according
aim
that
will,
focused
future
These
vary
important
objectives
themselves)
so
that
set
the
by
oor
company
objectives.
Table 1.3.2 Vision and the three types of objective
Vision (summary of aims)
Long-term and highest aspiration
Strategic objectives
Long-term goals
Tactical objectives
Medium or shor t-term goals
Operational objectives
Day-to-day goals
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Business objectives
Strategic and tactical objectives
use
relationship
aims,
which
executive
How
the
the
are
objectives
will
assess
the
the
are
set,
the
did
objectives?
CEO
may
objectives:
in
number
managers
At
the
be
also
met,
these
be
achieve
than
the
set
more
their
that
strategic
level,
and
or
ask:
executives
ambitious
Were
and
of
through
in
sum,
the
the
set
will
ensure
be
in
properly
meeting
next
by
or
the
the
the
year.
tier
to
be
of
greater
next
level
of
supervisors).
oor
the
way
SMART
objectives,
tend
set:
that
SMART
If
following
department
objectives
that,
the
usually
With
objectives
exceed
strategic
Ideally,
measurable
properly
the
chief
of
These
divisions.
objectives
are
(heads
operational
the
objectives
level
details).
are
the
general.
nature.
and
their
or
rather
next
in
for
perform
Tactical
objectives
the
fair
and
objectives
managers
be)
concrete
vastly
the
hierarchy
executives).
some
not
describe
the
should
below
has
to
of
entrepreneur
through
(see
must
tactical.
objectives
is
top
the
executives
strategic
are
middle
specic
the
or
by
(and
aims
CEO
CEO
the
(directors
executives
directors
to
those
or
At
set
number
or
objectives”
are
SMART
of
the
directors
the
and
aims
in
of
goals.
managers
entrepreneur
not
lowest
determine
will
If
–
The
greater
will
their
number
achieves
be
decide
Businesses
of
performance
objectives
or
in
senior
objectives
objectives,
“hierarchy
all
(CEO).
business
the
to
few
ofcer
managers–
these
term
between
tnemeganam
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ssenisub ot noitcudortnI 1
1.3
managers
tactical
will
objectives
met.
Consider
the
hierarchy
of
objectives
shown
in
Table
1.3.3.
Table 1.3.3 The hierarchy of objectives
Aim
Strategic objective
Tactical objective
Operational objective
To be the most successful
To have the highest market share
To hire and retain enough
To have the average amount of time
car dealership in the city.
of car dealerships in the city.
salespeople so that the
that a customer waits to be greeted
dealership has sucient
by a salesperson to be less than
salespeople to serve
two minutes.
customers at all times.
In
●
the
example
The
CEO
sets
successful
●
The
head
having
●
The
in
of
the
sales
within
a
in
Table
the
the
1.3.3:
aim
that
a
particular
car
dealership
should
be
the
most
city.
sales
determines
highest
market
managers
specied
realize
time
that
share
that
frame
the
of
to
best
any
have
means
way
car
the
to
measure
dealership
highest
having
more
in
success
the
market
is
by
city.
share
qualied
sales
staff
to
servecustomers.
●
The
the
will
salespeople,
sooner
go
service
nish
they
more
by
a
their
realizing
greet
than
the
two
their
minutes
salesperson
coffee
that
–
during
chance
customer,
even
their
agree
without
if
it
of
as
being
means
making
a
group
greeted
that
a
sale
that
no
and
salespeople
increases
customer
offered
will
not
break.
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1
An
important
tnemeganam
ssenisub ot noitcudortnI 1
concrete
A
vision
and
such
America”
allows
difference
can
is
as
be
“To
be
the
motivating,
almost
abstractness
not
to
it
is
feel
qualities
aims
into
most
but
everyone
are
between
translated
and
objectives
something
successful
also
and
to
it,
employees
that
and
respected
(purposely)
connected
that
is
specic
vague.
but
can
objectives
car
This
company
on
in
in
vagueness
vagueness
act
are
measurable.
and
unison.
SMART objectives
Specic
Businesses
Measurable
Achievable
Relevant
into
are
specic
objectives
are
Specic
●
relate
effective
objectives.
to
as
–
when
The
they
best
take
their
business
vision
objectives
and
are
transform
SMART.
it
SMART
follows:
is
the
the
objective
nature
of
clear
the
and
business
well
and
dened?
be
Objectives
unambiguous.
should
Rather
than
Time-specic
set
an
objective
would
clarify
number
of
been
–
also
members,
objectives
beyond
the
that
other
objectives
or,
more
relevant
a
staff
–
is
the
that,
to
do
a
not
the
IB
car
told
the
has
to
must
date
by
is
7%
a
a
staff
not
is
tell
which
up
need
be
use?
they
goals
managers
support
these
the
has
it
(number
of
or
reduce
wonder
can
how
for
set
company
that
Telling
the
are
have
think
also
school,
are
relevant.
reduce
a
that
can
the
employees
At
When
objectives).
Businesses
purpose
objectives
to
are
Objectives
because
or
it
specic,
realistic)?
Achievable
specic
the
whether
employees
responsibility.
that
“increase
share).
it
its
main
particularly
they
(is
or
any
the
or
are
not
telling
students
the
to
custodial
amount
of
relevant.
or
the
increase
of
to
objective
examples
market
employees
for
see
motivational.
going
of
sufcient
frame
of
giving
from
to
objective
above
business
actually
area
the
objective.
are
smart
share”.
achieved
be
(when
expenses,
by
be
objectives
custodial
time
dealership
salesperson
the
business
set
of
a
membership”
the
size
can
of
its
measured
employees
reach
scores
–
sold,
distractions
lower
a
reach
be
each
they
grow”,
market
should
objective
employees’
supplies
have
as
objective
are
the
of
only
units
with
the
“increase
objective
distractions
of
Time-specic
●
the
commonly,
to
to
“should
“increase
Not
of
cannot
and
high
cleaning
can
that
member
achieve
the
not?
effect,
aspects
Relevant
●
or
achievable,
they
dissonance
wants
reasonable
opposite
fear
business
measurable,
–
are
the
it
number
Achievable
●
or
be
the
sold”
can
achieved
should
of
that
units
Measurable
●
that
sales
by
the
time
deadline,
staff
5%
new
is
frame
they
that
been
are
the
target
is
to
If
of
unless
be
objectives
meaningful.
number
meaningless
sales
set?
not
cars
the
For
sold
sales
per
staff
is
met.
Business strategies
A
business
work
long
by
strategy
towards
term
the
and
owners
the
is
aims
will
a
of
plan
the
require
and/or
the
to
achieve
business.
senior
a
strategic
This
managers
strategy
to
make
objective
will
the
be
in
order
medium
decisions
to
to
approved
CEO.
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are
●
Careful
●
The
Careful
●
A
wants
after
a
business
strategies
the
aims
of
health
of
within
A
the
restaurant
count
or
might
be
t
it
can
for
One
of
to
to
the
business
(strategy)
how
to
process
plan
of
to
moment.
They
involve:
is.
for
how
instead
to
determine
time,
has
achieve
tactic
the
change.
implement
which
This
make
have
a
to
a
get
to
where
the
are
whether
the
be
objective
are
the
short-term
approved
less
on
strategy.
plan
is
working
worked.
tactical
will
focusing
the
themselves
decisions
They
customers
for
observing
to
the
sound
example,
tactic
obtain
might
with
plan
business,
business.
rm,
the
of
(aims).
period
a
spur
closely
how
to
by
and
the
tied
to
to
achieve
work
path
to
will
require
senior
the
towards
reaching
managers.
long-term
measurable
targets
strategy.
business
(but
the
is
the
easier
the
objective,
area.
of
managers
are
a
be
evaluation
specic
tactic
the
Tactics
of
to
or
where
consideration
periodic
middle
of
development
●
or,
unplanned
analysis
business
A
not
tnemeganam
Strategies
Business objectives
ssenisub ot noitcudortnI 1
1.3
not
might
to
be
of
strategy
be
the
determining
customers’
a
be
more
a
mix
highest
reactions
form
form
of
a
poor
food
the
if
as
of
the
tactical
that
quality
customers’
direct
better
marketing
but
offering
is
of
its
type
satisfaction
they
eat
customer
direct
plan.
A
perceived
in
food.
feedback
feedback
a
might
the
market
be
A
on
does
strategic
by
customer
better
food
not
tactic
quality
otherwise
restaurant).
The need for organizations to change objectives
Businesses
changing
tactical
often
need
strategic
objectives
operational
changes
in
to
and,
objectives.
either
change
objectives.
of
day
to
objectives.
More
day,
Regardless
these
Sometimes
commonly,
oor
of
it
managers
the
level,
this
involves
and
supervisors
objectives
C oncep t
requires
changing
change
change
because
CHANGE
of
Due to changes in their external
environments:
environment (such as new
●
The
internal
environment,
which
refers
to
changes
in
the
conditions
competitors) and changes in their
within
the
business.
internal environment (such as
restructuring), organizations may
●
The
external
environment,
which
refers
to
anything
outside
the
need to modify their objectives
business
that
nonetheless
has
a
bearing
on
its
operation
or
performance.
and strategies.
Changes in the internal environment
Do some research to nd examples
of such changes in objectives
Changes
in
the
internal
environment
might
include
the
following:
or strategies.
●
Leadership
aims
and
returned
will
have
require
●
HR
–
the
the
change
objectives.
to
a
Apple.
different
term
A
precipitate
by
an
lead
when,
leaders
style
to
HR
hierarchy.
or
is
can
from
in
a
change
1996,
brought
their
to
into
a
Steve
in
Jobs
company
predecessors,
which
can
objectives.
resources”
related
the
in
to
often
example
new
leadership
changes
unions
change
leadership
famous
“human
down
taken
of
Sometimes
Conditions
way
actions
a
signicant
business.
all
–
other
covers
can
a
Industrial
forms
vast
change
of
array
and
action,
of
can
which
organized
elements
alter
refers
labour,
of
a
objectives
to
can
often
organization.
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1
Organization
●
tnemeganam
ssenisub ot noitcudortnI 1
acquisition,
effect
through
many
of
cause
an
given
the
one
or
its
area
tactical
either
–
products
and
–
to
all
in
had
Many
other
to
for
sets
any
have
of
to
the
some
the
of
can
or
have
a
organization
internal
its
business
rethink
pressures
business.
functions,
including
ripple
to
may
However,
changes
changes
to
in
strategic
of
in
marketplace.
itself
as
this
aspects
(which
Sometimes,
marketplace
entire
With
product
a
sports
change
require
line.
In
in
the
to
Lucozade’s
to
an
even
the
may
drink
beverage
of
led
must
change,
amount
or
be
the
changes
1980s,
because
branded
an
of
for
market
identity
energy-providing
strategic
greater
nanced.
especially
of
nance
change
introduced
money
the
the
football
circumstances
2008,
to
ideally,
new
or
their
above
and
number
When
when
tactical
of
of
“Financial
teams
could
the
sources
decreases,
emphasis
change
many
had
to
make
to
nance
most
of
nance
organizations
their
Fair
have
business.
Play”
spend
delivering
reasons,
can
but
their
also
core
on
rule,
For
which
players,
and
as
are
by
factors
pre-empt
are
innovating
service
or
other
by
world
they
had
a
constantly,
better
product
changes
altered,
them
the
lending
because
developing
relocating
necessitate
After
raised
activity.
Sometimes
such
nance.
banks
adjustments
businesses
operations.
even
can
example,
capital
internal
or
for
products
operations
respond
an
activity
FIFA
everyday
in
a
the
objectives).
businesses
–
producing
more
the
access
offering
changes
another,
illness-curing
different
much
and
innovating
an
strategies
began
Operations
for
all
merger
respond.
limited
by
new
aspect
in
in
even
nance
2009,
how
teams
just
one
A
Cadbury,
the
of
in
tripled.
business
their
sold
change
and
more
or
operational
fewer
standards
If
many
become
modify
are
from
of
recession
change.
over
instances,
modify
reoriented
sales
had
in
modied
to
took
causing
other
product
Lucozade
example,
●
the
circumstances
to
In
changes
product
drink,
Finance
●
of
the
objectives
changes
organization,
require
product,
sports
Kraft
objectives.
pressures,
the
an
organizations
when
interconnectedness
can
example,
of
as
objectives.
performance
in
business
organization
Product
●
–
such
in
factory.
then
that
operations
changes
in
the
changing
–
Either
is,
by
occur
way,
objectives.
business
its
not
methods
may
well
objectives.
Changes in the ex ternal environment
Usually,
but
a
often
business
environment.
related
●
to
the
Social
–
A
external
this
preference
Coffee
its
to
change
for
example
university
to
or
no
change
changes
expensive
in
or
changes
is
Steeple
society
like
such
the
to
factors
or
as
used
are
culture,
change
those
external
changes
commonly
cultural
coffees,
over
response
framework
(social)
Social
control
in
environment.
refers
Aroma).
reappraise
limited
have
“STEEPLE”
demographic
One
has
objectives
as
may
to
environment,
the
external
frame
issues
follows:
such
(such
supplied
these
in
as
by
force
as
an
increased
Starbucks
the
or
business
to
objectives.
is
and
the
business
obtaining
of
education.
degrees
than
More
they
did
a
women
few
are
attending
decades
ago
and,
as
40
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result,
universities
offerings
●
to
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can
change
product
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because
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went
with
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new
ways
child
●
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force
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income
fall
Today,
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the
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strategic
rates
on
raising
an
a
If
(see
a
in
can
of
more
change
for
for
“softer”
environment
allow
Nike
and
communication
would
economies
when
the
have
and
companies
(such
a
using
could
increase
presence
(such
on
as
the
businesses
this
can
because
for
sells
in
downturn.
conditions
the
and
objectives.
capital
on
as
economy
inuence
company
economic
economic
ago,
tactical
cost
changes
methods
discovered.
conditions
loans
the
compete
force
new
their
example,
profound
and
A
Blackberry
to
can
technologies
changes
have
quickly
to
of
low-income
market
simply
aware
being
which
ways.
businesses.
business
for
of
course
women.
uncompetitive
struggles
develops
decades
without
elastic
in
a
how
or
from
of
change,
number
obsolete
other
more
shoes
investment.
sometimes
ago,
about
can
or
or
almost
a
in
hiring,
host
safety–
many
of
of
changing
businesses
a
product
and
the
demand
Chapter
For
force
many
a
other
for
least
ways
in
business
change
to
change
its
country
–
their
such
to
are
as
ethics
sexual
not
to
Fifty
concept
if
genuinely
stakeholders
not
harm
the
harm.
in
lending,
harassment,
values
society
concerned
even
external
that
a
practices.
Hawken’s
Today,
business
minimize
the
political
approach.
possibility
risk
to
business
practices,
society’s
–
this
a
values
in
have
led
and
to
diversity
product
changes
in
objectives.
to
assessment”
of
its
deeply
Paul
of.
the
values
change
were
unheard
expect
attentiveness
changes
business
risk
at
to
practices–
was
slowly,
ethical
businesses
sustainable
businesses’
Political
plan
or
in
business
business
certainly
environment,
In
few
a
executives
about
sometimes
Changes
force
capitalism”
owners
will
even
sustainable
concerned
quickly,
change.
relatively
“natural
the
A
interest
may
society
years
●
change
changing
encourage
of
in
crisis)
capital
is
to
tactics
or
force
be
number
innovation
than
information
unknown.
changes
to
to
any
that
competitor
also
in
(think
one
objectives,
technological
rendered
to
their
greater
change.
Ethical
of
those
a
need
because
conditions,
sales
reasons,
can
compared
nancial
which
rapid
business
cheaply
manufacturing
example,
4.5),
it
if
more
changes
in
–
preventing
for
be
of
the
Technological
techniques
competitors),
economic
of
for
can
“hot”
previously
follow
global
a
businesses
time
new
offers
products
Economic
of
era
product
labour
often
an
suit
innovation
actions
harder
is
many
to
being
Technological
in
today
environment
smartphones).
producing
their
modifying
practices,
technological
production
reasons.
–
the
business
from
are
residential
tnemeganam
a
Business objectives
ssenisub ot noitcudortnI 1
1.3
before
and
will
often
investing
assessment
system
very
often
Multinational
in
attempts
carry
a
out
particular
to
forces
businesses
a
“country
country.
determine
the
Consumer demand for ethical products has
likelihood
that
put
the
drastic
political
change
in
a
country
could
increased greatly recently
at
risk
investment
or
operations
of
a
business
there.
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1
Political
tnemeganam
ssenisub ot noitcudortnI 1
the
of
risk,
however,
outcome
a
country
of
can
decide
Legal
●
the
–
In
recovery models
or
occur.
the
the
in
1980s
country
in
by
the
the
United
young
of
a
a
due
to
business
change
election.
crime,
changes
changes
of
an
a
of
in
or
fatal
excessive
from
the
other
have
example,
number
the
can
Legislatures
even
an
environment.
host
for
of
if
legislature
political
scandal,
businesses
States,
example,
the
centre-right,
legislation
and
and
the
people
of
For
that
though,
results
another,
taxes,
home.
business
for
to
statute,
tired
to
the
because
coalition
grew
to
from
affects
Regulation,
at
determines
centre-left
responsibility
one
occur
Sometimes,
not
action
turn
merely
occurring
from
and
also
election
change.
take
when
changed
Resource
to
that
other,
often
can
unexpectedly
accident,
can
political
changes
environment
occur
a
factors
to
party
to
environment
can
be
respond.
many
or
one
legal
individuals
traumatic
alcohol
across
injuries
consumption.
One
Resource recovery models
by
one,
most
state
legislatures
raised
the
minimum
drinking
age
in
the
help to recycle waste into
United
States
from
18
to
21
years.
Many
taverns,
bars,
and
clubs
that
secondary raw materials,
targeted
customers
business
strategies.
in
the
18–20-year-old
age
range
had
to
modify
their
thus reducing the nal
disposal of waste and
Ecological
●
–
growing
environmental
awareness
and
the
“green”
reducing the extraction and
revolution
have
had
a
signicant
effect
on
many
businesses,
for
processing of virgin natural
example
with
the
emergence
of
hybrid
cars.
Ecological
factors
can
resources. The case study
affect
businesses
in
ways
other
than
the
now-dominant
focus
on
below gives an example
sustainability.
Ecological
depletion,
such
as
from
sheries
off
the
coast
of an organization using a
of
Canada,
to
change
or
through
some
types
of
mining,
can
force
a
business
resource recovery model.
their
highly
in
strategies.
ecological
innovative
anticipation
energy
(such
Large
disasters
of
as
in
their
rising
oil
such
companies,
as
huge
search
demand
for
and
oil
new
sometimes
spills,
are
sources
declining
notorious
for
nonetheless
of
clean
traditional
energy,
sources
of
oil).
yduts esaC
Bio-bean
Bio-bean
grounds
country
is
the
and
to
products
UK’s
works
largest
with
transform
at
an
recycler
other
coffee
industrial
of
waste
Bio-bean
coffee
companies
into
in
from
valuable
businesses
every
scale.
coffee
They
provide
a
solution
to
the
approximate
half
tonnes
of
waste
coffee
grounds
in
the
UK,
helping
shops,
while
achieving
businesses
greater
to
ofce
blocks,
save
hubs,
sustainability.
universities
Heavy,
waste
wet
coffee
stream
collection
coffee.
taking
they
fees
for
Bio-bean
management
grounds
enter,
most
works
weigh
spent
that
logistics
across
coffee
whichever
increasing
businesses
infrastructure
segregated
down
typically
with
cafes
restaurants
transport
money
at
from
produced
to
annually
scale:
a
and
million
recycles
the
produce
and
the
waste
UK
grounds
the
by
from
spent
and
grounds
factory
in
instant
are
coffee
collected
Cambridgeshire,
proprietary
processes
renewing
them
products
to
both
for
their
and
reuse
people
Segregated
delivered
where
condition
grounds,
benet
factories.
and
dry
in
and
to
their
innovative
the
valuable
planet.
these
Source: Adapted from https://www.bio-bean.com/renewals/
businesses,
reducing
in
costs
the
weight
of
their
waste
and
coee-recycling/
turn
the
associated
with
disposal.
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Business objectives
Corporate social responsibility
Key term
attention
social
since
companies
responsibility
the
which,
exacerbated
1960s.
in
Part
focusing
existing
(CSR)
of
this
on
problems
is
an
idea
attention
maximizing
(such
that
as
has
was
in
gained
much
reaction
shareholder
environmental
to
value,
the
many
or
Corporate social
responsibility (CSR)
either
degradation)
tnemeganam
Corporate
created
CSR is the view that
new
problems
(such
as
the
elimination
of
dened
benet
pension
plans).
businesses, rather than
The
main
make
the
thrust
money
of
for
perspectives
Corporations
CSR
their
of
all
should
is
that
companies
shareholders,
relevant
instead
and
should
more
stakeholders
do
positive
do
than
when
good
for
more
just
than
focusing solely on increasing
merely
shareholder value, should
consider
making
ssenisub ot noitcudortnI 1
1.3
contribute to the economic,
decisions.
social, and environmental
society.
well-being of society
Companies
including
benets
can
operationalize
philanthropy,
such
as
a
commitment
generous
exitime
for
salaries
working
to
and
CSR
in
wages,
parents,
or
by
many
ways,
meaningful
doing
more
for
the
Student workpoint
environment
than
the
minimum
legal
compliance
required
by
government
1.8
regulations.
Some
and
would
that
argue
there
that
have
the
always
roots
been
of
CSR
some
are
much
companies
older
that
than
have
the
Be a thinker
1960s
acted
in
ways
Many
which
were
good
for
society.
Regardless
of
when
exactly
the
idea
businesses
ethical
today
CSR
is
a
powerful
force
in
companies
all
over
the
set
emerged,
objectives.
What
world.
are
the
most
three
or
important
four
ethical
Why organizations set ethical objectives
principles
Businesses
may
commercial
set
themselves
reasons,
including
ethical
objectives
for
some
very
good
want
these:
that
up
●
Building
up
businesses.
and
●
are
Customers
respect,
Creating
likely
also
a
and
shop
at
loyalty
are
ethical
positive
to
true:
customer
more
image
–
will
repeat
likely
objectives
avoid
to
and
both
businesses
customers
–
customers
return
ethical
existing
with
good
businesses
to
a
are
business
action
and
foster
potential
reputations.
with
vital
to
in
that
any
you
you
would
organization
work
for
or
start
yourself?
most
they
trust
this.
customers
The
opposite
reputations
for
is
being
untrustworthy.
●
Developing
a
positive
well-motivated
competitive
attractive
and
●
many
from
the
the
bad
business
signicant
with
employees
by
for
–
the
strong
and
and
are
of
“punish”
in
to
with
court,
what
is
the
rm’s
can
–
businesses
business
ethical
serve
visible
being
to
that
have
have
a
objectives
improve
or
lead
by
can
be
morale
not
by
legal
be
cost
unethical
redress
customers
can
can
returning
by
a
and
behaviour.
the
themselves.
expensive
and
Even
cause
reputation.
and
than
by
expectations
the
ever
ethical
disregard
to
the
process
ICT
behaviours
unethical
customers
generated
ever-higher
considered
unethical
businesses
can
the
improved
more
reports
businesses
customers’
–
aware
redress
dissatised
behaviour
other
“wins”
behaviour
actions
legal
from
word-of-mouth
damage
Satisfying
of
both
unethical
government,
Few
working
Businesses
potential
risk
money,
Sometimes
●
environment
enjoy
motivation.
company
a
work
who
advantage.
to
Reducing
if
staff
before.
and
not
public
internet,
Today,
unethical
patronizing
for
ethical
business
decisions
consumers
behaviour.
certain
are
They
often
This poster from the clothing company
Matalan clearly states the business’s
ethical policy
businesses.
opinion.
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1
Increasing
●
tnemeganam
ssenisub ot noitcudortnI 1
are
prots
growing.
Often
manufacturers
“fair
that
trade”
will
coffee.
behave
–
opportunities
banks
not
use
Many
ethically,
will
not
for
businesses
lend
to
“sweatshop”
people
which
seek
can
workers,
out
lead
to
dubious
to
and
behave
and
coffee
purchase
higher
ethically
businesses,
clothes
houses
from
use
businesses
prots.
The impact of implementing ethical objectives
When
a
business
environment
The
●
implements
will
be
business
itself
experience
benets
term,
are
costs
certain
norms
may
have
to
Suppliers
●
policy
to
of
–
strong
The
●
local
thelocal
rise,
order
in
may
the
to
and
may
maintain
areas
of
the
business
on
the
following:
run,
the
business
ethical
employees
resist
many
be
long
implementing
practices
in
the
business
only
from
to
objectives,
who
are
in
may
the
short
accustomed
to
change.
their
market
position,
competitors
they
are
implementing
other
protect
likely
ethical
their
to
ethical
objectives
businesses,
includes
suppliers
may
the
have
orders.
trust
the
business
more
and
develop
a
loyalty.
community
generally
see
community,
–
businesses
an
that
improvement
which
can
benet
have
in
and
their
them
in
follow
ethical
relationship
terms
of
with
employment
goodwill.
Government
●
to
objectives,
effects
although
order
–
brand
objectives
and
if
in
Customers
●
–
The
respond.
buying
respond
–
from
likely
and
Competitors
●
ethical
affected.
local,
–
regional,
recognizing
feeling
and
pressure
national
businesses
government–business
from
levels
with
of
ethical
voters
and
objectives,
environment
other
government
fostering
are
overall
ethical
stakeholders,
increasingly
creating
a
objectives.
How ethical objectives are linked to CSR
Ethical
objectives
are
closely
Ethical
objectives
are
specic
on
established
obligation
As
a
part
of
result
CSR
is
its
of
particular
facility
to
CSR
early
broader
to
responsibly
business
a
in
less
is
a
the
specic
manner
to
honestly
have
would
a
a
for
assess
wish
its
to
itself
its
based
business
on
might
actions.
open
has
an
society.
a
As
a
crèche
employees.
as
laws
for
a
implement
A
company
“corporate
society
and
set
impact
objectives.
obeys
customers,
to
may
responsibility.
that
positive
good
benets
only
a
business
ethical
as
may
concept
want
centre)
act
not
with
the
business
than
to
social
business
is
example,
that
CSR
a
will
day-care
intending
corporate
CSR
that
For
to
that
business
objective.
and
and
way
assessment,
committed
responsibly
a
childhood
CSR
and
in
goals
behaviour.
policy,
an
ethical
(an
of
operate
such
committed
A
codes
related
a
citizen”:
whole
but
also
reduces
its
in
all
acting
matters.
interacts
impact
on
the
environment.
By
recognizing
business
the
its
model.
business
is
CSR,
By
a
business
building
more
likely
is
strong
to
be
a
more
links
than
with
valued
part
likely
society
of
the
to
have
and
the
a
sustainable
environment,
society.
44
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Business objectives
Timberland
is
an
American
company
tnemeganam
yduts esaC
C oncep t
Timberland
founded
ETHICS
in
1928
that
especially
manufactures
shoes.
The
outdoor
company
has
wear,
long
had
a
Corporate social responsibility
commitment
to
doing
social
good
and
does
so
and ethics are closely related.
through
are
of
a
variety
encapsulated
from
the
in
of
ways,
the
company’s
some
quote
of
which
below,
ssenisub ot noitcudortnI 1
1.3
Many organizations publish a
taken
“CSR policy” or a “CSR strategy”
on their website, where they
webpage:
show and communicate their
“We
are
committed
to
the
work
of
building
a
ethical objectives. For example,
more
inclusive
company
and
being
a
force
for
the case study here describes
social
and
environmental
good.
how Timberland publishes a CSR
repor t every quar ter.
●
Build
an
inclusive
●
Strengthen
●
Invest
●
Support
workspace
Do some research on the
communities
of
color
internet to nd examples of such
in
design
education
documents.
Every
quarter,
available
provides
in
its
black
to
social
By
quarter
These
efforts
engaging
create
but
in
its
providing
at
quarter
is
impact
CSR
year
it
is
the
of
its
is
made
Timberland
materials
community
what
its
that
used
service
corporate
environmental
improvements
Timberland
where
“green”
a
which
report,
in
social
and
various
year.
genuinely
creating
this
aspects
process
is
its
see
and
suggest
(the
that
and
these
on
report,
In
processes,
and
can
making
and
Timberland
environmental
on
anyone
transparency
impression
that
a
website.
efciency,
metrics
Timberland
on
its
manufacturing
resource
“greenwashing”
the
rather
about
its
publishes
through
programme,
impacts
areas
public
details
responsibility
to
Timberland
the
products,
initiatives.
entrepreneurs”
when
a
in
not
reality
committed
better
is
merely
company
to
tries
it
is
not),
reducing
its
world.
Source: Adapted from https://www.timberland.com/responsibility.html
Student workpoint
Many
businesses,
and
increasingly
big
businesses,
want
to
position
1.9
themselves
everyone
be
more
with
as
for
role
responsible
difcult
because
globalization
through
the
models
and
actions
of
–
as
leading
behaviour.
of
the
In
different
greater
citizens
an
setting
international
opinions
integration
multinational
–
about
of
companies,
the
the
standard
context
ethical
world’s
this
can
this
values,
for
might
but
Read
economies
still
be
Be reective
possible.
many
businesses
do
not
reach
their
highest
aspirations
for
a
result
around
1980
the
movement
towards
CSR
has
been
signicant
of
led
to
dramatic
changes
in
the
attitudes
and
practices
of
is
shifting
2020’s
crisis”
by
Carolyn
and
Berkowitz
has
social
CSR,
triple
since
article
responsibility
as
Although
the
“Corporate
(you
can
nd
businesses.
this
online
CSRwire
on
the
3BL
website).
SWOT analysis
What
SMART
objectives
are
part
of
a
coherent
strategic
plan.
In
the
1960s,
important
a
themes
business
tool
called
the
SWOT
analysis
was
developed
to
help
businesses
and
Chapter1.3
these
objectives.
Although
use
of
this
tool
has
not
been
without
general
many
businesses
rely
on
SWOT
analyses
for
planning
are
from
evident
in
criticism,
this
in
ideas
set
article?
purposes.
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tnemeganam
ssenisub ot noitcudortnI 1
SWOT analysis
“SWOT ” stands for strengths, weaknesses, oppor tunities, and threats.
Organizations often use this tool themselves during a strategic planning
process. Anyone else trying to understand an organization may also want to do
a SWOT analysis of it.
The focus of the tool is on the organization and its contexts. Those involved in
the strategic planning process think about their organization and identify its
current strengths and weaknesses, which are internal to the company. The
planners then look externally and determine the oppor tunities and threats
that the organization faces.
These four categories of items are then put into a table, often with the
format below:
SWOT
It
analysis
helps
is
combined
in
Oppor tunities
Threats
to
and
a
Weaknesses
meant
managers
opportunities,
Strengths
to
be
the
brainstorm
threats
matrix
as
facing
shown
rst
the
the
in
stage
in
perceived
business.
Table
the
planning
strengths,
These
process.
weaknesses,
elements
are
1.3.4.
Table 1.3.4 The SWOT matrix
Positive factors
Negative factors
Internal to the business
Strengths
Weaknesses
Ex ternal to the business
Oppor tunities
Threats
The
the
SWOT
more
factors.
sloppy,
matrix
reliable
The
or
business
is
based
the
opposite
data,
is
uninformed
tool,
it
is
on
perceptions.
the
also
stronger
true.
fashion,
useful
only
it
If
a
can
when
The
will
SWOT
be
wider
the
analysis
actually
is
mislead
thoughtfully
the
sources
analysis
and
of
done
a
and
the
in
a
business.
properly
SWOT
poor,
Like
any
applied.
A SWOT analysis for a given organization
Table
1.3.5
January
shows
an
example
of
a
SWOT
matrix
for
Apple
Inc
(as
of
2021).
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Business objectives
Table 1.3.5 SWOT matrix for Apple Inc
Weaknesses
●
Well recognized among most consumers.
●
Largest percentage of global market share in
tnemeganam
Strengths
Apple products lack compatibility
●
with much non-Apple software.
the global cellphone market (23.4%, four th
●
Limited distribution network .
●
Very dependent on Chinese
quar ter 2020).
Strong brand image provides an edge
●
ssenisub ot noitcudortnI 1
1.3
suppliers.
over competitors.
Price – other similar products are
●
Very protable – $90 billion cash and
●
more aordable.
marketable securities.
Focused research and development creating
●
stylish products.
Provides integrated operating systems,
●
hardware, application software and service to
its customers.
Major increase in share value over the last
●
5 years.
Tablet sales remain solid.
●
Oppor tunities
Threats
●
Strong growth in smar tphone markets.
●
Strong growth in tablet markets.
●
Mobile adver tising market is forecast to reach
Aggressive competition from
●
major rms like Samsung and
Amazon.
Many low-cost rms imitate
●
approximately $240 billion by 2022.
Apple’s products.
Increased scope in the educational market.
●
●
Rising labour costs in China.
●
The Covid-19 pandemic has
Development of new products and product
●
lines in online services.
compromised supply chains.
Note
and
the
that
strategy
business.
a
the
purpose
weaknesses
by
Once
strategy
can
of
a
of
a
identifying
these
be
SWOT
business
are
analysis
strategy
the
different
known,
the
is
itself;
not
it
is
to
strengths
SWOT
brainstorm
the
rst
and
matrix
part
the
of
weaknesses
can
be
strengths
developing
of
analysed
the
and
so
formulated.
SWOT analysis and market position
Use
of
each
the
SWOT
quadrant
matrix
and
then
can
be
strengthened
adopting
a
relevant
by
“pairing”
strategy,
as
key
factors
shown
in
from
Table1.3.6.
Table 1.3.6 Pairing key factors to determine the relevant strategy
Strengths
Oppor tunities
Threats
Weaknesses
S–O
W–O
Growth strategies
Re-orientation strategies
S–T
W–T
Defusing strategies
Defensive strategies
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1
Growth
●
tnemeganam
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a
strategies
business
positive
should
issues
with
short-term
pursue
in
any
Defensive
●
business
help
other
When
the
to
addressing
available
term.
its
in
Their
Defusing
●
focusing
the
can
a
business
simply
neutral
strategies
market.
in
which
from
it
the
is
when
weakness
and
the
strengths
produces
matrix.
condent
a
business
exist
quickly.
strategies,
adopted
order
that
re-orientate
are
not
designed
of
need
the
a
to
threats
medium-
to
in
the
The
that
of
most
business
it
has
is
at
but
its
no
big
most
combination,
Defensive
they
to
the
may
the
strategies
be
in
a
for
are
necessary
to
short-term
are
positive
rst
and
address
in
the
strategies
on
on
long
its
direction.
market
focus
focuses
opportunities
threats
Defusing
new
a
the
will
new
eliminate
through
business
for
strategies
itself
to
a
them
business
business.
look
when
use
Re-orientation
strengths
does
are
assumes
can
defuse
and
combining
survive.
then
the
adopted
and
short-term
strategies
on
by
when
defensively
adoption
weaknesses,
are
weaknesses
the
available
strategies
threats
“negative”
Re-orientation
●
achieved
opportunities,
area.
act
business
best
strategy
growth
needs
most
are
market
strategies
vulnerable.
the
the
market
assume
opportunities
core
strengths.
by
that
but
This
is
strategy.
The Anso matrix
Another
is
the
business
Ansoff
tool
matrix,
Manybusinesses
to
help
which
use
the
businesses
was
Ansoff
plan
designed
matrix
by
to
and
Igor
help
set
objectives
Ansoff
plan
in
their
1957.
growthstrategies.
The Anso matrix
The Anso matrix looks at the growth potential of a business in terms of the
market and product. It considers both the existing markets and products, and
new markets and products:
P
r
o
d
u
Existing
gnitsixE
M
Market
penetration
c
t
New
Product
development
a
r
k
e
weN
t
Market
Diversication
development
Figure 1.3.2 The Anso matrix
There are four possible growth strategies: market penetration, market
development, product development and diversication. These are
explored below.
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Business objectives
Market penetration
share,
penetration
selling
penetration
increasing
Market
to
more
is
The
away
the
may
business
on
and
the
for
by
Gambit
by
For
market.
but
brand
in
example,
develop
in
the
loyalty
general
Netix
great
its
market
Market
opportunities
competitors
promotion
to
increasing
same
growth,
the
promoting
on
competition.
Queen’s
grows
in
option
limited
heavily
the
The
a
products
safest
be
customers,
from
and
when
existing
relies
repeat
Crown
streaming
Key
share
penetration
customers
its
considered
market
encourage
like
occurs
of
in
to
has
brand
tnemeganam
Market
for
market.
order
ssenisub ot noitcudortnI 1
1.3
lure
used
loyalty
series
to
its
services.
factors
to
increase
●
The
growth
●
The
strength
●
The
power
the
potential
of
chance
of
the
customer
and
ability
of
of
success
are:
market
loyalty
competitors
Market development
Market
for
is
a
development
new
market
riskier
strategy
understand
For
the
example,
stores
in
existing
than
new
Successful
the
the
market
was
market
existing
by
looking
market.
penetration,
unsuccessful
Walmart
Walmart
(German)
in
as
for
new
Market
the
markets
or
development
business
may
not
markets.
Starbucks
Australia.
Germany.
expands
segments
had
was
also
when
it
initially
unsuccessful
underestimated
the
when
loyalty
of
opened
it
the
coffee
expanded
German
into
public
to
superstores.
market
development
requires
different
approaches
from
market
penetration.
Key
factors
to
reduce
●
Effective
market
●
Having
local
●
Having
an
the
risks
of
market
development
are:
research
knowledge
effective
on
the
distribution
ground
channel
Product development
Product
development
is
market.
Sometimes
may
however,
as
the
other
so-called
iPad,
times,
example,
airline
a
this
2,
was
to
iPad
reduce
on
the
the
risks
3,
off
is
market
is
Effective
●
Having
a
●
Having
rst-mover
of
genuinely
are
mini
a
when
all
variation
than
from
market
are
to
of
new
different
an
for
the
product.
introduced
budget
penetration,
original
Often,
products
variations).
existing
Australian
existing
product.
existing
Airlines
the
development
products
wholly
the
on
Singapore
customers
new
and
upgrades
and
competition
product
●
strong
iPad
riskier
loyal
of
a
products
case
ght
how
development
be
product”
development
depending
the
“new”
“new
“Scoot”
Product
to
iPad
it
with
(such
At
For
their
budget
airlines.
much
products.
Key
factors
are:
research
research
and
development
system
advantage
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1
Diversication
tnemeganam
ssenisub ot noitcudortnI 1
Diversication
TOK discussion
1.
If the eects of mission
diversifying
statements and vision
combines
–
is
the
riskiest
introducing
two
elements
a
of
growth
new
strategy
product
a
into
business
a
new
can
pursue.
market
–
a
When
business
risk:
statements cannot be
●
Lack
●
The
of
familiarity
and
experience
in
the
new
market
measured, does this
fact
that
the
new
product
is
untested
mean that they are
wor thless?
2.
When
Apple
moved
music
market
and
Many
attempts
away
then
from
the
home
computing
handphone
market,
and
it
entered
the
successfully
digital
diversied.
Should all businesses
at
diversication,
however,
have
failed.
For
example,
have ethical objectives?
Microsoft
3.
bought
the
telephone
company
Nokia
in
2013,
but
by
2015
Does the notion of
Nokia
had
failed
and
Microsoft
had
to
write-off
$7.3
billion.
“corporate social
responsibility” change
Key
factors
to
reduce
the
risks
of
diversication
are:
over time?
●
Effective
●
Due
market
diligence
research
testing
to
■
the
attractiveness
■
the
cost
of
●
Recognition
●
Possible
of
entering
of
the
tie-ups
determine:
the
the
existing
with
other
market
market
business
businesses
with
the
necessary
experience
Revision checklist
✓
A
vision
the
✓
A
statement
future.
mission
need
to
are
Aims
✓
Objectives
meet
modied
long-term
are
its
A
business
enable
✓
Business
✓
Ethical
on
✓
A
an
✓
hopes
to
be
in
what
the
business
is
doing
now.
It
might
passes.
or
medium-term
and
is
an
should
be
goals
which
SMART
allow
(specic,
a
business
measurable,
time-specic).
overarching
plan
of
objectives
which
will
are
the
actions
and
objectives
which
allow
a
business
to
codes
social
are
of
goals
that
a
business
sets
for
itself
based
on
behaviour.
responsibility
to
operate
(CSR)
in
a
is
way
the
concept
that
will
that
have
a
all
businesses
positive
impact
society.
SWOT
analysis
and
Ansoff
existing
a
matrix
a
is
used
and
business
development,
tool
used
in
weaknesses,
business
planning.
opportunities
and
It
involves
threats,
both
inside
externally.
products
allows
is
strengths,
business
The
It
business
met.
obligation
analysing
a
the
strategy.
objectives
Corporate
have
be
tactics
established
✓
to
time
Objectives
strategy
implement
describes
as
what
constant.
goals.
relevant
aims
encapsulate
remain
short-
aims.
achievable,
✓
should
should
statement
be
✓
to
It
to
new
to
product
plan
and
identify
business
existing
areas
development
of
growth.
markets
market
and
to
It
considers
identify
penetration,
new
and
opportunities.
market
diversication.
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Business objectives
Practice question
answer
Route
Route
the
11
11
question
Inn,
a
Chips
in
sourced
farmer
a
the
no
chip
time,
Inn.
11
on
2008,
the
Chips
●
locally
●
100%
●
waste
Posted
on
the
one
398–402.
sell
had
an
the
no
an
outgrowth
DC.
The
the
of
the
interest
in
sustainability
Inn
began
Tabard
The
Inn.
of
the
He
had
and
a
huge
the
Valley.
and
potato
(or
Tabard
Shenandoah
making
farmer
chips
the
owner
in
factory,
perhaps,
going
as
in
potato
locally
chips.
A
surplus
owner
of
the
chips.
real
business
located
farm
them.
than,
the
began
Tabard
of
is
manufactures
Washington,
potato
was
in
built
green
organic
to
to
was
out
no
distribution
some
able
of
to
limited
buy
business
Shenandoah
its
current
principles.
sweet
Valley.
network,
awareness
equipment
and,
The
in
from
1992,
business
of
it
and
the
a
small
opened
adopted
the
factory
Among
and
other
all
aspects
sustainable
of
the
new
features,
Route
selling
its
generally
or
is
more
on
to
or
whenever
power
reject
Route
brand
chips
11
to
run
to
feed
Chips
recognition
possible
sells
and
its
a
factory
cows
in
range
loyalty:
and
the
of
ofces
area.
products
T-shirts,
fridge
items.
an
supporting
opportunities
and
chips,
other
website
to
potatoes
hydroelectric
peelings
and
potatoes
regular
encourage
hats,
a
offer
to
hear
healthy
give.
We
around
opportunities
review
the
to
charity
community
5th
our
of
support
requests:
and
charity
the
requests
month,
generally
“Route
11
environment.
on
and
or
once
make
before
a
Chips
We
is
enjoy
per
decision
the
15th
of
month.”
a)
State
b)
Explain
two
social
c)
pages
that
which
organic
and
the
to
other
company
potato
on
month,
luck
make
11
renewable
committed
having
nearby
of
the
company
business
owners
that
produced
addition
magnets,
6
uses:
certied
designed
Unit
Chips.
followed
●
In
Route
11
of
business
However,
Route
factory
see
USA,
certied
trying
to
recognition
factory
In
the
was
the
in
a
owners
manufacturer
name
The
located
decided
held
Virginia,
owned
the
and
Inn
Tabard
of
combination
food,
name
privately
English).
also
potatoes
At
a
approached
Tabard
a
UK
Inn
Through
of
is
Valley
restaurant
Tabard
effectively,
Chips
Shenandoah
“crisps”
below
tnemeganam
To
ssenisub ot noitcudortnI 1
1.3
two
ways
of
a
that
privately
Route
11
held
company.
Chips
practises
one
11
challenge
Chips
faced
and
one
when
opportunity
starting
their
that
potato
[2
marks]
[4
marks]
corporate
responsibility.
Explain
Route
features
the
chip
owners
of
business.
[4
marks]
51
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tnemeganam
ssenisub ot noitcudortnI 1
1.4 Stakeholders
By the end of this chap ter, you should be able to:
➔
Outline the interests of
internal stakeholders
➔
Outline the interests of
ex ternal stakeholders
➔
Discuss possible
Stakeholders
interest
in
directly.
interest
a
are
all
are
the
shareholders,
direct,
such
individual
business
They
in
any
areas of conict
because
called
as
the
stakeholders
Sometimes
suppliers,
community
have
groups
actions
“stakeholders”
business.
lenders,
or
the
between stakeholders’ interests
an
or
in
interest
of
of
individuals
the
because
the
stake
is
business
they
which
in
a
will
have
directly
employees),
who
a
a
direct
stake
or
nancial(they
andatother
business
have
affectthem
operates.
times
it
are
is
less
Nevertheless,
thebusiness.
Internal and external stakeholders
Key terms
There
Stakeholder
are
separate
several
them
stakeholders
different
into
are
ways
market
those
that
and
the
to
categorize
stakeholders.
non-market
organization
One
stakeholders.
has
a
commercial
is
to
Market
relationship
a person or organization that
with
(that
such
as
is,
“money
changes
hands”).
Market
stakeholders
include
groups
aects or is aected by a
customers,
suppliers,
and
lenders.
business. Stakeholders are
often classied as internal
versus external, market
Non-market
change
stakeholders
hands,
like
the
are
media
stakeholders
or
the
with
which
money
does
not
community.
versus non-market, or primary
Another
common
distinction
is
between
primary
and
secondary
versus secondary.
stakeholders.
Internal stakeholder
affecting
the
relationship
Primary
stakeholders
organization,
with
the
whereas
are
those
secondary
organization.
Common
directly
affected
stakeholders
examples
of
by
have
or
an
indirect
secondary
a stakeholder who is internal
stakeholders
include
There
a
the
media,
government,
or
NGOs.
to (inside) the business, such
as an employee, a manager, or
is
also
third
common
way
to
categorize
stakeholder:
shareholders
●
the
Ex ternal stakeholder
a stakeholder who is external
Internal
●
External
the
to (outside) the business
stakeholders
are
individuals
or
groups
that
work
within
business.
stakeholders
are
individuals
or
groups
that
are
outside
business.
or organization, such as
In
practice,
grey
areas
exist
between
internal
and
external
stakeholders:
suppliers, customers,
government, media, or the
●
community
Employees
of
located.
employees,
the
●
In
As
a
business
community,
democratic
citizens
and
citizens
have
they
are
societies,
thus
in
some
live
they
in
the
are
external
claim
ways
on
(internal
they
the
where
stakeholders;
the
as
business
residents
is
of
stakeholders.
employees
some
community
internal
are
stakeholders)
external
are
voting
stakeholders,
as
voting
government.
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to
the
to
a
business.
particular
business,
They
area.
are
such
as
nancial
brought
However,
once
in
planners,
because
hired,
in
of
some
are
their
external
expertise
fashion
they
in
have
a
tnemeganam
Consultants
●
Stakeholders
an
internalposition.
Small
●
shareholders
internal
in
large
publicly
stakeholders,
even
if
However,
someone
company
respects
In
is
addition,
interests:
has
external
in
other
team,
to
owns
no
the
who
have
a
small
ability
to
a
companies
tiny
stake
of
ofalarge
inuence
are
fraction
the
considered
thecompany.
publicly
business
traded
and
in
most
business.
instances
employees
management
who
virtually
traded
theyown
ssenisub ot noitcudortnI 1
1.4
individuals
own
shares,
multiple
have
and
multiple
managers
stakeholder
stakeholder
who
are
part
of
the
interests.
The interests of internal stakeholders
●
Shareholders
●
The
CEO
strategy
Senior
●
or
Middle
and
Employees
working
director
focus
prots
on
their
focuses
and
the
investments.
on
coordinating
returns
strategic
that
satisfy
objectives
for
the
the
business
shareholders.
their
focus
on
the
tactical
objectives
for
their
areas.
formulating
●
on
areas.
managers
Foremen
returns
delivering
managers
functional
●
on
managing
and
functional
●
focus
supervisors
operational
and
their
focus
on
organizing
tactical
objectives
and
objectives.
unions
focus
on
protecting
their
rights
and
conditions.
The interests of ex ternal stakeholders
Government
●
operates
in
●
Suppliers
●
Customers
meets
in
business
Financiers
●
Pressure
their
The
●
local
the
maintaining
a
focus
of
community
local
focus
media
focuses
on
how
the
business
environment.
consumers
on
groups
area
levels)
stable
on
relationship.
the
best
product
that
needs.
the
●
on
and
in
all
business
focus
their
People
●
(at
the
focus
on
the
impact
of
the
area.
returns
focus
on
on
how
their
the
investments.
business
has
impact
on
concern.
focuses
on
the
impact
of
the
business
in
terms
External stakeholders include the local community
of
news
stories.
living near a business (if some of these residents are
Competitors
are
considered
to
be
stakeholders
because
also employees of the business, then they are also
they
can
affect
the
operation
of
the
business.
Consider
the
internal stakeholders)
following
an
example.
American
from
off,
being
medical
Chicago,
United
IL,
to
Airlines
given
On
to
a
9
April
doctor,
had
Louisville,
personnel
United
2017,
taken
KY.
his
Before
asked
Airlines
David
him
Dao
seat
the
to
Duy
on
a
plane
exit
the
Anh,
United
began
plane.
Airlines
to
His
taxi
ight
for
seat
take-
was
employee.
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1
Dr
Dao
objected,
tnemeganam
ssenisub ot noitcudortnI 1
following
who
forcibly
injured
This
saying
morning.
removed
incident
was
of
government
investigated
set
were
Dao
reported
airline
be
Dr
a
patient
Airlines
was
scheduled
personnel
from
the
called
airplane
to
see
him
security
and,
in
the
the
personnel,
process,
him.
entire
the
that
United
for
industry.
and
the
entire
therefore
(United
of
the
that
all
to
the
Many
United
new
media,
members
States)
regulations
airline
affected
industry.
by
and
of
the
the
story
Congress
demanded
regarding
This
of
one
that
the
impacted
actions
affected
legislative
the
all
their
of
the
branch
matter
treatment
on
of
quickly
(the
be
passengers
airlines,
which
competitors
Airlines).
Conflict between stakeholders’ interests
Groups
have
of
people
differences
stakeholders
Consider
object
to
return
have
the
the
on
of
who
The
also
●
and
the
targets
be
culture
of
of
so
is
intrinsic
●
Those
for
the
to
example.
Thus,
will
friction
spend
decision
may
to
One
feature
are
result
achieve
of
sufciently
stakeholders’
running
as
a
in
use
the
are
give
there
the
their
employees
them
will
be
by
do
are
a
higher
various
met,
reinforcing
ensuring
they
or
because
use
efforts
motivating
things
for
so
the
their
increases
extrinsic
support
happier.
would
prots.
undermine
pay
probably
employees
responsible
ratios
Extrinsic
as
of
could
may
reduce
are
also
all
different.
Shareholders
spectrum
reduce
that
might
people
are
therefore
principle
make
would
such
may
although
opinions.
would
motivation.
business,
focuses
positions
managers
community
it
in
would
the
However,
different
tries
rise
the
the
which
two
concerned
when
and
investment
rises
pay
Often
local
business,
any
elicit
be
a
on
of
rises
would
senior
their
a
sense:
factors
bonuses.
they
motivating
of
to
nd
extrinsic
foster
are
Intrinsic
that
strategies
doing
weakens
motivation.
in
the
this
rewards,
occurs
pay
end
these
as
employees.
prots
different
pay
intrinsic
employees,
money
of
that
rewarding.
as
for
other
managers
and
also
rise
favour
such
makes
business,
reduce
the
return
factors,
interest,
situation
the
pay
have
CEO
and
external
in
between
wages,
may
motivation
At
will
worried
motivating
types
In
a
This
could
senior
higher
Managers
a
of
it
would
who
However,
prot
as
living.
CEO
paying
common
“stake”
example
stakeholders
●
a
idea,
a
opinion.
investment.
themselves,
standard
with
of
of
satised
interests
sole
from
alliances
desired
shop
rises
importance,
and
as
a
of
such
may
as
be
–
any
at
a
favour
would
general
as
and
threatened
not
pay
rise
each
In
shops,
at
for
existence
the
the
this
wages
more
the
favour
stakeholders.
formed
higher
have
restaurants
way
probably
different
the
is
that
time.
particularly
sole
trader
in
would
businesses
not
principle
employees
idea.
business,
situation,
stakeholder
group
outcome.
most
is
in
that
community
pay
community
successful
the
local
the
reactions
their
small
stakeholders:
the
if
would
mean
trader
and
the
In
interests
some
complicated.
typically
perhaps
an
has
of
stakeholders
instances,
An
relatively
employee
or
managing
individual
few
two.
internal
While
in
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the
the
business
community,
stakeholders
business
Thus,
not
this
and
to
to
be
community
For
other
the
a
types
The
factory
have
in
a
and
stakeholders,
and
suppliers,
have
are
such
relatively
the
is
provide
laws
a
the
the
sole
small
of
as
external
stake
in
stakeholders
business
trader
government
such
these
the
inconsequential.
interests
for
into
workers,
go.
harder
be
a
in
the
may
the
to
with
be
an
regulations
be
keeping
up
for
that
to
in
is
is
protable
income,
and
with
the
lost
more
for
the
as
Those
work
of
may
various
in
a
productive
smaller
the
town,
for
if
the
they
workforce.
CEO
and
bonuses).
losing
not
pressuring
the
expenses
might
year-end
would
factory
employer
reduced
up
interests
large
business.
main
outcome,
not
the
the
a
instance,
the
workers
jobs
When
town,
this
to
dissatised.
was
coordinating
of
the
lead
greater
their
a
In
make
this
receive
or
success
might
with
ones,
challenge.
area.
retained
business
make
the
harder
would
city
the
factory
happy
those
if
to
of
in
workforce
however,
Even
small
stake
make
(who
Even
a
working
might
managers
unhappy.
the
also
in
large
formidable
employer
case
in
especially
more
major
the
might
pressured
work
business,
a
reduction
workers
to
of
important
Shareholders
senior
always)
shop
satisfying
and
with
operates
It
not
the
external
nanciers
requirement
expenses
much
example,
were
main
a
business.
of
business,
is
most
20%
be
for
several
standards.
stakeholders
For
of
The
compliance
stakeholders
business
be
type
pay
in
(though
decisions
complicated.
enough
of
the
have
government,
typically
that
for
would
the
tnemeganam
theory
Stakeholders
ssenisub ot noitcudortnI 1
1.4
like
the
those
their
jobs
seeing
would
their
remaining
retrenched,
a
co-
workers
general
C oncep t
sense
Many
the
of
fear
other
–
of
more
job
stakeholders
implications
for
the
cuts
–
would
local
would
be
affect
affected
community
the
as
and
workers.
well.
the
Here
local
are
just
a
few
of
SUSTAINABILITY
government.
Sustainable development may
Many
●
employees
could
struggle
to
nd
new
jobs,
in
which
case
be a cause of conict between
government
expenses
(support
for
the
unemployed
persons)
stakeholders, when some are
wouldincrease.
focused more on shor t-term prot
maximization, while others are
People
●
might
move
away
from
the
town,
selling
houses
or
moving
out
concerned about long-term social
of
rental
properties,
thus
depressing
the
real
estate
market.
and environmental impacts.
When
●
families
move
away,
the
number
of
children
in
the
schools
may
Can you nd an example of such
reduce,
thus
leading
to
lay-offs
of
teachers
in
those
schools.
a stakeholder conict around
sustainability? This could be
Local
●
businesses
would
suffer,
as
fewer
employees
at
the
factory
would
a star ting point for your IA
mean
fewer
people
with
the
resources
to
spend
money
in
local
shops
research project.
and
restaurants.
Stakeholder analysis
Large
businesses
interests
or
rank
this
in
the
step
the
often
is
or
those
perform
interests
to
of
a
various
determine
business.
This
is
businesses
that
stakeholder
how
stakeholders.
“close”
shown
have
analysis.
in
each
Figure
complicated
The
One
rst
stakeholder
step
is
conceptual
stakeholder
is
to
to
prioritize
approach
to
decision-making
1.4.1.
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1
tnemeganam
ssenisub ot noitcudortnI 1
government
employees
suppliers
owners
pressure
media
groups
managers
nanciers
consumers
local community
Figure 1.4.1 The comparative closeness of stakeholders to decision-making
Under
while
Most
this
approach,
suppliers,
distant
community.
are
owners
employees,
and
managers
nanciers,
government,
Decision-makers
pressure
try
to
and
are
groups,
satisfy
central
consumers
the
those
to
decision-making,
are
media
further
and
stakeholders
the
removed.
local
closest
to
thecentre.
Another
conceptual
mapping.
particularly
called
the
approach
Numerous
valued
models
model
power–interest
was
involves
for
a
tool
mapping
formulated
called
stakeholder
stakeholders
by
Johnson
exist.
and
One
Scholes
and
is
model.
Level of interest
Low
High
Low
Degree of power
Figure 1.4.2 The power–interest model (Johnson and Scholes)
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placing
likely
●
each
Stakeholders
interest
in
problem
these
the
for
the
their
Stakeholders
group
feel
a
kept
in
the
matrix,
a
business
can
decide
on
group
must
to
or
in
least
stakeholders,
limited
Owners
group
in
is
of
and
devote
B.
belonging
group
C.
power
who
over
managers
limited
owners
have
it,
can
energy
to
feel
the
and
minimal
are
fairly
and
managers,
Newsletters,
are
This
have
ways
them
For
important.
They
nd
make
at
These
have
rarely
safely
a
ignore
attention
to
interests.
satised.
business
A.
and
business.
sense
Stakeholders
be
group
group
included
conveying
●
in
business
stakeholders,
satisfying
●
stakeholder
strategies.
tnemeganam
By
Stakeholders
making
and
this
other
ways
of
important.
pivotal
power
atter
events,
ssenisub ot noitcudortnI 1
1.4
the
group
to
of
stakeholders
inuence
self-esteem
other
of
must
groups.
members
of
The
this
important.
TOK discussion
●
Stakeholders
The
business
in
group
must
not
D.
These
merely
stakeholders
communicate
are
with
the
most
them;
it
important.
must
also
1.
consult
with
them
before
any
major
decisions
are
made.
The
Is it possible to be both an
business
“internal stakeholder ” and
should
focus
on
their
needs
in
preference
to
the
others.
Failure
an “external stakeholder ”
to
involve
and
satisfy
these
stakeholders
can
have
very
negative
of an organization at the
consequences
for
the
business.
same time?
2.
Student workpoint 1.10
Are all stakeholders
equally impor tant? If
not, who decides on their
Be reective
relative impor tance?
One
theory
solely
on
for
running
legally
a
making
business
prots
is
and
that
management
increasing
should
shareholder
focus
Which criteria are used?
value.
3.
Another
theory,
which
emerged
in
the
1980s,
argues
that
when
If anyone can potentially
making
be considered a
major
decisions,
management
should
communicate
with
all
of
the
stakeholder, how
relevant
stakeholders
and
consider
their
interests.
useful is the notion of
Which
of
these
two
theories
makes
most
sense
to
you
and
why?
“stakeholder ”?
Revision checklist
✓
Stakeholders
the
✓
Internal
External
such
✓
The
individuals
stakeholders
business,
✓
are
or
groups
who
have
a
direct
interest
in
business.
as
such
stakeholders
of
return
conditions,
are
and
the
on
and
are
individuals
employees
customers
interests
include
as
and
groups
that
work
within
the
individuals
or
groups
outside
the
business,
suppliers.
various
stakeholders
investment,
the
or
managers.
quality
of
the
the
will
impact
product
on
differ.
the
Interests
local
area,
might
working
produced.
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1
To
tnemeganam
ssenisub ot noitcudortnI 1
Practice question
answer
the
question
below
effectively,
see
Unit
6
pages
398–402.
Ecosoluciones
Ecosoluciones
Spain.
One
electricity
One
Alumbre,
area
the
and
between
Alumbre
develop.
in
their
The
quality
to
government
a)
no
longer
Identify
Discuss
be
one
mentioned
b)
in
two
Alumbre
a
able
the
The
a
a
The
located
in
Madrid,
non-polluting
sources
of
of
to
the
case
areas
of
the
to
buy
were
village
with
also
of
crisis
for
Peru
supply
in
agreed
to
transformation
new
machinery.
Telecom
in
allowed
saw
and
the
communication
regional
this
trade
improvements
as
a
practical
country.
hit
Europe
research
wind
three
to
rms
also
signicant
the
Alumbre’s
and
the
Spanish
organizations
of
felt
it
generators.
external
stakeholders
[4
between
such
Ecosoluciones
study.
conict
This
of
created.
management
and
few
complete
government
areas
stakeholder
above
This
funding
maintain
a
able
jobs
experienced
result,
of
improvements
nancial
its
Project.
remote
Ecosoluciones
one
was
was
Peru.
Peruvian
direct
There
the
Alumbre
the
Ecosoluciones
partnership
fund
by
factory:
New
the
to
electricity.
sector.
factory
severe
was
installed
depressed
of
no
textile
in
rest
part
possible
Project.
were
help
the
internal
in
to
generators.
other
As
introduce
generators
had
community
2008
organization
to
research
wind
secondary
to
and
life.
try
dramatically.
suspended
Ecosoluciones.
may
the
entire
of
their
by
promised,
develop
Unfortunately,
as
the
government,
to
solution
time
process.
also
to
previously
increased
Ecosoluciones
Peruvian
in
repair
production
Productivity
of
generators
rst
is
countries.
created
which
wind
for
research
objectives
application
operating
maintain
the
non-prot
developing
Peru,
electricity
the
a
electricity
Alumbre,
in
in
is
their
successful
provided
In
of
stakeholders
in
marks]
the
[ 10
marks]
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tnemeganam
Growth and evolution
1.5 Growth and evolution
By the end of this chap ter, you should be able to:
➔
Dene the terms
➔
Explain reasons for
businesses to grow
➔
Explain reasons for
businesses to remain small
➔
Outline the dierence between
➔
Explain the following
ssenisub ot noitcudortnI 1
1.5
economies and diseconomies of scale
internal and ex ternal growth
ex ternal growth methods :
●
mergers and acquisitions (M&As)
●
takeovers
●
joint ventures
●
strategic alliances
●
franchising
The impact of the external environment on
a business
All
businesses,
business,
as
the
word
(including
manages
be
to
evolution.
Businesses
usually
control
–
The
One
with
its
a
only
They
or
tool
implies.
to
may
a
the
operate
the
over
type
of
analysis,
to
it
–
and
will
require
a
inuence
their
and
plans
planning
which
still
to
of
various
when
affect
to
its
conditions
business
alone
growth
can
and
evolve.
elements
of
the
contingency
growth
In
“ecology”,
a
challenge
business
the
environment.
Even
that
make
for
an
meaning
refers
business.
business
prepare
in
narrower
Rather,
to
also
means
however,
this
STEEPLE
big,
environment
external
control
or
have
external
limited
for
small
not
internal
can,
greater
common
begins
ones)
environment
have
have
how
does
means
elements
environment.
to
matter
ecological
difcult
order
no
“environment”
external
plans
in
andexpansion.
process
highlights
Ethical
and
focuses
on
these
external
elements.
Earlier
Economic
versions
PESTLE
of
the
STEEPLE
analysis.
incorporated
in
All
the
analysis
elements
STEEPLE
of
included
those
a
PEST
analyses
framework,
Political
or
were
shown
in
Technological
Legal
Figure1.5.1.
What
is
the
STEEPLE
difference
between
PEST,
PESTLE
and
analyses?
Social
●
PEST
–
Political,
Economic,
Social
The business
Ecological
and
Technological
●
PESTLE
–
Political,
Technological,
Economic,
Legal
and
Social,
Figure 1.5.1 The STEEPLE framework
Ecological
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1
STEEPLE
●
tnemeganam
ssenisub ot noitcudortnI 1
(also
The
–
Sociocultural,
known
addition
of
reect
when
idea
As
businesses
even
in
global.
which
addition
many
have
have
grown
operate.
businesses
all
rst
have
A
in
and
“legal”
business
larger,
to
and
Environmental
Ethical
and
practices
have
the
“ecological”,
and
become
different
transformation
ethical.
has
Whereas
in
on
making
prots,
including
striving
towards
stakeholders
only
many
consider
similar
focused
(rst
Economic,
Legal
thinking
and
then
since
1967,
emerged.
had
concerns,
Political,
elements
evolution
environmental
broader
treating
extra
PEST
They
they
of
an
of
Technological,
Ecological),
the
“ethical”)
the
as
multinational
legal
occurred
the
with
1960s
today
and
frameworks
and
most
the
1970s
businesses
sustainable
practices
and
ethically.
The impact on growth of changes in any of the
STEEPLE factors
If
any
of
the
objectives,
In
a
STEEPLE
strategy
STEEPLE
each
element
1.5.1.)
Then
important
business
analysis,
on
the
the
change,
ultimately
a
business
business.
business
inuences.
can
factors
and
develop
rst
this
the
strategy
an
most
to
will
growth
have
and
considers
(Common
conducts
Once
a
the
analysis
take
them
impact
particular
inuences
to
important
an
evolution
are
into
a
the
business.
inuences
listed
determine
inuences
on
of
in
the
are
of
Table
most
isolated,
the
account.
Table 1.5.1 Common inuences in a STEEPLE analysis
Sociocultural inuences
Technological inuences
Economic inuences
Ethical inuences
Political inuences
Legal inuences
Environmental inuences
●
lifestyles
●
education
●
social mobility
●
fashions or tastes
●
demographics
●
technological improvements
●
ICT
●
new technology transfer
●
research and development costs
●
infrastructure
●
the economic or business cycle
●
the rate of unemployment
●
the rate of economic growth
●
the exchange rate
●
the rate of ination
●
interest rates
●
corruption
●
transparency
●
codes of business behaviour
●
fair trade
●
political stability
●
regional policies
●
trade policies
●
lobbying or electioneering
●
regulations
●
health and safety legislation
●
employment laws
●
competition laws
●
depletion of renewable resources
●
organic farming
●
global warming
●
carbon footprints
Not
all
with
need
businesses
the
to
same
be
react
degree
concerned
to
of
the
inuences
energy
with
or
or
purpose.
changes
in
changes
Often,
particular
a
shown
in
business
laws
(if
they
Table
might
are
1.5.1
not
not
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service
to
(or
to
is
the
not
try
to
business)
or
determined
pre-empt)
to
by
changes
fashion
these
in
or
fashion
tastes).
inuences
will
or
tastes
How
depend
the
on
(if
its
product
business
their
will
or
react
relevance
to
Assessment ad vice
tnemeganam
relevant
Growth and evolution
its
Remember that when you
current
strategy
and
objectives.
cite numbers such as GNI
Businesses
than
and
that
businesses
having
move
fast
give
exible
that
are
rst-mover
enough.
abusiness
may
are
to
it
rst-mover
can
inexible
advantage
Planning
determine
the
and
opportunity
and
can
based
changes
to
adapt
on
to
do
be
to
change
not
adapt.
very
for
an
successful
early
often
factors,
perhaps
more
businesses
elements
environmental
and
be
Being
useful
STEEPLE
respond
will
even
adaptor
that
allows
which
to
per capita in a repor t, the
numbers have limited
ssenisub ot noitcudortnI 1
1.5
meaning unless you include
some comparative data. For
example, if you say New
have
a
Zealand has a GNI per capita
advantage.
of $42,760, that gure does
not tell your readers very
much. The gure takes on
STEEPLE analysis
much more meaning if, by
way of comparison, you point
A STEEPLE analysis is a way to examine external factors that inuence or have
out that the GNI per capita of
the potential to inuence a company. A STEEPLE analysis is often used by
Denmark is $63,950 and of
companies before entering foreign markets, as it is a systematic way
Morocco is $3,190.
to consider how the following factors in the foreign market will inuence
Another way to make a
the company:
comparison is to provide
•
Sociocultural
•
Political
•
Technological
•
Legal
•
Economic
•
Ethical
•
Environmental
historical data, such as New
Zealand’s GNI per capita in
2010, 2015, and 2020.
A STEEPLE analysis can also be an eective tool for companies that take
a proactive approach to addressing issues in their home country. Periodic
analysis of these factors in a company’s home country can aler t the company
to changing contexts that the business operates in.
A STEEPLE analysis requires research into each of the seven factors listed
above. When researching these factors, what types of information might you
gather? As an example, the case study below lists some of the questions that
the company Uber might consider before entering a foreign market.
yduts esaC
Uber
Uber
has
car
is
the
rental
UberCab
business
it
has
in
2009,
had
cars
and
with
an
or
as
2012
as
Uber’s
form
app
to
in
for
main
which
arrange
the
considered
thus
employees.
much
and
Founded
the
opened
Uber
employees,
that
taxi
famous.
use
business
by
taken
become
app
traditional
companies.
Customers
the
car-sharing
threatened
little
allowing
The
as
them
Uber
drivers
they
an
United
Uber
States,
driver
Uber
independent
to
avoid
could
wanted
pick
of
when
the
they
them
used
contractors
many
work
to
drivers
up.
their
rather
costs
When
own
than
associated
wanted
to
and
as
to.
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1
tnemeganam
ssenisub ot noitcudortnI 1
Uber’s
business
similar
the
to
business
Uber
must
model
classify
responsibilities
As
Uber
model
traditional
of
expands
analysis
of
those
allows
taxi
does
its
an
customers
services,
not
but
work
drivers
as
to
have
a
much
at
everywhere.
employees
and
transport
lower
In
in
France,
Uber
a
price.
for
bears
service
However,
all
example,
the
employer.
into
foreign
markets
markets,
could
help
performance
the
company
of
a
STEEPLE
identify
possible
problems:
Social:
●
they
Do
people
more
trams?
like
How
someone
to
would
without
Technological:
●
so
that
drivers
smartphones
model
to
traditional
Assessment ad vice
●
many
be
frequently
forms
feel
proper
Do
and
market
other
people
a
could
of
use
taxi
services,
transport
getting
into
a
like
car
or
buses
driven
are
and
by
licence?
people
cards,
public
about
taxi
in
recruited?
credit
Would
taxis,
catching
the
Ethical:
What
the
this
this
Is
both
market
there
own
cars
widespread
necessary
for
the
–
use
Uber
enough
of
business
work?
Economic:
●
in
use
bus.
traditional
people
an
Uber
Will
people
impact
taxi
pay
ride
will
for
is
be
the
industry
Uber
rides?
nonetheless
willing
to
presence
in
the
Though
more
pay
of
for
Uber’s
country?
cheaper
expensive
such
a
service
What
than
than
service?
have
impact
on
will
it
When doing a STEEPLE
have
on
the
employment
of
these
traditional
taxi
drivers?
analysis, remember that the
analysis is of external factors
●
(ie factors external to the
Political:
How
disruptive
inuence?
their
company), not internal ones.
union
will
have
the
government
Are
much
traditional
inuence
of
the
taxi
country
drivers
within
the
react
to
Uber’s
unionized?
political
Does
system?
A common mistake in STEEPLE
Legal:
●
Is
it
legal
to
operate
a
service
like
Uber
in
the
country?
analyses is that, when
Some
countries
require
taxi
drivers
to
be
professionally
trained
and
considering technological
licensed.
Will
Uber
be
able
to
legally
operate
in
the
country?
Is
any
and environmental factors,
legislation
being
considered
that
could
constrain
Uber
or
prevent
it
students focus on internal
from
operating
according
to
its
current
business
model?
What
are
conditions of the company,
the
insurance
and
liability
laws
in
the
country?
such as the technological
Ecological:
●
In
general,
the
presence
of
Uber
increases
the
use
of
capabilities of the company
cars,
as
people
are
more
willing
to
use
Uber
than
a
traditional
taxi
or the degree to which it is a
service.
What
impact
will
this
increase
in
the
use
of
cars
have
on
green company.
the
in
local
a
environment,
broader
sense
in
(noise
the
narrow
pollution,
environmental
trafc
sense
congestion,
but
also
etc)?
Key terms
Economy of scale
the decrease in per unit
production cost as output or
activity increases
Economies and diseconomies of scale
Businesses
the
larger
size
or
When
that
scale
volume
a
expand
to
of
business
or
become
increase
more
their
scale
efcient.
of
“Scale
operations
of
can
operations”
often
refers
use
to
the
output.
increases
its
scale
of
operations,
it
produces
more
or
in
and
in
Diseconomy of scale
greater
volume.
When
a
business
increases
its
scale
of
operations
the
the increase in per unit
process
becomes
more
efcient,
the
business
has
achieved
economies
of
production cost as output or
scale.
The
term
“economies
of
scale”
refers
to
the
reduction
in
average
unit
activity increases
cost
as
a
business
increases
in
size.
62
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becomes
sometimes
larger.
a
When
diseconomies
of
business
this
scale,
experiences
situation
which
inefciencies
occurs,
refers
to
the
an
business
increase
in
as
it
has
Assessment ad vice
achieved
average
unit
cost
tnemeganam
However,
Growth and evolution
as
When dening the term
the
business
increases
in
size.
“economies of scale” or
Efciency
more
refer
is
measured
complete
to
Unit
following
in
terms
explanation
5.
For
now,
of
of
costs
the
think
of
of
production
different
costs
of
types
of
per
cost
production
in
of
unit .
For
a
“diseconomies of scale”, be
production,
terms
of
sure to include the phrase
the
ssenisub ot noitcudortnI 1
1.5
“per unit” or “per average unit
formula:
cost” in your denition.
total
cost
=
xed
cost
+
variable
cost
Key terms
Using
the
variable
abbreviations
cost,
the
TC
formula
for
total
cost,
FC
for
xed
cost
and
VC
for
is:
Fixed costs
costs which do not change
TC
=
FC
+
VC
according to the amount of
goods or services produced
Fixed
costs
are
costs
that
do
not
change
as
production
changes.
For
by the business
example,
rent
if
a
business
payments
are
operates
the
same
in
a
rented
regardless
of
(leased)
the
factory,
quantity
of
the
monthly
production
of
Variable costs
thebusiness.
costs which increase or
Variable
costs
furniture
manufacturer
materials
(wood,
Further
costs).
the
costs
All
are
are
three
following
costs
metal
vary
expands
springs,
known
refer
that
to
as
as
production,
cloth,
average
total
production
cost
then
leather,
costs
per
(or
unit,
if
AC
is
will
example,
require
more
if
a
raw
etc).
decrease according to the
amount of goods or services
produced
unit
costs
which
total
cost
can
or
be
average
unit
calculated
with
average
the
cost
formula
(unit
cost
=
quantity
produced,
it
For
formula:
Average
And
changes.
costs
or
produced
average
unit
costs)
and
Q
is
quantity
becomes:
TC
AC
=
Q
As
we
Thus,
saw
above,
average
TC
cost
refers
can
also
to
total
be
cost,
derived
calculated
FC
AC
with
+
from
the
adding
following
FC
and
VC.
formula:
VC
=
Q
Expressing
the
economies
and
producing
costs
are
average
a
spread
that
go
over
a
down.
when
increase
this
quantity,
economies
Sometimes,
in
diseconomies
greater
costs
achieved
formula
a
of
costs
quantity
the
to
First,
of
business
explain
as
the
the
increase.
units
concepts
business
However,
produced.
becomes
more
of
expands
As
a
the
by
xed
result,
efcient.
It
the
has
scale.
business
average
helps
scale.
variable
greater
Thus,
way
of
unit
expands,
costs.
This
it
starts
situation
to
experience
refers
to
inefciencies
diseconomies
of
scale.
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For
tnemeganam
ssenisub ot noitcudortnI 1
As
is
example,
it
does,
that
units
the
will
be
at
acquire
In
this
When
and
a
down
space,
signicantly
the
of
(or
a
Figure
the
of
doubles
its
its
rent
100%
higher)
initially
shows
factory
this
a
The
year.
this
number
of
continues),
size
of
its
business
another
year
the
factory.
will
on
factory
acquire
space
to
have
for
come
a
or
year.
a
larger
signicantly
the
next
without
year
having
or
the
frequently.
its
capacity
In
our
same
(initially),
rent
units
utilization
example,
utilization.
business’s
higher
the
on
for
production.
probably
higher
of
larger
expanding
–
capacity
the
number
have
of
size,
The
The
is
a
year
reason
growth
for
5).
years
increase.
100%
double).
Unit
enough
for
locations
50%.
level
space
just
grow
(if
expand
should
remains
to
to
One
over
time
business
than
will
had
production
could
the
can
out
in
(see
space
production
scale.
production
business
rather
of
spread
point
additional
changing
diseconomies
1.5.2
that
business
slightly
being
some
utilization
or
business
will
is
additional
space
from
(it
business
achieved
–
expands
economies
maximum
or
and
business
at
capacity
the
the
but
rent
different
business
decrease
same
its
disruption
doubled
of
example
way,
a
remember
(initially)
old
will
at
100%
amount
That
When
is
be
different
for
that
achieves
However,
scenario,
greater
or
cost
acquiring
factory,
cost
xed
will
to
two.
imagine
initially
produced.
business
It
it
rent
will
When
be
cost.
the
factory
space
utilization
will
spread
With
go
old
the
capacity
now
unit
will
the
expense
produced.
average
in
increase
over
higher
Thus,
it
will
the
rent,
have
scale.
progression.
Costs
average
costs
economies
diseconomies
of scale
of scale
0
Optimum
Quantity
production
produced
Figure 1.5.2 Progression from economies of scale to diseconomies of scale
As
the
costs
At
business
go
the
down.
point
of
production”.
production
utilization.
more
The
our
Then
inefcient.
minimum
At
produces
be
the
point
that
costs,
using
the
of
costs
the
point,
output
more
the
rent
point
business
Average
more
becomes
average
example
also
as
it
business
lowest
In
would
production.
their
grows,
The
average
average
initially
business
is
at
the
chief
where
the
business
to
the
average
“optimum
as
continues
start
and
efcient.
to
xed
expand,
is
it
cost,
at
optimum
100%
starts
to
capacity
become
rise.
cost
costs
curve
is
are
the
at
the
optimum
lowest
and
level
of
prots
are
at
maximum.
Efciency
efcient
business
if
is
it
in
not
can
related
lower
which
the
to
production
average
savings
unit
per
alone.
costs,
unit
A
business
regardless
of
can
the
become
area
of
more
the
occur.
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Growth and evolution
Internal and ex ternal economies of scale
Type
Technical
Explanation
tnemeganam
Table 1.5.2 Internal economies of scale (eciencies that the business itself can make)
Example
Bigger units of production can reduce costs because
Operating a container ship with one crew, one fuel bill and one
of the law of variable propor tions – the increase in
ber thing fee is cheaper than running two or more smaller vessels.
ssenisub ot noitcudortnI 1
1.5
variable costs spread against a set of xed costs.
Similarly, some new large planes will be cheaper to operate
than two traditional long-haul aircraft; an ar ticulated lorry will be
cheaper to operate than two or three smaller vehicles.
Managerial
Financial
A bigger business can aord to have managers
Managers specializing by function (such as production,
specializing in one job as opposed to trying to
marketing, nance, and HR), as opposed to having a “general”
do everything.
manager, can typically work with greater eciency.
Bigger businesses are less risky than smaller
Banks and other nancial institutions charge lower rates of
businesses.
interest on loans or overdrafts to businesses they consider
nancially stable.
Marketing
Bigger businesses can run more eective
Only large businesses can aord to sponsor major spor ting
marketing campaigns
events such as the Olympic Games, the Super Bowl or the FIFA
World Cup, which are higher yielding promotions per dollar, pound
or euro.
Purchasing
Big businesses can gain discounts by bulk buying –
Supermarkets such as Lotus or Lotte Mar t buy large quantities of
buying in large quantities.
food at very low prices from farmers.
Risk
Big businesses can aord to produce a bigger range
PepsiCo owns a number of dierent brands such as Pepsi,
bearing
of products and in doing so spread the risk of one
Gatorade, Tropicana, Lipton’s Teas, Quaker Foods, and Lay’s.
product failing – hedging their bets
Table 1.5.3 External economies of scale (eciencies that the business achieves
because someone else has expanded)
Type
Consumers
Explanation
Example
A shopping mall increases the number of potential of
A shopping mall, an international airpor t, and a business
customers, as more people go to the mall compared to
park or zone all require servicing and maintenance as well
an independent shop because of the ease of one-stop
as their core business.
shopping. So, a whole range of other businesses benet
from someone else building the infrastructure.
Employees
Labour concentrations occur when some cities or
Hollywood is famous for having many actors and others
geographic areas concentrate on cer tain industries or
skilled in various aspects of lm and television production.
sectors. Individual businesses located in those areas and
London is a major banking centre, where numerous
operating in the industry that has the concentration can
professionals in nancial services live and work .
often benet from lower recruiting and training costs.
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As
tnemeganam
ssenisub ot noitcudortnI 1
Internal and ex ternal diseconomies of scale
we
noted
above,
diseconomies
of
if
a
business
expands
too
much
then
it
can
achieve
scale.
Table 1.5.4 Internal diseconomies of scale (ineciencies that the business itself can make)
Type
Technical
Example
A container ship can be too big to ber th in a harbour, an airplane can be too big to land at smaller airpor ts, or a lorry
may be too large to drive on minor roads.
Managerial
Businesses may have “over-specialized” managers who cannot (or will not) work outside their area of exper tise or for
everyone’s benet. This often occurs in the investment and commercial banking sectors.
Financial
Sometimes big businesses with large amounts of “surplus” cash make poor investments. Poor decisions occur
because the businesses do not think through the consequences of investment choices. For example, in 2012,
Alphabet purchased Motorola for $12.5 billion to develop premiere mobile devices. Two years later, Alphabet sold
Motorola to Lenovo for $2.9 billion.
Marketing
Sometimes big businesses can make big marketing mistakes. In the 1990s, Hoover oered free ights to anyone who
spent more than US$150 on a vacuum cleaner. Hoover did not realize that, for many people, an expensive vacuum
cleaner was wor th buying if it included a free ight anywhere in the world! When Hoover refused to honour the deal,
the cour ts ordered the company to pay US$50 million in compensation to customers. Weakened by this expense,
Hoover was acquired by a competitor, Candy.
Purchasing
Large businesses often buy too much stock , which can be costly if the cost of the capital funds used to purchase the
stock is greater than the cost savings from buying in large quantities.
Stock can also become spoilt, obsolete or unfashionable. The rst stock market crash was as a result of too many
tulips being bought by Dutch traders in the 17th century.
Risk bearing
Risk bearing is the sharing of responsibility for accepting losses if projects go wrong. Some risk exists in all economic
activities. In 2005, eBay bought Skype in the hope of broadening its range, but in 2011 sold it to Microsoft. In 2008,
Bank of America bought Countrywide, a mor tgage lender, just as the housing market in the United States star ted to
decline. The acquisition eventually cost Bank of America $50 billion.
Table 1.5.5 External diseconomies of scale (ineciencies that the business achieves because someone else has expanded)
Type
Employees
Example
If one geographic region becomes too concentrated on one economic activity, typically a shor tage of skilled workers
in the industry will occur. For an individual business, this relative shor tage of skilled workers means that the business
will have to pay higher wages than before to attract and retain skilled workers.
Reasons for businesses to grow or stay small
Reasons for businesses to grow
Big
●
businesses
Survival
likely
●
to
–
have
large
fail
Economies
which
and
of
translate
balance
some
advantages:
rms
less
scale
into
have
likely
–
a
to
large
greater
greater
be
chance
taken
rms
over
typically
prots,
higher
of
by
surviving.
another
enjoy
They
economies
returns,
and
are
less
rm.
a
of
scale,
healthier
sheet.
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status
However
rm
such
as
motivation
Market
●
share
in
market
can
services
rms
some
status
most
of
habits,
market
control
will
have
greater
clothing
&
Fitch
status
brands
or
than
may
Benetton
be,
can
smaller
ones.
working
provide
for
a
status
larger
and
employees.
leader
Increased
●
large
Abercrombie
to
restaurants
shape
–
fashionable
tnemeganam
Higher
●
Growth and evolution
be
McDonald’s
industrial
giving
share
the
the
–
the
it
–
the
market
All
competitive
large
market
industry
a
is
world.
by
by
leader
itself,
in
fast-food
McDonald’s
can
advantage.
companies
that
determining
have
prices
a
and
large
ssenisub ot noitcudortnI 1
1.5
market
deciding
which
standard.
Reasons for businesses to stay small
Not
all
businesses
remain
of
small.
growing
Many
For
their
service
products
example,
law
align
big
in
the
small
are
practices
clients.
world
the
–
the
rms
In
their
of
prefer
their
Big
small
Four.
tents
niche
to
complications
of
their
only
used
a
by
few
rock
means
customers
specialized
clients.
make
climbers
that
and
the
remain
climbing.
to
stay
small.
but
preferring
four
major
However,
businesses
and
market
pool
companies,
lawyers
accountancy,
of
this
prefer
added
high-quality,
markets
manufacturers,
small
simply
the
business.
offering
their
big-wall
also
want
large
hanging
Serving
to
multinational
so-called
needs
tent
portable
close
exist,
familiar
with
businesses
not
a
businesses
many
are
do
managing
and
the
Many
owners
closely
culture
large
expand.
or
walls.
stay
professional
rms
serve
to
which
climbing
Many
business
among
manufacturers
entrenched
to
business
businesses
prefer
“portaledges”,
when
want
Some
to
In
serve
rms
the
a
legal
the
sector,
world
small
serve
countless
around
the
around
group
clients
small
some
many
of
around
accounting
the
rms
world.
This “por taledge” tent is an
Advantages
●
of
Greater
know
focus
being
focus
they
Greater
lies.
have
able
prot
●
that
they
Less
small
more
do
help
want
have
and
businesses
their
expect
where
prots
and
businesses.
for
not
everyone,
lower
protability
larger
employees.
matter
to
to
convey
and
big
situation
having
they
than
higher
As
goods
a
businesses
businesses
believe
larger
returns
have
result,
and
small
small
sometimes
sense
exible
–
–
that
the
to
can
greatest
businesses,
on
a
some
services,
do
a
all
a
not
are
large
a
but
investment.
greater
small
leading
want
motivate
motivated
businesses
sense
of
businesses
to
higher
providing
is
to
with
so
managers
by
the
sometimes
idea
nd
it
matter.
competitive
market
market
can
also
employees
small,
give
sometimes
means
prestige
Very
being
can
businesses
often
more
employees
business.
advantage
being
that
–
Often
the
the
competition
market)
This
–
than
they
may
greater
to
example of a niche market product
include:
customers
able
where
They
charge
Competitive
service,
●
be
motivation
other
difcult
●
to
business
margins.
Greater
and
and
prestige
exclusiveness
small
because
investments
often
are
–
everything
protability
●
a
a
small
consider
limited
more
personalized
advantage.
(a
true
getting
niche
involved.
competition.
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tnemeganam
ssenisub ot noitcudortnI 1
Decision trees
One way a business can decide whether to grow or to stay small is to use a decision tree. This is a planning tool
designed to help simplify complex decisions.
Decision trees follow cer tain conventions:
•
Where a decision must be made, the decision is represented by a square “node” with possible choices as lines
stemming from the node.
•
When multiple outcomes are possible, they are represented by a round node with lines stemming from that node
and the outcome written above the line.
The nodes are numbered to help identify them.
Here is an example decision tree based on three choices and the data given in the table below:
succeed
60
0.4
Site A
2
15
fail
20
0.6
succeed
30
0.7
Site B
3
1
25
fail
10
0.3
succeed
40
0.6
Site C
4
20
fail
30
0.4
Choice
Outcome
Probability
Returns (US$m)
succeed
40%
60
fail
60%
20
succeed
70%
30
fail
30%
10
succeed
60%
40
fail
40%
30
Cost (US$m)
A
15
B
25
C
20
In this decision tree:
•
The costs of the choices being considered are written under the respective choice lines (under “Site A”, “Site B”
and “Site C” here).
•
The probability that a choice will succeed or fail is written below the line for a par ticular outcome (under
“succeed” and “fail” for each choice here).
•
The values of each outcome actually happening are written at the end of each outcome line.
In this scenario, which option should the manager choose?
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Growth and evolution
The dierence between internal and
tnemeganam
Key terms
external growth
Internal growth
Businesses
with
growth
as
a
strategy
have
two
broad
options
to
sometimes referred to as
choose
from:
organic growth, this occurs
Internal
●
(organic)
growth
when a business grows by
External
●
(fast-track)
ssenisub ot noitcudortnI 1
1.5
relying on its own resources
growth
and capabilities: investment
Internal
growth
is
often
known
as
“organic
growth”
because
it
happens
in new products, or new sales
slowly
and
steadily,
and
grows
out
of
the
existing
operations
of
the
channels, or more stores etc
business.
Although
it
may
take
a
long
time,
a
business
can
grow
this
way
to increase sales
without
more
taking
products
Although
some
or
too
most
money
expand
internal
or
many
by
risks.
developing
businesses
from
banks
property,
growth
is
The
that
for
plant,
business
its
are
product
and
capital
using
simply
selling
Ex ternal growth
internally
outlays
equipment
self-nanced
by
range.
growing
major
expands
–
most
retained
–
still
such
of
the
have
as
to
to
borrow
expansion
occurs when a business
expands with the aid of
update
resources and capabilities not
from
developed internally by the
prots.
company itself. Instead, the
External
growth
is
a
quicker
and
riskier
method
of
growth
than
internal
company obtains these new
growth.
Instead
of
selling
more
of
its
own
products
itself,
the
business
resources and capabilities by
expands
by
entering
into
some
type
of
arrangement
to
work
with
another
acquiring another company
business,
such
as
a:
or forming some type of
●
merger
and
●
takeover
●
joint
●
strategic
●
franchise.
acquisition
(M&A)
relationship, like a joint venture,
with another organization.
Merger
venture
occurs when two companies
alliance
that are theoretically “equal”
legally become one company
External
growth
the
are
usually
requires
signicant
external
nancing.
Although
Acquisition
risks
increase
greater,
market
the
share
potential
and
rewards
decrease
are
that
competition
the
very
business
can
when one company
quickly.
purchases a majority or all the
Ex ternal growth methods
The
most
common
forms
of
shares of another company
external
growth
are
as
follows.
Takeover
when one company acquires
Mergers and acquisitions (M&As) and takeovers
a majority or all the shares in
This
type
of
expansion
occurs
when
two
business
become
integrated,
either
another company. When the
by
joining
by
one
together
and
forming
a
bigger
combined
business
–
a
merger
–
or
word “takeover ” is used, the
business
taking
over
the
other
–
an
acquisition.
situation usually means that
When
term
held
the
typically
used
companies
company
buy
acquisition
do
them.
is
can
not
is
“takeover”
be
have
Public
unwanted
taken
to
sell
companies,
by
or
over,
their
the
company
“hostile
as
the
shares
whose
being
takeover”.
shareholders
if
shares
another
sell
in
acquired,
Only
in
a
privately
wants
forums,
the company being acquired
does not welcome the
publicly
company
public
the
held
transaction.
to
can
be
takenover.
The
result
bigger
of
a
merger,
acquisition,
or
takeover
is
the
same:
one
business.
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However,
tnemeganam
ssenisub ot noitcudortnI 1
general,
the
processes
●
underlying
integration
are
very
Horizontal
integrated
in
the
When
of
●
line
that
the
Vertical
another
two
of
a
scale.
different
and
In
the
or
the
integration
ways,
two
broad
the
can
vary.
although
businesses
industry,
same
when
occurs
reduce
the
chain
one
Vodafone
when
in
the
an
for
in
In
the
but
of
being
are
actually
production
chain
of
(for
grocery
stores
one
earlier
various
business
the
Often
business
of
can
with
combination
will
take
Idea
integrates
production,
stage
through
reasons,
and
it
merged
regulation
costs,
(the
acquisition)
have
advantage
Cellular
and
India.
chain
government
transaction
in
power.
company
in
new
involved
market
occurs
stage
avoid
occurs,
2018,
operations
integration
or
internal
including
(such
eliminate
as
the
with
when
to
price
a
growth.
ensure
controls
market
power
of
businesses.
If
a
business
production
process
occurs
is
becomes
(either
called
when
upstream
a
stage
in
Apple
terms
German
Forwards
integrates
vertical
For
might
a
open
meats
Forward
to
produced
a
on
(to
a
the
outlet
its
supply
Dialog
occurs
later
stage
and
chain
This
as
a
price.
to
sell
when
in
producing
to
one
the
The
preferred
In
2018,
for
make
business
chain
sells
to
Apple.
organic
that
of
this
usually
chain.
Semiconductor,
stage)
restaurant
the
growth),
of
crops
the
and
meats
organic
food
farm.
integration
secure
a
in
integration .
continue
farm
or
stage
internal
availability,
maker
would
a
or
protect
integration
store
earlier
“downstream”
chip
forward
retail
to
quantity,
example,
vertical
ensure
the
supplier
further
production.
and
of
bought
an
vertical
wants
treat
in
integration
backwards
can
example,
the
involved
through
business
customer
sure
■
in
merge
were
telecom
supply,
■
or
share
reliable
other
same
and
integration
largest
begins
taxes),
for
following
when
the
airlines
merged
Vertical
or
in
business
integration
at
business
the
occurs
merely
of
market
economies
became
reason
of
another).
two
increased
of
not
horizontal
the
one
different.
when
purchases
in
integration
are
same
example,
business
occurs
usually
for
its
occurs
products.
when
In
a
2017,
business
Amazon
wants
bought
A furniture maker acquiring a
Whole
Foods
and
immediately
gained
almost
500
bricks-and-
wood mill would be an example of
mortar
stores.
Because
Amazon
was
already
selling
groceries
(albeit
backwards ver tical integration
on
a
small
scale),
Nevertheless,
a
●
physical
the
store
Conglomeration
of
business
It
overall
corporate
among
its
many
Motors
(such
as
Group
the
and
presence
occurs
occurs
For
type
for
still
have
two
of
Tata
Hotels
a
horizontal
mostly
previously
businesses
reasons
the
successful
the
If
steel
in
is
as
it
gave
unrelated
also
but
Indian
Company.
element
to
it.
Amazon
lacked.
Chemicals,
or
vertical,
integration
many
business
had
was
example,
businesses
Indian
it
when
This
risk.
chemical
would
acquisition
acquisition
integrate.
diversication.
Tata
this
mainly
any
Steel,
one
business)
in
to
company
Tata
businesses
known
of
reduce
Tata
Tata
the
were
other
lines
as
Group
has
Teleservices,
businesses
to
fail,
Tata
industries.
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reason
seasonal
activity.
months
that
If
a
a
purchased
business
business
a
business
may
that
diversify
does
that
had
is
most
most
to
of
of
have
its
its
complementary
sales
sales
in
in
the
the
Assessment ad vice
summer
tnemeganam
Another
Growth and evolution
winter
When people use the
months,
then
the
new,
combined
enterprise
would
not
have
long
periods
word “takeover ”, they are
ofinactivity.
communicating that the
Integration
of
scale,
has
advantages
complementary
production.
business
fees.
many
However,
being
company,
M&As
when
especially
Employees
activities,
acquired,
Sometimes
from
if
the
for
can
one
the
two
and
be
typically
businesses,
control
costly.
there
company
takeover
are
high
hostile,
do
up
not
or
legal
or
a
economies
down
addition
acquires
is
companies
In
including
to
the
and
work
well
chain
cost
of
takeover is not wanted.
of
Because publicly held
the
companies are sold on an
consulting
combines
culture
the
with
clash
ssenisub ot noitcudortnI 1
1.5
exchange, only publicly held
another
companies can be subject to
occurs.
a takeover. If the owners of
together.
privately held companies do
not want to sell their shares,
In
addition,
the
protability
of
integration
can
change
over
time.
At
rst,
they do not have to.
a
company
vertical
that
may
achieve
integration,
outsourcing
but
this
cost
savings
later
or
other
determine,
process
is
more
benets
because
of
from
backwards
changes
cost-effective.
Thus,
in
the
market,
sometimes
a
Key term
business
will
stages
another
at
integrate
vertically
only
to
divest
upstream
and
downstream
time.
Joint venture
an organization created,
Joint ventures
owned, and operated by two
Joint
ventures
specic
is
goal
created
time
into
and
with
period
one
occur
of
is
when
over
a
nite
funding
over,
the
by
the
parent
two
period
the
new
businesses
two
of
time.
“parent”
business
businesses,
agree
or
is
As
a
combine
result,
businesses.
either
the
to
two
separate
After
dissolved
parent
a
resources
or
rms
the
for
a
business
dened
The joint venture is legally
distinct from the organizations
incorporated
extend
or more other organizations.
that created it.
the
timeframe.
Although
areas
of
transfer
future.
a
joint
of
skills,
role
Examples
of
Ericsson
in
knowledge,
in
and
joint
a
joint
then
be
Zealand
temporary
transfer
and
out
Post–DHL
one
the
include
Channel
of
in
nature
specialist
expertise
venture
buys
ventures
(2001–2012),
New
may
considerable
Sometimes
dominant
1994),
venture
business,
could
of
the
and
skills
open
can
benet
either
partners
up
occur.
new
This
party
begins
to
in
play
the
a
other.
Uber–Volvo
Tunnel
(formed
in
2016),
Group–France-Manche
(2004–2012),
and
Sony–
(1985–
BMW–Brilliance
(formed
2003).
Joint
ventures
have
the
advantage
that
the
two
rms
typically
enjoy
The Channel Tunnel, which links
greater
sales,
but
neither
loses
its
legal
existence
or
its
identity.
Joint
the UK and France, was built as
ventures
also
have
the
advantage
that
the
two
businesses
forming
the
joint
par t of a joint venture
venture
can
powerful
bring
different
areas
of
expertise,
amalgamating
to
create
a
combination.
Assessment ad vice
However,
a
sometimes
company
realizes
joint
that
it
ventures
could
do
have
not
produce
accomplished
the
desired
what
the
outcome,
joint
or
venture
Remember that, unlike a
is
doing
without
having
to
share
the
prots
with
the
other
company.
strategic venture, a joint
At
least
conceptually
(though
not
always
legally),
a
joint
venture
is
a
venture involves the creation
partnership.
All
partnerships
run
the
risk
that
a
disagreement
between
of a legally distinct new
partners
will
occur.
Sometimes
of
partnership
a
disagreement
may
be
so
severe
that
the
organization owned by
effectiveness
the
is
compromised
or
the
partnership
(or
joint
the companies forming the
venture)
breaks
up.
joint venture.
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1
Strategic
tnemeganam
ssenisub ot noitcudortnI 1
Strategic alliances
Key terms
Strategic alliance
alliances
businesses
differ
are
similar
collaborating
from
joint
for
ventures
to
a
in
joint
ventures
specied
several
goal.
because
However,
fundamental
they
involve
strategic
alliances
ways:
occurs when two or more
businesses cooperate in some
More
●
legal way that enhances the
than
alliances
value for all par ties. Members
In
of the alliance retain their
the
airline
including
independence. A strategic
two
often,
United
businesses
though
industry,
Singapore
not
the
may
be
always,
Star
Airlines,
part
of
involve
Alliance
has
Lufthansa,
the
more
alliance.
than
two
Strategic
businesses.
26
airlines
in
South
African
Airways
the
alliance,
and
Airlines.
alliance is less binding than
No
●
new
business
is
created.
No
new
legal
entity
comes
into
a joint venture, as no new
existence;
instead,
a
strategic
alliance
is
typically
an
agreement
to
work
organization is created.
together
for
mutual
benet.
Franchising
Individual
●
businesses
a method of distributing
existing
products or services, where
independent
businesses
and
may
often
in
the
agree
alliance
to
share
otherwise
remain
resources
compete
independent.
but
against
they
each
The
remain
other.
the franchisor develops
Strategic
●
alliances
are
more
uid
than
joint
ventures.
In
a
strategic
products or services and
alliance,
membership
can
change
without
destroying
the
alliance.
its brand and then sells the
right to use the brand and
All
its products or services to
involved
of
these
franchisees. The franchisee
agreement
pays a fee and typically some
an
percentage of revenue or
the
prots to the franchisor.
capital
in
strengths
a
becomes.
enterprise
alliance,
that
but
strength
economies
greater
are
strategic
of
in
legal
of
the
existence,
independent
other
members
with
forms
also
The
the
means
alliance
that
that
has
may
they
less
force
from
do
not
do
lacks
get
they
provide.
alliance
are
and
benet
nor
growth
the
that
coordination
enterprises,
external
means
businesses
businesses
other
of
more
challenging
Individual
merger
that
more
legal
law.
remaining
of
weaknesses.
Without
exists
scale
uidity
also
alliance,
than
the
enjoy
Lastly,
stability.
Franchises
Franchising,
popular
the
●
for
another
An
original
the
to
of
external
want
to
the
business
right
to
of
other
growth,
expand
is
becoming
globally.
new.
is
buyers
and
or
sell
to
be
franchise
Instead,
is
the
the
then
the
increasingly
Franchising
In
the
involves
originally
concept
by
franchisees).
does
(the
other
to
the
and
offer
the
franchisor.
in
by
some
the
can
is
often
have
sells
be
The
instances
franchisor.
actually
franchisor)
Franchisees
the
franchisee
Franchising
not
the
businesses
service.
words,
with,
franchisor.
business
or
developed
franchisor
developed
to
right
other
consistent
the
that
sells
product
buy
service.
business
(the
franchisor,
service,
developed
because
businesses
to
that
individuals,
companies.
proving
has
businesses
nds
to
the
or
franchisees,
has
original
starts
or
franchisor
other
the
product
also
growth
anything
partnerships,
The
the
that
Franchising
concept
as
the
usually
to,
form
produce
the
as
product
products/services
identical
rapid
sell
known
and
known
and
franchisee
it
offer
Businesses,
sells
a
business,
concept
right
concept
A
that
following:
business
●
form
businesses
of
in
a
particularly
host
the
the
or
home
other
concept
attractive
country.
places
of
the
where
as
a
The
it
means
wants
enterprise.
to
franchisor
The
to
grow
can
expand
–
franchisees
globally.
then
as
sell
long
to
as
typically
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knowledge
Franchisees
franchisor
There
areas
are
of
of
also
wants
many
to
McDonalds
●
Budget
●
Hilton
●
Kumon
–
–
markets,
local
grow
in
examples
business,
●
local
know
–
car
local
different
of
which
is
countries
franchises
in
lots
and
local
cultures.
particularly
around
of
the
helpful
if
the
world.
different
including:
fast
food
hire
hotels
–
conditions,
languages,
tnemeganam
have
Growth and evolution
education
●
Wokinabox
–
●
Spar
stores
●
Benetton
●
Body
–
food
–
Shop
fast
food
ssenisub ot noitcudortnI 1
1.5
clothes
–
cosmetics.
An outlet of the Body Shop in Hong Kong
The
the
cost
of
the
franchise
franchisor’s
pay
the
–
a
business
Bell,
These
for
of
the
right
or
sales
be
will
exactly
restaurants),
between
or
The
●
●
●
Staff
●
Legal
●
Global
advertising
●
Global
promotions
a
Rental
the
have
as
exactly
the
the
in
The
ttings
●
Set
The
uniforms
●
Pay
●
Create
●
Sell
nancial
help
Which
party
vary
such
as
McDonald’s,
restaurant
close.
immediately
in
a
provides
considerably
strong
A
have
the
are
new
to
and
to
especially
name
dictate
terms
in
their
individual
franchisee
Brands
the
(KFC,
franchise
the
division
of
follows.
will:
and
wages
agreed
local
party
royalty
on
sales
promotions
the
products
of
and
is
locally
provides
of
Rarely
of
to
staff
only
restaurant
recognition
the
as
typically
franchisor
strength
strong.
as
general,
prices
an
must
thefranchisor.
Yum!
are
Advertise
which
the
McDonald’s
strong
position
outlet
according
of
franchisee
Employ
for
the
responsibilities
same
●
and
to
McDonald’s
stock
training
go
pay
offering
according
those
franchisee
The
must
franchisee
which
However,
and
●
is
–
business
specic
the
can
a
somewhat
same
Cars.
franchisor
fee
example,
nor
franchisee
Then
at
vary
For
the
operate
service.
provide:
●
First,
to
franchisee
industries.
not
Enterprise
franchisor
parts.
a
product
and
other
responsibilities
two
responsibilities
and
would
and
agreement
The
and
percentage
concepts
agreements
has
essentially
franchisor
relationship.
Taco
–
concept
royalties
Both
franchise
itself
the
does
a
almost
high
owning
start-up
Some
costs
brands,
McDonald’s
certain
sales,
a
the
brand.
so
to
the
franchisor
McDonald’s
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1
franchise.
tnemeganam
ssenisub ot noitcudortnI 1
the
Other
franchisor
and
For
brands
may
responsibilities
businesses
many
the
and
market
bargaining
franchisor
of
legal
power.
In
strength
and
circumstances,
setting
the
rights
franchisee.
organization),
disadvantages
those
when
compared
acquiring
to
a
franchise
developing
their
has
own
model.
Advantages
to
the
●
The
product
●
The
format
●
The
set-up
●
The
franchisee
●
The
franchisor
franchisee
exists
for
and
selling
costs
Disadvantages
The
of
less
less
(regardless
advantages
business
have
have
are
has
can
to
is
usually
the
well
product
is
known.
established.
reduced.
a
secure
provide
the
supply
legal,
of
stock.
nancial,
managerial,
and
technical
help.
franchisee
franchisee:
●
has
unlimited
●
has
to
●
has
no
control
over
what
●
has
no
control
over
supplies.
pay
Franchisors
The
royalties
also
Advantages
liability
have
to
the
for
to
the
the
franchise
franchisor
to
sell
advantages
and
disadvantages.
franchisor
franchisor:
●
gains
quick
●
makes
●
does
●
gains
●
makes
use
not
access
of
to
local
assume
wider
markets
knowledge
the
risks
and
and
expertise
liability
of
running
the
franchise
TOK links
1.
For a business deciding
more
all
prots
of
the
and
the
global
sign-up
fees
decisions.
to grow (or to stay small),
Disadvantages
to
the
franchisor
is “big” or “small” just a
matter of perspective?
The
2.
franchisor:
Can we state that
●
loses
●
can
some
control
in
the
day-to-day
running
a
fails
of
the
business
economies of scale are
see
its
image
suffer
if
franchise
or
does
not
perform
properly.
always good?
Do
3.
some
franchisees
eventually
become
tired
of
the
control
of
the
parent
To what degree are
company?
Perhaps,
but
by
then
the
operators
of
the
franchise
may
have
businesses limited in
enough
expertise
to
start
their
own
independent
business.
On
the
other
how much they can know
hand,
many
franchisees,
even
if
tired
of
the
control
of
the
franchisor,
enjoy
about their market and
the
great
protability
that
can
come
with
a
successful
franchise.
Regardless,
other factors outside
for
the
franchisor,
selling
franchises
is
an
easy
and
fast
way
to
break
into
of the business that
new
markets
with
a
minimum
of
difculty
and
risk,
and
it
is
a
way
to
gain
inuence it?
an
advantage
over
its
competitors.
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Growth and evolution
Revision checklist
A
STEEPLE
which
analysis
might
technological,
the
✓
As
at
✓
factors
change,
of
✓
✓
External
joint
need
These
to
adapt
its
by
social,
If
any
of
strategy.
internal
(organically)
are:
ecological.
economies
be
factors
factors
of
or
by
scale
but
also,
external.
expansion
forming
some
of
types
organization.
businesses
not
to
external
The
and
(inorganically)
to
dominance,
choose
the
legal
can
internally
external
for
all
business.
political,
externally
an
a
experience
scale.
either
of
may
often
of
market
companies
remaining
evaluating
ethical,
they
or
exist
of
success
business
grow
with
increase
Many
✓
can
operations
reasons
share,
a
grow,
relationship
Many
way
the
diseconomies
Companies
existing
a
economic,
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times,
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inuence
tnemeganam
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grow,
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grow
including
increase
and
nd
to
increase
market
prots.
advantages
from
small.
growth
ventures,
can
happen
strategic
through
alliances,
mergers,
acquisitions,
takeovers,
andfranchising.
Practice question
To
answer
Statson
Statson
(SI)
as
name
SI’s
recognition
SI
grew,
service
the
found
less
it
was
known
SI’s
The
as
to
management
pages
to
name
398–402.
years
Ltd
many
having
grew
ago,
(FF),
the
company
which
continued
SI
eliminate
with
increased
that
a
in
many
the
two
rapidly.
and
some
economies
rst
several
thorough
two
of
the
expenses,
different
However,
names.
as
customers
between
of
years
scale
after
diseconomies
analysis
companies
problems
was
two
convinced
features
b)
With
reference
diseconomies
one
have
more
outweigh
State
should
Five
FlowForm
the
sales
experiencing
negotiate
would
Explain
times
combined
a)
c)
6
sales
SI’s
and
complained
were
SI
of
the
of
would
the
scale.
situation.
result
acquisition,
SI’s
This
analysis
experiencing:
and
the
company
formerly
FF
ability
acquisition
able
and
However,
the
Communication
(taps).
associated
anticipated
revealed
●
Unit
personal.
conducted
●
see
under
were
delivery
management
that
but
costs,
acquisition.
that
faucets
improved,
seemed
management
from
effectively,
manufacturer,
companies
promotional
production
that
faucet
independently
combined
such
below
manufactures
another
operate
The
question
Inc
Inc
acquired
to
the
to
of
of
SI,
an
the
favourable
that,
in
purchase
time,
the
prices
advantages
reason
of
suppliers.
the
disadvantages.
acquisition.
distinguish
[2
between
economies
of
scale
scale.
SI
grew
small.
and
one
reason
why
it
marks]
and
[4
why
remained
from
marks]
perhaps
[4
marks]
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1
tnemeganam
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1.6 Multinational companies
(MNC s)
By the end of this chap ter, you should be able to:
Evaluate the impact of MNC s
➔
on the host countries
Globalization
Globalization
evolution.
economies
wholly
British
of
First,
is
of
on
a
a
signicant
is
and
impact
process
by
integrated
Empire,
other
global
the
one
Roman
the
historical
known
as
on
businesses’
which
global
Silk
the
The
the
and
of
since
has
and
regional
process
Age
periods
Nevertheless,
“globalization”
growth
world’s
unit.
Road,
examples
interdependence.
phenomenon
is
not
Exploration,
saw
the
some
Second
changed
from
the
degree
World
earlier
interdependence.
just
goods
had
becoming
The
Empire
the
forms
of
are
new.
economic
War,
has
Globalization
in
terms
and
of
the
services
completely
intensity,
being
scale,
exchanged,
different
scale
from
speed,
global
that
and
economic
value
interdependence
seen
in
earlier
today
periods
or
circumstances.
Second,
current
number
of
globalization
is
being
characterized
by
a
relatively
small
Student workpoint
extremely
large
“post-national”
businesses.
Post-national
1.11
means
Be knowledgeable
ofce
that,
is
although
legally
transnational;
Different
posed
people
different
about
when
Was
Roman
consider
no
place
business
wherever
during
it
Exploration
or
the
the
Age
or
Empire
and
to
its
when
was
Pax
the
it
during
World
War
of
or
Increased
every
place
their
businesses
home).
they
can
make
a
prot.
Loyalties
are
They
to
the
will
do
company
and
not
to
any
country.
a
signicant
following
impact
on
the
growth
of
domestic
reasons:
competition
to
become
–
large
more
foreign
efcient
as
businesses
the
domestic
can
force
domestic
consumer
“Greater
efciency”
can
mean
lower-cost
goods
and
has
more
services
However,
one
way
that
businesses
become
more
for
efcient
Was
by
the
slowing
the
growth
from
in
wages
of
its
workers
and
extracting
greater
them.
internet?
Greater
brand
awareness
–
domestic
producers
have
to
compete
these
with
big
brand
names
and
so
they
need
to
create
their
own
unique
arguments
selling
to
(or
container
about
different
“home”
the
●
Learn
these
(the
otherwise
its
productivity
shipping
record,
are
or
Americana?
era
record
the
at
is
it
home
have
the
consumers.
the
their
prots,
can
for
choice.
Second
of
of
businesses
Silk
producers
Was
home
home
of
●
peak?
legal
a
the
the
businesses
British
the
have
country),
globalization
it
Empire
Was
from
one
arguments
Globalization
Road?
apart
companies
in
have
itself
began.
these
registered
develop
a
point
(USP).
Sometimes
they
do
this
by
emphasizing
the
local
or
nuanced
national
understanding
origins
of
their
products
compared
to
the
“foreign”
products
of
sold
by
multinationals
and
global
rms.
Creating
a
USP
can
make
many
globalization.
businesses
more
competitive
and
efcient.
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Skills
some
transfer
local
which
will
lead
multinational
particular
develop
●
Closer
or
–
foreign
knowledge:
to
or
a
global
rm
while
some
no
of
transfer
will
of
learn
those
matter
their
how
knowledge
from
workers
big,
workforce
the
can
and
hired
new
use
be
skills.
workers
learn
must
must
local,
The
in
approaches
and
skills.
collaboration
strategic
least
two-way
countries,
new
businesses,
at
tnemeganam
●
Multinational companies (MNCs)
alliances,
–
whether
domestic
through
producers
joint
can
ventures,
create
new
franchises,
ssenisub ot noitcudortnI 1
1.6
business
opportunities.
Reasons for the growth of multinational companies
A
multinational
company
is
a
business
that
operates
in
more
Key term
than
Multinational corporation
one
country
or
is
legally
registered
in
more
than
one
country.
The
(MNC)
word
“multinational”
suggests
that
a
company
is
global
or
operating
in
a company that operates
many
countries,
but
that
is
not
always
the
case.
For
example,
a
small
in two or more countries.
company
operating
in
the
small
countries
of
Luxembourg
and
Belgium
is
It is generally a very large
amultinational.
company, but it does not
However,
multinational
companies
are
typically
the
biggest
type
of
business
have to be. MNCs are also
and
in
fact
they
often
generate
more
revenues
than
the
country
they
sometimes referred to as a
operate
in.
For
example,
Table
1.6.1
shows
a
comparison
of
the
world’s
multinational enterprises
leading
countries
and
businesses
in
terms
of
GDP
and
sales
revenues.
(MNEs).
Table 1.6.1 The world’s leading countries and businesses – GDP and sales revenues
Revenue
GDP
Rank
Rank
Country
Company
(in millions USD)
(in millions USD)
1
United States
21,433,226
2
China
14,342,903
2
Sinopec Group
414,649
3
Japan
5,081,770
3
Royal Dutch Shell
396,556
4
Germany
3,861,124
4
China National Petroleum
392,976
5
India
2,868,929
5
State Grid
387,056
6
United Kingdom
2,829,108
6
Saudi Aramco
355,905
7
France
2,715,518
7
BP
303,738
8
Italy
2,003,576
8
Exxon Mobil
290,212
9
Brazil
1,839,758
9
Volkswagen
278,341
Canada
1,736,426
10
Toyota Motor
272,612
10
1
Walmar t
514,405
Source: Adapted from World Bank & For tune Global 500, 2019
Four
●
factors
have
Improved
●
●
of
of
trade
components
Deregulation
transfer
of
funds,
Increasing
–
not
companies
only
ICT,
to
but
grow
also
rapidly:
transport
and
networks.
Dismantling
materials,
multinational
communications
distribution
●
allowed
the
as
companies
–
can
low-income
countries.
as
and
be
–
allowing
nished
world’s
well
economic
this
barriers
and
of
tax
easier
movement
of
raw
products.
nancial
markets
–
allowing
for
easier
avoidance.
political
power
enormous
of
benet,
the
multinational
especially
in
middle-
and
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tnemeganam
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The impact of multinational companies on the
TOK links
host countries
1.
As businesses grow
Multinational
companies
can
have
both
positive
and
negative
impacts
on
internationally and
the
host
(domestic)
countries
in
which
they
operate.
become multinational,
how do their methods
Advantages
for
the
host
country
include:
of knowing change
●
Economic
growth
–
multinational
companies
can
boost
the
domestic
(knowing their customers,
economy
by
providing
employment,
developing
a
local
network
of
knowing their markets,
suppliers,
and
paying
taxes
and
providing
capital
injections.
knowing their business
environment, knowing
●
2.
How can we know about
New
ideas
doing
their competitors)?
●
Skills
the dierent impacts that
of
MNCs may have on their
own
–
multinational
business
and
transfer
local
–
new
of
multinational
employees.
business
companies
ways
with
Domestic
the
skills
may
interacting
companies
businesses
introduce
new
ways
of
socially.
may
can
help
benet
develop
from
the
skills
starting
their
learned.
host countries?
●
3.
Are the terms
Greater
variety
choice
of
of
products
products
will
–
the
domestic
market
will
benet
as
the
increase.
“international”,
●
Short-term
infrastructure
projects
–
multinational
companies
often
“multinational” and
help
to
build
infrastructure
(for
example
roads
to
the
factory,
schools
“global” interchangeable?
for
workers’
children).
If there is a dierence
between them, who
Disadvantages
for
the
host
country
include:
should give the ultimate,
●
Prots
being
repatriated
–
the
multinational
companies
may
pay
into
authoritative denition?
the
●
local
from
the
Loss
of
doing
tax
host
cultural
●
Brain
for
Loss
the
●
drain
of
a
may
identity
and
the
–
even
bulk
–
the
of
their
appeal
cultural
younger
many
prots
of
norms
generations
long
share
market,
plans
time
move
highly
company
market
domestic
Short-term
for
the
will
be
rerouted
away
domestic
may
who
products,
suffer.
are
This
more
is
ways
of
especially
likely
to
buy
brands.
multinational
●
but
country.
business,
important
global
system,
out
–
at
if
–
in
–
skilled
another
as
multinational
domestic
producers
multinational
lower-cost
short
employees
may
look
to
work
for
the
country.
companies
may
companies
producers
can
take
over
more
of
suffer.
be
may
not
found
intend
to
elsewhere,
stay
they
notice.
Revision checklist
✓
Multinational
✓
MNCs
can
which
they
companies
have
both
(MNCs)
positive
and
operate
in
negative
more
effects
than
on
one
the
country.
countries
in
operate.
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Multinational companies (MNCs)
Practice question
answer
the
Khumalo
Lungile
in
question
Pottery
Khumalo
Johannesburg,
are
sold
to
traditional
pay
its
difcult
beauty
time
to
Across
and
the
becoming
these
shops.
their
2013,
Johannesburg.
to
large
require
retailers
to
a)
Evaluate
opening
the
a
pages
a
than
398–402.
Khumalo
selling
They
plates
point
decorating
made
always
quantity.
also
States,
As
a
Pottery
and
the
based
pottery.
that
on
KP
does
redundant,
repeated
Workers
developed
(KP)
bowls
(USP)
anyone
very
sold
up
to
the
good
the
impact
in
large
their
to
to
at
his
KP
great
not
even
workers
could
pride
opened
Africa.
take
in
the
with
penetration
shelves
on
as
the
South
small
who
Africa
of
very
be
in
shops
the
Johannesburg.
of
factory
pottery
would
but
not
the
(benets).
Africa,
KP’s
selling
lower
scale,
price.
American
jobs
South
pottery.
had
the
hand-made,
payments
the
low
automated
These
was
pottery
produce
African-looking
successful,
pricing
with
a
mass
economies
highly
sell
not
fringe
their
retailers
If
a
at
designs
American
to
their
Africans.
would
used
large
and
African
large
began
to
products
South
pottery
wages
scale,
produce
150
with
several
Thanks
company
was
pottery
result,
patterns.
immediately,
factory
called
never
Lungile
sub-Saharan
stocked
to
has
United
on
aim
company
almost
unique
pottery.
American
The
offer
customers
6
manufactures
patterns
and
popular.
creativity:
eagerly
decline
losing
and
times.
the
employ
would
American
retailers
in
across
would
much
company
The
large
KP
a
manufacturers
in
Unit
work.
operating
In
company
has
African-looking
American
see
company
important
beautiful
Atlantic,
one
KP
wages
increasingly
with
small
Africa.
designs
more
in
manufacturers,
pottery
a
economic
produce
company
owns
high
was
effectively,
(KP)
South
African
workers
during
that
small
below
tnemeganam
To
ssenisub ot noitcudortnI 1
1.6
sales
KP’s
and
large
started
pottery
were
prices.
American
company
[ 10
marks]
Source: Adapted from IB examination paper, May 2014
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2
HUMAN
tnemeganam
ecruoser namuH 2
RE SOUR CE
MAN AGEMENT
2.1 Introduction to human
resource management
By the end of this chap ter, you should be able to:
➔
Explain the role of
human resource management
➔
Explain internal and external factors that inuence
human resource
planning
➔
Explain reasons for
resistance to change
➔
Discuss human resource strategies
in the workplace
for reducing the impact of change
and resistance to change
Role of human resource (HR) management
Human
resources
resources
and
is
quaternary
have
the
are
critical
especially
right
sectors.
types
for
any
important
of
for
business.
Nevertheless,
employee
The
businesses
and
all
issue
businesses
that
of
operating
those
must
human
in
the
tertiary
ensure
employees
are
that
they
working
effectively.
Successful
the
best
businesses
from
continuous
in
jobs
same
for
their
processes.
which
time,
are
as
they
part
likely
human
of
to
Businesses
are
HR
have
resources.
strive
properly
planning,
a
HR
clear
to
make
trained
a
framework
management
and
business
sure
their
properly
estimates
for
and
how
get
are
employees
suited.
its
to
planning
At
future
are
the
HR
needs
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2.1
(thecorrect
type
and
number
of
employees),
Introduction to human resource management
so
that
the
business
does
not
Key terms
have
too
(which
many
can
employees
hurt
(which
increases
costs)
or
too
few
employees
productivity).
Human resource management
This
framework
for
getting
the
most
from
a
business’s
human
resources
is
how an organization manages
the
process
of
HR.
With
large
businesses,
the
various
elements
of
the
HR
its human resources; includes
process
are
written
down
and
are
known
as
the
HR
plan.
With
smaller
recruitment and retention,
businesses,
the
HR
plan
might
not
be
written
down,
but
the
director
of
HR
the
owner
of
the
small
business
will
decide
HR
issues
and
have
a
plan
tnemeganam
benets, and specifying job
inmind.
responsibilities
Demographic changes
The internal and external factors that inuence
shifts in demographic factors,
HR planning
Many
factors
business
can
employs
pool
of
may
change
labour
ecruoser namuH 2
setting compensation and
or
such as bir th rates, death
inuence
someone,
available
for
an
organization’s
some
external
potential
HR
plan.
factors
can
employment.
Even
have
Also,
before
an
the
rates, education levels,
a
effect
on
business
the
religion, ethnicity, age, etc
itself
Labour mobility
in
place.
and
This
is
internal
shown
in
factors
Figure
may
inuence
the
HR
plan
that
is
already
the ability of workers to
2.1.1.
move occupationally or
geographically (within
countries or internationally). Ie
immigration
how easily workers can change
technological
their place or type of work.
change
government
regulation/
laws
changes in
changes to
the business
business
demographic
organization
nance
change
Pool of
labour
available for
social
work
trends
The HR plan
state of the
economy
changes in
changes in
labour
the business
reactions
strategy
changes to
education
exi-time,
labour
remote
mobility
working etc
External factors can aect the
Internal factors can
labour pool of potential
aect an organization’s
employees
current HR plan
Figure 2.1.1 External and internal factors aecting the HR plan
81
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2
Ex ternal factors
Key terms
External
Immigration
factors
potential
have
employees
an
for
impact
the
on
the
business,
size
and
and
availability
include
the
of
the
pool
of
following:
the international movement
●
Technological
change
–
improvements
in
ICT
can
lead
to
more
of people into countries where
teleworking
and
working
from
home.
Infrastructure
improvements,
they are not citizens. People
such
as
new
roads
or
other
transport
links,
can
make
employing
who are temporarily in a
someone
who
lives
further
away
easier
than
before.
tnemeganam
ecruoser namuH 2
foreign country, like tourists or
●
Government
regulations
–
changes
in
laws
or
government
students, are not considered
regulations
regarding
health
and
safety
issues
can
inuence
a
potential
to be immigrants; rather
workforce.
Laws
or
government
regulations
can
affect
maximum
immigrants are those who
weekly
working
hours
or
contractual
issues,
such
as
equality
in
seek permanent residency in
the
workplace
irrespective
of
age,
gender,
ethnicity,
or
disability.
the new country.
Laws
Flexi-time
generally
retirement
a exible work schedule that
●
allows workers to adjust the
Demographic
or
star ting and nishing times
changes
the
of their work day, giving
determine
in
change
–
an
immigration
demographic
employees
obligations
such
as
pension
provisions
or
age.
changes
available
and
aging
and
that
can
their
population,
emigration
have
specic
reduced
patterns
an
impact
are
on
requirements
fertility
just
the
rates,
some
of
potential
to
work.
of
women
them exibility to meet other
●
Social
trends
–
changes
in
society,
such
as
the
role
in
demands (such as childcare
society,
a
rise
in
the
number
of
single-parent
families,
or
the
importance
requirements)
of
an economy where many
leisure
the
Gig economy
●
in
labour
The
state
positions are temporary
on
and organizations hire
wages;
independent workers for
workers
the
of
pool
a
the
“work–life
balance”
can
all
have
signicant
impacts
on
pool.
the
of
economy
labour
recession
are
will
available
–
an
available
have
and
the
so
economic
and
opposite
they
boom
consequently
may
effect,
accept
will
lead
as
lead
to
more
lower
to
a
strain
increased
unemployed
wages.
shor t-term commitments
●
Changes
of
in
education
education
education
a
factor
levels
employment.
can
Also
of
–
some
would
demography.
have
a
relevant
direct
is
the
consider
changes
Regardless,
impact
range
on
and
the
rising
in
or
suitability
type
of
levels
falling
of
courses
labour
for
available
tostudents.
●
Labour
can
mobility
refer
either
geographical
of
●
the
Immigration
●
Changes
can
Technological change has made it
also
or
many
a
such
–
a
shift
in
in
how
inuence
affects
the
skillset
of
remote
people
labour
(changing
locations).
immigration
the
exi-time,
inuence
can
mobility
(changing
signicantly
change
as
factors
occupational
mobility
workforce
available
–
to
In
either
labour
can
working,
in
new
arrived
or
case,
the
which
or
mobility
pool.
result
newly
mobility,
occupations)
workers
being
workers.
gig-economy
contracts
work.
easier for people in cer tain sectors
Internal factors
to work from home
Internal
impact
the
●
factors
on
the
stem
from
current
HR
within
plan,
the
business
which
may
itself
have
to
and
will
change
have
as
a
an
result
of
following:
Changes
they
are
in
business
organized
reorganization
can
to
organization
better
affect
meet
the
–
their
current
businesses
strategic
HR
plan.
change
the
objectives.
way
Any
Organizational
changes
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2.1
the
or
Changes
●
impact
for
HR
is
in
on
labour
the
requirements
way,
hand,
the
in
in
in
Changes
●
will
have
the
can
an
affect
impact
inuence
increase
in
on
be
well.
For
available
in
a
business
and
power
of
more
–
or
acquires
may
HR
to
–
lead
the
plan.
pay
the
may
will
the
allow
another
a
unionize,
decreases,
on
the
workers.
to
Either
to
situation
that
wages
pension
has
the
of
a
and
plan.
business
salaries,
factors
can
liabilities
number
itself,
HR
limited
workforce,
greater
changes
re-orienting
nancial
current
signicant
work
with
response
business
Other
a
to
change.
in
highest
for
the
amendments
unfunded
for
union
nancial
the
with
business
to
A
retention.
example,
a
have
chooses
exibility
whether
to
can
force
contend
circumstances
resources
protability
relations
labour
to
have
nance
the
the
the
market
able
recruitment
as
when
labour
If
have
may
strategy
business
not
If
–
strategy
the
bearing
may
will
union.
business
in
resources
planning.
labour
business
a
occur
relations
business
circumstances
changes
also
business
long-term
Changes
●
of
the
can
acquired.
workforce
example,
other
plan
itself
tnemeganam
business
ecruoser namuH 2
affecting
Introduction to human resource management
or
of
a
which
have
can
signicant
staff.
SWOT analysis
Companies often use a SWOT analysis as par t of their strategic planning
process (see Chapter 1.3). However, SWOT analyses can also be used for
narrower purposes.
Consider, for example, a company planning on opening a new factory in a
dierent region of their home country. The HR manager must recruit qualied
new employees to work in the factory. They could do a SWOT analysis with a
narrow focus on the strengths, weaknesses, oppor tunities, and threats that
they will face as they look for sta for the new factory.
How would the SWOT analysis of one function, such as recruitment of new
employees to work at the new factory, be dierent compared to a SWOT
analysis for strategic planning purposes?
Changes in work patterns, practices, and
preferences
Since
have
the
changes
For
have
example,
work–life
of
1970s,
occurred
these
factors
in
many
work
stemmed
social
balance,
affecting
from
trends
and
employees.
changes
that
patterns,
Other
external
have
many
led
many
trends
which
employers
and
factors
businesses
social
businesses,
affect
practices,
can
affecting
employees
are
trying
have
and
to
from
the
to
Some
pool
want
respond
stemmed
benet
employees
preferences.
from
some
of
a
of
of
these
labour.
better
to
the
desires
internal
the
new
workpractices.
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2
yduts esaC
Work–life balance and the “right to disconnect ”
In
2000,
from
the
39
the
to
“right
more
to
than
at
work.
to
do
French
35
government
hours.
Then
disconnect”.
50
The
employees
aim
additional
of
the
work
in
reduced
2017,
This
new
from
law
sending
legislation
from
the
home,
was
for
the
statutory
French
prohibited
replying
to
protect
to
emails
workers
they
were
with
when
from
not
week
introduced
companies
or
which
working
government
not
having
being
tnemeganam
ecruoser namuH 2
compensated.
In
2018,
Spain
disconnect.
Belgium,
the
government
right
is
●
jobs in 2020
1
Software developer
2
Sales representative
3
Project manager
4
IT administrator
5
Customer service specialist
6
Digital marketer
7
IT suppor t/help desk
8
Data analyst
9
Financial analyst
10
Graphic designer
of
right
Canada
disconnect.
the
a
to
similar
Even
factors
Privatization
a
the
to
allow
“city
right
to
the
move
that
India,
or
does
working
The
sleep”,
the
federal
adopting
New
York
the
City,
legislation.
environment
from
and
proposed
not
to
Philippines,
Québec,
have
disconnect
away
employees
spreading.
considering
the
changing
and
is
Luxembourg,
are
adopting
right
disconnect
Netherlands,
of
considering
Some
Table 2.1.1 Top 10 sought-after
to
adopted
The
public-sector
include:
to
private-sector
employment.
●
Increased
across
migration
the
●
Increasing
●
Changing
●
Increasing
●
An
aging
of
potential
employees
in
a
country
or
region
and
globe.
participation
educational
females
in
the
workforce.
opportunities.
urbanization
population
of
and
and
the
consequent
increasing
average
rise
in
age
of
stress
the
levels.
workforce.
Changes in work patterns
One
change
businesses,
has
as
been
well
as
in
the
the
patterns
types
of
of
jobs
work
people
–
the
types
of
jobs
required
by
want.
Source: https://www.cnbc.
com/2020/07/02/linkedin-the-
Table
worlds-10-most-in-demand-jobs-
trying
2.1.1
that-dont-need-a-degree.html
fastest-declining
to
shows
ll
in
the
2020,
top
10
jobs
according
occupations
in
to
that
employers
LinkedIn.
the
United
around
Table
States
2.1.2
the
world
shows
(forecast
for
the
were
10
2019–2029).
Table 2.1.2 Ten fastest-declining occupations in the United States, forecast for 2019–2029
Employment in 2019
Employment in 2029
Percentage
(0 0 0s)
(0 0 0s)
change (%)
Occupation
Word processors and typists
52.7
33.5
−36.4
Parking enforcement workers
8.1
5.2
−36.2
Nuclear power reactor operators
5.3
3.4
−35.7
Watch and clock repairers
3.2
2.1
−32.3
Cutters and trimmers, hand
9.8
6.9
−29.9
Telephone operators
5.0
3.6
−27.9
Travel agents
Data entry keyers
82.0
60.8
−25.9
172.4
130.0
−24.6
84
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2.1
Introduction to human resource management
Employment in 2019
Employment in 2029
Percentage
(0 0 0s)
(0 0 0s)
change (%)
Occupation
Electronic equipment installers and
10.4
8.0
−23.2
69.9
54.1
−22.5
repairers, motor vehicles
Switchboard operators, including
One
signicant
improvements
geographical
Today
it
is
change
in
that
has
has
been
happened,
an
especially
increase
in
with
the
occupational
Student workpoint
and
2.1
mobility
fairly
expanding
ICT,
easy
number
to
of
determine
positions
which
and
occupations
which
will
will
experience
experience
a
an
Be reective
contracting
Look
number.
For
example,
email,
electronic
banking
and
online
bill
at
are
reducing
the
need
for
traditional
mail
services.
Letter
other
individuals
in
contracting
professions,
can
easily
work
2.1.1
jobs
and
listed
2.1.2.
in
Do
carriers,
any
or
the
payment
tables
services
tnemeganam
Source: Adapted from https://www.bls.gov/emp/tables/fastest-declining-occupations.htm
ecruoser namuH 2
answering service
out
of
the
results
surprise
which
you?
occupations
those
ICT
to
the
example,
Before
were
of
the
provides
regions
shortages
ICT
processing
in
particular
of
that
vastly
of
data
geographic
information.
European
For
Commission,
between
skills
seek
of
acquire
mobility
have
both
and
and
has
more
common
match
of
necessary
people
people
Kingdom
chefs.
skilled
what
Then,
example,
Skills
data
and
the
than
Many
for
previously.
seeking
with
and
skills
positions
certain
Belgium,
countries
skills.
for
have
professionals.
challenging
regions).
offers
to
United
nurses
matching
(who
is
shortages
the
ICT
more
needed
to
opportunities
that
revolution,
was
then
pandemic,
pharmacists
needed
faster
or
and
occupational
Covid-19
had
shortages
Thus,
also
countries
Prior
exist
growing
positions.
Similarly,
with
are
and
jobs
people
than
skills
ICT
it
to
is
and
what
allows
for
Panorama,
information
available
in
places
today.
a
where
ICT
skills
easier
are
where
different
for
needed
dissemination
website
on
they
allows
run
by
the
mismatches
countries.
Changes in work practices
Not
only
also
have
changed
exible
the
as
types
of
businesses
working
jobs
changed.
have
The
responded
nature
to
of
greater
work
routines
demands
for
has
more
practices.
Work practices in decline
●
Full-time
accepted
●
work
by
law
Permanent
without
a
–
when
(for
employees
example,
contracts
–
predetermined
work
working
when
time
35
the
maximum
hours
employees
a
week
are
hired
less
than
hours
in
for
per
week
Europe).
positions
limit.
Work practices on the increase
●
Part-time
weekly
work
–
maximum
when
employees
work
the
full-time
hours.
85
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2
●
Temporary
of
a
employee
●
tnemeganam
ecruoser namuH 2
have
●
work
ofce,
and
the
–
they
Casual
dress
work
a
Three-day
days,
the
–
Friday
work
weekend
employee
–
it
be
set
who
or
from
to
usually
leave).
nds
The
them
works
for
work.
several
the
of
is
would
from
be
of
hours
from
home.
they
of
to
they
home.
Usually,
have
hours
have
rest
is
away
working,
to
at
say,
days
a
of
to
the
work
at
the
employee’s
number
the
wear
the
of
employee.
less
formal
weekend.
ve
and
an
core
up
allowed
ten-hour
telecommunication
number
home.
would
go
a
core
hours
number
easier
four
a
works
of
ofce;
instead
works
home
remainder
employee
is
agency
have
number
the
an
that
the
a
contract,
maternity
self-employed
from
employee
at
when
so
is
would
would
the
cover
an
employee
core
xed-term
time.
place
involving
Usually,
a
to
to
who
and
an
a
remainder
Fridays
on
ofce,
when
on
up
same
taking
have
to
sign
employee
the
–
the
is
example,
someone
work
have
that
(for
at
the
at
choosing.
hours
●
–
would
Flexi-time
own
●
when
Homeworking
employee
●
–
Usually,
to
work
normally
employers
Teleworking
centre.
–
nature
would
Freelancing
different
●
work
temporary
eight-hour
so
has
a
three-day
weekend.
●
The
for
gig
economy
short-term
Companies like Deliveroo and
exibility
Uber have beneted from the gig
it
economy
time
for
typically
–
where
organizations
commitments.
both
means
Some
employers
workers
employment,
such
and
are
as
receiving
leave
or
independent
laud
employees,
not
sick
hire
people
the
while
most
paid
of
gig
workers
economy
other
the
for
criticize
benets
it
of
its
as
full-
vacation.
yduts esaC
The future of working from home
The
for
impact
years
More
of
to
before.
may
mean
into
The
once
virtual
(and
and
at
the
may
ofces
could
every
meetings
time
most
not
service
who
of
the
for
will
or
If
if
this
days
a
to
week
be
are
(WFH)
from
home,
from
as
situation
is
still
studied
evident.
than
or
home
WFH
and
and
their
the
in
norm
employment
Francisco,
residential
properties
lustre.
This
statement
who
many
San
into
participate
becomes
or
their
those
come
and
unclear),
York,
of
Even
the
only
month
remotely.
such
a
will
practices
home
workers
New
some
cars.
“go
from
commercial
lose
practices
work
working
once
situation
done
repair
in
days.
even
both
be
to
three
London,
employees,
continue
to
time.
may
work
work
always
greater
or
the
like
high,
houses
will
of
will
three
even
writing
jobs
to
weeks
prices
sector
clean
employees
all
two
two
on
changes
from
work
centres
real-estate
workers
become
most
pandemic
some
vary
for
two
extraordinarily
However,
or
WFH
population
where
are
Already,
employees
their
impact
ofce
Covid-19
professional-level
ever
go
the
come.
work
in
is
true
for
restaurants
professional-level
ofce”.
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2.1
Dimon,
which
that
Chairman
bankers
young
will
to
of
only
happen
informal
people
Thus,
peak
are
the
of
not
trend
employees’
stage
practices
the
in
need
when
of
J.P
.
in
Morgan,
the
learn
the
come
not
small
has
bank’s
culture
into
from
of
work.
formal
gatherings
encouraged
ofces.
According
Dimon
also
meetings
that
to
organizations,
occur
argued
but
the
when
home.
not
Hybrid
career
of
they
and
from
may
to
occurs
exchanges
pandemic.
CEO
working
creativity
working
WFH
the
and
to
employees
considerable
kind
return
be
as
powerful
models,
may
all
be
as
it
variations
factors
seems
by
that
now,
industry,
determine
at
the
tnemeganam
Dimon,
young
and
WFH
future.
ecruoser namuH 2
Jamie
Introduction to human resource management
Changes in work preferences
Instead
many
of
lifestyles.
●
working
employees
Common
Career
breaks
usually
a
year
Sometimes
employee
Job
●
free
●
back
share
up
–
–
after
or
–
order
Study
of
an
work
decides
–
this
years
is
for
to
the
routines
routines
this
employees
other
30
work
returning
break
stop
to
working
decide
in
agrees
known
to
same
suit
business,
changing
include:
work
and
to
as
a
for
the
to
a
time,
same
take
career.
the
“sabbatical”.
share
a
job
in
order
to
activities.
employee
to
to
formalizes
more
for
employment
area
before
the
20
their
adapt
employee
more,
time
in
to
employer
two
more
an
for
adapting
methods
or
the
now
Downshifting
or
●
continuously
are
gives
change
up
career
a
senior
into
a
position
different
or
highly
lower-paid
paid
eld
interest.
leave
qualication,
–
an
employee
such
as
an
is
granted
time
off
work
to
acquire
a
new
MBA.
The impact of innovation, ethical considerations,
and cultural dierences
Innovation,
have
an
ethical
impact
on
considerations,
HR
and
cross-cultural
differences
can
also
processes.
Innovation
Innovation
processes.
strategic
from
and
or
A
focus
people.
retains
its
opposite
business
on
The
the
environment
–
HR
than
business
right
a
–
inertia
committed
any
will
people.
vital
part
–
to
can
other
not
be
HR
a
major
innovative
business
a
planning
impact
must
function.
successfully
Developing
of
have
being
innovative
and
–
the
help
HR
a
greater
Innovations
supportive
will
on
have
unless
come
it
stimulating
creative
recruits
business
process.
Google prides itself on being
Ethical considerations
innovative and employing creative
individuals; this approach is
A
strong
connection
has
always
existed
between
HR
planning
and
ethical
reected in its oces
behaviour.
the
way
rightly
HR
that
insist
processes
the
that
are
business
based
treats
businesses
its
on
relationships,
employees.
should
treat
their
which
Today
most
employees
are
reected
in
stakeholders
ethically.
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2
The
internet
network
how
in
they
an
enables
sites,
have
ethical
Ethical
Figure
in
been
manner
issues
people
particular,
that
to
treated.
–
or
might
at
be
send
can
be
As
the
a
and
receive
places
result,
least
to
addressed
where
information.
employees
businesses
create
that
through
the
must
Social
can
be
tell
others
careful
to
act
appearance.
HR
plan
can
be
seen
in
2.1.2.
tnemeganam
ecruoser namuH 2
Performance
appraisal
Salaries and
Right to
financial
privacy
renumeration
Lay-os
Ethical
Health &
and/or
issues in
safety
redundancies
the HR plan
Discrimination
Restructuring
Employment
Figure 2.1.2 Ethical issues in the HR plan
One
example
ethical
sector.
after
Through
the
global
themselves
matched
got
of
how
an
considerations
very
nancial
the
news
nancial
excessive
by
their
angry
improved
involves
and
crisis
salaries
other
that
and
performance.
about
packages
of
this
information
executive
forms
some
other
Many
situation.
executives
at
ow
of
ICT,
a
forms
of
a
result,
several
intersected
in
the
perception
executives
were
in
there
the
with
banking
emerged
awarding
nancial
stakeholders
As
has
compensation
rewards
banking
were
not
sector
changes
in
the
banks.
Cultural differences
Cultural
any
differences
business
would
naturally
countries.
The
that
Many
citizens
of
can
also
employs
include
many
of
migrant
country.
Businesses
have
signicant
businesses
countries
workers
that
a
multicultural
multinational
domestic
children
a
are
grow
adapt
businesses
also
employ
becoming
up
their
effect
as
HR
on
workforce.
operating
migrant
increasingly
citizens
plan
the
Such
to
in
their
suit
a
HR
plan
for
businesses
in
different
workers.
diverse
parents’
more
as
adopted
varied
cultural
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2.1
workforce
especially
In
the
affect
are
if
HR
the
more
their
likely
to
markets
context,
cultural
Figure
be
are
successful
as
2.1.3
expectations
diverse
a
with
as
highlights
of
Introduction to human resource management
a
their
some
business’s
diverse
workforce,
workforce.
of
the
factors
that
might
employees.
tnemeganam
Dress
Individualism
ecruoser namuH 2
Power
distance
Body
Masculinity
language
Cultural
dierences
Personal
Uncer tainty
space
avoidance
Long-term
Humour
orientation
Figure 2.1.3 Cultural dierences in the HR plan
The
concept
indicate
the
extent
to
power
is
not
and
of
a
in
As
the
the
Training
2.1.3.
in
of
from
people
Such
training
most
important
people
to
can
with
to
also
different
in
help
of
a
power
would
low
shows,
score
have
occurs
can
diverse
when
backgrounds
Geert
Hofstede
distance
organization
fact,
not
distance
a
to
refers
accept
problem,
expect
more
from
to
the
that
and
all
are
see
gathered
authority.
opposite.
parts
of
potential
cultural
advantage
a
are
society
expectations.
reduce
from
a
consulted
of
the
different
can
workforce:
people
be
expect
different
take
to
(PDI)
from
accepting
would
emerge
to
index
employees
workforces
businesses
a
a
not
are
people
cultures
that
or
is
Hofstede,
They
diverse
by
Power
fact.
distance
friction
benets
society
Hofstede’s
index
work
and
developed
inequality.
Inequality
this
According
different
Innovation
from
equally.
power
of
particular
accept
from
distance
and
a
countries
misunderstanding
creativity.
in
was
society
decision-making.
from
power
world
by
culture
level
included
Employees
people
scores
Table
high
distance”
distributed
the
example
shown
with
“power
which
members
Some
of
acceptance
of
increased
problem
together
differences.
one
of
the
innovation
and
to
solve
solve
it.
and
When
problems,
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2
the
diversity
novel
of
solution
perspectives
will
be
increases
the
likelihood
that
a
successful
and
found.
Table 2.1.3 PDI scores for selected countries
Country
PDI
Malaysia
Country
100
PDI
tnemeganam
ecruoser namuH 2
Spain
57
Panama
95
Pakistan
55
Saudi Arabia
95
Japan
54
Philippines
94
Italy
50
Mexico
81
Argentina
49
China
80
South Africa
49
Ecuador
78
United States
40
Indonesia
78
Hungary
46
India
77
Netherlands
38
Student workpoint
Singapore
74
Australia
38
Egypt
70
Costa Rica
35
Brazil
69
South Africa
49
2.2
Be an inquirer
Go
to
the
webpage
https://www.hofstede-
insights.com/product/
France
68
Germany
35
Hong Kong
68
United Kingdom
35
Thailand
64
Switzerland
34
compare-countries/,
where
you
countries
of
Hofstede
the
uses.
similar
your
home
and
is
difference
33
31
Uruguay
61
Norway
31
Zambia
60
Ireland
28
What
cultures
countries
Finland
Sweden
six
have
country
63
63
culture
countries
to
Chile
Por tugal
compare
along
dimensions
that
can
in
the
which
Greece
60
New Zealand
22
South Korea
60
Denmark
18
Iran
58
Israel
13
Taiwan
58
Austria
11
cultural
greater?
Source: https://www.hofstede-insights.com/product/compare-countries
Reasons for resistance to change in the workplace
For
is
many
reasons,
typically
internal
change
or
as
external
desirable
protability,
Specic
●
●
not
●
reasons
want
Fear
–
to
–
change
are
often
workers
often
will
change
Whereas
for
the
are
makes
by
employees
often
status
the
of
of
workplace.
changes
managers
health
threatened
and
in
because
in
typically
the
Change
the
view
organization
and
for
change.
may
happy
resist
with
the
change
current
include:
situation
quo.
employees
afraid
simply
because
they
do
happen.
reward
requires
the
resist
managers
necessary)
employees
what
may
by
environments.
maintain
changes
know
them
(or
that
Insufcient
the
on
workers
Discomfort
and
employees
“forced”
–
employees
them
to
do
often
more
perceive
work
that
without
implementing
an
increase
in
compensation.
●
Lack
of
perform
job
in
skills
the
–
employees
changed
work
may
not
have
the
skills
necessary
to
environment.
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2.1
they
of
do
control
not
●
Mistrust
●
Poor
Poor
employees
to
timing
personal
Prior
–
over
–
insist
their
sometimes
change
but
on
change,
employees
feel
that
lives.
do
not
employees
reasons,
in
is
might
may
experience
change
managers
do
trust
not
managers.
know
why
the
business
change.
organization
●
when
control
communication
needs
●
–
–
have
another
–
brought
occur
t
an
at
about
a
poorly
time
with
employee
organization,
the
may
or
for
at
the
needs
of
for
either
professional
that,
needs
have
an
of
had
earlier
the
or
tnemeganam
Loss
employees.
a
bad
time
experience
with
their
with
current
employer.
●
Social
resist
support
change
–
an
may
employee
choose
to
who
resist
works
for
the
with
sake
a
of
group
of
people
maintaining
ecruoser namuH 2
●
Introduction to human resource management
who
social
relationships.
HR strategies to reduce the impact of change and
C oncep t
resistance to it
Good
organizations
do
not
blindly
move
forward
with
change;
they
lead
CHANGE
and
manage
done,
a
employees
change
through
process
helps
its
and
to
a
change
reduce
process.
the
When
resistance
effectively
and
transitions
the
In many ways, human resources
organization
to
new
desired
set
of
circumstances.
management and workforce
planning are about adapting
Organizations
and
managers
can
reduce
the
impact
of
change
through
to change: changes in work
various
steps.
The
rst
is
simply
assessing
the
potential
impact
of
the
patterns, work practices or
change,
assessing
employees’
possible
reactions
to
it,
and
determining
the
work preferences, resistance to
degree
to
which
managers
can
control
the
change
process.
Thereafter,
the
change, strategies to reduce the
management
team
should
take
the
following
steps:
impact of change, etc.
1.
Develop
a
vision
for
the
change
process
and
the
desired
outcomes.
If
Research recent examples of
necessary,
for
the
the
business
may
have
to
realign
its
largest
aims
and
vision
organization.
changes in HR that have had a
positive impact, and others that
have had a negative impact. This
2.
Forecast
3.
Involve
and
allocate
the
necessary
resources
to
implement
the
change.
could also give you ideas for
not
4.
employees
surprised
Regularly
process
is
and
in
so
the
change
they
communicate
unfolding.
do
to
not
all
process
feel
from
outset
so
they
your IA.
are
powerless.
appropriate
Managers
the
should
not
stakeholders
be
afraid
to
how
the
report
change
problems
Bar chart
or
implementation
occurring
when
dips.
they
Pretending
clearly
are
that
will
problems
weaken
in
the
process
employees’
are
condence.
not
On
A bar char t presents data
the
other
hand,
managers
should
report
successes
in
the
change
process
with rectangular-shaped
to
inspire
condence.
bars, plotted ver tically or
5.
Train
employees
which
should
employees
be
in
advance
allow
are
not
them
of
to
properly
those
see
the
trained,
changes
benets
the
that
of
fears
affect
change
of
lack
of
them
directly,
immediately.
competence
If
will
heightened.
horizontally, propor tional
in length to their values.
It compares dierent
categories and is a powerful
way to show data visually,
6.
Routinely
7.
Be
communicate
the
benets
of
the
changes.
as illustrated in the case
aware
of
the
stress
that
change
can
cause
and
support
employees
as
study on the next page.
much
as
possible
before,
during,
and
after
change.
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2
yduts esaC
Managing change
One
of
Towers
that
the
three
Often
resist
major
Watson,
the
out
of
failure
change.
tnemeganam
ecruoser namuH 2
management
challenges
based
four
of
The
on
a
for
change
change
Towers
executive
survey
of
276
management
large
management
initiatives
Watson
is
and
initiatives
blamed
study,
on
however,
is
managing
midsize
change.
organizations
A
major
around
the
study
by
world,
found
fail.
employees,
found
that
who,
most
for
of
many
the
reasons,
problems
frequently
stemmed
from
itself.
Employers felt 55% of change
management initiatives met initial
87%
objectives, but only 25% felt
gains were sustained over time.
68%
55%
87% of respondents trained their
managers to “manage change,”
53%
but only (a dismal) 22% felt the
training was actually eective.
40%
68% of senior managers said
25%
they’re “getting the message”
22%
about reasons for major organi-
zational changes, but that figure
falls to 53% for middle managers
and 40% for front-line supervi-
sors.
Figure 2.1.4 Change management and why it often fails
Revision checklist
TOK links
✓
1.
Is it possible to identify all
Human
resource
employees
are
processes
selected,
are
used
designed
and
and
developed
planned
in
the
to
ensure
that
most
effective
human
resource
way.
the factors, internal and
✓
Both
internal
and
external
factors
can
inuence
external, that inuence
planning.
workforce planning?
2.
precisely predicted, is
3.
✓
There
are
✓
Effective
many
reasons
employees
often
resist
change.
As the future cannot be
workforce planning a
well,
futile task?
the
Are there as many
reasons for resistance to
✓
As
to
organizations
reduces
plan
resistance
to
and
manage
change
and
change,
helps
the
which,
when
organization
done
through
transition.
working
adapt
practices
their
HR
and
patterns
have
changed,
businesses
have
had
strategies.
change in a workplace as
there are employees?
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2.1
Introduction to human resource management
Practice question
the
Premium
Premium
makes
and
Fruit
Fruit
revenue
sources
PFD
is
years
have
located
and
in
city
is
increasing
now
the
of
specialist
high
The
types
head
of
are
pages
398–402.
manufacturing
drinks.
Over
park
out
about
the
has
with
a
schools
last
hopes
human
city
city,
the
PFD
worries
future
technical
resource
easy
can
to
needs
nd.
company
decade,
that
outskirts
many
develop
at
sales
will
appropriate
needs.
of
Kuala
high-tech
universities
PFD
will
the
engineers
new
healthy
employees
to
prefer.
careful
gig
planning
factors
Improvements
employees
example)
work
also
be
in
in
the
were
prefer
IT
home
from
team
labour
PFD’s
from
Working
planning,
can
Lumpur,
in
the
sector
last
and
producing
30
an
an
ever-
be
for
relatively
company
to
manage
drinks.
hard
to
needs
the
low-skilled
two
factory,
Traditionally,
nd
and
had
types
and
both
to
be
of
paid
certain
home
tasks
out
least
also
50%
ts
those
(the
to
that
to
infrastructure
at
(especially
subcontracted
believes
market
of
well
with
can
new
allows
the
small
of
take
specialist
professional-
time,
with
development
independent
PFD
nd
which
exi-time,
children).
new
which
Finally,
drinks,
contractors
for
working
in
economy.
a)
Dene
b)
With
the
term
reference
gig
to
economy.
PFD,
explain
two
roles
of
human
Explain
PFD’s
one
internal
human
and
resource
one
external
planning.
factor
that
[2
marks]
[4
marks]
resource
management.
c)
that
PFD’s
growth
signicantly
growing
and
this
obtaining
resources
grown
However,
industrial
workforce
several
employees
employees
the
6
graduates.
specialized
the
of
employees.
with
of
small
The
modern
of
who
of
Unit
salaries.
advantage
level
lling
employees:
nutritionists
these
a
a
industrial
human
which
see
considerably.
Malaysia.
number
Some
is
fruit
management
and
an
number
of
the
of
growing
workers,
grown
nance
capital
effectively,
(PFD)
low-sugar
though
of
below
Drinks
Drinks
healthy,
continue,
the
question
tnemeganam
answer
ecruoser namuH 2
To
will
inuence
[4
marks]
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2.2 Organi zational structure
By the end of this chap ter, you should be able to:
tnemeganam
ecruoser namuH 2
Explain the following terminology to facilitate understanding of
➔
dierent types of
organizational structures :
●
delegation
●
span of control
●
levels of hierarchy
●
chain of command
●
bureaucracy
●
centralization
●
decentralization
●
delayering
●
matrix structure
Explain and draw the following types of
➔
organization char ts :
●
at/horizontal
●
tall/ver tical
●
by product or by function or by region
Evaluate the appropriateness of dierent organizational structures
➔
given a change in external factors
Evaluate changes in organizational structures
➔
(such as project-based
organization, Handy’s “Shamrock Organization”)
Even
some
Key term
to
a
Organizational char t
depicts the repor ting
relationships within an
the
most
sense
survive.
formal
of
When
plan
a
business,
a
of
start-ups
well
as
the
formally
the
with
and
succeeds
outlining
structure
as
roles,
business
clearly
organizational
of
chaotic
organization,
more
one
responsibilities
and
grows,
structure
represents
reporting
than
(HL only)
lines
of
then
the
the
if
owner
the
it
must
must
between
and
is
develop
organization.
roles
have
business
An
responsibilities
individuals
in
thebusiness.
organization. All levels of the
organization are depicted and
Organizational charts
the char t shows who repor ts
The
most
common
way
to
present
the
structure
of
an
organization
is
to whom down to the least
through
an
organizational
chart
–
a
diagram
that
outlines
the
formal
senior level of employees in
roles,
responsibilities,
and
reporting
lines.
Figure
2.2.1
shows
a
typical
the organization.
organizational
chart
for
a
business.
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2.2
Organizational structure
CEO
Marketing
Finance
HR
Administration
executive
executive
executive
executive
executive
Assistant 1
Assistant 2
Assistant 1
Assistant 2
Assistant
Assistant 2
Assistant 1
Assistant 1
tnemeganam
Production
Assistant 2
Junior
Key terms
ecruoser namuH 2
PA (to CEO)
Figure 2.2.1 An organizational char t for a business
Hierarchy
A
few
terms
help
organizational
to
describe
the
organizational
structure
in
an
a system organizing or
chart:
ranking people according to
power or impor tance
●
Levels
of
hierarchy
responsibility
in
the
are
business.
in
In
–
a
this
term
business.
this
case,
refers
Each
four
to
how
level
levels
many
indicates
range
from
levels
a
level
most
of
of
seniority
senior
Chain of command
(the
the ocial hierarchy in an
“CEO”)
to
the
most
junior
(the
“Junior”
working
in
the
marketing
organization. The chain of
department).
command indicates who
repor ts to which manager and
Each
level
of
hierarchy
indicates
line
managers
–
people
who
have
which manager has authority
the
authority
to
make
decisions
and
who
bear
responsibility
for
the
over specic employees.
outcomes
of
those
decisions.
Span of control
Note
that
levels
of
the
hierarchy
manager
made
Personal
by
–
in
Figure
someone
the
CEO
Assistant
with
without
(PA)
2.2.1.
the
to
This
the
is
employee
authority
the
CEO
to
not
is
included
known
communicate
responsibility
for
that
a
as
a
in
the
staff
repor ting to a specic
decision
decision.
the number of people
manager. A wide span of
Other
control means many people
types
of
staff
managers
could
be
secretarial
and
administrative
staff.
repor ting to the manager; a
●
Chain
of
command
–
this
term
refers
to
the
formal
route
by
which
a
narrow span of control means
decision
must
travel
through
the
organization.
Traditionally,
decisions
a small number of people
travel
often
from
the
referred
top
to
as
of
the
organization
“commands”.
In
downwards
this
case,
if
and
the
are
CEO
therefore
wants
repor ting to the manager.
to
Delegation
communicate
message
the
PA)
will
to
with
pass
the
the
Junior
through
Marketing
in
the
the
marketing
chain:
Executive,
from
to
the
department,
CEO
Assistant
1,
then
(typically
and
the
through
nally
assigning authority or
responsibility over specic
to
tasks from one person, a
theJunior.
manager, to someone lower on
●
Span
of
control
–
this
refers
to
how
many
subordinates
are
directly
the organizational char t. The
under
the
authority
of
a
manager,
for
whom
managers
are
responsible.
manager remains accountable
In
this
case,
assistants
any
staff
the
and
span
the
of
control
Junior
manager
such
are
as
of
not
the
the
CEO
included
PA
would
is
in
not
ve.
the
be
Note
span
that
of
included
the
various
control,
and
for the successful completion
of the delegated tasks.
either.
Bureaucracy
The
following
terms
are
relevant
to
how
an
organization
is
structured
refers to any organization with
(though
not
necessarily
to
an
organizational
chart):
multiple layers of authority.
●
Delegation
authority
outcome
is
more
for
of
–
this
a
occurs
particular
thatdecision.
likely
when
the
when
a
manager
decision,
That
span
but
not
remains
of
control
assigns
the
with
is
to
a
responsibility
the
wide.
manager.
A
Because bureaucracies
subordinate
for
often have complex approval
the
Delegation
manager
who
has
a
processes, decision-making is
typically slower than in small
organizations.
narrow
span
of
control
usually
keeps
a
tighter
control
on
alldecisions.
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2
●
Centralization
–
a
high
degree
of
centralization
indicates
that
all
Key terms
major
decision-making
operating
close
to
the
is
maintained
head
of
the
within
business.
a
small
This
group
type
of
of
managers
organizational
Centralization
structure
is
usually
associated
with
businesses
that
have
many
levels
of
when personnel at the main or
hierarchy
and
narrow
spans
of
control
–
so
that
key
managers
can
keep
central oce of the business
more
effective
control
of
their
subordinates.
Delegation
rarely
happens
have the authority for
in
such
an
organization
and
leadership
is
more
likely
to
be
autocratic.
decision-making. Personnel
tnemeganam
ecruoser namuH 2
●
Decentralization
–
this
is
the
opposite
of
centralization.
In
a
not in the central oce
decentralized
organization,
senior
managers
may
maintain
core
implement the decisions
strategic
decisions,
but
other
decision-making
authority
is
delegated
made by it. Centralization can
to
middle
managers.
This
type
of
organizational
structure
is
usually
also occur at one location,
associated
with
businesses
that
have
fewer
levels
of
hierarchy
and
when senior management
wider
spans
of
control
–
so
that
key
managers
allow
greater
freedoms
retain all key decision-making
to
their
subordinates.
Delegation
is
more
likely
to
happen
in
such
an
functions for themselves and
organization
and
leadership
is
more
likely
to
be
democratic.
delegate little or no decision-
making authority to others.
●
Bureaucracy
serving
in
–
originally
government,
a
term
today
referring
this
term
to
non-elected
means
any
ofcials
administrative
Decentralization
system.
the opposite of centralization;
decision-making authority is
delegated out to oces from
In
business,
and
procedures.
and
procedures
thinking
and
An
the
term
indicates
organization
and
set
ways
delegation
are
of
not
that
the
is
doing
relative
importance
“bureaucratic”
things.
has
Personal
of
rules
many
rules
initiative,
exible
expected.
the main or central oce.
This
type
of
organizational
structure
is
usually
associated
with
Managers in regional or outlying
businesses
that
are
well
established
and
have
been
operating
for
oces have authority for
many
years.
As
such,
they
are
more
likely
to
have
many
levels
of
making many types of tactical
hierarchy.
Typically,
such
organizations
require
paperwork
to
get
tasks
and operational decisions.
accomplished
procedures
Delayering
the process of removing
●
and
have
Delayering
–
have
been
this
is
levels (layers) of hierarchy
levels
in an organization. The aim of
strategy
delayering is usually to improve
and
an organization’s eciency by
to
making it less bureaucratic.
reduce
bureaucracy
middle
managers.
of
hierarchy
is
have
have
usually
been
built
process
associated
many
that
with
of
of
when
years.
reduces
a
to
is
As
that
business
are
such,
is
decision-making
as
the
that
likely.
reduces
This
well
they
Delayering
costs
show
not
management.
businesses
the
checks)
Delegation
hierarchy.
increase
typically
and
occurs
layers
many
levels
and
It
for
(rules
followed.
removing
operating
up
tape”
correctly
a
by
“red
the
business
established
are
more
likely
intended
capability
business
does
to
of
not
Matrix structure
have
to
employ
as
many
levels
of
managers.
typically exist in contexts
●
Matrix
structure
–
a
matrix
structure
combines
two
different
types
where projects and
of
organizational
structures:
typically
organization
by
function
(design,
project completion require
operations,
nance,
marketing,
etc)
with
organization
by
product
or,
involvement from people
more
typically,
by
project.
For
example,
a
team
managed
by
a
product
with dierent exper tise
manager
moves
a
project
forward
by
getting
input
(and
often
approval)
from dierent areas of the
from
individuals
from
functional
areas.
organization (such as HR,
marketing, operations, etc).
In a matrix structure, people
work in teams and repor t to
Matrix
team
organization
effectively
individuals
from
is
have
the
complex
multiple
and
can
bosses
functional
be
ambiguous,
(such
as
the
as
project
people
on
manager
the
and
areas).
these people with dierent
exper tise. Thus, they repor t to
more than one person when
doing their job.
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2.2
Organizational structure
Types of organization char t
Assessment ad vice
Many
are
different
described
types
of
organizational
structure
exist.
The
most
common
With delegation, a manager
below.
passes authority or
responsibility over specic
T
all or ver tical organizational structure
assignments down the
A
tall
organizational
structure
is
the
traditional
organizational
form
of
organization, to someone
business
and
it
is
common
in
well-established
businesses.
It
has
the
lower down the hierarchy,
features:
tnemeganam
following
but the person doing the
●
Many
levels
●
Narrow
●
Centralized
of
hierarchy
delegation is ultimately
responsible for the
spans
of
control
outcome of those delegated
●
Long
●
Autocratic
●
Limited
decision-making
chains
of
ecruoser namuH 2
a
assignments.
command
leadership
delegation
Flat or horizontal organizational structure
A
at
organizational
structure,
or
with
the
and
those
following
has
structure
become
attempting
is
a
modication
popular
to
with
reinvent
of
the
businesses
themselves.
more
set
Flat
up
traditional
since
the
organizations
1960s
have
features:
Senior managers
●
Few
levels
of
●
Wider
●
Decentralized
●
Shorter
●
Democratic
●
Increased
spans
hierarchy
of
control
Middle managers
decision-making
(though
more
diffuse)
chains
of
command
Junior managers
leadership
delegation
Super visors
Organizational structure by hierarchy
Another
way
to
show
an
organizational
structure
is
by
showing
hierarchy.
Workers
Individuals
the
in
at
the
traditional
Figure
top
way
of
have
more
presenting
authority
an
than
those
organizational
below
structure
them.
and
is
This
is
shown
2.2.2.
Figure 2.2.2 Organizational
structure by hierarchy
Organizational structure by function
An
organizational
employees
They
will
do.
then
structure
Employees
be
can
are
organized
be
presented
grouped
by
by
by
function
department
–
(see
indicating
Figure
what
2.2.3).
seniority.
Board of
directors
Production
Marketing
Finance
HR
Administration
Figure 2.2.3 Organizational structure by function
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2
Organizational structure
Board of
directors
by product
Another
an
Current
way
of
presenting
structure
is
by
Technical
what
Fiction
typical
organizational
Educational
the
business
produces.
For
Translations
aairs
manuals
example,
publisher
Figure
2.2.4
organized
shows
a
according
to
Figure 2.2.4 Organizational structure by product
tnemeganam
ecruoser namuH 2
the
types
of
books
it
produces.
Organizational structure
by region
Head oce
(Germany)
A
further
typical
presenting
structure
the
Asia
Americas
Europe
Africa
is
an
way
according
business
of
organizational
to
operations
where
are.
Figure
Oceania
2.2.5
Figure 2.2.5 Organizational structure by region
for
a
shows
an
example
multinational
structure
corporation.
Infographics
Infographics can show statistical information in a way that is eye-catching and conveys key ideas visually.
Bank of America is the second largest bank in the United States and has employees in many par ts of the world. What
kinds of conclusions can you draw about Bank of America’s workforce from the infographic below?
GLOBAL AND REGIONAL WORKFORCE
7,866
172,285
EUROPE, MIDDLE
NORTH AMERICA
EAST AND AFRICA
900
LATIN
27,080
AMERICA
ASIA PACIFIC
GLOBAL WORKFORCE BY GENDER
U.S. WORKFORCE BY GENDER
204,489
171,651
82.5% OF GLOBAL WORKFORCE
MEN
WOMEN
Total global workforce
104,023 (50%)
104,108 (50%)
Global management team
MEN
54%
WOMEN
46%
Total U.S. workforce by gender
Board of directors
65%
35%
47%
53%
DIVERSE RACES AND ETHNIC BACKGROUNDS
47%
U.S. WORKFORCE
18%
BOARD OF DIRECTORS
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2.2
Organizational structure
Changes in organizational structures (HL only)
Key terms
As
well
some
as
the
standard
businesses
changes
in
the
have
types
of
organizational
attempted
business
to
adapt
environment.
their
Two
structure
described
structure
examples
of
to
take
this
above,
account
of
Project-based organization
are:
an organizational form,
●
Project-based
●
Shamrock
often similar to a matrix
organization
structure, that organizes
organization
tnemeganam
project-based organizations
Project-based organization
create temporary systems for
Project-based
organization
is
designed
to
be
more
exible
and
responsive
to
carrying out dierent projects.
market
run
demands.
teams
of
completed,
Project-based
employees
the
team
is
organizations
focusing
split
up
on
and
have
individual
project
projects.
reassembled
to
managers
After
begin
the
another
who
project
is
Shamrock organization
ecruoser namuH 2
work into projects. Thus,
project.
An organizational structure
Typically,
with
many
each
project.
other
Each
complete
operate
because
team
the
marketing
teams
each
such
as
once,
team
“borrows”
project,
at
is
but
they
focused
members
of
accountants,
do
on
not
need
to
completing
different
its
managers
resources expert Charles
own
departments
operations
based upon the work of human-
interact
Handy, who modelled the
to
structure on the shamrock (a
and
clover-like plant). A shamrock
specialists.
organization has three types
This
type
of
business
structure
is
common
in
construction
and
IT,
where
of employees: the full-time
businesses
are
often
under
contract
to
run
a
number
of
different
projects
professional core, a exible
at
the
same
time.
It
is
also
known
as
a
matrix
structure
as
often
the
labour force, and a contractual
organizational
teams
are
shown
as
a
matrix
(see
Table
2.2.1).
(outsourced) group.
Table 2.2.1 Matrix of organizational teams
Operations
Finance
Marketing
HR
Administration
management
Project 1 manager
4 employees
2 employees
1 employee
1 employee
1 employee
Project 2 manager
3 employees
2 employees
2 employees
2 employees
1 employee
Project 3 manager
3 employees
2 employees
1 employee
1 employee
1 employee
Shamrock organizations
This
type
of
organization
management
can
be
more
theorist
exible
is
based
Charles
by
on
a
Handy.
taking
model
Handy
advantage
of
suggested
argued
the
by
that
changes
the
Irish
businesses
in
the
external
Core
environment
national
has
and
symbol
three
leaves
its
of
impact
Ireland
on
each
–
on
workforce
the
shamrock
planning.
–
which
His
is
a
idea
type
uses
of
the
clover
that
stem.
Temporary
The
model
advantage
retain
●
●
and
only
delivery
are
suggests
of
a
a
increase
outsourced
rst
and
employees
leaf
The
second
third
response
of
leaf
are
the
core,
All
shamrock
Handy
consists
and
time
possible
essential
to
of
a
reduce
by
is
the
trimming
gain
their
with
supporting,
workforce
the
to
creation
non-central
or
functions
the
core
managers,
technicians
business.
the
Figure 2.2.6 The shamrock model
“contractual
to
exible
Contractual
competitive
periphery:
represents
out
costs,
concerned
other
to
the
calls
seasonal
can
which
service.
subcontracted
leaf
temporary,
or
wherever
The
The
businesses
multiskilled
product
activities
●
that
specialist
fringe”,
because
non-core
businesses.
workforce
made
up
of
part-time,
workers.
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2
Appropriateness of different organizational structures
Student workpoint
No
2.3
Be a thinker
Consider
of
the
organization
discussed
tnemeganam
ecruoser namuH 2
In
various
what
in
structures
this
ways
types
chapter.
the
does
“correct”
organizations
in
the
business.
depending
on
of
organizational
formed
the
Large
Manufacturing
way
as
that
chains
rms
the
or
are
of
they
of
structure
grow,
think
grocery
often
nature
they
will
stores
organized
their
exists.
executives
maximize
are
by
When
structure
often
the
their
objectives
organized
function
or
by
by
of
region.
product,
markets.
each
objectives
change
or
external
conditions
change,
executives
often
organizational
rethink
structures
affect
employees?
In
have
organized
their
business
and
they
restructure.
what
rms
periodically
delayer
in
order
to
make
the
Many
business
ways
ie
less
bureaucratic
and
more
responsive
to
market
pressures.
organizational
Many
structure
they
bureaucratic
leaner,
each
how
individual
large
does
form
are
As
of
one
organizations
potentially
employees’
high-tech
start-ups
often
have
at
organizational
structures
and,
affect
as
they
to
add
grow,
management
sees
the
need
to
bring
more
order
and
starts
work–life
levels
of
hierarchy.
Thus,
when
thinking
about
organizational
balance?
structure
are
the
the
question
consequences
organizational
is
not
“What
(advantages
structure
that
is
is
the
and
best
structure?”
disadvantages)
of
but
any
rather
“What
potential
selected?”
TOK links
1.
How useful are the images
Revision checklist
and metaphors used to
✓
Delegation
occurs
decision
someone
when
a
manager
gives
authority
for
a
particular
talk about organizational
to
else.
The
manager
still
has
responsibility
for
the
structure (for example:
outcome
of
that
decision.
chains, layers, ver tical,
horizontal, matrix,
✓
shamrock)?
2.
Why can organizational
The
span
of
authority
✓
A
level
✓
The
of
control
of
a
is
how
particular
hierarchy
is
a
many
employees
are
directly
under
the
manager.
level
of
responsibility
within
a
business.
char ts be misleading?
3.
chain
of
command
is
the
formal
route
through
which
a
decision
How are our values
must
travel.
Usually,
decisions
are
made
at
the
highest
level
and
are
reected in the
communicated
down.
language we use to
✓
Bureaucracy
refers
✓
Centralization
to
rules
and
procedures
within
an
majority
decisions
organization.
describe the structure
of organizations (for
example: bureaucracy,
small
centralization,
group
occurs
of
Decentralization
delayering)?
managers.
strategic
✓
Delayering
A
at
have
✓
A
wide
or
by
to
needs
where
and
a
of
position
decisions
is
likely
business
structure
control.
many
be
to
are
are
within
made
retain
made
the
by
by
a
business.
middle
control
of
key
reduces
the
levels
of
hierarchy
by
has
levels
of
autocratic
structures
few
levels
of
Decision-making
can
hierarchy
and
be
hierarchy
is
and
narrow
decision-making
organized
by
and
tends
to
decentralized.
is
spans
of
control.
centralized.
hierarchy,
by
function,
by
region.
organizational
project-based
to
senior
management.
of
has
tends
Organizational
Some
when
of
span
structure
product
✓
occurs
layers
Leadership
✓
found
a
management
organizational
a
tall
is
Senior
the
in
decisions.
removing
✓
when
individuals
structures,
organization,
are
circumstances.
like
Handy’s
dynamic
(HL
and
shamrock
change
model
rapidly
and
according
only)
100
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2.2
Organizational structure
Practice question
To
answer
ABC
the
question
below
effectively,
see
Unit
6
pages
398–402.
plc
CEO
EVP
Manager
Employee
Manager
Employee
tnemeganam
EVP
Employee
Manager
Employee
Employee
ecruoser namuH 2
COO
Manager
Employee
Employee
Employee
Char t 1 Current organizational char t for ABC plc
ABC
to
plc
has
a)
Dene
b)
Explain
c)
Draw
of
d)
decided
that
the
company
is
too
bureaucratic
and
needs
delayer.
a
the
term
what
new
delegation.
type
of
organizational
organizational
chart
for
chart
ABC
is
shown
plc
after
in
a
Chart
reference
delayering.
to
ABC
plc,
explain
two
advantages
marks]
[2
marks]
[2
marks]
[4
marks]
process
delayering.
With
1.
[2
of
101
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2
2.3 Leadership and management
By the end of this chap ter, you should be able to:
tnemeganam
ecruoser namuH 2
Explain the dierence between
➔
scientic and intuiti ve thinking/
management (HL only)
➔
Explain the dierence between
➔
Discuss the following
management and leadership
leadership styles :
●
autocratic
●
laissez-faire
●
paternalistic
●
situational
●
democratic
Introduction to management
Management
making
not
the
people
Key terms
sure
people
with
company
For
is
is
made
tasks,
a
up
of
whether
who
do
special
the
set
the
people
large
work
of
or
of
in
small,
the
organizations
are
organizations.
responsibilities
charged
accomplished.
who
are
they
are
Rather,
ensure
that
with
They
the
work
the
of
the
performed.
example,
in
a
television
manufacturing
company,
those
in
management
Management
roles
are
not
have
some
actually
making
the
televisions
on
the
shop
oor.
Rather,
they
the ongoing process of
supervisory
role
to
make
sure
televisions
are
made
according
to
planning, decision-making,
company
standards.
organizing, leading, motivating
and controlling the nancial,
human, physical, and
information resources of a
business or organization,
with the aim of eciently and
Management
and
the
(HR,
covers
various
accounting
Other
ofce
levels
of
a
range
people
and
in
nance,
management
supervisors.
of
To
levels.
charge
some
of
Top
each
marketing,
exist,
all
degree,
the
even
management
of
the
and
includes
business
operations
way
they
major
down
are
to
part
CEO
management).
the
of
the
functions
oor
or
the
management.
eectively reaching the goals
In
Administration
Industrielle
et
Générale
(1916),
Henri
Fayol
outlined
ve
of the business or organization
major
at
a
functions
large
of
French
management
coal
based
upon
his
experiences
as
a
manager
mine:
Leadership
●
Planning
–
managers
must
plan.
They
must
set
strategic
objectives,
a process of motivating a
tactical
objectives,
and
even
operational
objectives,
all
of
which
have
group or team of people to
implications
throughout
the
organization.
work towards the goals of
a business or organization.
●
Organizing
–
managers
must
then
make
sure
that
the
business
has
Unlike management, which is
sufcient
resources
to
achieve
its
objectives.
This
process
requires
generally considered a science,
careful
organization,
as
too
many
resources
tie
up
too
much
capital;
too
much of leadership is an “art”:
few
mean
that
the
organization’s
objectives
cannot
be
met.
an intangible ability to inspire,
●
Commanding
–
managers
must
make
sure
that
all
individuals
know
lead, coerce, or charm through
which
duties
they
are
to
perform.
If
necessary,
managers
must
also
charisma and other aective
make
sure
that
employees
receive
instruction
in
how
they
are
to
and intellectual qualities.
perform
their
tasks.
102
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2.3
are
going
on,
businesses.
each
activity
situation
quality
power
Fayol
to
so
to
to
is
–
done
when
or
together
business,
contributing
and
can
be
functions
it
They
They
the
these
where
control.
reduce
these
of
coordinate
objectives.
processes
bring
types
activity
must
managers
that
must
many
each
achieve
that
any
In
with
expand
argued
applied
managers
Managers
Controlling
●
–
objectives.
is
changed
scale
were
of
to
the
power
to
output
operations
universal
and
to
activities
the
sure
that
be.
over
test
as
of
making
to
necessary.
resources
different
activities,
power
if
various
supposed
have
have
the
various
a
given
(or
They
“control
also
conditions
could
for”)
have
tnemeganam
achieve
require.
therefore
be
organization.
ecruoser namuH 2
Coordinating
●
Leadership and management
yduts esaC
Charles Clinton Spaulding (1874–1952)
When
scholars
management,
Henri
Fayol
Industrielle
write
they
about
(1841–1925),
et
Générale
groundbreaking
the
usually
history
include
whose
(1916)
is
“The
of
the
the
Administration
considered
Administration
article,
Frenchman
Spaulding
same
available
a
was
work.
a
concepts
in
Another
name
should
get
some
attention
living
Clinton
in
people
North
faced
segregation,
the
largest
States,
the
Company,
Spaulding.
Carolina
terrible
at
built
Black-owned
North
and
was
ran
in
Mutual
for
over
Probably
Black
was
Life
page
United
was
an
important
funeral
half
of
could
One
service
the
way
and
20th
afford
the
cultural
practice
“homegoing”:
burial
century,
these
to
is
ceremony.
few
elaborate
surmount
this
African
a
insurance,
which
In
were
willing
to
the
was
of
to
low-income
do.
To
rst
North
opportunity
Carolina
with
Mutual
offered
Insurance
what
1927,
in
two
Spaulding
of
wrote
the
a
short
Pittsburg
lled
African
had
limited
Whites.
reason,
brief
should.
yet
he
and
and
compared
ideas
He
to
rarely
able
to
Spaulding
his
two-piece
Fayol’s
get
encountered
culturally,
was
because
because
150-
mentioned,
many
economically
formulate
and
pioneering
management
as
a
science.
degree
does
people
even
prejudice
from
still
starting
prevent
and
growing
today?
what
degree
by
article,
still
do
academic
exclude
and
practical
improbable
voices
business
such
as
this
Clinton
Spaulding?
the
How
Company.
Courier,
the
probably
not
Courier
buy
do
the
concepts
sustainability
of
creativity,
illuminate
the
change,
story
of
ethics
Charles
published
Clinton
editions
among
socially,
businesses
life.
and
In
Pittsburg
African
Spaulding
policies
Life
this
marginalized
Charles
market
any,
Spaulding’s
about
literature
Americans
of
was
among
Americans
celebrations
obstacle
many
this
formal
To
life
work
The
serving
and
American,
they
obstacles,
years.
ideas
African-Americans
1949.
newspaper
rather
book,
though
Insurance
for
politically,
Traditionally,
if
African
article
then
the
50
until
whose
In
many
too:
complete
what
Business”.
articulated
American
when
business
Carolina
he
African
time
hostility
Spaulding
which
An
a
Big
Fayol,
community
readership,
Charles
as
English
weekly
American
of
actually
Spaulding?
entitled
The dierence between scientic and intuitive
thinking/management (HL only)
Managers
ways.
and
One
deliberative
and
others
time
of
they
can
approach
categorization
thinking
who
combination
the
leaders
simple
follow
both
make
processes ,
their
responsibilities
managers
also
intuition.
approaches
their
their
divides
known
In
according
as
reality,
to
into
the
in
several
those
“scientic
most
who
managers
specic
use
thinking”,
use
a
circumstances
at
decisions.
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2
Sometimes
a
certain
scientic
choose
what
an
evidence
way.
suggests
Following
management.
to
disregard
their
it.
the
At
that
other
The
a
manager
evidence
times,
manager
“gut”
tells
them.
unsystematic
way
all
In
the
in
this
is
this
managers
acting
latter
evidence
should
way
on
case,
that
will
a
the
they
make
would
a
be
see
form
of
evidence
feeling:
a
and
“hunch”,
manager
are
decision
a
is
or
broadening
in
considering.
Management versus leadership
tnemeganam
ecruoser namuH 2
A
manager
is
monitoring
effect.
Many
is
A
responsible
the
manager
would
focused
leading
instruct
●
help
●
generally,
bear
and
(by
have
generally
a
have
to
like
by
to
a
to
deal
leader’s
inspire
of
time
motivate
●
often
rely
choosing
●
have
●
often
and
on
the
role
vision
is
Aliko Dangote, founder of The
a
Dangote Group
about
have
totally
safe
and
the
systemic
of
a
put
group,
into
in
a
timely
(that
manner
is,
a
manager
rather
than
on
managers:
problems
and
and
their
bring
giving
position
that
technical
precise
in
the
expertise
to
instructions)
organization
function
(and
therefore
tend
more
emotional,
follow
them
building
since
a
great
voluntarily.
relationships
A
leader
leader
and
is
will
have
spends
therefore
Leaders:
their
even
in
personal
the
face
qualities
of
evidence
that
they
are
option
others
vision
different
is
complexity.
organization
to
with
instincts
–
of
energy
inspire
less
work
plan
organization).
relationship-orientated.
●
the
the
task-orientated
expertise
the
people
and
is
that
people
virtue
the
with
schedules
make
overseeing
accomplished,
resolve
strict
and
ensuring
accomplished
tasks
to
and
deals
technical
challenge
ability
planning
manager
coordinate
authority
contrast,
great
get
setting
●
the
To
a
tasks
subordinates
●
In
that
getting
people).
for
progress,
therefore
argue
on
●
not
group’s
follow
that
the
them
because
organization
way,
and
can
inspire
the
change
and
innovation.
of
that
should
vision
be
doing
condence
things
needed
to
in
bring
yduts esaC
The Dangote Group
The
Dangote
when
loan
Aliko
from
sugar
and
began
Group
Group
was
Dangote,
his
uncle,
began
consumer
trading
has
other
the
a
goods.
in
help
decades.
the
of
business
Over
the
late
1970s
the
traded
business
business
that
over
trade
commodities,
but
it
is
also
and
has
interests
in
the
salt,
seasoning,
pasta,
cement,
beverages
in
The
Dangote
natural
Group
gas,
steel,
also
and
has
has
its
and
training
rewards
grown
30,000.
leadership,
One
its
one
found
organizational
development
schemes
from
study
have
programme,
all
improved
performance.
Dangote
Africa
and
in
has
part
built
one
because
of
of
the
his
largest
businesses
company’s
effective
sugar,
resources
management.
Today,
Mr
Dangote
real
investments
also
a
major
philanthropist
with
a
special
in
concern
fertilizer,
over
textile
is
estate.
to
company’s
nancial
human
our,
employees
continues
engaged
in
manufacturing
of
Dangote)
employee
Mr
to
number
culture,
and
Dangote
growth
The
(Aliko
$3,000
that
The
considerable
Today,
a
time,
commodities.
experienced
subsequent
founded
with
in
the
area
of
public
health.
telecommunications.
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2.3
Leadership and management
Leadership styles
Key terms
Leadership
styles
can
be
categorized
as
follows.
Autocratic leadership
Autocratic
occurs when the leader
as
minimally)
be
they
with
obeyed,
and
hold
on
possibly
to
as
can.
employees
employees
much
They
when
should
power
tend
and
not
making
a
welcome
to
decision-making
consult
decision.
the
(or
only
Their
structured
concentrates all or most
consult
orders
decision-making in their own
should
environment.
hands. Autocratic leaders
typically do not seek input
from others and are condent
This
style
of
leadership
is
most
likely
to
be
used
when
subordinates
are
in their own decision-making.
unskilled,
in
an
not
trusted,
organization
and
that
their
focuses
ideas
on
are
not
results
valued.
and
has
to
It
is
also
make
more
urgent
likely
decisions
tnemeganam
authority
leaders
Paternalistic leadership
that
depend
highly
on
the
manager.
Many
in
the
military
rely
on
ecruoser namuH 2
Autocratic
an
occurs when the head of an
autocratic
style,
which
is
often
accompanied
In
some
situations,
by
very
detailed
instructions
organization treats employees
and
close
supervision.
subordinates
may
expect,
and
like they are par t of their
like,
to
be
told
what
to
do.
family. A paternalistic leader is
Autocratic
leadership
will
probably
be
unsuccessful
when
employees
typically warm and protective
have
the
opposite
characteristics
to
those
just
described.
Highly
skilled
of employees but also expects
individuals
who
have
experienced
democratic
systems
and
who
like
to
do
loyalty and obedience.
things
A
their
benet
decisions
to
be
of
And
be
not
in
leadership
quickly.
any
to
is
that
What
come
to
tolerate
an
lines
the
of
leader
depend
autocratic
on
authority
manager.
are
clear,
communicates
the
guidance
is
but
and
what
also
is
to
precisely.
aspect
develop
rarely,
unlikely
Employees
negative
to
are
made
instructions
major
tend
way
autocratic
can
followed.
execute
The
own
the
of
an
ability
business,
autocratic
to
can
manage
the
leadership
on
leader
their
make
style
own
all
or
the
is
that
to
employees
make
decisions.
decisions.
Paternalistic
Paternalistic
in
that
the
autocratic
as
leadership
leader
leaders,
“family”
–
a
“Paternalistic”
heart
the
of
the
Paternalistic
of
loyalty
leadership,
become
A
successful.
because
The
stand
even
they
in
features
the
style.
with
authority
paternalistic
family,
from
are
like
by
certainly,
Latin
over
leader
but
word
a
for
Paternalistic
will
the
do
of
parents.
them.
trust
come
As
a
from
probably
committed
They
they
a
employees
blind
aspect
pride
some
autocratic
leadership
employees.
views
family
all
“father”,
leaders
the
Unlike
employees
the
same.
which
have
great
is
at
the
concern
for
employees.
totally
positive
great
gurative
leaders
will
and
however,
derives
safety.
business
shares
considerable
paternalistic
business’s
sense
has
to
it,
not
want
at
let
the
leader,
do
the
If
no
is
the
that
whatever
is
leader
leaders
for
a
long
necessary
the
this
the
get
total
style
time
of
and
aims.
employees
of
a
what,
often
like
leader’s
“ownership”
with
matter
employees
business
and
leadership
and
employees
that,
paternalistic
employees.
(gurative)
to
provide
believe
result,
the
paternalistic
some
to
remain
organization
take
They
take
to
make
business,
it
in
part
down.
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2
However,
may
paternalistic
mean
that
evaluating
across
as
they
employees’
having
knowing
that
advantage
of
leaders
do
not
they
a
great
fully
performance.
favourites
the
place
have
are
or
part
leader
Thus,
favouring
of
and
a
leader’s
on
loyalty,
critical
paternalistic
certain
“family”,
the
importance
objective,
eye
leaders
employees.
employees
loyalty
to
may
In
at
which
when
may
come
addition,
times
take
them.
Democratic
tnemeganam
ecruoser namuH 2
The
democratic
them
a
about
spectrum.
democratic
Truly
At
type
employees in the decision-making
However,
process
responsible
of
process
and
honours
as
Democratic leadership
a
of
a
the
is
leadership
is
is
one
process,
impact
The
consults
team,
the
most
the
most
also
when
leader
any
leader
the
like
the
can
is
will
being
more
as
common
regularly.
have
the
nal
say.
among
“democracy”
involved
decisions
produce
a
the
ultimately
style
word
across
practical.
organization,
employees
popular
informs
occur
facilitates
and
Thus,
leader
and
can
who
possible
or
the
people
They
especially
democratic
is
decisions.
because
the
for
as
leadership
leader,
business
make
who
connotations.
decision-making
much
in
to
probably
because
as
and
of
decision-making
democratic
rare
matter
decisions
possibly
them.
is
it
in
Democratic
truly
leader
leader
practical
emotional
on
the
leadership
role
for
Democratic
positive
employees
them.
is
democratic
employees,
affect
end
one
Democratic leadership involves
involves
that
one
democratic
ultimately
Key terms
leader
issues
have
results
in
a
has
the
major
since
many
occurs when the leader
employees
like
the
trust,
cooperation,
and
sense
of
belonging
that
go
with
regularly seeks input from
it.
Employees
feel
as
though
they
have
a
voice.
employees and involves them
in decision-making
The
be
democratic
most
leadership
effective
when
style
used
may
with
not
always
skilled,
work
out.
free-thinking,
It
and
is
likely
to
experienced
Laissez-faire leadership
subordinates
who
enjoy
the
relationships
and
chaos
that
can
result
from
occurs when the leader of an
belonging
to
a
highly
effective
team.
However,
the
democratic
process
organization gives employees
may
slow
down
decision-making
and
may
prove
too
costly.
The
style
also
considerable freedom to make
requires
a
positive
“chemistry”
in
the
team.
If
this
characteristic
is
absent,
decisions on their own
no
amount
of
democracy
can
make
the
style
work.
Laissez-faire
Laissez-faire
gives
Employees
problems
This
to
their
to
who
are
other
be
it
set
they
job
be
laissez-faire,
and
benet
of
where
a
and
as
can
and
of
the
In
freedom
goals,
this
in
leadership
how
make
their
be
appropriate
are
motivated,
university
experts
individual
when
foster
the
in
they
do
own
can
style
when
style,
their
the
manager
work.
decisions,
eld,
practitioners
with
work
is
and
resolve
employees
organization
may
be
trusted
Universities
and
professors,
told
what
being
demand
considerable
based
on
diverge
away
too
enjoy
from
its
to
do.
In
freedom.
the
own.
the
However,
far
from
around
their
employees
innovations.
veer
can
educated.
resist
culture
many
and
can
a
and
researchers
successfully
that
creativity
employees
skilled,
lecturers,
their
working
people
laissez-faire
it
interests
organization,
may
they
world
appropriate
provides,
individual
style
too,
own
alone”.
t.
because
professions
may
leave
their
see
generally
individual
The
can
as
“to
considerable
management
do
tend
It
means
employees
the
vision
freedom
the
focus
and
of
the
aims.
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2.3
an
employee’s
unnerving,
not
as
provide
give
and
this
much
comfort
to
style
results
and
can
be
of
feedback.
laissez-faire
does
Precise
In
employees
not
a
leadership
much
not
and
laissez-faire
instances
are
give
instructions
whereas
employees.
the
a
leader
employees,
disciplined
faire
perspective,
type
where
a
disposed
a
be
may
and
watchful
style
leader
to
style
guidance
eye
requires
adopts
a
successful
be
may
can
condent
laissez-
under
it,
the
disastrous.
Key term
Situational
leadership
rests
on
the
notion
that
different
situations
require
Situational leadership
different
deemed
styles
“the
unskilled
which
of
leadership.
best”.
workers
leadership
circumstances
Sometimes,
versus
style
will
Thus,
the
highly
ts
the
determine
no
one
nature
trained
most
of
of
the
leadership
employees
professionals)
situation.
the
style
At
other
will
times,
appropriate
would
(for
ever
be
example,
determine
the
nature
of
Situational leadership
tnemeganam
Situational
ecruoser namuH 2
From
Leadership and management
occurs when leaders in an
the
style.
organization adapt their
leadership style to (1) the
nature of the situation, task ,
In
emergency
situations,
even
highly
democratic
leaders
will
often
become
or work and (2) the ability and
autocratic
in
order
to
efciently
through
lead
the
employees
and
the
organization
quickly
and
expectations of the people in
the
emergency.
Sometimes,
in
situations
where
the
the organization
outcome
as
a
of
whole
may
allow
the
but
decision
may
is
not
inuence
democracy
and
let
altogether
employee
the
consequential
morale,
employees
even
for
the
organization
autocratic
leaders
decide.
Assessment ad vice
The
benet
of
situational
circumstances
at
hand.
leadership
However,
a
is
that
leader
leaders
may
match
too
their
frequently
style
to
change
the
styles
Do not assume that one type
or
may
change
styles
when
the
circumstances
of
the
situation
determining
of leadership is “good” or
the
switch
the
leader
are
not
clear
to
employees.
In
either
of
these
scenarios,
necessarily preferred over
may
come
across
as
unpredictable
or
arbitrary,
which
may
another type of leadership.
demotivate
employees.
Each of the leadership
In
summary,
the
style
of
leadership
is
likely
to
be
inuenced
styles have advantages
by:
and disadvantages and you
●
the
subordinates
(subordinates’
skills,
age,
education,
expectations,
should know what these are.
and
motivation)
●
the
decision
(whether
●
the
leader
●
the
environment
(the
urgent,
leader’s
important,
character,
values,
or
consequential)
experience,
and
expectations)
Student workpoint
2.4
democratic,
or
(whether
creative,
standardized,
repressive,
compliant).
Be reective
Draw
Ethical considerations and cultural dierences
the
a
table
showing
advantages
disadvantages
Ethical
considerations
and
cultural
differences
may
inuence
management
styles
in
an
the
leadership
veleadership
and
and
of
styles
organization.
discussed
here.
Ethical considerations
Ethical
styles,
focus
considerations
though
on
in
“doing
managers
tend
can
inuence
somewhat
the
to
right
do
the
both
different
thing”
right
with
thing
leadership
ways.
Leaders,
respect
with
to
styles
as
their
respect
to
and
management
opposed
people,
to
managers,
whereas
theirorganizations.
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2
Leaders and ethical considerations
Leaders
are
focused
relationships
leaders
They
have
must
Leaders
tnemeganam
ecruoser namuH 2
them
leader
is
of
are
do
is
was
to
might
or
it
the
but,
risk
ethical
employee
–
error
The
a
for
In
lives
their
when
of
the
to
objectives,
“their
if
people”.
require.
military,
protect
for
the
necessary,
employees
second
a
manager
judgment,
leader
any
about
by
lives
to
of
take
the
protecting
criticism.
might
chance.
responsibility
arguably,
building
these
circumstances
willing,
serving
on
care
ends.
own
are
intervene
an
they
when
their
leaders
focus
accomplish
that
care
unwarranted
made
risk
that
means
example,
who
say
they
To
not
future
on
argue
In
only
errors
of
to
the
the
the
the
thing
leader
employee’s
judgment
a
that
right
instance,
the
sack
grounds
that
this
for
wants
the
error
employee
make.
Another
example
objectives
(typically
ethical
leader
for
personal
judgment
business,
if
result,
towards
who
inexperienced.
give
a
In
excessive
might,
taking
those
a
merely
demonstrate
outcomes
employee
As
employees.
than
organizations
bad
employee
people.
inspiring
more
actually
from
young
to
do
leaders
for
on
on
subordinates.
blame
A
to
guide
example,
their
and
for
the
because
behaviour
is
of
not
a
ethical
considerations
organization,
ethical
to
even
objectives
leadership
leader
at
have
that
is
when
a
many
when
some
a
leader
adopts
stakeholders
nancial
would
cost).
argue
So
that
ethical
object
central
an
is
unethical
all.
Managers and ethical considerations
On
the
are
criticized
own
issue
of
positions
criticism
of
Managers,
in
supervising
the
the
of
In
if
summary,
When
people
managers,
They
are,
that
in
in
they
the
see
who
to
too
in
leaders
hasty
fair
above.
sacking
and
leaders,
these
really
unethically,
roles
putting
their
has
ethical
made
thing
to
which
in
criticized.
for
putting
Most
of
do
sacking
obligations
For
the
They
their
time,
major
is
to
an
If,
an
to
protect
this
are
on
they
their
are
own
or
are
by
whether
ahead
is
of
to
money.
not
giving
deserves
from
not
the
criticism,
focusing
on
career.
ethical
on
they
managing
interests
or
centred
centred
the
employee
manager
are
to
manager
judgment
business
own
inuenced
unethically,
people
the
in
the
the
employee
considerations
leading
sack
the
perspective,
themselves
employee,
rather
error
this
cost
consideration,
more
example,
From
could
considerations
their
a
business.
managers
behave
not
often
and
employees.
employees.
but
ethical
ethical
are
their
the
right
and
are
followers”,
unfair.
the
organization
managers,
of
judgment,
is
hasty
With
to
liability
process
their
most
with
leaders,
than
mentioned
too
of
considerations.
whereas
a
manager
criticism
are
to
errors
due
ahead
managers
“rule
somewhat
employee
as
believes
a
interests
is
business
further
managers
rewards
young
individual
type
the
a
considerations,
bureaucratic
contrast
employee
However,
the
and
or
manager
prevent
being
managers
organization
sees
ethical
as
an
on
the
are
people,
organization.
leaders
or
organization.
others.
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2.3
Leadership and management
Cultural differences
TOK links
Cultural
most
over
differences
famous
his
treatment
business
dimensions
business
can
and
theory.
have
six
also
of
inuence
this
concept
academic
According
leadership
career
to
is
the
work
developed
Hofstede,
and
management.
of
Geert
and
cultural
The
Hofstede,
rened
his
inuences
who
1.
relevant
To what degree is it
misleading to claim that a
cultural
manager and a leader are
to
dierent? How helpful is
dimensions:
distance
●
Individualism
●
Masculinity
●
Long-term
2.
Is the dierence
orientation
between scientic
Uncertainty
●
avoidance
Indulgence
●
management and intuitive
management the same
Different
cultures
value
individualism
(Anglo-American
cultures),
for
tnemeganam
Power
as the dierence between
example,
whereas
others
(such
as
the
Japanese
culture)
value
ecruoser namuH 2
this terminology?
●
group
natural sciences and
cohesion.
The
style
of
leadership
or
management
that
an
individual
adopts
human sciences?
will
also
be
inuenced
be
inuenced
by
by
the
culture
the
from
cultures
of
which
the
they
people
originate,
they
lead
or
and
should
manage.
3.
Is being knowledgeable
an essential quality in
Employees
from
cultures
with
great
power
distance
prefer
(and
arguably
a manager, or are other
function
better,
at
least
initially)
in
organizations
with
autocratic
leaders.
traits and characteristics
On
the
other
hand,
employees
from
countries
or
cultures
with
low
power
more impor tant?
distance
better
might
under
resent
an
democratic
autocratic
leader
and
would
probably
perform
leadership.
Hofstede’s cultural dimensions (HL only)
Hofstede’s country comparison tool, which you can nd at https://www.hofstede-insights.com/
product/compare-countries/, allows users to compare cultures in dierent countries according to
dierent socio-cultural measures.
With this tool, a CEO could make a judgment about which country might be better for their company to
expand into, and determine the degree of intercultural competency training their employees may need.
95
92
88
86
74
70
68
63
57
58
57
54
46
42
31
28
29
23
Power
Individualism
Masculinity
distance
Chile
Uncer tainty
Long term
avoidance
orientation
Czech Republic
Indulgence
Japan
If you ran a Chilean company and were considering opening an oce in either the Czech Republic or
Japan, which country would be most culturally aligned with yours?
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2
Revision checklist
✓
The
key
functions
command,
✓
A
manager’s
contrast,
✓
to
a
tnemeganam
ecruoser namuH 2
✓
role
leaders
and
Paternalistic
have
✓
A
✓
them
Cultural
plan
is
hold
to
and
to
as
have
leader
will
issues
ethical
a
style
own
the
to
organize,
to
lot
of
allows
be
instil
as
they
trust
employees
and
manage
affect
considerations
a
group.
In
can.
They
make
all
obeyed.
employees
will
of
decision-making
and
goals
work
inspire.
power
should
involve
which
plan,
and
much
employees
their
to
oversee
motivate
onto
also
are
control.
instructions
their
set
of
and
leadership
and
leadership
can
democratic
inform
to
their
for
laissez-faire
A
management
role
leaders
concern
Employees
✓
is
leader’s
Autocratic
decisions,
of
coordinate
in
and
power.
They
loyalty.
much
freedom.
problems
as
they
decision-making
see
t.
and
them.
can
and
should
inuence
styles.
Practice question
To
answer
Rox
Rox
the
and
was
question
Inclusive
a
music
considerable
style.
and
He
their
acts
brought
In
June
social
2020,
to
was
very
In
2021,
support
borrow
to
Initial
it
student
Within
three
students
Michel
took
State
b)
Dene
c)
With
the
no
action
the
for
features
term
style
IM,
and
a
band
The
band
enjoyed
autocratic
generously
received
Their
last
the
business
mission
CD,
leadership
to
many
asked
Louis
lower
local
schools
awards
Action
a
Not
for
Words,
music
non-prot
(IM).
At
IM’s
rst,
Unfortunately,
“Action
allowed
popular
adopted
not
aim
Michel
he
words”.
students
former
a
to
singer,
laissez-faire
Louis
leadership
students.
expected
gone
and
quickly
missing,
and
worsened.
many
lessons.
concert
Louis.
new
fully.
and
had
a
families.
statement
among
than
of
Music”
plan.
IM
lessons
instruments
a
start-up
“Inclusive
nance
free
organized
In
by
the
Rox
to
music
promote
media,
IM.
Without
Michel
received
Louis.
non-prot
corporate
to
the
dismissed
a
a
to
attending
of
gave
low-income
creativity
dismissing
reference
leadership
he
from
Michel
was
many
and
help
director.
allow
longer
anyone,
two
with
school’s
would
to
afford
offered
attendance
criticism
a)
it
398–402.
Michel’s
Rox
The
called
prepared
instruments.
months,
were
consulting
much
be
hoping
opened
pages
fame.
asked
not
6
Mbappe.
to
responsibility.
school
and
could
IM
Michel
decisions.
musicians
mission,
musical
Marsaud,
style,
was
young
Rox
its
social
music
enthusiastic
that
June
a
Unit
thanks
organizations.
Michel
support
realized
all
considerable
enterprise,
by
success
made
see
(IM)
managed
corporate
them
was
To
band
non-prot
of
effectively,
Music
commercial
personally
other
below
social
social
enterprise.
responsibility.
distinguish
between
laissez-faire
an
leadership
[2
marks]
[2
marks]
[4
marks]
autocratic
style.
110
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2.4
Motivation and demotivation
2.4 Moti vation and demoti vation
Describe the following
moti vation theories :
tnemeganam
➔
●
Taylor
●
Maslow
●
Her zberg (motivation–hygiene theory)
●
McClelland’s acquired needs theory
●
Deci & Ryan’s self-determination theory
●
equity and expectancy theory
➔
Explain labour turnover (HL only)
➔
Explain the following
(HL only)
(HL only)
(HL only)
types of appraisal (HL only) :
●
formative
●
360-degree feedback
●
summative
●
self-appraisal
➔
Explain methods of recruitment (HL only)
➔
Evaluate internal and ex ternal recruitment (HL only)
➔
Explain the following types of
➔
nancial rewards :
●
salary
●
wages (time and piece rates)
●
commission
●
performance-related pay (PRP)
●
prot-related pay
●
employee share-ownership schemes
●
fringe payments (perks)
Explain the following types of
●
job enrichment
●
job rotation
●
job enlargement
●
empowerment
ecruoser namuH 2
By the end of this chap ter, you should be able to:
non-nancial rewards :
●
purpose/the oppor tunity to
make a dierence
●
➔
Explain the following types of
●
induction
●
on the job
●
o the job
teamwork
training:
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2
Intrinsic and extrinsic motivation
Key terms
This
Intrinsic motivation
can
chapter
studies
motivate
their
the
factors
employees,
it
is
that
more
inuence
likely
a
that
person
those
to
work.
managers
If
managers
will
achieve
goals.
motivation which comes from
the satisfaction of carrying
out a par ticular activity (no
external reward is required)
tnemeganam
ecruoser namuH 2
Ex trinsic motivation
Intrinsic
activity
likely
to
be
They
●
If
motivation
itself
without
intrinsically
can
they
occurs
threats
see
put
that
in
when
or
motivated
their
more
if
success
work,
someone
rewards
they
is
they
a
gets
from
are
in
result
will
satisfaction
outside.
the
of
achieve
from
Employees
following
something
more
work
they
positive
the
are
more
situations:
have
done.
outcomes.
motivation that is derived from
external factors (in a business
They
●
context, typically money)
of
have
They
●
some
control
over
their
results
–
they
are
given
a
degree
freedom.
are
Rewards
are
individual.
provide
interested
extrinsic
In
the
for
the
the
that
“pain”
work
motivators
workplace,
satisfaction
workers
in
the
or
pay
job
is
they
–
doing.
motivators
an
itself
are
obvious
may
dissatisfaction
not
that
that
come
example.
provide,
they
from
outside
Extrinsic
and
may
experience
the
motivators
compensate
atwork.
Motivation theories
Frederick Winslow T
aylor
Taylor
was
a
mechanical
contribution
and
wanted
results.
to
as
He
the
science
to
attempted
to
apply
would
be
adopted
and
when
methods
is
took
shovels,
is
a
The
on
idea
amount
from
this
a
is
side.
a
by
his
its
task.
1912
since
his
to
Revolution,
achieve
and
ideas
measurement
of
work
is
similar
often
on
under
The
time.
and
busy
benets
his
parts
example.
that
can
were
in
referred
management
controlled
If
you
arise
if
each
how
then
of
a
and
strikes.
involved
how
long
involved
a
you
“bit”
took
ideas
numerous
which
output
were
agriculture
Taylor’s
studies
watch
restaurant,
that
factories
measuring
famous
enforced
ideas
leaving
of
studies,
and
and
ensure
these
provoked
most
fast-food
to
Taylor’s
introduction
time-and-motion
of
how
managers
component
One
methods
were
Americans
Many
workers
different
and
huge
of
cooked
The
time.
cost.
at
fries
Each
position
coordinated
be
each
large
the
for
into
Industrial
hamburger
will
the
get
system
is
precisely.
their
low
can
of
burger
each
down
and
possible
educated
factories.
resented
famous
1894
of
phenomenal
the
management
working
shortest
poorly
in
consider
in
the
of
decision-making.
perform
but
managed
work
in
methods
the
and
output.
ways
in
to
management,
standardization
best
often
job
prepared
some
at
style
most
to
scientic
many
to
was
breaking
between
scientic
that
observed
agriculture
research
maximize
the
who
to
methods
maximized
hands-on
it
of
starting
Taylor
to
believed
adoption
of
made
scientic
published
circumstances
Taylor
apply
founder
engineer
had
to
employed
has
at
given
also
worker
is
will
largely
cost
and
at
have
time
consistent
been
low
temperature,
cooked
minimize
effort
Skill
a
are
a
a
food,
removed
with
a
little
in
precise
amount
temperature
specic
wasted
fast
for
given
role
and
will
movement.
cooked
from
the
for
not
The
quickly
system,
time
precise
move
result
and
so
of
a
of
far
all
efciently
employees
training.
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2.4
Motivation and demotivation
Abraham Maslow
Maslow
explain
is
most
famous
motivation.
arranged
these
in
He
for
proposing
argued
terms
of
that
their
a
hierarchy
people
have
a
of
human
number
of
needs
needs
to
and
importance.
tnemeganam
spontaneity,
problem solving,
lack of prejudice,
acceptance of facts
Self-actualization
ecruoser namuH 2
morality,
creativity,
self-esteem, confidence,
achievement, respect of others,
Esteem
respect by others
friendship, family, sexual intimacy
Love/belonging
security of: body, employment resources,
Safety needs
morality, the family, health,
proper ty
food, warmth, shelter
Basic needs
1
Figure 2.4.1 Maslow’s hierarchy of needs
The
basic
needs
individual
will
considered
longer
The
they
ways
potential:
One
of
more
to
workers
explain
not
the
of
if
the
they
Once
diagram
are
these
not
needs
best
they
for
needs”.
In
needs.
fact,
These
can
be
managers
not
failure
methods
been
of
are
met.
are
most
The
met,
a
Once
the
important
rst
four
they
as
“go
that
resulted
once
by
to
in
needs
involve
many
worker.
factories
these
individual
needs
motivated
his
often
in
is
motivate
initially
the
his
“growth
away”.
these
will
have
but
why
are
“go
issues
same
will
shelter,
needs”.
satisfy
key
the
bottom
anxiety
needs
do
being
the
of
the
and
levels
away”
an
are
or
no
anxiety.
remaining
new
and
“basic
cause
fullled,
at
suffer
as
need
in
the
need
labour
initially
to
nd
fullling
their
possible.
is
So,
satisfy
are
strive
people
areas
a
will
satised,
Taylor’s
for
providing
factories,
food,
higher-level
warmth,
needs
may
unrest.
Frederick Her zberg
Herzberg
needs
provide
will
is
a
two-factor
motivational
dissatisfaction
probably
heating
it
developed
and
is
not
unlikely
necessary
intrinsic
lead
you
are
to
the
reward
work
demotivated
working
to
for
Motivators
be
at
to
if
if
they
the
properly.
started,
things
that
them.
If
are
motivation
needs
not
these
things
Hygiene
they
you
do
if
are
are
factors
not
working
example,
are
based
those
attended
classrooms
but
get
For
of
Hygiene
motivation.
get
from
theory
needs.
not
to.
At
clean,
drive
the
you
play
in
or
if
to
that
you
the
however,
things
you
a
hygiene
school
satisfactory,
are
because
you
on
factors
that
are
succeed.
get
some
football
team,
1
“Hierarchy of needs”, developed 1943–54 and published in Maslow, A. (1954) Motivation and
Personality, Harper & Row, New York
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2
you
the
will
probably
recognition
Herzberg’s
tnemeganam
ecruoser namuH 2
Company
●
Relationship
●
Work
●
Salary
●
Company
●
Status
●
Security
●
Relationship
●
Personal
with
the
as
successes
part
of
you
the
have
notched
up
and
team.
are:
administration
supervisor
car
with
subordinates
life
research
identied
that
true
“motivators”
were
other
completely
factors:
Achievement
●
Recognition
●
The
●
Responsibility
●
Advancement
work
argued
their
and
by
playing
needs”
policy
●
of
for
conditions
Herzberg’s
He
motivated
get
“hygiene
●
different
be
you
itself
that
people
have
a
number
of
needs
and
arranged
these
in
order
importance.
McClelland’s acquired needs theory (HL only)
David
McClelland
needs,
and
employees
needs
he
have
three
inuence
where
their
motivates
the
they
of
McClelland
three
to
wants
may
feel
or
did
needs.
be
to
well
at
liked,
feel
times.
or
some
The
on
human
research,
and
of
do
they
all
power.
The
They
that
These
achievement-motivated
to
relationships
like
the
want
ts
have
or
being
best
to
employee
–
part
of
as
into
encourage,
one
some
to
gain
of
also
in
these
of
each
achievement
employee
achievement
that
think
power.
measure
afliation-motivated
though
tasks
managers
tend
to
wants
want
on
work.
them.
win
still
work
hard
employees
neatly
also
uncomfortable
of
to
and
social
make
think
employee
they
of
not
employees
but
want
employees
want
employee
disliked.
accepted,
power,
types
employees.
and
each
not
They
mastery
Power-motivated
contrary,
least
their
others
power-motivated
and
by
often
what
losing,
that
the
at
loved
want
say
On
focused
afliation,
maintenance
some
others.
and
who
academic
employees.
These
they
about
motivates
The
and
reason,
teach
not
some
determined
creation
much
winning
categories.
these
and
too
extensive
motivation.
employees.
this
power
inuence,
terms
the
For
worry
Finally,
●
–
is
psychologist
upon
achievement,
motivates
other
group.
American
based
needs:
success
Afliation
●
an
employees’
Achievement
●
of
was
theorized,
may
and
make
wants
to
them
be
liked,
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2.4
though
gaining
whether
the
According
the
professional
group
to
likes
McClelland,
managers
can
better
recognition
them
or
when
create
for
whether
managers
a
mastery
they
get
is
important
than
power.
understand
motivational
more
Motivation and demotivation
each
approach
for
employee’s
each
needs,
employee.
Deci and Ryan’s self-determination theory (HL only)
Ryan
theory,
with
Deci
were
and
autonomous
when
and
an
Ryan
and
Autonomous
volition
two
American
psychologists
all
argued
psychologists
over
that
the
world.
two
types
who
In
of
collaborated
their
in
their
self-determination
motivation
tnemeganam
and
research
exist:
controlled.
motivation
choice
in
individual
occurs
what
is
they
doing
when
are
an
individual
doing.
something
in
has
Controlled
order
to
get
a
full
sense
motivation
a
reward
or
of
ecruoser namuH 2
Deci
is
avoid
a
punishment.
Deci
and
relate
to
Ryan
further
Competence:
●
they
get
develop
build
a
where
a
more
the
that
all
humans
they
have
three
sets
of
needs
that
of
are
feel
to
take
competence
likely
suitably
to
fail.
more
on
by
competent
for
doing
new
challenges.
avoiding
They
putting
should
challenging
in
particular
as
well
the
can
in
competence
employees
domain,
and
Managers
employees
nurture
tasks
a
something
help
situations
by
giving
become
competent.
to
care
connected
need
individuals
(self-satisfaction)
condence
sense
Relatedness:
both
when
reward
employees
●
argued
motivation:
is
individuals
for
to
met.
and
others
be
in
Managers
have
cared
the
can
the
for
need
by
to
others.
workplace,
enhance
this
feel
connected
When
important
feelings
of
to
others–
individuals
feel
psychological
relatedness
by
fostering
Deci and Ryan argued that
a
sense
of
team
spirit,
encouraging
collaboration,
and
building
a
culture
feeling connected to others in the
of
mutual
support.
workplace can increase motivation
Autonomy:
●
some
sense
managers
can
a
when
on
When
individuals
of
business
possible
which
these
control
should
within
Intrinsic
extrinsic
and
Ryan.
motivation
in
a
to
will
take
that
they
are
control
complete
on
they
doing.
over
to
met,
they
Whenever
autonomy,
how
are
that
what
constraints,
and
needs
feel
they
but
give
have
possible,
do.
Rarely
managers
employees
approach
can,
choice
solutions.
employees’
sense
of
increase.
motivation
Sometimes
way
when
organizational
psychological
motivation
and
what
employees
assignments
three
better
employees
autonomous
Deci
over
give
give
do
do
not
employees
actually
necessarily
internalize
then
bolsters
conict,
the
their
according
extrinsic
sense
of
forms
to
of
autonomous
motivation.
If
employees
sense
of
motivation
set
and
is
align
productive
more
are
purpose
just
and
doing
their
things
autonomous.
with
people
effectively
the
will
because
motivation
When
the
autonomous
then
towards
will
be
controlled
less
controlled
motivation
internalize
the
of
the
organization’s
motivation,
strong
than
motivations
that
has
extrinsic
if
are
properly
developed,
motivators
their
their
highly
and
work
aims.
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2
Equity theory and expectancy theory (HL only)
The
theorist
based
is
upon
that
tnemeganam
ecruoser namuH 2
a
exists
will
developed
of
be
motivated
between
a
“inputs”,
their
theory
called
“outputs”,
when
inputs
they
into
the
the
and
equity
“equity”.
perceive
business
that
and
theory
His
a
theory
balance,
their
outputs
it.
Inputs
to
Adams
concepts
employees
orequity,
from
John
the
are
those
business
or
affective
and
organization.
cognitive
Inputs
qualities
that
an
employee
brings
include:
●
Ability
●
Loyalty
●
Adaptability
●
Personal
●
Attitude
●
Skill
●
Dedication
●
Support
sacrice
from
co-workers
and
colleagues
●
Determination
●
Effort
●
Flexibility
●
Hard
●
Knowledge
are
can
outcomes
●
Fringe
●
Job
●
what
be
an
employee
negative
(though
quantied).
Student workpoint
Time
●
Tolerance
●
Trust
in
superiors
work
Outputs
Outputs
●
and
Adams
Typically,
receives
thus
did
not
outputs
are
in
from
some
believe
that
positive
benets
working
sense
inputs
and
at
subtract
and
organization.
the
outputs
positive
could
be
include:
●
Responsibility
●
Reward
Praise
●
Sense
●
Recognition
●
Stimuli
●
Reputation
●
Thanks
security
the
from
of
achievement
2.5
When
they
Be an inquirer
to
Nobody
has
ever
employees
will
an
be
organization
with
a
want
that
seems
all
people
in
The
to
10
upon
different
sense
the
know,
from
a
backgrounds
and
motivates
Compare
of
their
the
degree
of
equity
between
what
be
they
demotivated.
give
what
they
receive.
Motivation,
according
to
to
this
the
theory,
a
perception
of
is
fairness.
of
fairness
is
not
restricted
Employees
also
solely
by
compare
the
their
employee’s
“ratio”
of
relationship
inputs
and
compare
it
to
that
of
other
employees.
If
employee
A
to
perceives
a
B
loss
has
of
a
more
favourable
input-to-output
ratio,
employee
A
motivation.
Closely
related
Vroom.
to
equity
theory
Expectancy
is
theory
expectancy
holds
that
theory,
employees
developed
are
by
motivated
when
motivational
above
with
will
inputs,
(inputs)
them.
responses.
seem
to
their
believe
that
their
efforts
will
lead
to
good
performance,
for
which
they
t
will
best
and
employee
they
theories
some
organization.
suffer
Victor
Which
they
their
more
ages,
will
what
(outputs),
than
giving
variety
that
of
receive
greater
are
people
outputs
you
they
are
employees
all
circumstances.
Ask
outputs
to
based
t
than
their
however,
motivational
organization
theory
that
If,
come
Employees
up
believe
motivated.
be
rewarded,
and
that
the
rewards
will
be
worthwhile
(ie
the
rewards
responses?
are
desirable).
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2.4
Three
to
key
good
the
terms
in
expected
be
When
theory
are
expectancy
instrumentality
outcomes?),
theemployee?).
will
expectancy
performance?),
and
all
valence
three
of
(will
(are
these
the
the
(will
the
effort
performance
outcomes
elements
Motivation and demotivation
align,
lead
produce
desirable
to
employees
motivated.
Labour turnover (HL only)
business
stable
a
in
a
refers
given
business
to
time
the
movement
period
(usually
of
a
employees
year)
and
is
into
an
and
out
indicator
of
of
a
how
Labour turnover
is.
the percentage of employees
Labour
turnover
is
usually
measured
by
the
following
who leave a company during a
formula:
tnemeganam
turnover
ecruoser namuH 2
Key term
Labour
xed period of time, typically
one year. The percentage is
number
of
staff
leaving
over
a
year
labour turnover =
× 100
average
number
of
staff
employed
in
a
calculated by the ratio of the
year
number of an organization’s
employees who leave
A
high
labour
turnover
rate
suggests
that
the
business
has
labour
problems.
(whether because of attrition,
For
some
reason
or
reasons,
employees
do
not
stay
for
a
long
period
of
time.
dismissal or resignation)
By
itself,
high
labour
turnover
suggests
that
workers
are
dissatised
by
some
to the total number of
aspect
of
their
employment
situation.
This
source
of
dissatisfaction
may
also
employees during that period.
affect
workers
When
a
labour,
business
which
training
those
High
who
can
who
be
turnover
interruption
be
higher
new
affect
work
to
can
than
may
labour
New
in
for
lead
anticipate
In
since
are
often
to
are
In
business
are
believe
to
lower
frequently
productivity.
hire
Recruitment
less
as
it
new
and
productive
has
a
that
they
economy,
In
to
than
some
high
problem
otherwise
plentiful.
leads
addition,
circumstances
booming
jobs
must
motivation,
the
certain
a
lead
business.
routines.
workers
them
it
may
business.
and
that
if
the
workers
the
and
turnover,
employees’
Even
others.
business
problems
employees
opportunities
the
practices
there.
turnover
Businesses
high
cause
expensive.
can
employment
labour
at
established
in
communicates
of
has
can
are
remain
turnover
with
satised
should
when
in
be
addition,
aspect
jobs,
high
dissatised.
labour
employees
some
their
turnover
tend
to
younger
will
look
for
employees
Grocery stores and supermarkets
tend
to
change
jobs
more
often
than
middle-aged
employees.
are likely to have a high labour
Finally,
some
rate
may
and
lack
indicate
of
especially
reskilled.
who
no
basis
The
is
HR
kept
the
it
if
they
for
plan
an
and
among
not
its
signicant
(being
managers
should
be
acceptable
expect
but
experienced
changes
in
to
red
to
high
a
law
or
the
or
lawyers.
the
can
bring
be
sure
but
and
less
new
a
turnover among their cashiers and
sta on the store oor
ideas,
and/or
productive
otherwise
worker
that
the
labour
according
position.
turnover
turnover
are
turnover
complacency
retrained
who
When
each
would
to
low
or
provide
such
as
this
happy.
vary
for
lead
A
energy
been
sacked).
will
business.
business
Managers
labour
to
have
make
labour
rm
a
employees
actually
which
for
stability
tend
requirements
fairly
it),
but
has
may
level,
good
college
designed
experience
want
left
business
contributions
separation
be
employees
just
a
can
business,
New
have
minimal
might
did
stable
progress.
business,
at
skill
chain
if
a
a
turnover
Sometimes,
make
leaves
labour
not
pay
among
want
close
to
to
A
its
the
turnover
rate
industry
and
grocery
cashiers
see
high
attention
to
store
(even
turnover
any
rate.
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2
Labour
C oncep t
in
turnover
circumstances
turnover
ETHICS
against
rate,
can
the
external
get
either
higher
in
or
business
quickly
outside
can
try
as
the
to
a
result
business.
correct
of
By
internal
a
signicant
tracking
factors
the
or
change
labour
mitigate
factors.
Some organizations deliberately
recruit employees from socio-
Methods of recruitment (HL only)
demographic groups that are
There
are
three
parts
to
recruitment:
tnemeganam
ecruoser namuH 2
underrepresented in their
workforce, in order to ensure
1.
Identication
2.
Application
3.
Selection
more diversity. For some social
enterprises, this can be a direct
par t of their mission, ethical
objectives and CSR strategy.
Find some examples of
The identification processes
HR practices that relate to
recruitment and diversity.
Identication
The business realizes that it needs a new employee
because of a change in its internal factors.
Job description
This gives details about the job, such as:
Key terms
•
the job title
•
what the employee will have to do
•
the employee’s responsibilities.
Internal recruitment
occurs when a position
becomes available at
an organization, and the
Person specication
This gives details about the type of person required to
do the job, such as:
organization recruits someone
who is already working there
•
the skills required to do the job
•
the qualications necessary
•
what experience is necessary.
to take on the new position
Ex ternal recruitment
when an organization recruits
Internal or ex ternal recruitment
The business has to weigh up the advantages of
employees who are not
recruiting internally by promotion (or redeployment),
presently employees of
such as it being:
the organization
•
cheaper
•
quicker
•
more ecient, as the person would know how the
business works.
It then has to weigh up the advantages against the
disadvantages. For example, recruiting internally:
•
limits the pool of potential candidates
•
may cause resentment
•
causes the “domino” eect as the person promoted
would leave a vacancy to be lled, and so on down
the hierarchy.
Searching externally would be the reverse of all of
the above.
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2.4
Motivation and demotivation
The application processes
Application
The business has to decide how to nd the best applicants
Student workpoint
for the job.
2.6
Job ad ver t
The business will need to consider:
Be a thinker
•
where to place the adver t so it is seen by the
A
new
is
opening
restaurant
right people
applicants have sucient information
•
the legal requirements that have to be met.
local
in
town.
expensive
by
a
What is the most appropriate tool to process the
résumé (CV)
applications? Every tool should include the same
highly
restaurant
for
will
food
chef.
is
waiters
sell
cooked
trained
well-known
Application form or
your
It
and
The
tnemeganam
what should be included in the adver t, so the
ecruoser namuH 2
•
advertising
and
waitresses.
elements (eg personal details, skills and qualications,
Draw
up
a
job
description
work experience, interests and hobbies, and references).
of
Application forms are:
a
this
role,
detailed
including
person
specication.
•
standardized (so they are useful for jobs with lots of
possible applicants)
One
you
think
•
have
about
nished,
how
you’d
designed specically to match the job requirements
change
•
focused on the issues that the business wants
•
legally binding.
to
suit
the
a
job
busy
description
fast-food
restaurant.
However, a résumé (CV):
•
is better for jobs with limited applicants (such as
senior posts)
•
is more personal and can reveal more about
the applicant
•
•
can be more exible
can be quicker for applicants to submit as it can be
prepared beforehand.
Internal or ex ternal agency
The business has to weigh up the advantages of nding
the best applicants internally using its HR depar tment,
such as it being:
•
cheaper
•
quicker
•
more ecient, as the HR depar tment will know
precisely what the business requires.
It then has to weigh up the advantages against the
disadvantages. For example, using its HR depar tment:
•
limits the pool of potential candidates; agencies may
have plenty more applicants in their databases
•
•
may cause a lack of focus in other areas
may not cater for specialist skills, in contrast with an
agency that specializes in administrative vacancies,
for example.
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2
The selection processes
Selection
The nal par t of the process of recruitment is the selection of the best
applicant for the job.
Shor tlisting
The business will have to discard many applicants on the basis of:
tnemeganam
ecruoser namuH 2
Testing
•
their overall quality
•
how many are required for interview
•
any legal requirements that have to be taken into account.
Many businesses like to subject the shor tlisted applicants to some
form of test, to be used as a complement to the nal interview. These
tests can be:
•
aptitude (task-orientated activities, designed to test
understanding and application of theories or concepts)
•
psychometric (personality questionnaires, designed to test
reasoning skills and personality traits)
•
team-based (exercises designed to focus on the qualities
necessary for working in project teams).
Inter views
The interview is the nal par t of the recruitment process and there is
no one best style of interview. It will depend on circumstances but
may include the following:
•
face to face (one to one)
•
panel (with more than one person)
•
video conference (or telephone)
•
multi-stage (one interview leads to another)
•
multi-day (conducted over a number of days).
Key terms
Induction
the introduction of new
employees to an organization.
Training
The process aims to increase
Training
the likelihood that new
employee
employees can successfully
to
do their new job.
Training
the
can
help
up
to
employee
learned
might
an
date
employee’s
with
nding
even
previously
a
the
new
prevent
professional
latest
ideas
career
the
and
path
employee
as
development.
It
can
technologies.
It
may
a
result
from
of
losing
being
a
skill
keep
the
lead
reskilled.
that
they
had
(deskilling).
On-the-job training
However,
training
is
also
important
for
a
business.
It
can:
involves training employees
at their place of employment
●
improve
●
lead
●
motivate
●
reduce
the
quality
of
the
work
during their normal working
to
greater
productivity
hours
the
employee
O-the-job training
labour
turnover.
involves employees receiving
In
some
countries,
a
full-time
worker
has
the
right
to
be
allowed
to
take
training not at their place
time
off
to
train.
of employment but osite.
The employee’s company
Training
can
take
many
forms,
including
the
following:
typically pays for the tuition,
●
Induction
–
training
that
focuses
on
making
a
new
employee
familiar
which is usually provided by
with
the
way
the
business
functions
and
with
lines
of
authority
(who
to
outside par ties.
report
to,
for
example).
A
good
induction
programme
helps
to
ensure
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2.4
employees
The
making
them
procedures
normal
is
job.
when
an
Another
–
attend
when
follows
–
conference,
of
courses
at
required
gain
a
type
away
are
can
begin
new
training
run
the
work
straight
employees,
about
by
is
company
universities,
employees.
light
the
even
if
the
new
off
earn
many
want
be
or
when
one
to
workshop,
educational
MBA
of
is
which
trained.
work
a
not
see
with
the
education
employers
to
their
skill.
an
coursework
just
being
from
may
importance
economies,
Businesses
time
to
doing
shadowing,
a
agencies,
choose
of
is
training
consultants,
are
mentoring,
employee
learn
given
That
managers
In
the
to
they
through
training
another
job.
while
occurs
guides
employee
from
many
trained
on-the-job
employer.
local
better
of
post-industrial
the
they
welcoming
providing
employee
the
course
their
of
so
training
(“shadows”)
Today,
contemporary
and
employees
when
or
institutions.
quickly
includes
on-the-job
experienced
training
support
accepted,
Often
Off-the-job
in
process
expectations.
common
employee
●
feel
and
On-the-job
●
settle
induction
tnemeganam
new
away.
pay
ecruoser namuH 2
that
Motivation and demotivation
in
for
otherwise
their
employees
On-the-job training is often led by
an experienced employee
education.
yduts esaC
Starbucks
Starbucks
location
is
in
worldwide
customer
an
American
Seattle,
chain.
coffee
Washington,
Starbucks
experience
is
wants
to
keep
Starbucks
places
emphasis
USA,
does
centrally
Starbucks
shop,
quality
on
not
or
café,
and
that
has
franchise
important
control
employee
to
over
began
since
as
the
that
training
it
as
grown
believes
success
of
customer
and
uses
one
into
a
a
that
the
the
brand.
experience.
70-20-10
model:
10%
on-the-job
20%
feedback and mentorships
70%
online e-learning modules
Pie chart
A pie char t is a statistical
Figure 2.4.2 Training at Starbucks for baristas
graphic. A circle is divided
Starbucks
level.
For
promotes
example,
management
internally,
it
training
runs
a
so
it
“shift
program”
has
training
supervisor
(for
store
beyond
training
assistant
the
barista
program”,
managers
“retail
into slices to illustrate
numerical propor tion.
and
This is illustrated in the case
managers),
and
“district
manager
training
program”.
study here, in which the
Starbucks
it
has
is
well
earned
this
known
for
reputation
having
is
for
a
motivated
the
training
it
workforce.
offers.
One
reason
dierent methods of training
at Starbucks are shown.
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2
Appraisal (HL only)
Key terms
Appraisal
occurs
Appraisal
is
when
the
performance
of
the
employee
is
reviewed.
Formative appraisal
occurs during the training
or work of employees. It
is ongoing, continuous,
and intended to improve
know
as
different
from
inspection.
employees’
performances
Communication
opportunity
to
a
more
Under
tends
to
respond)
a
and
be
traditional
system
make
of
judgments
one-way
and
form
(the
top-down
of
inspection,
based
employee
(from
employee
managers
on
is
their
not
manager
to
review
review
observations.
given
the
employee).
tnemeganam
ecruoser namuH 2
employees’ performance.
Often,
Summative appraisal
in
a
indicators
system
of
frequency
of
inspection,
performance
with
which
–
the
the
what
process
the
employee
focuses
employee
did
not
has
meet
on
the
failed
negative
to
do,
or
the
targets.
occurs at the end of the training
or at a xed time during a year.
Under
Summative appraisals are the
discussion.
formal, documented evaluation
feedback
of employees. They attempts
Appraisal
to measure employees’
supportive
a
system
of
appraisal,
Communication
in
order
is
to
foster
supposed
to
a
be
employees
is
two-way,
positive
a
may
and
and
respond
managers
inclusive
non-threatening,
to
or
even
include
working
initiate
constructive
environment.
non-judgmental
and
process.
performances.
For
an
employee,
appraisal
can:
360-degree feedback
●
be
motivating
●
be
instructive
●
help
●
lead
occurs when an employee
–
employees
can
learn
from
past
mistakes
receives input from all
categories of people (peers,
employees
progress
along
their
career
path
customers, their supervisor,
to
a
change
in
career
direction.
among others) with whom the
For
the
business,
appraisal
can:
employee interacts. Because
360-degree feedback is
●
act
as
a
check
●
help
●
be
useful
●
be
motivating
on
performance
comprehensive and expensive,
to
review
new
initiatives
usually only senior members
of an organization receive it.
Self-appraisal
occurs when an employee
evaluates their own
Appraisal
well.
to
record
as
systems
Good
it
document
formally
can
appraisal
and
be
recognizes
costly
systems
performance
and
tend
good
performance.
time-consuming,
to
have
certain
especially
when
done
characteristics:
performance. It can be par t
●
They
are
not
directly
linked
to
pay
or
promotion.
Linking
appraisal
of formative or summative
to
pay
or
promotion
can
lead
to
mercenary
behaviour,
“backstabbing”
evaluation.
(when
to
●
people
look
better
sabotage
systems
Sometimes
employees
appraisal
Good
on
to
focus
ll
may
be
of
the
be
role
hand,
be
is
but
the
require
forms
performance
on
from
is
performances
for
to
whole
be
some
order
essence
of
paperwork.
line
Having
managers
In
accomplishments,
recordable,
perform.
appraisal.
or
having
to
Linking
minimal
easily
in
systems.
failure
positive.
time-consuming.
discrete
nonetheless
or
atmosphere.
disciplinary
punished
supposed
destroys
numerous
process
provide
transparent.
of
to
positions
poisonous
excessively
addition,
many
rather
of
than
it
puts
which
on
more
issues.
Appraisals
to
a
separate
systems
their
others’
and
have
other
out
nominal
substantive
are
punishment
documenting
the
the
appraisal
employees
●
to
Appraisal
Appraisal,
●
try
themselves),
those
an
honest
Everyone
around
them.
exchange
involved
Though
of
should
appraisal
views.
know
Appraisal
their
should
be
role
and
positive
has
the
overall,
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2.4
conversations
areas
of
should
strength
be
and
honest,
areas
that
with
need
appropriate
Motivation and demotivation
discussions
about
Student workpoint
improvement.
2.7
Appraisal
systems
may
include
these
methods
of
assessment:
Be reective
often
it
is
–
a
cycle.
done
idea
well
is
to
“forms”
appraisal
continuous
employee’s
year
because
time
The
and
approach
work.
also
help
the
at
focus
is
on
is
giving
areas
employees
ie
to
in
is
be
which
they
This
inuences
learning
run
on
feedback
have
type
their
a
performance
typically
employees
improve.
it
to
evaluate
Appraisal
on
employee,
intended
of
had
a
process,
during
one-
when
to
three-
they
difculties.
appraisal
“Appraisal”
an
have
a
neutral
employees
process
The
even
presumably
parts
people
●
Summative
–
this
measures
an
employee’s
performance
set
standards.
A
summative
assessment
has
an
are
element
of
jobs
judgment
about
whether
the
employee
passed
or
scary
the
failed.
and
a
tests
employees’
markers
and
then
knowledge
“sums
up”
and
skills
(hence
it
is
against
clear
summative)
will
not
has
performed
conducted
at
the
against
end
of
the
a
standards.
project,
a
Summative
contract,
or
a
appraisal
specic
In
should
not
necessarily
lead
to
360
degree
–
opportunity
line
this
to
manager,
subordinates
method
receive
but
also
and
provides
from
even
customers
employee
appraisal
between
or
four
to
clients.
not
eight
This
with
only
mean
of
upward
appraisal
and
is
The
360-degree
executives
being
co-workers,
who
(see
serve
Figure
the
appraisal
and
most
method
complex,
involves
having
is
often
used
with
interact
directly
with
CEOs
several
Self-appraisal
reect
the
on
on
help
their
of
various
suggest
a
relevant
with
own
training
time
method
performance.
self-appraisal
form
and
and
any
of
appraisal,
Usually,
on
indicators.
needs,
weaknesses,
in
means
an
that
an
performance
is
an
you
were
a
new
six
job
months
that
you
and
groups
liked,
would
you
of
an
appraisal?
2.4.3).
this
performance
their
strengths,
–
though,
multiple
Why
●
loses
judged.
welcome
stakeholders
someone
employee’s
their
really
other
of
Everywhere
world,
into
perspectives.
job.
appraisal
the
from
If
element
parts
appraisal
termination.
each
performance
other
bad
is
the
●
a
goal.
their
Failure
to
an
can
usually
lead
(getting
and
how
world,
employee
in
poor
Summative
red).
explicit
world,
protected
“termination”
assessment
and
In
making
appraisal
a
appraisal
be
of
to
according
their
to
the
can
like
but
threatening.
some
development.
sounds
term,
tnemeganam
Formative
ecruoser namuH 2
●
which
this
discuss
reection
employees
Typically,
is
rate
employees
their
potential
individual
think
employees
done
with
also
accomplishments,
problems
faced
during
appraisal
not?
views
system
Do
on
you
the
would
depending
on
whether
your
supervisor
said
were
doing
you
good
the
why
your
change
themselves
can
or
or
bad
a
job?
period.
Motivation in practice
customer/
manager
client
Many
and
organizations
motivate
exists.
This
rewards
their
need
complex
employees.
section
that
devise
identies
to
be
payment
Unfortunately,
some
of
the
systems
no
major
in
perfect
issues
of
an
effort
payment
the
main
to
reward
system
nancial
considered.
Appraisee
Salary
Employees
are
Motivation
paid
a
sum
factors:
the
of
money
main
per
month.
motivator
is
likely
to
be
the
security
of
subordinate
receiving
a
regular
Disadvantages:
the
staff
to
the
provide
co-worker
income.
employer
the
quality
is
typically
and
relying
quantity
on
the
expected.
professionalism
of
Figure 2.4.3 360-degree appraisal
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2
Wages (time rates)
Key terms
Employees
Financial rewards
rewards that an employer gives
to employees, typically as
It
is
are
possible
Motivation
receiving
a
paid
that
an
hourly
overtime
factors:
regular
the
rate,
rates
main
income
of
or
paid
pay
are
motivator
and
the
for
a
used
is
number
of
hours
per
week.
too.
likely
opportunity
to
to
be
the
receive
security
of
overtime
pay.
par t of an extrinsic motivation
Disadvantages:
it
is
possible
that
employees
will
work
slowly
since
their
scheme, that have a specic
is
not
based
on
output.
If
overtime
rates
apply
then
employees
could
monetary value (pay rise,
tnemeganam
ecruoser namuH 2
pay
benefit
financially
from
ensuring
that
they
extend
their
work
to
cover
time
bonus, commission, employee
beyond
the
usual
hours
of
the
working
day.
ownership scheme, etc)
Salary
a xed, regular compensation
Wages (piece rates)
Employees
are
paid
for
each
unit
(or
batch)
produced.
paid to employees on a periodic
Motivation
factors:
the
main
motivator
is
likely
to
be
the
fact
that
basis, usually bi-weekly or
increased
output
will
bring
a
expressed on an annual basis
Disadvantages:
this
might
(“He makes $52,000 a year ”)
employees
and are typically paid to white-
(for
measurable
benefit.
monthly. Salaries are typically
may
example
not
to
have
supply
involve
control
tedious
over
and
their
repetitive
results
if
they
work,
rely
and
on
others
materials).
collar workers.
Employees
that
a
may
system
of
work
quickly
checks
will
to
get
have
to
as
much
be
put
money
in
place
as
to
possible.
ensure
It
that
may
be
quality
Wages (time and piece rates)
standards
have
been
met.
There
may
be
an
emphasis
on
quantity
rather
the monetary compensation
than
quality.
paid by employers to workers
either on a time basis (eg
Commission
$22 per hour) or on a piece
basis (eg $8 for every item
completed). Blue-collar workers
Employees
each
item
are
paid
by
results,
for
example,
a
flat
fee
or
a
percentage
for
sold.
typically receive wages rather
Motivation
factors:
the
main
motivator
is
likely
to
be
the
fact
that
than a salary.
employees
Commission
will
be
Disadvantages:
income).
For
rewarded
employees
example,
by
results.
may
during
a
not
have
recession,
control
sales
over
results
commission
(and
will
fall
thus
in
payment to an employee
many
industries.
when they complete a sale.
The commission amount is
usually a percentage of the
sale value.
Employees
may
interests
the
the
of
organization.
customer
if
be
the
will
tempted
customer
For
to
sell
the
products
business
example,
receive
customer
or
a
and
bank
defaults
are
could
employee
commission,
subsequently
that
this
but
on
the
the
not
in
create
who
bank
sells
may
the
best
problems
a
for
mortgage
suffer
to
a
financially
loan.
Prot-related pay
The
amount
business
an
employee
Motivation
encourage
a
factors:
sense
Disadvantages:
of
the
receives
is
linked
to
the
amount
of
prot
the
makes.
business
experience
a
of
sharing
the
belonging
productivity
rather
than
demoralizing
nancial
and
may
the
loss
a
be
cause.
rewards
desire
a
If
through
to
of
consequence
prots
no
a
business
contribute
fall
fault
of
of
then
their
to
the
its
may
success.
protability
employees
could
own.
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2.4
Motivation and demotivation
Performance-related pay (PRP)
Key terms
PRP
is
usually
a
bonus
paid
in
addition
to
the
employee’s
ordinary
Performance-related pay
compensation.
Motivation
factors:
productivity
based
upon
or
PRP
output
is
ordinarily
cannot
pre-established
be
used
measured
performance
with
those
precisely.
employees
However,
whose
the
pay
compensation that is based
upon performance of an
is
individual, a unit, or even
targets.
in
a
PRP
system,
employees
receive
a
salary
and
are
expected
reach
certain
targets.
Employees
exceeding
the
targets
are
then
paid
an
schemes, management
additional
amount.
The
assumption
is
that
employees
will
be
motivated
by
establishes measurable goals.
the
opportunity
to
make
extra
money
by
performing
better
than
thetargets.
When an individual, a unit,
Disadvantages:
skills,
PRP
involved,
divisions
on
can
PRP
in
a
as
long
enhance
may
the
tasks
are
performance.
actually
business
subjective
as
if
reduce
the
repetitive
However,
when
productivity.
evaluation
of
and
In
involve
addition,
employees’
or the company exceeds the
physical
cognitive
tasks
PRP
can
performance
is
tnemeganam
performance-related pay
to
are
goals, employees receive
cause
compensation in addition to
based
their regular wages or salary.
ecruoser namuH 2
an entire company. In
Ordinarily,
factors.
Employee share-ownership
schemes
Employee share-ownership schemes
award employees shares in the
These
come
in
two
forms.
The
rst
is
as
some
type
of
bonus
where
the
company, permit employees
payment
is
shares
in
the
business
rather
than
cash.
The
second
is
some
type
to purchase shares in the
of
employee
savings
plan
where
employees
are
allowed
to
purchase
shares
company at a below-market
through
a
payroll
deduction
(typically
a
xed
amount
per
pay
period)
price, or match employees’
without
having
to
pay
brokerage
fees.
purchases of shares (eg for
Some
employers
every
$1
the
the
will
also
employee
employee’s
Motivation
offer
invests
contribution
factors:
when
a
“match”
in
shares
with
programme
the
company
(for
example,
will
give
(or
for
every share that employees
“match”)
$0.50).
offered
as
a
purchase, the company buys
0.5 shares for them)
bonus,
employee
share
schemes
Fringe payments
can
motivate
in
the
same
ways
that
other
types
of
bonuses
do.
Even
when
forms of compensation that
an
employee
share-ownership
scheme
is
simply
a
savings
plan,
a
benet
an employee receives other
is
that
employees
become
partial
owners
of
the
business,
which
is
thought
than their salary, such as life
to
provide
an
incentive
for
employees
to
work
harder
(as
they
now
have
a
insurance coverage or use of a
“stake”
in
the
business).
company car
Disadvantages:
basis
and,
of
for
awarding
ideally,
are
to
in
have
plan,
tied
the
offered
bonus
measurable
“favouritism”
employees
match
when
their
their
of
the
bonus,
be
the
clear
accusations
them.
savings
salaries
viability
a
must
avoid
granting
all
both
the
to
as
Also,
in
a
and
if
company
their
savings
business.
Fringe payments (perks)
Fringe
types
payments,
of
extras
employees.
a
car,
and
forms
of
related
at
They
private
to
the
a
its
hotels
They
of
chain
to
are
include
pension
nature
hotel
perks,
businesses
can
payment.
example,
rates
or
that
the
plans,
the
to
medical
often
may
many
offer
their
insurance,
among
include
business
offer
other
perks
(for
discounted
employees).
Gym membership is one type of fringe payment
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2
Motivation
C oncep t
substantial
benets
CHANGE
the
factors:
value.
for
tax
employee
benets
on
a
employees
While
purposes,
with
an
pre-tax
like
employees
many
do
additional
basis
is
fringe
may
not
have
benet:
much
benets
have
to
the
cheaper
to
as
be
often
some
declared.
business
than
they
declare
This
paying
employees
have
fringe
provides
for
fringe
paying
for
these
Organizations sometimes have
items
with
after-tax
salary.
than
paid
Thus,
the
business
is
able
to
give
more
value
to
to change how they motivate
employees
if
it
them
the
equivalent
amount
in
additional
salary.
their workers, for example with
tnemeganam
ecruoser namuH 2
increases in salary or wages, or
Disadvantages:
through new oppor tunities for job
or
on
enlargement and teamwork .
employees
angry
a
clear,
if
can
some
if
fair
fringe
basis,
come
perks
benets
division
to
expect
are
taken
are
not
among
certain
given
the
equally
staff
fringe
can
to
all
result.
benets
and
employees
In
addition,
may
become
away.
What factors may lead to those
changes in nancial and non-
nancial rewards? You may want
factors and external factors.
yduts esaC
to distinguish between internal
Salaries of hospitality workers in Slovenia
Hospitality industry
Salary (€ per month)
Hotel receptionist
850
Cleaner (hotel, restaurant)
700
Cook/chef
1,200
Waiter
900
Restaurant/hotel manager
Based
upon
workers),
in
categories
the
Ljubljana
(850
+
1,900
mean
is
700
of
€1,110,
+
1,200
workers
income
which
+
900
of
is
+
(not
actual
people
in
numbers
the
calculated
as
of
hospitality
industry
follows:
1,900)
=
1,110
5
Descriptive
However,
the
pay
of
restaurant/hotel
managers
is
substantially
statistics
greater
This
than
that
inclusion
of
of
the
other
categories
restaurant/hotel
of
hospitality
managers’
pay
workers.
skews
the
data.
Descriptive statistics
describe or summarize
Perhaps
characteristics of a set of
Ljubljana
data. The two most basic
data
aims of descriptive statistics
The
a
from
better
is
to
way
lowest
median
to
consider
pay
pay
of
consider
the
to
the
median,
highest
hospitality
pay
pay
of
which
and
workers
hospitality
requires
then
by
nd
the
category
workers
we
is
in
reorder
the
midpoint.
€900:
are to measure the central
tendency of a set of data,
and to characterize the
Hospitality industry
Salary (€ per month)
Cleaner (hotel, restaurant)
700
Hotel receptionist
850
dispersion of data within the
set. This dispersion is also
Waiter
90 0
referred to as variability.
Cook/chef
1,200
Restaurant/hotel manager
1,900
Consider the case study here
about hospitality workers in
Ljubljana, Slovenia.
Though
each
have
and
we
do
category,
fewer
than
the
know
can
managers
waiters.
represents
not
we
Thus,
of
exactly
chefs
median
earnings
€1,110
how
condent
and
the
“typical”
mean
be
than
gure
of
a
many
that
workers
restaurants
cleaners,
of
€900
hospitality
fall
and
into
hotels
receptionists,
probably
worker
in
better
Ljubljana
does.
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2.4
Motivation and demotivation
Examples of non-financial rewards
Key terms
Job enrichment
Non-nancial rewards
Job
enrichment
makes
an
employee’s
job
“richer”
(more
meaningful
rewards that an employer
and
rewarding)
by
allowing
employees
to
use
the
full
range
of
their
gives to employees, typically
abilities.
It
typically
involves
supervising
employees
less
and
making
their
as par t of an extrinsic
responsibilities
more
employee
the
challenging.
Often
enrichment
will
mean
that
an
motivation scheme, that do
entirety
of
a
production
process
in
order
to
have
a
sense
of
ownership
and
responsibility
in
what
theyproduce.
value but which employees
Motivation
that
are
factors:
challenging.
motivated
to
work
employees
Employees
typically
who
are
prefer
more
to
have
satised
responsibilities
are
typically
nonetheless value, such as a
more
hard.
better job title or some type
tnemeganam
not have precise monetary
greater
of recognition (“employee of
ecruoser namuH 2
does
the month”)
Disadvantages:
because
of
the
job
type
enrichment
of
work
cannot
involved
or
be
applied
because
of
in
all
the
situations,
calibre
of
either
the
workers.
Job enrichment
when an employee is given
Job rotation
additional tasks that are
Job
rotation
business
form
of
involves
over
a
rotating
period
training,
but
of
an
time.
can
be
employee
It
is
used
often
at
through
used
many
with
different
young
different
stages
divisions
employees
of
a
in
as
a
a
career.
challenging and usually done
by managers. These extra
tasks lead to professional
growth and improve
Motivation
factors:
job
rotation
benets
companies
as
it
gives
them
motivation.
employees
who
employees,
have
rotation
a
better
provides
sense
of
the
additional
business
training
as
and
a
whole.
the
For
acquisition
of
Job rotation
new
skills
and
knowledge,
which
can
lead
to
new
opportunities
with
the
occurs when employees rotate
business
(or
with
other
organizations).
positions in an organization
Disadvantages:
job
productivity
as
training
dips
phase
rotation
they
before
means
begin
they
in
fully
a
employees
new
go
division
understand
the
through
and
new
must
periodic
go
through
a
Job enlargement
position.
occurs when additional tasks
associated with a job are
Job enlargement
added to the job description.
Job
enlargement
involve
giving
shortage
of
may
include
employees
job
more
rotation
tasks
to
or
do,
job
enrichment.
sometimes
It
because
Diers from job enrichment
may
of
in that the additional tasks
a
do not generally require
staff.
additional skill or are
Motivation
factors:
in
general,
employees
prefer
some
variation
in
the
more dicult.
tasks
they
must
do.
Disadvantages:
additional
if
duties,
job
it
enlargement
may
increase
is
nothing
employee
more
than
giving
employees
dissatisfaction.
Assessment ad vice
Empowerment
Though they sound similar,
job enrichment and job
Empowerment
involves
giving
individuals
access
to
resources
and
enlargement are not the same
information
to
do
their
jobs
and
giving
them
the
power
to
make
decisions.
thing. With job enrichment, an
In
an
employment
context,
empowerment
means
giving
employees
employee is given additional
considerable
control
over
Motivation
factors:
how
their
jobs
should
be
done.
tasks of greater complexity
can
be
instrumental
empowered
in
changing
employees
things
and
generally
nd
this
believe
that
rewarding.
they
and challenge. With job
enlargement, an employee is
given additional duties that do
not require additional skill.
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2
Disadvantages:
will
not
be
able
Employees
the
may
business
businesses
to
manage
make
run
the
some
risk
that
responsibility
decisions
that
are
the
they
not
empowered
have
fully
been
employees
given.
productive
or
that
cost
unnecessarily.
Purpose or oppor tunity to make a dierence
Purpose
tnemeganam
ecruoser namuH 2
ability
aims
this
or
of
of
the
opportunity
businesses
the
Many
than-prot
as
they
for-prot
aims
Motivation
into
They
and
connected
are
People
tend
want
to
to
to
nd
Disadvantages:
environmental
if
make
other
than
difference
to
prot.
exist
businesses
to
today,
in
the
connect
Non-prot
meet
some
however,
world
refers
employees
to
to
organizations
social
have
or
also
the
the
have
environmental
adopted
other-
objectives.
many
individuals
know
that
purposes
these
they
larger
purposes
for-prot
aims,
a
organizations
typically
their
factors:
money.
to
other
organization
advantage,
need.
or
want
are
than
may
do
lose
more
a
than
merely
difference
themselves
intrinsically
organizations
employees
to
making
or
in
their
the
make
world
organization.
motivating.
overemphasize
focus
on
the
social
or
prot-making
objectives.
Teamwork
Teamwork
achieve
a
involves
Motivation
factors:
organization’s
performance
which
teams.
a
organizations.
of
in
above
of
when
incomes.
industrial
In
important.
For
and
in
of
an
teams
can
a
group
be
organization
tend
to
be
cohesion
of
and
can
crucial
will
people
by
common
can
to
an
to
have
working
high-
in
teams,
purpose.
have
amplify
to
strive
energized
teamwork
failures
many
great
yields
dissatisfaction
many,
work
forms
strong.
based
countries,
a
upon
are
social
these
piece
circumstances
and
have
for
and,
thus,
to
of
be
a
cohesion
contexts,
have
can
In
to
general,
making
contemporary
simple,
rates
differing
cultures.
unaccustomed
tends
series
of
In
rewards
countries
people
production:
remain
Wages
non-nancial
different
traditional
etc)
developed
team
countries,
many
so
group
nancial
traditional
be
with
productivity.
signicant
association,
success
successful,
effectiveness
developing
addition,
of
However,
employees’
the
degrees
cooperatively
Individuals
sense
Disadvantages:
All
the
performance,
creates
weaken
working
goal.
(family,
nancial
be
changed
version
uninteresting
tasks.
village,
labour
rewards
especially
of
In
tend
to
motivating.
signicantly
since
the
Assessment ad vice
1970s.
Individuals
virtually
are
guaranteed)
accustomed
high
to
standards
(and
of
in
many
living.
developed
Economies
countries
have
largely
shifted
Remember that salaries are
to
the
tertiary
and
quaternary
sectors,
where
work
tasks
tend
to
be
more
typically paid to white-collar
complex
and
require
cognitive
processes.
Finally,
traditional
forms
of
social
workers, and wages (either
cohesion
have
weakened.
In
these
contexts,
people
are
increasingly
interested
time or piece rates) are paid
in
non-nancial
rewards.
Personally
satisfying
work,
teamwork
and
making
a
to blue-collar workers.
difference
in
the
world
are
of
considerable
importance
to
workers.
128
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2.4
However,
remember
that
generalizations
such
as
these
can
be
Motivation and demotivation
misleading.
TOK discussion
In
all
economies,
while
others
are
some
people
mostly
are
mostly
interested
in
interested
non-nancial
in
making
money,
objectives.
1.
When we refer to
“motivation theory”, is the
Revision checklist
word “theory” the same
as in mathematics?
Many
theorists
individuals.
have
Early
offered
theorists
explanations
about
what
motivates
included:
2.
Can we ever really
✓
Frederick
Winslow
Taylor,
who
believed
that
the
standardization
of
(or demotivates) an
working
practices
and
enforced
adoption
of
the
most
efcient
ways
employee?
of
working
were
the
key
to
ensuring
maximum
output.
3.
✓
Abraham
Maslow,
who
argued
that
human
needs
can
be
Can nancial rewards
tnemeganam
know what motivates
categorized
ecruoser namuH 2
✓
always be measured and
into
levels
of
importance.
The
more
needs
an
employer
can
satisfy,
quantied, and thus are
the
more
motivated
a
worker
will
be.
they more precise and
✓
Frederick
and
“motivational
truly
✓
As
the
the
motivate
business
West
David
has
the
types
Edward
Deci
maintains
their
(HL
✓
they
S.
✓
✓
out
in
stable
a
a
Businesses
merits
Financial
Richard
modern
new
needs
afliation
on
they
the
do.
types
(HL
Ryan,
autonomy,
of
whose
they
the
into
is
given
it
the
ones
industrial
insights
meaningful than non-
which
society
into
theory
states
or
power.
nancial rewards?
in
human
What
of
organizations
that
people
motivates
they
are
them
work
in
only)
whose
self-determination
autonomous
competence,
work
(HL
the
to
both
motivation
and
theory
increases
relatedness
are
when
met.
enlargement,
rewards
businesses
many
forms.
offer
of
using
employees
(outputs)
they
are
individuals
fairly:
is
that
worth
treated
employees
a
into
year).
pay,
fringe
include
formative
and
It
is
are
what
what
they
comparably
and
an
to
out
of
a
indicator
of
summative
and
(HL
only)
externally,
and
there
only)
time
and
piece
rate
performance-related
wages,
pay,
share-
payments.
job
enrichment,
purpose,
training
and
self-appraisal.
internally
(HL
salary,
empowerment,
Many
that
treated
only)
feedback,
and
that
(usually
employees
prot-related
Non-nancial
and
approaches.
schemes,
maintains
being
only)
(HL
include
are
arrangement
period
is.
recruit
theory
they
movement
time
360-degree
can
equity
feel
(inputs),
business
rewards
ownership
✓
are
needs”
include:
acquired
individuals’
evaluate
commission,
✓
bearing
employees.
Businesses
are
and
offered
theorists
whose
roles
when
put
assessment,
✓
changed
theorists
these
and
for
turnover
business
how
of
Adams,
get
to
other
Labour
needs
“hygiene
only)
motivated
✓
between
Motivational
achievement,
that
needs
John
had
of
considerable
and
✓
new
McClelland,
by
distinguished
needs”.
landscape
Some
motivated
who
workers.
matured,
motivation.
✓
Herzberg,
for
and
job
rotation,
job
teamwork.
employees,
and
training
can
come
in
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2
Practice question
To
answer
Fish
The
the
questions
Packaging
rm
Fish
Packaging
and
sells
are
€10
per
tnemeganam
ecruoser namuH 2
Workers
shing
are
are
a
lack
a
shortage
●
insufcient
a
)
b)
rest
at
to
the
Reykjavik,
in
the
plant
and
several
13
kg
have
are
still
issues,
boats
per
hour.
nothing
paid
to
€4
When
pack.
per
local
When
hour.
including:
shing
less,
so
workers
are
style
in
breaks
day-to-day
during
that
from
the
workers
about
Furthermore,
and
decision-making
clothing
concerned
changes
workers
local
in
Workers
boxes.
home
about
plant
market.
often
complains
two
Explain
features
one
the
is
working
seldom
the
sh
Russian
day.
exceed
possible
ships.
the
the
target
imposition
packaging
factory
considering
of
a
time
disadvantage
rate
two
an
changes
to
stay
protective
also
piece
Using
398–402.
industry
of
of
has
been
Management
introduction
of
13
kg
shing
a
per
quotas
badly
feels
piece
it
has
rate
system.
Explain
a
led
competition
Packaging
d)
of
some
State
of
c)
are
pages
packaging
domestic
into
shing,
leadership
governments.
payment
has
more
involvement
Management
make
out
concerned
autocratic
the
go
workers
home
●
to
not
the
●
by
sh
approximately
an
hit
a
the
pack
●
by
to
to
do
weather
and
owns
sh
expected
workers
hour
Ltd
frozen
sh
The
of
6
pack
happens,
staying
Unit
to
boats
poor
see
hour
this
●
effectively,
Ltd
Iceland,
paid
below
payment
external
rate
and
system
factors
payment
one
at
that
system.
advantage
Fish
to
Packaging
could
the
appropriate
improve
Fish
the
motivation
Packaging
motivation
Ltd
of
theory,
evaluate
management
the
workforce.
[4
marks]
[4
marks]
[ 10
marks]
Fish
Ltd.
that
marks]
workers
Ltd.
inuence
[2
possible
could
introduce
Source: Adapted from IB examination paper, May 2008
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2.5
Organizational (corporate) culture (HL only)
2.5 Organizational (corporate) culture (HL only)
Dene organizational culture
➔
Explain several dierent types of organizational culture
➔
Discuss the nature of
the achievements, ar ts,
attitudes, customs, norms,
cultural clashes , including why they occur
social institutions, and
tnemeganam
Culture
➔
ecruoser namuH 2
Key terms
By the end of this chap ter, you should be able to:
values of a par ticular nation,
people, or other social group.
Organizational culture (HL only)
Organizations can have
The
term
organizational
attitudes,
experiences,
generally
considered
ways
that
outside
the
beliefs,
to
individuals
culture
make
in
an
organization
(or
and
up
“corporate
values
the
an
elements
organization
often
of
culture”)
reect
dress
the
refers
organization.
of
corporate
or
treat
culture
of
the
These
other
their own culture, which in
are
culture.
each
the
to
business is referred to as
The
and
corporate culture.
those
Organizational culture
organization.
similar to corporate culture.
If
an
individual
joins
an
organization
and
does
not
share
its
values
and
It is the achievements, ar ts,
beliefs,
it
is
highly
likely
that
person
will
not
stay
there
long.
This
situation
attitudes, customs, norms,
is
described
as
a
culture
clash.
social institutions, and values
Managers
may
try
to
inuence
the
culture
of
an
organization.
Doing
so,
of a par ticular organization.
however,
is
difcult,
especially
at
established
and
old
institutions
with
low
An organization’s culture
staff
turnover
(institutions
with
a
strong
corporate
culture).
Nonetheless,
will often reect some of
setting
the
values
and
the
way
things
get
done
is
a
role
of
managers.
New
the cultural practices of its
managers
will
spell
out
their
beliefs
and
values
to
staff,
and
expect
staff
to
host country, although two
behave
in
a
manner
that
reects
the
beliefs
that
managers
have
set.
organizations within the
Different
cultural
organization.
department,
The
the
the
country
in
the
nationality
norms
will
factors
that
members
which
of
the
the
exist
of
in
different
inuence
the
team,
organization
department
these
the
is
departments
will
be
senior
the
of
head
managers,
operating
in,
and
dierent cultures.
of
the
the
same country could also have
an
culture
culture
of
of
members.
Types of organizational culture (HL only)
Charles Handy
The
management
memorable
distinct
and
way
scholar
of
organizational
person
culture.
Organizations,
constellation
In
Handy
of
and
viewing
cultures:
power
his
Gods
book
chose
values
theorist
Charles
organizational
four
of
Greek
corresponding
Handy
culture
culture,
role
Management:
gods,
to
the
each
four
introduced
when
of
he
culture,
The
types
task
Changing
which
of
a
highly
described
four
culture,
Work
reected
of
the
organizational
culture.
131
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2
tnemeganam
ecruoser namuH 2
Power culture
Role culture
T
ask culture
Person culture
Figure 2.5.1 Handy’s organizational culture
Power culture
Key terms
A
Power culture
power
power.
culture
Control
organization.
exists
comes
This
when
from
type
of
a
few
these
culture
individuals
individuals
retain
and
corresponds
to
the
essential
spreads
the
out
Greek
across
god
the
Zeus,
who
exists when a few individuals
ruled
as
king
of
the
gods
on
Mount
Olympus.
retain the essential power
in an organization. Power
cultures have few rules and
procedures, and decision-
making tends to be swift.
Role culture
Power
by
cultures
their
more
results
important
decisions
The
have
may
collapses
merchant
than
not
of
bank
few
rather
in
US
and
how
means.
be
the
rules
than
the
procedures.
those
Swift
results
long-term
interests
Bank
are
giant
attributed
of
can
the
Enron
to
are
usually
achieved,
decision-making
energy-trading
Barings
People
are
since
result,
judged
ends
but
are
the
organization.
and
the
dominant
family-owned
power
cultures.
refers to organizations where
Family
businesses
and
merchant
banks
often
have
power
cultures.
employees have clearly
dened roles and operate
in a highly controlled and
precise organizational
structure. Organizations with
Handy
from
represented
the
reward
spider;
or
unlikely
a
punish.
to
work
a
power
web
In
a
culture
with
no
power
there
for
as
spider
culture,
a
spider’s
has
no
web.
The
strength.
individuals
power
The
who
do
comes
spider
not
t
can
in
are
long.
a role culture are usually
hierarchical bureaucracies.
Role culture
In
a
role
highly
are
culture,
controlled
usually
Power
tall
stems
procedures)
slow
and
Apollo,
employees
and
hierarchical
from
play
This
a
position.
roles
type
represented
clearly
dened
organizational
bureaucracies
person’s
dominant
detailed.
who
a
have
precise
of
in
roles
structure.
with
Position
a
long
and
a
culture
corresponds
the
of
in
a
organizations
of
command.
book”
which
to
combination
operate
chain
“rule
decision-making,
harmonious
and
These
is
(corporate
often
Greek
bodily,
god
moral
and
spiritualvirtues.
In
role
cultures,
organizations,
Handy
uses
Temples
or
buildings
such
as
people
and
the
symbol
buildings
in
a
avoid
taking
nationalized
town
of
are
a
temple
old
and
traditionally
government
ofces
and
risks.
industries
or
exist
services,
have
military
role
building
to
environments.
stable
describe
cultures.
in
house
the
Civil
often
organizations
main
post
with
a
role
role
culture.
The
oldest
cultures,
ofce.
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2.5
Organizational (corporate) culture (HL only)
T
ask culture
Key terms
The
task
culture
describes
specic
problems.
person,
since
Power
different
a
situation
within
people
a
in
task
with
which
culture
different
short-term
shifts
skills
from
can
teams
address
person
lead
the
Task culture
to
team
at
refers to an organizational
different
times.
The
task
culture
often
features
the
crossing
lines
of
a
matrix
culture focused on specic
structure.
This
type
of
culture
corresponds
to
the
Greek
god
Athena,
who
problems. In this context,
represented
wisdom,
war,
and
crafts.
She
was
the
god
who
got
things
done.
a
people
rapidly
the
changing
emotional
damage
like
energy
the
idea
a
task
environment.
can
team.
of
emerge.
This
culture
A
strong
However,
passion
for
a
because
team
spirit
divisive
team
can
they
like
with
a
decisions
be
highly
to
work
great
can
person as dierent people
in
deal
of
issues.
seriously
constructive,
are suited to dierent tasks or
but
tnemeganam
Many
Person culture
the
reverse
can
also
be
ecruoser namuH 2
power shifts from person to
true.
exists where individuals
A
task
culture
is
often
found
in
management
consultancies,
where
a
team
believe themselves to be
enters
an
organization
to
work
on
projects.
Once
a
project
is
completed,
superior to the organization.
the
team
will
break
up
and
a
new
team
will
form
for
another
project.
Some professional
In
schools,
drama
departments
may
resemble
a
task
culture.
One
team
par tnerships, such as
produces
a
major
theatrical
production
and
then
a
new
team
emerges
for
architecture rms and some
the
next
one.
university depar tments, can
Handy
a
net
used
is
its
the
image
different
of
a
net
to
describe
the
task
culture.
The
strength
of
be predominantly person
cultures.
strands.
Culture clash
Person culture
when two dierent cultures
A
person
culture
exists
where
individuals
believe
themselves
to
be
come into conict. In a
superior
to
the
organization
and
just
want
to
do
their
own
thing.
These
business setting, a culture
organizations
are
where
employees
simply
go
to
work;
they
see
themselves
clash occurs when one
as
separate
from
the
organization
(as
“free
spirits”).
Some
professional
organization has to work
partnerships,
such
as
architecture
rms
and
some
university
departments,
with another organization,
can
be
predominantly
person
cultures.
There,
each
specialist
brings
a
often because of a merger
particular
expertise
to
the
organization.
This
type
of
culture
corresponds
to
or acquisition, and the two
the
Greek
god
Dionysus
(known
as
Bacchus
to
the
ancient
Romans),
who
organizations have very
was
the
god
of
wine
and
viticulture,
fertility,
religious
ecstasy,
and
other
dierent cultures.
human
Handy
(or
passions.
represents
person)
is
the
unique
person
and
culture
different,
as
a
and
constellation
individuals
of
stars.
operate
on
Each
star
their
own.
Student workpoint
Person
cultures
are
difcult
to
manage.
Individuals
preferring
this
culture
2.8
will
often
they
nd
impose
working
on
these
in
organizations
individuals
seem
difcult
because
the
constraints
unbearable.
Be a thinker
For
each
of
the
following,
Edgar Schein
suggest
Edgar
Schein
described
three
levels
of
organizational
culture.
one
business
would
type
of
organization
suit
that
it.
Organizational attributes
You
sense
When
signs
of
a
organizational
entering
or
a
warnings
dominant
government
are
leader.
conformist
fashion.
heard,
felt
and
attributes
building
everywhere.
People
may
Outsiders
reects
the
when
are
in
Often
speak
you
a
into
communist
visible
in
viewed
walk
is
a
hushed
with
an
country,
picture
tones
suspicion.
a)
A
power
culture
b)
A
role
culture
c)
A
task
culture
d)
A
person
organization.
or
and
stern
statue
dress
What
is
in
a
culture
seen,
culture.
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2
Professed culture
Some
organizations
images
give
that
clues
project
to
how
organizations
or
value.
customers,
tnemeganam
ecruoser namuH 2
classied
certain
the
give
These
“profess”
a
and
elements
of
These
of
what
statements
other
with
about
statements,
statements,
Websites
the
stakeholders.
professed
slogans,
slogans,
operates.
statements
contain
charities,
as
culture
organization
clear
sites
their
image.
of
business
most
are
large
to
what
or
images
professes
commitment
These
or
to
believe
employees,
Schein
culture.
Organizational assumptions
People
who
have
about
“how
These
people
the
really
are
to
how
and
things
best
helps
is
organization
for
“really
to
to
about
if
time
will
“ofcial”
assumptions.
organizational
have
even
long
the
often
talk
channels.
This
aspect
of
understand.
people
explain
have.
work
some
The
closely
time.
the
who
been
the
assumptions
understand
there
“ofcial”
nd
it
the
best
with
difcult
to
the
or
are
not
organizational
longest.
They
organizational
be
even
people
who
if
has
that
know
structure
why
initiate
some
new
to
organizational
been
person
unmentionable.)
explain
to
that
understand
someone
may
helps
difculty
way
(Although
truth
assumptions
may
a
to
organizational
The
who
–
for
opposed
otherwise.
work”,
organizational
talk
Schein
to
the
as
difcult
them.
done
often
assumptions
organization
to
organization
done”
to
those
get
state
organization
things
are
an
get
most
afraid
really
insight
the
articulate
literature
This
with
really
referring
is
often
able
assumptions
an
are
organization
People
been
things
with
the
knows
The
how
existence
managers
new
to
of
an
change.
yduts esaC
Corporate culture and Godrej Consumer Products
Godrej
Consumer
conglomerate
is
noted
for
excellence
According
work,
not
its
of
to
Prachi
well
as
Vivek
Gambhir,
one.
by
an
of
and
HR
stretching
put
in
of
beyond
2001
and
has
culture
them
as
There’s
GCP
,
and
at
says
GCP
,
what
they
his
subsidiary
is
based
support
“What
exibility,
that
The
a
expanded
which
challenging
talent.
is
since
mush
Manager
in.
keeps
high-quality
them
1897
giving
that
Director
recruits
in
General
you
environment
founded
corporate
always
hours
Managing
GCP
was
locks
uplifting
Kulkarni,
number
as
(GCP)
making
and
employees,
the
employees
began
dynamic
team,
inspiring
Products
that
a
on
and
Godrej
two
ideas:
noticed
open
Group,
numerous
exibility
gets
very
of
into
and
as
an
Indian
industries.
always
GCP
demanding
possible.
here
is
the
quality
approachable
of
your
leadership
you.”
organization
work
thought
is
environment
they
could
a
is
do,
great
place
energizing,
and
by
to
work
and
and
GCP
rewarding
an
develops
strong
performance.
GCP
works
employees.
low
labour
hard
So,
to
create
despite
turnover.
a
work
being
People
a
environment
demanding
want
to
work
with
the
organization
kind
that
of
culture
expects
and
values
excellence
out
that
of
are
uplifting
everyone,
to
GCP
its
has
there.
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2.5
Organizational (corporate) culture (HL only)
Cultural clashes (HL only)
Reasons for culture clashes
When
individuals
merge
together,
●
to
●
comfort
diversity;
Different
formal
the
●
in
a
an
company
Different
are
●
or
when
occur.
two
Reasons
or
more
organizations
for
these
clashes
can
Different
country,
who
an
some
–
These
from
countries
organizations
organizations
typically
speak
when
to
are
can
have
a
are
highly
language
language
also
well
occur
if
that
often
differences
styles.
leadership
leadership,
style
both
merge,
For
example,
acquires
leaders
and
difcult.
tasks
and
are
in
differences
organizations
leadership
to
people
–
some
organizations
relationship-orientated.
organizations,
or
the
two
in
democratic
differences
organizations.
different
–
changes
others
all
some
communication.
situation
and
practices
not
authoritarian
to
orientations
have
do
styles
the
task-orientated,
some
organizations
accustomed
nd
–
Misunderstanding
with
–
informal.
experience
will
diversity
ethnocentric.
non-verbal
organization
employees
●
–
leadership
individuals
if
are
difculties.
of
with
are
formality
Individuals
modes
Different
of
others
languages
norm.
experience
exist
levels
others
degrees
whereas
Different
is
can
following:
Different
used
organization
clashes”
tnemeganam
●
the
an
ecruoser namuH 2
include
enter
“culture
even
practices
can
be
those
from
compared
greater
when
to
the
same
other
organizations
are
cultures.
A bank is likely to have a very
●
Different
senses
of
time
–
in
some
cultures,
time
is
xed:
exact
dierent culture than a small
appointment
times
and
schedules
are
taken
very
seriously.
Other
creative star t-up
cultures
have
a
more
uid
sense
of
time.
Consequences of culture clashes
Businesses
combine
management
of
economies
scale
resources
of
of
the
organization
combine,
the
for
different
two
or
rms
increased
organizations.
has
similar
culture
goals.
clashes
of
that
organization
The
the
new
should
harmonization
occurs
at
struggle
for
culture
consequences
business
The
a
signs
of
several
of
the
the
a
severe
such
–
years
a
cultures.
typically
the
of
when
or
can
be
for
the
need
combining
when
managing
when
a
The
overarching
combine
is
benets.
Leaders
the
of
the
merger,
change
anticipate
acquiring
businesses
above.
expected
and
as
the
the
companies
signicant.
to
(such
takeover,
noted
more
owners
that
in
including
leadership
employees
may
style.
a
the
nal
larger
or
the
benets
from
reasons
Similarly,
failure
failure
consequence
new,
merger,
sometimes
two
plan
managers
include
a
share)
achieve
clash
strategic
leadership
can
the
not
consequences
serious
of
for
In
achieving
acquisition
when
does
culture
two
new
leadership
themselves
a
an
However,
clash
organization,
with
most
new
an
of
develop
market
In
occur
consequence
reasons.
anticipate
may
to
of
harmonize
the
take
accounts
several
are
organization.
cultures
business.
years
prepared
Evidence
to
after
of
or
prepare
However,
the
reveal
the
rst
problems
as
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2
signicant
as
potential
must
be
acutely
early
indicators
Lack
●
the
of
tnemeganam
ecruoser namuH 2
energy
than
on
Sense
●
on
of
a
have
these
early
experience
●
Lower
long
time
of
to
a
appear,
culture
for
–
and
new
and
and,
the
thus,
of
so
managers
clash.
Those
values
are
not
and
aims
focused
of
on
the
and
fact
job
on
a
their
new
styles,
some
rather
suffer.
differences
similarities.
attention
leader,
performance
their
many
focus
of
rather
Or,
in
employees
the
may
than
case
think
favour.
while
managers
feel
isolated
–
focus
and
on
the
ignorant
employees
feel
strategy
of
that
what
of
is
the
new
happening.
managers
are
not
well-being.
go
serious
unaddressed,
problems,
expected
more
employees
or
focus
their
management
their
–
merger
leadership
out
productivity
organization
merger
employees
–
indicators
the
understand
leader
Productivity
employees
more
produce
a
indicators
not
new
the
purpose
isolation
concerned
of
jobs.
fallen
Unresponsive
●
may
the
the
fact
own
leader
organization,
or
with
the
division
of
take
early
employees
common
they
Sense
●
of
new
that
on
their
their
may
the
aims.
Preoccupation
and
If
–
organization
organizational
●
to
include:
focus
new
failure
sensitive
–
workers
in
efciencies
difcult
the
organization
including
the
but
because
the
new
organization
actually
they
can
are
then
following:
nd
do
working
unfamiliar
not
in
with
the
new
norms
and
procedures.
●
Higher
fearful
new
labour
that
jobs.
primary
●
Increased
purpose
types
cultures
can
likely
to
to
of
and
place
turnover
in
is
worst
–
if
to
the
is
in
important
in
with
in
is
it,
the
new
many
especially
form
to
organization
employees
may
troublesome
greater
workplace
likely
human
–
when
increase.
and
seek
when
a
capital.
differences
The
stress
of
a
people.
workers
conict
the
are
less
productive,
workplace
resources
to
these
labour
increases,
problems,
the
business
which
is
prots.
or
failure
protability
bankruptcy
a
conict
the
and
devote
Bankruptcy
enough
out
dissatised
merger
protability
reduce
–
have
conict
increases,
have
the
occur,
bring
Decreased
will
of
not
labour
of
between
turnover
●
may
Various
merger
●
turnover
they
or
–
if
the
falls
problems
too
much,
from
the
a
merger
organization
are
severe
runs
the
risk
failure.
Organizational culture and individuals (HL only)
Individuals
inuences
Culture
is
inuence
a
very
simultaneously
everything
norms
can
of
organizational
culture,
and
organizational
culture
individuals.
tricky
because
an
issue
everything
it
is
the
organization.
inuence
everything
to
address
and,
sum
It
is
that
in
organizations,
paradoxically,
of
the
values,
sum
happens
attitudes,
total
in
a
nothing.
of
the
as
it
is
Culture
beliefs,
is
practices,
organization,
and
and
so
it
business.
136
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though
businesses
high-performing
into
of
high-performing
the
organization
business.
business
and
On
they
the
the
beliefs,
leaders
other
hand,
of
an
cannot
be
values,
attitudes,
seen,
then
practices,
know
the
New
and
the
t
to
tasted,
in
of
a
the
culture
or
and
of
shaping
a
they
touched.
norms
of
in
the
values,
Most
over
respected
individuals,
priority.
remark
sense
people
energy
values
culture
high
the
their
organization.
often
literal
smelt,
practices,
by
attract
transform
“feel”
hierarchy
in
typically
also
can
organizational
individuals
organization,
beliefs,
of
issues
although
to
norms
cultures
usually
employees
sense
strive
power
make
heard,
businesses
intuitively
will
deliberately
culture
high-performing
such
individuals.
and
Employees
attitudes,
with
individuals,
that
they
cannot.
Culture
can
“feel”
Culture
derives
individual
tnemeganam
Even
Organizational (corporate) culture (HL only)
from
employees
ecruoser namuH 2
2.5
TOK discussion
and
groups
culture
of
of
employees.
our
When
organization”,
someone
asserts
they
actually
mean
must
change.
In
“We
that
need
to
values,
change
the
attitudes,
1.
beliefs,
practices,
and
norms
other
words,
what
changes
If culture cannot be heard,
is
seen, smelt, tasted, or
not
“culture”,
but
rather
what
individuals
think,
value,
and
do.
touched, is it appropriate
From
this
perspective,
signicantly.
where
the
spending
For
example,
practices
too
individuals
much
of
imagine
employees
time
can
sending
inuence
that
an
include
individual
long,
personal
organizational
joins
an
unauthorized
emails.
If
the
new
culture
to speak about “culture”
organization
breaks
at all in a business
and
context?
employee
2.
decides
not
to
follow
these
practices
and
only
takes
authorized
Who has the best
breaks
perspective to describe
and
sends
only
the
occasional
personal
email,
that
person
is
starting
to
the culture of an
inuence
the
culture
of
the
organization.
organization? The
In
this
they
scenario,
will
be
it
made
is
to
possible
look
that
bad.
fellow
They
employees
may
be
will
hostile
to
grumble
the
new
managers or the workers?
that
employee
3.
for
violating
unofcial
company
practice.
Possibly
fellow
employees
As an external person, is
will
it possible to really know
think
the
person
is
odd
and
not
care;
they
are
not
going
to
change
their
about the culture of an
behaviours
regardless
of
what
any
new
employee
does.
Possibly,
however,
organization, or can only
the
new
person
will
inspire
others.
For
example,
other
employees
may
start
internal stakeholders
to
feel
guilty
about
taking
long
breaks
and
sending
numerous
emails,
but
access that knowledge?
they
may
lack
the
courage
to
break
with
the
culture
of
the
organization.
Revision checklist
✓
Organizational
culture
is
the
attitudes,
beliefs
and
values
of
an
organization.
✓
A
✓
In
power
a
role
within
✓
In
a
a
culture
exists
culture,
each
highly
task
when
few
employee
controlled
culture,
a
teams
individuals
has
a
clearly
retain
most
dened
role
of
the
and
power.
operates
structure.
address
specic
problems
within
a
dened
timeframe.
✓
A
to
✓
person
the
Reasons
for
different
time
culture
exists
organization
and
culture
leadership
and
where
just
clashes
styles,
individuals
do
their
include
different
own
believe
that
they
are
superior
thing.
different
degrees
languages,
and
of
formality,
different
senses
of
urgency.
137
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2
Practice question
To
answer
Fourth
Fourth
in
the
and
the
question
Wave
Wave
effectively,
Econometrics
Econometrics
quaternary
general
below
Inc
sector.
econometric
(FWE)
FWE
tnemeganam
ecruoser namuH 2
organizations.
years
four
FWE’s
the
and
of
has
years.
the
prides
Labour
part
of
its
10-year
market-driven,
most
presents
a
an
Two
of
culture
is
aging
some
is
a
They
four
Dene
b)
Explain
With
is
With
in
a
young
new
of
and
organization,
in
data
leadership
and
10%
style
FWE
per
operating
data
analytics
community
founded
only
10
analytics.
is
laissez-faire,
exibility.
founders,
almost
company
eld
housing,
working
four
by
limited
the
health,
the
review,
very
world)
FWE
has
The
has
year
Despite
grown
for
and,
opportunity.
most
identied
American
expensive
the
A
it
major
healthcare
of
is
and
the
rapidly
past
ve
concern,
are
American
sector
healthcare
demographic
growing
companies.
companies
the
health
(American
because
population),
healthcare
the
fear
observe
changes
rapidly.
Thus,
however,
Unlike
is
FWE,
bureaucratic
is
is
and
it
the
hospital
decision-
that,
that
are
an
in
working
issue.
FWE
older,
procedures
is
not
they
have
The
the
now
had
with
other
to
healthcare
two
organization
manage
be
put
a
companies,
founders
it
large
into
are
was
work
place
now
less
10
years
force,
that
and
FWE
organization.
term
two
quaternary
possible
sector.
reasons
why
labour
turnover
could
to
FWE,
inuence
reference
to
FWE,
explain
human
discuss
two
ways
resource
the
issue
that
marks]
[4
marks]
[4
marks]
[ 10
marks]
demographic
planning.
of
[2
at
low.
reference
change
d)
private
opportunity.
become
founders
larger
a)
c)
might
bureaucratic
FWE
of
founders
clashes
much
the
large
398–402.
low.
American
culture
a
nimbleness
its
pages
slow.
FWE’s
The
and
great
in
is
at,
its
strategic
a
business
other
concerned.
ago.
is
on
workforce
is
is
for
FWE
6
(FWE)
students
decentralized,
great
and
making
as
expensive
organizational
chains
its
turnover
sector
(especially
chart
itself
organization
expanded
healthcare
the
graduate
organizational
company
youth
As
by
Unit
specializes
services
development
ago,
Inc
see
culture
clash.
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2.6
Communication
2.6 C ommunication
Formal communication
for an
organization in a given situation
refers to the ocial and
formally recognized methods
Explain barriers to communication
➔
of communication in an
tnemeganam
Evaluate formal and informal methods of communication
➔
organization. Traditionally,
An
important
element
communicates
a
business
with
of
its
functions.
the
organizational
stakeholders.
Successful
structure
is
how
Communication
is
integral
businesses
communicate
a
formal communication was
business
to
often through paper memos
how
effectively
ecruoser namuH 2
Key terms
By the end of this chap ter, you should be able to:
and meetings. Today, formal
with
communication occurs more
both
their
internal
and
external
stakeholders.
commonly through group or
Communication
can
take
two
routes:
formal
communication,
which
individual emails, some type
is
channelled
through
communication
Figure
2.6.1
the
outside
shows
the
organizational
the
“proper”
process
by
structure,
channels.
which
a
and
The
message
informal
of electronic announcement
communication
is
loop
in
communicated.
system, and, for natural
disaster and emergency
communication, via text.
Background noise
Informal communication
refers to the various ways in
which information is casually
disseminated. A manager might
“get the word out” by dropping
Sender
Media
Receiver
by people’s oces or sharing
information with a few key,
highly connected individuals
who then share the information
with others in the depar tment.
Informal communication also
includes gossip and rumours.
Feedback
Barriers to communication
Figure 2.6.1 The process of communicating a message
the various impediments that
The
sender
of
the
message
is
said
to
“encode”
the
message
by
deciding
what
they
consider
to
prevent communication from
form
the
message
should
take.
The
sender
chooses
what
be
happening when and how
the
appropriate
media
through
which
to
deliver
the
message.
The
receiver
it should. Sometimes these
is
the
person
who
If
the
message
gets
the
message
and
“decodes”
it.
barriers are linguistic (people
do not all speak the same
has
been
delivered
successfully
then
the
sender
should
language). Sometimes they
receive
some
form
of
feedback
to
show
that
the
message
has
been
are psychological (people
understood
and
acted
upon
successfully.
However,
the
message
may
not
do not “hear ” the message
get
through
clearly
because
of
so-called
“background
noise”.
This
can
be
as it was communicated).
anything
from
the
wrong
choice
of
media
to
something
outside
the
control
Sometimes they are structural
of
either
party.
Background
noise
can
even
be
due
to
deliberate
interference.
(because of organizational
Communication
which
increases
different
forms
of
can
the
methods
take
several
likelihood
of
forms
that
the
communication
communication
include
the
using
a
variety
message
are
will
combined.
of
get
The
different
across.
most
media,
Sometimes,
common
structure management has
limited oppor tunities or
windows to communicate).
following.
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2
Verbal
This
communication
communication
tnemeganam
ecruoser namuH 2
●
Interviews
●
Meetings
●
Lectures
●
Presentations
●
Telephone
Informal
verbal
●
Gossiping
●
Telephone
conversations
between the dierent models of
feedback.
communication constantly
the
with
other
However,
wrong
spoken
word.
Formal
verbal
(recorded)
might
include:
conversations
communication
combined
the
communication
Face-to-face
Many employees at work shift
on
in:
conversations
●
Verbal
relies
occurs
can
be
forms
the
language,
(unrecorded)
quick,
of
message
does
not
direct
and
communication.
can
speak
be
effective,
It
also
misunderstood
clearly,
or
does
especially
allows
if
not
the
for
if
immediate
sender
allow
for
uses
feedback.
Visual
This
can
form
take
of
communication
place
●
Presentations
●
Videos
●
Noticeboards
●
Signs
●
Sign
●
Symbols
●
Maps
visual
●
Body
●
Gestures
be
less
communication
communication
and
difcult,
communication
be
effective
cultures
sight.
Formal
visual
communication
might
include:
language
recognizable,
can
on
language
Informal
Visual
relies
through:
may
can
especially
is
if
be
effective
immediate.
not
the
respond
in
a
for
those
position
image
as
However,
or
who
to
can
it
can
same
permanent,
of
communication
limited
requires
the
be
type
have
where
picture
differently
it
this
be
sight
seen
or
if
easily.
interpretation,
the
It
as
can
also
some
image.
Written
Written
communication
communication
●
Reports
●
Letters
is
found
relies
on
the
written
word.
Formal
written
in:
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2.6
●
Notices
●
Bulletins
●
Forms
●
Press
releases
●
Memos*
●
Emails*
●
Texts
●
Blogs
(*In
some
communication
might
include:
tnemeganam
written
organizations,
memos
and
emails
would
be
considered
ecruoser namuH 2
Informal
Communication
formal
communication.)
Written
kept,
written
of
communication
and
the
written
communication
message
can
be
effective.
communication
may
be
can
lost.
be
In
can
Records
be
considered
addition,
of
amended
the
or
impersonal
feedback
is
message
revised.
and
not
may
be
However,
often
the
“tone”
immediate.
C oncep t
CRE ATIVITY
Student workpoint 2.9
When communicating with
Be reective
both internal and external
What
would
be
the
most
appropriate
method
of
communication
in
stakeholders, creativity can be
these
situations?
impor tant. It can help in ensuring
a)
Your
manager
tomorrow
for
needs
to
tell
emergency
all
staff
that
the
ofce
will
be
that the recipient pays attention
closed
to the message. However,
maintenance.
creativity could also become an
b)
You
want
to
persuade
your
managers
that
your
new
product
idea
obstacle to good communication.
is
a
good
one.
You
have
done
lots
of
research
and
have
gures
and
How can organizations
data
to
back
up
your
arguments.
communicate creatively to their
c)
A
new
the
product
rst
of
its
is
launching
kind
and
you
globally
want
it
in
to
two
sell
months’
time.
It
will
be
stakeholders? Research some
examples of successful creative
well.
communication, and also some
You
might
choose
more
than
one
method
for
each
scenario.
Think
about
examples of less successful
what
inuences
your
choices
so
that
you
can
justify
your
decision.
creative communication.
Barriers to communication
Many
barriers
disconnects
those
These
for
whom
barriers
Management
with
over
company
to
communication
often
the
can
an
communication.
between
message
be
costly.
(SHRM)
10,000
lost
exist
average
you
of
For
reasons
person
trying
explained
to
below,
communicate
and
intended.
The
Society
conducted
employees.
If
is
exist.
the
a
According
$62.4
multiply
for
study
to
million
$62.4
of
Human
400
the
per
SHRM’s
year
million
Resources
American
by
in
400
companies
ndings,
revenue
each
due
companies,
to
poor
that
is
2
more
than
$24
billion
dollars
a
year.
2
Willkomm, A C. July 2018. “6 Barriers to Eective Communication”. https://drexel.edu/goodwin/
professional-studies-blog/overview/2018/July/6-barriers-to-eective-communication/
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2
The
main
barriers
to
communication
include:
TOK links
●
1.
Communication
people
“Between what I think,
are
directly:
what I want to say, what
with
I believe I say, what I
chatty
they
greater
styles
while
are
candid
subtly,
–
people
others
and
communicate
are
quiet.
honest.
preferring
Some
Others
suggestion
differently.
people
approach
and
Some
speak
very
communication
indirectness.
say, what you want to
●
Conicts
in
the
workplace
–
there
are
often
conicts
between
people
hear, what you believe to
within
organizations,
and
when
that
occurs
communication
becomes
more
tnemeganam
ecruoser namuH 2
hear, what you hear, what
difcult.
People
may
stop
talking
altogether
or,
when
they
are
you want to understand,
communicating,
they
may
not
be
open
to
hearing
the
message
that
is
what you think you
being
conveyed.
understand, what you
●
Cultural
differences
and
language
–
in
our
increasingly
diverse
understand... They are
world,
groups
of
people
living
in
the
same
area
or
working
for
the
ten possibilities that we
same
organization
may
not
speak
the
same
spoken,
but
the
language.
In
the
business
might have some problem
world
English
is
typically
speakers
of
English
may
have
communicating” (Bernard
varying
prociency
in
the
language.
Werber). What are the
implications of this in a
Cultural
business context?
2.
differences
example,
some
communication
Is the dierence
people
between formal and
come
embedded
informal methods
is
a
play
come
very
from
in
also
people
a
major
from
direct
and
high-context
host
of
other
role
in
communication.
low-context
based
upon
cultures
cultures
the
(where
communication
words
the
For
(where
spoken).
words
Other
spoken
are
cues).
of communication a
●
Dissatisfaction
or
disinterest
with
one’s
job
–
many
people
in
the
dierence of degree or a
workplace
are
not
happy
to
be
there,
or
at
least
they
are
not
happy
to
dierence of kind?
be
3.
in
the
job
they
Does “communication”
communicates
mean the same internally
worse).
(within the organization)
colleagues
and externally (with
trying
to
in.
In
this
ineffectively
Unhappy
and
are
(which
employees
supervisors,
communicate
to
situation,
often
and
the
probably
do
they
not
may
unhappy
makes
employee
their
communicate
not
hear
often
dissatisfaction
with
what
their
others
are
them.
stakeholders such as
●
Inability
to
listen
to
others
–
listening
is
a
skill
which
many
people
customers)?
have
never
paying
about
●
Lack
fully
attention
what
of
the
and
options
before
privacy
in
to
to
what
speaker
transparency
transparent,
needs
developed.
for
they
certain
be
being
intends
and
good
make
areas.
closely
transparency,
is
Effective
a
trust
tend
to
rather
–
is
few
than
may
Employees
However,
may
have
whenever
are
be
listening).
100%
reviewing
the
right
sensitive
there
and
is
that
listening:
assumptions
active
still
be
assumptions,
active
making
than
organizations
information
make
requires
easier
Managers
decision.
guarded.
people
said
(which
reasons.
Some
listening
a
to
and
lack
of
hinders
communication.
Revision checklist
✓
Communication
in
many
forms,
within
businesses
including
formal
and
and
between
informal,
stakeholders
and
written
comes
and
not
written.
✓
Many
barriers
to
communication
exist,
and
they
can
be
very
costly
to
businesses.
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2.6
Communication
Practice question
Get
Get
Going
Going
disabled
and
the
After
a
which
(GG)
of
(the
the
that
cut
ofcer
for
to
the
the
the
of
are
the
see
the
Unit
6
pages
GG.
out
a
recent
led
398–402.
of
GG
a
She
GG
provides
with
is
experienced
have
been
have
manual
limited
nancial
Some
circulating
also
wheelchairs
mostly
to
work,
prociency
in
located).
employees.
delayered
tall
started
also
to
the
problems,
employees
about
about
the
job
organization
organizational
communication
memorandum
restructuring.
that
involve
are
cause
losses,
and
dissatisfaction.
from
to
GG
where
among
Rumours
employee
at
immigrants
country
Rumours
change
enterprise
business
management
The
social
positions
motivation
problems.
however,
sent
of
start,
low
leaving
costs.
structure,
effectively,
non-prot
workers
increasing
Recently,
to
the
nancial
is
a
Many
language
led
considering
of
is
successful
has
below
(GG)
people.
many
English
question
tnemeganam
answer
ecruoser namuH 2
To
all
problems.
employees
promised
structure
to
start
The
out
order
a
chief
explaining
sending
in
to
the
a
at
executive
reasons
weekly
memorandum.
a)
State
than
two
examples
of
a
non-prot
social
enterprise
other
GG.
b)
Explain
two
c)
Explain
one
example
of
barriers
to
example
informal
of
communication
formal
at
GG.
communication
communication
at
GG.
and
[2
marks]
[4
marks]
[4
marks]
one
Source: Adapted from IB examination paper, May 2005
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2
2.7 Industrial/employee
relations (HL only)
tnemeganam
ecruoser namuH 2
By the end of this chap ter, you should be able to:
➔
Explain sources of conict
in the workplace
➔
Evaluate approaches to conict
in the workplace, including:
approaches of employees, such as collective bargaining,
●
work-to-rule, and strike action
approaches of employers, such as collective bargaining, threats of
●
redundancies, changes of contract, closure and lockouts
Evaluate approaches to
➔
conict resolution , including conciliation and
arbitration, employee par ticipation and industrial democracy, no-strike
agreement, and single-union agreement
This
chapter
aspect
of
discusses
business
situations
generally
can
employer
that
differ
is
from
applicable
in
and
governed
country
many
employee
or
to
relations.
inuenced
country.
by
the
As
with
laws
Nevertheless,
of
a
what
any
country,
follows
is
countries.
Sources of conict (HL only)
The
in
●
primary
the
causes
workplace
Change
way,
–
this
change
introduction
poorly
●
to
in
wages).
the
of
conict.
and
Often,
by
stress.
–
workers,
than
as
–
the
for
of
and
more
internal
or
employees
example.
conict
who
in
or
the
management
in
external
will
When
the
certain
in
that
the
factors.
respond
workplace
respects
team
do
not
Either
to
the
adapt
increases.
have
focus
workplace
workers
well
employees
shareholders,
exibility
believe
a
on
or
lesser
their
higher
sufciently
business.
individuals
see
understanding
workers
all
managers
sometimes
of
workers
either
Not
likelihood
(such
values
acceptance
driven
the
goals
between
following:
technology,
business
goals
Different
be
new
Managers
consider
●
of
the
cause
interests
the
individual
conict
can
can
change,
Different
stake
of
include
have
a
the
of
world
these
culture
differently.
differences
that
differs
can
from
A
lack
cause
that
of
the
managementteam.
●
External
factors
workplace:
resources
new
available
workers
political
do
any
in
to
number
the
the
not
can
lead
of
external
economic
business,
unaccustomed
changes
managers
–
changes
to
to
an
new
factors
environment
migration
of
organization’s
laws
and
can
can
disrupt
affect
labour
can
traditional
regulations
that
the
the
bring
in
culture,
workers
and
or
like.
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2.7
Insufcient
●
Managers
resources
must
decide
employees
think
to
jobs.
that
–
no
how
they
organization
resources
have
to
are
has
Industrial/employee relations (HL only)
unlimited
allocated.
compete
for
resources.
Key terms
Frequently,
available
resources
just
Conict in the workplace
do
pay.
their
Conict
Having
often
insufcient
arises
when
resources
workers
or
also
affects
managers
employees’
demand
more
pay.
most commonly refers to
conict between management
Poor
●
communication
–
sometimes
managers
and
workers
clash
and organized groups of
because
a
lack
of
communication
has
created
misunderstanding.
when
managers
or
workers
have
tried
to
communicate,
can
occur.
control over the work .
Poor
●
performance
–
sometimes
people
do
not
do
all
levels
their
jobs
properly,
Collective bargaining
and
this
People
or
is
a
not
situation
doing
workers,
problem
is
demoted,
has
that
their
an
even
jobs
impact
addressed
or
can
properly,
on
(the
happen
others
at
whether
and
can
non-performing
sacked),
that
too
can
of
they
lead
an
are
to
occurs when employees
managers
conict.
employee
cause
organization.
is
If
tnemeganam
occur over pay, benets, and
misunderstandings
ecruoser namuH 2
workers. Disputes usually
Even
of an organization work
the
reprimanded,
together when bargaining with
management about wages
conict.
and work conditions. Typically,
collective bargaining occurs
Approaches by employees to conict in
at organizations where the
employees are unionized, and
the workplace (HL only)
union representatives assist
Collective bargaining
with the bargaining process.
When
the
management
team
and
workers
have
representatives
who
Work-to-rule
negotiate
on
collective
bargaining.
with
the
individual
employer
and
terms
and
conditions
Large
employment,
organizations
employees.
employee
of
For
both
do
not
workers
representatives
to
have
and
this
the
is
time
managers,
negotiate
called
makes
to
negotiate
better
occurs when employees
precisely follow the rules of
having
sense.
their existing contract. In this
way, they do the minimum
Work-to-rule
required. They meticulously
follow every single regulation,
Sometimes
the
collective
bargaining
system
may
not
work,
and
an
which may slow down work or
industrial
dispute
may
arise.
Workers
may
start
a
“go
slow”,
which
means
decrease productivity. During
they
deliberately
work
below
their
potential.
Alternatively,
they
may
work-to-rule, workers typically
“work-to-rule”,
which
involves
working
strictly
by
the
company
rulebook–
will not work over time or
and
following
every
rule
in
the
organization
would
probably
bring
it
to
a
beyond their contracted hours.
standstill.
An
overtime
case,
the
ban
occurs
organization
when
may
employees
nd
it
very
refuse
difcult
to
to
work
overtime.
In
this
Strike action
operate.
when workers stop working
because they are dissatised
Strike action
with work conditions or
Perhaps
the
workers
strike
A
can
action
strike
is
working
to
meet
strikes,
their
or
“go
an
employers
from
time.
the
is
to
compensation. When workers
take
“go on strike”, the work
strike”.
stoppage provides leverage
stop
against the employer to
not
are
may
pay
not
are
receive
for
discuss pay and conditions.
During
workers
union
that
employer
do
who
they
the
on
demands.
workers,
If
take
step
employees
force
their
unionized,
of
drastic
legally
when
to
working.
pay
most
a
As par t of a strike, employees typically try
strike
period
to raise awareness and sympathy for their
demands in the hope that this will pressure
management into accepting them
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2
Approaches by employers to conict in
Key terms
the workplace (HL only)
Threats of redundancies
Collective bargaining
when management threatens
tnemeganam
ecruoser namuH 2
to eliminate employment
The
collective
positions if workers do not
and
management
bargaining
accept terms in an industrial
collective
dispute. Were those positions
sides
(or
bargaining
and
arrive
at
a
process
someone
process
involves
both
representing
is
to
nd
resolution
to
the
worker
representatives
management).
common
ground
The
aim
between
of
the
the
two
conict.
to be made redundant, the
Threats of redundancies
workers in them would lose
their jobs.
A
in
redundancy
the
occurs
business
no
when
longer
an
employer
needs
to
be
determines
performed,
that
and
a
thus
position
the
or
job
position
Changes of contract
is
made
redundant.
when agreement is reached
reference
over new contract terms in
redundancies
collective bargaining and
agree
to
with
In
people
as
a
colloquial
(“He
way
was
to
English,
made
put
the
term
redundant”).
pressure
on
is
often
used
Employers
employees
to
be
in
can
threaten
more
willing
to
management.
negotiation. Changes are
Changes of contract
made in the existing contract
between management and
labour, and typically relate to
pay, benets, and control over
the work .
In
most
developed
unilateral
changes
depending
employer
on
the
may
contract
if
changes
to
all
changes
might
be
the
countries,
to
the
laws
of
right
is
country
permitted
correct
the
contract
to
legal
of
one
severely
where
make
the
certain
party
in
limited
dispute
is
changes
considerations
are
a
by
contract
law.
to
occurring,
to
an
followed.
make
However,
the
employment
If
those
possible
Lockout
when, as par t of the
the
contract
give
are
some
objectionable
bargaining
to
power
employees,
to
the
even
the
threat
of
employer.
negotiating process,
management locks up
Lockouts
the company or factories,
A
lockout
is
a
work
stoppage
that,
unlike
a
strike,
is
initiated
by
preventing workers from
management.
Employees
are
locked
out
of
the
work
premises
and
therefore
entering them. During a
they
are
unable
to
work.
Like
a
strike,
during
a
lockout
workers
are
not
lockout, workers can no longer
paid
because
may
be
they
are
not
working.
Depending
on
where
they
live,
workers
can work and so they do not
entitled
to
some
compensation
from
the
government
during
the
receive any pay.
period
of
the
lockout.
Closure
Closure
refers to the permanent or
Closure
is
conict
in
the
most
drastic
action
that
the
employer
can
take
during
a
temporary shutting down of a
the
workplace,
as
it
may
mean
the
permanent
closure
of
the
site, such as a factory, a plant,
business
itself.
or an oce. Many countries
have national laws, which
vary from country to country,
Approaches to conict resolution (HL only)
stipulating various conditions
Conciliation and arbitration
and consequences of closure.
Conciliation
and
arbitration
are
two
ways
to
resolve
a
conict
between
Conciliation
management
occurs when a third-par ty
party
–
a
and
labour.
conciliator
or
Both
an
approaches
arbitrator
–
to
involve
help
bringing
resolve
the
in
an
outside
conict.
conciliator mediates between
In
conciliation,
a
conciliator
will
offer
ideas
to
management
and
labour
management and labour and
with
the
hope
that
these
ideas
may
form
the
pathway
to
a
resolution,
but
oers ideas that may help
any
nal
decisions
are
made
by
management
and
labour.
In
arbitration,
the two sides come to an
the
third-party
arbitrator
has
the
authority
to
settle
the
disagreement.
agreement
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2.7
With
either
conciliation
or
arbitration,
an
Industrial/employee relations (HL only)
assumption
is
that
the
conciliator
Key term
or
the
arbitrator,
arrive
at
a
as
an
settlement
outside
that
is
party,
fair
to
can
both
look
at
the
dispute
objectively
and
sides.
Arbitration
Employee par ticipation and industrial democracy
occurs when a third-par ty
arbitrator mediates between
Employee
participation
and
industrial
democracy
are
used
to
described
management and labour.
situations
where
workers
make
decisions
or
share
responsibility
and
Unlike in conciliation, the
in
the
workplace.
In
some
countries,
traditionally
it
is
rare
for
to
participate
workers
are
in
decision-making.
In
other
countries,
however,
to decide how the conict
viewed
differently.
Though
the
shareholders
own
the
company,
between management and
the
company
(and
therefore
the
shareholders)
could
not
make
a
prot
labour will be resolved.
without
about
the
workers,
employee
circumstances
so
the
workers
participation
vary
from
and
ought
to
industrial
company
to
have
some
democracy
company
and
say.
are
Generalizations
difcult,
country
to
tnemeganam
arbitrator has the authority
workers
ecruoser namuH 2
authority
because
country.
Student workpoint
Employee
participation
and
industrial
democracy
have
a
bearing
on
the
2.10
nature
of
conict
employee
workers
resolution.
participation
have
a
right
and
to
In
countries
industrial
some
voice
where
a
democracy,
in
tradition
an
exists
assumption
decision-making.
In
of
is
that
countries
Be a researcher
without
Use
such
a
tradition,
the
assumption
is
that
the
shareholders
alone
the
internet
research
their
designated
agents:
management)
have
the
right
to
make
agreement
is
a
stipulation
in
the
collective
industrial
dispute
that
in
country.
●
no-strike
an
decisions.
No-strike agreement
A
bargaining
your
What
has
during
the
lifetime
of
the
contract,
workers
will
not
go
on
strike.
caused
typically
agree
to
a
no-strike
stipulation
in
exchange
for
some
a
by
management
during
the
collective
it
one
combination
of
concession
many
made
the
Was
Workers
or
will
occurred
agreement
dispute?
that,
to
(through
factors?
bargainingprocess.
●
What
strategies
were
Single-union agreement
adopted
A
single-union
represent
the
agreement
workers’
occurs
interests
when
in
the
workers
collective
agree
that
one
bargaining
union
will
employees
process.
●
What
was
outcome
dispute?
Employee
and
employer
representatives
act
on
behalf
of
employees
✓
in
and
b)
the
the
of
the
Was
there
a
“winner”?
negotiations.
Collective
bargaining
through
trade
a
the
and
clear
employers
a)
employers?
Revision checklist
✓
by
is
union)
a
negotiation
and
their
between
employers
to
employees
agree
(usually
wages
and/or
TOK links
working
conditions.
1.
✓
If
in
collective
bargaining
employees
are
not
getting
the
outcomes
In what ways can
that
language be both a source
they
seek,
they
can
take
stronger
action
to
improve
their
bargaining
of conict in the workplace
position,
eg
work-to-rule
or
going
on
strike.
and the main vehicle of
✓
When
employees
work-to-rule,
they
follow
every
rule
and
regulation
conict resolution?
exactly,
which
often
means
slowing
down
production.
When
workers
2.
strike,
they
refuse
to
work
and
may
also
protest
outside
their
Are conicts always
workplace.
about a dierence
✓
Employers
may
negotiate
by
threatening
redundancies
or
changing
the
between stakeholders’
terms
of
employees’
contracts.
This
would
put
pressure
on
workers
and
perspectives?
might
persuade
them
to
agree
to
a
settlement.
3.
✓
A
lockout
involves
employees
from
closing
working
the
and
business
being
for
paid.
a
short
time,
preventing
Should good managers
anticipate and therefore
prevent all conicts?
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2
Practice question
To
answer
Gabriel
In
de
1752,
factory
mines
tnemeganam
ecruoser namuH 2
be
at
was
also
Despite
were
19th
the
to
these
as
as
late
cut.
new
6
for
pages
398–402.
at
coal
other
open
long
French
of
different
the
14
those
vocations
for
to
a
city.
to
a
coal
history
The
make
and
glass
protable
glassmaking
the
purposes.
mine
of
As
glass,
for
and
the
coal
glass,
the
wine.
was
long:
–
well
right
began
southern
as
ailments,
–
time.
years.
who
and
the
than
For
The
most
one
work
reached
the
average
age
(including
an
best-paid
During
mine
they
century,
factory.
of
less
The
and
Soon,
the
many
complaints.
other
thing,
was
of
types
the
also
death
of
on-the-job
very
pinnacle
workers,
of
dangerous,
the
was
whose
efforts
by
both
their
in
France
trade–
low
occupation
of
like
a
the
they
They
late
control
19th
over
century,
guild
than
who
a
was
controlled
management
many
oor
took
changes,
Operating
shop
the
the
shop
targets.
glassblowing,
the
in
determined
and
new
day).
of
medieval
instituted
the
over
and
profession.
considerable
most
production
owners
(for
had
advanced,
and
the
new
over
the
including
machinery
and
workers’
and
determined
pay
soon
the
work.
Carmaux
factory
sides
in
and
more
owners
Management
threatened
pride
workers
glassworkers
who
took
practices
of
The
traditional
also
glassworks
management
new
than
glassworkers
the
craft
and
automation
skill
century
quality
new
great
glassworkers
their
met
took
industrial
18th
workforce.
Management
changes,
the
the
apprentice
as
19th
far
glassworkers
the
controlled
rhythms
Despite
Unit
the
thus
amounts
factory
Moreover,
degree
required
got
users
very
risks,
long
glassworks
high
was
industrial
admitted
a
the
employment
lung
paid
century.
the
and
bottles
glass
other
glassworkers
In
in
glassblowers
workplace.
oor,
see
dangerous).
well
modern
other
the
suffered
received
France,
made
period
compared
effectively,
considerable
sector
master
often
to
factory
training
Solages
glassmaking
sold
work
and
de
Carmaux,
secondary
below
Solages
required
Solages
The
questions
Gabriel
in
and
factory
could
the
at
took
strike
responded
in
Carmaux
collective
various
by
types
action.
arguing
would
no
bargaining,
of
action
in
The
workers
that,
longer
workers
response
had
without
be
these
competitive.
and
to
the
conict.
Source: Adapted from Scott, J W. 1980. The Glassworkers of Carmaux, French Craftsmen
and Political Action in a Nineteenth-Century City
a)
Dene
b)
With
the
reference
secondary
c)
Explain
Discuss
on-the-job
to
the
training.
Solages
glassworks,
explain
the
one
one
approach
industrial
advantage
of
offering
approach
that
one
disadvantage
highest
that
workers
conict.
and
the
industrial
management
could
take
in
to
could
trying
the
wages
to
marks]
[2
marks]
[4
marks]
[ 10
marks]
Solages
in
take
[2
term
sector.
glassworks
d)
term
France.
and
resolve
one
the
148
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FIN ANCE AND
3
stnuocca dna ecnaniF 3
ACCOUNTS
3.1 Introduction to nanc e
By the end of this chap ter, you should be able to:
Explain the role of nance for businesses in terms of
➔
capital
expenditure and revenue expenditure
Introduction
All
forms
activities
reasons,
its
of
exact
The
role
growth
role
of
and
nance
or
The
starting
nance
expenditure
organization
undertake.
including
future
the
business
they
a
business,
expansion.
plays
for
in
As
their
businesses
revenue
need
money
a
funding
could
for
be
its
result,
be
nance
day-to-day
business
can
or
required
businesses
for
for
a
the
various
variety
operations,
need
to
be
of
or
for
clear
on
operations.
categorised
as
either
capital
expenditure
Capital expenditure
This
is
money
spent
to
Key terms
acquire
items
in
a
business
that
will
last
for
more
Capital expenditure
than
as
a
year
xed
and
assets
equipment.
income
for
may
and
These
the
be
used
include
xed
business
over
and
over
machinery,
assets
are
land,
needed
over
the
longer
cost,
most
again.
for
Such
buildings,
the
items
are
vehicles,
purpose
of
known
and
generating
money spent to acquire xed
assets in a business
term.
Revenue expenditure
Due
to
their
high
initial
xed
assets
can
be
used
as
collateral
money used in the day-to-day
(nancial
security
pledged
for
repayment
of
a
particular
source
of
running of a business
nance,
such
as
bank
loans).
Capital
expenditures
are
therefore
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3
long-term
Student workpoint
For
3.1
investments
example,
expenditure
spread
over
when
a
because
the
long
intended
business
the
to
assist
businesses
to
a
is
purchases
benets
accrued
van,
to
this
the
succeed
seen
business
as
and
grow.
capital
from
this
will
be
term.
Be a researcher
Choose
any
Revenue expenditure
two
multinational
companies
This
that
you
are
interested
is
money
payments
Using
the
internet
or
available
out
for
They
each
its
main
are.
capital
stnuocca dna ecnaniF 3
a
day-to-day
rent,
running
wages,
raw
of
a
business.
materials,
These
insurance,
not
involve
the
purchase
of
longer-term,
xed
assets.
and
Funds
expenditure
operational
need
and
to
should
be
available
therefore
immediately
provide
instant
to
keep
the
benets,
unlike
and
expenditure
which
has
a
long-term
focus.
expenditures
Separately
company’s
in
do
revenue
capital
revenue
the
include
company
business
what
on
expenses
resource,
for
nd
or
any
fuel.
other
spent
in.
list
each
expenditures
table.
Businesses
need
expenditure
required
difcult
a
to
for
school
teachers
is
as
to
be
this
make
them
it
long-term
to
get
spending
or
cautious
makes
paying
out
most
food
not
to
difcult
have
for
investments.
of
of
a
its
sudden
money
suppliers,
and
consistently
them
In
build
addition,
crisis
it
salaries
costs
are
high
revenue
sufcient
situation.
paying
these
to
makes
For
and
not
capital
it
extremely
example,
bonuses
checked,
if
to
it
TOK discussion
may
be
student
1.
unable
to
demand.
build
In
a
new
classrooms
business,
a
high
to
accommodate
level
of
expenses
any
may
increases
also
in
erode
What role does intuition
theprots.
play in nancial decision-
making?
2.
As nance is largely
Revision checklist
about mathematics, how
✓
Capital
expenditure
is
money
spent
to
acquire
xed
assets
in
a
business,
dierent is knowledge
which
include
machinery,
land,
buildings,
vehicles
and
equipment.
about nance from
✓
Revenue
expenditure
business,
such
is
money
spent
on
the
day-to-day
running
of
a
knowledge in other areas
as
rent,
wages,
raw
materials,
insurance
and
fuel.
of business management,
such as human resource
management?
3.
Is nance “value free”?
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3.1
Introduction to nance
Practice question
answer
Peter
in
the
Dee
is
question
an
South-East
developing
decisions
about
the
have
been
their
revenue
to
track
believes
better
a)
years
to
their
revenue
farm
he
been
why
plans
for
Asia.
6
for
wants
to
worked
been
progress
a
to
to
most
and
398–402.
them
longer
assess
help
two
with
how
of
of
time.
useful
have
in
purchasing
farmers
costs)
types
farmers
involved
period
the
farmers
fertilizer
these
with
heavily
helping
last
because
pages
has
has
plans,
also
approach
the
and
He
wages
not
the
plans
with
been
able
sustainably.
plans
will
He
lead
to
farmers.
understanding
expenditure
South-East
he
as
Unit
would
tracking
(such
balanced
an
that
Now
expenditure
prospects
years.
expenditure
farmers.
a
15
inputs
has
see
consultant
over
expenses
having
Explain
for
capital
the
growth
effectively,
agricultural
Asia
their
Over
below
would
be
of
both
capital
benecial
to
expenditure
the
farmers
and
stnuocca dna ecnaniF 3
To
in
[4
marks]
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3
3.2 S ources of nanc e
By the end of this chap ter, you should be able to:
Comment on the following internal sources of nance:
➔
personal funds,
retained prot and sale of assets
Comment on the following external sources of nance:
➔
share capital,
loan capital, overdrafts, trade credit, crowdfunding, leasing,
micronance providers
and business angels
Examine the appropriateness of
stnuocca dna ecnaniF 3
➔
shor t- or long-term sources of nance
for a given situation
The
sources
of
nance
for
a
business
can
be
either
internal
or
external.
Internal sources of nance
Internal
to
nance
access
sources
by
is
money
businesses
include
the
obtained
that
are
from
already
within
the
established.
business
Some
of
and
is
these
easier
internal
following.
Personal funds
Key term
This
Personal funds
a source of nance for sole
traders that comes mostly
from their own personal
savings
is
their
a
traders
trader
way.
key
own
source
personal
maximize
shows
This
should
is
the
a
of
nance
savings.
their
control
personal
also
sole
a
good
trader
for
By
sole
over
the
commitment
signal
need
to
to
traders
investing
to
other
and
using
business.
the
In
comes
them
or
for
mostly
personal
by
the
investing
nancial
from
savings,
addition,
business
investors
approach
it
their
sole
sole
in
this
institutions
additional
sources
ofnance.
Advantages
●
The
the
●
It
sole
trader
knows
exactly
how
much
moneyis
available
to
run
business.
provides
the
nancesthan
does
not
lenders,
need
who
sole
other
to
trader
pay
could
with
nance
the
funds
decide
muchmore
options.
to
back
It
also
or
withdraw
rely
control
means
on
their
over
that
outside
support
the
the
sole
trader
investors
at
any
or
time.
Disadvantages
●
It
poses
be
a
large
investing
risk
their
to
the
life’s
owners
savings,
or
sole
hence
traders
putting
a
because
strain
on
they
could
family
or
personallife.
●
If
a
the
savings
business,
are
not
especially
sufcient
if
this
is
it
the
may
only
prove
difcult
source
of
to
start
or
maintain
funding.
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3.2
Sources of nance
Retained profit
Key terms
This
is
the
paid
out
prot
is
prot
dividends
and
may
considered
for
a
that
to
be
to
remains
be
its
after
business
shareholders.
reinvested
one
a
of
the
back
most
It
into
is
(a
also
the
prot-making
known
business
important
as
for
entity)
ploughed-back
growth
long-term
has
purposes.
sources
of
It
nance
business.
Retained prot
prot that remains after a
business (a prot-making
entity) has paid out dividends
to its shareholders
Advantages
Sale of assets
●
It
is
cheap
because
●
It
is
a
●
It
is
exible
as
●
The
owners
have
it
does
not
incur
interest
charges
(like
bank
loans
do).
when a business sells o its
permanent
source
of
nance
as
it
does
not
have
to
be
repaid.
unwanted or unused assets to
can
be
used
control
from
other
in
over
a
way
their
nancial
the
business
retained
deems
prots
institutions
such
raise funds
t.
without
as
stnuocca dna ecnaniF 3
interference
it
banks.
Disadvantages
Start-up
●
businesses
will
not
have
any
retained
prot
as
they
are
newventures.
If
●
retained
or
A
●
prot
high
paid
retained
out
stock
to
too
low,
buyers
year
than
to
non-prot
nancial
prot
may
shareholders
generously
For
is
it
may
not
be
sufcient
for
business
growth
expansion.
its
a
similar
mean
that
either
dividends.
protable
This
very
could
business
little
be
that
or
less
nothing
was
attractive
distributes
to
dividends
shareholders.
businesses
is
as
referred
or
to
entities,
as
the
“retained
money
remaining
at
the
end
of
a
surplus”.
Sale of assets
This
is
when
a
funds.
These
assets
obsolete
also
sell
business
that
machinery
off
any
or
excess
sells
are
off
no
its
redundant
land
or
unwanted
longer
or
required
buildings.
equipment
To
they
unused
by
the
raise
may
assets
to
business
cash,
not
raise
include
businesses
be
could
using.
Advantages
This
●
is
which
No
●
a
good
are
not
interest
or
way
of
being
raising
cash
from
capital
that
is
tied
up
in
assets
used.
borrowing
Student workpoint
3.2
costs
are
incurred.
Be a researcher
Using
an
internet
Disadvantages
search
This
●
option
is
only
available
to
established
businesses
as
new
engine
Google,
may
lack
excess
assets
to
nd
at
a
It
can
be
time-consuming
to
nd
a
buyer
for
the
assets,
especially
large
extent
some
cases,
businesses
adopt
a
sale
and
leaseback
approach,
selling
an
asset
that
the
business
still
needs
to
use.
For
business
to
internal
of
nance
can
sell
an
asset
to
a
specialist
rm
and
then
lease
What
are
to
internal
the
sources
example,
they
the
on
which
main
involves
ve
rely
machinery.
operate.
In
that
for
sources
obsolete
as
least
sell.
organizations
●
such
businesses
it
use,
and
why?
back.
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3
External sources of nance
External
usually
nance
from
sources
is
money
nancial
include
the
obtained
institutions
from
or
sources
outside
individuals.
Some
the
of
business,
these
external
following.
Share capital
This
is
is
also
money
raised
known
as
shareholders
term
of
a
Unlike
the
stnuocca dna ecnaniF 3
where
as
of
the
to
limited
Stock
Johannesburg,
Exchange.
of
capital
shares
Buyers
entitled
is
to
of
of
a
dividends
the
limited
these
company
shares
when
maximum
are
prots
amount
and
known
are
the
as
made.
The
shareholders
raise.
company
shares
companies
example
The
Other
and
sale
exchange.
(for
investors.
exchange
be
limited
stock
The trading oor of the Tokyo stock
the
capital.
share
public
securities
willing
may
intend
private
shares
known
to
and
authorized
company
from
equity
York
is
shares
oldest
global
New
This
stock
that
are
a
not
in
bonds)
exchange
sold
a
regulated
and
exchanges
stock
are
sold
and
are
in
include
to
the
special
public,
share
purchased
the
market
organized
world
Bombay,
is
market
and
the
Tokyo,
sold
London
Nairobi,
exchanges.
Advantages
Key terms
●
It
is
a
permanent
(repaid
Share capital
they
by
have
the
to
source
of
business).
nd
a
If
buyer
capital
as
it
will
shareholders
for
their
not
want
need
to
get
to
be
their
redeemed
money
back
shares.
money raised from the sale of
shares of a limited company
●
There
are
no
additional
interest
payments
and
this
relieves
the
business
from
expenses.
Loan capital
money sourced from nancial
Disadvantages
institutions such as banks,
●
Shareholders
will
expect
to
be
paid
dividends
when
the
business
makes
with interest charged on the
a
prot.
loan to be repaid
●
For
public
diluted
the
or
stock
limited
change
companies,
hands
from
the
ownership
the
original
of
the
company
shareholders
to
may
new
be
ones
via
exchange.
Loan capital
Also
known
institutions
however,
the
full
may
not
be
as
these
loan
either
Avariable
as
capital,
banks.
xed
and
or
money
is
plus
variable.
rate
is
A
xed
changes
the
on
are
interest)
xed
for
sourced
charged
(installments)
(principal
remains
interest
this
Interest
repayments
amount
uctuate
market
debt
such
loan
usually
is
paid.
interest
entire
from
the
periodically
The
of
based
to
be
spread
rate
term
nancial
is
interest
one
the
on
repaid;
evenly
that
loan
the
until
rates
does
repayment.
prevailing
conditions.
Advantages
●
Loan
capital
specic
●
Its
is
accessible
and
can
be
arranged
quickly
for
a
rm’s
of
time,
purpose.
repayment
reducing
the
is
spread
burden
to
out
over
the
business
a
predetermined
of
having
to
period
pay
it
in
a
lump
sum.
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3.2
Large
●
on
The
●
to
organizations
the
amount
owners
dilute
still
their
can
they
negotiate
want
have
full
to
for
lower
interest
charges
Sources of nance
depending
borrow.
control
of
the
business
if
no
shares
are
issued
ownership.
Disadvantages
●
The
●
In
capital
some
cases,
have
to
be
collateral
redeemed
(security)
even
will
if
be
the
business
required
is
making
before
any
a
loss.
funds
lent.
●
Failure
●
If
to
repay
variable
may
be
the
interest
faced
loan
rates
with
a
may
lead
increase,
high
debt
to
a
the
rm
seizure
that
repayment
of
has
a
a
rm’s
variable
assets.
rate
loan
burden.
stnuocca dna ecnaniF 3
are
will
Overdrafts
Key terms
This
is
than
when
it
a
lending
currently
account.
has
a
In
limit
has
most
placed
Exceeding
the
institution
in
its
cases,
on
limit
it.
set
allows
account,
the
is
to
higher
withdraw
more
overdrawing
amount
charged
attract
rm
called
overdrawn
Interest
may
also
a
only
is
an
on
agreed
the
additional
money
from
amount
amount
Overdraft
the
that
when a lending institution
overdrawn.
costs.
allows a rm to withdraw more
money than it currently has in
its account
Advantages
Trade credit
●
It
provides
an
opportunity
for
rms
to
spend
more
money
than
they
an agreement between
have
in
their
account
(even
in
situations
where
there
is
no
money
in
businesses that allows the
the
account),
which
greatly
helps
in
settling
short-term
debts
such
as
buyer of goods or services to
paying
suppliers
or
wages
for
their
staff.
pay the seller at a later date
●
It
is
the
●
a
exible
business
Charging
option
form
at
a
loan
nance
particular
interest
than
of
only
on
as
its
point
the
demand
in
will
depend
on
the
needs
of
time.
amount
overdrawn
can
make
it
a
cheaper
capital.
Disadvantages
●
Banks
●
Due
can
to
high
request
the
for
variable
interest
the
overdraft
nature
of
an
to
be
paid
overdraft,
the
back
at
bank
very
can
short
at
times
notice.
charge
rates.
Trade credit
This
or
is
an
agreement
services
occurs
at
suppliers
to
the
the
time
of
(trade
businesses
between
pay
are
seller
at
trading.
credit
known
businesses
a
later
The
providers)
to
extend
credit
to
at
No
allows
lasts
least
the
buyer
immediate
period
usually
it
that
date.
offered
from
180
30
cash
by
to
most
90
of
goods
transaction
creditors
days;
or
jewelry
days.
Advantages
●
By
delaying
cash
●
It
is
ow
an
credit
payments
position
to
than
interest-free
if
suppliers,
they
means
of
paid
businesses
cash
raising
are
left
in
a
better
immediately.
funds
for
the
length
of
the
period.
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3
Disadvantages
●
Debtors
(trade
discounts
●
Delaying
lead
to
had
payment
poor
refusing
credit
they
to
receivers)
purchased
to
creditors
relations
engage
lose
by
or
between
in
future
out
on
paying
the
suppliers
the
possibility
of
getting
cash.
after
debtors
transactions
and
with
the
agreed
suppliers,
the
period
with
may
the
latter
former.
Crowdfunding
Key term
This
Crowdfunding
when a business venture
or project is funded by a
large number of people each
stnuocca dna ecnaniF 3
contributing a small amount
is
where
people
use
of
each
the
through
ability
order
a
business
vast
networks
crowdfunding
to
to
venture
contributing
appeal
reach
to
a
a
a
or
small
of
people
websites
who
or
sufciently
specied
project
amount
nancial
funded
money.
can
social
large
is
of
be
a
accessed
media.
group
by
of
Its
large
number
Crowdfunding
primarily
success
potential
of
makes
online
relies
upon
contributors
the
in
target.
of money
Examples
of
40Billion,
Funding4Learning
crowdfunding
platforms
and
include
Indiegogo,
Kickstarter,
Fundable.
Advantages
●
Crowdfunding
interact
●
It
is
a
with
valuable
business
It
by
●
a
The
team
is
the
a
to
thousands
project’s
marketing
online
of
fundraising
because
platform
can
investors
who
can
see,
campaign.
pitching
result
in
a
project
media
or
attention
that
opportunity
for
feedback
suggestions
about
and
how
expert
to
guidance.
improve
it
can
By
be
sharing
provided
experts.
still
raising
including
It
of
of
the
idea,
business
gets
form
access
a
business.
an
business
when
●
the
provides
the
share
through
publicises
●
provides
and
maintains
funds.
how
It
much
can
to
full
control
decide
ask
for,
how
and
and
to
won’t
have
structure
then
choose
the
how
to
forfeit
control
campaign,
to
operate
once
it
funding.
good
businesses
alternative
that
have
nance
struggled
option
to
get
as
it
provides
bank
loans
or
another
pathway
traditional
for
funding.
Crowdfunding is a popular strategy
used by businesses to raise funds
Disadvantages
●
Businesses
seeking
crowdfunding
accessibility,
given
way
●
The
time.
to
idea
is
does
of
rules
Fees
of
need
the
to
are
be
the
to
not
paid.
amount
a
is
popular
met
then
Many
raised.
of
plan
their
be
the
money
a
and
(like
and
campaign
crowdfunding
The
fees
are
project
of
major
platforms
attack,
and
rejection.
accepted
platforms
allowed
the
As
and
a
at
any
clever
competitors.
scrutiny
to
competition.
advantages
on
from
is
its
projects
going
what
strong
of
detailed
thorough
it
Some
about
contributions
reduce
need
themselves
mean
have
because
numerous
subject
not
choice.
detailed
requirements
●
are
popular
businesses
differentiate
platform
very
crowdfunding
quite
there
So
business
solid
is
by
might
is
not,
never
platforms
may
Having
take
minimal,
otherwise
a
crowdfunding
Kickstarter)
what
usually
the
have
and
be
a
if
all
seen.
percentage
but
they
still
get.
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3.2
There
●
it
can
the
is
a
be
potential
hard
business
addition,
same
to
plan
most
project
risk
of
recover.
is
not
failure.
A
good
Hence,
the
to
platforms
the
crowdfunding
crowdfunding
enough
crowdfunding
twice.
If
failed
the
majority
will
not
consequences
campaign
campaign
of
allow
of
a
fails,
sign
investors.
you
failure
is
are
to
list
Sources of nance
that
In
the
severe.
Leasing
Key terms
is
where
company
or
purchase
by
into
(which
a
it
with
usually
the
companies
(lessee)
acquire
the
for
asset.
are
enters
use
lessor
a
or
Large
known
rm
and
than
lease
to
lessee.
where
three
contract
assets
use
their
In
at
such
a
leasing
cases,
of
are
having
are
leasing
given
the
a source of nance that allows
made
businesses
the
airlines,
Leasing
machinery,
without
payments
end
they
as
as
asset
some
the
with
such
an
leasing
years)
organizations
to
a
monthly
agreement,
more
into
particular
allows
Periodic
lease
lasts
or
This
cash.
between
nance
purchasing
car
to
property.
agreement
get
business
(lessor)
equipment
to
a
a rm to use an asset without
may
having to purchase it with cash
period
option
electronics
of
and
Micronance providers
institutions that provide
assets.
stnuocca dna ecnaniF 3
This
banking services to low-
income or unemployed
Advantages
individuals or groups who
would otherwise have no other
●
A
rm
does
not
need
to
have
a
high
initial
capital
outlay
to
purchase
access to nancial services
the
●
asset.
The
lessor
takes
on
the
responsibility
of
repair
and
maintenance
of
the
asset.
●
Leasing
or
for
is
useful
short
when
periods
of
particular
assets
are
required
only
occasionally
time.
Disadvantages
●
Leasing
of
●
A
an
can
asset
leased
turn
due
asset
additional
out
to
to
the
cannot
source
of
be
more
expensive
accumulated
act
as
total
collateral
than
costs
for
a
of
the
outright
the
leasing
business
purchase
charges.
seeking
a
loan
as
an
nance.
Microfinance providers
A
micronance
unemployed
provider
individuals
access
to
nancial
access
to
conventional
microcredit,
accounts),
to
reach
become
Bank
services.
which
microinsurance;
is
and
among
excluded
banking
groups
These
banking
the
and
and
Examples
Indonesia,
Faulu
would
include
services.
services.
customers
services
who
provision
savings
other
self-sufcient.
Rakyat
offers
or
of
small
DTM,
of
with
other
lack
include
clients;
known
as
checking
micronance
an
is
opportunity
providers
Grameen
or
no
that
services
poor
(also
goal
micronance
Kenya
to
accounts
them
have
businesses
loans
ultimate
provide
of
low-income
Micronance
small
current
The
to
otherwise
Bank
include
and
to
51Give,
Kiva.
Advantages
●
Most
micronance
nancial
●
They
to
institutions
do
not
seek
any
collateral
for
providing
credit.
provide
or
individuals,
disburse
groups
nancialemergency.
or
loans
small
quickly
and
businesses,
with
so
less
they
formalities
can
meet
any
Micronance can transform lives
and provide hope to many
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3
●
They
have
loans,
●
They
by
an
extensive
housing
promote
providing
minimal
loans,
portfolio
self-sufciency
funds
to
investment
of
loans,
including
working
capital
etc.
and
individuals
but
will
entrepreneurship.
to
set
provide
a
up
a
They
business
sustainable
that
do
this
may
need
prot.
Disadvantages
●
Micronance
event
●
They
of
a
offer
The
lower
stnuocca dna ecnaniF 3
same
In
that
interest
offer
way
rates
as
the
on
much
their
is
loans
banks
or
volume
of
have
nancial
are
that
recovery
not
methods
legal
capital
in
the
representation.
than
other
nancial
amounts.
high
because
money
their
harsh
does
larger
partly
borrow
Hence,
adopt
amounts
traditional
large
can
customer
loan
This
they
functions.
despite
the
provide
rates.
addition,
their
if
smaller
institutions
●
institutions
default
nd
from
and
they
it
easy
these
operating
cost
transactions
they
do
to
every
it
difcult
operate
in
accumulate
banks
per
nd
not
in
order
funds.
to
transaction
is
to
the
execute
quite
high
day.
Business angels
Key term
Also
known
as
angel
investors,
these
are
afuent
individuals
who
provide
Business angels
nancial
highly auent individuals
equity
who provide nancial
good
capital to small star t-ups or
time
entrepreneurs in return for
their
capital
in
their
potential
initial
to
small
start-ups
businesses.
for
high
capital
They
returns
injection
or
or
entrepreneurs
invest
or
in
future
high-risk
growth.
continually
in
return
businesses
They
support
for
the
may
ownership
that
show
provide
businesses
a
one-
through
lifetime.
ownership equity in their
businesses
Advantages
●
Business
lenders
angels
to
successful
with
No
them
in
does
●
one
not
They
or
both
get
offer
succeed
the
using
best
an
is
to
negotiation
businesses.
who
interest
get
the
paid
open
business.
understand
Their
of
required.
and
institutions
they
the
amount
of
Angel
angel
other
because
and
nance
stake
than
is
exibility
sources
ownership
business
This
in
in
investor
risk
risk-taking
this
or
usually
involved
attitude
situation.
investors
the
are
fund
business.
benet;
if
If
the
business
the
business
not,
the
angel
back.
valuable
by
nancial
a
of
exchange
succeeds,
more
start-up
entrepreneurs
repayment
and
or
establishing
make
●
are
small
knowledge
their
and
extensive
they
focus
business
on
helping
experience
a
business
coupled
with
good
capital.
Disadvantages
●
Business
the
angels
businesses
may
they
assume
invest
a
in,
large
degree
therefore
of
control
diluting
the
or
ownership
ownership
of
in
the
entrepreneur.
●
They
rst
This
may
few
can
expect
years,
create
a
substantial
sometimes
additional
return
equal
on
their
to
10
times
pressure
on
the
investment
their
original
within
the
investment.
business.
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3.2
Sources of nance
Micronance
service
have
difculty
nancial
at
is
people.
services.
The
the
as
setting
demands
the
in
The
of
as
of
to
so
faces
developing
formal
greater
in
in
the
women.
various
can
nancial
India
countries
channels
micronance
empower
or
costs
the
formal
and
is
that
help
do
not
meet
small-scale
stability.
1970s
Despite
challenges
small
with
at
India
level
loans
no
high
aims
the
or
people
as
its
a
solution
strong
related
to
to
potential,
accessibility
a
to
lend
to
the
are
unable
to
provide
The
problems
alternative
to
fail
collateral.
create
interest
through
increasing
institutions
these
employment
of
poor
in
grassroots
banking
India
moneylenders
women
poor,
In
through
providing
sector
in
income
Micronance
the
products.
services
introduced
way
reason
leaves
local
by
as
India.
transaction
This
such
accounts,
rural
was
a
population
proof
supporting
bank
the
ourish
and
main
rural
targeted
services
up
micronance
rural
is
who
formal
unemployed
nancial
Micronancing
poverty
banking
microinsurance
India,
businesses
It
and
offer
providing
such
of
those
institutions
micronance
lending,
type
to
accessing
low-income
and
a
provided
stnuocca dna ecnaniF 3
yduts esaC
The story of micronance in India
but
to
high
for
the
borrow
risk
large
and
banks
high
as
money
well.
from
rates.
promote
socio-economic
community-based
household
development
approach,
at
empowering
income.
How microfinance star ted in India
The
rst
initiative
to
Employed
Women’s
the
Bank
SEWA
nancial
own
launched
areas
together
Through
nutrition
the
Since
then,
individuals
and
promoting
Kerala
1998.
in
ght
NHGs,
in
this
rural
in
India
Gujarat,
bank
areas
for
as
nancial
Poverty
female-led
(NHGs)
their
women
agriculture.
time
state’s
This
Groups
to
these
same
the
in
Neighbourhood
at
1974.
to
micronance
has
who
was
the
which
been
want
Self
established
providing
to
grow
their
businesses.
Kudumbashree,
was
in
services
introduce
Association(SEWA)
The
seeking
brings
rights,
work
women
and
on
scheme
a
in
it
helps
and
to
earn
small-scale
underprivileged
like
of
urban
empower
issues
them
Such
rural
to
of
Mission,
organization
from
variety
allows
microcredit.
independence
Eradication
community
them.
health,
an
income
initiatives
are
areas.
Challenges
As
with
implementing
any
micronance
programme
Schemes
not
The
are
do
micronance
below
the
reach
rural
those
delivery
poverty
transformative
in
who
models
level
as
India
initiative,
comes
need
fail
to
theyare
with
running
some
a
challenges:
them
focus
on
deemed
to
people
be
too
who
risky.
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3
There
is
a
operators
This
bias
of
allows
repayment
in
from
Limited
There
lag
are
order
the
few
of
the
in
of
stnuocca dna ecnaniF 3
are
very
not
may
the
lending
The
and
to
So
schemes
attain
risk-averse
future.
they
to
are
–
the
stable.
higher
consider
less
likely
to
states
schemes
lives
in
in
those
states
poverty.
Madhya
schemes
governments,
local
institutions
on
such
and
schemes.
depends
the
where
States
Pradesh
micronance
micronance
interest
sensitive,
increase.
Thus,
economic
interest
that
in
tend
comes
banking
status
the
to
of
the
in
a
large
as
Orissa,
Uttar
The
Pradesh
successful
support
culture
(MFIs)
and
capacity
poor
poor
rates
and
extended
practice,
these
and
states.
charges
a
these
policies
and
of
the
It
is
of
also
Those
makes
reduces
as
counterproductive
costs,
9–10%
rates
borrow
exploitative
Generally,
sector.
transaction
borrowing
to
are
clients.
clients.
micronance
impose
with
the
interest
for
However,
conditions
so
high
rates
sector
11–24%.
micronance
remains
difference
the
from
their
too
the
economically
interest
MFIs
which
it
less
annual
interest
to
rates
that
have
increases
attractive.
interest
vary
rate,
MFIs
according
to
MFI.
uptake
taken
and
successfully
are
for
are
rates
the
the
qualify
who
schemes.
Jharkhand,
regulated
charge
Low
of
interest
burden
Whereas
run
poorer
population
state
high
well
regulated
the
the
who
people
poor
in
micronance
are
rates
weaken
charge
invest
implementing
interest
interest
to
the
micronance
respective
Borrowers
and
in
the
concentration
High
to
of
for
micronance
Chhattisgarh,
behind
distribution
by
Most
those
look
programme
spread
percentage
Bihar,
the
selecting
schemes
rates.
borrowing
benet
when
the
to
small
the
short
using
to
Often
situation
loan
the
loans
programme
small.
term
loans
for
address
is
the
of
expanding
loans
poorer
(rarely
but
too
people.
more
productive
liquidity
are
than
The
a
rather
number
to
really
of
restrict
They
than
loans
make
insufcient
year)
purposes.
issues,
the
small
loan
a
size
borrowers
generally
borrowing
use
to
these
invest.
The nex t steps in implementing microfinance in India
The
micronance
India.
still
of
Student workpoint
However,
on
the
needs
expanding
nancial
to
be
a
programme
the
focus
uptake
services.
proper
of
has
most
with
In
witnessed
of
little
addition
structure
to
let
the
phenomenal
micronance
attention
to
to
removing
the
quality
these
micronance
growth
service
and
is
viability
problems,
empower
in
providers
there
rural
India.
3.3
Adapted from: https://www.bridgeindia.org.uk/the-story-of-micronance-in-india
Be a researcher
Find
out
how
the
Short- and long-term nance
various
sources
nance
for
of
In
private
it
organizations
is
the
important
sources
for
nanced.
to
consider
classify
the
a
source
investor’s
of
nance
preference
or
as
short
the
type
or
of
long
asset
term,
The
type
of
nance
should
therefore
be
matched
to
the
to
type
of
public
asset
sector
whether
to
compare
be
with
determining
sector
being
nanced.
Thus,
a
long-term
asset
should
be
nanced
with
organizations.
long-term
nance
and
a
short-term
asset
with
short-term
nance.
160
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3.2
There
of
a
is
no
uniformly
source
of
agreed
nance,
but
way
most
of
determining
nancial
the
literature
exact
uses
the
Sources of nance
duration
Student workpoint
following
3.4
denitions.
Be knowledgeable
Shor t-term finance
Prepare
This
is
money
needed
for
the
day-to-day
running
of
a
business
a
therefore
provides
the
required
working
capital.
External
table
is
usually
expected
to
be
paid
back
within
12
that
months
or
following
of
and
credit.
short-term
nance
include
bank
overdrafts,
short-term
into
short
of
or
loans
long
trade
sources
less.
nance
Examples
complete
classies
short-term
the
nancing
and
and
term:
●
retained
prot
●
trade
●
leasing
●
sale
●
crowdfunding
●
share
●
overdrafts
●
loan
●
micronance
Long-term finance
is
assets
the
funding
or
other
overall
long-term
year
to
loans
obtained
expansion
improvement
nancing
pay
and
for
it
back.
share
the
purpose
requirements
of
usually
the
of
business.
have
Long-term
of
a
time
nance
purchasing
a
business.
Businesses
span
of
sources
long-term
It
is
that
more
normally
take
than
include
up
one
credit
xed
used
for
external
of
stnuocca dna ecnaniF 3
This
assets
nancial
long-term
bank
capital.
capital
Factors inuencing the choice of a source
capital
of nance
In
determining
for
a
given
inuence
the
appropriateness
situation,
their
rms
decision.
need
Some
to
of
of
using
consider
these
a
a
particular
number
factors
are
source
of
of
factors
explored
nance
which
can
below.
Purpose or use of funds
Businesses
specic
used
for
to-day
when
will
need
to
requirements.
the
purchase
running
of
purchasing
materials
are
the
a
match
What
of
source
long-term
business?
xed
needed
the
exactly
asset,
urgently
will
of
xed
for
trade
the
carefully
nance
assets
Long-term
while
nance
the
or
loan
be
for
used
the
capital
credit
may
to
their
for?
Will
short-term
may
be
be
it
be
day-
appropriate
suitable
if
raw
business.
Cost
Businesses
with
will
obtaining
administration
the
an
need
a
costs,
opportunity
alternative)
appropriate
to
consider
source
is
and
cost
an
source
of
costs
(the
Such
lost
benet
all
costs
associated
important
of
thoroughly
nance.
with
that
of
the
include
a
issue.
have
when
associated
interest
share
would
consideration
costs
been
deciding
payments,
In
addition,
derived
on
the
from
most
nance.
Status and size
Public
to
sole
in
size
source
sole
can
limited
companies
traders.
than
of
public
nance
traders.
use
This
to
In
is
have
because
limited
that
is
addition,
negotiate
options
traders
companies.
only
possible
large
lower
more
sole
For
for
rates
obtaining
less
well
example,
public
organizations
interest
in
are
from
issuing
limited
have
nance
known
shares
collateral
smaller
is
companies
added
nancial
compared
and
a
and
that
not
they
institutions.
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3
Amount required
For
small
nance
loans
or
sources
amounts,
such
the
as
rms
bank
issuing
will
be
of
used
may
consider
overdrafts,
shares
while
are
depending
mostly
for
available
on
the
short-term
larger
options.
amount
sources
amounts,
of
long-term
Therefore,
bank
varying
required.
Flexibility
This
one
considers
form
or
the
ease
source
additionalnance
be
inuenced
that
may
such
a
by,
require
short
of
at
with
to
particular
for
example,
additional
period
which
nance
a
business
another.
points
during
unexpected
nancing.
depends
on
how
can
switch
Businesses
The
the
trading
seasonal
the
requiring
need
period.
changes
availability
exible
from
may
of
in
these
business
is
in
This
could
demand
funds
in
adapting
tochange.
stnuocca dna ecnaniF 3
State of the ex ternal environment
This
involves
increases
prices
both
in
in
factors
interest
an
economy)
consumers
businesses
rising
and
make
interest
increased
that
in
or
will
business
ination
greatly
producers.
sourcing
rates
cost
the
rates
may
not
no
control
affect
the
nance.
the
best
over.
increases
purchasing
Consequently,
their
be
has
(persistent
this
Taking
choice
will
up
for
a
a
For
in
example,
average
decisions
affect
bank
rm
the
of
choices
loan
because
with
of
the
involved.
Gearing
C oncep t
This
refers
company
to
the
has
a
relationship
large
between
proportion
of
share
loan
capital
capital
to
and
share
loan
capital.
capital
it
is
If
a
said
CRE ATIVITY
to
be
high
geared,
proportion
of
loan
while
capital
a
company
to
share
that
is
low
geared
has
a
smaller
capital.
Creativity is about coming up
with new ideas or developing
For
innovative solutions to existing
example,
companyB,
assume
each
there
with
a
are
total
two
companies,
capital
of
$60
company
million.
A
and
Company
A
may
problems. The case study
have
a
loan
capital
of
$10
million
and
share
capital
of
$50
million,
while
below explains how M-Pesa
company
B
may
have
a
loan
capital
of
$40
million
and
share
capital
of
revolutionised the banking sector
$20
million.
Company
A
is
therefore
low
geared
compared
to
company
in Kenya.
B,
Carry out some research on two
which
nancial
is
high
geared.
institutions,
High-geared
and
they
will
businesses
be
reluctant
are
to
viewed
lend
as
risky
money
to
by
such
or more organizations that have
rms.
These
businesses
will
therefore
need
to
seek
alternative
sources
of
creatively developed solutions to
nance.
One
way
of
measuring
gearing
is
by
calculating
the
gearing
ratio
existing problems.
(see
Chapter
3.6).
yduts esaC
How Kenya created the world’s most successful
mobile-payments service
M-Pesa
the
has
transformed
traditional
market.
secret
banking
Allowing
to
M-Pesa’s
the
everyday
system
whole
and
businesses
impressive
lives
of
capturing
to
be
run
performance
most
the
from
can
be
Kenyans,
previously
a
mobile
found
disrupting
unbanked
phone,
the
backstage.
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3.2
Sources of nance
What’s this M-Pesa thing all about?
word
spoken
pesa
service
was
for
money
to
around
fees,
over
one
to
nancial
of
M-Pesa:
A
●
fast
the
A
●
secure
wait
Cheap
●
rates
Taking
the
and
host
for
rates
on
value
that
of
of
bills
and
roughly
the
70%
benet
theft
users
by
of
from
the
was
with
of
a
in
its
out
to
school
Kenya,
to
and
contribution
advantages
available
mobile
need
built
cash,
salaries.
following
system,
it
transfer
electricity
households
removingthe
or
platform
withdrawals
from
to
However,
serviceto
receipt
of
operator,
demonstrating
everyone
service,
the
and
widely
developed
collected.
M-Pesa
money-transfer
of
reduce
it
phones.But
of
a
throughout
phone.
carry
cash
and
loss.
removing
the
range
network
offers).
Kenyan
elsewhere
the
most
the
need
to
travel
to
banks
and
costs
of
nancial
products,
eg
lower
microloans.
advantage
of
risk
using
deposits
to
the
mobile-payment
originally
easily
households,
accessible
trusted
be
payment
Kenyans
is
a
queues.
dividend
more
and
was
also
transactions,
convenient
savings
in
the
for
is
mobile-network
to
response,
captured
consequent
Time
In
which
M-Pesa
M-Pesa
were
allowing
inclusion.
and
largest
users
lower-income
country
the
●
has
Swahili,
microloans
M-Pesa
savings
in
Africa.
2007,
transfers,
M-Pesa
of
in
another.
and
50%
Kenya’s
on
e-wallet,
account
loan
Today,
by
Launched
that
an
“money”
Southeast
payments
found
bank
in
developed
Safaricom.
allow
means
language
stnuocca dna ecnaniF 3
The
In
fact,
start-ups
few
have
of
the
of
contextual
effects
the
who
ideas
managed
to
(the
more
factors,
people
introduction
run
their
spawned
replicate
of
M-Pesa
using
M-Pesa
businesses
from
its
has
wholly
M-Pesa
unique
has
reaped
M-Pesa,
and
the
spurred
on
a
mobile
implemented
success.
So what’s the big secret?
M-Pesa
has
met
all
mobile-payments
partnerships
outshines
structured
as
it
may
and
To
and
terms
of
factors
technology,
support
the
from
money
of
the
with
mobile
high-performing
marketing,
regulator.
distribution
via
a
simple
prociency
M-Pesa’s
transferring
wish
exchange
appreciate
the
the
in
M-Pesa.
deposit
for
in
M-Pesa
rural
strength
challenges
cities
As
a
and
withdraw
money,
agents.
the
which
system.
requires
a
But
it
has
As
sound
one
factor
been
effortless
robust
can
cash
do
Compared
superior
from
so
at
to
their
one
the
convenience
of
840
of
M-Pesa
Kenya’s
bank
M-Pesa
is
areas.
of
it
the
distribution
faces.
sends
result,
or
mobile
countrywide,
especially
isemployed
to
registered
found
understand
using
success
great
maintained:
who
in
40,000-plus
evident,
in
critical
–
set-up.
Customers
branches
the
banks,
rest
seem,
backstage
e-wallet,
with
the
of
service
A
large
money
M-Pesa
home
agents
system
though,
proportion
in
to
of
family
cities
the
in
mostly
we
must
population
rural
areas
receive
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3
deposits
of
cash,
Therefore,
the
management;
replenishing
for
mobile
through
M-Pesa
and
rural
their
agents
in
the
need
to
resources
the
net
These
mostly
rests
have
once
have
the
money
on
efcient
these
exchange
pay
heavily
an
within
mobile
to
areas
withdrawals.
“layering”
distance
intermediary.
rural
system
customer
and
pool
short
of
agents
via
“pooling”
a
agents
cash
money
travel
M-Pesa
while
reliability
been
intermediaries,
in
receive
cash
turn,
liquidity
of
swapped
has
distribution
for
withdrawals.
system
M-Pesa
they
this
out
active
out
achieved
this
system.
from
from
pool
a
customers
registered
the
cash
and
C oncep t
mobile
money
afliated
received
from
agents,
and
arrange
the
logistics
between
banks.
CHANGE
The
pooling
in
the
system
aims
to
increase
efciency
by
reducing
the
Due to increasing competition
number
of
players
layering
in
banking
system,
that
need
to
ferry
cash
at
each
stage.
Meanwhile,
the
stnuocca dna ecnaniF 3
and unexpected changes
the
system
acts
as
a
cushion
against
clearing
delays
in
the
in consumer behaviour,
allowing
for
the
core
to
speed
of
M-Pesa
transfers.
Because
the
businesses are forced to adapt
availability
of
liquidity
is
any
payment
service,
Safaricom
visits
in order to remain relevant and
all
agents
on
a
bi-monthly
basis
to
check
on
the
quality
of
this
process,
succeed. These adaptations
and
how
agents
are
handling
the
growth
in
volumes
of
transactions.
come with frequent changes
to organizational objectives,
What’s the headline?
including decisions regarding the
best source of nance to choose
In
to achieve the set objectives.
summary,
immediately
agent,
How exible in terms of nance
the
should businesses be in adapting
carefully
to change? Carry out research on
customer
if
moneytransfers
available,
M-Pesa
if
system
orchestrated
service
or
made
cash
through
could
would
be
distribution
of
not
be
little
M-Pesa
reliably
value
to
networkenables
were
not
obtained
its
the
users.
from
an
M-Pesa’s
required
levels.
how various global businesses
Source: Adapted from https://digital.hbs.edu/platform-rctom/submission/howare adapting to change in respect
kenya-created-the-worlds-most-successful-mobile-payments-service
of their nancial requirements.
Revision checklist
TOK links
✓
1.
Are objective facts or
Internal
include
sources
of
personal
nance,
loans,
which
retained
are
obtained
prots
and
within
sale
of
the
business,
assets.
appeals to emotion
✓
External
sources
of
nance
that
are
obtained
outside
the
business
more eective when
include
share
capital,
loan
capital,
overdrafts,
trade
credit,
applying for an external
crowdfunding,
leasing,
micronance
providers
and
business
angels.
source of nance such as
crowdfunding?
✓
Short-term
with
2.
the
nance
working
which
capital
lasts
that
for
it
one
needs.
year
or
less
Long-term
provides
nance
a
business
with
a
Is there a moral obligation
duration
of
more
than
one
year
is
funding
obtained
for
the
purpose
of
for nancial institutions
purchasing
long-term
xed
assets
or
other
expansion
requirements
to lend to every star t-up
of
a
business.
business?
✓
3.
In
deciding
on
the
appropriate
source
of
nance
to
use,
businesses
Is it ever possible to know
need
to
consider
the
purpose
of
the
funds,
cost,
exibility,
their
what the best source of
statusand
size,
amount
required,
gearing,
and
the
state
of
the
nance is?
externalenvironment.
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3.2
Sources of nance
Practice question
answer
Three
Three
the
Hills
Hills
to
25
in
THDS
is
funds.
the
owned
Maria
Her
to
sell
in
her
by
or
time.
term
in
a
She
due
who
set
time
to
This
the
pages
driving
drive
who
it
a
car.
have
was
was
398–402.
instruction
They
target
nished
high
for
people
people
aged
school,
and/or
ve
two
up
years
for
selling
this
some
ago
and
of
using
was
her
her
personal
determined
household
to
items
get
in
funds.
about
half
up
save
included
necessary
after
to
more
fund
bank
can
is
loan.
her
6
$90,000
in
the
rst
amount
in
the
same
that
years
to
a
business
angel
year,
while
year.
who
has
She
her
plans
shown
to
interest
it.
to
banks
to
students
long
expenditure
employ
loan
provides
licence
Maria
a
started.
business
Currently,
nance
by
expenditure
buying
and
Unit
(THDS)
(THDS)
a
mostly
took
generate
capital
revenue
School
see
students.
business
order
are
effectively,
School
obtaining
who
university
below
Driving
Driving
interested
18
question
stnuocca dna ecnaniF 3
To
increased
this.
also
quite
not
and
is
the
has
She
she
will
Maria
if
if
fact
has
that
in
are
planning
seek
that
to
the
borrowed
enough
she
to
whether
worried
funds
she
been
is
is
need
considering
high
sure
However,
account
She
overdraft.
be
demand,
instructors.
has
business
a
to
take
a
more
to
years
of
long-term
rates
charged
period
acquire
amount
could
cars
sources
a
short
reasonable
two
up
interest
for
security
for
buy
external
a
of
long-
of
work
money
to
her
advantage.
a)
Dene
the
b)
Explain
two
personal
c)
term
Evaluate
business
benets
to
angel.
Maria
of
raising
money
the
expansion
to
view
that
getting
plans.
a
taking
bank
up
a
long-term
overdraft
for
marks]
[4
marks]
[ 10
marks]
using
funds.
preferable
[2
loan
Maria’s
would
be
business
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3
3.3 C osts and revenues
By the end of this chap ter, you should be able to:
Explain the dierent
➔
types of costs
(xed, variable, direct and indirect/
overhead ), using examples
Comment on the meaning of the term
➔
suggest various
revenue streams
revenue and, using examples,
available to organizations
stnuocca dna ecnaniF 3
Introduction
Costs
any
on
and
these
●
revenues
business.
Cost
elements
is
an
service,
●
●
very
enable
expenditure
is
important
therefore
the
income
effective
or
or
that
accurate
determine
and
the
reliable
success
of
information
decision-making.
amount
acquisition
earned
factors
need
paid
of
to
produce
business
money
or
sell
a
good
or
resources.
generated
from
the
sale
of
goods
services.
Prot
is
calculated
difference
business
Key terms
to
including
Revenue
or
are
Businesses
(where
by
subtracting
revenue
is
costs
higher
from
than
revenue.
costs)
is
a
A
high
good
positive
indicator
of
success.
Types of costs
Fixed costs
Fixed costs
These
are
costs
that
do
not
change
or
vary
with
that
have
the
amount
of
goods
or
costs that do not change
services
produced.
They
are
expenses
to
be
paid
regardless
of
any
with the amount of goods or
business
activity
the
rm
engages
in.
services produced
They
are
mostly
time
related
and
are
usually
paid
per
month,
per
quarter,
Variable costs
bi-annually,
costs that change with the
run
number of goods or services
(resource
is
or
dened
per
as
a
needed
year.
They
period
to
of
remain
time
produce
xed
when
goods
or
at
in
the
least
short
one
services)
run.
factor
does
not
of
The
short
production
change.
produced
Examples
Direct costs
of
payments.
decides
to
xed
For
costs
include
instance,
take
a
week’s
if
a
rent,
rm
holiday,
insurance,
usually
this
pays
rent
will
salaries,
rent
still
of
and
$5,000
need
to
interest
per
be
month
paid
and
despite
costs that can be identied
the
holiday.
It
is
therefore
important
to
note
that
xed
costs
do
not
change
with the production of specic
due
to
a
change
in
output
in
the
short
run.
goods or services
Variable costs
Indirect costs
These
are
costs
that
vary
or
change
according
to
the
number
of
goods
costs that are not clearly
orservices
produced.
They
are
expenses
that
change
in
proportion
to
identied with the production
business
activity.
Variable
quantity
produced.
costs
are
volume
related
as
they
are
paid
per
of specic goods or services
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3.3
These
run
are
(a
also
pegged
increase
are
costs
period
in
to
xed
can
time
sales,
variable
incurred.
gives
(TFC)
+
the
incurred
that
costs.
(total
us
total
in
variable
factors
an
increase
no
units
variable
and
xed
total
costs)
of
in
are
sales
added
short
or
to
or
then
raw
in
the
variable).
sold
no
long
They
leads
to
variable
material
costs,
are
an
costs
sales
costs.
all
total
run
are
output
produced,
include
usage
Hence,
the
production
in
costs
energy
costs.
costs
both
all
If
of
packaging,
costs
costs)
be
when
Examples
commissions,
All
that
of
Costs and revenues
variable
costs
(TC)
costs
=
(total
total
variable
xed
costs
(TVC).
Direct costs
Raw materials are a direct cost
are
costs
production
traced
cost
in
of
making
to
bread
chicken
labour,
and
a
be
identied
goods
or
particular
Some
manufacturing
only
can
specic
directly
centres).
that
in
a
bakery,
and
products.
packaging
services.
product,
examples
rm,
with
of
cost
cost
of
Generally,
clearly
They
are
costs
of
labour
direct
or
include
chicken
in
costs
used
a
attributed
expenses
department,
direct
the
the
or
in
cost
car
fast-food
include
that
process
the
raw
to
the
can
be
(known
of
our
used
production
restaurant
materials,
as
stnuocca dna ecnaniF 3
These
in
a
selling
direct
costs.
Indirect costs
These
are
goods
or
given
they
costs
cost
are
centre
difcult
overheads
audit
fees,
interest
that
services.
or
such
to
not
are
as
a
assign
overhead
legal
on
are
They
and
identied
product,
to
that
cost
Examples
insurance,
warehouse
with
are
activity,
particular
costs.
expenses,
loans,
clearly
expenses
not
or
the
production
directly
department.
centres.
include
advertising
They
rent,
of
traceable
As
are
a
expenditure,
a
result,
also
ofce
specic
to
known
staff
as
salaries,
security,
Rent on business premises is an
indirect cost
costs.
Student workpoint 3.5
Be a researcher
Research
they
the
following
organizations
and
identify
the
various
costs
incur.
Assessment ad vice
●
An
airline
●
A
mobile
●
A
college
●
A
hospital
●
A
bank
In most cases, indirect costs
phone
company
are xed costs while direct
costs are variable costs.
However, both indirect and
direct costs can be either
xed or variable depending
Classify
also
be
the
costs
as
categorised
either
as
xed
direct
or
or
variable.
Which
of
these
costs
can
indirect?
on the specic nature of the
business activity.
Total revenue
This
is
the
calculated
total
by
amount
of
multiplying
total
money
the
revenue
=
a
price
rm
per
price
receives
unit
per
by
unit
from
the
×
its
sales.
number
quantity
of
It
is
units
sold:
sold
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3
Abbreviated
as
and
quantity
TR
=
P
×
Q,
where
TR
is
total
revenue,
P
is
price
per
unit
Key terms
Revenue
For
Q
is
the
example,
toys
a
if
month,
a
sold.
toy-producing
then
its
total
rm
revenue
charges
for
the
$8
per
month
toy
will
and
be
sells
($8
×
200,000
200,000)
=
a measure of the money
$1,600,000
or
$1.6
million.
generated from the sale of
goods and services
Total
revenue
confused
(also
with
known
prot,
as
which
sales
takes
revenue
costs
or
or
turnover)
expenses
into
should
not
be
account.
In
addition,
goods
services
Total revenue
total
the total amount of money a
rm receives from the sale of
revenue
were
only
sold
on
from
its
includes
credit
all
or
trading
for
income
cash.
activities.
received,
However,
Other
whether
a
rm’s
revenue
the
revenue
streams
is
or
obtained
include
the
not
following:
goods or services, found by
Rental
●
income
a
business
could
has
–
invested
in.
receive
income
from
rent
it
collects
multiplying the price per unit
from
property
it
A
seasonal
business
could
also
hire
out
its
by the number of units sold
ofce
stnuocca dna ecnaniF 3
Sale
●
or
of
factory
xed
underutilized
Dividends
●
is
entitled
Interest
●
bank
on
can
the
on
assets
assets
a
a
–
–
this
in
a
business
share
to
money
organization
during
of
deposits
lead
Donations
●
–
to
space
if
a
could
these
be
could
a
demand
from
the
for
sale
shareholder
also
be
rates
cash
mostly
known
substantial
earning
interest
targeting
be
prots,
holding
business
the
could
when
of
its
products
unused
islow.
or
business.
the
–
times
good
are
in
as
other
amounts
levels
businesses
and
dividends.
of
of
cash
in
accumulated
the
interest
favourable.
gifts
made
charitable
by
an
individual
or
organizations.
Contribution: absorption costing (HL only)
As a contribution tool, absorption costing aids in business decision-making by
providing a platform where various cost situations are analysed and evaluated.
Absorption costing (also called full costing) is a managerial accounting method
that captures all costs associated with producing a given product. The direct
and indirect costs, including direct materials, direct labour, rent, and insurance,
TOK links
are accounted for using this method.
Research the following.
1.
When calculating the
costs and revenue
•
How does absorption costing dier from variable costing?
•
What are the advantages and disadvantages of using absorption costing
streams of a business,
is it always objective,
in accounting?
or is there scope for
Find two company examples that use this method.
subjectivity?
2.
Could it sometimes be
arbitrary to decide if a
cost is xed or variable, or
Descriptive statistics
if it is direct or indirect?
Descriptive statistics involve the use of statistical data and they help to present
3.
We can know
large amounts of data in simplied and manageable forms.
retrospectively about
previous costs, but how
To what extent would the use of mean, mode and median be useful when
we can know about future
analysing nancial data for businesses? How would this information be
costs?
visually presented?
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3.3
Costs and revenues
Revision checklist
Fixed
costs
services
rm
✓
are
engages
Variable
or
✓
Total
is
✓
Direct
cost
✓
Available
assets,
✓
with
It
is
present
costs
the
is
change
with
regardless
vary
in
or
revenue
of
that
cost
total
known
streams
interests
statistics
all
of
the
any
amount
of
business
can
be
of
number
to
and
goods
activity
or
the
gained
as
revenue
sales
to
businesses
deposits,
the
data
use
in
traced
indirect
goods
from
or
include
of
and
a
particular
are
not
clearly
of
goods
and
turnover.
income,
grants
statistical
services
services.
rental
donations,
simplied
to
sale
sales
or
costs.
costs
or
the
goods
activity.
variable
directly
while
specic
of
business
income
on
of
the
xed
centre,
involve
amounts
with
proportion
production
the
also
large
that
expenses
dividends,
Descriptive
not
paid
summation
are
revenue
services.
do
are
change
department
identied
Total
are
that
the
costs
product,
that
and
in.
costs
produced
✓
costs
produced
data
and
and
sale
of
xed
stnuocca dna ecnaniF 3
✓
subsidies.
help
manageable
to
forms.
Practice question
To
answer
the
question
below
effectively,
see
Unit
6
pages
398–402.
TAK
TAK
is
a
sole
providing
up
the
The
set-up
housed.
Tom
of
owns
The
three
three
his
rst
to
drivers
newly
year
cut
low
his
his
Tom
He
in
spent
ofce
aware
that
another
xed
where
most
of
focuses
obtained
on
space
seasons,
became
total
by
shares
amount
tourist
the
to
set
company.
costs.
all
ofces
the
on
funds
TAK
owns
employees
are
increasing
not
used.
direct
a
are
As
costs
costs.
working
per
of
up
tourists.
for
him
tourists
tourist
vehicle
who
using
vehicles
is
are
TAK’s
paid
based
tourist
and
monitored
two
on
vans.
the
Tom
ve-year-old
based
on
the
number
currently
vehicles.
number
of
makes.
Tom
did
not
make
especially
down
the
large
Tom
driving
on
a
consultant
Dene
part
set
to
sufcient
acquired
guarantee
nancial
a)
on
make,
insignicant,
therefore
order
during
business,
vehicle
a
with
consumption
each
quite
included
impact
they
fuel
trips
In
an
has
trips
his
business
services
selling
building
However,
had
travel
from
costs
operated
that
and
business
three-storey
he
proprietorship
tour
his
prot
to
costs
by
help
following
due
and
the
him
any
to
prot
the
is
because
downturn
seeking
close
of
improve
next
the
in
more
year.
his
the
revenue
revenue
He
was
economy.
has
performance
He
streams
has
in
approached
of
his
a
business.
terms:
(i)
xed
[2
marks]
(ii)
revenue
[2
marks]
(iii)
prot
[2
marks]
[4
marks]
[6
marks]
b)
Using
c)
Explain
about
costs
examples
three
ways
to
from
ways
TAK,
the
improve
explain
nancial
his
the
term
consultant
revenue
streams.
direct
costs.
could
advise
Tom
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3
3.4 Final accounts
By the end of this chap ter, you should be able to:
➔
Discuss the purpose of accounts to dierent stakeholders
➔
Prepare and interpret nal accounts, namely the
prot and loss
account and the balance sheet
➔
Describe the dierent types of
➔
Calculate and distinguish between the
stnuocca dna ecnaniF 3
depreciation methods
intangible assets
Examine the appropriateness of the
➔
straight-line and units of use
(HL only)
depreciation methods
straight-line and units of use
(HL only)
Purpose of accounts to dierent stakeholders
Final
of
a
accounts
year.
These
expenses–
nancial
Internal
while
nancial
accounting
records
help
to
position
of
accounts
accounts
and
of
include
of
compiled
as
and
of
an
by
businesses
end
of
a
transactions,
scal
at
or
the
revenues,
stakeholders
end
trading
and
about
the
organization.
shareholders,
nanciers,
the
external
stakeholders
these
at
including
internal
external
each
–
such
performance
competitors,
to
statements
period,
inform
stakeholders
examples
government,
of
are
particular
managers,
are
and
stakeholders
the
is
and
customers,
local
employees,
suppliers,
community.
explored
the
The
purpose
below.
Shareholders
Shareholders
become
protable
They
an
the
check
attempt
see
interested
its
business
on
to
performance
to
are
throughout
how
make
of
whether
the
the
in
is
in
year.
order
efciently
a
knowing
nancial
to
the
worthwhile
directors
directors
is
assess
return
of
to
valuable
are
the
business
also
need
how
They
is
on
the
to
safety
of
investing
their
interest
be
keen
to
business
establish
their
investment.
capital
investment.
them:
motivated
has
how
in
The
shareholders
further
or
want
replaced.
Managers
Final
judge
accounts
and
number
in
of
years.
monitoring
Knowing
planning
are
used
compare
the
for
These
and
managers
to
performance
will
help
controlling
nancial
more
by
their
records
effective
set
them
in
a
which
particular
setting
expenditure
will
targets,
within
budgets,
patterns
therefore
decision-making
in
greatly
in
they
which
various
assist
can
nancial
use
to
year
will
or
then
help
departments.
managers
in
strategic
thebusinesses.
Employees
A
protable
This
may
business
also
could
indicate
that
signal
they
to
employees
could
get
pay
that
rises.
their
The
jobs
are
potential
secure.
for
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3.4
business
and
growth
salary
necessarily
trade
could
increases.
lead
unions
to
to
help
to
strengthen
However,
pay
an
increases
negotiate
for
further
these
increase
in
two
employees,
on
their
aspects
protability
leading
of
job
does
them
Final accounts
security
not
to
involve
behalf.
Customers
Customers
supply
of
are
a
interested
rm’s
dependent
they
due
protability,
to
low
reliable
and
in
products
should
knowing
in
be
the
on
whether
future.
the
This
business.
customers
will
go
there
will
If
a
will
be
a
determine
rm
lacks
elsewhere
constant
how
security,
where
perhaps
supply
is
guaranteed.
Suppliers
with
can
rms.
immediate
to
pay
off
use
They
cash
its
nal
can
accounts
either
payments.
debts
will
be
to
negotiate
extend
The
a
the
security
key
better
trade
of
concern
credit
the
for
cash
or
period
business
credit
or
and
terms
demand
thus
its
stnuocca dna ecnaniF 3
Suppliers
ability
suppliers.
The government
The
government
abiding
in
the
by
and
law
protability
making
could
the
business
mean
country’s
an
tax
authorities
regarding
of
will
the
will
accounting
business
to
see
check
on
whether
regulations.
how
be
of
grave
concern
to
increase
in
unemployment,
much
the
They
tax
it
the
will
pays.
government
which
could
be
business
be
A
is
interested
loss-
because
it
detrimental
to
a
economy.
Competitors
Businesses
other
for
●
●
will
rms
the
to
want
see
answers
Are
their
to
how
to
key
compare
well
competitors’
nancial
How
competitors’
statements
performing
such
with
nancially.
those
They
will
of
look
as:
protability
struggling
the
are
questions
competitors
do
their
they
levels
higher
than
theirs
or
are
the
nancially?
sales
revenues
compare
with
theirs?
Financiers
These
include
establish
gearing
of
soliciting
be
much
the
able
who
from
assess
to
the
pay
check
money
business,
funding
thoroughly
will
banks
how
on
they
because
a
nancial
accounts
back
its
creditworthiness
lend
it.
This
high-geared
institutions
of
loan
the
can
a
with
in
of
also
business
(see
business
will
will
Chapter
order
the
to
have
3.2).
be
business
depend
on
to
the
problems
Banks
condent
will
that
it
interest.
The local community
Residents
living
protability
opportunities
the
around
and
residents
for
minimizing
them
will
environmentally
air
a
particular
expansion
also
and
be
friendly
or
noise
business
potential.
lead
to
is
growth
concerned
and
This
about
whether
its
will
want
because
in
the
it
to
know
may
community.
whether
accounts
the
job
However,
business
consider
its
create
will
costs
be
for
pollution.
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3
yduts esaC
Ethics and the code of conduct
Ethics
to
and
general
integrity,
ethical
and
professional
set
of
rules
ofcertied
the
rules
the
world
behaviour
principles
such
morals.
The
conduct,
set
by
out
code
of
is
governing
accountants.
by
more
honesty,
however,
the
public
set
refer
as
different
a
specic
bodies
Although
bodies
around
C oncep t
are
universal.
unique,
Let’s
take
a
some
rules
closer
look
are
at
some
Is it ethical to give suppliers
ETHICS
of
these
importantrules.
expensive gifts like luxury
watches or holidays abroad?
Ethics in accounting is the study
Rules and guidance
of moral values and judgments
stnuocca dna ecnaniF 3
as applied in the accounting
process. A code of ethics is
One
of
North
the
key
America
therefore a set of principles,
auditor,
usually based on the rm’s core
relationships
values, that guide accountants
you
rules
is
set
the
must
be
with
out
idea
by
of
totally
the
judgment
and
impair
There
two
forms
objective
client,
the
professional
accounting
independence.
since
overall
and
that
This
must
could
course
of
is
be
the
bodies
idea
without
potentially
the
audit
in
that,
ties
as
to
impair
an
or
your
work.
on the standards that need to
are
of
independence:
be upheld. A code spells out
the “rules” for behaviour with
●
Independence
in
fact
●
Independence
in
appearance
respective pre-emptive warnings.
The case study here provides a
deeper understanding of some
Independence
in
fact
refers
to
any
factual
information,
such
as
of the impor tant rules set by
whether
you,
as
an
auditor,
own
any
shares
or
other
investments
in
the
professional accounting bodies.
client
rm.
These
facts
are
usually
easy
to
determine.
Research how ethics has
Independence
in
appearance ,
however,
is
more
subjective.
Let’s
say,
inuenced the nance and
accounting practices of one or
more organizations.
for
the
example,
client
also
who
to
rm.
receive
was
a
of
as
The
nice
invited
maintain
conict
that
auditor
party
watch
to
the
turns
as
a
observer
a
you
out
gift.
party
independence
interest,
reasonable
an
and
in
the
reasonable
say
about
were
to
In
be
invited
also
audit?
In
observer’s
the
a
extremely
appearance,
who
to
luxurious
would
received
order
test
to
is
year-end
a
the
gift,
solve
used
(ie
and
at
you
auditor,
be
a
party
able
potential
what
would
a
situation?).
Threats to independence
There
are
always
independence.
1.
Familiarity
client
2.
client
through
4.
are
If
threat:
threat:
shares
Self-review
or
a
threat:
bookkeeping
a
If
to
If
If
at
that
examples
auditor
has
a
can
of
long
reduce
some
of
the
level
these
relationship
of
threats:
with
the
friends/relatives.
the
auditor
switch
the
large
the
services,
situations
look
the
close
threatens
Self-interest
and
take
threat:
they
Intimidation
the
3.
or
threats
Let’s
it
auditor
fee
a
has
a
the
direct
outstanding
auditor
is
changes
nancial
statements,
auditors.
performs
review
of
the
nancial
from
the
both
audit
auditor’s
interest
client.
and
own
work.
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3.4
Final accounts
Other impor tant rules
Some
other
rules
Contingent
●
based
bank
on
a
loan
Integrity
●
fees
means
and
as
they
to
the
due
and
experience
Duty
not
in
professional
allowed.
of
care.
a
the
For
net
accounting
bodies
include
example,
income
audit
gure
or
a
fees
that
are
percentage
of
a
in
have
the
a
any
of
relevant
Condentiality.
the
of
the
to
must
be
necessary
rules.
If
an
rules,
Auditors
client
be
done
thoroughly,
competent,
academic
which
knowledge
and
industry.
rule.
these
must
Auditors
both
breach
work
manner.
competence.
must
report
regarding
Audit
timely
whistleblower
violating
●
are
percentage
Professional
●
by
received.
diligently,
●
outlined
following:
This
they
must
rule
auditor
have
not
is
commonly
observes
a
a
responsibility
disclose
any
referred
fellow
to
to
stnuocca dna ecnaniF 3
the
auditor
report
it.
information
outsiders.
Source: Adapted from https://corporatenanceinstitute.com/resources/knowledge/
accounting/accounting-ethics/
The main nal accounts
The profit and loss account
This
is
also
income
It
known
and
therefore
and
how
three
the
establishes
this
parts:
as
expenditure
was
the
of
whether
distributed
trading
appropriation
income
ows
at
statement
a
a
business
business
the
account,
end
the
and
over
has
of
that
prot
shows
a
given
made
a
prot
period.
and
the
It
loss
records
time
is
of
period.
or
a
loss
divided
account,
into
and
the
account
The trading account
The
the
trading
cost
income
to
account
the
statement
Table3.4.1).
shows
business
In
that
given
revenue
period.
producing
formula
or
for
cost
is
of
=
income
sales
sales
sales
gross
prot
of
=
difference
sales.
establishes
purchasing
cost
of
the
Cost
the
those
calculating
gross
Sales
of
sales
as
cost
goods
shown
the
prot
that
−
selling
goods
the
sold
were
sales
the
top
of
the
business
cost
part
formula
of
goods
is
of
and
the
(see
used:
sales
or
(COGS)
sold
revenue
as
following
revenue
from
of
between
is
gross
prot,
earned
or
the
is
the
It
is
during
services
the
that
over
direct
a
cost
period.
of
The
follows:
opening
stock
+
purchases
−
closing
stock
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3
For
example,
a
rm
at
the
beginning
of
a
trading
period
had
$500
worth
Key terms
of
stock.
then
It
then
closed
bought
this
period
more
with
stock
stock
during
valued
this
at
period
$200.
valued
What
is
its
at
$800.
COGS
It
during
Prot and loss account
theperiod?
also known as the income
COGS
=
$500
+
=
$1,100
$800
−
$200
statement, this is the record of
income and expenditure ows
of a business over a given
What
would
the
rm’s
gross
prot
be
if
it
sold
400
units
of
a
product
at
time period
$10
each?
Cost of sales
Sales
revenue
Gross
the direct cost of producing
prot
=
$10
×
=
$4,000
=
$2,900
or purchasing the goods that
400
−
=
$4,000
$1,100
were sold during that period
The prot and loss account
stnuocca dna ecnaniF 3
Gross prot
This
is
the
second
part
of
the
income
statement
that
shows
the
prot
before
found by deducting cost of
interest
and
tax,
prot
before
tax,
and
prot
for
period
(see
Table
3.4.1).
sales from sales revenue
To
nd
out
prot
before
interest
and
tax,
expenses
are
subtracted
from
the
Prot before interest and tax
gross
the dierence between gross
prot and expenses
costs
prot
or
include
shown
in
overheads
the
trading
which
advertising
costs,
are
account.
not
directly
administration
These
linked
expenses
to
the
comprise
units
charges,
rent,
and
=
prot
sold.
indirect
Examples
insurance
costs.Therefore:
Prot before tax
found by subtracting interest
prot
before
interest
and
tax
gross
expenses
from prot before interest
and tax
Prot
the
before
prot
tax
is
before
calculated
interest
by
and
subtracting
interest
payable
on
loans
from
tax:
Prot for period
equal to prot before tax
prot
before
tax
=
prot
before
interest
and
tax
interest
less tax
Dividends
Then,
the
company
prot
for
prots)
period
from
is
found
prot
by
before
deducting
corporation
tax
(tax
on
tax:
a sum of money paid to
shareholders, which is
prot
for
period
=
prot
before
tax
corporation
tax
decided by the board of
directors of a company
Retained prot
The appropriation account
the amount of earnings left
This
after dividends and other
company’s
deductions have been made
is
in
is
the
two
prot
nal
part
prot
forms:
for
of
the
prot
period
either
(ploughed-back
as
is
and
loss
distributed
dividends
prot).
to
account
(see
that
Table
shareholders
Retained
prot
is
shows
3.4.1).
or
as
how
This
the
distribution
retained
calculated
using
the
followingformula:
retained
prot
=
prot
for
period
dividends
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3.4
Final accounts
Table 3.4.1 Prot and loss account for XYZ Ltd (prot-making entity)
X YZ Ltd (prot-making entity)
Statement of prot or loss for the year ended 30 June 2021
US$ million
Sales revenue
800
Cost of sales
(250)
Gross prot
Trading account
550
Expenses
(300)
Prot before interest and tax
250
Interest
(20)
Prot and loss account
Prot before tax
230
Tax
(40)
190
Dividends
stnuocca dna ecnaniF 3
Prot for period
(50)
Appropriation account
Retained prot
140
Table 3.4.2 Prot and loss account
It
is
important
is
used
to
instead
of
note
that
“prot”
for
in
non-prot
the
entities,
statement
of
the
prot
or
term
loss.
“surplus”
As
noted
for XYZ (non-prot entity)
in
X YZ Ltd (non-prot entity)
Table
3.4.2,
the
organization
is
exempt
from
corporation
tax
and
hence
Statement of prot or loss for the
nothing
is
deducted
from
the
surplus
before
tax
to
get
surplus
for
period.
In
year ended 30 June 2021
addition,
no
dividends
are
paid
and
therefore
the
surplus
for
period
is
also
US$ million
the
retained
surplus.
Sales revenue
Cost of sales
800
(250)
Student workpoint 3.6
Gross surplus
Be a thinker
Expenses
Surplus before interest
550
(300)
250
Prot and loss account for BTW Ltd for the year ended 31 December 2021
Interest
(20)
$000
Surplus before tax
Sales revenue
950
Tax
Cost of goods sold
230
Retained surplus
230
?
Prot before interest and tax
350
Interest
10
Prot before tax
?
Tax
40
Prot for period
?
Dividends
50
Retained prot
?
Complete
numbers
Identify
and
c)
Surplus for period
650
Expenses
b)
(0)
?
Gross prot
a)
230
loss
Explain
this
the
above
(indicated
four
and
the
for
loss
question
stakeholders
account
how
prot
by
BTW
above
who
account
by
lling
in
the
missing
marks).
would
be
interested
in
the
prot
Ltd
stakeholders
would
use
the
information
in
account.
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3
The balance sheet
Key terms
Also
Balance sheet
a nancial statement that
outlines the assets, liabilities
and equity of a rm at a
known
liabilities,
the
It
as
and
nancial
gives
the
the
statement
equity
of
position
rm
shareholders
an
have
a
of
idea
of
rm
a
rm
of
nancial
at
in
position,
specic
and
what
invested
a
it
is
used
owns
point
to
and
this
in
outlines
time.
calculate
owes,
a
It
is
a
rm’s
including
the
assets,
snapshot
net
how
of
worth.
much
it.
specic point in time
The
basic
assets)
requirement
must
equal
of
what
a
it
balance
owes
sheet
(total
is
that
what
liabilities)
a
plus
business
how
the
owns
assets
(total
are
Assets
nanced
(equity).
This
is
what
makes
the
balance
sheet
balance.
The
three
resources of value that a
main
components
of
assets,
liabilities,
and
equity
are
explored
below.
business owns or that are
owed to it
Assets
Liabilities
These
stnuocca dna ecnaniF 3
a rm’s legal debts or what
They
are
resources
include
xed
of
value
assets
that
and
a
business
current
owns
or
that
are
owed
to
it.
assets.
it owes to other rms,
Non-current
assets,
also
called
xed
assets,
are
long-term
assets
that
last
institutions or individuals
in
a
business
Net assets
in
nature
found by subtracting total
Some
liabilities from total assets
over
of
these
time.
In
difcult
Current
months.
is
Debtors
and
Stock,
●
goods,
are
held
also
received
at
business
as
nished
total
will
cash,
known
and
assets
be
or
are
looked
assets
from
the
usually
other
in
in
a
are
physical
is
(lose
value)
deducted
the
in
from
nature
the
tend
to
unit.)
business
for
up
to
12
stock.
sale
or
depreciate
later
last
that
machinery.
non-physical
at
that
and
the
bank
and
depreciation
that
debtors,
examples
vehicles,
machinery,
short-term
either
Tangible
accumulated
individuals
the
months.
equipment,
as
the
(These
include
are
owe
12
Intangible
money
be
such
case,
value.
assets
could
●
assets,
asset.
to
than
buildings,
this
They
Cash
●
more
include
non-current
be
for
of
by
rms
goods
the
and
services,
which
business.
that
have
bought
goods
on
credit
money.
inventory,
includes
raw
materials,
semi-nished
goods.
assets
=
non-current
assets
+
current
assets
Liabilities
These
or
are
a
rm’s
individuals.
are
usually
current
a
liabilities
or
Current
within
goods
and
on
bank
months.
credit
owed
funding
current
to
to
and
are
the
the
for
it
owes
course
the
known
after
12
rm.
to
of
other
rms,
business
They
are
institutions,
operation
classied
and
into
non-
as
long-term
months
by
liabilities,
the
business.
are
long-term
They
include
mortgages.
short-term
These
the
what
liabilities.
also
payable
loans
or
during
liabilities,
liabilities
12
(money
of
borrowings
long-term
debts
arise
source
Non-current
debts
legal
They
include
rm),
a
debts
that
creditors
bank
government,
overdraft
such
as
are
payable
(unpaid
(see
by
suppliers
Chapter
corporation
the
business
who
3.2),
sold
and
tax
tax).
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3.4
total
To
work
liabilities
out
net
assets,
net
Having
how
calculated
they
were
=
current
total
assets
the
net
liabilities
liabilities
=
total
assets
is
the
non-current
subtracted
assets
of
+
−
total
business,
from
Final accounts
liabilities
total
assets:
liabilities
we
then
need
to
nd
out
nanced.
Equity
Key terms
if
refers
all
of
a
of
to
the
rm’s
entities
assets
assets
there
However,
the
for
amount
were
are
are
money
liquidated.
sold
two
of
off
to
aspects
non-prot
would
be
Liquidation
pay
to
that
is
returned
a
situation
any
funds
owing.
equity:
share
capital
entities
there
is
only
one
to
For
and
aspect
a
business
where
Equity
all
prot-making
retained
of
equity
refers to the amount of money
earnings.
(retained
earnings).
refers
bought
by
include
the
that would be returned to a
business if all of the assets
were liquidated
Share capital
This
stnuocca dna ecnaniF 3
This
to
Liquidation
the
original
shareholders.
the
daily
current
buying
market
capital
It
is
and
value
of
a
invested
into
permanent
selling
of
the
source
shares
in
business
of
a
capital
stock
through
and
shares
does
exchange
not
market
a situation where all of a rm’s
assets are sold o to pay any
or
funds owing
shares.
Retained earnings
This
includes
entities)
Hence,
capital
or
for
and
all
current
retained
prot-making
retained
prior
businesses,
=
non-prot-making
share
both
net
prot-making
assets
of
the
and
business
=
has
3.4.3
been
and
3.4.4
discussed
are
above
prots
(prot-making
entities).
is
the
combination
retained
is
retained
enables
use
the
of
the
equal
of
share
=
earnings
to
retained
earnings:
earnings
entities,
assets
examples
and
+
equity
non-prot
and
net
Tables
retained
equity
capital
businesses,
equity
In
period
(non-prot
earnings:
equity
For
and
surpluses
equity
balance
helps
sheet
to
to
nance
the
balance:
equity
balance
required
sheets
IB
that
incorporate
what
format.
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3
Table 3.4.3 A statement of nancial position for a prot-making entity
X YZ Ltd (prot-making entity)
Statement of nancial position as at 30 June 2021
$m
$m
Non-current assets
Proper ty, plant and equipment
Accumulated depreciation
600
(30)
Non-current assets
570
Current assets
stnuocca dna ecnaniF 3
Cash
20
Debtors
15
Stock
55
Current assets
90
Total assets
660
Current liabilities
Bank overdraft
10
Trade creditors
20
Shor t-term loans
15
Current liabilities
45
Non-current liabilities
Borrowings – long term
250
Non-current liabilities
250
Total liabilities
295
Net assets
365
Assessment ad vice
The formats for the prot and
loss account and balance
Equity
sheet used in this chapter
are the recommended ones
that are indicated in the IB
Business Management Guide
Share capital
220
Retained earnings
145
Total equity
365
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3.4
Final accounts
Table 3.4.4 A statement of nancial position for a non-prot entity
X YZ (non-prot entity)
Statement of nancial position as at 30 June 2021
$m
$m
Non-current assets
Proper ty, plant and equipment
Accumulated depreciation
600
(30)
Non-current assets
570
Cash
20
Debtors
15
Stock
55
Current assets
stnuocca dna ecnaniF 3
Current assets
90
Total assets
660
Current liabilities
Bank overdraft
10
Trade creditors
20
Shor t-term loans
15
Current liabilities
45
Non-current liabilities
Borrowings – long term
250
Non-current liabilities
250
Total liabilities
295
Net assets
365
Equity
Retained earnings
Total equity
365
365
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3
Student workpoint 3.7
Be a thinker
1.
Using
30
Table
June
stnuocca dna ecnaniF 3
Key terms
prepare
after
the
●
Cash
●
Trade
creditors
●
Stock
decreased
●
A
increased
●
Debtors
●
Retained
●
The
●
Non-current
long-term
rose
by
rose
by
loan
by
another
following
US$10
by
US$15
US$5
US$5
assets,
sheet
for
the
year
ended
occurred:
million.
million.
by
10%.
million.
fell
overdraft
balance
adjustments
million.
increased
earnings
bank
the
2.
3.4.3,
2022
by
US$26
reduced
share
by
million.
US$4
capital
million.
and
short-term
loans
remained
same.
Explain
two
uses
and
two
limitations
of
the
balance
sheet.
Intangible assets
These
are
assets
that
are
non-physical
in
nature.
However,
even
though
Intangible assets
they
do
not
have
a
physical
value,
they
can
prove
to
be
very
valuable
to
a
assets that are non-physical
rm’s
long-term
success.
Some
of
them
are
explained
below.
in nature
Patents
Patents
These
provide
inventors
with
the
exclusive
rights
to
manufacture,
use,
provide inventors with
sell,
or
control
their
invention
of
a
product.
The
inventors
are
provided
the exclusive rights to
with
legal
protection
that
prevents
others
from
copying
their
ideas.
manufacture, use, sell or
Anyone
wishing
to
use
the
patent
holder’s
idea
must
apply
and
pay
a
fee
control the product or process
to
be
granted
permission
to
use
it.
The
legal
life
for
most
patents
is
about
they invented
20years,
patents
although
include
a
this
pen
depends
with
a
on
the
scanner,
useful
steel
life
of
kidneys
the
and
patent.
rubber
Interesting
shoes
for
Goodwill
horses’
health.
the value of positive or
favourable attributes that
Goodwill
relate to a business
This
Copyright laws
to
a
refers
to
the
business.
brand
name,
It
value
of
includes
highly
positive
a
good
skilled
or
favourable
customer
employees,
a
base
attributes
and
desirable
that
relations,
location
a
and
relate
strong
the
good
legislation that provides
reputation
a
rm
enjoys
with
its
clients.
Goodwill
usually
arises
when
one
creators with the exclusive
rm
is
purchased
by
another.
During
an
acquisition,
goodwill
is
valued
as
right to protect the production
the
amount
the
rm
paid
by
the
purchasing
rm
over
and
above
the
book
value
of
and sale of their ar tistic or
being
bought.
literary work
Copyright laws
Trademark
These
are
laws
that
provide
a
creator
with
the
exclusive
right
to
protect
a recognizable symbol, word,
the
production
and
sale
of
their
authors,
and
lm
artistic
or
literary
work.
Creators
include
phrase or design that is
musicians,
producers.
Copyright
laws
will
only
apply
ocially registered and that
if
the
original
ideas
are
put
to
use,
such
as
in
the
creation
of
a
published
identies a product or business
novel,
a
music
album
or
developed
computer
software.
Most
copyright
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3.4
lasts
for
between
patents,
anyone
permission
to
50
and
100
wishing
do
to
years
use
a
after
the
copyright
death
of
holder’s
the
creator.
works
must
As
Final accounts
with
seek
so.
Trademarks
These
are
a
registered
recognizable
and
distinguish
one
trademarks
be
sold
on
for
their
the
Capital
of
a
others
and
a
can
be
most
“What’s
from
sued
last
of
the
word,
product
products
Examples
“swoosh”,
One’s
symbol,
identies
rm’s
fee
use.
Nike
that
a
popular
your
design
golden
include
arches
who
owners.
renewable
trademarks
that
is
ofcially
Trademarks
Anyone
trademark
15-year
McDonald’s
in
the
or
business.
another’s.
by
for
phrase
or
help
Apple,
to
the
Trademarks
period,
symbol,
also
infringes
can
depending
Coca-Cola,
and
slogans
like
wallet?”
The diamond retailer De Beers has
Intangible
assets
are
difcult
to
value
due
to
their
subjective
nature,
and
in
cases
they
will
not
be
shown
in
the
balance
sheet.
Their
value
stnuocca dna ecnaniF 3
trademarked the famous slogan
many
can
“A diamond is forever ”
uctuate
can
be
either
used
before
an
over
inate
to
a
time
or
“window
purchase.
intangible
including
and
it
in
the
deate
a
dress”
or
The
asset
simple
rm’s
serves
balance
in
of
As
reputation
a
result,
increase
specic
to
the
value.
articially
setting
just
changes
the
parameters
increase
the
of
an
organization
intangible
value
to
be
complexity
of
a
used
and
assets
rm
to
can
just
quantify
inaccuracy
of
sheet.
Depreciation (HL only)
Key terms
This
is
the
non-cash
to
expense
determine
depreciate
●
decrease
Wear
the
in
the
that
is
prot
value
of
recorded
before
a
non-current
in
the
interest
prot
and
tax.
asset
and
Two
over
loss
time.
account
reasons
It
in
why
is
a
order
assets
the decrease in the value of a
are:
and
Depreciation
xed asset over time
tear
–
the
repeated
use
of
non-current
assets
such
as
cars
or
Straight-line depreciation
machinery
causes
them
to
fall
in
value
and
more
money
is
needed
to
a method that spreads out
maintain
them.
the cost of an asset equally
●
Obsolescence
–
existing
non-current
assets
fall
in
value
when
new
or
over its lifetime by deducting
improved
versions
are
introduced
in
the
market.
With
time
these
“old”
a given constant amount of
assets
become
obsolete
or
out
of
date
and
are
eventually
withdrawn.
depreciation of the asset’s
Two
and
methods
the
for
units
of
calculating
depreciation
production
method ,
are
as
the
straight-line
explained
method
value per annum
below.
Units of production
depreciation
Straight-line method
also called units of activity
This
is
a
commonly
used
method
that
spreads
out
the
cost
of
an
asset
method, it calculates the
equally
over
its
lifetime
by
deducting
a
given
constant
amount
of
depreciation of the value of an
depreciation
of
the
asset’s
value
each
year.
It
requires
the
following
asset based on usage
elements
●
The
in
its
calculation:
expected
intends
to
be
●
The
original
●
The
residual,
of
its
worth
useful
used
cost
of
scrap
or
life
of
before
the
or
value
the
asset,
which
salvage
over
asset,
which
is
the
length
of
time
it
replacement.
its
value
useful
is
of
its
purchase
the
asset,
or
historical
which
is
an
cost.
estimation
life.
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3
Incorporating
the
above,
the
annual
depreciation
original
annual
depreciation
cost
costing
years.
31
On
Calculate
December
First,
Key term
1:
it
is
$30,000,
years.
1
$30,000.
January
It
is
the
Then
to
ABC
have
depreciation
calculated
residual
as:
useful
life
value
of
asset
Company
purchased
a
$6,000
value
expense
on
of
the
at
vehicle
a
vehicle
the
for
end
the
of
year
four
ended
2021.
important
the
2021,
expected
−
be
=
expected
Example
can
to
residual
apply
identify
value
the
is
annual
the
key
$6,000,
elements:
and
the
depreciation
the
original
expected
cost
useful
life
is
is
four
formula:
Residual value
$30,000
an estimation of an asset’s
annual
depreciation
$6,000
=
=
stnuocca dna ecnaniF 3
4
$6,000
years
wor th or value over its useful
life, also known as scrap or
salvage value
The
above
value
information
over
four
can
be
presented
in
a
table
to
show
the
net
book
years.
Table 3.4.5 Straight-line depreciation at $6,000 per annum
Annual depreciation
Net book value on
expense ($)
vehicle ($)
Year
0 (present)
0
30,000
1
6,000
24,000
2
6,000
18,000
3
6,000
12,000
4
6,000
6,000
Example
was
2:
Calculate
purchased
In
such
as
follows:
a
case
on
we
1
the
July
will
depreciation
2021
be
required
6
depreciation
expense
=
with
expense
the
to
year
charge
months
the
)
×
above
on
31
depreciation
($30,000
(
12
of
ending
for
if
half
the
it
2021.
year
$6,000)
[
]
months
vehicle
December
=
$3,000
4
Advantages of using straight-line depreciation
●
It
a
●
It
is
simple
number
is
most
written
to
of
calculate
suitable
off
as
it
is
a
predictable
expense
that
is
spread
over
years.
within
for
less
the
expensive
asset’s
items,
estimated
such
useful
as
furniture,
that
can
be
life.
Disadvantages of using straight-line depreciation
●
It
is
it
does
not
over
●
It
the
can
It
cater
useful
inate
amount
●
suitable
not
does
of
not
the
take
expensive
for
the
life
value
environment
for
of
the
value
in
of
their
into
that
loss
in
such
efciency
as
or
plant
and
increase
in
machinery,
repair
as
expenses
asset.
some
rst
account
may
assets
assets
or
the
render
which
second
may
years
(eg
fast-changing
certain
xed
have
lost
motor
the
greatest
vehicles).
technological
assets
obsolete
very
quickly.
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3.4
Final accounts
Units of production method
the
called
asset’s
of
useful
time.
In
volume
during
The
of
of
The
this
it
●
cost
on
basis
salvage
used
Based
units
current
on
(cost
the
is
to
will
when
used
its
be
an
on
usage
higher
asset
to
[
over
Note
is
calculate
The
cost
the
basis
asset
of
for
a
method
It
than
just
when
used
the
there
a
calculates
assumes
lot,
that
an
passage
is
a
and
depreciation
non-current
use
the
the
asset.
end
number
is
the
life.
wears
greater
lower
using
the
in
the
asset
business.
is
the
This
is
the
This
its
is
units
of
This
the
useful
to
the
estimated
be
produced.
number
gure
value
of
the
asset
if
life.
is
of
The
units
usually
it
based
wear
is
and
expected
on
tear
to
production
information.
This
out
produced.
of
result
life.
historical
of
is
the
and
The
length
needs
to
number
of
be
of
time
an
asset
is
expected
to
be
replaced.
units
the
asset
produced
during
year.
of
the
asset
units
-
of
production
salvage
depreciation
total
units
estimated
to
be
is:
actual
units
produced
=
depreciation
expense
]
produced
useful
formula
value)
×
estimated
usage.
less.
required
acquire
useful
above,
basis
is
depreciation
based
asset.
of
at
total
useful
it
related
year
asset.
to
the
its
and
before
Actual
the
of
sold
over
Estimated
asset
the
machinery
estimates
●
of
paid
estimated
the
the
this
asset
method:
value
be
an
depreciation
during
an
method,
of
closely
information
value
produce
●
more
when
to
activity
value
method,
amount
were
The
is
of
the
production
original
The
of
activity
times
total
●
units
life
following
units
●
the
depreciation
stnuocca dna ecnaniF 3
Also
life
that:
(cost
basis
of
asset
-
salvage
value)
=
[
estimated
over
Hence,
units
the
of
Use
using
of
to
units
rate
3.4.6
of
×
to
be
produced
useful
production
Table
the
units
estimated
production
Example:
assets
units
total
of
production
rate
life
depreciation
actual
units
calculate
production
units
]
the
formula
can
produced
=
depreciation
also
be
written
depreciation
for
two
as:
expense
non-current
method.
Table 3.4.6 Information required for units of production depreciation calculation
Non-current
Cost basis
Useful life
Total estimated units
Actual units
(years)
produced over useful life
produced for period
Salvage
asset
Photocopier
$4,000
$500
5
200,000
40,000
Tractor
$8,000
$800
8
96,000
12,000
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3
Photocopier annual depreciation expense calculation
To
calculate
units
of
the
depreciation
The
for
1.
steps
the
annual
production
expense
used
in
the
(cost
will
will
be
be
in
year
units
basis
the
one
of
expenses
calculated
unit
are
of
as
$4,000
units
production
production
salvage
produced
the
Once
photocopier,
that
is
the
complete,
the
depreciation
expense
follows:
rate
for
the
photocopier
value)
=
estimated
for
rst.
calculated.
calculating
photocopier
Calculate
depreciation
rate
over
useful
units
of
production
rate
life
$500
=
0.0175
200,000
2.
Calculate
stnuocca dna ecnaniF 3
Actual
the
units
photocopier
produced
×
depreciation
units
of
expense
production
rate
=
depreciation
for
40,000
×
0.0175
=
Year
expense
1
$700
Tractor annual depreciation expense calculation
To
of
calculate
the
production
depreciation
The
for
1.
steps
the
will
expense
used
tractor
in
in
Calculate
Student workpoint
annual
rate
be
calculating
one
units
basis
expenses
calculated
will
year
the
(cost
depreciation
be
the
as
estimated
$8,000
Be knowledgeable
units
unit
of
production
production
salvage
produced
asset
a
that
business
had
an
has
of
$2,000,
a
an
of
$200,
depreciation
rate
for
the
of
value)
over
useful
units
of
production
Calculate
0.075
the
tractor
depreciation
expense
units
produced
×
units
of
production
rate
=
depreciation
Use
the
method
its
expense
ve
Year
1
life.
12,000
1.
rate
life
original
and
useful
expense
tractor
for
years
units
the
salvage
Actual
value
the
complete,
96,000
2.
cost
tractor,
is
$800
=
Suppose
the
that
follows:
=
3.8
for
Once
calculated.
are
of
rst.
×
0.075
=
$900
straight-line
to
annual
determine
Advantages of using units of production depreciation
depreciation
●
As
the
depreciation
expense
is
directly
tied
to
the
wear
and
tear
on
the
expense.
2.
If
the
units
asset,
this
time.
This
produced
useful
life
down
an
asset
based
on
its
usage
as
opposed
the
accurate
reection
of
the
declining
physical
to
value
asset.
It
accurately
asset
matches
usage,
it
is
revenues
important
and
to
expenses.
note
that
the
As
this
method
expenses
is
based
uctuate
with
expense
customer
units
demand.
This
allows
revenues
generated
to
be
matched
to
of
expenses
production
more
the
on
the
a
over
calculate
depreciation
is
is
●
100,000,
using
writes
estimated
of
the
method
when
producing
nancial
statements,
hence
providing
a
more
method.
realistic
view
of
what
is
taking
place
in
the
business.
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3.4
Final accounts
Disadvantages of using units of production depreciation
C oncep t
It
●
is
tie
only
useful
to
manufacturers
depreciation
to
asset
usage
if
or
a
producers.
business
It
does
makes
not
little
sense
manufacture
to
or
ETHICS
produce
a
product.
The Sarbanes–Oxley Act was
This
●
method
is
not
allowed
for
tax
purposes.
It
cannot
be
used
when
a
passed in 2002 by the United
business
computes
its
tax
returns
at
the
end
of
the
year.
States Congress to protect
It
●
can
be
complicated
measuring
output
recalculated
each
to
can
compute
be
tricky
the
and
units
of
depreciation.
depreciation
expense
Also,
must
investors from fraudulent
nancial repor ting by
be
organizations and hence deter
period.
unethical accounting. This came
By
assessing
the
advantages
and
disadvantages
of
each
depreciation
method
in response to nancial scandals
above,
a
business
it
a
given
can
determine
which
method
is
most
appropriate
for
in the early 2000s that involved
the
by
asset
is
passage
period.
cheap
of
depreciation
or
time,
As
noted,
expensive,
and
what
key
factors
whether
the
tax
to
the
consider
asset
include
depreciates
considerations
are
in
whether
by
the
use
companies such as Enron
or
choice
Corporation, Tyco International
of
stnuocca dna ecnaniF 3
over
plc, and WorldCom.
method.
Are there any other global
examples of unethical behaviour
in accounting that come to mind?
Revision checklist
How did the rms concerned
✓
Final
the
accounts
end
of
an
stakeholders
suppliers,
nancial
accounting
about
organization.
employees,
are
the
Internal
while
statements
period
that
nancial
government,
of
inform
position
stakeholders
examples
compiled
external
competitors,
businesses
internal
and
include
by
and
stakeholders
nanciers
and
are
handle the situation?
external
performance
shareholders,
at
of
an
managers
and
TOK links
customers,
local
community.
1.
Do nal accounts reect
“the truth” about a
✓
A
prot
and
loss
account
shows
the
records
of
income
and
expenditure
business?
ows
of
income
a
business
over
a
given
time
period
and
is
also
known
as
an
2.
statement.
Financial information is
sometimes presented
✓
A
balance
sheet
is
a
snapshot
of
the
nancial
position
of
a
rm
and
is
to the wider audience
used
to
calculate
a
rm’s
net
worth.
It
gives
the
rm
an
idea
of
what
it
in tabular, graphical
owns
(assets)
and
owes
(liabilities),
including
how
much
shareholders
or another form of
have
invested
in
it
(equity).
quantitative summary.
✓
Current
than
a
assets
last
up
to
a
year
while
non-current
assets
last
for
more
Do such simplifying
year.
representations limit our
knowledge of accounts?
✓
Non-current
are
payable
liabilities
within
a
are
payable
after
a
year,
while
current
liabilities
3.
year.
Is it possible to know
the value of intangible
✓
For
a
balance
sheet
to
balance,
a
rm’s
net
assets
should
equal
assets?
itsequity.
✓
Intangible
assets
to
long-term
a
rm’s
trademarks
✓
The
and
are
over
its
depreciation
lifetime
depreciation
of
depreciation
method
based
on
success.
the
usage.
in
These
nature
include
and
can
patents,
be
very
valuable
copyrights,
goodwill.
straight-line
equally
non-physical
by
asset’s
(HL
method
deducting
value
calculates
per
the
spreads
a
given
annum.
out
the
constant
The
depreciation
units
of
the
cost
of
an
amount
of
asset
of
production
value
of
an
asset
only)
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3
Practice question
To
answer
BPT
BPT
the
question
below
effectively,
see
Unit
6
pages
398–402.
Ltd
Ltd
is
a
specialises
small,
in
years
of
Mary
owns
private
providing
limited
online
company
education.
owned
The
by
Mary
business
has
Davis
that
enjoyed
many
expansion.
Table 1 Extract from the balance
the
copyright
for
her
patented
software.
However,
the
copyright
sheet for BPT Ltd for the year
will
expire
in
the
near
future.
Moreover,
several
rival
companies
have
ended 31 October 2021
recently
established
a
presence
in
the
online
education
market.
US$
Mary
Cash
to
Cost of sales
stnuocca dna ecnaniF 3
Creditors
Debtors
Depreciation
said,
“Due
3,000
X
28,000
1,500
get
using
for
the
a
her
line
units
Net assets
Non-current assets
of
She
accurate
of
rapidly
your
production
non-current
method.
more
changing
technology
assets.
believes
reection
mostly
of
non-current
method
Prior
the
of
to
to
industry
the
computer
of
wear
right.”
calculate
that
units
assets
she
the
was
it
is
important
and
tear
hardware).
on
She
is
recently
depreciation
using
production
She
the
method
her
straight-
will
give
non-current
also
started
expenses
looking
for
a
assets
an
easier
25,000
way
Long-term loan
the
valuation
(consisting
Expenses
to
2,000
to
track
her
revenues
and
increasing
expenses.
0
Y
30,000
Retained earnings
8,500
Share capital
2,000
Shor t-term borrowing
0
Stock
0
Total (current assets)
30,000
Total (current liabilities)
48,000
Total equity
10,500
Mary’s
Table
1
accountant
for
a)
Dene
b)
Using
c)
BPT
the
Ltd
has
as
term
Table
just
of
presented
31
October
the
nancial
information
shown
in
2021.
copyright.
[2
marks]
[4
marks]
[4
marks]
[4
marks]
1:
(i)
calculate
(ii)
construct
Explain
two
method
for
the
a
missing
complete
benets
to
calculating
gures
X
balance
Mary
of
and
sheet
using
depreciation.
Y
for
the
BPT
Ltd
units
of
for
2021.
production
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3.5
Protability and liquidity ratio analysis
3.5 Protability and liquidity ratio analysis
By the end of this chap ter, you should be able to:
Calculate and comment on the protability ratios:
➔
gross prot margin ,
prot margin, and return on capital employed (ROCE)
➔
Examine possible strategies to
improve protability ratios
➔
Calculate and comment on the liquidity ratios:
current ratio and acid
Discuss possible strategies to
➔
stnuocca dna ecnaniF 3
test (quick) ratio
improve liquidity ratios
Ratio analysis
This
of
a
is
a
nancial
rm’s
analysis
nancial
performance
by
tool
determining
strengths
and
weaknesses.
historical
and
inter-rm
ratios
The
of
other
following
liquidity
used
statements.
of
in
certain
It
aids
in
the
ratios
in
interpretation
in
evaluating
trends
and
through
or
and
below:
assessment
rm’s
by
its
nancial
various
making
analysing
different
explored
a
exposing
decision-making
same
are
the
helps
comparisons
businesses
types
It
past
meaningful
ratios
and
industries.
protability
ratios
and
ratios
Protability ratios
Key terms
These
ratios
ability.
assess
Other
protability
the
performance
variables
ratios
are
are
used
gross
in
of
a
rm
in
interpreting
prot
margin
terms
this
and
of
its
prot-generating
protability.
prot
Two
types
of
Gross prot margin
margin
calculated by dividing the
gross prot by the sales
Gross profit margin
revenue, expressed as a
This
a
is
found
percentage,
by
dividing
as
the
gross
prot
by
the
sales
revenue,
expressed
as
percentage
follows:
Prot margin
gross
gross
prot
margin
calculated by dividing the
prot
=
×
100
net prot before interest and
sales
revenue
tax by the sales revenue,
expressed as a percentage
Example:
prot
of
A
business
US$70
has
million.
sales
revenue
Calculate
its
of
gross
US$100
prot
million
margin,
and
using
gross
the
aboveformula:
US$70
gross
prot
margin
million
×
=
US$100
The
to
business
mean
prot.
that
That
Businesses
generates
for
is,
every
every
aim
for
a
gross
$100
$1
of
higher
100
=
70%
million
prot
of
sales
gross
sales,
margin
the
revenue
prots
of
70%.
business
brings
to
help
in
This
makes
70
them
is
cents
pay
interpreted
$70
as
their
as
its
gross
gross
prot.
expenses.
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3
Possible strategies to improve gross prot margin
A
●
rm
can
increase
competition
changes.
this
case
A
●
and
be
on
stnuocca dna ecnaniF 3
A
●
help
can
persuade
need
to
A
●
to
business
its
staff
goods
care
lead
adopt
ensure
are
as
cheaper
costs.
the
to
gross
increase
very
a
few
the
less
sales
way
if
of
where
there
sensitive
revenue
when
any
image
to
suppliers
This
will
prot
on
customer
more
that
aim
more
of
the
to
less
because
too
the
changes.
The
business
them
is
price
price
substitutes.
the
charging
they
with
much
loyal
in
materials
reduce
The
quality
in
the
order
cost
business
of
the
of
will
to
cut
sales
need
materials
to
bought,
resentment.
its
do
of
help
margin.
the
aggressive
buy
promotional
products
not
be
to
reduce
productive
produced.
remaining
have
are
signicantly
damage
it
markets
use
(see
strategies
Chapter
expensive
that
4.5).
could
Businesses
campaigns
that
will
lead
costs.
can
should
alter
compromise
customers
increased
may
in
consumers
prots.
source
to
products
could
not
perceive
higher
increase
not
here
could
purchase
could
rm
they
can
its
careful
which
if
this
for
where
may
market
that
make
business
down
the
is
consumers
to
prices
purchased
drawback
order
prices
markets
Raising
quantity
In
or
direct
or
Unproductive
taken
not
to
are
labour
able
staff
to
may
demotivate
costs
sell
need
or
by
ensuring
more
to
be
reduce
units
of
shed.
the
that
the
However,
morale
of
the
staff.
Profit margin
This
is
a
measure
the
sales
tax
by
of
revenue.
the
sales
the
It
is
prot
that
calculated
revenue,
expressed
prot
prot
margin
remains
by
as
a
interest
above
A
and
rm
tax
has
of
That
A
margin
of
is,
high
well;
a
costs.
all
costs
before
before
revenue
million.
of
from
interest
and
interest
and
tax
100
revenue
US$150
Calculate
its
million
prot
and
a
prot
margin,
before
using
the
formula:
rm
$100
prot
×
sales
million
×
=
US$150
The
deducting
=
US$75
US$75
prot
the
percentage:
sales
Example:
after
dividing
therefore
sales
every
prot
low
$1
of
Businesses
for
better
used
increase
a
could
should
the
brings
margin
=
50%
margin
business
in
mean
could
50
that
a
look
margin,
50%.
This
generates
as
rm
prot
is
for
the
ways
In
a
means
prot
to
in
following
its
for
of
expenses
controlling
improve
addition
that
margin
every
$50.
margin.
meeting
difculties
performance.
prot
of
cents
indicate
therefore
nancial
gross
prot
made,
sales
margin
prot
margin
to
makes
revenue
100
million
to
can
the
their
its
very
overall
prot
strategies
help
to
boost
protmargin.
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3.5
Protability and liquidity ratio analysis
Additional strategies to improve prot margin
A
rm
can
expenses
carefully
may
expensive
A
rm
costs.
could
For
product
rm
see
It
is
the
discounts.
important
should
prot
be
managers
negotiate
to
move
to
used
who
have
key
in
for
the
to
effort
used
is
to
than
increase
raise
the
or
aim
gross
lead
to
Customers
some
revenues
both
cutting
suppliers
could
ideal.
lose
could
holidays.
of
with
rent
on
this
expensive
rent
could
unnecessary
However,
cheaper
less
where
expenditure
with
cheaper
rm
to
see
managers.
been
that
and
an
to
reducing
negotiating
measures
collectively
costs
stakeholders
location
detrimental
that
senior
landlords
However,
note
indirect
example,
for
with
with
another
as
the
For
packages
example,
moving
the
check
avoided.
holiday
demoralize
●
be
of
and
its
cut
prot
for
a
might
prestige.
costs
margin
and
margin.
stnuocca dna ecnaniF 3
●
Return on capital employed (ROCE)
Key term
This
ratio
measures
the
protability
of
a
rm’s
invested
capital.
It
Return on capital employed
assesses
the
employed
returns
is
found
a
rm
by
is
making
adding
a
from
rm’s
its
capital
non-current
employed.
liabilities
to
Capital
its
equity,
as
shownbelow:
assesses the returns a rm
is making from its capital
employed
capital
This
is
then
used
employed
in
=
calculating
prot
ROCE
non-current
the
return
before
prot
of
generated
First,
the
liabilities
prot
Suppose
US$0.5
a
interest
capital
(US$2
US$0.5
Capital
US$3.5
Then,
million)
is
rm
more
is
is
should
is
the
capital
other
US$2
calculated
need
equity
follows:
tax
100
capital
tax
to
of
US$1
liabilities
of
be
of
million,
US$2
US$700,000.
calculated
(share
capital
by
US$1
retained
million.
Calculate
adding
million
It
its
ROCE.
non-current
+
retained
million
+
US$1
million
+
US$0.5
million
=
as
making
the
higher
the
also
to
20%
made
get
a
acts
their
on
the
20%.
the
as
$20
ROCE
as
it
its
of
for
the
of
for
and
sources
years,
the
that
before
returns
higher
analyses
key
past
assessment
means
prot
incentive
businesses
from
This
greater
an
because
prot
better
of
generates
ROCE,
ratio
generate
be
=
ROCE
This
into
important
rms,
an
rm
employed.
to
100
million
money
an
able
follows:
million
invested,
Generally,
ROCE
share
and
as
follows:
×
business
inject
has
will
and
as
=
capital
their
=
employed
employed
non-current
interest
employed
US$3.5
of
and
million)
US$0.7
The
business
equity
million
ROCE
ROCE
a
before
employed
and
+
×
million
prot
capital
=
capital
Example:
on
liabilities
for
every
interest
businesses
business
$100
and
get
owners
tax.
from
to
returns.
judges
of
how
nance.
together
with
performance
of
well
a
Comparisons
a
those
of
rm.
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3
Possible strategies to improve ROCE
In
addition
prot
A
●
to
rm
does
aid
in
the
or
above
following
try
to
prot
The
reduce
before
further
improving
be
the
used
with
essential
and
this
xed
production
to
amount
interest
problem
purchase
on
could
of
is
of
that
goods
prot
remains
the
such
that
margin
loans
while
unchanged
long-term
as
loans
machinery,
could
and
ROCE:
long-term
tax
assets
gross
improve
be
sold
to
still
or
may
which
be
will
generate
prot.
rm
will
fall.
to
the
more
A
that
not
needed
strategies
the
should
ensuring
●
the
margin,
could
have
ROCE,
does
stnuocca dna ecnaniF 3
leads
effect
and
of
assuming
not
to
declare
the
prot
decrease.
less
pay
additional
reducing
The
the
before
interest
drawback
ploughed-back
dividends
retained
prot
is
for
and
that
to
prot,
tax
hence
remains
reducing
future
shareholders.
and
This
raising
unchanged
retained
prot
investment.
Liquidity ratios
Key terms
These
Current ratio
ratios
obligations.
pay
their
can
be
measure
the
Businesses
day-to-day
ability
need
bills.
of
a
rm
sufcient
Liquidity
is
to
pay
levels
a
of
off
its
liquid
measure
of
short-term
assets
how
to
debt
help
quickly
an
them
asset
a ratio that compares a rm’s
converted
into
cash.
Liquid
assets
include
cash
and
others
such
as
current assets to its current
stock
and
debtors
that
can
be
quickly
turned
into
cash.
Two
important
liabilities
liquidity
ratios
are
the
current
ratio
and
the
acid
test
ratio
Acid test ratio
Current ratio
a stringent ratio that subtracts
stock from the current assets
and compares this to the
This
ratio
compares
calculated
using
a
the
rm’s
current
following
assets
to
its
current
liabilities.
It
is
formula:
rm’s current liabilities
current
current
ratio
current
Example:
liabilities
A
business
amount
to
has
current
$250,000.
assets
=
assets
What
is
liabilities
totalling
its
$500,000
current
while
its
current
ratio?
$500,000
current
ratio
=
=
2
$250,000
The
is
above
rm’s
interpreted
$2
of
current
Accountants
recommend
sufcient
A
current
current
it
current
mean
comes
differ
a
ratio
of
could
A
is
for
2,
which
every
which
its
acceptable
1.5:2.
capital
high
mean
the
of
below
paying
in.
on
range
working
to
ratio
that
$1
can
of
also
be
current
expressed
liabilities,
as
the
2:1.
rm
This
has
assets.
liabilities,
operates
ratio
to
to
1:1
pay
creditors.
of
the
off
put
the
that
the
This
ratio
range
range
means
could
current
any
This
of
will
current
short-term
the
rm
for
also
the
debts
current
in
depends
should
the
allow
on
be
the
but
the
are
industry
A
less
the
high
of
business.
difculties
avoided.
many
availability
of
assets
nancial
ratio,
than
the
when
rm
current
following:
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3.5
There
●
used
is
in
●
There
●
Too
too
much
cash
purchasing
are
many
much
being
debtors,
stock
is
held
non-current
and
held,
being
invested.
This
could
be
assets.
increasing
being
not
Protability and liquidity ratio analysis
the
leading
possibility
to
high
of
bad
debts.
warehouse
storage
costs.
Possible strategies to improve the current ratio
A
●
rm
term
could
loans.
improve
the
increase
(see
reduce
This
bank
helps
current
the
interest
Chapter
3.6),
to
overdrafts
reduce
ratio.
the
and
However,
payable
thereby
and
gearing
its
instead
liabilities
increasing
the
affecting
choose
current
to
and
long-term
ratio
efciency
of
the
and
seek
long-
hence
loans
could
business
future
liquidity
position.
This
strategy
increases
disadvantage
business
is
will
would
the
be
to
available
that
have
if
to
the
sell
same
lease
existing
working
long-term
capital
long-term
them,
which
for
the
assets
can
be
assets
for
business.
are
needed
cash.
stnuocca dna ecnaniF 3
Another
●
The
back,
the
costly.
Acid test (quick) ratio
This
is
a
more
short-term
current
stringent
obligations.
assets.
It
is
indicator
This
is
calculated
of
how
because
using
it
the
well
test
ratio
business
Using
has
the
stock
current
worth
ratio
test
ratio
example
US$150,000.
US$500,000
acid
is
able
stock
as
to
meet
part
of
its
the
formula:
assets
-
stock
=
current
Example:
rm
following
current
acid
a
removes
liabilities
above,
What
is
its
suppose
acid
test
the
same
ratio?
US$150,000
=
=
1.4
Student workpoint
US$250,000
3.9
In
the
above
case,
for
every
$1
of
current
liabilities,
the
business
has
$1.4
Be a thinker
of
current
the
least
cases,
assets
liquid
there
is
less
of
no
stock.
current
By
removing
assets
guarantee
to
that
focus
stock
stock,
on
can
the
the
be
business
most
sold,
liquid
gets
rid
ones.
eventually
of
In
some
leading
1.
to
be
an
ratio
met
acid
sound
indicates
by
selling
test
ratio
nancial
to
3.4.1
3.4.3,
to
its
of
creditors
liquid
less
health.
assets
than
It
how
1:1
may
at
much
short
could
be
of
rm’s
notice.
mean
facing
a
a
As
that
short-term
with
the
liquidity
the
current
business
crisis
(the
debts
is
not
its
short-term
debts)
and
should
therefore
be
scrutinized
with
and
on:
a)
protability
can
ratio,
three
ratios
in
inability
Tables
comment
to
b)
pay
and
calculate
obsoleteitems.
This
Referring
two
liquidity
extreme
ratios.
caution
by
nancial
institutions.
However,
as
with
the
current
ratio,
the
2.
variation
of
acid
test
ratios
in
different
industries
needs
to
be
Which
from
Ahigh
acid
test
ratio
has
the
same
implications
as
a
high
current
that
there
is
no
stock
to
be
(a)
the
and
ratios
(b)
are
ratio
in
except
of
considered.
need
of
further
considered.
improvement?
Evaluate
Possible strategies to improve the acid test ratio
strategies
In
addition
to
the
strategies
to
improve
the
current
ratio,
the
following
with
the
acid
test
to
improve
can
each
help
possible
of
those
ratios.
ratio:
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3
●
A
rm
could
improve
capital
at
a
A
sell
rm
off
available
to
could
increased
bad
off
the
stock
debts
a
its
reduce
the
on
in
discount
of
for
cash.
business
revenue
This
and
debts.
will
make
However,
generated
from
help
more
to
working
selling
the
sold
stock
stock,
prots.
credit
credit.
the
the
short-term
the
rm’s
increase
more
at
position
pay
could
reducing
purchase
stock
liquidity
discount
thereby
●
the
period
The
for
debtors
problem
business
if
the
here
debtors
to
is
enable
that
do
not
it
them
may
to
lead
to
pay.
SWOT analysis
The internal and external attributes that impact on Apple are explored below
using a nancial lens.
stnuocca dna ecnaniF 3
Strengths
Weaknesses
•
•
Great revenue streams from its iPhone
Due to the high prices of products, no
sales and service provision.
source of revenue from low-income
market segments.
•
High retained earnings with an ability
to nance its own investment and
research.
Oppor tunities
Threats
•
•
Develop products that target
The US government imposed higher
low-income market segments for
taris on impor ts from China. The
increased revenue potential.
overall cost of the products increased
as a consequence, and gross margin
on the products was adversely
aected.
•
Intense competition may reduce
revenues and protability.
TOK links
1.
How do our expectations
Revision checklist
and assumptions have
✓
Ratio
analysis
is
a
nancial
analysis
tool
that
assesses
a
rm’s
nancial
an impact on how we
statements
and
aids
its
decision-making.
It
makes
meaningful
historical
interpret nancial ratios?
and
2.
Do liquidity ratios
inter-rm
other
comparisons
businesses
in
the
through
same
or
analysing
different
past
ratios
and
ratios
of
industries.
represent a nancial
✓
Protability
ratios
that
assess
a
rm’s
ability
to
generate
prot
reality?
include
3.
gross
prot
margin,
prot
margin
and
return
on
capital
What role do reason
employed(ROCE).
and emotion play when
✓
Liquidity
ratios
measure
the
ability
of
a
rm
to
pay
off
its
short-
analysing nancial
term
debt
obligations.
Two
examples
are
current
ratio
and
acid
test
performance?
(quick)ratio.
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3.5
Protability and liquidity ratio analysis
Practice question
To
answer
the
question
below
effectively,
see
Unit
6
pages
398–402.
WAW
sold
manufactures
to
suppliers
recognized
in
Because
the
and
its
WAW
with
order
energy-efcient
building
housing
that
be
was
order
in
is,
and
additional
only
30
to
For
the
in
houses.
The
industry
America,
standard-sized
However,
the
special
in
The
WAW
windows
brand
is
are
widely
Canada.
WAW
windows
orders,
would
windows.
WAW
minimum
remainder
employee
North
for
Canada.
construction
manufacture
if
in
has
seen
its
sales
fall
deteriorate.
days.
protable
100.
crisis
position
windows
materials
residential
manufactures
payment
could
the
the
nancial
orders”,
so
of
of
the
upon
have
is
that
are
number
buyer
delivery.
to
be
WAW
considering
not
of
pay
per
50%
to
credit
“special
plan
the
Doing
special
upon
disadvantage
employed
trade
standard-sizes.
windows
would
The
offers
taking
is
Table 1 Selected items from WAW’s
placing
that
an
balance sheet as at 31 May 2021
(all gures in $ thousands)
production
Cash
process
will
a)
be
for
each
sufcient
Using
the
special
to
order.
improve
information
WAW
its
from
is
not
nancial
Table
1
certain
that
stnuocca dna ecnaniF 3
WAW
special-order
150
sales
Creditors
515
Debtors
850
position.
and
showing
all
your
working,
Long-term loan
X
calculate:
Shor t-term borrowing
(i)
the
long-term
(ii)
the
current
loan
(X)
[1
mark]
Retained earnings
ratio
[2
marks]
Share capital
Stock
(iii)
the
acid
test
(quick)
ratio.
[2
Using
the
working,
information
from
Table
2
and
showing
all
1,300
300
400
marks]
Total (non-current assets)
b)
285
1,800
your
calculate:
Table 2 Selected items from WAW’s
prot and loss account for the year
(i)
the
prot
(ii)
the
gross
(iii)
the
prot
before
interest
and
tax
[2
marks]
ended 31 May 2021 (all gures in
prot
margin
[1
mark]
[1
mark]
$ thousands)
c)
Using
the
working,
d)
Examine
margin.
information
calculate
WAW’s
windows.
the
from
Tables
return
decision
to
on
start
1
and
capital
2
and
showing
employed
producing
special
all
(ROCE).
your
[2
marks]
Cost of sales
4,700
Expenses
2,150
Gross prot
2,195
Sales revenue
6,895
order
[ 10
marks]
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3
3.6 Deb t/equity ratio
analysis (HL only)
By the end of this chap ter, you should be able to:
Calculate and comment on the eciency ratios:
➔
days, creditor days
stock turnover, debtor
and gearing ratio
stnuocca dna ecnaniF 3
➔
Evaluate possible strategies to
➔
Distinguish between
improve eciency ratios
insol vency and bankruptcy
Eciency ratios (HL only)
Key terms
These
Stock turnover ratio
ratios
liabilities.
chapter,
assess
They
the
how
also
well
help
following
to
a
rm
internally
analyse
efciency
the
ratios
utilizes
its
performance
will
be
of
explored:
assets
a
and
rm.
stock
In
this
turnover,
measures how quickly a rm’s
debtor
days,
creditor
days
and
gearing
ratio.
stock is sold and replaced
over a given period
Stock turnover ratio
Debtor days ratio
measures the average number
of days a rm takes to collect
This
ratio
given
It
can
measures
period.
be
It
how
quickly
considers
calculated
the
using
a
rm’s
number
two
of
stock
times
is
sold
stock
and
is
replaced
sold
and
over
a
replenished.
approaches.
its debts
One
approach
rm
sells
its
looks
stock.
at
The
how
many
times
in
a
(number
of
times)
formula
given
period
(usually
a
year)
a
is:
Creditor days ratio
measures the average number
cost
stock
of days a rm takes to pay its
turnover
ratio
of
sales
=
average
stock
creditors
Gearing ratio
Average
measures the extent to which
stock
beginning
of
is
the
calculated
year
and
by
at
nding
the
end
the
of
average
the
value
of
the
stock
at
the
year:
the capital employed by a rm
(opening
average
stock
stock
+
closing
stock)
=
is nanced from loan capital
2
Example:
the
year
$50,000.
Average
Suppose
with
Calculate
stock
a
goods
is
its
rst
rm
stock
a
cost
of
$150,000
stock
turnover
sales
and
totalling
closed
the
$400,000.
year
with
It
started
goods
worth
ratio.
calculated:
$150,000
average
has
worth
+
$50,000
=
$200,000
=
2
=
$100,000
2
$400,000
stock
turnover
ratio
=
=
4
times
$100,000
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3.6
Another
of
days
approach
it
takes
to
in
calculating
sell
the
stock.
stock
The
turnover
following
is
to
Debt/equity ratio analysis (HL only)
consider
formula
can
average
stock
turnover
ratio
(number
of
days)
the
above
calculated
example,
stock
turnover
number
used:
stock
=
×
cost
Using
the
be
ratio
in
of
the
goods
number
365
sold
of
days
is
as:
$100,000
stock
turnover
ratio
×
=
365
=
91.25
days
$400,000
The
above
business
turns
over
its
stock
four
times
a
year,
or
every
91
days,
A supermarket has a high stock
on
average.
A
higher
stock
turnover
in
terms
of
number
of
times
is
preferred
turnover ratio
In
a
business
–
considering
high
stock
or
the
more
become
obsolete
It
is
rm
has
as
than
to
car
retail
service
Stock
of
good
to
note,
assessment
the
administered.
may
However,
selling
stock
at
its
is
a
For
it
is
low
good
hold
stock
means
prot
a
that
lower
This
for
margins
of
goods
expire,
differs
stock
ratio
is
assessing
and
or,
days).
times),
quickly,
a
thereby
do
not
showing
that
turnover
as
the
very
their
turns
its
protably,
worse
is
liabilities
over
still,
at
such
times
relevant
stock.
A luxury car dealer like Tesla is
effectiveness
management
current
done
signicantly
companies
not
products
capital
is
that
not
turnover
business
this
(number
stock
manufacturing
“tangible”
assets
faster
do
of
decisions.
average
Working
current
sells
goods
instrument
important
gross
also
example,
on
number
turnover
purchasing
that
(in
rm
supermarkets.
not
the
the
This
have
management.
the
ratio
stock
perishable
as
do
Generally,
better.
sales.
over
such
way
to
that
however,
that
ratio
capital
of
its
and
industries.
producers
turnover
means
control
businesses
turnover
approach
from
industries
working
stock
ratio
quickly
different
luxury
rst
prot
important
between
lower
turnover
earning
the
a
stnuocca dna ecnaniF 3
by
a
likely to have a low stock
an
are
stock,
turnover ratio
being
the
rather
than
loss.
Possible strategies to improve stock turnover ratio
●
Slow-moving
help
lead
reduce
to
or
the
losses
obsolete
rm’s
due
to
goods
level
the
of
lost
should
stock.
sales
be
The
disposed
downside
revenue
that
of.
is
these
This
that
will
it
goods
could
could
havegenerated.
●
Firms
with
a
wide
better-selling
minimize
●
Keeping
of
goods
low
by
sufcient
●
the
holding
Some
(see
the
levels
amounts
are
stocks
delivery
raw
5.3).
of
the
production
products
stock
has
adopt
raw
and
the
major
need
to
added
benet
sudden
with
low
levels
the
just-in-time
ordered
drawback
materials
eventually
to
is
offer
is
of
increases
market.
are
to
a
that
narrower,
this
may
consumers.
the
materials
The
may
disadvantage
offered
during
sustain
to
The
products
businesses
to
able
of
of
of
of
products.
However,
customers,
Chapter
affect
of
variety
stock.
rms
where
range
range
of
that
producers
they
there
then
may
it
are
are
any
could
costs
for
not
production
when
if
the
demand
stock
(JIT)
only
reducing
in
have
method,
needed
delays
in
negatively
sales.
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3
Debtor days
This
to
ratio
collect
measures
its
customers
ratio
is
who
also
efcient
a
debts
owe
referred
business
following
the
number
from
the
to
is
of
customers
business
as
in
the
its
days
it
it
has
money
debt
credit
takes
sold
are
average
to
known
collection
control
on
goods
on
as
It
is
a
debtors,
period.
systems.
for
credit.
It
rm
These
and
assesses
calculated
the
how
using
the
formula:
debtors
debtor
days
ratio
(number
of
days)
=
×
total
Example:
total
A
rm’s
number
of
total
debtors
stnuocca dna ecnaniF 3
$2
debtor
days
ratio
therefore
shorter
provides
it
The
credit
too
can
period
range
long
a
business
from
credit
and
a
the
with
this
given
30
to
What
$16
is
its
million,
debtor
while
days
the
ratio?
365
=
45.625
days
million
business
invest
amounts
million.
365
revenue
million
days,
business
also
$2
×
the
debtor
the
and
could
takes
the
revenue
=
$16
It
sales
equals
sales
to
period
average
it
working
money
days
in
is
as
other
of
to
as
46
the
to
days
to
collect
business.
run
its
This
debts.
is
The
because
day-to-day
this
operations,
projects.
varies
many
lead
for
capital
customers
to
could
liquidity
an
better
from
120
business
days.
serious
to
business
However,
cash-ow
and
allowing
problems
for
the
crisis.
Possible strategies to improve debtor days ratio
A
●
to
rm
pay
can
receives
A
●
rm
A
rm
could
A
●
with
any
may
can
consistently
has
stop
stiff
might
nalized.
debtors
business
rm
its
these
lose
to
payers.
customers
does
seek
such
not
may
is
as
to
nes
for
with
as
the
debtors
business
originally
late
agreed.
payers.
customers.
overdue
debtors
payment
suppliers
such
the
was
guarantee
harm
encourage
that
than
loyal
alternative
means,
This
here
transactions
still
legal
incentives
long-time
further
to
other
drawback
penalties,
This
opt
resort
late
or
The
from
impose
the
is
discounts
earlier.
income
could
payment
some
debts
less
However,
●
provide
their
court
for
their
action
reputation
until
though,
and
goods.
for
that
a
business
customers.
Creditor days
This
ratio
creditors.
is
measures
It
assesses
calculated
using
the
average
how
the
number
quickly
following
a
rm
of
is
days
able
a
to
rm
pay
takes
its
to
pay
suppliers.
its
The
ratio
formula:
creditors
creditor
days
ratio
(number
of
days)
=
×
cost
Example:
$7
million.
A
business
Calculate
owes
its
its
creditors
creditor
days
$700,000,
of
with
a
365
sales
cost
of
sales
of
ratio.
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3.6
Debt/equity ratio analysis (HL only)
$700,000
creditor
days
ratio
=
×
$7
This
means
creditor
term
that
days
the
ratio
obligations.
strain
the
rm’s
problems.
a
In
this
as
The
rm
creditor
suppliers
or
rm
has
enables
relations
in
days
period
rm
37
to
allowing
with
other
nancial
other
about
the
However,
addition,
365
=
36.5
days
million
its
days
use
this
suppliers,
will
and
vary
pay
period
stakeholders
trouble
to
its
available
as
to
to
a
A
full
too
future
investors
reconsider
according
to
extend
leading
such
may
to
creditors.
cash
short-
long
may
nancial
may
investing
rm’s
high
its
perceive
in
it.
relationship
with
its
creditors.
Possible strategies to improve creditor days ratio
Having
a
rm
good
to
suppliers
could
business
●
in
Effective
will
relationships
negotiate
to
long
they
easy
task
business
that
the
the
will
creditors
extension
in
it
of
might
on
the
the
as
dire
their
of
the
assistance).
ratio.
Managers
versus
This
position
enable
some
support
days
early
payment.
ow
to
need
creditor
may
However,
refuse
in
creditors
cash
suppliers
period.
and
be
paying
making
depend
such
credit
improve
risks
delay
will
with
extended
(when
control
should
at
to
future
assess
and
an
object
the
credit
need
for
stnuocca dna ecnaniF 3
●
may
and
how
not
needs
be
of
an
the
time.
Gearing ratio
This
measures
nanced
from
business,
retained
The
the
extent
loan
while
to
capital.
capital
which
Loan
the
capital
capital
employed
is
includes
used
gearing
ratio
ratio
Example:
employed
A
A
of
ratio
business
ratio
is
geared
if
million
to
pay
will
×
has
a
gearing
assess
seen
debt
worsen
a
rm
liability
is
in
the
capital
and
due
loan
100
of
=
it
gearing
to
from
has
lend
a
businesses.
fact
In
repayment
that
million
with
a
capital
ratio?
to
position
is
of
ratio
be
above
in
not
such
such
A
of
the
gearing
50%
as
a
of
interest
and
risky
by
situation
investors
foresee
obligation
sudden
fths
with.
viewed
potential
may
main
any
two
loans.
burdened
could
and
that
long-term
businesses
They
the
addition,
means
gearing
ratio
Shareholders
the
US$10
business
if
high
of
which
come
a
100
employed
40%
40%,
debt
reluctant
to
capital
gearing
A
loans.
is:
loan
its
geared
burden.
long-term
the
of
high-geared
payments
their
is
business
level
high
be
ratio
the
50%.
may
about
of
the
as
below
large
the
What
million
due
dividend
by
share
×
long-term
US$25
who
to
a
US$10
nanciers,
concerned
has
million.
=
help
business
low
business
US$25
requirements
can
capital,
=
capital
capital
loan
formula
loan
gearing
The
employed
non-current
prots.
commonly
gearing
a
will
any
these
rate
be
future
rms
is
increases
businesses.
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3
On
the
may
in
other
fact
initiatives.
offering
with
Student workpoint
hand,
not
be
low-geared
borrowing
Shareholders
minimal
good
may
returns.
growth
to
therefore
They
strategies
businesses
enough
may
see
even
promising
that
fund
might
future
be
low-geared
prefer
higher
viewed
growth
“safe”
expansion
businesses
high-geared
future
as
and
as
businesses
returns
on
investment.
Possible strategies to improve the gearing ratio
3.10
Businesses
difcult
Be a thinker
that
are
nancial
very
highly
position.
geared
This
ratio
can
could
nd
be
themselves
reduced
in
using
a
the
followingmeasures:
Referring
and
3.4.3
calculate
the
to
Tables
in
Chapter
and
following
3.4.1
3.4,
comment
A
●
on
business
related”,
ratios:
may
of
stnuocca dna ecnaniF 3
a)
stock
take
any
can
for
a
seek
alternative
example
long
existing
issuing
time
to
issue
shareholders
sources
more
shares
who
of
funding
shares.
and
do
not
The
it
may
want
that
are
drawbacks
go
to
against
lose
not
are
“loan
that
the
it
objective
ownership
of
turnover
thebusiness.
b)
debtor
days
c)
creditor
A
●
rm
could
increase
among
d)
gearing
decide
not
to
issue
dividends
to
shareholders
so
as
to
days
the
amount
of
shareholders,
retained
especially
prot.
if
the
But
this
reasons
may
for
lead
doing
to
so
resentment
are
not
ratio
wellexplained.
Insolvency and bankruptcy (HL only)
Key terms
Insolvency
Insolvency
debt
to
is
a
payments
pay
off
nancial
on
their
time.
debt
state
The
where
person
obligations,
a
or
and
person
rm
their
no
or
rm
longer
debts
cannot
has
exceed
the
their
meet
their
money
assets.
a nancial state where a
Naturally,
people
or
rms
towards
resolution.
that
become
insolvent
will
take
certain
steps
person or rm cannot meet
a
One
of
the
most
common
solutions
for
insolvency
is
their debt payments on time
declaringbankruptcy.
Bankruptcy
Bankruptcy
is
that
no
a
legal
process
that
happens
when
a
person
or
rm
declares
a legal process that happens
they
can
longer
pay
back
their
debts
to
creditors.
It
is
a
legal
process
when a person or rm
for
liquidating
the
property
and
assets
a
debtor
owns
in
order
to
pay
off
declares that they can
their
debts.
This
process
can
provide
protection
and
relief
for
people
or
no longer pay their debts
rms
that
are
unable
to
pay
off
their
debts.
to creditors
In
some
Trustee
cases
is
investigate
duties,
and
their
which
necessary
Insolvency
state
of
debts
are
not
bankruptcy
while
will
be
les
The
for
rm
attending
again.
mean
is
a
assets,
will
have
credit
the
The
that
process
bankruptcy
to
can
be
leads
and
to
a
their
Insolvency
creditors,
with
takes
is
9
a
process.
may
court
be
Once
from
to
21
all
bankruptcy
months.
nancial
state,
Insolvency
able
order
and
bankruptcy
sessions.
released
Insolvency
organization
usually
Licensed
comply
usually
declaration
an
a
contact
counselling
rm
bankruptcy.
legal
distress
bankruptcy,
their
completed,
solvent
does
rm
liquidate
affairs.
economic
through,
a
to
include
tasks
become
whereas
when
assigned
to
is
a
work
dictating
how
covered.
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3.6
Debt/equity ratio analysis (HL only)
yduts esaC
Future of sta and residents secured as care home sold out
of liquidation
Yellow
Homes
home
elderly
is
a
based
and
is
Commission
small,
in
registered
for
up
independent
Vancouver.
to
with
25
It
the
James
residential
houses
Quality
the
only
Life
led;
sale
residents.
Smith,
became
that
and
meant
plan
bankers
The
partner
involved
a
froze
“Initially
Ltd,
which
traded
as
Yellow
Homes,
amassed
substantial
we
company
would
the
with
have
business
tax
arrears
a
and
after
Agency
winding-up
seen
and
Revenue
for
the
said:
little
time
business
“We
had
to
been
nd
before
a
the
or
the
closed
care
petition.
home
down
with
assets
of
Yellow
futures
advice
Homes
of
20
from
Ltd
in
Secure
were
out
an
residents
attempt
and
21
the
out
to
of
a
company
company
voluntary
into
constraints
the
tight
presence
of
were
with
placed
timescale
on
the
and
business
the
the
winding-up
petition
meant
by
the
we
of
immediate
Inc,
sold
But
nancial
left
no
alternative
–
we
had
to
pursue
a
effect.
to
Lifecare
the
petition
solution
Following
secure
the
This
forced
to
place
consistent
issued
creditors’
The
very
Inc.,
petition
account.
tried
administration.
non-payment,
The
the
had
arrangement
to
had
future
its
Secure
after
problem
Lifecare
The
we
at
stnuocca dna ecnaniF 3
care
business
and
the
business
liquidation.
out
of
Then
we
were
able
liquidation.”
Source: Adapted from https://www.realbusinessrescue.
liquidation
safeguard
sell
voluntary
co.uk/case-studies/future-of-residents-and-sta-secured-
the
as-care-home-is-sold-out-of-liquidation
staff.
result
sale
open
ensured
and
without
its
that
the
residents
disruption.
care
could
All
21
home
remained
continue
jobs
were
living
there
alsosaved.
Revision checklist
TOK links
✓
Efciency
assets
days,
ratios
and
assess
liabilities.
creditor
days
how
These
and
rms
ratios
gearing
utilize
their
include
resources
stock
in
turnover
terms
ratio,
of
debtor
1.
What role does today’s
nancial evidence play in
ratios.
making judgments about
✓
Stock
turnover
ratio
measures
how
fast
a
rm’s
stock
is
sold
and
an organization’s future
replenished
over
a
given
period.
It
can
be
measured
in
two
ways.
Firstly
stock,
and
performance?
it
assesses
secondly
how
it
many
considers
times
the
in
a
given
number
of
period
days
it
a
rm
takes
sells
for
a
its
rm
to
sell
itsstock.
2.
Are the results of
some types of ratio
✓
Debtor
days
rm
collect
measures
the
average
number
of
days
it
takes
for
a
analysis less open
to
money
from
its
debtors.
It
is
also
known
as
the
debt
to interpretation than
collectionperiod.
others?
✓
Creditor
days
assesses
how
fast
in
a
number
of
days
within
a
year
a
rm
3.
is
able
to
pay
its
Is it ethical for
creditors.
businesses to insist on
✓
Gearing
by
a
geared
✓
ratio
rm
is
or
low
Insolvency
their
debt
happens
their
measures
nanced
is
a
when
to
percentage
loan
capital,
to
which
to
establish
the
capital
whether
employed
it
is
high
nancial
a
on
person
early payments from
debtors while they delay
payments to creditors?
geared.
payments
debts
the
from
state
time,
or
where
while
rm
a
person
or
bankruptcy
declares
that
rm
is
they
a
cannot
legal
can
meet
process
no
longer
that
pay
creditors.
199
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3
Practice question
To
answer
CB
CB
the
Ltd
started
quality
valued
It
and
at
in
effectively,
million
raw
see
Unit
negatively
CB
has
also
web
stnuocca dna ecnaniF 3
solutions,
prot
given
but
had
to
one
and
of
to
The
is
up
of
to
6
pages
398–402.
their
grew
of
director
sheet
and
for
for
and
Ltd
is
for
for
high
was
has
initially
has
insolvency.
increased
hence
been
faced
facing
expenses
has
declares
balance
it
cameras
sales
cameras
boom.
CB
where
web
web
customers
rapidly
growth,
advertising
Ltd
its
technology
point
cost
nancial
and
producing
among
sales
the
their
CB
the
the
produce
that
account
ago
company
consistent
increase
which
loss
the
height
impacted
cameras.
years
reputation
rst,
the
materials
has
Ltd
ten
a
problems
which
designed
At
at
slow
nancial
of
business
developed
reliability.
despite
signicant
cost
up
has
$75
However,
The
below
Ltd
computers.
The
question
rapidly,
protability.
for
their
looking
at
newly
a
range
of
bankruptcy.
2020
and
2021
are
below.
Balance sheet as at 31 December 2020 and 2021 ($0 0 0)
Year
Non-current assets
2020
2021
1,500
1,400
Current assets
Cash
10
5
Debtors
550
650
Stock
910
1,220
Current assets
1,470
1,875
Total assets
2,970
3,275
Current liabilities
Overdraft
350
Trade creditors
300
Current liabilities
475
250
650
725
Non-current liabilities
Long-term loan
1,750
1,950
Non-current liabilities
1,750
1,950
Total liabilities
2,400
2,675
570
600
Share capital
250
250
Retained earnings
320
350
Total equity
570
600
Net assets
Equity
200
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3.6
Debt/equity ratio analysis (HL only)
Prot and loss account for the year ended 31 December 2021 ($0 0 0)
Sales revenue
Cost of sales
Gross prot
Expenses
Prot before interest and tax
2020
2021
5,750
6,100
(4,175)
(4,750)
1,575
1,350
(1,250)
(1,300)
325
Interest
Prot before tax
Tax
50
(175)
(225)
150
(175)
(100)
Prot for period
50
Dividends
20
Retained prot
30
a)
Dene
the
term
b)
Recommend
(10)
(185)
0
(185)
insolvency.
whether
CB
Ltd
should
declare
stnuocca dna ecnaniF 3
Year
for
bankruptcy.
[2
marks]
[ 10
marks]
201
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3
3.7 Cash ow
By the end of this chap ter, you should be able to:
➔
Distinguish between
prot and cash ow
➔
Construct and comment on
➔
Explain the relationship between
➔
Evaluate the strategies for dealing with
cash-ow forecasts
investment, prot and cash ow
cash-ow problems
stnuocca dna ecnaniF 3
The dierence between prot and cash ow
Key terms
Cash
Cash ow
is
money
services,
It
is
the
that
a
borrowing
most
liquid
business
from
obtains
nancial
asset
in
a
through
either
institutions,
business
and
is
or
the
sale
investment
placed
under
of
its
by
goods
or
shareholders.
current
assets
in
money that ows in and out of
the
balance
sheet.
This
cash
is
essential
to
the
smooth
running
of
any
business
a business over a given period
and
a
lack
of
it
could
result
in
business
failure
or
bankruptcy.
of time
Cash
ow
is
the
money
that
ows
in
and
out
of
a
business
over
a
given
Prot
the positive dierence
between sales revenue and
period
of
time.
Cash
period
of
time,
while
over
a
period
of
inows
cash
are
the
outows
monies
are
the
received
monies
by
paid
a
business
out
by
a
over
a
business
time.
total costs
Cash
ow
is
obligations.
will
enable
Prot
the
a
is
Prot
to
and
have
be
If
by
of
a
then
different
rm’s
and
their
it
are
this
total
is
a
will
they
still
revenue
its
if
of
if
a
the
most
position
at
running
buying
on
part
nancial
cash
outows)
costs.
revenue.
is
It
is
negative.
the
that
goods
credit.
of
total
of
total
difference
buy
as
its
exceed
prot
Prot
if
is
rm.
When
count
meet
inows
from
the
can
exceeds
However,
cash-ow
costs
loss
success
or
to
cash
day-to-day
different .
cash
ability
(where
nancial
prot.
from
a
meet
use
sales
the
of
ow
subtracting
ow
used,
the
earned
to
the
either
is
cash
positive
cash
can
methods
purchases,
will
is
indicator
business.
indicator
businesses
obtained
customers
a
key
positive
difference
great
two
a
A
the
costs,
If
sales
a
in
services,
of
the
revenue
business
purchases
point
or
either
were
time
for
is
of
said
credit
the
business
protability.
Cash is generated by selling goods
or services
Example:
incurring
credit
of
a
During
total
50%
of
a
particular
cost
of
sales.
What
prot
prot
=
$10,000
net
net
cash
ow
=
=
$4,000
cash
(50%
month,
$4,000.
was
=
a
business
business
the
sales
ow
of
The
prot
and
revenue
sold
offered
−
cash
$10,000
worth
customers
ow
total
for
one
of
goods,
month’s
thatmonth?
costs
$6,000
=
cash
10,000)
inow
$4,000
−
=
cash
outow
$1,000
202
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3.7
a
the
above
prot
ow
Two
a)
sold,
sold
example,
$6,000
gure
were
the
of
is
lower
50%
goods
of
business
known
as
poor
●
can
purchasing
as
of
month
prot
was
sales
in
cash
in
not
but
received
for
have
Chapter
funds,
of
in
that
by
incurred
The
though
month.
cash-
the
goods
However,
month.
or
and
business
$1,000.
even
between
little
3.6)
possibly
the
the
only
because
differentiating
(see
question
ow
gure
revenue
protable
suppliers
prot
no
it
cash.
may
allowing
be
and
This
cash
is
also
brought
customers
ow.
a
about
very
by:
long
too
capital
early
and
equipment
leaving
or
little
many
or
no
cash
non-current
for
operations
assets
at
the
time
overtrading
eventually
servicing
business
achieve
the
arise
be
the
positive
period
●
A
a
money
insolvency
paying
same
b)
the
can
●
●
than
collection
credit
●
during
had
counted
possibilities
A
but
a
–
purchasing
tied
up
loans
can
●
sourcing
●
gaining
●
obtaining
with
have
positive
cash
cash
in
a
from
cash
too
stock
with
cash
that
is
cash.
ow
the
cash
in
bank
from
much
business
positive
cash
from
the
stnuocca dna ecnaniF 3
In
Cash ow
the
ow
but
be
following
unprotable.
It
can
ways:
loans
sale
of
a
rm’s
shareholders’
xed
assets
funds.
Cash ow forecasts
Key term
These
a
are
given
future
period
expected
predictions
of
time.
The
month-by-month
of
a
rm’s
forecast
is
receipts
cash
a
inows
nancial
and
and
cash
document
payments
of
a
outows
that
business
shows
that
over
the
Cash ow forecast
have
the future prediction of a rm’s
not
yet
occurred.
cash inows and outows
Examples
or
of
business
likely
assets,
shareholders,
materials
salaries;
or
and
xed
paying
cash
inows
payments
from
borrowing
assets
for
creditors;
include
debtors,
from
cash;
cash
banks.
cash
repaying
sales
cash
Cash
expenses
loan;
and
from
selling
investments
outows
such
making
as
over a given period of time
goods
from
include
rent,
purchasing
wages
dividend
and
payments
to
shareholders.
Constructing cash flow forecasts
In
constructing
a
cash
ow
forecast,
it
is
important
to
know
the
followingterms:
●
Opening
every
trading
●
Total
Total
a
It
balance
is
also
–
the
this
is
cash
the
held
cash
by
a
that
a
business
business
at
the
starts
start
with
of
a
year.
cash
particular
●
cash
month.
inows
–
this
is
a
summation
of
all
cash
inows
during
a
month.
cash
particular
outows
–
this
is
a
summation
of
all
cash
outows
during
month.
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3
Net
●
and
cash
the
Closing
●
of
the
the
Table
ow
total
cash
3.7.1
this
is
It
is
–
difference
this
found
balance
shows
the
between
the
total
cash
inows
outows.
balance
month.
opening
–
cash
how
of
by
the
the
is
the
estimated
adding
same
above
the
net
cash
cash
available
ow
of
at
one
the
end
month
to
month.
terms
are
applied.
Table 3.7
.1 Cash ow forecast for XYZ Ltd for the rst ve months of trading
All gures in $
January
February
March
A pril
May
2,000
4,500
5,600
4,650
3,250
10,000
9,000
8,000
9,500
7,500
6,000
5,000
4,500
4,000
4,750
Opening balance
Cash inows
Cash sales revenue
Payment from debtors
stnuocca dna ecnaniF 3
Rental income
4,000
4,000
4,000
4,000
4,000
20,000
18,000
16,500
17,500
16,250
Electricity
1,500
1,800
1,750
2,000
1,900
Raw materials
5,000
4,000
4,500
5,500
6,000
Rent
3,000
3,000
3,000
3,000
3,000
Wages
5,000
5,000
5,000
5,000
5,000
500
600
700
900
450
2,500
2,500
2,500
2,500
2,500
Total cash inows
Cash outows
Assessment ad vice
Telephone
The format for the cash ow
forecast used in this chapter
is the recommended one as
indicated in the IB Business
Loan repayments
Total cash outows
17,500
16,900
17,450
18,900
18,850
Net cash ow
2,500
1,100
(950)
(1,400)
(2,600)
Closing balance
4,500
5,600
4,650
3,250
650
Management Guide
In
of
the
above
May.
attributed
identify
to
the
December
the
It
is
credit
the
predict
the
offered
to
note
future
Ltd
net
reasons
previous
accuracy
its
XYZ
amount
negative
period
the
this
specic
of
important
Hence,
to
example,
However,
that
of
the
cash
cash
for
year
to
shows
has
a
positive
been
ows
this?
was
closing
reducing
in
since
March,
Assuming
$12,000,
April
the
what
balance
March.
cash
does
and
sales
this
at
the
This
May.
Can
revenue
tell
end
can
you
be
you
in
about
customers?
cash-ow
gures
inows
forecasts
depends
and
cash
on
are
based
how
well
on
the
estimates.
business
is
able
outows.
Benefits of cash flow forecasts
●
A
to
cash
start
ow
a
business
●
Cash
and
ow
intending
because
forecast
business.
provides
forecasts
to
is
apply
they
a
This
useful
is
estimated
provide
for
enable
planning
because
a
banks
document
helps
to
projections
good
funding
the
it
support
from
to
for
on
anyone
the
future
base
nancial
check
for
clarify
for
of
the
performance.
businesses
institutions.
the
wishing
purpose
This
businesses’
is
solvency
and
creditworthiness.
●
Predicting
when
the
source
cash
ow
business
can
may
help
need
managers
cash,
and
identify
in
therefore
advance
plan
periods
accordingly
to
it.
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3.7
A
●
cash
By
its
ow
making
actual
lies
and
forecast
can
comparisons
gures,
seek
the
a
help
with
between
business
respective
monitoring
the
should
and
estimated
be
solutions
able
to
to
solve
managing
cash
assess
ow
cash
gures
where
the
Cash ow
ow.
and
problem
it.
The relationship between investment, prot,
Key term
and cash ow
Investment
Investment
generally
refers
to
the
act
or
state
of
investing.
In
nance
the act of spending money on
or
business,
investing
is
spending
money
on
purchasing
an
asset
with
purchasing an asset with the
the
expectation
of
future
earnings.
Investing
involves
wealth
creation,
expectation of future earnings
hoping
Examples
property.
about
The
the
by
of
that
nancial
All
forms
relationship
different
asset
investment
changes
between
stages
bought
investments
of
unexpected
the
of
in
include
come
the
in
a
buying
with
market
investment,
growth
appreciates
value
bonds,
risks,
and
This
cash
is
over
stocks,
especially
conditions
prot,
business.
in
in
brought
economy.
can
in
or
risks
an
ow
noted
time.
stnuocca dna ecnaniF 3
including
be
Table
linked
to
3.7.2.
Table 3.7
.2 The relationship between investment, prot, and cash ow, using various
stages in a business
Investment
Prot
Business stage
Cash ow
(owner ’s funds)
Star t-up
This involves very high investment
There is no prot because costs are
Cash ow is negative – cash
due to the purchase of initial
not yet met
outow is signicantly higher than
Investment could still be high
There is a small prot, as more
Cash ow may be positive (ie cash
because the business is not yet
revenue star ts to be generated to
inow is higher than cash outow)
fully established
cover costs
but low until cash inows increase,
Investment may be minimal as the
High prot is achieved
assets or set-up costs
Growing
cash inow
especially from sales revenue
Established – thriving
Cash ow is positive – cash inow
business can plough back prots
Table
3.7.2
owner’s
However,
by
provides
injection
it
is
qualitative
more
has
detailed
been
of
a
simplied
capital
important
attributes
to
earlier
are
of
in
model
the
note
that
explanation
covered
into
that
the
beyond
the
this
of
how
business
difference
investment
relates
above
the
is higher than cash outow
to
features
control
of
between
in
prot
terms
and
could
the
prot
be
of
cash
affected
business.
and
the
ow.
cash
(A
ow
chapter.)
Strategies for dealing with cash flow problems
As
is
noted
facing
capital
to
problems
control.
earlier,
a
a
business
liquidity
run
in
The
a
its
crisis
can
and
day-to-day
business
following
are
a
is
be
protable
having
operations.
lack
strategies
of
The
effective
can
yet
insolvent,
difculties
be
used
in
major
causes
planning
to
deal
which
sustaining
of
and
with
its
cash
poor
these
means
it
working
ow
credit
problems.
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3
Reducing cash outows
The
●
following
A
methods
business
This
helps
can
it
drawbacks
and
●
Purchases
and
stnuocca dna ecnaniF 3
A
costs
business
capacity,
reduce
●
A
or
of
future
business
reduce
of
funds.
product
long
be
up
a
look
for
be
to
delay
short-term
may
be
affect
a
business:
payment.
needs.
The
time-consuming,
future
Assets
the
relationships
to
as
–
or
machinery
cash,
business.
obsolete
lead
such
business’s
in
becoming
specic
for
a
into
expenses
costs.
If
sourcing
danger
not
business’s
materials
possible
the
cash
may
leaving
future.
delayed.
of
cash
creditors
its
could
the
lot
avail
advertising
demand
in
of
and
outdated,
decreased
delaying
However,
if
the
delaying
efciency
and
term.
decrease
could
may
can
are
or
for
negotiations
suppliers
to
amount
suppliers
supply
take
the
capital
replacements
as
costs
A
to
to
helps
the
can
such
to
that
equipment
in
with
assets
may
them
purchase
higher
●
refuse
xed
of
machines
are
payment
of
decrease
working
this
equipment
purchases
the
have
with
may
to
negotiate
to
delaying
suppliers
aim
or
of
cheaper
is
will
not
affect
checked,
production
though,
this
may
products.
essential
this
compromised,
that
well
that
affecting
suppliers.
stock,
the
This
decreasing
quality
future
of
the
customer
will
the
help
outow
nished
relationships.
Improving cash inows
●
A
business
goods.
which
ties
customers
●
Offering
This
●
A
is
up
rm
may
of
worth
with
no
The
or
the
The
less
on
to
that
guarantee
of
with
cash
that
the
when
from
business
buying
debtors,
may
lose
credit.
encourage
is
only
payments
debtors
that,
previously
product
offer
on
here
is
on
can
burden
than
its
pay
delayed
goods
incentives
remembering
clear
buy
limitation
diversify
of
disadvantage
to
debt
cash
goods
customers
problem
prefer
reduce
receive
that
the
cash.
who
agreed.
variety
insist
avoids
discounts
will
earlier
will
can
This
as
after
debtors
they
the
to
will
pay
pay
early.
less
discount,
than
businesses
expected.
offering.
customers,
This
will
potentially
diversication
comes
help
to
increase
increasing
with
higher
sales.
costs
the
It
and
sales.
Looking for additional nance sources
These
additional
include
●
the
Sale
of
nance
sources
were
discussed
in
Chapter
3.2
and
they
following:
assets
generate
cash.
–
the
focus
Selling
should
assets
that
be
on
are
selling
still
obsolete
needed
could
xed
lead
assets
to
to
reduced
production.
●
Arranging
allows
times
of
Sale
and
assets
bank
to
can
on
overdraft
overdraw
immediate
payments
●
a
rms
the
cash
be
–
this
which
assets
hired
–
their
setbacks.
overdraft,
leaseback
then
from
back
can
by
is
a
short-term
accounts.
However,
are
be
the
to
is
there
usually
sold
It
a
loan
great
will
help
that
during
interest
high.
generate
business
be
facility
for
use
cash
in
and
these
production.
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3.7
The
disadvantage
this
also
seeking
denies
future
is
the
that
leasing
business
can
the
prove
use
of
costly
the
asset
in
as
the
long
collateral
run,
Cash ow
and
C oncep t
when
loans.
CHANGE
Limitations of cash flow forecasting
The cash ow statement will
A
cash
ow
forecast
is
generally
a
prediction,
and
inaccuracies
are
bound
only change if the inows
to
occur
that
limit
the
forecast’s
effectiveness.
Some
of
the
causes
of
these
and outows impact on cash
inaccuracies
include
the
following:
and cash equivalents. The net
Unexpected
●
changes
in
the
economy
–
for
example,
change in cash position is the
uctuating
dierence between the total
interest
rates
could
affect
borrowing
by
rms
and
have
a
negative
amount of money brought in
impact
on
their
cash
ow
needs.
by the business and the total
Poor
●
market
demand
thereby
research
predictions
affecting
–
can
cash
improperly
have
a
done
negative
sales
effect
forecasts
on
future
due
cash
to
poor
sales,
amount that it expended over the
repor ting period.
inows.
stnuocca dna ecnaniF 3
The cash ow statement
therefore provides information
Difculty
●
in
predicting
competitors’
behaviour
–
competitors
may
on an organization’s liquidity
change
their
strategies
often
and
make
it
hard
for
other
businesses
to
and solvency and its ability to
predict
their
actions
and
compete
with
them.
This
can
negatively
affect
change cash ows in future
the
cash
ow
of
a
struggling
business.
circumstances. In addition, it
●
Unforeseen
machine
machinery
is
difcult
position
a
or
to
equipment
predict,
and
it
failure
can
–
breakdown
drastically
affect
provides additional information
of
the
for evaluating changes in assets,
cash
liabilities and equity.
in
business.
Using the internet, do some
Demotivated
●
employees
–
being
demotivated
can
negatively
affect
research on the various cash-
the
productivity
of
workers,
reducing
output
or
sales
and
leading
to
less
ow statements of dierent
cash
inow.
organizations. How do the
changes in the other nancial
documents inuence their cash-
Student workpoint 3.11
ow statements?
Be knowledgeable
Juma
the
plans
●
He
●
He
●
He
has
has
open
of
secured
estimates
to
Material
a
restaurant
information
$4,000
trading
●
to
following
be
a
his
as
follows:
expenses
of
sales
are
year
the
money
loan
cash
next
answer
own
bank
the
to
to
$6,000
revenue
$2,000,
50%
of
beginning
questions
inject
to
add
for
to
the
$4,000,
cash
into
the
his
rst
January.
Use
business.
capital
ve
$5,000,
sales
in
below:
requirements.
months
$5,500,
revenue
per
of
$6,000.
month
TOK discussion
and
1.
paid
in
cash
every
How do our assumptions
month.
have an impact on the
●
Wages
●
Total
and
salaries
advertising
February
●
A
loan
●
Rent
1.
Using
and
are
costs
the
a
of
other
repayment
is
constant
$6,000
in
$500
gure
are
of
paid
$5,000
in
two
every
month.
installments,
one
way that we analyse
April.
each
cash ow forecasts?
in
2.
As cash ow forecasting
is about imagining the
month.
future, to what extent is
is
$6,000
every
month.
it reliable?
the
format
shown
in
Table
3.7.1,
construct
a
cash
ow
forecast
3.
for
Juma’s
restaurant
business
for
the
rst
ve
months
of
Is it ethical for a business
trading.
to seek nance by using a
2.
Comment
on
recommend
a
the
cash
way
ow
forward
position
for
him.
faced
by
Juma’s
business
and
cash ow forecast that is
knowingly too optimistic?
207
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3
Revision checklist
✓
Prot
when
the
A
the
both
other
only
✓
is
positive
cash
hand,
considers
cash-ow
is
include:
debtors
cash
salaries,
When
stnuocca dna ecnaniF 3
✓
Some
Some
or
sales
xed
ows
strategies
purchases,
to
reduce
and
to
money
nancial
that
total
are
in
revenue
and
considered.
and
selling
for
goods
cash,
cash-ow
out
of
reduce
cash
cash
payments,
improve
offering
yet
the
total
Cash
costs
ow,
business,
or
shows
and
business
expenses
Cash
assets,
outows
the
on
and
expected
payments
occurred.
Cash
cash
to
that
inows)
payments
include:
such
as
(cash
inows
from
purchasing
rent,
wages
and
shareholders.
forecasts,
balance,
closing
not
banks.
payments
cash
document
(cash
have
from
assets
and
of
receipts
from
dividend
opening
to
a
business
strategies
creditors
is
cash
constructing
cash
ow
borrowing
and
included:
net
a
between
transactions
transactions.
forecast
cash
and
materials
✓
of
credit
the
month-by-month
outows)
difference
and
total
the
cash
following
inows,
need
total
to
cash
be
outows,
balance.
outows
and
cash
inows
incentives
include:
delaying
to
the
negotiating
purchase
include:
encourage
of
insisting
debtors
on
to
with
xed
assets.
cash
pay
early.
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3.7
Cash ow
Practice question
To
answer
the
question
below
effectively,
see
Unit
6
pages
398–402.
NPF
Dawes
donation
organization,
countries.
worried
up
In
–
an
and
a
NPF
web
has
online
as
the
are
no
volunteers
aims
fee
to
in
–
is
a
for
an
all
social
is
with
nancial
NPF’s
economic
also
no
a
very
for
cash
generous
non-prot
children
statements
reserves
climate,
non-current
fee
over
the
and
for
updating
investment
in
are
NPF’s
developing
and
is
getting
being
main
used
source
of
All
NPF’s
and
NPF
running
to
email
paperless
the
websites
funds
only
assets.
servers
expenses
computers,
website.
Steve
is
projects.
world
networking
rst
up
online
falling.
administrator.
the
his
regularly
electronically
become
set
It
maintenance
some
from
website
was
opportunities
at
poor
but
fee,
of
It
situation.
current
debt
usage
engaging
chief
looking
liquidity
the
community
2015.
educational
been
designer’s
of
in
businessman.
donations
has
transferred
NPF
in
online
internet
thinking
has
NPF’s
and
NPF
NPF
retired
nancing
about
2020,
are
a
Steve
quickly
nance
founded
from
stnuocca dna ecnaniF 3
Steve
the
organization.
connects
nance
them
with
educational
communication
is
An
Steve
projects
allowed.
Donations
charity.
Forecast
(millions of US$)
Steve
has
concert,
would
been
which
asked
will
generate
volunteers
money
on
spent
educational
watching
become
be
a
very
substantial
the
NPF
concert
or
the
may
only
public
forums
sponsoring
slow
popular
broadcast
opportunities
the
too
by
are
be
over
not
band
the
relations
concert
for
rock
internet.
convinced.
They
frustrated
if
sponsor
The
opportunities,
should
children.
to
be
They
used
also
global
to
a
but
argue
that
broadband
June
40
July
30
August
30
September
20
opportunity
some
that
provide
believe
reunion
the
further
many
people
connections
Millions of US$
fail.
Opening balance
Steve
refer
is
to
preparing
2020)
a
cash
based
on
ow
the
forecast
for
the
next
four
months
(all
gures
Donations received
following:
1
in June 2020
50
in May 2020
●
Donations
are
transferred
to
the
educational
projects
one
month
after
Internet usage fee
the
money
has
been
1 to be paid
received.
in June and
●
a)
Educational
Dene
the
projects
term
receive
95%
of
all
donations.
September
investment.
[2
marks]
Maintenance fee
0.25 per month
for servers and
b)
(i)
Using
Steve’s
forecast
gures,
prepare
a
cash
ow
forecast
computers
for
the
NPF
from
opening
June
and
to
September
closing
2020,
monthly
cash
clearly
ow
showing
balances.
(ii)
Comment
(iii)
Explain
on
two
highlighted
your
results
possible
in
parts
from
solutions
(i)
and
(ii).
part
to
(i).
the
Web designer ’s fee
0.5 per month
Concer t
5 to be paid in
sponsoring fee
September
forecast
liquidity
[6
marks]
[4
marks]
[6
marks]
problems
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3
3.8 Investment appraisal
By the end of this chap ter, you should be able to:
➔
Calculate and evaluate the
payback period as an investment appraisal
method
➔
Calculate and examine the
average rate of return
(ARR) as an
investment appraisal method
➔
Calculate and discuss the
stnuocca dna ecnaniF 3
appraisal method
net present value
(NPV) as an investment
(HL only)
Introduction
Key terms
Investment
Investment appraisal
evaluating
assesses
appraisal
the
and
viability
justies
refers
or
the
to
the
quantitative
attractiveness
capital
of
an
expenditure
techniques
investment
allocated
to
used
in
proposal.
a
It
particular
the quantitative techniques
project.
It
therefore
aims
to
establish
whether
a
particular
business
venture
used in evaluating the viability
is
worth
pursuing
and
whether
it
will
be
protable.
Investment
appraisal
or attractiveness of an
also
assists
businesses
in
comparing
different
investment
projects.
investment proposal
In
this
chapter,
we
look
at
three
methods
of
investment
appraisal:
payback
Payback period
period,
average
rate
of
return,
and
net
present
value
the length of time required for
an investment project to pay
Payback period
back its initial cost outlay
This
to
method
pay
back
recover
its
calculated
estimates
its
initial
principal
using
the
cost
length
outlay.
investment
the
following
of
It
time
looks
amount
required
at
from
period
1:
A
construction
cement-mixing
in
annual
cash
machine
ow.
its
net
an
a
investment
business
cash
ows.
project
takes
It
to
can
be
investment
cost
=
annual
Example
for
long
formula:
initial
payback
how
engineer
and
cash
plans
estimates
Calculate
the
ow
on
that
payback
it
from
investment
investing
will
period
$200,000
generate
for
the
about
in
a
new
$50,000
machine.
$200,000
payback
period
=
=
4
years
$50,000
Hence
the
Example
a
new
payback
2:
period
Another
timber-cutting
following
cash
ows
for
the
new
construction
machine.
in
the
rst
machine
engineer
The
aims
machine
four
years:
would
is
to
be
invest
expected
$60,000,
four
to
years.
$300,000
generate
$80,000,
in
the
$100,000
and$120,000.
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3.8
The
payback
cumulative
period
cash
for
ows
this
machine
over
the
four
can
be
years,
found
as
by
shown
rst
in
calculating
the
table
Investment appraisal
the
below.
Table 3.8.1 Expected cash ows of a new machine
Annual net cash ows ($)
0
(300,000)
(300,000)
1
60,000
(240,000)
2
80,000
(160,000)
3
100,000
(60,000)
4
120,000
60,000
The
in
Cumulative cash ows ($)
initial
which
investment
month
outlay
exactly?
extra
will
This
cash
be
can
paid
be
inow
back
sometime
calculated
using
The
in
extra
year
year
4
cash
3,
to
it
pay
$120,000.
inow
has
been
off
the
Applying
cash
shown
ow
in
initial
this
in
Table
calculated
year
four
following
–
but
formula:
required
×
annual
in
the
stnuocca dna ecnaniF 3
Year
that
year
3.8.1
only
investment.
information
to
12
months
4
is
$60,000.
$60,000
The
the
This
needs
annual
cash
formula,
we
is
to
because
be
ow
paid
in
in
year
4
is
get:
$60,000
×
12
months
=
6
months
$120,000
It
therefore
takes
investment
The
results
projects
period
to
of
of
in
The
business
off”
that
1
an
above,
four
pays
the
project,
may
1
the
have
and
2
the
three
better
also
six
can
months
is
not
project
project
years
it
be
As
to
pay
and
compared
general
on
go
just
in
a
for
decided
should
investment
while
in
and
decision-making.
investment
years),
back
years
examples
help
the
three
back
the
initial
$300,000.
the
an
six
internal
meets
such
this
2
is
results
the
investing
below,
example
with
rule,
the
other
payback
business.
payback
as
four
criterion
better
from
shorter
off
period
years.
(it
by
pays
six
In
or
“cut-
example
back
in
months
(it
months).
Advantages of payback period
●
It
is
simple
●
It
is
a
It
helps
useful
before
●
●
It
to
to
method
estimate
another
helps
fast
rms
calculate.
in
with
cash
Since
short-term
is
to
Business
a
the
fast
machine,
projects
it
rapidly
how
investment
prone
●
and
for
can
managers
can
problems
pay
measure
inaccuracies
of
initial
example,
ow
that
changing
the
back
of
easily
can
be
such
will
as
be
technology.
recovered
purchased.
because
more
quick
long-term
industries
investment
they
quickly
returns
on
can
choose
than
the
others.
investment,
it
is
less
forecasting.
understand
and
use
the
results
obtained.
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3
Disadvantages of payback period
●
It
does
could
●
It
ignores
only
●
not
The
consider
inuence
on
the
overall
how
annual
changes
in
the
major
fast
cash
it
cash
protability
will
ows
demand,
earned
investment
pay
the
payback
period,
which
of
an
investment
project
by
focusing
back.
could
which
after
decisions.
be
affected
could
by
unexpected
negatively
affect
the
external
payback
period.
Average rate of return
Key term
This
method
measures
the
annual
net
return
on
an
investment
as
a
Average rate of return (ARR)
percentage
measures the annual net
generated
return on an investment as a
accounting
of
by
its
a
capital
project
rate
of
cost.
over
return.
It
a
It
assesses
period
can
be
of
the
protability
time.
It
calculated
is
also
using
per
annum
known
the
as
the
following
formula:
stnuocca dna ecnaniF 3
percentage of its capital cost
(total
returns-capital
years
average
rate
of
return
(ARR)
of
=
×
capital
Example:
A
photocopier
for
the
next
business
at
a
cost
ve
is
of
years:
considering
$150,000.
$30,000,
respectively.
Calculate
total
=
$30,000
=
$345,000
returns
its
+
period
expects
$50,000,
a
the
new
commercial
following
$75,000,
100
cost
revenue
$90,000
and
streams
$100,000
ARR.
$50,000
($345,000
payback
purchasing
It
cost)
usage
+
$75,000
+
$90,000
+
$100,000
$150,000)
=
=
$39,000
5
$39,000
ARR
=
×
100
=
26%
$150,000
The
business
business
the
project
The
the
ARR
level
rate
of
showing
can
of
also
risk.
a
should
and
rate
this
be
set
was
may
of
below
20%
for
still
be
ARR
with
rate
the
nd
it
rates
it
the
is
26%
on
ARR
of
above
interest
case,
worthwhile
than
or
to
above
a
the
if
investment.
projects
to
selected.
business,
a
on
A
and
choose
an
that
is
project
assess
rate.
an
investment
example,
ARR
to
interest
investment
lending
rate
loans
offer
pursue
For
the
desirable
rates
banks
base
minimum
be
considered
its
other
return.
banks’
higher
if
of
the
of
with
in
11%
criterion
go
would
highest
compared
return
not
an
gure
example,
businesses
with
criterion
expects
this
the
For
businesses
project
rate
compare
15%,
projects
Other
therefore
can
6%
to
if
the
above
this
pursue.
Advantages of average rate of return
●
It
of
shows
the
protability
of
an
investment
project
over
a
given
period
time.
●
Unlike
●
It
the
allows
payback
for
allocation
of
easy
period,
it
makes
comparisons
investment
with
use
of
other
all
the
cash
competing
ows
in
projects
a
business.
for
better
funds.
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3.8
A
●
business
for
a
can
project
use
to
its
assess
own
the
criterion
viability
rate
of
the
and
check
this
with
the
Investment appraisal
ARR
venture.
Disadvantages of average rate of return
●
Since
it
there
are
considers
accuracy
It
●
does
the
of
not
same
other
The
●
likely
longer
be
consider
to
effects
time
period
forecasting
or
errors.
useful
life
Long-term
of
the
project,
forecasts
reduce
the
results.
ARR
due
a
to
but
faster
on
the
one
the
timing
could
cash
time
of
cash
pay
inows.
back
more
Two
projects
quickly
might
compared
to
have
the
inows.
value
of
money
are
not
considered.
Net present value (HL only)
is
dened
as
the
difference
in
the
summation
and
the
original
of
present
values
stnuocca dna ecnaniF 3
Key terms
This
of
Net present value (NP V)
future
value
cash
is
inows
today’s
example,
offering
$100
10%
or
value
returns
of
an
invested
interest
at
amount
the
would
of
money
beginning
be
worth
of
cost
the
$110
of
investment.
available
at
year
the
in
end
in
a
future.
bank
of
the
Present
For
the dierence in the
account
summation of present values
year:
of future returns and the
original cost of investment
10
×
(
$100
)
+
$100
Discounted cash ow
100
Hence,
the
$110
present
in
one
value
of
year’s
$110
time
in
a
is
worth
year’s
$100
today.
In
other
words,
$100
is
uses a discount factor that
conver ts future cash ows to
time.
their present value
If
$110
year
to
10%
get
To
is
do
a
the
the
this
be
less
present
we
cash
use
ows
to
using
interest
their
you
a
value
what
less
uses
present
than
If
$100
then
a
the
how
ie
discounted
This
a
that
factor
further
account
a
today.
at
ow
the
converts
a
bank
over
years
cash
in
is
of
money
How
10%
do
This
value
future
usually
we
interest?
method .
present
these
at
three-year
amount
paid
affect
discount
a
xed
three
rates
in
and
received
amount
over
factor
$121
invested
today,
interest
today.
to
$100
xed
invested
discount
value
and
amounts
received
called
a
it
$133,
$100
considers
It
rates
of
is
to
$100
worth
year,
observe?
grows
than
is
that
ows.
another
do
years
future
technique
future
for
What
three
will
in
to
invested
$133.
over
period
paid
is
of
cash
calculated
time.
Table 3.8.2 Discount factors
Years
Discount rate
4%
6%
8%
10%
20%
1
0.9615
0.9434
0.9259
0.9091
0.8333
2
0.9246
0.8900
0.8573
0.8264
0.6944
3
0.8890
0.8396
0.7938
0.7513
0.5787
4
0.8548
0.7921
0.7350
0.6830
0.4823
5
0.8219
0.7473
0.6806
0.6209
0.4019
6
0.7903
0.7050
0.6302
0.5645
0.3349
7
0.7599
0.6651
0.5835
0.5132
0.2791
8
0.7307
0.6271
0.5403
0.4665
0.2326
9
0.7026
0.5919
0.5002
0.4241
0.1938
10
0.6756
0.5584
0.4632
0.3855
0.1615
Assessment ad vice
Discount factors, as shown
in Table 3.8.2, are provided in
the IB Business Management
Guide.
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3
To
is
get
the
present
multiplied
the
present
Present
means
by
value
value
that
Example:
produces
value
the
=
net
of
$100
0.7513
$100
cash
Year
1:
$100,000
●
Year
2:
$200,000
●
Year
3:
$300,000
●
Year
4:
$250,000
Calculate
stnuocca dna ecnaniF 3
The
the
net
working
is
an
in
in
from
three
over
the
value
in
the
ows,
the
Table
3.8.2)
(NVP)
at
following
a
×
is
that
four
In
years
time
project
appropriate
year.
three
years’
next
the
given
over
investment
present
shown
cash
ow
(taken
ows
●
future
invested
received
Consider
net
of
cash
at
the
10%
$100
worth
costs
years
as
discount
discount
earlier
=
will
be:
$75.13.
only
This
$75.13
$500,000
factor
example,
today.
and
follows:
factor
of
8%.
table:
Table 3.8.3 Calculating net present value
Year
Net cash ow ($)
0
(500,000)
1
100,000
0.9259
92,590
2
200,000
0.8573
171,460
3
300,000
0.7938
238,140
4
250,000
0.7350
183,750
NPV
NPV
The
is
a
=
$685,940
NPV
viability
An
in
viable
of
the
be
in
worth
=
total
$500,000
that
less
is
present
=
a
would
discount
when
(500,000)
values
-
original
cost
$185,940
positive
should
project
the
Present value in $
1
example
project
increase
will
this
-
Discount factor at 8%
go
be
rate
value
ahead.
in
If
of
the
question
reduces
discounted
at
$185,940,
value
and
the
it
NPV
higher
signifying
was
negative,
should
because
not
be
future
that
then
this
the
pursued.
cash
ows
rates.
Advantages of net present value
●
The
in
opportunity
its
●
All
●
The
cost
and
time
value
of
money
is
put
into
consideration
calculation.
cash
ows,
discount
economic
including
rate
can
variables,
be
such
their
timing,
changed
as
to
interest
are
suit
rate
included
any
in
its
expected
computation.
changes
in
variations.
Disadvantages of net present value
●
It
is
●
It
can
●
more
complicated
only
be
cost
outlay.
The
discount
which
may
used
rate
be
to
to
calculate
compare
greatly
affected
than
investment
inuences
by
the
the
inaccurate
payback
projects
nal
interest
NPV
rate
period
with
result
or
the
ARR.
same
initial
obtained,
predictions.
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3.8
Investment appraisal
Student workpoint 3.12
BCG matrix
Be knowledgeable
The BCG matrix is a planning
A
large
major
retail
business
has
the
following
forecasted
net
cash
ows
for
a
project:
and decision-making
tool that uses graphical
representations of a rm’s
Year
Net cash ows ($)
goods or services in order to
0
(40,000)
1
15,000
2
30,000
3
10,000
4
5,000
help the rm to decide what
to keep, sell or invest more in.
How can the knowledge of
this tool help businesses
to improve their nancial
Calculate
the
payback
2.
Calculate
the
ARR.
3.
Calculate
the
NPV
in
Table
3.8.2).
at
(HL
decision-making?
period.
a
discount
rate
of
6%
(use
the
discount
factors
only)
yduts esaC
C oncep t
What is sustainable nance?
Sustainable
nance
stnuocca dna ecnaniF 3
1.
generally
refers
to
the
process
of
taking
due
SUSTAINABILITY
account
of
environmental,
considerations
when
social
making
and
governance
investment
decisions
(ESG)
in
the
nancial
Sustainability is about nding
sector,
leading
to
increased
longer-term
investments
into
sustainable
ways to eciently use resources
economic
activities
and
projects.
today (including nances) while
considering the needs of future
More
specically,
environmental
considerations
may
refer
to
generations. The case study
climate-change
mitigation
and
adaptation,
as
well
as
the
environment
here discusses what sustainable
more
broadly,
such
as
the
preservation
of
biodiversity,
pollution
nance is and why it is impor tant,
prevention
and
circular
economy.
and it provides the European
Social
labour
as
considerations
relations,
human
may
investment
rights
refer
in
to
issues
human
of
inequality,
capital
and
inclusiveness,
communities,
as
well
Union’s perspective as a context.
Research on how one or more
organizations are sustainable in
issues.
their nancial practices.
The
governance
management
In
the
and
to
plays
policy
and
taking
nance
ESG
that
such
risks
corporate
through
relations
role
in
considerations
sustainable
into
growth
account
the
in
the
nance
executive
the
inclusion
decision-making
is
understood
reducing
social
and
system,
governance
on
and
of
risks
the
of
process.
as
pressures
governance
transparency
nancial
appropriate
and
including
ensuring
while
encompasses
impact
the
institutions,
on
the
aspects.
related
to
mitigation
nancial
and
actors.
Sustainable
the
also
may
private
employee
economic
Sustainable
factors
and
fundamental
context,
support
environment
of
a
environmental
EU’s
nance
public
structures,
remuneration,
social
of
nance
objectives
investment
of
into
at
EUlevel
theEuropean
the
resource-efcient
transition
and
just
aims
to
Green
to
a
support
Dealby
the
climate-neutral,
economy,
as
a
delivery
channelling
of
private
climate-resilient,
complement
to
public
money.
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3
Why is sustainable finance impor tant?
Sustainable
capital
Deal,
to
as
nance
deliver
well
as
sustainability
resilient
The
EU
more
at
the
and
key
role
policy
EU’s
to
play
objectives
international
a
It
helps
mobilising
the
that
the
European
commitments
ensure
sustainable
in
of
on
climate
investments
recovery
from
the
necessary
Green
and
support
impacts
a
of
the
pandemic.
is
strongly
supporting
resource-efcient
the
a
the
objectives.
economy
Covid-19
has
on
forefront
of
and
efforts
to
the
transition
sustainable
build
a
to
a
low-carbon,
economy
nancial
and
system
it
has
that
been
supports
sustainablegrowth.
In
2015,
stnuocca dna ecnaniF 3
the
goals
in
landmark
adoption
and
of
the
particular,
pathway
On
11
Deal,
Paris
towards
growth
continent
by
As
the
part
2020
at
of
the
least
will
and
agreement.
the
and
to
to
concluded
Paris
align
make
climate
presented
Europe
with
development
agreement,
nancial
climate-resilient
Commission
aiming
were
sustainable
The
commitment
low-carbon
2019,
agreements
agenda
ows
with
a
development.
theEuropean
the
rst
Green
climate-neutral
2050.
a
for
the
strategy
Green
trillion
enable
2030
climate
European
€1
needed
UN
includes
December
a
international
the
Deal,
Green
of
Commission
to
transition
a
plan,
investments
facilitate
to
presented
investment
sustainable
framework
the
the
Deal
public
over
and
climate-neutral,
on
which
the
next
private
green,
14
will
January
mobilise
decade.
It
investments
competitive
and
inclusiveeconomy.
Reaching
already
a
year
the
the
by
required
challenge
nancial
additional
2030.
Investments
●
current2030
require
is
The
is
investments
and
other
beyond
sector
re-orient
EU
has
already
with
capacity
key
investments
and
role
play
towards
impetus
European
the
Fund
the
public
in
more
targets
alone
approximately
However,
of
to
energy
of
providing
the
initiatives.
the
a
climate
investments
to
for
scale
sector
reaching
help
billion
attract
Strategic
of
the
alone.
those
sustainable
would
€260
investment
The
goals.
It
can:
technologies
and
businesses
●
nance
●
contribute
circular
To
this
agenda
on
end,
on
The
the
a
sustainable
creation
of
a
manner
over
low-carbon,
the
long
term
climate-resilient
and
economy.
the
nancing
Deal.
to
in
Commission
sustainable
sustainable
its
growth
sustainable
nance
international
is
platform
in
also
on
developed
since
growth
strategy
Commission
has
nance
2018,
and
the
the
a
comprehensive
comprising
development
framework
coordinating
sustainable
of
the
the
of
policy
action
a
European
international
plan
renewed
efforts
Green
through
nance.
Source: Adapted from https://ec.europa.eu/info/business-economy-euro/banking-
Sustainable nance suppor ts
and-nance/sustainable-nance/overview-sustainable-nance_en
investment in renewable energy
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3.8
Investment appraisal
Revision checklist
TOK links
Investment
an
investment
venture
in
appraisal
is
making
appraisal
net
is
the
proposal.
worth
comparisons
techniques
present
It
pursuing
quantitative
establishes
or
with
include
whether
protable,
other
assessment
as
investment
payback
a
well
period,
of
the
viability
particular
as
projects.
1.
business
assisting
average
of
knowledge in investment
Investment
rate
of
return
and
appraisal scientic?
value.
2.
✓
Payback
period
principal
simple
calculate
However,
and
✓
by
of
a
time
Net
of
It
the
It
of
makes
includes
can
cost
time
only
used
method
the
cash
protability
of
of
the
time
all
the
consider
of
in
an
is
ows
to
net
after
the
per
as
are arbitrarily decided,
is
so how reliable are the
NPVs calculated using
period
those numbers?
generated
accounting
in
a
business
a
given
cash
It
industries.
project.
annum
known
its
ows.
payback
over
of
recover
cash
changing
investment
also
timing
take
its
rapidly
earned
project
the
will
from
protability
and
cash
investment
is
the
difference
or
returns
discounted
ows
of
(HL
useful
business
outlay
and
period
inows
and
The discount factors
(given in discount tables)
rate
time.
effects
Can we really know
in advance whether
an investment will
shows
of
3.
be successful?
on
money.
the
cash
a
cash
assesses
use
an
inows
value
be
of
of
a
period
not
value
use
outlay.
of
long
consider
return
a
how
initial
overall
does
cash
all
and
makes
value
present
future
and
it
at
or
not
over
protability
However,
✓
does
rate
project
return.
the
the
it
ignores
Average
looks
investment
to
To what extent are the
methods used to gain
businesses
stnuocca dna ecnaniF 3
✓
in
its
money.
to
in
the
summation
and
the
original
ow
method
cash
computation
However,
compare
it
is
investment
as
well
more
of
cost
in
as
its
with
values
investment.
calculation.
the
complex
projects
present
of
It
opportunity
to
the
calculate
same
cost
and
initial
only)
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3
Practice question
To
answer
the
question
below
effectively,
see
Unit
6
pages
398–402.
EEB
EEB
is
a
small,
reservation
pride
in
their
customer
and
Maia
two
A:
software
stnuocca dna ecnaniF 3
Option
EEB
EEB
Due
reputable
employees
has
to
an
technology,
computers
received
increase
the
and
are
stable
motivated
recognition
in
nance
and/or
nancially
highly
global
for
its
Maia,
take
hotel
great
high-quality
demand,
director,
online
and
greater
has
competition
decided
to
software.
options:
purchase
new
software
called
new
computers,
“Book-Fast”
from
a
local
designer.
B:
Reach”,
in
EEB’s
has
Option
work.
service.
changes
upgrade
well-known,
service.
purchase
from
a
manufacturer
with
installed
software
called
“Global
abroad.
Option A
Option B
Cost
$20,000
$40,000
Technical suppor t
24 hours onsite at EEB
24 hours online
Further payments payable:
Employees
No change
At the end of their contract 15% of
employees to be made redundant,
cost: $15,000 in year 2
The
estimated
revenue
in
$
return/total
per
year
Training cost
On-the-job: free
Intensive: $12,000 in year 1
Maintenance cost
Free
$1,000 per year
Insurance cost
$500 per year
$1,000 per year
The
average
Maia
shown
will
below.
last
for
Each
four
of
return
(ARR)
of
Option
A
is
46.25%.
is
considering
carrying
out
an
investment
appraisal
on
each
option.
option
years.
EEB
employees
using
Year 1
rate
is
Option A
Option B
10,000
14,000
security
more
will
Year 2
12,000
16,800
Year 3
17,000
23,800
Year 4
20,000
28,000
issues.
also
give
Dene
b)
Calculate
your
a
though
has
and
with
chosen
secure
advantage
some
the
Option
of
B,
which
reservation
and
an
their
software,
competitors
including
will
system
ability
to
provide
software.
handle
the
your
all
both
investment
Explain
one
NPV
Examine
average
appraisal.
period
for
Option
A
(show
a
A
rate
and
discount
advantage
method
Maia’s
of
It
large
of
return
(ARR)
for
Option
rate
and
of
one
investment
choice
of
B,
4%
calculate
(show
all
Option
the
disadvantage
appraisal.
Option
B.
net
your
for
[2
marks]
[2
marks]
[2
marks]
all
B
working).
Option
using
a
reservations.
payback
(show
For
even
problems
competitive
hotel
term
the
Maia
sophisticated
Calculate
the
f)
of
A,
working).
(NPV)
e)
the
Option
reported
However,
EEB
volume
a)
d)
have
up-to-date,
global
c)
favour
Book-Fast
present
value
working).
EEB
of
[4
marks]
[4
marks]
[ 10
marks]
using
218
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3.9
Budgets (HL only)
3.9 Budgets (HL only)
Key terms
By the end of this chap ter, you should be able to:
Budget
➔
Explain the dierence bet ween cost and prot centres
➔
Analyse the role of cost and prot centres
➔
Construct and comment on a
➔
Calculate and analyse
➔
Explain the impor tance of budgets and variances in decision-making
a quantitative nancial plan
that estimates the revenue
budget
and expenditure over a
specied future time period
Budget holder
stnuocca dna ecnaniF 3
variances
a person involved in the
A
budget
is
a
expenditure
for
quantitative
over
individuals,
a
for
nancial
specied
future
governments,
plan
time
or
for
that
estimates
period.
any
revenue
Budgets
type
of
can
be
formulation and achievement
and
prepared
of a budget
organization.
Cost centre
Budgets
help
in
setting
targets
and
are
aligned
with
the
main
objectives
of
a section of a business
the
organization.
the
specied
They
enable
the
efcient
allocation
of
resources
within
where costs are incurred and
time
period.
recorded
The
person
involved
in
the
formulation
and
achievement
of
a
budget
Prot centre
is
known
ensuring
used
as
the
that
budgets
budget
the
are
holder.
specied
sales
The
budget
revenue
budget
holder
allocations
budgets
and
are
cost
is
responsible
being
met.
for
Commonly
a section of a business where
both costs and revenues are
budgets.
identied and recorded
Cost and prot centres (HL only)
To
be
able
different
to
account
parts
of
a
for
the
business
revenues
are
generated
divided
into
and
cost
costs
centres
incurred,
or
prot
centres
Cost centres
This
Cost
is
a
part
centres
Examples
electricity,
can
●
be
By
By
of
section
help
costs
wages,
divided
cost
product
phones,
these
business
and
–
–
a
is
cost
televisions,
products
in
where
some
be
cost
in
of
include
each
For
are
use
these
the
and
several
a
products
more
because
costs.
could
cost
are
centre.
ensure
produces
products.
costs
Businesses
marketing,
specic
Samsung
recorded.
ways:
production,
is
and
effectively.
include
other
following
nance,
many
data
sections
among
example,
centres
incurred
cost
department
producing
centre.
costs
and
insurance,
computers,
could
where
collect
recorded
examples
business
a
to
and
centres
resources,
product
each
a
collected
into
human
of
managers
advertising,
department
and
●
or
can
that
mobile
Each
incurred
of
in
their
KFC has outlets all round the world
production.
(these two are in the Netherlands
●
By
geographical
Cola
Company
geographic
location
are
areas
located
that
they
–
in
businesses
different
are
located
such
parts
in
as
of
could
KFC
the
be
or
The
world.
cost
Coca-
Each
centres.
of
the
and Thailand) – each geographical
area could be treated as a
cost centre
219
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3
Profit centres
This
is
a
part
identied
much
Prot
or
and
prot
each
centres
performance
can
identify
prot
most
Just
each
of
centre
enable
in
the
the
a
business
These
comparisons
most
where
sections
both
allow
costs
and
businesses
revenues
to
are
calculate
how
makes.
various
product
protable
makes
to
sections
or
car
by
be
of
made
the
so
as
to
business.
models
in
comparing
the
judge
For
market
which
the
example,
by
Toyota
comparing
geographical
the
location
is
protable.
like
cost
department
is
section
recorded.
also
centres,
or
prot
centres
geographical
can
location,
be
as
divided
long
as
in
according
addition
to
to
product,
cost,
revenue
generated.
stnuocca dna ecnaniF 3
The role of cost and profit centres
●
Aiding
decision-making.
managers
with
business.
This
continue
or
●
stopped
Better
their
●
there
costly
in
their
a
lot
product
and
for
Cost
prot
them
a
the
in
and
prot
For
be
help
but
With
protable
more
centres
help
and
of
to
held
a
to
such
products
protable
managers
identied
providing
parts
whether
product.
least
example,
in
different
deciding
particular
lower-cost
and
can
centres
about
high-cost
new,
department
centres.
charge
set
a
of
customer
motivation.
(such
targets
these
centres
improve
as
helps
to
can
be
hold
who
can
products.
specic
perform
accountable
for
also
the
can
efciency
be
in
checked
bonuses)
their
to
a
the
particular
if
high
by
in
one
store
number
use
of
to
nd
a
of
cost
the
to
the
and
them
cost
staff
to
and
prot
managers
in
motivation.
in
the
individual
enable
within
control
improve
managers
to
morale
performance
of
enable
example,
departmental
or
help
in
For
resulting
delegating
helps
centres
sought.
increase
and
monitoring
overall
prot
detected.
Providing
business
This
this
can
Comparing
a
and
be
promotion
staff
centres
in
efcient.
to
complaints
solutions
Empowering
of
Cost
business
replacements,
Benchmarking.
prot
areas.
in
incentives
achieve
to
of
accountable.
quick
Increasing
least
assist
producing
way
problem
areas
are
centre,
●
sections
Tracking
with
make
and
inefciency.
problem
●
to
can
production
accountability.
business
poorly
information
the
Cost
information
discontinue
information,
be
nancial
the
areas
parts
of
various
that
a
cost
are
and
most
business
can
or
help
business.
Problems of cost and profit centres
●
Indirect
or
cost
insurance
centres.
allocation.
are
They
difcult
may
be
Indirect
to
costs
allocate
allocated
such
as
specically
unfairly,
advertising,
to
distorting
particular
the
rent
cost
overall
business
performance.
●
External
affect
factors.
specic
competition
the
cost
in
Factors
and
one
performance
of
beyond
prot
centre
the
the
centres
than
centres
in
control
of
differently.
another,
the
thereby
experiencing
business
There
may
may
be
negatively
greater
levels
of
more
inuencing
competition.
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3.9
●
Centre
in
their
conicts.
own
organization.
centres
●
Staff
be
for
This
the
stress.
very
could
high
lead
Staff
centres
The
and
be
could
rm’s
for
to
to
lead
to
resources
pressure
some
staff
managers
superior
of
staff,
to
could
the
unhealthy
and
a
lack
managing
especially
a
if
consider
overall
the
of
sharing
cost
they
performance
performance
competition
and
lack
of
of
between
vital
prot
the
Budgets (HL only)
information.
centre
right
the
the
may
skills.
This
demotivation.
Constructing a budget (HL only)
following
important
●
Total
by
a
income
Total
●
Net
total
●
●
income
which
is
a
a
have
been
used
in
earlier
chapters)
are
budget:
summation
income
of
all
sources
income
include
or
money
sales
received
revenue
and
–
this
and
–
is
by
a
a
wages,
this
is
summation
business.
the
rent,
all
expenses
or
Common
expenses
include
material
income
and
and
of
advertising
difference
between
cost
of
costs.
the
total
expenses.
Actual
spent
gure
spent
actual
gure
or
as
Variance
Table
this
incurred
salaries
Budgeted
or
–
Common
expenses
received
●
of
earned.
operations
costs,
(some
constructing
business.
interest
●
terms
when
stnuocca dna ecnaniF 3
The
a
–
–
–
as
this
result
this
this
set
is
is
of
the
is
the
out
the
estimated
in
the
amount
business
amount
of
money
to
be
budget.
of
money
that
is
denitely
received
activity.
difference
between
the
budgeted
gure
and
the
gure.
3.9.1
shows
how
the
above
terms
are
applied.
Table 3.9.1 Budget for PQR Ltd for the period ended 2021 ($m).
F = favourable, A = adverse
Budgeted gures
Actual gures
Variance
Income
Sales revenue
Interest earned
Total income
600
650
50 (F)
50
45
5 (A)
650
695
45 (F)
Expenses
Salaries and wages
180
200
20 (A)
Materials
90
85
5 (F)
Rent
10
10
Assessment ad vice
Adver tising
Electricity
Total expenses
0
7
10
3 (A)
14
11
3 (F)
301
316
15 (A)
The format for the budget
shown in Table 3.9.1 is
the recommended one as
indicated in the IB Business
Management Guide
Net income
349
379
30 (F)
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3
In
Table
$45
million.
of
3.9.1,
million,
(F)
PQR
while
Overall,
(which
variance)
is
Ltd
it
it
obtained
got
had
means
a
a
positive
favourable
discussed
a
positive
negative
balance
balance
net
on
income
variance)
its
of
and
on
its
total
$30
(A)
total
income
expenses
million.
(which
of
The
of
$15
analysis
means
adverse
below.
Variance analysis (HL only)
Key terms
In
Variance
budgeting,
budgeted
the
end
as
gure
of
a
noted
and
budget
above,
the
a
actual
period
variance
gure.
once
the
is
This
the
difference
variance
actual
is
amounts
between
usually
are
the
calculated
at
determined.
the dierence between the
budgeted gure and the
actual gure
Variance
analysis
between
the
done
both
for
is
a
budgetary
budgeted
cost
amount
and
sales
control
and
process
the
revenue
actual
of
assessing
amount.
the
This
differences
analysis
can
be
budgets.
Favourable variance
stnuocca dna ecnaniF 3
Variances
can
either
be
favourable
or
adverse
when the dierence between
the budgeted and actual gure
A
is nancially benecial to
actual
favourable
gure
variance
is
is
nancially
when
the
benecial
difference
to
the
between
the
budgeted
and
rm.
the rm
For
Ad verse variance
example,
and
the
if
actual
variance
of
the
budgeted
sales
revenue
$10,000.
If
the
sales
was
revenue
$40,000,
budgeted
in
one
then
marketing
month
the
rm
costs
was
has
were
$30,000
a
favourable
$80,000
in
a
when the dierence between
month
and
the
actual
gure
turned
out
to
be
$65,000,
then
the
rm
has
a
the budgeted and actual gure
favourable
variance
of
$15,000.
is nancially costly to the rm
An
adverse
and
For
actual
example,
budgeted
then
the
In
Table
as
the
rm
Example:
of
actual
Mr
the
sales
positive
total
the
is
income
more
higher
expenses
is
are
expenses
million
as
was
than
the
an
by
the
the
budgeted
lower
the
than
the
budgeted
costs,
variance.
termed
than
between
rm.
amount
were
unfavourable
total
$30
difference
to
revenue
or
budgeted
of
the
costly
costs
received
the
the
when
actual
adverse
variance
total
occurs
nancially
the
an
the
Table
from
is
income
exceed
adverse
nature
or
However,
favourable
taken
the
has
3.9.2,
expenses
the
if
gure
actual
million.
a
variance
amount
as
a
favourable
budgeted
adverse
$15
income
variance
million.
favourable
But
total
variance
by
$45
because
PQR
Ltd
income
actual
makes
exceeds
expenses.
3.9.2
shows
Kamau’s
variance
some
business.
obtained,
of
the
The
budgeted
third
where
F
=
and
column
actual
shows
favourable
and
amounts
the
A
amount
=
and
adverse.
Table 3.9.2 Variance in Mr Kamau’s business
Par ticulars
Sales of televisions
Budgeted gure ($)
Actual gure ($)
Variance
10,000
12,500
2,500 (F)
4,000
3,800
200 (F)
15,000
13,900
1,100 (A)
Cost of labour
5,000
5,700
700 (A)
Cost of rent
3,000
3,000
Cost of materials
Sales of laptops
0
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3.9
The
above
example
Favourable
●
and
cost
(by
of
one
and
which
declined
both
actual
other
were
sales
with
gure
lower
nancially
$1,100,
while
in
the
presented
experienced
proved
by
experienced
Here,
an
the
variances
labour,
sales
with
that:
were
materials.
$2,500)
Adverse
●
variances
of
business,
shows
Budgets (HL only)
the
a
that
actual
in
the
costly
cost
of
televisions
benet
is
than
higher
costs
sales
to
of
sale
nancial
the
(by
of
the
$200).
laptops
rm.
labour
to
expected
and
the
Expected
increased
by
cost
laptop
$700.
The importance of budgets and variances in
Key term
decision-making (HL only)
Decision-making
from
a
various
given
a
possible
problem.
relevant
is
data
or
process
that
alternatives
Choices
are
with
made
information,
involves
and
by
the
selecting
aim
of
course
providing
identifying
assessing
a
the
a
of
solution
problem,
alternative
action
a process that involves
to
gathering
stnuocca dna ecnaniF 3
Decision-making
selecting a course of action
from various possible
resolutions.
alternatives with the aim of
A
business
is
always
faced
with
decision-making
opportunities
as
it
aims
providing a solution to a
to
dene
its
future
direction
and
decide
on
how
to
allocate
its
resources
given problem
effectively
In
in
dening
the
order
its
future
opportunities
course
the
of
action
vision
and
and
carrying
important
following
to
full
involves
out
in
it
and
rst
before
a
mission.
needs
to
pursuing
formulating
place
variance
in
vision
position,
available
putting
role
its
key
series
analysis
is
decision-making.
of
one
This
know
its
goals
steps
of
or
to
is
current
course
objectives
achieve
those
role
its
desired
steps,
further
position
of
action.
derived
them.
and
from
Budgeting
both
explored
and
The
play
in
an
the
points.
Benefits of using budgets and variances in decision-making
●
Planning:
to
provide
should
be
by
a
as
problems
●
a
and
(modalities
help
in
budget
taken
In
recognized
increased
as
part
clearly
of
should
for
that
budgets
understood
an
also
help
organizations.
by
all
organization’s
assist
in
These
internal
goals.
anticipating
A
future
solutions.
the
are
empowered
are
responsible
budgeted
and
trusted,
involved
organizational
for
budgetary
performance
in
team,
the
which
is
in
boosts
budgetary
which
could
control
line
with
their
process
even
feel
lead
to
productivity.
allocation:
the
in
be
are
who
who
ensure
purpose
attainment
ensure
the
be
could
or
possible
staff
Resource
used
the
feel
of
that
holders
that
addition,
managers
document
devising
performance)
morale.
●
to
targets,
direction
targets
planning
Motivation:
actual
of
realistic
stakeholders
budget
setting
sense
very
budgets
organization.
high,
available
resources
purposes
based
on
budgets
are
not
help
Since
set
to
the
prioritise
demands
certain
boundaries
overstretched
designated
how
for
but
are
resources
nancial
that
used
ensure
for
will
resources
that
specied
needs.
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3
●
Coordination:
together
ow
the
of
●
minimize
that
act
and
losses
they
nancial
SMART
goals:
stnuocca dna ecnaniF 3
line
with
budgeted
as
ensuring
a
for
from
This
sense
Coordination
monitoring
spent
that
each
wastage
they
debt
a
of
in
departments
improving
collaboration
helps
more
different
helps
all
the
between
departments
effective
of
the
do
variance
resources.
not
be
analysis
performance,
in
exceed
in
the
set
realistic
organization’s
evaluation
regulating
budget
should
agreed,
and
department.
by
problems
budgets
the
in
within
measurable,
Comparison:
to
and
people
purpose.
expenditure
are
ensure
serious
in
bring
agreements
and
to
be
to
together.
being
especially
specic,
●
are
revenue
ensure
●
help
common
budget
budgets
funds
control
to
a
to
achievement
of
targets.
Control:
how
for
working
uniform
set
budgets
work
communication
people
reach
the
to
tools
Budgets
how
Budget
their
the
to
check
help
money
holders
spending
budget,
as
to
is
spent
need
patterns
this
to
and
could
lead
organization.
based
and
on
the
SMART
time-bound
–
criteria
and
should
–
all
objectives.
aims
thereby
to
compare
helping
to
actual
assess
performance
organizational
performance.
●
●
Detecting
of
any
to
rectify
in
the
appraisal:
appraising
budgeting
in
variance
budget
analysis
so
that
helps
in
corrective
detecting
measures
the
can
causes
be
taken
them.
Objective
However,
deviations:
deviations
the
an
budget
attempt
brings
with
it
variance
holders
to
full
some
analysis
the
of
provides
responsible
vision
the
for
and
following
an
their
objective
various
mission
of
an
way
of
departments.
organization,
limitations.
Limitations of budgets in decision-making
TOK links
●
Inexible
external
1.
How can we know if a
too
budgets
that
do
environment,
difcult
to
stay
not
such
within
consider
any
as
increases
in
and
therefore
be
unforeseen
raw
changes
material
costs,
in
the
may
be
unrealistic.
budget is realistic, or if
●
Signicant
differences
between
the
budgeted
and
actual
results
could
it is too optimistic or too
make
the
budget
lose
its
importance
as
a
decision-making
tool.
pessimistic?
●
2.
Since
most
gains
(such
budgets
are
based
on
the
short
term,
long-term
future
What assumptions
as
increased
sales
potential
due
to
unexpected
increases
in
underlie the techniques
demand)
could
be
lost
by
looking
only
at
the
current
budgeted
amount.
used when budgeting?
●
3.
Highly
underspent
budgets
towards
the
end
of
the
year
could
result
in
Could it be said that
unjustied
wasteful
expenditure
by
managers.
variance analysis is
both objective (with the
●
Setting
budgets
without
involving
some
people
could
make
them
feel
mathematic calculation
resentful
and
affect
their
motivation
levels.
of the variances) and
Despite
these
limitations,
budgets
and
variance
analysis
do
play
an
subjective (with the
important
role
in
decision-making.
They
are
vital
nancial
planning
interpretation of the
documents
or
processes
that
help
to
monitor
and
control
income
and
variances)?
expenditure
so
that
the
specied
organizational
objectives
are
attained.
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3.9
Budgets (HL only)
Student workpoint 3.13
Be a thinker
following
information
refers
to
XA
V
Ltd.
Budgeted
Actual
gure ($)
gure ($)
Variance ($)
Par ticulars
Material costs
12,000
Direct labour costs
18,500
9,000
7,800
Sales of radios
25,000
25,600
Sales of Apple iPad
15,000
12,750
6,000
7,100
Adver tising costs
1.
Calculate
the
2.
Comment
reasons
3.
the
variance
What
on
for
do
missing
is
the
your
the
gures
favourable
in
(F)
material
the
or
costs
table
above
adverse
and
note
whether
stnuocca dna ecnaniF 3
The
(A).
variance
and
suggest
possible
answer.
overall
variance
gures
tell
you
about
the
business?
Revision checklist
✓
A
budget
the
✓
is
time
period.
Cost
centres
recorded,
centres
prot
Cost
are
✓
are
rm,
difference
is
known
in
factors
and
and
business
which
are
target
setting
over
where
where
both
a
are
use
costs
businesses
by
estimating
specied
costs
effectively
allows
important
tracking
beyond
is
a
for
the
in
aiding
problem
However,
indirect
rm’s
planning,
between
budgetary
the
the
known
an
in
business
incurred
cost
and
to
future
data.
and
Prot
revenues
calculate
are
how
much
decision-making,
areas,
some
costs
to
increasing
challenges
particular
faced
cost
centres,
control.
motivation,
resource
allocation,
control.
between
as
helps
a
business
collect
allocating
important
is
a
of
makes.
between
it
that
benchmarking.
analysis
differences
difference
a
centres
and
external
Variance
of
of
to
recorded,
difculties
Budgets
the
helps
accountability,
coordination,
✓
sections
centre
motivation,
and
plan
expenditure
sections
prot
improving
include
are
and
each
and
nancial
and
which
identied
✓
a
revenue
as
the
adverse
control
budgeted
budgeted
a
gure
favourable
budgeted
process
amount
and
and
actual
assessing
actual
variance.
and
of
the
On
actual
gure
the
gure
is
the
amount.
is
other
If
the
benecial
hand,
nancially
if
to
the
costly,
it
variance.
225
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3
Practice question
To
answer
KJC
KJC
it
a
the
question
Ltd
specialises
developed
a
well-developed
rst
sales
of
have
half
their
slowed
recession
of
stnuocca dna ecnaniF 3
over
the
monitor
specic
out
this
the
is
a
He
Unit
6
pages
398–402.
managers
table
this
below
is
all
for
have
sizes
and
shapes.
high-quality
both
the
second
manager,
have
of
to
and
On
and
half
while
part,
shows
pots
the
as
the
Liu,
out
Mr
a
year
this
feel
has
For
in
the
their
to
that
the
second
budgeted
sales
the
increased
that
this
business
of
and
the
He
with
performed
controls
that
manager.
half
gures
so
tasked
company
budgetary
feels
nance
been
the
closely
Liu
of
has
how
strict
centre
sections
in
Jon
ascertain
carry
efcient
the
Mr
prot
his
which
to
he
can
will
can
could
and
track
make
also
have
the
him
advise
caused
the
the
year.
actual
Budgeted gures
gures
Actual gures
500
400
Interest earned
100
80
Direct labour costs
90
75
Direct material costs
80
90
Adver tising
20
10
Rent
15
15
Electricity
30
40
a)
Dene
b)
Construct
from
d)
growth
the
others
years
Ltd
overseas.
attribute
Sales revenue
the
the
term
a
on
question
Explain
cost
for
KJC
Ltd
budget
for
KJC
Ltd
using
variances
from
the
complete
(b).
two
the
roles
of
prot
centres
to
KJC
Ltd.
[2
marks]
[6
marks]
information
above.
two
Variance
centre.
complete
table
Comment
in
of
the
KJC
year.
$0 0 0
c)
and
signicant
stakeholders
experiencing,
Over
products.
nationally
experienced
for
Some
analysis
centre
about
sales
of
cause.
areas.
accountable
for
they
drastically.
may
cost
other
The
see
network
However,
nancial
more
in
year
variance
year.
each
pots
reputation
country
the
problem
decrease
making
distribution
down
company’s
carrying
in
good
products.
that
competition
The
effectively,
Ltd
has
the
below
budget
completed
[4
marks]
[4
marks]
226
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MARKE TING
4
gnitekraM 4
4.1 Introduction to marketing
By the end of this chap ter, you should be able to:
➔
Dene marketing
➔
Distinguish between
market orientation
➔
Distinguish between
market share and market growth
➔
Calculate market share
➔
Calculate market growth
➔
Discuss the impor tance of market share and market leadership
and product orientation
(HL only)
Introduction
Marketing
is
not
more
just
is
essential
about
than
that:
about
satisfying
There
are
common
many
ones
“Marketing
and
is
satisfying
selling
it
is
to
or
more
consumer
globally
include
the
the
success
of
a
needs
business.
many
However,
people
philosophy
of
think.
how
It
best
marketing
is
much
to
think
demands.
denitions
of
marketing.
Some
following:
management
consumer
or
any
as
business
acceptable
the
of
advertising,
needs
process
involved
in
identifying,
anticipating
protably.”
The
Chartered
Institute
of
Marketing
227
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4
“Marketing
is
the
activity,
set
of
institutions,
and
processes
for
creating,
Key terms
communicating,
customers,
delivering,
clients,
partners,
and
exchanging
and
society
at
offerings
that
have
value
for
large.”
Marketing
American
Marketing
Association
the management process of
getting the right product to
the right customer at the right
price, the right place and the
right time
Kotler
(1994)
summarized
it
well
when
he
said,
“Marketing
is
meeting
the
1
needs
the
of
your
right
This
customer
product
means
marketing
that
to
the
at
a
right
marketing
department
prot.”
Ultimately,
customers
involves
should
aim
a
to
at
the
number
satisfy,
marketing
right
of
all
price
at
activities
centred
is
about
the
that
on
the
getting
right
time.
every
consumer.
Product orientation
a business approach that
Market orientation versus product orientation
focuses on making the
product rst before attempting
There
to sell it
products.
are
two
distinct
They
can
approaches
either
market-orientated
use
a
that
businesses
can
use
product-orientated
approach.
These
two
to
market
approach
approaches
are
or
shown
their
a
in
the
Market orientation
table
below.
a business approach of
Table 4.1.1 Dierences between a product-orientated approach and a market-orientated
rst establishing consumer
approach
demand through market
research before producing
Product-orientated
Market-orientated
approach
approach
and selling a product
gnitekraM 4
Inward looking; focused on making the
Outward looking; focused on carrying out
product rst and then trying to sell it.
market research rst and then making
products that can sell.
Product-led and assumes that supply creates
Market-led and focused on establishing
its own demand (Say’s law). Here, businesses
consumer demand in order to supply
produce innovative products and tempt
products that meet consumers’ needs
customers to buy them.
and wants.
Organizations
products
that
include
have
adopted
Bosch,
a
Siemens,
product-orientated
Microsoft,
Ferrari
approach
and
Dyson.
to
their
However,
Student workpoint
many
organizations
are
now
market-orientated
businesses,
including
4.1
Amazon,
Google,
Facebook,
Uber
and
Airbnb.
Be a thinker
Benets of a market-orientated business
1.
Explain
what
understand
you
by
the
●
term
2.
“marketing”.
Using
specic
●
the
Access
will
to
research,
sell,
market
quickly
which
rms
information
to
have
reduces
changes
increased
the
means
in
the
risk
that
of
condence
that
their
failure.
rms
can
anticipate
and
market.
comment
benets
As
a
result
of
regular
feedback
from
consumers
due
to
market
research,
of
rms
market
market
respond
●
on
to
products
organizational
examples,
Due
are
in
a
strong
position
to
meet
the
challenges
of
new
competitors
orientation.
entering
the
market.
1
Kotler, P
. 1994. Marketing Management: Analysis, planning, implementation and control. Englewood
Clis, NJ. Prentice Hall.
228
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4.1
Introduction to marketing
Limitations of a market-orientated business
●
Conducting
therefore
●
Due
to
may
●
its
it
Uncertainty
the
Product-orientated
on
the
production
customers.
They
to
can
a
be
costly
rm’s
consumer
meet
every
and
budget.
tastes,
rms
consumer’s
needs
resources.
about
on
on
changing
difcult
available
inuence
research
heavily
frequently
nd
with
market
weigh
the
future
could
market-planning
businesses
process
focus
place
rather
mostly
on
a
lot
than
the
have
a
negative
strategy.
of
on
emphasis
their
rm’s
potential
internal
capabilities.
Dyson takes a product-orientated approach to marketing
Benets of a product-orientated business
●
It
is
associated
products
like
●
It
crash
can
with
such
as
is
production
sports
of
cars,
high-quality
or
safety
products
helmets.
succeed
change
the
luxury
in
slow
industries
and
the
where
rm
has
the
speed
already
of
built
a
good
●
It
has
that
control
over
consumers
its
will
activities,
purchase
with
its
a
strong
gnitekraM 4
reputation.
belief
products.
Limitations of a product-orientated business
●
Since
takes
or
●
the
rm
risks
ignores
that
may
the
lead
needs
to
of
the
eventual
market,
business
it
Google uses a market-orientated approach to marketing
failure
closure.
Spending
money
consumer
needs
on
research
could
be
and
costly
development
and
not
yield
without
any
considering
promising
results.
Market share
Market
share
industry.
market,
It
is
and
is
the
the
is
percentage
percentage
calculated
by
of
of
total
one
using
sales
rm’s
the
that
share
a
following
share
percentage
●
By
It
●
By
can
volume:
is
the
share
a
be
this
measured
measures
quantitative
number
value:
number
Indian
this
of
monetary
of
measure
bags
of
terms,
in
sales
in
(units)
number
the
units
of
an
the
sales
×
volume
the
of
within
sales
the
or
goods
sold
by
100
market
value
(revenue):
bought
by
businesses,
customers.
for
example
maize.
measures
goods
by
has
total
=
total
Market
the
formula:
rm’s
market
business
of
sold
by
such
as
the
amount
businesses.
Kenyan
spent
It
is
by
the
shillings
customers
total
(KSh),
on
revenue
US
the
total
expressed
dollars
(US$),
in
or
rupees.
229
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4
Calculating market share
Assume
and
the
PQR
€100
total
Using
Electronics
million
worth
sold
of
€8
million
computers
worth
were
market
share
percentage
×
€8
sales
in
the
×
€100
share
market
=
share
increase
in
for
business
away
result
PQR
market
marketing
may
period
in
100
market
100
million
8%
effective
it
Sweden,
million
=
An
in
same
sales
=
total
The
the
formula:
rm’s
share
market
computers
during
market.
the
market
of
sold
the
share
could
strategies
from
in
Electronics
its
so
being
8%.
mean
that
competitors.
business
is
it
that
sells
a
This
could
key
player
a
business
more
has
products
lead
in
to
the
adopted
and
takes
increased
prots
and
industry.
Market growth
Key terms
Market
gnitekraM 4
Market size
the total sales of all rms in
good
growth
or
period
is
service.
of
time,
the
It
is
increase
the
usually
in
the
percentage
a
number
change
of
in
consumers
the
market
who
size
buy
over
a
a
given
year.
a market
Market
size
market.
represents
Market
size
the
can
total
be
sales
made
measured
by
by
all
value
businesses
or
in
a
given
volume.
Market growth
the percentage change in the
Calculating market size
total market size over a period
Assume
there
are
three
rms
in
a
given
market.
In
the
last
two
years:
of time
●
the
sales
revenue
experienced
●
second
year
Firm
had
$32
●
$62
C’s
$2
Adding
a
million
Firm
by
B
a
up
sales
the
million
for
sales
in
million
in
10%
the
Firm
revenue
second
revenue
in
sales
year
A
the
was
increase
of
one
was
and
$20
sales
$28
million
revenue
million
in
in
the
to
rst
$22
the
year,
million
rst
year
and
in
it
the
and
year
$14
second
revenue
in
million
year
gures
$70
to
$16
for
in
each
million
the
rst
year
and
it
increased
million.
for
year
year
results
in
market
sizes
of
two.
Table 4.1.2 Calculation of market size
Sales revenue
Sales revenue
($) – year 1
($) – year 2
Firm A
20 million
22 million
Firm B
28 million
32 million
Firm C
14 million
16 million
Market size (Firm A + Firm B + Firm C)
62 million
70 million
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4.1
Introduction to marketing
Calculating market growth
Market
year
by
the
the
is
rst
calculated
market
market
size
size
in
the
in
by
the
rst
subtracting
second
year
and
year.
the
The
multiplied
market
result
by
is
100
size
in
then
to
the
rst
divided
convert
it
to
percentage.
market
market
growth
percentage
size
(second
year)
$62
1:
million
Using
the
in
Table
and
the
4.1.2,
the
market
market
size
for
growth
the
size
percentage
growth
Example
2:
=
the
million
sales
million
to
percentage
=
market
growth
year
was
(rst
100
year)
was
$70
million.
year
from
US$80
million
million
$50
increased
two.
from
What
is
the
million
100
million
×
100
million
60%
market
growth
This
sales
year
million
$50
of
in
×
$30
example
100
televisions
=
increasing
100
million
$50
=
million
million
$80
growth
$62
×
revenue
one
growth?
them.
year)
12.9%
in
market
for
(rst
million
$62
An
rst
year
size
×
$8
market
the
=
=
US$50
for
second
$62
market
size
formula:
$70
market
market
×
market
Example
-
=
gnitekraM 4
a
growth
from
has
growth
worldwide,
attracted
is
the
with
many
sale
of
many
smartphones,
consumers
smartphone
which
nding
suppliers
has
seen
multiple
because
of
uses
Assessment ad vice
the
It is impor tant to remember
high
prot
potential.
However,
such
growth
does
not
happen
in
isolation.
that the calculations for
There
are
several
external
factors
inuencing
the
growth
of
the
smartphone
market share and for market
market,
such
as
economic
growth
patterns,
technological
changes,
and
growth are dierent.
changes
in
consumer
tastes
and
income,
among
others.
Student workpoint 4.2
Be a thinker
In
its
The
that
second
quarter
Coca-Cola
it
had
market
experienced
share
in
ready-to-drink
Do
you
think
information
for
2020
Company
its
total
a
that
decrease
beverages.
publishing
be
a
in
non-alcoholic
(NARTD)
can
results,
announced
such
marketing
tool
businesses?
231
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4
Importance of market share and market leadership
Key terms
(HL only)
Market share
Even
though
market
share
does
not
show
exactly
how
protable
a
rm
the percentage of one rm’s
is,
it
does
provide
useful
insights
into
the
rm’s
revenues,
growth
and
share of the total sales in
protmargins.
the market
This
Market leader
is
because
production
the
rm,
as
the
of
a
economies
result
better
it
of
of
scale
increasing
can
serve
(a
a
decrease
rm’s
greater
scale
numbers
in
the
of
operation).
of
average
consumers
costs
The
in
a
of
bigger
more
a rm with the largest market
cost-efcient
manner.
This
is
because
goods
can
be
bought
for
greater
share in a given market
discounts
Hence,
its
even
share
Firms
that
driving
can
As
have
provide
can
it
can
it
is
means
or
making
offer
that
services,
share.
The
stronger
tend
larger
to
the
hence
more
and
a
interpreting
thereby
use
so
its
market
in
as
it
the
share
more
can
given
market
cycle
share,
as
a
efciently
the
captures,
the
price
scale
driving
effective
it
of
competitors.
market
the
share
and
same
overall
from
more
market
services,
the
rm
rm,
the
for
economies
consumers
effect
or
goods
and
promotions,
new
and
its
share
it
more
the
goods
calculating
selling
market
captures
provide
when
rm
greater
orders.
rm
the
it
is
more
continues.
careful
thought
gnitekraM 4
needed:
Since
●
market
volume,
share
The
●
type
to
of
measured
may
period
be
and
in
different
obtained
market
in
can
the
ways,
same
inuence
by
value
time
and
period.
market
included
may
also
inuence
the
calculation
of
A
leader
businesses
winning
share
market
is
important
leader
is
the
because
rm
it
with
can
the
indicate
largest
that
a
market
rm
is
share
a
in
industry.
market
over
Increasingly,
become
time
products
market
leader.
particular
other
the
be
share.
Measuring
The
in
can
results
results.
market
market
share
different
Changes
●
a
a
as
market
it
larger
compounding
This
goods
capturing
However,
a
wholesale
margins,
result,
higher,
force.
efciently
a
with
prot
a
even
larger
when
higher
market.
is
to
competitors,
attain
at
due
use
its
dominance
competitors
consumers,
the
market
can
or
internet
to
follow
pricing
age
has
in
the
it.
This
decisions,
provided
market
to
distribution
huge
inuence
inuence
scope
for
could
extend
coverage,
etc.
businesses
to
leaders.
Benefits of being a market leader
●
The
market
Microsoft
idea
of
a
The
of
market
higher
its
portable
examples
●
leader
with
often
has
operating
computer
companies
leader
that
enjoys
rst-mover
system
with
have
a
advantages
(Windows)
and
touch-screen
leveraged
increased
sales
this
in
new
Apple
display
markets.
with
(the
the
iPad)
are
advantage.
revenue
that
translates
to
prots.
Microsoft is a market leader known
for its Windows operating system
●
The
business
is
be
able
to
gain
economies
of
scale.
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4.1
Since
●
the
product
good
with
popular
them
or
lawsuits.
In
For
addition,
business
the
for
rm’s
total
development
the
most
to
to
be
the
brand
the
who
leader
leading
would
leader
be
their
(providing
brand
like
to
can
be
the
act
as
a
associated
not
that
may
a
it
target
may
which
of
help
competitors
in
to
most
high
costs,
may
use
and
in
the
anti-trust
regulators.
the
a
manufacturing
they
dominant
subject
be
have
costs)
how
too
be
necessarily
marketing
its
development
processes
about
become
once
though
among
and
competition.
position
(including
and
highest-quality
cautious
was
may
Even
costs
rm
their
to
Microsoft
expenses
the
technologies
Businesses
abusing
investor.
protable
attract
need
share.
(R&D)
to
outperform
leaders
market
an
be
share),
consumers
innovative
example,
a
also
market
for
manage
market
seem
tool
adopt
market
their
market
and
continue
However,
could
highest
brands.
leaders
partners
obtain
leader
the
promotional
Market
●
market
with
Introduction to marketing
be
the
protable
market
share,
research
too
high
and
to
make
it
industry.
Student workpoint 4.3
TOK links
Be knowledgeable
Table 4.1.3 Dierent sales volumes and values from dierent companies
1.
Why would all businesses
Company
X YZ
ABC
gnitekraM 4
need to know their market
PQR
share and their market
Year
2020
2021
2020
2021
2020
2021
550
580
700
740
620
650
Sales of toys (million units)
growth?
2.
As market share and
market growth can be
Sales of toys ($ million)
25
28
45
48
32
30
calculated and expressed
as percentages, does
Use
Table
4.1.3
to
calculate
the
following:
that mean that they are
1.
Market
share
for
company
XYZ
2.
Market
share
for
company
ABC
by
volume
by
value
in
in
2020
necessarily true?
3.
2021
To what extent are
marketing practices a
3.
Market
share
for
4.
Market
growth
company
PQR
by
volume
in
2020
reection of the values of
for
the
whole
industry
by
value
from
2020
to
2021
a given time and culture?
Revision checklist
✓
Marketing
is
customers
at
with
✓
other
Product
it,
✓
✓
the
business
market
size
growth
is
Market
share
in
a
market.
given
looks
the
about
price
focuses
and
at
the
A
is
the
rm
total
a
satisfy
the
product
time.
needs
the
carrying
It
of
the
product
out
to
the
involves
right
working
customer.
rst
market
before
selling
research
product.
sales
change
right
right
producing
the
market
the
the
involves
percentage
is
at
to
on
selling
percentage
getting
and
functions
orientation
producing
Market
the
right
orientation
while
before
essentially
of
in
of
all
rms
market
one
leader
rm’s
if
it
in
size
a
share
has
market,
over
the
of
a
while
period
the
highest
total
of
market
time.
sales
market
in
share
market.
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4
Practice question
To
answer
the
question
below
effectively,
see
Unit
6
pages
398–402.
Bak
Bak
is
share
a
market
in
the
companies
to
10
the
that
high
These
two
without
hand,
to
size
a
lot
to
on
has
motorbikes
motorbikes.
satisfy
product
need
motorbike
industry
for
companies
relies
Market
models
are
the
in
produce
demand
different
companies
leader
motorbike
the
believe
they
for
in
a
Bak
and
is
of
that
market
its
offer
know
Recently,
increasing.
market
for
There
is
orientated
is
The
models
right
insights.
its
are
for
in
in
and
two
market.
market
on
the
other
feedback.
the
motorbike
companies
is
given
below.
Sales revenue
Sales revenue
company
(rupees) – 2020
(rupees) – 2021
100 million
145 million
Jia
70 million
95 million
Ter
40 million
68 million
gnitekraM 4
Explain
the
product
orientation.
b)
Calculate
c)
Comment
difference
the
leadership
on
for
market
the
between
share
for
importance
Bak.
due
offers
Motorbike
Bak
a)
other
size
other
the
the
Bak,
market
two
growing
consumers.
fewer
what
consumers
consumer
information
been
needs
orientated
approach
manufacturing.
market
Bak
of
in
orientation
and
2021.
market
share
and
[4
marks]
[2
marks]
[4
marks]
market
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4.2
Marketing planning
4.2 Marketing planning
By the end of this chap ter, you should be able to:
➔
Explain the role of
marketing planning
➔
Distinguish between
segmentation, targeting and positioning
➔
Distinguish between
niche market and mass market
➔
Explain the impor tance of having a
unique selling point/proposition
(USP)
Evaluate how organizations can
➔
dierentiate themselves and their
products from competitors
The role of marketing planning
Key term
Marketing
on
the
overall
planning
marketing
strategic
is
a
process
strategies
objectives.
that
To
that
involves
would
be
facilitate
most
this,
it
an
organization
effective
is
in
essential
deciding
attaining
to
draw
up
its
Marketing planning
a
the process of formulating
marketing
plan.
gnitekraM 4
comprehensive
marketing objectives
A
marketing
that
are
to
face
some
of
Marketing
achievable,
increasing
●
Key
the
to
●
new
Detailed
The
by
achieve
competition
6%
plans,
products
in
will
are
be
plan
marketing
The
strategies
and
prepare
marketing
and devising appropriate
marketing strategies to meet
marketing
adequately
market.
and
(specic,
those objectives
plan
measurable,
time-specic).
For
example,
year.
steps
that
achieved.
provide
For
an
overview
example,
plans
of
on
how
how
markets.
providing
to
used
budget,
marketing
to
SMART
are
actions
be
the
organization’s
the
next
existing
that
will
the
which
marketing
activities
are
realistic),
in
an
need
in
about
components:
that
(or
objectives
marketing
overall
to
following
objectives
strategies
document
departments
the
sales
marketing
●
order
relevant
strategic
pricing
detailed
in
the
marketing
sell
a
Marketing
themselves
●
is
developed
objectives.
includes
plan
be
and
carried
how
including
information
out.
the
the
For
products
nance
on
the
example,
will
be
required
to
specic
which
distributed.
fund
the
strategy.
Benefits of marketing planning
●
Marketing
solutions
●
Setting
Sharing
sense
the
of
a
rm
to
identify
potential
problems
and
seek
objectives
improves
the
chance
of
success
for
a
rm’s
strategy.
marketing
coordination
or
helps
them.
SMART
marketing
●
planning
to
and
where
plan
provides
it
is
with
the
other
whole
business
departments
organization
with
a
improves
clearer
picture
heading.
235
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4
Devising
●
a
marketing
unprotable
A
●
clearly
inspire
budget
ensures
that
resources
are
not
wasted
on
activities.
spelled-out
condence
plan
about
could
the
improve
employees’
organization’s
motivation
and
future.
Limitations of marketing planning
Student workpoint
4.4
Marketing
●
consider
plans
may
changes
in
become
market
outdated
if
organizations
are
not
quick
to
conditions.
Be a thinker
The
●
1.
Using
of
an
your
may
consume
expertise,
and
money
Failure
prioritize
in
considerable
designing
the
resources
in
terms
of
time,
plans.
choice,
explain
go
process
organization
how
about
it
would
creating
●
to
a
tell
to
whether
marketing
they
are
objectives
meeting
may
make
it
difcult
for
rms
them.
marketingplan.
To
2.
Explain
of
a
the
limitations
marketing
plan.
be
effective,
organizations
They
need
to
marketing
constantly
do
this
if
planning
review
they
are
needs
and
to
to
be
evaluate
survive
in
a
reective
their
exercise
marketing
today’s
where
policies.
competitive
business
environment.
Segmentation, targeting and positioning
Key terms
Market segmentation
Market segment
A
market
segment
refers
to
a
sub-group
of
consumers
with
similar
gnitekraM 4
a sub-group of consumers
characteristics
in
a
given
market.
Market
segmentation
is
the
process
of
with similar characteristics in
dividing
the
market
into
smaller
or
distinct
groups
of
consumers
in
order
to
a given market
meet
Market segmentation
their
Markets
desired
can
be
needs
and
segmented
wants.
in
the
following
ways.
the process of dividing the
Demographic
segmentation
–
this
considers
the
varying
characteristics
market into distinct groups of
of
the
human
population
in
a
market,
which
include:
consumers so as to meet their
●
age
–
babies
●
gender
will
need
diapers
while
teenagers
will
want
smartphones
desired needs and wants
–
women
●
religion
in
●
a
young
be
will
that
a
products
climatic
in
–
the
it
difcult
to
businesses
example,
DINKY
stations
geared
–
sectors
care
products
for
sell
certain
from
have
OINK
(double
animal
eating
used
(one
creative
income,
income,
products
them
no
acronyms
no
kids
kids)
yet)
targets
this
and
where
for
in
towards
is
many
a
where
considers
the
products
the
is
broadcast
group.
divided
into
including:
reside
in
countries
ethnic
market
factors
consumers
ofce
African
particular
–
city
for
example,
and
there
agricultural
areas
conditions
throughout
personal
discouraged
some
for
radio
are
demand
in
are
while
country
rural
jackets
nd
–
segmentation
in
for
couples
grouping
more
demand
people
markets;
geographical
thick
higher
singles,
married
regions
may
●
their
young
Geographic
●
where
languages
different
a
men
characteristics
ethnic
in
is
for
businesses
segment
targets
●
–
country
family
to
there
than
Tibet
–
for
than
example,
in
there
Botswana,
will
which
be
is
greater
usually
demand
quite
for
hot
year.
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4.2
Psychographic
lifestyle
choices
social
●
and
belong
to
specied
values
●
segmentation
or
personality
economic
luxury
wealth
–
status
clubs
this
divides
that
–
some
exclude
the
market
such
based
high-income-earning
people
on
people’s
as:
who
have
not
individuals
attained
a
status
people’s
customer
–
characteristics,
Marketing planning
values
morals
and
regarding
beliefs
are
recycling
of
considered
products
or
here,
for
animal
example
testing.
Advantages of segmentation
Segmentation
●
opportunities
helps
in
businesses
domestic
as
to
well
identify
as
existing
international
gaps
and
new
markets.
Geographic segmentation could
lead a winter clothing retailer to
Designing
●
products
for
a
specic
group
of
consumers
can
increase
sales
target colder climates
hence
protability.
Segmentation
●
identifying
By
●
right
differentiating
their
risks
However,
in
the
market
development,
large
minimizes
the
their
of
and
segmentation
actual
waste
for
products,
market
production,
segment
the
consumers
and
and
so
of
resources
their
businesses
increase
can
be
potential
can
businesses
diversify
market
expensive
promotion,
by
through
products.
as
a
and
spread
share.
in
terms
rm
of
research
attempts
to
reach
and
a
consumers.
yduts esaC
gnitekraM 4
and
Real-world examples of eective market
segmentation
Market
can
to
a
segmentation
adapt
what
their
particular
business
manner.
for
satisfy
Many
particular
groups
products
groups
those
customization
of
based
services
use
You
on
so
customers
expectations
companies
markets.
customers
and
in
based
that
expect.
a
see
how
real-world
their
needs.
more
Such
to
and
customize
companies
Businesses
closely
correspond
segmentation
differentiated
segmentation
can
on
they
carry
more
helps
effective
products
out
such
examples.
Demographics
Segmenting
customers
your
by
McDonald’s
segments.
younger
aimed
at
the
&
loss
to
age
adult
Gamble
to
by
Ronald
at
deodorant
gender
segments
The
aimed
Procter
market
age,
based
or
on
demographics
similar
age,
and
McDonald
groups.
directs
ads
Ads
means
grouping
your
characteristics.
for
different
target
a
ads
children
quick
to
different
with
breakfast
products
before
work
are
segment.
segments
women
while
by
gender,
marketing
and
the
offers
the
Rogaine
“Secret”
treatment
brand
for
hair
men.
Income
Income
target
is
an
effective
expensive
items
segmenting
to
technique,
customers
who
can
because
afford
you
can
them.
237
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4
Department
target
If
the
you
items
The
target
or
products.
emphasizes
customers
strategy
for
Marcus,
market
lower-income
value
store
that
storeNeiman
upper-income
can
car
get
segments,
Walmart
low
Rolex
pricing
more
for
watches
segments
is
you
a
in
of
their
can
their
ads
and
money.
Rolls-Royce
respective
carry
successful
its
and
cars
industries.
reduced-price
example
for
emphasizes
Hyundai
retailing.
the
follows
message
a
similar
sales.
Purchases
Businesses
them
the
to
may
buy
purchase
The
where
travelled
with
each
rm
went,
to
Such
their
existing
carry
out
The
season
studied
they
company
and
to
encourage
segmentation
what
they
able
is
what
trips
preferred
then
were
segmentation
exactly
customers
such
based
on
customer.
Backroads
customers
detailed
them
their
what
children.
revenue.
giving
of
travel
they
packages
and
segment
Companies
history
adventure
took,
also
more.
proposed
to
customers
and
whether
substantially
based
on
they
personalized
studying
increase
customers
want.
Causes
Cause-based
causes
marketing
customer
gnitekraM 4
animal
rights
Patagonia,
a
and
quality
and
and
fair
selling
responsible
groups
products
favoring
develop
grown
high
and
are
their
markets
by
what
environmentalism,
outdoor
market
innovates
makes
to
This
loyalty
achieve
to
sound
has
a
emphasizes
outdoor
enthusiasts
to
small
high-performing
raw
materials
allowed
high
targets
It
donations
produce
targeting
and
clothing,
segment.
appealing
company
environmentally
cotton.
brand
aware
production,
The
environmental
while
segment
examples
high-end
environmentally
environmentalists.
organically
companies
Typical
trade.
company
high-income,
lets
support.
the
such
company
as
to
margins.
Key terms
Target market
T
argeting
a group of consumers with
common needs or wants that
a business decides to serve
or sell to
After
A
segmenting
target
that
a
market
business
specic
its
is
market,
a
group
serves
market
or
of
a
rm
must
consumers
sells
to.
then
with
Targeting
is
decide
on
common
the
its
target
needs
process
of
or
market.
wants
marketing
to
a
segment.
Targeting
the process of marketing to a
T
argeting strategies
specic market segment
Undifferentiated
Mass market
ignores
entire
the
marketing
differences
market.
Here,
in
or
the
mass
marketing
specic
businesses
market
consider
the
–
a
strategy
segments
common
and
where
targets
needs
or
a
rm
the
wants
of
a large or broad market that
consumers
in
the
market
in
maximize
and
aim
to
sell
their
products
to
many
customers
ignores specic market
order
to
their
sales.
Examples
of
companies
that
do
this
are
segments
Samsung,
Walmart,
LG,
Levi
Strauss,
Dell,
HP
,
Coca-Cola
and
Zoom.
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4.2
Differentiated
targets
mixes
marketing
several
for
different
each
these
rms
can
increasing
Concentrated
to
of
or
smaller
smaller
rms
that
market
niches
status
gain
sales
more
a
or
have
there
that
have
by
that
operate
businesses
Rolls-Royce
businesses
cars.
to
are
their
consumer
segments.
resources.
few
specic
proles
–
by
is
cars
for
the
segmented
their
key
strategy
is
a
and
segments,
take
include
in
appeals
can
advantage
of
provided
iTunes
segments
and
for
serve
Products
Apple’s
these
effective
that
strategy
rms
rms.
efciently
to
good
small
larger
consumers
more
a
It
These
markets
products
designs
With
of
that
marketing
world.
each
competitors
niche
strategy
Toyota
in
marketing
overlooked
in
the
position
a
share.
market
been
Targeting
market
Understanding
niche
in
–
appropriate
example,
people
market
limited
opportunities
For
of
marketing
develops
stronger
and
specic
where
and
segments.
marketing
and
segmented
segments
socio-economic
marketing,
thereby
market
Marketing planning
A
service targeted at the mass market
and
enables
effectively.
targeting.
Zoom is a video conferencing
Key terms
consumer
Niche market
prole
product
social
is
a
in
description
different
status,
consumer
and
of
the
markets.
income
spending
characteristics
These
levels.
patterns
in
of
consumers
characteristics
Consumer
terms
of
include
proles
the
of
can
number
particular
gender,
also
and
a
age,
consist
of
frequency
a narrow, smaller or more
specic market segment
of
Consumer prole
products
bought.
the characteristics of
For
segmentation
and
targeting
to
be
successful,
it
is
very
important
consumers of a par ticular
that
rms
have
good
knowledge
of
who
their
consumers
are.
This
will
them
to
target
their
products
effectively
to
the
right
gnitekraM 4
product in dierent markets
enable
consumers,
based on their gender, age,
using
appropriate
marketing
strategies.
In
addition,
a
rm
that
is
aware
and income levels, among
of
its
target
market
can
cut
its
costs
and
utilize
more
cost-effective
other characteristics
promotionaltechniques.
yduts esaC
Identity marketing: a modern approach to
market segmentation
Identity
marketing
segmentation.
collection
on
a
to
rises
Rather
build
consumer
a
above
than
market
tribe
that
the
using
shortcomings
costly,
segment,
aligns
with
limited
identity
a
of
traditional
methods
marketing
brand’s
values
–
of
is
the
market
data
based
ultimate
marketsegmentation!
These
their
consumer
life
stage
responders),
Identity
brands
offer
are
viral.
of
the
Z
deep-seated
seniors),
(the
campaigns
Unlike
boost
traditional
would
which
share
a
identity
occupation
military
networking
connected,
Gen
share
afliation
marketing
socially
83%
or
harness
go
tribes
(students,
of
market
greatly
gated
such
nurses,
as
rst
community).
customer
power
attributes
(teachers,
acquisition
consumer
segments,
enhances
tribes
to
For
exclusive)
helping
make
consumer
sharing.
(personalized,
by
an
tribes
example,
offer
withfriends.
Identity marketing success stories
Leading
use
brands
identity
in
retail,
marketing
streaming,
to
acquire
software,
high-value
hospitality,
consumer
and
nance
tribes:
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4
CheapCaribbean
CheapCaribbean
consumer
offer
tribe
brought
36%,
and
Targus
Targus
8,000
Headspace,
honour
to
the
offers
in
app
boosted
for
the
and
a
a
389%
with
in
to
new
support.
new
reduced
in
–
a
personalized
fraud
orders
awareness
to
nurses
brand’s
by
and
clients.
ramp
the
by
loyalty
After
things
number
389%
of
while
running
up.
The
orders
the
new
and
a
year.
subscribers
personalized
three
its
increase
decided
over
for
club
time.
corporate
increase
year
travel
The
Club,”
staff
subscription-based
a
classroom
subscribers
of
brand
and
it
its
brand.
“ER&R
offers
year,
into
promotion
the
hours
greater
25,000
popular
its
100
tribes
revenue,
acquired
educators
educator
generate
a
with
into
than
generated
increase
Headspace
nurses
nurses
create
well
consumer
identity-driven
413%
to
pairs
more
to
key
programmes
8,000
identity-driven
wanted
rewarding
wanted
that
saved
uses
brings
meditation
offer
that
Headspace
markets,
gave
acquired
reduced
app,
them
wanted
free
25,000
fraud
by
to
access
new
41%,
and
engagement.
Source: Adapted from https://www.sheerid.com/blog/how-top-brands-use-market-
segmentation-to-reach-customers/
gnitekraM 4
Positioning
Key term
Product
positioning
Product position map/
perceive
perception map
consumers
simplify
a
product
are
their
involves
compared
sometimes
purchasing
analysing
to
faced
other
with
process
an
they
how
products
consumers
in
overload
categorize
the
of
dene
market.
information,
products
and
or
As
to
position
a visual representation of how
them
accordingly.
Marketers
must
therefore
plan
positions
that
will
give
consumers perceive a product
their
products
a
competitive
advantage
in
the
market.
in relation to other competing
products
An
effective
This
is
a
relation
tool
visual
to
they
could
use
representation
other
competing
Prestigious to own
of
is
a
position
how
map
consumers
or
perception
perceive
a
map.
product
in
products.
High
Mercedes-Benz
Jaguar
ssenevitcee laicnaniF
Mitsubishi
BMW
Motors
Toyota
Ford
High
Low
Audi
Honda
Volvo
Proton
Low
Figure 4.2.1 A position map for cars
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4.2
The
rst
that
the
step
in
consumers
second
positioning
nd
step,
positioning
requires
important,
the
rm
strategy.
chooses
Finally,
marketers
such
the
as
the
key
rm
to
quality,
identify
price,
features
to
communicates
product
and
use
its
image.
to
features
Student workpoint
In
develop
desired
Marketing planning
4.5
its
position
to
Be a thinker
its
target
customers
with
the
support
of
its
marketing
mix.
Suggest
The impor tance of a position map
the
consumer
someone
It
●
can
help
a
rm
to
establish
who
its
close
competitors
or
threats
are
possible
prole
who
for
buys
the
in
following:
the
It
●
helps
the
It
●
market.
to
rm
is
a
could
simple
research
It
●
identify
helps
ll
and
important
by
gaps
creating
quick
way
or
of
or
opportunities
offering
new
presenting
in
the
market
products.
usually
sophisticated
data.
a
Louis
Vuitton
b)
Yamaha
c)
Nintendo
handbag
motorbike
Wii
game
console
rm
consumer
a)
that
in
targeting
needs
and
specic
market
segments
to
best
satisfy
wants.
The dierence between niche market and
mass market
A
niche
who
market
have
focuses
interests
that
on
a
align
small
with
group
the
of
people
product
or
or
consumers
service
of
a
In
niche
niche
marketing,
appeal
of
plumbing
as
plumbing
services
market
A
that
niche
consumer
mass
audience.
For
mass
as
nding
the
for
of
Many
is
it
is
a
its
identity
USA.
on
an
For
organization
example,
organization
buildings
a
moderate
a
using
a
only,
establishes
instead
can
of
the
providing
specialize
hence
large
a
number
specic
aimed
involve
of
market
in
pursuing
a
offering
niche
buyers
and
is
in
the
aware
of
the
at.
or
broad
market
communicating
TV
a
many
have
by
it
the
larger
commercial
the
or
segment.
to
a
organization’s
wide
potential
been
For
able
the
A
largest
huge
yer
the
this
market
Henry
Ford
viewed
was
to
as
mass
possible
printing
and
aimed
automobile
the
needs
niche
the
from
skate
its
strategy
the
needs.
aim
are
of
Coca-Cola,
techniques,
of
skaters
with
the
market
company
in
the
success
Southern
business
to
Airwalk
California
then
success.
that
before
product
mass
industry.
niche
shoe
market,
great
niche
at
with
possible.
realized
a
for
marketing
move
with
marketing
base
customers
as
example,
to
customer
mass
consumers
mass
T
an
a
employs
catering
was
Model
in
of
dominated
example,
success
that
market.
Once
in
capturing
number
as
automobile
However,
huge
mass
to
another
at
is
restrictions
organizations
in
the
an
old
targets
product
brand
found
T,
to
capture
aimed
highest
a
In
general,
would
focuses
capturing
expanded
to
example,
targeting
the
that
service.
campaign.
example,
goal
the
marketing,
limited
in
or
marketer
strategy
distribution
important
under-served.
aims
niche
market
is
targeted
be
group
marketing
In
may
The
it
product
service
market
market.
A
a
its
gnitekraM 4
specicorganization.
he
only
market
created
for
and
the
the
Model
wealthy.
later
gained
him
Airwalk rst aimed at a niche
market selling skate shoes
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4
yduts esaC
How niche brands create social media sales in China
The
bag
social
and
pandemic.
the
accessories
media
by
As
Little
and
Gen-Z
the
darling
Red
niche
Book
BY
took
platforms,
Chinese
Weibo,
more
become
brought
WeChat,
millennial
loyal
affair
with
Chinese
Covid-19
inuencers
China’s
have
FAR
the
fashion
to
customers
Bulgarian
label
despite
Chinese
Instagram
and
storm
fans
of
months
found
FAR
is
known
for
its
unique
designs
details.
Every
season,
the
brand
BY
FAR
some
new
leads
customers
trends
According
on
to
some
classic
IT
bags
fashion-featured
1980s,
is
the
brand’s
inspired
the
example,
1990s,
its
one
of
was
smartly
the
Rachel
and
Mini
most
social
founder,
styles
the
Rachel
popular
based
from
by
BY
the
on
90s
from
early
bag,
bags
the
might
problematic
for
sitcom
the
For
“BY
FAR
now
said
Martha
Saint
brand,
the
in
future.
character
how
BY
gnitekraM 4
Program
in
space
the
is
on
currently
brands
over
to
the
FAR
launched
China
that
social
one
set
up
of
to
WeChat
as
messaging
the
most
buy
as
it
as
WeChat.
tools
functions
and
their
Luxury
niche
media
brands,
will
be
marketing
luxury
best
quick
As
have
FAR’s
the
a
path
top
to
top
Cartier,
heavy
to
(ie
trading
choice.
seeing
payments.
media
WeChat
1.15
monthly
billion
become
the
marketing
emerging
on
of
and
be
BY
FAR’s
seen
Chow
as
its
its
and
can
has
for
face.
has
space
fashion
to
the
lose
its
of
the
its
DNA,”
at
Central
brand
social
knows
atmosphere,
“armpit
bag”
on
China.
collaborate
bloggers
on
in
usually
critics
with
China,
aren’t
believe
Chinese
country’s
niche
for
that
social
mass
but
a
top
after
media
market,
BY
positioning.
about
Bumbarov
their
brands
good,
over
can
also
had
FAR,
its
should
be
customers
and
can
expand
the
Marble
Xia,
a
in
senior
brands’
sales
enough
For
the
about
have
success
and
and
worth
early
and
niche
to
China.
Ignatova
China.
raving
the
growth
all,
in
her
lifelong
twin
friend
the
When
stated,
future
signature
aren’t
in
trafc
images.
BY
they
are
plan
start,
success
e-market
motives,
a
Ignatova,
their
asked
“We
will
potential.”
long-term
designs
still
vision,
just
like
but
consumers
DNA
is
true
–
–
and
presence
future
this
our
have
succeed
founders
Gyosheva,
physical
to
winning
inuencer
company’s
many
celebrityKOLGrace
The
brand’s
are
Mini
commercialization
of
to
and
potential
Sabina
believe
a
and
social
via
huge
the
sister
For
way
purchasing
consistency
naming
–
than
“mood”
The
in
inuencers
Some
could
show
2019
WeChat
useful
yet
shown
trafc
more
in
said
local
branding
stars
catering
Denitsa
Dior
base.
the
a
success.
is
and
WeChat,
important
in
use
Yet
High-end
Chinese
users
use
creating
brand
new
for
Much
that
ambitious
in
app
brands
FAR
customers,
enhancing
online
media
social
luxury
China
customer
active
brands
mimic
on
accumulated
campaigns.
like
in
strategically
designer
to
brands
young
BY
most
Instagram,
Program
a
of
Bulgari,
converting
consumers,
other
future.
presence
marketing
expand
social
and
battleeld
foreseeable
like
social
way
the
the
brands
already
BY
in
WeChat
the
the
social
researcher
She
the
platforms
controversial
for
FAR
For
with
brandslove
high-prole
It
WeChat
make
era’s
fashion
College.
connect
with
this
a
Mini
shopping
app
directs
products
a
effective
e-commerce
internet),
followers
a
serves
got
Tu,
Martin’s
to
such
Friends
has
e-commerce
Recently,
the
late
is
the
of
be
media.
2000s.
by
the
controversy
FAR’s
the
which
style
but
and
brand
aesthetic
win
always
followers,
offers
news
has
and
over
vintage
then
women.
Chow
helped
BY
but
among
constant
about
brand.
famous
ago
fame
younger
The
a
singer
big
the
prots
them.
will
here
of
impact
longer
fashion
in
brand,
and
“Chinese
the
on
a
term,”
editor
be
achieving
niche
money
adopters
a
value
a
products
for
at
brand’s
said
Elle.
judged
by
“After
online
China.”
Source: Adapted from https://jingdaily.com/how-niche-
brands-create-social-media-sales-in-china/
an
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4.2
Marketing planning
The unique selling point or proposition (USP)
Key term
This
is
a
feature
products
product
in
the
of
a
product
market.
unique
and
The
helps
that
differentiates
differentiating
to
explain
why
it
from
factor
is
other
what
consumers
competing
makes
choose
Unique selling point/
a
one
product
proposition (USP)
overanother.
a product’s feature that
dierentiates it from other
The impor tance of having a USP
competing products in
A
●
USP:
the market
Helps
and,
●
●
to
as
establish
a
result,
Leads
to
about
the
Leads
to
that
a
customer
meets
reputable
in
competitive
attract
as
more
revenue
as
needs.
that
they
advantage
to
can
rival
view
as
its
product
offering
identify
buy
customers
being
something
special
products.
customers
Some
in
customers.
customers
comparison
their
brand
to
loyalty
product
improved
best
rm’s
helps
a
product
can
high
pay
or
top
service
prices
for
a
quality.
C oncep t
●
Makes
see
the
value
product
in
the
or
service
product
or
easy
even
to
use
sell.
the
Sale
representatives
product
will
nd
it
who
easier
to
CRE ATIVITY
passionately
and
persuasively
sell
the
product
to
customers.
Creativity involves considering
perspectives in addition to
gnitekraM 4
yduts esaC
existing ideas from new
How three businesses creatively use their
generating new ideas. To be
unique selling points (USPs)
successful, businesses create
1.
Love
with
Food
unique features that dierentiate
(lovewithfood.com)
them from the competition. The
Love
with
Food
sells
organic
snack-boxes
which
are
delivered
case study here gives three
directly
to
customers
each
month.
For
every
box
sold,
the
company
examples of businesses that
donates
a
meal
to
a
food
bank
to
feed
hungry
children.
This
creates
have thought creatively about
a
unique
get
buying
anywhere
experience
else.
Love
for
with
their
Food
customers
offers
that
something
they
wouldn’t
different,
their USPs.
while
Research one more business that
still
selling
exactly
what
their
customers
want.
uses their USP creatively.
2.
BridgeU
BridgeU
(bridge-u.com)
aims
to
help
students
discover
and
explore
the
best
career
Student workpoint
pathways
available
to
them
worldwide.
It
uses
data
to
assist
in
4.6
identifying
It
focuses
opportunities
on
for
empowering
students
secondary
wherever
schools
they
and
may
be.
universities,
Be an inquirer
with
software
and
solutions
designed
to
help
them
meet
global
1.
Draw
a
position
map
challenges.
of
3.
Hear
and
Play
(hearandplay.com)
an
industry
choice
and
products
Many
websites
and
of
your
identify
or
brands
the
on
businesses
offer.
help
and
people
Play
learning
ear,
learn
focuses
to
play
making
who
don’t
sheet
it
Hear
specically
the
ideal
want
music.
music.
to,
piano
for
or
on
by
people
can’t,
read
2.
Using
in
it
the
information
question
1,
important
organizations
those
why
for
offering
products
brands
to
is
the
have
and
a
USP?
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4
How organizations can dierentiate themselves
and their products from competitors
Differentiation
customers
several
the
and
the
of
strategy
that
best
organization
its
overall
strategies.
will
competition,
strategies
an
boost
differentiation
choice
from
enables
can
them.
provide
However,
depend
on
organizations
suit
to
protability
These
the
not
type
need
to
superior
and
all
of
are
in
equally
could
those
to
its
There
are
effective,
organization.
invest
strategies
value
viability.
To
and
stand
out
differentiation
include
any
of
thefollowing.
Product differentiation
This
is
form
other
on
the
of
physical
product
criteria.
this
type
However,
product
do
patent
a
gnitekraM 4
produce
a
be
nature,
to
their
least
is
most
be
a
patents
and
challenges.
competitors
and
the
any
product.
It
marketers
can
take
the
reliability,
spend
or
their
time
customers.
short-term
duplicated.
protects
none
a
performance,
pursuing
can
easily
like
in
durability,
when
practical
at
there
similar
difference
as
tangible
rights
reveals
patent
when
its
can
present
this
such
differentiation
property
not
as
perceived
differentiation
product
However,
unlike
to
innovations
intellectual
these
Due
of
or
features
strategy,
Despite
the
copyrights,
Some
how
product
the
with
many
several
life
their
of
capital
not
to
product.
the
can
of
cases
choose
duplicate
for
competitor
in
businesses
to
as
existence
patent,
quickly
product.
Ser vice differentiation
This
like
includes
customer
installation
that
and
differentiates
with
the
right
customers
customer
Some
on
service.
information
and
delivery,
HubSpot
It
and
understand
and
is
ensures
a
that
processes
their
specic
supporting
good
its
business
example
of
employees
needed
needs,
to
better
which
an
are
provided
know
leads
elements
organization
to
their
great
service.
organizations,
business
service,
training.
not
however,
requiring
any
view
level
of
this
as
a
simple
component
of
a
sophistication.
Price differentiation
A
successful
is
willing
to
price
pay
differentiation,
differentiated
For
to
example,
offer
existing
the
in
can
environment.
a
product
at
prices
can
a
mobile
price
strategy
for
network
and
its
the
recognizes
product.
maximize
different
to
a
its
price
operator
consumers
company
potential
in
each
of
the
still
every
its
by
market
has
Kenyan
customer
segmentation
revenue
Safaricom
in
has
that
Through
always
to
a
segments.
market
managed
and
offering
managed
despite
post
very
the
high
prots.
goods
of
business
competition,
Importantly,
form
a
different
affordable
after-tax
the
differentiation
a
price
be
In
the
negotiation
product
or
differentiation
subjective
service
world
and
and
of
the
discrimination)
by
business,
customers
than
(or
vary
most
exist
prevailing
consumer,
who
prices
are
market
the
value
use
and
are
subject
prepared
of
operating
to
to
pay
some
more
for
price.
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4.2
Marketing planning
Distribution differentiation
The
channel
until
This
it
could
when
For
be
many
reach
can
this
For
by
through
be
goods
demand
the
end
of
path
providing
or
through
is
an
immediate
services,
or
high
organizations
different
consumer
products
without
exists
time-consuming
and
facing
the
the
a
of
an
to
a
service
greater
market
it
function.
and
passes
ease
service.
market),
distributor
for
or
differentiation.
expertise,
unequal
same
expensive
of
technical
distribution
the
good
means
access
levels
in
between
which
effective
is
(in
not
which
possible
Where
a
manufacturer,
competitor
to
duplicate
differentiation.
example,
having
or
consumer
relationship
very
level
end
manufacturing
supportive
it
distribution
the
ordering
consumers
to
of
reaches
a
PepsiCo
wide
has
range
managed
of
retail
to
differentiate
outlets
providing
itself
its
well
product
globally
close
to
itsconsumers.
Relationship differentiation
is
differentiation
employees
for
the
link
team
day-to-day
between
business
A
or
closer
leading
related
can
the
be
to
the
organization’s
with
customer
communication
product
with
personnel,
links.
They
customers,
and
the
customer.
between
the
personnel
If
this
and
link
including
are
responsible
are
an
is
important
broken
then
the
ruined.
relationship
to
through
members
better
business
service,
this
relationship
any
organization.
but
its
takes
performance.
main
time,
it
focus
is
This
on
establishes
and
the
a
the
type
of
customer
people.
highly
builds
differentiation
Even
is
though
differentiated
trust,
gnitekraM 4
This
closely
building
position
for
Image/reputation differentiation
This
is
high
a
usually
product
business
created
quality,
can
control
communication
New
in
entrants
markets
example,
the
It
is
an
to
in
stand
must
for
to
the
it
note
from
be
its
forms
or
of
differentiation
superior
its
image
(such
performance),
with
the
means
as
although
of
customers.
can
reputable
strong
nd
it
difcult
businesses
image
of
to
with
being
a
establish
exemplary
technical
themselves
images.
For
powerhouse
in
participates.
that
its
a
brand
does
competitors.
something,
To
manage
market
by
communicate
competition.
marketing
has
other
service,
with
given
which
important
it
and
uses
a
DuPont
organization
and
it
dominated
market
must
through
great
it
needs
to
something
successful
in
this,
not
For
be
and
differentiate
differentiation,
recognized
unique
an
automatically
effective
by
the
different
organization
target
from
requires
a
a
brand
audience,
the
existing
large
budget.
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4
Porter ’s generic strategies (HL only)
Michael Por ter came up with generic strategies that are applicable to products
and services in all organizations and industries regardless of their size. These are
“cost leadership” (a no-frills approach), “dierentiation” (involving the creation
of uniquely desirable products and services), and “focus” (oering a specialized
service in a niche market).
The focus strategy is subdivided into two par ts: “cost focus”, which emphasizes
cost-minimization within a focused market, and “dierentiation focus”, which
involves pursuing strategic dierentiation within a focused market.
The case study below focuses on the “dierentiation” strategy by having uniquely
desirable products and services that stand out from the competition.
yduts esaC
Five examples of organizations that use a
dierentiation strategy
Emirates
While
airlines
like
gnitekraM 4
as
the
industry
airline
Based
in
United
per
week
However,
countries
what
than
really
they
Air
is
for
the
The
150
ways
to.
in
chosen
80
other
the
airline
operates
approach
companies
differentiate
state-owned
cities
The
to
company
differentiates
y
have
strategy,
of
cost
within
themselves.
and
ag
carrier
about3,600
of
ights
countries.
them
elements
is
not
that
the
make
number
them
of
stand
ights
out
or
are
follows.
Exceptional
The
customer
company
passengers
Economy
provides
class,
for
●
In-ight
●
Excellent
●
Complementary
●
On-board
An
the
and
commodities
to
their
includes:
inspired
entertainment
customer
service
ight.
service
dishes
with
and
over
from
the
4,500
ight
movies
destination
to
choose
from
catering
beverages
wi
technology
latest
aspect
of
technologies
usingadvanced
ensuring
innovation
that
whole
regionally
digital
important
From
the
example,
High-quality,
Latest
service
exceptional
throughout
●
to
Wizz
advantage
looking
Emirates.
more
that
are
Emirates
Arab
to
and
competitive
Dubai,
the
as
a
Ryanair
leadership
they
the
is
aim
a
best
Emirates’
available
navigation
part
the
on
of
board,
the
strategy
is
investing
in
market.
technologyfor
entertainment
fundamental
to
differentiation
on
their
their
airplanes
dedication
customer-centric
to
experience
provide.
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4.2
Marketing planning
Tesla
With
a
mission
American
the
idea
then
But
to
of
accelerate
vehicle
targeting
move
what
to
electric
into
makes
the
afuent
larger
the
world
company
to
customers
markets
company
sustainable
initially
at
in
lower
stand
out
entered
the
luxury
price
and
energy,
the
sector.
points
this
market
at
a
differentiate
with
They
later
itself
were
point.
from
itscompetitors?
The
the
rst
innovation
and
most
automotive
that
people
Their
cars
tech,
but
years,
none
But
are
also
not
only
have
are
others
with
not
The
●
Regular
●
Solar
●
Self-driving
it
tech
is
the
to
distinctive
have
detail
only
tried
and
innovation.
friendly
and
Tesla
electric
of
and
beautiful
building
elegant
aspects
customize
software
panels
the
product
environmentally
very
the
possibility
from,
is
market-disruptive
entered
vehicles
electric
design
Tesla’s
extremely
aesthetic.
or
that
product
hybrid
Tesla
high
Over
the
cars,
but
achieved.
differentiation.
include:
●
From
a
companies
them
these
Some
point
offering
liked.
many
of
important
industry
no
and
your
car
updates
supercharging
gnitekraM 4
Product
compatibility
features
functionalities
surprise
that
to
Tesla
the
materials
really
the
managed
cars
to
are
built
differentiate
from
itscompetitors.
Marketing
Another
point
According
of-mouth
their
strategy
to
of
differentiation
Forbes,
the
advertising
products
onto
company
than
the
for
Tesla
focuses
traditional
target
is
TV
their
more
marketing
on
strategy.
referrals
advertisements
and
and
word-
pushing
audience.
Shopify
Shopify
the
But
is
a
what
covered
to
a
in
However,
case
so
multinational
that
people
different
known
chat
they
Shopify
even
dedicated
is
live
channelsthat
support
it
so
e-commerce
can
from
build
its
their
platform
own
that
business
provides
online.
competitors?
service
company
support
tools
makes
Customer
The
Canadian
necessary
its
to
excellent
help
to
centre,
contact
identied
customers
further.
entirely
a
need
also
their
for
and
The
company
providing
help
Shopify
them,
the
most
customer
no
service.
has
got
matter
the
communication
often
frequent
actually
to
their
made
24/7
clients
time
and
and
a
From
its
of
social
took
Twitter
the
day.
media
their
account
customers.
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4
In
this
and
account,
they
will
people
receive
can
tweet
responses
their
issues
providing
and
problems
immediate
to
Shopify,
assistance.
Lush
This
company
has
managed
to
stand
out
in
a
saturated
cosmetics
market.
Lush
49
is
a
UK-based
countries
industry.
and
Here
is
is
cosmetics
quickly
what
retailer
building
makes
the
that
its
has
way
company
grown
in
the
stand
to
operate
highly
in
competitive
out.
gnitekraM 4
Handmade
The
of
rst
quality
differentiation
ingredients,
but
point
also
when
for
it
Lush
is
comes
quality
to
the
–
not
only
production
of
in
terms
the
nalproduct.
All
Lush
often
papaya,
also
products
containing
vanilla
are
100%
fruits
and
beans,
handmade,
vegetarian,
vegetables
avocado
which
is
butter,
highly
and
such
and
valued
by
about
as
85%
grapefruit
aloe
vera.
their
are
also
juice,
Their
vegan,
fresh
products
are
customers.
Ethics
The
company’s
customers
on
in
animals,
selling
They
such
are
are
company
to
involved
Charity
also
ofethics
products
also
the
generated
small
the
their
as
values
terms
the
a
environmental
in
series
tests
of
campaign.
the
those
of
their
responsibility.
on
human
target
Instead
volunteers
of
testing
before
public.
over$33,000,000in
organizations
with
social
actually
in
Pot
aligned
and
donation
Launched
prots,
areas
of
of
and
in
which
human
charity
2007,
the
100%
rights,
campaigns,
campaign
were
animal
donated
welfare,
to
and
conservation.
Nespresso
Nespresso,
a
Swiss-based
premium-priced
coffee,
operating
and
it
is
unit
mostly
of
the
Nestlé
known
for
its
Group,
provides
single-use
coffeecapsules.
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4.2
Product
The
Marketing planning
TOK links
differentiation
capsules,
offered
in
elegant
boxes,
are
made
of
aluminium
and
1.
hermetically
sealed,
preventing
the
coffee
aroma
from
degrading
As a two-dimensional
over
diagram, is a positioning
time
(as
opposed
to
a
pack
that
has
been
opened).
map a true representation
The
company
market,
is
selling
currently
28
offering
different
a
huge
Original
Line
variety
arabica
of
options
and
on
robusta
of the market?
the
capsules.
2.
They
also
release
limited
editions
occasionally,
allowing
their
Can a USP be only par tly
customers
unique?
to
select
from
awide
range
of
carefully
selected
avours.
3.
Additionally,
and
the
premium
beautiful,
elegant
packaging
gives
a
sense
of
luxury
How much knowledge
(of the market, of
quality.
the customers, of
the competitors) is
Physical
locations
necessary to ensure
Another
way
Nespresso
differentiates
from
its
competitors
is
the
successful marketing
company’s
physical
shop
locations.
The
majority
of
its
competitorsdon’t
planning?
have
stores
purchase
exclusively
them
Additionally,
once
you
are
in
the
for
their
conventional
company’s
there,
and
capsules,
stores
shops
you
feel
and
are
that
and
you
only
able
to
supermarkets.
designed
you
are
are
tocreate
an
purchasing
a
experience
premium
product.
way
adds
up
there
offer
the
in
in
their
to
the
a
capsule
the
boxes
high-end
shop,
which
conventional
are
ordered
experience.
is
You
something
store
unless
by
that
they
colour
can
and
alsotry
avour
their
competitors
do
a
specic
only
coffee
are
not
right
able
campaign
gnitekraM 4
The
to
within
store.
Source: Adapted from https://mktoolboxsuite.com/dierentiation-strategy-
examples/
Revision checklist
✓
A
marketing
plan
development
of
organization’s
✓
A
target
that
of
✓
A
a
mass
while
✓
The
a
market
primary
perceive
an
✓
effort
There
from
a
a
is
a
focus
the
to
broad
of
rm
various
and
of
ways
to,
while
that
help
with
a
characteristics
market
product
to
that
consumers
sell
focuses
product
document
strategies
concerns
in
the
achieving
an
objectives.
similar
competition,
relationship,
essential
group
market
rm’s
for
are
the
is
decides
with
market
niche
an
marketing
business
consumers
is
marketing
on
that
a
gain
in
positioning
a
to
is
organizations
by
can
needs
segment
isa
or
wants
sub-group
givenmarket.
specic
market
to
other
competitive
including
a
ignores
narrow
compared
common
market
market
segments,
segment.
analyse
how
consumers
products
in
the
market,
advantage
in
the
market.
differentiate
product,
service,
in
themselves
price,
distribution,
image/reputation.
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4
Practice question
To
answer
the
question
below
effectively,
see
Unit
6
pages
398–402.
TX
TX,
a
huge
excellent
was
a
company
niche
group
of
with
car
cars.
the
mass-produced
Where
TX
as
niche
In
other
taking
and
Once
didn’t
TX
took
read
example,
and
was
their
the
Despite
gnitekraM 4
and
is
about
or
in
it
listened
publications.
in
it
the
automobile
rst
very
the
focused
as
that
an
companies
interested
business,
to
in
realize
is
an
there
environmentally
development
of
Tyb,
one
of
to
pursued
market
doing
on
the
to
mass
market
identify
the
this,
their
effective
It
people
(provided
with
an
media.
by
only
opportunity
a
saw
new
niche.
market
promoted
In
be
with
that
brand
any
to
on
the
cars.
niche
just
heavily
focused
niche
on
concerned
car
TX
only
is
done
marketing
media
about
through
not
it
brand.
plan.
outlets
the
that
It
were
environment.
environmental
dominated
the
groups
niche
–
it
niche.
growing
regarded
how
Dene
the
b)
Explain
competition
as
long
a)
the
rst
the
plunge,
Tyb
it
need
saw
brand
the
own
the
promote
watched,
For
often
can
its
TX
of
would
this
hybrid
risk,
focus
one
manufacturers
huge
establish
marketing,
global
was
who
answered
car
a
successfully)
c)
TX
It
buyers
friendly
rst
a
marketer.
it
a
can
term
the
niche
from
leading
depend
mass
on
other
hybrid
brand.
Tyb
as
cars,
However,
its
main
the
in
Tyb
is
need
this
“TX
reasons
success
think
niche
market.
[2
not
for
a
to
market.
statement
likely
far
will
brand
only
dominated
the
niche.”
Discuss
so
TX
the
success
of
Tyb.
niche
–
it
marks]
was
[2
marks]
[ 10
marks]
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4.3
Sales forecasting (HL only)
4.3 Sales forecasting (HL only)
By the end of this chap ter, you should be able to:
➔
Dene sales forecasting
➔
Explain the terminolog y associated with sales forecasting
➔
Comment on sales forecasting data
➔
Examine the benets and limitations of sales forecasting
Introduction
Key terms
Sales
will
forecasting
be.
trends
It
uses
over
a
is
the
process
quantitative
specied
of
predicting
methods
period
of
to
what
estimate
a
the
rm’s
future
future
sales
sales
levels
and
Sales forecasting
time.
the process of predicting the
Accurately
predicting
management
of
the
stock
future
and
cash
reduces
ow,
uncertainty,
and
ensures
helps
better
in
future sales of a rm
the
planning
for
Time series analysis
Businesses
intelligent
complex
business
process
need
sales
decisions.
and
can
be
forecasting
However,
affected
by
information
making
to
help
accurate
numerous
them
make
predictions
external
is
a
a quantitative sales
gnitekraM 4
growth.
forecasting method that
factors.
predicts future sales levels
from past sales data
Sales forecasting terminology (HL only)
Time series analysis
This
is
levels
a
quantitative
from
past
information
businesses
Below
●
are
The
●
that
rely
key
It
can
Seasonal
varying
a
of
a
new
Cyclical
in
an
but
●
the
past
is
in
are
but
For
during
–
an
An
fall
are
decline
these
and
are
in
in
could
Cyclical
of
is
sales
sales
time.
in
a
given
demand
The
middle
of
to
during
variations
the
due
at
to
the
the
can
sales
the
is
when
beginning
year.
year
the
past
period.
the
one
tied
data.
variation
clothing
within
rise
series
inputting
seasonal
of
the
time
over
variations
sales
recession.
of
occur
period
after
sales
sales
future
which
future.
changes
in
predicts
data,
given
seen
of
example
increase
sales
a
the
identied
pattern
these
example,
a
be
that
series
over
predict
to
repeated
–
time
kept
and
year.
these
usually
rise
method
on
to
visible
the
experiences
have
need
the
the
relies
data
that
uctuations
or
Seasonal
less.
business
growth
extend
cycle
phase
for
more
year.
Random
that
this
economy.
one
It
uctuations
decline
than
this
indicate
year
variations
●
–
forecasting
data.
businesses
on
seasons
business
sales
aspects
trend
data.
sales
stand
uctuations
out
demand
variations
from
for
are
a
–
these
given
ice-cream
are
trend.
during
unpredictable
and
notable
For
a
rare
can
changes
example,
warm
occur
at
a
day
any
or
uctuations
sudden
in
increase
winter.
in
Random
time.
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4
Moving averages (HL only)
Key terms
This
Moving average
the
is
a
useful
direction
simply
indicator
of
a
trend.
predicting
in
It
future
sales
is
a
sales
forecasting
more
from
for
accurate
actual
identifying
and
sales
and
complex
data.
This
emphasizing
method
is
than
because
it
helps
sales forecasting method that
to
smooth
out
any
uctuations
from
sales
data.
identies and emphasizes the
direction of a trend
Calculating a three-year moving average
Ex trapolation
Table 4.3.1 Yearly sales of a calculator manufacturer
an extension of a trend line to
Year
1
2
3
4
5
6
7
8
Sales (US$0 0 0)
400
600
800
650
700
850
950
1,200
predict future sales
Variation
dierence between actual
Using
sales and trend values
year
1.
Table
4.3.1,
moving
Calculate
the
mean
the
following
steps
can
be
used
to
calculate
the
three-
average:
the
mean
from
(400,000
sales
years
+
1,
for
2
600,000
the
and
+
3
rst
three
years.
For
example,
is
800,000)
US$
=
600,000.
3
2.
Do
the
same
for
(600,000
+
the
next
800,000
three
+
sets
of
data:
650,000)
=
US$
683,333
for
years
2,
3
and
4.
gnitekraM 4
3
3.
The
same
process
should
be
(800,000
Years
3,
4,
5:
used
+
for
the
650,000
+
following
sets
of
threes:
700,000)
US$
=
716,667
=
733,333
=
833,333
3
(650,000
Years
4,
5,
6:
+
700,000
+
850,000)
US$
3
1400
1200
(700,000
Years
5,
6,
7:
+
850,000
+
950,000)
US$
1000
3
selaS
800
The
above
data
is
summarized
in
Table
4.3.2
and
Figure
4.3.1.
600
400
Table 4.3.2 Sales revenue with three-year moving average (trend)
sales (US$000)
trend (three-year moving
200
average) (US$000)
Year
1
2
3
4
5
6
7
8
400
600
800
650
700
850
950
1,200
600
683.333
716.667
733.333
833.333
0
1
2
3
4
5
6
7
8
Sales (US$0 0 0)
Years
Trend (three-year
Figure 4.3.1 Actual sales and the
moving average)
three-year moving average trend
(US$0 0 0)
for the calculator manufacturer
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4.3
Sales forecasting (HL only)
Ex trapolation
Once
the
trend
t”,
line
of
best
as
extrapolation.
provide
trend
shown
an
line
has
by
The
estimated
can
be
a
been
drawn,
dotted
trend
sales
line,
line
value
this
to
from
for
line
can
predict
Figure
future
be
extended
future
4.3.1
years.
sales.
can
be
Figure
using
This
is
a
“line
known
extrapolated
4.3.2
shows
to
how
a
extrapolated.
erusaem
ytilauq ataD
2007
2008
2009
2010
2011
Time (year)
Figure 4.3.2 Example of an extrapolated trend line
Variation
is
shown
is
in
the
difference
Table
between
actual
sales
and
the
trend
values.
This
gnitekraM 4
Variation
4.3.3.
Assessment ad vice
Table 4.3.3 Sales revenue with variations in each year
Year
1
2
3
4
5
6
Calculation of moving
7
8
950
1,200
averages and variations is not
Sales (US$0 0 0)
400
600
800
650
700
850
required in the examination.
Trend (three-year
However, to gain a better
moving average)
600
683.333
716.667
733.333
833.333
0
116.667
−66.667
−33.333
16.667
understanding of sales
(US$0 0 0)
forecasting, it is impor tant to
Variation
know how it is done.
Benefits of sales forecasting
●
Alignment
forecasting
resources
of
its
sales
to
be
to
know
in
the
and
position
at
the
base
allocate
right
by
the
management.
nancial
of
efciency.
the
strategy
for
organization’s
better
time.
20%,
results.
strategy,
An
for
necessary
it
When
enables
organization
example,
could
resources
to
its
sales
the
right
with
base
a
goal
this
on
personnel
to
customers.
factors,
Increased
an
customer
cash-ow
liquidity
with
allocated
its
potential
Better
organization
forecasts
variation
●
an
aligns
increasing
seek
●
of
a
considering
can
cyclical
better
plan
to
and
seasonal
improve
the
business.
Sales
number
By
managers
of
forecasting
goods
to
helps
produce
the
and
production
to
plan
for
department
stock
required
future.
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4
●
Better
workforce
human
number
●
of
Improved
of
planning.
resources
future
staff
required
marketing
trends
accordingly
to
Accurate
department
and
in
in
the
able
increase
Marketers
to
their
forecasting
planning
can
help
the
regarding
the
future.
planning.
be
sales
succession
adjust
market
will
their
gain
greater
marketing
awareness
strategies
share.
Limitations of sales forecasting
●
Sales
forecasting
because
of
its
calculation
number
●
Sales
and
of
of
●
In
for
●
Sales
to
its
switch
gnitekraM 4
which
in
to
electronic
entry
a
long
when
in
time
to
calculate
considering
each
be
due
with
products
of
present
buying
quarter
instability,
the
over
a
and
change
into
an
social,
forecast
consumer
example,
lose
that
present
good
market
a
rm
that
position
tastes
may
if
is
be
dynamic
enjoying
the
a
consumers
products.
technology
progress.
sales
technology.
a
organization’s
For
technological
latest
changesin
can
on
Political,
ofsales
uctuations.
competitors
enjoying
the
factors.
accuracy
competitors’
based
to
be
the
external
the
rate
position.
the
currently
made
political
signicantly
may
obsolete
may
products
the
sales
status
inuence
exchange
can
forecasting
rendered
takes
variations
qualitative
can
and
This
inuence
decide
It
especially
seasonal
example
forecasting,
monopoly
nature,
ignores
factors
preferences,
unforeseen.
and
average
forecasting
economic
sales
time-consuming.
years.
predictions,
and
is
complex
may
An
which
Hence,
lose
their
example
can
be
products
is
market
the
to
market
for
computers.
Simple linear regression (HL only)
Simple linear regression comprises tools that predict or describe the relationship
between two variables. These tools include scatter diagrams and correlation.
How would a business or marketing depar tment benet from understanding
and applying these tools?
Revision checklist
TOK links
✓
1.
To what extent does
Sales
sales
forecasting
levels
and
is
a
quantitative
trends
over
a
process
specied
of
estimating
period
of
a
rm’s
future
time.
knowing help us in
✓
Seasonal
variations
are
caused
by
changes
in
demand
due
to
the
predicting?
varying
2.
How do we know that
tied
our sales predictions are
to
seasons
the
notable
in
the
business
changes
year.
cycle
that
in
stand
Cyclical
an
out
variations,
economy,
from
a
while
given
on
the
other
random
hand,
variations
are
are
trend.
reliable?
✓
3.
Moving
averages
greatly
assist
in
developing
trend
lines
that
help
to
Is it ethical to knowingly
smooth
out
any
uctuations
from
sales
data.
overpredict?
✓
Extrapolation
is
the
use
of
a
line
of
best
t
drawn
to
predict
futuresales.
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4.3
Sales forecasting (HL only)
Practice question
To
answer
the
question
below
effectively,
see
Unit
6
pages
398–402.
B-Games
B-Games
on
is
its
is
predicted
managers
preferred
While
is
a
the
option
about
The
carry
is
coming
to
the
is
out
sales
three
increase
for
of
and
years
their
a
sales
worried
intend
limited
games
considering
need
managers
They
are
B-Games’
director
company.
private
computer
B-Games
accepting
nancial
range.
for
of
worried
to
well-known
innovative
B-Games
to
use
forecasting
to
funds
data
them
prides
A
itself
recession
economy,
product
so
the
portfolio.
The
offering.
the
marketing
during
to
considering
trend
help
their
product
of
which
workforce.
domestic
strategy,
new
lack
are
sales
the
product
a
about
in
revising
growth
of
company,
dedicated
best
the
director
recession.
produce
the
from
a
a
new
option
previous
The
product
for
the
seven
years
decide.
B-Games computer games sales record: 2015–2021
2015
5,000
2016
5,500
2017
4,500
2018
8,600
2019
9,100
2020
9,300
2021
11,000
a)
Dene
b)
Discuss
sales
Sales (units)
the
term
the
benets
forecasting
product
sales
in
portfolio.
gnitekraM 4
Financial year
forecasting.
and
limitations
aiding
their
to
B-Games
decision
to
of
[2
marks]
[ 10
marks]
using
increase
their
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4
4.4 Market research
By the end of this chap ter, you should be able to:
➔
Examine why and how organizations carry out
➔
Analyse the primary market research methods
➔
Comment on the
➔
Distinguish between
➔
Explain the various
Market
related
and
research
to
a
services
market
is
and
research
on
secondary market research methods
qualitati ve and quantitati ve research
sampling methods
the
particular
market research
process
market.
of
This
competitors’
information
to
collecting,
includes
behaviour.
make
key
analysing,
data
on
and
reporting
consumption
Importantly,
of
data
goods
businesses
use
decisions.
The purposes of market research
gnitekraM 4
●
To
identify
consumer
For
example,
customers
●
To
assist
For
a
buying
in
reduce
●
of
●
risk
wants,
and
sodas
and
predicting
may
the
well
in
is
patterns
to
to
understand
nd
trends
likely
may
as
purchasing
want
sales
what
recession
spending
as
patterns
company
upcoming
to
signal
because
behaviour.
out
over
the
a
happen
rms
of
a
to
type
given
in
be
possible
of
period.
the
future.
prepared
decline
for
in
levels.
of
carrying
product
out
failure
market
(especially
research
that
of
new
products)
establishes
the
likes
by
and
consumers.
measure
by
assessing
To
in
and
levels
their
overall
the
To
activities
Key terms
an
income
effectively
dislikes
needs
beverage
business
consumer
To
a
example,
decreases
●
consumer
satisfaction
in
provide
the
or
effectiveness
evaluating
specic
the
market
latest
of
how
a
a
marketing
rm
strategy.
implements
its
This
can
be
marketing
done
mix
segments.
information
on
activities
happening
in
the
market.
Market research
For
example,
most
large
technological
companies
have
huge
research
the process of collecting,
and
development
budgets
to
keep
up
to
date
with
developments
in
the
analysing, and repor ting data
market
and
benet
from
rst-mover
advantages.
related to a par ticular market
Conducting
Primary research
the collection of rst-hand
information from the market
market
in
successfully
gain
market
an
effort
in
the
competitive
research
to
means
investigate
market,
analysing
possible
increase
sales,
all
ways
the
for
attract
information
the
its
business
target
about
to
the
operate
audience,
and
advantages.
Secondary research
Market research methods
the collection of second-hand
Market
research
can
broadly
be
carried
out
in
two
ways:
primary
and
information from the market
secondary
research
256
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4.4
Market research
Primary market research
This
is
also
collection
Most
out
to
known
of
organizations
specic
buying
anticipate
over
out
as
a
any
given
this
“eld
rst-hand
will
conduct
patterns
changes
period
research
research”
information
of
of
in
time.
this
their
or
involves
the
may
seek
to
and
spending
nd
attempt
behaviour
decide
the
the
market.
research
consumers
Firms
themselves
and
from
help
to
of
carry
a
market
researchagency.
A
key
can
advantage
gain
gives
may
it
an
is
prone
to
to
many
and
hours
However,
over
takes
its
days
is
that
for
requires
that
It
can
may
their
expensive
organization
which
example,
research
who
the
customers,
For
cancellations.
research
and
is
its
rivals.
customers
possibly
time
from
primary
ight
attract
eld
research
directly
through
information
process
primary
advantage
discover
airline
of
information
a
use
be
a
this
waiting
connecting
because
specialist
hotel
particular
the
for
Asking customers to complete surveys is one form of
ights.
primary market research
research
researchers.
Secondary market research
is
the
known
some
as
collection
“desk
second-hand
it
information
involves
analysing
from
data
the
that
market.
already
Also
exists
in
form.
Organizations
background
measure.
research
should
picture,
Desk
and
However,
been
of
research”,
gnitekraM 4
This
research
most
the
rst
and
of
is
the
organization.
for
In
a
secondary
quicker
other
cases,
the
research
primary
and
collected
purposes
some
out
conduct
information
information
collected
carry
then
cheaper
involved
may
than
be
the
source
of
out
readily
of
date
data
get
as
method
is
specic
the
to
research
a
overall
than
eld
available.
and
needs
may
an
gap-lling
of
be
it
might
the
have
researching
unreliable.
Primary market research methods
Sur veys
These
the
are
different
answers,
and
Surveys
ways
●
to
by
the
by
of
questions,
their
can
be
can
mail
–
an
on
on
surveys
example,
a
ofce
a
particular
as
closed
which
getting
audience
questionnaire
require
a
needing
ways.
or
to
enable
may
“yes”
lengthier
information
product
different
target
questions
specic
particular
in
The
contain
or
“no”
response.
from
A
consumers
issue.
Some
of
the
most
common
include:
an
in
alumni
a
survey
school,
distributed
seeking
opinions
via
direct
from
past
mail
by
students
issue
telephone
their
such
implemented
for
to
information.
questions
focus
opinion
development
out
useful
open-ended
administer
about
●
gather
survey
seeking
sent
to
types
consumer
by
questionnaires
researcher
opinion
–
for
about
example,
using
a
a
researcher
certain
calling
product
or
consumers
to
elicit
service
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4
online
●
–
for
evaluation
example,
tool
to
workshop
seek
leaders
participants’
can
use
opinions
of
Ad vantages
Disad vantages
•
•
They enable researchers to collect a
•
online
the
surveys
as
an
workshop.
Surveys that are poorly constructed and
large amount of data in a relatively shor t
administered can undermine otherwise
period of time.
well-intended research.
If designed well, surveys can be
•
The answers provided by respondents
administered and completed easily by
to a survey may not be an accurate
the respondents.
reection of how they feel, with some
results also being biased.
•
Surveys can be used to collect
information on a wide range of aspects,
•
As large samples are normally used,
including attitudes, preferences,
surveys can be costly and take a long
and opinions.
time to construct and administer. While
random sampling is generally used to
select par ticipants, response rates can
bias the results of a survey.
Inter views
An
interview
interviewee
gnitekraM 4
conducted
is
a
conversation
questions
one
on
in
one,
during
order
face
to
to
which
gain
face,
by
the
interviewer
information.
telephone
or
Ad vantages
Disad vantages
•
•
They can provide detailed information
asks
Interviews
the
can
be
online.
The whole process can be very time-
about the perceptions and opinions
consuming as it involves setting up
of consumers through in-depth
the interview, carrying it out, analysing
questioning.
responses, gathering feedback , and
repor ting.
•
They usually achieve a high response
rate because of the one-on-one attention
•
Some interviewers may be biased,
provided.
therefore inuencing interviewees’
responses.
•
Precise wording can be tailored to
the respondent and the meaning of
questions claried during the
interview process.
Focus groups
Focus
groups
discuss
a
consist
specic
representative
of
a
product
of
the
small
or
number
idea.
customers
The
of
of
people
group
the
brought
comprises
business
or
of
a
together
individuals
specic
to
who
segment
are
of
customers.
In
the
discussion,
researchers.
They
can
also
be
asked
responses
are
the
market
larger
participants
Participants
viewed
respond
share
to
and
try
a
their
new
studied
to
to
questions
opinions,
product.
help
prepared
ideas,
and
Usually,
researchers
all
by
market
reactions
freely.
participant
predict
the
reaction
of
population.
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4.4
Ad vantages
Disad vantages
•
•
As focus groups consist of a small group
Market research
A business could be seeking information
of individuals, using them is a cheap and
about the entire market; however, the
easy way of gathering market research.
opinions of a small number of individuals
may not reect this.
•
They can be used to measure the
•
reaction of customers to a rm’s new
It is possible that some members of the
group may not express their honest and
product or to the rm’s strategies.
personal opinions on the discussion
•
They help identify key product
topic. They may be hesitant to express
requirements as well as other needs
their own views, especially when their
not addressed by the business and its
opinions dier from those of another
competitors.
par ticipant.
•
They provide insights on the current
•
Focus groups are more costly to set
position of the rm’s competitors in the
up than surveys as each par ticipant is
mind of the customer.
usually compensated in cash or in kind.
Obser vation
by
carefully
behaviour.
consumers
the
It
can
ow
a
fundamental
Some
Observation
pay.
is
watching
can
of
and
trying
observations
be
notice
also
and
be
trafc
used
their
are
by
a
certain
method
understand
scientic
supermarkets
displays
used
in
by
basic
to
or
how
to
long
government’s
areas
and
in
of
nature,
check
they
trafc
help
getting
certain
but
how
may
information
things
not
people’s
all
are.
quickly
spend
department
provide
or
queuing
to
gnitekraM 4
Observation
to
observe
recommendations
forimprovement.
Ad vantages
Disad vantage
•
•
•
It is a direct method of collecting data
Complete answers to any problem or
or information when studying actual
issue cannot be obtained by observation
human behaviour, as the researcher
alone, so market researchers need to
can see exactly how people behave in a
combine this with other methods (such
given situation.
as issuing questionnaires).
A large number of individuals can be
surveyed in a shor t space of time.
•
Observation is usually a cost-eective
way of gathering data.
Secondary market research methods
Academic journals
These
are
should
given.
with
be
publications
well
The
experts
rst-hand
Academic
scholarly
to
usually
experience
journals
distributing
of
referenced
are
include
in
a
written
knowledge
and
articles
provide
as
written
exact
by
source
experts.
of
professors,graduate
particular
for
not
the
the
a
the
The
articles
information
students,
or
others
subject.
sole
purpose
of
money-making
providing
and
opportunity.
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4
Ad vantages
Disad vantages
•
•
Academic journals undergo a peer-
specic academic interest, they may not
by academics and other exper ts. This
be the best source for general-interest
increases the reliability of the information.
•
Since they contain information of very
review process where they are checked
topics.
Most academic journals include repor ts,
•
The peer-review processcan betime-
reviews of current research, and topic-
consuming, which may also aect the
specic information. They are therefore
provision of the latest or current event
good sources when a rm needs original
information.
research on a topic.
•
They take less time to publish
than books.
Media ar ticles
These
are
A
include
texts
newspapers
newspaper
is
a
advertisements,
of
television
submitted
publication
for
publication.
containing
correspondence.
world
and
and
Some
examples
magazines.
printed
and
communicating
since
written
and
the
events,
internet
Once
newspapers
have
news,
viewed
have
become
as
more
gnitekraM 4
Disad vantages
•
•
articles,
dominant
declined
Ad vantages
Communicating via a newspaper
feature
the
in
means
readership
widespread.
It is dicult to communicate events in
is cheaper than communicating
real time. As the process of producing
via television.
content, printing, and distributing the
nished paper is time-consuming,
•
Most serious newspaper ar ticles have
ar ticles that were written may be out of
been well researched, written using
date by the time they are delivered to
reliable sources, and edited for accuracy,
the customer.
which is not the case for some
internet resources.
•
Newspapers can be biased, depending
on the type of organization that
•
They are widely available and can be
owns them.
found in many retail stores.
•
The process of producing newspapers
could be considered a waste of paper
and energy resources.
Government publications
These
are
documents
record
of
can
issued
be
produced
government
by
local,
activities
regional,
by
the
and
or
government
cover
a
national
wide
that
provide
variety
governments
of
an
topics.
or
by
ofcial
They
their
respectiveagencies.
260
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4.4
Ad vantages
Disad vantages
•
•
They provide details about any changes in
It can be dicult to gain access to
some ocial government data.
government policy or governance in a country.
•
Market research
They provide information that in most cases
would only be under taken by the government,
such as a population census in a country.
•
They provide useful statistical information on
a wide range of activities such as education,
trade, and social trends.
•
The information that the government collects
to inform its activities is up to date as it is
collected on an ongoing basis.
Market analyses
that
are
include
gather
usually
sourced
reports
at
commercial
data
about
carried
various
include
out
by
local
Dun,
publications
particular
specialist
business
Mintel
and
or
market
markets.
The
market
libraries.
intelligence
highly
research
reports
detailed
agents.
Organizations
reports
They
that
can
provide
be
such
Verdict.
Ad vantage
Disad vantage
•
•
The information provided is usually
gnitekraM 4
These
Obtaining information this way can be
accurate and recent as it is carried out by
quite costly as some organizations
specialist research agents.
charge a lot for this service.
C oncep t
ETHICS
Online content
Ethics involves moral philosophies
or guidelines that inuence
This
involves
gathering
information
from
the
internet
or
websites.
The
the way businesses conduct
internet
provides
access
to
an
abundance
ofdata.
Both
published
and
themselves. This includes
unpublished
secondary
data
can
be
found
on
the
internet.
how they conduct their market
Ad vantages
Disad vantages
•
•
research. The case study on the
next page provides a deeper
Many websites provide up to date news
As anyone can publish on the web,
understanding of the ethical
and information about current events,
information can be inaccurate or biased,
trends and interesting topics.
and even outdated.
considerations in market research.
Carry out research on any two
•
Information is provided quickly and most
of it is easy to access.
•
A limited amount of scholarly research
organizations that consider
or information is openly available on
ethical implications in their
the internet.
market research practices.
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4
yduts esaC
Ethical considerations of market research
Market
with
the
research
the
popularity
than
ever
directly
has
experienced
widespread
of
before
with
use
social
for
of
the
a
resurgence
internet
networking.
companies
customers
and
to
It
and
is
easier
customer
the
extent
that
goes
into
a
computer
be
matched
with
other
pieces
during
unrelated
of
way
a
research
can
impacting
that
company
have
yet
companies
if
their
have
the
to
can
market
of
be
be
its
market
ethical
consumers
fully
faced
research
In
many
know
company’s
or
instances,
understand
inltration
into
company
uses
this
with
information
targeted
to
reach
advertising,
of
targeting
can
have
a
chilling
but
the
effect
transactions.
conducts
serious
lives
the
not
data
on
The
of
customer
process
collected
privacy.
database
the
to
to
does
individual
The
information
right
the
theirlife.
connect
collect
person’s
repercussions,
have
privacy
ways
a
Further,
public
practices
are
backlash
increased
Data
a
new
resident
Laws
such
Protection
punishments
violations.
adopted
to
freedom.
(General
in
understood.
with
personal
GDPR
and
Similarly,
law
granting
as
the
EU’s
Regulation)
nes
for
California
greater
data
has
protections
consumers.
perceived
Breaches of confidentiality
asunethical.
Another
signicant
ethical
consideration
The use of deceptive practices
involved
Any
out
action
about
category
that
uses
consumer
of
lies
and
deceit
opinions
deceptive
falls
to
nd
under
of
the
practices.
gnitekraM 4
ease
and
gather
with
which
information
afliates,
a
about
company
its
can
customers
deceptive
practices
and
ethical
customers
when
research
problem
dishonesty
that
they
methods.
can
range
information
visit
a
This
from
in
website,
is
to
type
not
being
customers
they
the
with
customer
don’t
breaches
regularly
want
to
share
partners
to
and
opt-out
be
of
involved.
US
and
EU
have
different
standards.)
lead
companies
sell
information
they
have
the
gathered
company’s
about
if
involves
Companies
access
can
Some
to
research
requiring
sharing
(The
data
market
condentiality.
the
The
in
on
customers
to
outside
companies.
of
telling
Ethically,
any
collected
customer
information
unauthorized
is
disclosure
of
problematic.
misrepresenting
Under taking objective market
research
results
should
researcher
a
respondent
to
by
using
give
ever
a
faulty
data.
coerce
particular
or
At
no
time
pressure
a
research
answer.
Marketing
Another
deceptive
“sugging”,
guise
of
contacts
a
the
practice
research.
an
market
technique
individual
researcher.
supposedly
in
the
of
With
As
phone
of
under
method,
they
name
known
selling
this
by
is
a
the
salesman
posing
ask
impact
as
questions,
research,
they
and
conduct
or
have
research
allows
for
fact
gaining
information
about
a
lead
or
even
leading
the
a
bias
for
a
person
particular
ethical
signicant
obligation
objectively,
so
that
development
of
to
available
a
balanced
picture.
are
skew
who
their
allow
work
their
tend
to
own
prejudices
contribute
to
the
towards
perpetuation
developing
an
a
Market
potential
to
sales
have
perceptions.
the
reality-based
Researchers
in
advertising
public
researchers
data
as
on
of
stereotypes
in
advertising,
the
product.
development
and
the
of
destructive
enabling
of
unjust
social
constructs,
proting
from
Invasion of privacy
poverty.
One
of
the
involved
privacy.
most
in
serious
market
Companies
ethical
research
have
an
is
For
to
collect,
store
and
a
market
researcher
with
considerations
invasion
a
one-dimensional
a
lot
view
of
minorities
could
do
of
of
harm
if
allowed
to
shape
an
advertising
unprecedented
campaign
ability
example,
match
based
on
skewed
data
collection.
information
Source: Adapted from http://smallbusiness.chron.com/
relating
to
customers
that
can
infringe
on
a
ethical-considerations-marketing-research- 43621.html
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4.4
Market research
The dierences between qualitative and
quantitative research
Primary
research
quantitative
Table
4.4.1
in
or
secondary
research
can
be
either
qualitative
or
nature.
shows
the
differences
between
qualitative
and
quantitative
research.
Table 4.4.1 Dierences between qualitative and quantitative research
Qualitative research
Quantitati ve research
This involves the collection of data about
This involves the collection of numerical data
opinions, attitudes or beliefs.
or data that can be measured.
Information is open to a high degree
Information is less open to interpretation.
of interpretation.
It is subjective.
It is objective.
Key research questions would include “ Why?”
Key research questions would include
“How many”?
The researcher is par t of the process.
The researcher is separate.
It provides multiple realities, ie the focus is
It provides one reality, ie the focus is concise
complex and broad.
and narrow.
Key terms
data
by
qualitative
observing
research
what
is
people
collecting,
do
and
say.
analysing,
and
Quantitative
Qualitative research
interpreting
research
refers
gnitekraM 4
Generally,
to
the collection, analysis, and
counts
and
measures
of
things,
whereas
qualitative
research
refers
to
the
interpretation of data about
meanings,
denitions,
characteristics,
and
descriptions
of
things.
consumer opinions, attitudes,
For
example,
many
quantitative
customers
bought
research
the
may
company’s
seek
answers
sports
shoes
to
in
the
the
question:
month
of
How
or beliefs
May
Quantitative research
2020?
Qualitative
research
may
seek
answers
to
the
question:
Why
do
the collection, analysis and
customers
like
the
company’s
sports
shoes?
interpretation of numerical
Common
methods
used
in
collecting
qualitative
data
include
the
use
data or data that can be
of
focus
groups
and
in-depth
interviews.
Surveys
and
government
measured
publications
are
the
methods
normally
used
to
collect
quantitative
data.
yduts esaC
How Safaricom adopts market research to overcome competition
Safaricom
company
of
products
EDGE
It
is
has
one
and
and
data
been
of
the
leading
operating
and
is
Yu
of
the
and
years.
Zain.
other
share).
marketing
of
is
that
problem
a
host
GPRS,
3G,
they
be
a
problems,
other
into
the
include
caused
(and
can
of
many
companies
competition
This
provides
number
problem
companies
unwanted
It
telephony,
companies
These
The
a
entry
telecommunications
over
for
fax.
with
the
telecommunications
Kenya.
services
faced
which
in
by
bring
the
Telkom,
entry
about
decrease
solved
market
by
in
market
conducting
research.
263
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4
The
rst
step
identifying
the
problem”
explaining
In
this
case,
customers
year
Step
two
speaking,
almost
would
it
and
and
is
should
the
is
than
to
problem
in
step
involve
market
an
they
is
that
honest
on
After
it
a
and
the
number
could
would
at
the
a
and
the
lead
and
to
the
assessment
a
set
better
approach
of
the
establishing
four
with
the
business’s
factors,
and
has
problem
to
nd
they
approach
A
special
team
at
and
market
gnitekraM 4
with
a
number
of
possible
rst
lower
proposed
call
rates
competition
can
in
for
money
example
affect
to
they
aid,
market
only
tree
to
to
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will
–
to
and
socially.
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can
introduce
of
the
ve
for
is
the
and
This
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telephony
other
Apple’s
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iPhone
by
being
a
for
graph
solution
industry
carrying
has
decided
to
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increasing
out
be
the
third
step
the
rm
the
elements
reduce
to
the
marketing
is
make
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to
research,
launch
competitor
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risk
to
an
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of
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3G
is
in
a
Safaricom
Apple’s
iPhone
has
do
market
research
appropriate
marketing
investing
observed.
in
to
to
decision
mix,
an
launch
geographical
The
price
the
to
of
the
collected
presentation
analyst.
plot
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data
to
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received
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trend
trends
Test
about
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the
of
and
marketing
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example,
the
diagrams
show
variables.
also
shows
market,
the
analyst
can
the
sales
help
to
use
in
decisions.
six
involves
must
the
provide
information
to
market
the
they
understand
presentations,
match
research
readers
(the
report.
sponsor)
The
with
require
the
as
well
all
as
to
unprotable
will
Apple’s
area
be
where
high
as
it
of
and
readers’
and
in
a
format
appreciate.
analysis
level
Also,
launching
the
the
of
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they
are
methods
vocabulary,
used
understanding
report
should
should
and
show
any
product.
enable
on
In
this
the
case,
iPhone
positive.
that
decided
analysis
interpretation
requirements.
advantage.
venture.
limited
in
to
the
Safaricom
and
ofcially
is
threats
The
collected
product
3G.
extensive
the
data
the
by
able
After
the
launch
Data
revenues
making
would
the
by
collection
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the
launch
to
the
easy
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for
cause,
etc.
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report
outmatching
collected
diagrams,
Kenya.
relationships
a
subscribers
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special
planting
control
evaluate
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whole
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supremacy
data
come
introduce
event
a
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includes
raw
research
solutions.
solution
charity
goes
decisions.
research
the
the
increased
Safaricom
second
a
make
food
the
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have
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counter
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subscribers,
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participate.
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for
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survey
concerned
its
allow
up
and
suitable
making
information.
competition.
editing
form
test
the
product.
or
a
to
about
hypotheses.
to
which
launched
is
and
environment
facing,
be
information
in
malls,
budget,
formulating
an
are
launched
collection
the
Step
the
will
receive
be
while,
more
shopping
collection
problem
the
Safaricom
will
two
data
approach
decide
inuencing
It
novelty.
a
the
data
in
sales,
attract
to
advertising
collecting,
from
to
a
for
called
material
should
next
as
around
Generally,
Safaricom
understanding
is
been
consumer.
exciting
non-price-sensitive
products
reduced
Nairobi,
the
team’s
a
and
new
has
consumers
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of
dening
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see
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ensure
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will
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developed
dened
will
Westlands,
of
it
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product
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lead
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price
new
be
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consumers
problem.
approach.
around
skills,
a
product,
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want.
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will
process
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growth
identifying
one
as
identied
should
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research
seen
share.
and
develop
Clearly
development.
be
has
approach
exclusively
research
problem.
expanding
threat
market
less
the
mean
margins,
the
objectives.
market
Safaricom
prot
that
the
dening
why
competitors,
lower
in
and
may
Safaricom
3G
as
their
However,
not
whole
this
has
decided
research
was
effectively
a
in
test
to
on
represent
launch
this
a
the
area
was
small
group
behaviour
of
market.
iPhone
demand
is
a
unique
Source: Adapted from http://www.123helpme.com/
marketing-research--view.asp?id=166275
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4.4
Market research
Sampling methods
Key terms
The
population
simply
a
not
survey
comprises
enough
of
the
time,
whole
all
potential
energy,
consumers
money,
population.
labour,
However,
to
in
or
a
market.
There
equipment
gather
to
adequate
is
carry
out
Sample
primary
a group of people selected to
research
and
still
have
a
clear
idea
of
consumers’
views,
it
is
necessary
to
represent the population or
take
a
sample
of
the
population.
target market under research
A
sample
is
a
small
group
of
people
selected
to
represent
the
population
Sampling
or
target
could
be
market
selected
Sampling
Below
under
is
are
a
advantages
out
simply
of
a
the
number
and
research.
of
large
For
number
process
of
commonly
disadvantages
example,
of
of
small
potential
selecting
used
a
the
group
buyers
of
appropriate
sampling
methods
of
a
consumers
the process of selecting an
product.
appropriate sample
sample.
and
the
each.
Assessment ad vice
Quota sampling
In determining the best
This
involves
that
share
segmenting
a
given
population
into
a
number
of
groups
sampling method to use, it
certain
characteristics
(mutually
exclusive
sub-groups)
such
as
is impor tant to analyse the
age
or
gender.
Targets
are
then
set
for
the
number
of
people
who
must
strengths and weaknesses
be
interviewed
in
each
segment.
For
example,
in
a
school
of
500
students
of each method. A key
offering
the
IB
diploma
programme,
a
researcher
may
target
15
males
and
consideration is the level of
20
females
to
interview
regarding
their
perception
of
the
programme.
bias in the sample and how
cost-eective the method is.
Ad vantages
Disad vantages
•
•
by factors such as nancial
sampling method, especially where the
statistically representative of the
resources, business size, and
propor tions of the dierent groups in the
population as random sampling (see
rationale of the research.
population are known.
below) is not done; this also leads to
gnitekraM 4
This could also be inuenced
Results obtained are not always
This is a quick and cost-eective
statistical errors.
•
Findings obtained are usually more
reliable than those of random sampling.
•
The interviewer may be biased in the
selection of interviewees and choose
those who will be the most cooperative
in the process.
Random sampling
Every
part
member
of
the
example,
target
50
in
the
sample,
by
using
population).
people
from
a
as
a
population
has
the
of
sample
computer
An
to
example
telephone
an
equal
generate
of
chance
respondents
a
selecting
directory
list
a
is
of
the
Ad vantages
Disad vantage
•
•
Random sampling reduces bias as
being
random
random
containing
of
selected
selected
randomly
numbers
sample
names
is
of
as
(for
from
choosing
1,000
a
any
people.
The sample chosen may be too small
everyone has an equal chance of
and/or it may not consist of the target
being chosen.
population; a larger, more representative
sample may have to be selected.
•
It is a relatively easy way of obtaining
a sample.
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4
Convenience sampling
C oncep t
This
is
their
CHANGE
a
sampling
easy
doing
access
research
physically
technique
and
on
the
present
where
proximity
school
and
to
research
the
canteen
directly
groups
researcher.
could
are
For
conduct
interviewing
a
students
selected
example,
study
by
based
a
on
teacher
being
purchasing
items
from
Technological innovation has
the
canteen
at
break
time
or
lunchtime.
transformed the way market
research is done. Social media
Another
has expanded the landscape
patient
example
list
to
would
select
a
be
a
sample
researcher
when
using
the
conducting
rst
10
research
names
in
a
in
the
hospital.
and is transforming research
in exciting new ways. It allows
Ad vantage
Disad vantage
•
•
unltered feedback but requires
It is a fast, easy and cheap method of
The sample may be biased and not
new research skills. With new
sampling because the research groups
representative of the entire population.
technology, researchers can
are readily available.
precisely target what to measure
and who their focus will be. Using
the most recent social media
Importance of properly collected data
and online survey methods,
businesses can collect data
Businesses
about all sor ts of things. They can
out
do it faster, better and cheaper
than ever.
What do you think are the major
collection
Whether
it
are
research.
is
interested
It
is
methods
using
essential
in
therefore
are
the
maintain
or
of
results
important
appropriate
quantitative
to
range
very
and
offer
qualitative
integrity
in
that
the
a
they
get
they
ensure
high
data,
or
research
from
degree
a
carrying
their
of
data
accuracy.
combination
of
both,
process.
drawbacks in conducting market
Selecting
the
appropriate
data
collection
instruments
and
providing
gnitekraM 4
research given the recent
clear
instructions
for
their
correct
use
reduces
the
likelihood
of
sampling
changes in technology? How do
errorsoccurring.
you think these drawbacks can
be addressed?
Benets
the
●
of
properly
ability
questions
of
collected
the
data
research
to
include:
accurately
answer
the
research
posed
C oncep t
●
the
ability
●
increased
●
good
to
repeat
accuracy
and
of
validate
ndings
a
particular
resulting
in
study
an
where
efcient
needed
use
of
resources
CHANGE
opportunities
for
other
researchers
to
pursue
areas
needing
There are several dierent
further
investigation.
reasons why companies use
market research, and these
The
reasons change according to the
or
organization’s objectives.
results.
Before a product is introduced, a
company uses market research
main
aim
of
intervention
Collecting
connections
researcher
to establish the needs of the
data
targeted consumers. The case
what
research
and
can
and
may
not
need
have
insight
to
be
to
it
gather
to
analysing
(correlations)
provide
may
is
analyse
variables
considered.
into
the
about
signicance
data
and
Collecting
varying
or
information
the
quantitative
among
improved
reliable
determine
can
help
address
and
participant
of
to
other
an
the
issue
sample
highlight
factors
analysing
the
qualitative
experiences,
including
changed.
study on the next page describes
On
gaining
the
required
knowledge
from
the
research
information
how companies have changed
provided,
a
researcher
should
continue
evaluating
the
whole
process
to
and succeeded as a result of
using market research.
obtain
even
better
results
in
the
next
research
round.
Research two more organizations
that have changed and
succeeded as a result of carrying
out market research.
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4.4
Market research
yduts esaC
How ve massive companies changed using market research
Google
Cargill
Nest
normally
Customers
turn
to
Cargill
for
their
whether
it
involves
enhancing
product,
improving
process
efciencies,
a
solution
that
helps
them
launch
a
innovation.
To
achieve
this
its
extensive
market
status,
research
generate
be
distinctive
and
value
innovative
through
ways
to
to
Cargill’s
able
to
easily
strong
done
to
to
regional
out
to
new,
reduce
Google
to
they
they
serve
can
their
improve
their
customers
systems
even
and
better.
their
feedback,
customers
technical
products
this
with
services
tailored
enables
the
latest
support
to
meet
so
Cargill
local
can
tastes
questions
about
functioning
and
how
what
their
needs
improve
their
them.
This
feedback
allows
on
any
Nest’s
The
surveys
open
quickly
gain
up
services
opportunities
Nest
to
to
people
on
information
whatever
they
from
want.
question
“How
they
high
is
have
your
asked
their
ceiling?”
customers
They
to
get
an
average
height
so
asked
they
this
could
in
judge
on
large
to
make
a
certain
appliance.
provide
and
By
create
and
of
processes
Based
applications
they
research.
on
how
customer
marketing
are
enquire
order
to
their
improved
is,
how
products
Google
costs.
presence,
customers
are
give
products.
One
reach
for
include
products
thousands
Due
use
capabilities
for
products
several
They
Cargill
and
to
Surveys
surveys
customer
leverages
reinvent
home.
rst-
to
to-market
to
the
or
current
uncovering
in
an
Their
existing
trying
scientic
Consumer
expertise,
is
found
incorporating
receiving
cultures.
Nest
is
from
able
improve
to
the
feedback
online
that
marketing
improve
its
they
are
research,
products
and,
Google
in
turn,
sales.
Apple
has
years.
This
to
be
they
the
use
their
been
is
the
not
most
largest
innovative.
market
customers
name
necessarily
research
want
in
Instead,
to
from
technology
because
nd
their
it
out
they
is
for
appear
because
exactly
devices;
McDonald’s
in
what
they
McDonald’s
the
McDonald’s
out
how
to
make
those
wants
a
“Apple
prime
the
Customer
example.
company
is
data
faster,
and
This
makes
the
Pulse”
Because
able
the
to
these
compile
surveys
market
research
are
are
and
research
group
online
to
more
uses
their
market
is
focus
to
that
participate,
as
well
as
to
and
surveys
have
modications
modications
view
videos
led
of
Google Nest
different
Apple
include
and
to
games
more
fast-food
market
this
chains
trend,
research.
research,
they
different
have
narrowed
questions:
1.
Which
products
2.
What
prices
3.
What
TV
are
well
received?
the
are
consumers
willing
to
pay?
administer.
appealing
the
programmes,
websites
and
to
do
consumers
read
and
view?
company.
Which
restaurants
are
most
visited?
designs
products.
having
largest
continue
a
4.
These
to
ongoing
four
advertising
those
the
surveys,
analyse
easy
of
order
reality.
their
Their
one
In
then
In
gure
is
world.
gnitekraM 4
Apple
bigger
clearly.
By
Such
screens
to
to
answering
determine
customers
One
was
of
the
problems
food.
campaign
chicken
of
their
such
as
questions,
the
McDonald’s
pool
of
their
is
able
target
growing.
whether
organic
a
is
these
whether
As
to
menu
a
result,
prove
nuggets
apple
addressed
McDonald’s
to
are
was
the
by
such
serving
company
that
their
meat
real.
They
also
include
healthier
research
healthy
or
launched
patties
and
changed
part
alternatives,
slices.
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4
Tyson Foods
Tyson
Foods
factors
drive
recognizes
customer
consumption
more
them
to
the
preferences
to
that
many
preferences
patterns,
personal
unique
Conclusion
making
In
consumerism,
marketing
consumer.
and
demographic
and
triggers
even
Consumers
that
order
customers.
have
direct
motivate
no
buy.
predict
diet
the
preferences
company
and
carries
how
age
groups
use
those
between
media,
use
demographics,
millennials
Instagram.
latest
their
This
consumption
food
who
market
even
had
kept
trends,
processes
to
such
use
suit
the
is
leading
it
or
is
over
edge
be
making
to
a
and
listen
there
market
market
cheaper
to
to
through
groups,
ignore
online
also
of
willing
thephone,
usingfocus
companies
but
must
is
research.
research
more
not
accurate
consumption
out
to
conduct
as
enabling
market
but
Not
they
only
can
can
now
businesses
know
exactly
segmenting
and
those
informed
of
their
services
are
wanted
and
why.
them
to
Source: Adapted from https://www.surveypolice.com/
who
on
blog/how-5-massive-companies-changed-using-market-
the
research/
change
demands.
TOK links
Student workpoint 4.7
1.
Be an inquirer
To what extent is market
services,
distinguishing
T
witter
Tyson
research.
research
which
within
online,
for
possible,
provide
into
on
businesses
Whether
Technology
way
patterns,
keep
mail,
excuse
only
To
to
research information
Investigate
an
organization
of
your
choice
that
carries
out
market
gnitekraM 4
reliable?
research.
2.
In
the
process,
consider
the
following:
How does the language
1.
What
are
the
2.
Does
3.
Comment
primary
and
secondary
research
methods
that
it
uses?
used in questionnaires
inuence consumers’ and
it
use
qualitative
or
quantitative
research,
or
both?
businesses’ conclusions
on
the
sampling
method
or
methods
that
it
uses.
when doing market
research?
3.
Could companies know
us better than we know
Revision checklist
✓
ourselves?
Market
research
analysing
✓
Primary
are
✓
the
✓
research
Secondary
decision-making
related
research)
which
methods
research
Quantitative
which
to
and
market
include
or
methods
publications,
research
of
collects,
attitudes
In
in
business
data
a
particular
secondary
research
surveys,
can
by
collecting,
market.
research
be
(desk
carried
interviews,
research)
out.
focus
groups,
observations.
interpretation
✓
in
(eld
ways
government
✓
helps
reporting
research
two
Primary
and
and
include
and
concerns
numerical
analyses
the
data,
and
academic
market
as
journals,
media
articles,
analyses.
collection,
compared
interprets
data
analysis
to
and
qualitative
about
research,
consumer
opinions,
beliefs.
conducting
market
methods
businesses
accuracy
while
research,
use
are
maintaining
it
is
important
appropriate
integrity
in
and
the
that
offer
a
the
data
high
research
collection
degree
of
process.
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4.4
Market research
Practice question
answer
the
question
Technology
Recently,
when
executives,
factors
said
market
The
she
that
that
if
inuenced
research
qualitative
given
very
that
product
important
such
ensure
gave
relied
seek
a
their
future.
toys,
an
lot
On
the
to
inuence
In
conclusion,
wider
b)
Distinguish
c)
Explain
“to
the
pages
398–402.
that
that
a
using
to
that
a
The
and
are
their
company
the
Y,
research
to
customers.
cellphones,
to
and
is
added
methods
in
see
producing
market
well
a
product
potential
like
the
very
about
order
in
to
the
children’s
used
these
data
decisions.
that
because
research
using
of
was
online
technological
enabling
researchers
and
qualitative
methods
effectively
to
platforms.
research.
research
She
quantitative
consumers
would
with
are
professor
produces
from
they
of
opinions
secondary
which
that
particular
have.”
existing
in
the
increase
companies
products
combination
directly
existed
noted
the
consumer
X,
should
of
customers.
that
and
cellphone
market
they
customers”.
right
targeting
quantitative
primary
themselves.
business
especially
market
conducting
they
one
chief
were
use
production
company
was
consumers
said
of
technology
company
she
audience
in
produced
primary
of
large
accident
have
a
already
toy
a
the
information
hand,
between
two
6
competitive,
means
for
how
professor
term
no
of
both
type
that
to
companies
conducting
ensure
potential
of
audience,
Dene
is
This
use
next
the
target
effectively
the
other
a)
use
on
data
advancements,
a
are
their
Unit
changes
remain
number
gathering
views
collected
reach
the
example
on
“It
information
they
see
businesses
budgets
These
companies
that
to
and
research.
or
spoke
rapid
how
are
budgets
globally.
Lin
that
continued,
market
recognized
and
Professor
businesses
professor
effectively,
research
argued
research
biggest
She
and
below
gnitekraM 4
To
that
research.
companies
targeting
[2
marks]
[4
marks]
[4
marks]
can
existing
and
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4
4.5 The seven Ps of the
marketing mix
By the end of this chap ter, you should be able to:
➔
Explain the stages in a
product life cycle
➔
Examine various
➔
Analyse the relationship between the
ex tension strategies
that could be used by rms
product life cycle, product
por tfolio and the marketing mix
Comment on the relationship between the
➔
product life cycle,
investment, prot and cash ow
gnitekraM 4
➔
Explain the various aspects of
➔
Comment on the
➔
Justify the appropriateness of using par ticular
➔
Explain the main forms of promotion
➔
Discuss the role of
➔
Examine the impor tance of dierent types of
➔
Discuss the impor tance of
impor tance of branding
social media marketing
marketing a ser vice and
pricing methods
as a promotional strategy
distribution channel
employee–customer relationships
cultural variation
Evaluate the impor tance of
➔
branding
in
in these relationships
deli very processes
in marketing a ser vice
and changes in these processes
Examine the impor tance of
➔
tangible physical evidence
in marketing
a ser vice
Evaluate the appropriate marketing mixes
➔
for par ticular products
or businesses
The marketing mix – an introduction
Central
mix.
the
to
This
marketing
is
successful
marketing
and
●
a
evidence)
–
such
television
is
a
of
(product,
Product
as
term
marketing
mix
physical
planning
collective
this
intangible.
is
a
are
is
ensure
the
development
includes
briey
or
should
this
that
while
aim
a
to
a
and
are
seven
people,
in
such
a
as
needs
existing
taken
marketing
that
ensure
Ps
of
the
processes
explained.
offered
the
rm’s
the
place,
service
or
a
elements
section,
satisfy
new
interests
is
of
key
introduced
service
providing
consumer’s
In
the
promotion ,
tangible,
Products
Whether
the
product.
price,
good
consumers.
that
a
is
that
market.
health
and
product,
into
A
good
insurance
wants
rms
of
need
to
consideration.
270
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4.5
●
Price
–
this
is
the
amount
consumers
are
charged
The seven Ps of the marketing mix
when
they
buy
a
Key terms
product.
For
It
indicates
example,
when
the
the
value
consumers
Samsung
special
perceive
edition
the
product
Galaxy
to
have.
Smartwatch
Marketing mix
was
launched,
consumers
paid
a
high
price
for
it
because
of
its
perceived
the key elements of a
quality.
On
the
other
hand,
second-hand
clothes
are
priced
lower
than
marketing strategy that
brand
new
ones
because
they
are
perceived
as
having
a
lower
value.
ensure the successful
Setting
an
appropriate
price
can
be
difcult
for
businesses
because
of
marketing of a product
the
sensitive
internal
●
and
and
methods
of
external
Promotion
about
nature
–
this
factors
refers
persuaded
used
important.
A
to
of
to
in
that
the
the
could
both
to
purchasing
inuence
various
purchase
attract
rm
combination
consumer
a
use
to
ways
to
television
order
these
product.
consumer
behaviour
the
various
behaviours.
consumers
The
buy
are
Product
any good or service that is
informed
oered to the market with the
communication
the
product
advertising,
convince
and
sales
consumers
to
are
aim of satisfying consumer
very
promotions
buy
the
or
a
needs or wants
product.
Price
●
Place
–
this
refers
to
a
product’s
location
or
channels
of
distribution
what consumers pay to
used
to
get
the
product
to
the
consumer.
Products
can
be
purchased
acquire a product
shops
or
retailers,
and
need
them.
have
many
products
●
over
People
–
internet.
agents,
For
are
outlets
available
many
mix
also
example,
retail
are
marketing
the
to
pay
used
large
to
as
many
work
little
get
including
products
supermarkets
distributed
businesses
and
Intermediaries,
countrywide
consumers
very
hard
attention
to
as
on
the
to
such
where
as
to
wholesalers,
consumers
Shoprite
ensure
or
that
Giant
their
the
other
in
ways of convincing consumers
why they need a product and
why they should buy it
possible.
people
Promotion
elements
the
of
business
the
Place
gnitekraM 4
in
who
this concerns where the
are
involved
in
decision-making
on
a
regular
basis.
A
rm’s
ability
to
product will be sold and how it
select,
recruit,
hire,
and
retain
the
best
people,
with
the
right
skills
and
will be delivered to the market
abilities
found
they
to
that
rst
bus”.
do
an
“got
After
the
job,
is
a
important
the
hiring
right
the
crucial
factor
present
people
right
aspect
on
the
people
of
in
the
bus
they
any
best
and
then
business.
the
“got
Collins
companies
wrong
the
(2001)
was
people
right
that
off
people
the
in
the
People
the human capital in terms of
skills, attitudes, and abilities
12
right
the
seats
right
on
the
people
bus”.
to
Successful
carry
out
businesses
specic
tasks
think
and
in
terms
of
getting
responsibilities.
necessary in the production
of goods or the provision of
services
●
Processes
how
an
–
This
refers
organization’s
to
the
procedures
product
is
and
provided
policies
and
related
delivered.
It
to
should
Processes
inform
customers
on
“how
easy
it
is
to
do
business”
with
a
particular
the procedures and policies
organization.
Examples
of
processes
that
don’t
function
well
and
per taining to how an
need
urgent
attention
include,
for
example,
call
centre
staff
who
do
organization’s product is
not
answer
customers’
questions,
and
products
in
supermarkets
with
provided and delivered
barcodes
The
that
more
process
are
not
intangible
recognized
the
when
product,
the
customers
more
are
important
ready
it
is
to
to
pay.
get
the
Physical evidence
right.
the tangible or visible touch
points that are observable to
●
Physical
evidence
–
This
refers
to
all
the
tangible
or
visible
touch
customers in a business
points
that
offering
the
observable
tangible
product
customers’
on
are
trust.
before
customers
where
purchasing
recommendations
As
adequate
products
to
a
result,
evidence
businesses
of
quality
a
consumers
it,
or
in
service
business.
can
businesses
testimonials,
need
to
try,
that
Examples
touch,
usually
which
ensure
throughout.
Unlike
are
they
of
businesses
or
smell
depend
usually
are
on
based
providing
good-quality
1
Collins, J. 2001. Good to Great: Why Some Companies Make the Leap… and Others Don’t. London.
HarperBusiness.
271
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4
evidence
ambient
in
a
prime
aspects
The
Key term
include
lighting
seven
location.
must
Ps
well-dressed
with
To
create
therefore
are
staff,
pleasant
be
explored
in
a
well-organized
music
a
good
delivered
more
in
a
customer
with
detail
reception
restaurant,
the
and
area,
ofces
experience,
located
tangible
service.
below.
Product
A
product
is
any
good
(tangible
item)
or
service
(intangible
offering)
that
is
Product life cycle
offered
to
the
market
with
the
aim
of
satisfying
consumer
needs
or
wants.
the course a product passes
A
product
life
cycle
shows
the
course
that
a
product
takes
from
its
through from its development
development
to
its
decline
in
the
market.
Most
products
go
through
six
to its decline in the market
stages
in
their
saturation,
life
and
cycle:
development,
introduction,
growth,
maturity,
decline.
Stage 1: Development
In
1.
this
stage,
the
Generating
ideas
stakeholders
are
consumer
needs
department
research
gnitekraM 4
2.
also
Creating
It
allows
can
in
4.
a
–
may
not
–
a
production
changes
out
to
test
the
of
part
rst
to
or
the
the
stage,
and
deciding
or
of
may
in
which
further
sell
well,
is
rst
a
that
number
may
include
others.
gaps
steps.
where
anything
among
potential
and
help
market
market.
ideas
(good
while
of
satisfy
employees,
Conducting
the
–
to
leave
ideas).
others
out
Some
may
be
too
is
no
or
trial
A
select
provide
of
form
the
of
a
product.
product,
group
of
feedback
customers
that
will
help
necessary.
after
stage,
making
the
necessary
product
are
launched
to
if
assess
the
place.
the
potential
product
costing
successful
takes
research
effort
if
without
after
market
–
can
market
this
removed
therefore
they
developed
the
At
a
examination
department.
so
the
marketing
the
physical
product
of
product.
changed
money,
series
stakeholders
research
marketing
samples
the
of
to
a
session
with
prototype
or
prototype
elements
up
practical
visualization
Commercialization
yet
involves
the
product
any
ones
be
prototype
representative
sales
These
the
of
come
customers,
by
sales
this
brainstorming
identify
this
following
produce.
but
time,
a
to
and
which
product,
the
is
wants.
to
the
be
this
given
Carrying
can
At
to
making
or
5.
be
and
for
especially
and
ideas
ideas
expensive
designed
consulted
helps
ideas)
product
–
is
managers,
Screening
(poor
3.
product
test
This
the
does
marketing,
will
a
involve
a
sell
too
full
to
small
demand
not
business
changes
in
for
well,
it
much.
launch
using
all
of
of
the
mix.
and
development
invested
prot
is
in
costs
developing
earned.
Cash
the
ow
are
high
product.
is
also
as
a
lot
There
of
are
no
negative.
Stage 2: Introduction
This
is
the
because
Costs
launch
most
incurred
protable.
greater
stage
in
the
Moreover,
than
of
consumers
the
cash
the
are
launch
the
product
not
are
cash
yet
high,
ow
on
to
aware
is
so
it
the
of
is
market.
the
likely
negative
as
Sales
product’s
that
the
the
cash
are
low
existence.
product
outow
is
is
not
still
inow.
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4.5
High
prices
products
there
or
are
few
To
as
or
penetration
initially
price
(such
skimming
personal
no
may
competitors.
pricing
be
computers
strategy
used
or
Where
could
be
for
brand-new
smartphones),
there
are
adopted,
The seven Ps of the marketing mix
technological
especially
many
where
competitors,
where
low
prices
a
are
charged.
increase
Expensive
income
awareness
products
of
the
could
be
product,
sold
in
informative
restricted
advertising
retail
outlets
can
be
used.
targeting
high-
consumers.
Stage 3: Growth
Once
and
the
product
hence
prots,
has
revenues
especially
been
start
with
well
to
the
received
increase
by
the
market,
signicantly.
possibility
of
This
economies
of
the
sales
translates
scale
or
volumes
to
rising
lowering
of
Apple use price skimming
unit
costs.
Cash
ow
now
becomes
positive.
when introducing most of their
After
a
successful
penetration
started
at
launch,
pricing)
high
can
prices
prices
be
that
were
increased
(through
price
to
initially
maximize
skimming)
low
prots.
may
new products
(through
Products
need
to
have
that
their
Key terms
reduced
businesses
attracted
Advertising
brand
to
demand,
because
by
convinces
loyalty.
product
slightly
A
the
increased
to
buy
more
of
distribution
consumers
in
various
begin
from
other
Price skimming
number
discussions
competition
prots.
consumers
larger
different
the
of
on
issues
products
outlets
locations.
regarding
and
are
To
product
establish
used
to
maintain
setting a high price when
push
the
consumer
introducing a new product to
the market
gnitekraM 4
prices
improvements
Penetration pricing
and
developments.
setting a low initial price for
Stage 4: Maturity
a product with the aim of
At
this
well
stage,
established,
positive
is
sales
little
cash
continue
with
ow.
growth
as
a
to
stable
Sales
rise,
and
revenue
competitors
but
they
do
signicant
is
at
have
its
slowly.
market
peak
entered
so
and
the
The
share
prot
market
is
to
product
resulting
high,
take
in
but
attracting a large number
is
a
there
of customers quickly and
gaining a high market share
advantage
Promotional pricing
of
these
prots.
competitors
at
A
promotional
pricing
strategy
is
preferred
to
keep
temporarily reducing the price
bay.
of a good or service to attract
Promotion
assumes
emphasize
brand
a
reminding
role,
to
maintain
sales
growth
and
customers
product
has
loyalty.
been
new
wide
range
of
distribution
outlets
for
the
established.
Plans
for
rms
introducing
product
(This
is
discussed
A
developments
extension
further
are
strategies
at
to
an
advanced
extend
the
life
stage,
of
with
their
some
products.
below.)
Stage 5: Saturation
By
this
Sales
point,
are
positive.
at
Some
competition.
Many
they
in
rms
use
an
high
has
and
point
businesses
use
to
competitors
highest
Prices
high
effort
outlets
many
their
will
extension
levels
of
mostly
forced
to
be
sales.
The
to
get
out
to
of
to
so
widest
market
and
However,
market
as
their
such
range
products
of
to
as
saturated
cash
a
ow
result
promotional
stabilize
activities
the
the
fall.
the
reduced,
strategies
established
entered
begin
promotional
maintain
been
are
have
have
and
of
pricing
market
share,
aggressive
geographical
consumers.
is
the
is
it.
still
stiff
used.
and
advertising
distribution
Prots
are
stable.
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4
Stage 6: Decline
This
stage
prots.
The
signies
In
product
have
been
from
the
are
not
may
steady
cash
have
introduced.
drop
ow
lost
If
in
begins
its
appeal
sales
fall
sales
to
to
too
and,
fall
but
as
is
a
consumers
low,
the
result,
still
decreased
positive.
because
product
is
new
slowly
models
withdrawn
market.
Promotional
reduced
the
addition,
in
activities
most
are
cases
protable
are
to
reduced
sell
off
and
any
kept
at
existing
a
minimum.
stock.
Prices
Distribution
are
outlets
that
closed.
selaS
development
introduction
growth
maturity
saturation
decline
Time
Figure 4.5.1 The product life cycle
gnitekraM 4
Key term
Extension strategies
Extension
strategies
are
an
attempt
by
rms
to
stop
sales
from
falling
Ex tension strategies
by
plans by rms to stop sales
lengthening
maturity
or
or
extending
saturation
the
stages
of
product’s
a
life
product’s
cycle.
life
This
is
done
at
the
cycle.
from falling by lengthening
Common
methods
that
businesses
use
to
extend
their
products’
life
the product’s life cycle
cycles
●
include:
Selling
existing
products
●
Finding
in
new
introduced
has
a
●
Changing
helped
Targeting
opened
country
product.
For
of
uses,
For
example,
and/or
example,
device
including
different
a
demand
market
new
This
the
buy
selling
exporting
the
but
them.
cellphone
now
offering
it
the
for
open
for
to
the
was
rst
smartphone
banking
a
One
and
other
to
to
their
with
For
customers
For
revive
times,
the
consumers’
example,
is
banks
income
various
example,
encourage
changing
stimulate
many
example
strategies.
helping
to
the
which
has
time.
on
customers
appeal
to
long
For
include
product.
based
them.
promotional
could
package
repackaged
segments.
campaigns
thereby
of
been
for
may
accounts
account
advertising
products,
to
has
accommodated
special
sharia
colour
them
Omo
customers
also
packaging.
and
persuade
that
Developing
their
product’s
sustain
have
have
new
the
markets.
a
communication
variety
detergent
to
accounts
●
the
and
washing
and
wider
appearance,
interest
banks
for
basic
new
within
services.
design,
●
a
into
regions
uses
as
much
online
products
other
of
in
religious
Kenya,
the
example,
rms
to
for
different
Some
beliefs
Barclays
Muslim
consumers
demand
having
levels.
could
continue
their
bank
faith.
create
using
product.
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4.5
Extension
as
it
the
would
in
sales
be
is
always
For
a
its
a
be
is
life
use
entirely
example,
extend
it
sales
on
a
life
not
the
long-term
sales
of
a
always
forecasting
predicting
accurate.
inuence
on
recession
existing
the
is
to
and
begin
mature
easy
to
success
to
drop.
product
of
For
a
before
determine
product
businesses,
this
where
decline
exactly
a
cycle.
based
strong
rm’s
to
important
saturated
However,
businesses
forecasting
have
better
in
are
becomes
starts.
product
Some
strategies
market
The seven Ps of the marketing mix
Moreover,
any
could
products
to
as
future
have
well
help
trends,
as
a
the
with
this.
results
unexpected
However,
obtained
external
since
may
not
factors
may
sales.
negative
any
new
effect
on
products
the
that
demand
it
may
for
have
Product life
introduced
be
critical
order
to
as
for
part
the
manage
of
its
rm
its
extension
to
know
resources
strategy.
where
its
In
this
products
efciently.
situation,
lie
Spending
in
the
money
it
would
life
on
cycle
a
ex tension models
in
terminally
Product life extension
declining
product
is
a
waste
of
resources
–
one
example
would
be
spending
models extend the use
money
on
marketing
DVD
players
today.
period of existing products.
They slow the ow of
constituent materials
through the economy, and
selaS
help to reduce the rate of
resource extraction and the
gnitekraM 4
generation of waste. The
case study below gives an
example of an organization
that uses a product life
Time
extension model.
Figure 4.5.2 Extension strategies in a product life cycle
yduts esaC
Better World Fashion
The
aim
quality,
of
Better
durable
embraces
World
goods
changing
Fashion
with
styles
a
is
to
offer
business
and
high-
model
that
and
as
either
preferences.
or
For
Better
World
Fashion,
the
decision
as
an
in
leather
–
and
initially
was
important
leather
cattle
for
for
three
food
or
main
reasons.
leather
energy
and
resource
intensive
outright
as
methods.
Secondly,
it
under
enables
they
the
to
explore
activities.
materials
used,
Finally,
that
the
factors
prevent
old
being
led
or
on
inner
the
leather
actually
improving
These
from
focusing
loops
the
higher
of
is
gets
a
look
Better
one
and
of
World
or
of
feel
few
the
of
sitting
like,
onwards
Fashion
jackets
available
today
are
lease
garment.
to
seek
to
products
in
The
to
patina
that
it’s
a
closets.
story
the
a
of
develops
of
their
next
user
“family
unique
from
collected
from
NGOs
across
the
option.
jacket
but
when
they’re
for
done
as
with
phase
a
is
jacket
clearly
can
in
send
place.
it
back
Those
to
receiving
a
50%
discount
Better
on
the
customer
can
a
new
transfer
friend
or
relative.
the
time.
jacket,
and
for
which
is
the
clothing).
prole
of
isn’t
the
to
the
Owners
(something
tree”
ID
material
over
also
of
founder
the
on
to
describes
garment
customers
the
thing
share
passed
Each
give
story
only
can
a
product.
has
as
a
better
This
reused
works
leather
buyback
onto
circular
clothing
unused
made
hang
Alternatively,
understanding
The
jackets
re-use
the
leather
with
the
arrangement,
the
more
Fashion
“unfashionable”
disposed
value
better
lease
aluminium
of
today’s
the
economy,
purchase
can
purchased
garment.
company
monthly
and
one
is
World
traditional
a
obtain
Firstly,
production
that
very
polyester
jackets
it,
rearing
through
customer
long
–
reused
Customers
to
The
specialize
much
possible.
in
conjunction
with
any
scars
or
blemishes
Denmark
275
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4
the
jacket
are
taken
has
picked
the
imperfections
care
harnessed
as
a
of
by
up
during
Better
and
the
unique
its
World
story
design
use.
The
Fashion,
behind
element,
repairs
repaired,
with
reused
them
bags,
giving
in
as
much
new
gloves,
of
the
jackets
and
leather
or
other
in
the
as
possible
is
manufacture
smaller
of
accessories.
the
Source: Adapted from https://www.
jacket
a
one-off
appeal
for
subsequent
customers.
ellenmacar thurfoundation.org/case-studies/a-model-forAt
the
point
when
a
jacket
can
no
longer
be
fast-fashion-that-lasts
Product portfolio analysis
Key term
A
product
portfolio
Boston Consulting Group
organization.
matrix
products.
decisions
Product
Portfolio
includes
portfolio
analysis
regarding
its
all
uses
overall
the
products
analysis
is
various
product
the
or
services
process
models
offering
to
of
help
and
provided
evaluating
the
by
business
business
an
these
make
portfolios.
A
an analysis method of a rm’s
business
will
want
to
invest
more
resources
into
its
protable
products
and
product por tfolio regarding
phase
out
those
that
are
not
doing
well.
its market share and
market growth
A
common
Group
product
(BCG)
developed
by
The
BCG
rate
on
The
market
gnitekraM 4
while
the
–
is
a
growth
its
(also
analysis
known
management
vertical
relative
captured
into
the
matrix
the
portfolio
matrix
rate
market
in
four
matrix
relative
shows
share
strength
following
and
how
looks
the
the
consulting
growth–share
axis
method
as
at
rm
that
market
market.
Boston
on
the
the
product
of
the
which
Consulting
measures
a
Consulting
matrix),
Boston
much
This
the
share
attractive
how
is
Boston
market
horizontal
is
in
the
market
growth–share
a
was
Group.
growth
axis.
market,
product
matrix
is
has
classied
categories:
Market share
low
Stars
Question marks
hgih
high
htworg tekraM
wol
Figure 4.5.3 The BCG matrix
●
Stars.
share.
These
They
amounts
of
of
are
are
income
investment
especially
gain
turn
in
market
products
into
products
a
to
for
the
sustain
mature
by
and
rapid
market
attracting
the
growth
market
However,
growth
where
new
market
market
in
business.
their
their
high
products
fast-growing
share
cash
with
successful
they
and
slows
high
status
With
market
generate
need
competing
customers.
growth
and
and
in
high
the
market,
rms
can
time,
as
down,
they
high
levels
easily
these
eventually
cows.
276
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4.5
Cash
●
cows.
market
market
and,
market
share.
generate
have
a
a
market
the
the
a
Dogs.
and
poor
problems
into
have
generate
of
for
low
market
not
and
products
As
and
to
their
so
the
even
high
mature
on
they
products
charge
could
be
their
be
the
share
that
and
problem
high
businesses
mean
market
need
need
to
children
they
eliminated.
share
for
with
to
Businesses
and
growing
may
may
products
increase
which
income
rm
sustaining
to
should
are
hold
concern
succeed.
ones
little
are
a
competitive
to
a
protable,
can
growth
about
that
the
these
continue
are
are
needed
ercely
to
in
business.
These
market
growth
margins.
They
money
which
less
very
businesses
marks.
selective
market
products
the
prot
share.
they
that
and
for
their
markets
prospects
many
they
cash
high
a
if
and
products
therefore
with
if
in
very
in
of
the
stars
operate
future
Businesses
be
low
invest
high
market,
market
strategy
and
of
question
operating
are
They
markets
offer
are
marketing
These
the
amount
have
will
are
increase
low
large
develop
growth.
in
to
or
and
sales
amount
Moreover,
carefully
should
●
the
products
think
prices
that
well-established
businesses
product
presence
market.
strong
result,
children
of
products
comprise
reasonable
growth
because
in
a
The
higher
Problem
are
They
as
strong
slightly
●
These
share.
The seven Ps of the marketing mix
or
low
in
business.
need
faced
to
be
with
market
declining
They
replaced.
cash
ow
them.
Holding
●
market
in
the
strategy
share,
to
market.
–
the
ensure
Some
focus
that
here
they
investment
is
on
products
maintain
will
be
their
needed
with
a
current
to
gnitekraM 4
BCG matrix strategies
high
position
ensure
sustained
consumerdemand.
Building
●
stars.
strategy
Money
distributing
products
nance,
phased
the
product
products,
the
this
products
–
can
be
sold
effectively
–
off.
to
to
increase
is
boost
in
is
the
where
problem
invested
on
These
in
children
milking
the
benets
provide
portfolio
up
performance
or
from
of
the
the
of
necessary
products.
poor-performing
freed
into
promoting
share.
products
other
the
resources
the
be
market
here
ow.
invested
The
turning
could
focus
cash
this
on
cows
the
positive
strategy
or
focuses
cash
this
dogs
will
other
are
need
to
products
in
portfolio.
portfolio
generators)
dogs
a
which
out
beused
–
the
strategy
with
Divesting
●
A
these
Harvesting
●
from
and
will
such
be
as
if
has
to
problem
problem
business
that
able
this
not
good
in
number
the
children.
children
is
a
invest
can
well
of
other
However,
seriously
stars
(high
a
drain
and
cash
market
relatively
any
cows
large
positive
(nance
growth)
number
cash
ow
of
from
managed.
The limitations of the BCG matrix
●
It
focuses
little
●
It
to
on
advice
may
be
dene
a
or
the
or
current
market
information
for
time-consuming
classify
their
position
future
and
of
complex
products
the
rm’s
products,
with
planning.
exercise
according
to
for
businesses
market
share
and
marketgrowth.
277
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4
●
High
market
because
may
share
sales
drive
does
revenue
down
a
not
could
rm’s
necessarily
be
gained
equate
using
to
high
prots.
promotional
This
pricing,
is
which
protability.
Table 4.5.1 Summary of the relationship between the product life cycle, product por tfolio and the marketing mix (using only the
rst four Ps)
Strategies
Product
Development
Introduction
Growth
Maturity
Saturation
Decline
In the planning phase.
The basic product
Product
New product
Extension
Weak
The product has not
is marketed.
improvements
development is
strategies are
products are
or new product
at an advanced
critical to maintain
withdrawn
development
stage. Extension
sales.
from the
plans star t.
strategies are
yet launched in the
Most products
market.
released into the
market.
market star t as stars
Products are cash
introduced in
or question marks.
Products are
cows due to high
The product
market share.
becomes a
some cases.
stars or question
marks due to
The product
dog due to
high growth.
becomes a cash
low market
cow as growth
share and no
stabilizes.
oppor tunity
for growth.
Price
gnitekraM 4
Research is ongoing on
Cost-plus, price
Penetration
Promotional
Promotional
Price cuts
the appropriate pricing
skimming or
prices slightly
pricing can be
pricing can be
are made.
methods to use.
penetration pricing
increase.
used.
used.
Research is ongoing
Informative
Persuasive
There is extensive
Aggressive
Adver tising
on the appropriate
adver tising is used.
adver tising is
adver tising to
adver tising is
is reduced to
used.
remind customers
carried out to
a minimum.
of the product.
emphasize the
can be used.
Promotion
promotion strategies
to use.
brand’s benets
and dierences.
Place
Research is ongoing
Selective or
Intensive
There is more
The widest range
There is
on appropriate
restricted
distribution
intensive
of geographical
selective
distribution channels
distribution takes
or more
distribution or
distribution
distribution
to use.
place.
distribution
a wide range
outlets is used.
and
outlets are used.
of distribution
unprotable
outlets.
outlets are
eliminated.
Table 4.5.2 Summary of the relationship between the product life cycle, investment, prot, and cash ow
Product life
Development
Introduction
Growth
Maturity
Saturation
Decline
cycle stage
Investment level
High research and
High costs on
Average to
Lower costs on
Cost focus is
Very low costs
development costs
promotion
high costs on
promotion
on extension
on promotion
promotion
Prot
None
None or negative
strategies
Some prot
High prot;
High and mostly
Decreasing
and rising
reaches its
stable prot
prot
peak
Cash ow
Negative
Negative but
improves with sales
Positive
Positive
Positive
Positive but
decreasing
cash ow
278
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4.5
The seven Ps of the marketing mix
Student workpoint 4.8
Be a thinker
1.
Analyse
the
relationship
portfolio
and
2.
Why
extension
3.
Using
are
your
the
the
BCG
between
marketing
strategies
matrix,
the
product
life
cycle,
product
mix.
important
evaluate
the
to
a
business?
product
offering
of
a
business
of
choice.
yduts esaC
Facebook – BCG matrix
Facebook’s
Star
—
BCG matrix
Instagram
The case study here
Besides
its
high
market
share,
Instagram
is
also
currently
the
highest
examines Facebook’s
growing
strategic
doubled
its
business
unit
(SBU)
owned
by
Facebook,
and
has
product por tfolio based on
user
base
to
700
million
monthly
active
users
in
two
years.
its relative market share and
This
is
largely
due
to
Instagram’s
features
“Direct”
and
“Stories”.
By
industry growth rate. The
sticking
to
its
roots
of
visual
communication
while
shrewdly
adapting
BCG matrix assists Facebook
to
new
trends
by
investing
in
product
development,
Instagram
has
in making decisions
managed
to
stay
on
top
of
the
game.
regarding what it should
Question
Mark
—
invest in, discontinue or
Oculus
gnitekraM 4
Facebook’s
develop in the future.
Oculus
specializes
products.
efforts,
whether
plans
of
Large
yet
to
invest
users,
Facebook’s
its
desire
Cow
rate
—
that
VR.
the
in
research
Oculus
NY
next
will
Times
decade
intentions
to
and
be
and
to
development
successful
reports
turn
software
bring
that
VR
Oculus
or
Zuckerberg
to
into
millions
a
Star.
WhatsApp
has
in
been
more
WhatsApp
however,
—
is
very
or
is
less
hence
high,
maximized,
deemed
making
with
few
unnecessary.
WhatsApp
a
money-
Messenger
everyone
growth
over
hardware
required
for
Facebook’s
unnecessary.
low
are
(VR)
cow.
Dog
almost
a
billion
share,
cash
reality
guarantee
Investment
market
generating
seems
$3
growth
competitors.
Since
no
have
Cash
WhatsApp’s
Their
is
signalling
Facebook’s
virtual
investments
there
people
in
rate
uses
WhatsApp,
Facebook
and
low
can
an
additional
consider
market
share,
divesting
making
it
app
like
Messenger
Messenger
a
due
to
dog.
Key terms
Source: Adapted from https://medium.com/pitchspot/an-in-depth-analysis-of-theBrand
bcg-growth-share-matrix-with-examples-82d17b092b8
a name, symbol, sign, or
design that dierentiates a
rm’s product from those of
Branding
its competitors
A
a
brand
rm’s
is
dened
product
distinguishing
as
from
one
a
name,
that
of
symbol,
its
business’s
sign,
competitors.
product
from
or
design
that
Branding
another
is
differentiates
the
process
business’s,
of
and
can
on
how
Branding
add
the process of distinguishing
great
value
to
a
product.
Branding
can
have
a
strong
inuence
one rm’s product from another
consumers
view
or
perceive
a
product.
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4
Examples
of
well-known
global
brands
include
Nike,
Samsung,
Apple,
Key terms
Coca-Cola,
Brand awareness
Google,
and
KFC,
among
many
others.
Aspects of branding
the ability of consumers to
recognize the existence and
Brand awareness
availability of a rm’s good
This
refers
to
the
ability
of
consumers
to
recognize
the
existence
and
or service
availability
step
of
a
rm’s
businesses
good
should
take
or
service.
to
Creating
effectively
brand
promote
a
awareness
is
a
major
product.
Brand loyalty
In
addition,
brand
awareness
is
important
when
promoting
related
products
when consumers become
because
there
is
usually
very
little
difference
between
one
rm’s
product
committed to a rm’s brand
and
its
competitors’
products.
As
a
result,
the
product
with
the
greatest
and are willing to make repeat
brand
awareness
will
sell
more.
For
example,
in
the
beverage
industry
purchases over time
there
Brand value
how much a brand is wor th
are
numerous
“Coca-Cola”
strong
is
image
soft
easily
it
drinks
available
recognized
portrays
in
by
their
in
most
the
market.
consumers,
However,
clearly
the
showing
name
the
minds.
in terms of its reputation,
A
high
level
of
brand
awareness
often
leads
to
higher
sales,
and
can
serve
potential income, and
as
a
strong
indicator
to
competitors
of
the
amount
of
market
share
a
market value
product
commands.
Brand development
This
is
any
gnitekraM 4
market.
a
product
leading
plan
Brand
by
to
to
increasing
higher
Businesses
may
promotions
their
products
is
a
Cadbury’s)
an
effort
and
and
or
to
and
to
strengthen
is
a
way
power
invest
way
to
into
its
the
image
enhancing
name,
in
of
a
the
product
brand
symbol,
promotional
persuade
further
that
of
or
in
the
awareness
sign,
of
ultimately
share.
more
develop
businesses
consumers
them
of
market
advertising
give
tempt
the
therefore
common
use
to
sales
have
sales
samples
improve
development
a
buying
their
to
to
brands.
producing
chance
their
campaigns
consumers
taste
such
Offering
consumables
or
try
as
purchase
their
free
(such
products
as
in
brands.
Brand loyalty
This
is
when
willing
of
to
brand
they
with
preferred
feel
the
Successful
to
repeat
preference,
Customers
their
consumers
make
brands,
loyal
talking
positively
help
provide
to
enhancing
that
is
word
of
it
the
signicantly
the
often
In
among
carries
from
of
variety
loyalty
of
brand
some
justies
will
of
a
in
the
its
is
and
a
over
another.
products,
a
strategies
develop
particular
friends,
which
business.
from
because
price.
marketing
market
are
result
products
businesses
mouth,
of
brand
loyalty
purchase
colleagues,
word
consumer
rm’s
one
these
who
reputation
brand
a
doing,
their
by
a
Brand
prices
employ
so
to
prefer
high
consumers
and
strong
time.
consistently
brand
marketing
image
establishing
beneting
are
about
free
the
will
over
will
despite
customers.
These
committed
consumers
loyalty
value
businesses
cultivate
ambassadors.
in
where
brand
added
become
purchases
or
is
relatives.
very
Samsung
electronics
recommendations
by
They
effective
is
a
industry
or
brand
brand
name
and
marketing
by
mouth.
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4.5
The seven Ps of the marketing mix
Brand value
This
refers
potential
business
Brands
can
that
business.
such
at
to
have
This
Starbucks
Brand
code
high
a
a
of
worth
are
a
is
a
at
terms
value
because
regarded
are
of
as
of
is
its
reputation,
extra
brand
to
pay
purchasing
another
its
the
café.
a
a
Such
money
a
name.
considerable
willing
consumer
coffee
in
Brand
products
consumers
assets
high
to
price
a
to
higher-priced
brands
obtain
coffee
increase
the
business.
an
expression
particular
help
and
is
value.
value
example
customers
They
special
is
a
brand
its
because
are
which
cause
value
of
a
market
from
instead
values
product.
way
is
One
value
by
much
and
make
brands.
overall
that
how
income,
to
in
at
buy
a
a
brand’s
lives.
rm’s
than
the
its
heart
“personality”
Brand
product
differentiating
better
therefore
of
brand
a
rather
business
competitors.
of
values
successful
are
than
and
and
also
its
a
as
a
things
competitor’s
making
Emphasizing
act
those
it
seem
rm’s
in
some
brand
branding.
The values associated with
The impor tance of branding
Starbucks keep many customers
coming back , even though cheaper
Branding
is
one
of
the
most
important
tasks
of
marketers.
Despite
the
alternatives are available
and
initial
recognized,
start-up
For
to
the
start-ups,
which
work
so
investment
they
on
that
it
is
can
audience
be
about
the
recognized
bound
ensuring
factor
the
to
does
result
its
and
not
in
any
a
type
customers
As
the
image,
immediately.
market
that
giving
of
for
that
brand
of
is
widely
business
–
known
from
the
companies.
business.
perceptions
Branding
is
is
associate
brandcomplements
audience.
essential
in
well-established
branding
can
customer
it
an
large,
required
the
the
decreased
and
clear
try
Initially,
meets
meet
a
business
to
it
image
grows,
with
it
establish
is
critical
expectations
expectations
of
can
its
that
of
its
gnitekraM 4
heavy
the
brand
the
target
target
sales.
C oncep t
Businesses
high
the
with
prices
minds
for
of
consistently
earn
and
high
most
their
high
have
and
margins
because
enabling
on
a
consistently
brands
can
Consumers
quality,
their
brands
products
consumers.
prot
BMW
market
well-known
of
the
regular
been
the
will
premium
image
associate
businesses
basis.
provided
have
use
For
the
as
brand
such
to
or
make
cars
charge
has
brands
example,
good-quality
viewed
pricing
in
ETHICS AND
with
good
sales
and
SUSTAINABILITY
Mercedes-Benz
to
representing
the
global
good
Ethics and sustainability have
quality
by
consumers.
had a major impact on the way
businesses brand themselves
and their products. This includes
Customers
make
judgments
about
certain
products
and
services
based
an assessment of their code of
on
the
way
they
are
presented
to
them.
Something
as
simple
as
choosing
conduct and their conservation of
the
right
colour
for
a
rm’s
brand
can
have
a
massive
impact
on
the
way
resources for future generations.
it
is
perceived
by
the
general
public.
For
example,
some
men
may
not
The case study on the next page
particularly
like
their
gym
being
painted
pink.
on the energy and resource
exploitation industry provides a
A
rm’s
brand
name
can
provide
legal
protection
to
a
product’s
specic
clear example of this.
features
to
provides
prevent
the
the
product
product
with
a
being
unique
copied
name
by
that
competitors.
makes
it
Branding
different
from
its
Research two more examples
of how ethics and sustainability
competitors,
therefore
enabling
the
business
to
have
a
sense
of
ownership
help to enhance an organization’s
over
its
products.
For
example,
companies
such
as
Nike,
Nestlé,
and
Toyota
image.
have
been
able
to
distinguish
themselves
well
in
their
respective
industries.
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4
Effective
branding
emotional
branding
chances
leaves
of
messages
is
a
to
can
connection
on
having
that
saying
succeed,
potential
repeat
ensure
that
enable
“the
sense
personal
customers.
their
are
target
impression
need
of
consumers.
customers
that
rst
businesses
a
among
to
use
The
If
the
high.
the
Good
lasting
enough
is
the
is
brands
respond
to
that
positive,
the
communicate
positively.
impression”.
resources
and
impression
impression
customers
is
identication
key
build
There
Therefore,
a
good
brandreputation.
yduts esaC
How companies rebrand to keep their corporate image
Two
major
events
perception
These
the
are
BP
Each
of
oil
the
Deep
incident
corporate
but
to
all
result,
oil
be
have
gnitekraM 4
example,
“protecting
of
its
has
Chevron
values
visions.
particularly
around
1989
and
2010.
of
damage
BP
the
and
world.
and
to
Exxon
themselves
images
–
1980s.
in
As
to
improve
without
which
they
protable.
has
core
deal
rebranded
relations
in
only
consumer’s
the
spill
spill
not
corporate
For
its
oil
great
companies
their
not
a
of
the
since
Horizon
caused
stakeholder
could
reshaped
Valdes
images
most
enhance
their
Exxon
Water
the
a
have
companies
and
In
its
branded
the
(formerly
as
“sustainability”
terms
of
its
promotional
itself
Texaco)
environment”
as
a
one
as
that
one
marketing
this
dislike
mix,
techniques,
socially
now
of
image
an
organization,
Chevron
possibly
interested
in
the
ordinary
people
to
and
solve
innovating
social
causing
even
it
causing
many
marketing
it
they
to
lose
to
If
consumers
often
boycott
revenue
close
that
and
down.
of
the
issues
practices
oil
companies’
and
strategies
shifts
have
energy
resulted
technologies
damaged.
well-being
in
of
not
responsible
However,
organization
is
organization,
such
in
ercer
opposition
from
the
public
as
and
other
stakeholders.
Companies
such
as
poverty.
Royal
BP
similarly
and
other
after
the
rebranded
social
oil
regulations
customers
media
spill.
and
as
It
by
its
also
policies
possible
to
promoting
on
compensation
promoted
online
avoid
to
its
new
reach
major
Twitter
efforts
as
safety
many
losses.
accused
groups
market
year
shift
in
after
marketing
reporting
billion
net
record
strong
recorded
prot
in
in
a
techniques
loss,
2012
results,
BP
and
with
paid
declared
it
$10
off.
a
billion
net
and
to
prot
2019.
Chevron
In
the
value
of
share
image
and
have
attempted
to
Chevron
standards”
Greenpeace
themselves
as
processes
This
by
because
socially
been
environmental
while
they
responsible,
continue
causes
have
to
damage
regular
their
the
uctuations
in
prices.
new
shareholders
long-term
legislation
of
marketing
are
protability
that
production.
would
uncertain
due
hugely
However,
strategies
to
has
the
about
fears
around
increase
adoption
largely
the
of
helped
to
their
mitigate
corporate
“double
addition,
their
costs
recognize
and
A
new
BP
Shell
environment.
US$3.3
continues
of
like
extraction
their
This
Dutch
the
effects
of
such
market
uncertainties.
ensure
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4.5
The seven Ps of the marketing mix
Price
Price
plays
a
signicant
that
generates
mix
are
associated
Price
refers
good
or
the
role
revenue
to
the
service.
with
meet
pricing
in
a
the
marketing
business.
The
mix
other
because
aspects
of
it
is
the
the
only
“P”
marketing
costs.
money
To
appropriate
for
customers
their
pay
or
marketing
strategies
for
give
up
for
objectives,
new
and
having
or
businesses
existing
using
need
a
to
set
products.
Cost-plus pricing (mark-up pricing)
Key term
Cost-plus
pricing
producing
wishes
to
a
refers
product.
gain
for
to
The
every
adding
a
mark-up
mark-up
product
is
a
that
to
the
percentage
it
sells.
The
average
of
the
cost
prot
average
cost
of
a
is
Cost-plus pricing
rm
the
cost
per
refers to adding a mark-up to
unit
or
the
total
cost
divided
by
the
number
of
products
produced.
the average cost of producing
a product
For
is
example,
US$20,000.
packet
the
●
imagine
for
following
First,
The
and
it
the
business
get
a
50%
cost-plus
would
total
cost
wants
to
mark-up
pricing
calculate
of
producing
calculate
on
each
10,000
how
packets
much
packet.
To
do
it
of
would
that,
it
biscuits
sell
each
would
use
method:
the
average
cost,
which
is
US$2
(US$20,000/10,000).
Second,
(50%
●
it
of
Finally,
selling
would
work
out
the
mark-up
prot,
which
$1
it
would
add
the
average
cost
to
the
mark-up
to
get
US$3
as
the
price.
Ad vantages
Disad vantages
•
•
It is a simple and quick method of
It fails to consider market needs or
calculating the selling price of a product.
•
is
US$2).
gnitekraM 4
●
customer value when setting prices.
It is a good way to ensure that a business
•
Since competitors’ prices are not
covers its costs and makes a prot.
considered, a rm could lose sales if it
sets a selling price that is higher than
its competitors’.
Penetration pricing
Setting
a
number
low
of
penetration
new
pricing.
product
products.
initial
price
customers
to
This
market
share,
known
to
an
is
it
have
a
for
This
existing
start
entered
product
and
could
strategy
can
a
quickly
be
used
market
used
to
the
in
with
gaining
or
by
Chinese
the
its
aim
high
of
new
marketing.
price
market
share
either
markets
Then
slowly.
by
attracting
market
businesses
entering
mass
increase
a
using
For
as
is
a
introducing
with
a
as
a
existing
rm
example,
this
large
known
gains
IKEA
is
strategy.
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4
Ad vantages
Disad vantages
•
•
As the prices are low, consumers are
Gaining a high sales volume does not
encouraged to buy the products and
necessarily mean achieving high prots,
this leads to high sales volume and
especially where the prices are too low.
market share for the business.
•
•
Customers may perceive the product to be of
The high sales volume can lead to
low quality if the price is kept too low.
decreases in the costs of production
•
Penetration pricing is only suitable for use
and increases in stock turnover.
in markets that are very price sensitive.
Therefore, as businesses increase their
prices over time, they risk losing potential
customers, who may seek lower-priced
products from rival rms.
The loss leader
Key terms
Businesses
Loss leader
charging a low price for
a product, usually below
its average cost, to attract
consumers to buy other
cost,
refer
attract
some
that
to
charge
that
many
a
customers.
products
higher-priced
at
low
product
a
loss
as
price
a
Large
with
(protable)
loss
for
a
product,
leader.
The
supermarkets
the
view
products
that
and
usually
aim
use
of
this
its
strategy
strategy
customers
therefore
below
this
will
by
also
compensate
average
is
to
selling
buy
for
other
any
lossesmade.
higher-priced products
gnitekraM 4
Ad vantages
Disad vantage
•
•
Predatory pricing
Businesses selling a large number of frequently
when a rm deliberately sets
a very low price on its good or
Firms using this strategy may
purchased products may attract many customers
be accused by competitors of
and benet from higher overall prots.
undercutting them by using
service with the aim of driving
unfair business practices.
•
Businesses may use loss leaders as a promotional
its competitors out of
strategy to encourage consumers to switch to their
the market
brand instead of buying the competitors’ brands.
Predatory pricing
Predatory
good
A
or
pricing
service
predatory
market
when
and
and
pricing
hence
there
is
recoups
include
is
ABC
no
its
when
with
the
a
rm
aim
strategy
acts
as
a
of
restricts
barrier
competition
prots.
Food
Ltd
deliberately
driving
left
new
to
in
sets
a
very
competitors
competitors
entry.
the
Organizations
and
its
After
market,
that
have
a
low
out
from
certain
the
rm
employed
price
of
the
on
entering
period
of
increases
this
its
market.
the
time
its
prices
strategy
Amazon.
Ad vantages
Disad vantages
•
•
The rm can gain a dominant position in the
market using this strategy.
Predatory pricing is a form of anti-
competitive behaviour and is illegal in
many countries because it is used to
•
Competition is minimized, as nancially
restrict competition.
weaker competitors that are unable to bear
the loss will be driven out of the market.
•
This strategy may work in the shor t
term but it will be dicult to sustain in
•
New entrants are deterred from entering
the long term as new competitors may
the market, cutting out any potential
enter the market.
competition.
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4.5
The seven Ps of the marketing mix
Premium pricing
Premium
This
the
is
pricing
usually
impression
customers
will
quality
than
pricing
or
In
for
premium
sustained
Gucci
bags,
the
a
a
where
higher
rm’s
its
a
rm
than
product
product
competitors’
is
as
sets
the
high
superior.
they
products.
a
price
competitors’
The
perceive
This
rm
it
strategy
to
is
for
its
products
product.
to
expects
be
also
of
give
that
better
known
as
image
pricing.
is
different
new
pricing,
for
strategy
purchase
the
pricing
set
a
that
prestige
Premium
initially
is
substantially
long
to
price
(sometimes
as
the
time.
Rolls-Royce
product
is
Examples
cars
and
skimming,
low-quality)
of
of
high
where
a
product
quality,
the
premium-priced
Rolex
high
and
price
then
high
is
reduced.
price
products
is
include
Gucci is known for its premium-
priced products
watches.
Ad vantages
Disad vantages
•
•
As customers are convinced of the high quality of the product,
The rm misses out on price conscious consumers who nd
the price too high.
they do not try to buy it for less. This leaves the rm to
concentrate on improving the product’s quality or features
•
High marketing costs are incurred as a rm will need to create
without worrying about consumer purchases.
brand awareness of its product to convince customers that its
•
high price equates to a high-quality product.
When a rm can set a high price for its product but still manage
to sell it, there is the potential to maximize its prot margin.
•
•
Premium pricing cannot be applied to all products, especially
those that face sti competition.
A high price on a product can increase the brand value of a
gnitekraM 4
rm. The product then becomes exclusive, where not everyone
is able to aord it. Loyal customers continue to enjoy and buy
the product, fur ther increasing the brand value.
•
Premium-priced products can gain a high status in a society.
These products become status symbols or a symbol of
luxury. Their owners tend to show them o to others, thereby
providing free adver tising for the rm.
Dynamic pricing (HL only)
Dynamic
pricing
is
a
strategy
where
rms
charge
different
prices
for
their
Key terms
products
depending
products
sell.
on
Dynamic
which
pricing
customers
involves
are
buying
tailoring
the
them
or
prices
of
when
the
goods
or
Premium pricing
services
based
on
specic
customer
preferences.
It
is
also
known
as
surge
where a rm sets a high price
pricing,
demand
pricing
or
time-based
pricing.
for a high-quality product
This
and
strategy
other
adjusting
considers
market
in
factors
conditions.
response
to
such
Here,
real-time
as
demand
product
demand
and
prices
and
supply,
are
competition,
continuously
supply.
Dynamic
Dynamic pricing
pricing
where rms charge dierent
examplesinclude:
prices for their products
●
Increases
in
●
Hotels
●
Ridesharing
airline
prices
due
to
high
depending on which
demand.
customers are buying them or
offering
discounts
on
their
rooms
during
off
seasons.
when the products sell
trafc
Some
services
charging
twice
the
normal
amount
during
high
periods.
rms
that
use
this
strategy
include
Uber
and
Amazon.
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4
Ad vantages
Disad vantages
•
•
There is the potential for high sales
Can lead to customer dissatisfaction as
and prots, as product prices can be
some customers end up paying a higher
increased when demand rises.
price for the same product. Those who pay a
higher price tend to become hostile towards
•
A rm can beat its competition
the rm, reducing its brand image, while
easily by adjusting to customer
those who paid a lower price may become
preferences and providing a better
loyal to the rm’s brand.
experience at a cheaper price
•
compared to its competition.
It could lead to the loss of sales if customers
are knowledgeable about the prices of
•
If a business has a product that is
products in the market. If a customer comes
producing a good prot, it gives them
across the same product which is priced
the exibility and freedom to focus
signicantly lower by another rm, they may
on other business areas or dierent
opt to buy the lower-priced product from the
sources of revenue while still breaking
competitor.
even during the dicult times.
•
•
Some customers can play the system and
It helps with better stock
have worked out methods and tools to help
management. Discounts can be
them beat the changing prices. These tools
provided for overstocked products
provide customers with a list of prices for
and higher prices charged for items
the same product from dierent sellers.
in high demand, helping to maintain
This helps them to nd cheaper deals for
the ow of stock .
products and means they do not need to
gnitekraM 4
worry about a rm’s brand any more but can
focus on pricing only, thereby spending less.
•
Dynamic pricing is not applicable to all
industries and works better in cer tain areas
than others. Some businesses prioritize
customer satisfaction to attain a better brand
image than aiming purely for high prot
margins.
•
Can lead to signicant price uctuations
in the market, which will disadvantage the
rm practising it. For example, if the rm
increases its price then a competitor may
immediately reduce its price. Alternatively,
the rm may lower its price and the
competitor lowers their price even fur ther.
Key terms
In such scenarios the rm’s revenue can be
negatively impacted.
Competitive pricing
where a rm sets the price
of its product relative to the
competitors’ prices
Competitive pricing (HL only)
Competitive
a
rm
sets
pricing
the
price
(also
known
of
product
its
as
a
market-orientated
relative
to
its
strategy)
competitors’
is
prices.
where
Instead
Contribution pricing
of
pricing
based
on
consumer
demands,
the
prices
of
competitor
products
the calculation of the variable
are
used
for
comparison
before
the
rm
arrives
at
its
own
pricing
strategy.
cost of production of a rm’s
Competitive
pricing
requires
in-depth
research
or
detailed
market
analysis
product, after which the
of
competitor
behaviour
to
determine
their
product
offerings,
including
the
product’s price is set
prices
they
charge
for
their
products.
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4.5
The seven Ps of the marketing mix
Ad vantages
Disad vantages
•
•
Can prevent a rm from losing customers and market share to
Competitive pricing is not sustainable in the long term. It can
its competitors. With adequate intelligence on the competition,
work in the initial stages of market entry, but in the long term
a rm can control the competition and respond to their
competitors might improvise based on pricing data and
every move.
change their pricing strategy entirely to focus on a dierent
market segment.
•
As online shoppers depend on pricing before making their nal
•
purchase, adopting a competitive pricing strategy helps to
A rm focusing purely on competing with the other players
in the market may miss out on other impor tant aspects, like
keep a stable customer base and aids business growth.
covering their production or overhead costs. This can lead to
•
It is a low-risk strategy as the competitors are usually well-
lower future revenue and prot.
known players in the market who have been in existence for
•
some time. Hence, using their pricing as a star ting point has a
A rm will nd it dicult to dierentiate itself from other
competitors in the market as its pricing strategy is solely
high probability of success.
based on the co-market players. The rm’s brand may not
•
It can be used in combination with other pricing strategies to
stand out as customers view the products as being similar to
make it more ecient. For example, competitive pricing can
other competitors’ products in the market.
be used in conjunction with cost-plus pricing to decide on the
target prot margins based on the competitor pricing model.
Contribution pricing (HL only)
a
rm’s
level).
and
the
that
goes
price
towards
example,
with
the
let
involves
after
Contribution
unit
For
pricing
product,
which
per
per
unit
unit.
covering
us
following
calculating
the
is
assume
the
Note
the
variable
price
difference
that
it
unpaid
that
the
product’s
JCD
is
Cars
set
cost
prot
costs
Ltd
has
of
of
production
(usually
between
not
xed
is
the
but
at
a
variable
the
of
higher
cost
per
gnitekraM 4
Contribution
contribution
production.
xed
costs
of
$300,000
scenario:
Product (type
Variable cost
Price per unit
Contribution
Total
per unit ($)
($)
per unit ($)
contribution ($)
Sales
of car)
A
20
8,000
10,000
2,000
40,000
B
17
12,000
16,000
4,000
68,000
C
15
18,000
24,000
6,000
90,000
D
12
25,000
30,000
5,000
60,000
E
10
35,000
43,000
8,000
80,000
$338,0 0 0
As
the
xed
$338,000
$38,000
costs
will
be
are
able
($338,000
−
only
to
$300,000,
cover
these
JCD’s
costs
total
and
contribution
generate
a
of
prot
of
$300,000).
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4
Ad vantages
Disad vantages
•
•
The contribution per unit measure is useful
The price set for each product using
as it enables the rm to know how much
this approach may not be competitive
prot it will earn for every unit sold beyond
in the market. It is impor tant for
the point where the rm breaks even.
rms to check what competitors are
charging before nalising the price.
•
It is conducted using existing information
that the rm already has or is calculating for
•
•
Allocating costs appropriately across
other purposes. For example, sales revenue
the whole range of a rm’s products
and cost information. It can therefore be
can be dicult, which may lead to
used without much additional cost.
inaccurate pricing.
It is a useful strategy for a rm to use if it
wants to determine the price to charge for a
Key terms
special order.
Price elasticity of demand
Price elasticity of demand (HL only)
a measurement of how the
A
rm’s
pricing
strategy
will
directly
impact
on
its
revenue.
Therefore,
quantity demanded of a good
it
is
essential
for
the
rm
to
understand
its
products’
price
elasticity
of
is a ected by changes in
demand
to
help
determine
whether
a
change
in
price
will
have
a
positive
its price
or
negative
impact
on
its
revenue.
Price discrimination
Price
elasticity
of
demand
(PED)
is
a
measurement
of
how
the
quantity
charging di erent prices
demanded
of
a
good
is
affected
by
changes
in
its
price.
In
other
words,
it
is
gnitekraM 4
to di erent groups of
a
quantitative
measure
of
the
responsiveness
of
consumers
to
uctuations
consumers for the same
in
the
price
of
a
good.
product
PED
is
calculated
as
follows:
percentage
price
elasticity
of
demand
change
in
percentage
The
calculated
greater
0–1:
in
than
or
higher
for
cigarettes
=1:
A
price
situation
in
elastic
extreme
demand,
to
a
a
of
in
in
the
if
such
1
is
than
a
if
it
the
to
demanded
switch
(% ∆QD)
for
unit
in
values)
away
this
is
Here,
from
a
the
include
salt,
always
be
large
In
change
these
product
those
tap
that
water,
are
a
petrol,
product).
elastic
price
will
ranges:
demanded.
diabetics,
to
(%∆P)
following
products
addiction
as
price
as inelastic.
insulin
and
represents
matched
by
an
a
equal
demanded.
are
known
change
in
generally
bars,
the
quantity
such
change
1
products
is
as
the
of
dened
large
chocolate
cases,
difcult
Examples
quantity
greater
in
in
absolute
into
classied
consumers’
particular
and
are
change
it
in
separated
percentage
result
water,
to
nd
price.
change
will
afliated
range
small
elasticity
markets,
bottled
In
(due
Elasticities
price
a
change
(provided
usually
consumers,
where
percentage
1+:
this
in
elasticity
is
consumers
its
necessity
and
in
results
markets,
despite
price
0,
Markets
price
quantity
=
and
as
the
elastic,
quantity
have
products
many
where
where
a
small
demanded.
substitutes,
consumers
In
change
highly
such
are
as
not
brand.
PED
innite
is
it
zero
is
then
called
this
is
called
perfectly
perfectly
elastic
inelastic
demand
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4.5
The seven Ps of the marketing mix
Examples of calculating PED
Example
What
is
When
lamps
the
The
●
1:
of
price
price
2/10
=
Quantity
●
PED
●
Therefore
Hence
The
●
With
a
●
Evidently,
Example
new
2:
the
has
●
Quantity
●
PED
●
Therefore
in
this
rose
fell
from
PED
=
demand
is
(in
from
to
$10
to
$12,
the
65.
lamps?
Therefore
=
−0.35
$12,
price
absolute
price
the
percentage
change
=
=
35%.
$10,
the
on
milk
price
increased
200
demand
$2
to
$4
200
to
170
to
$1,000
$599.04
has
from
led
$2
to
to
($10
($12
×
reduced
$4,
the
×
100).
65).
revenue.
quantity
milk?
rise
(15%
is
is
revenue:
170.
for
(100%
rm’s
earned
earned
increased
from
the
revenue
revenue
the
of
the
values).
elastic.
impact
of
change
for
has
the
new
●
In
this
if
a
market,
rm
it
allows
a
marketplace.
competitor
starts
the
of
an
For
strategy
of
$2,
$4,
in
price).
fall).
impact
in
price
to
keep
track
a
makes
the
use
the
of
earned
led
PED
how
PED
to
in
price
$400
($4
×
product
inuence
the
or
($2
increase
its
and
sensitive
is
an
that
revenue:
$680
become
substitutes
of
is
is
competitive
may
more
rm’s
earned
has
product
become
values).
accordingly
persuasive
they
that
on
price
on
revenue
revenue
information
its
absolute
inelastic.
the
the
example,
and
(in
price
increase
offering
decrease
is
change
rm
0.15
following
price
has
can
=
milk
price
example,
Therefore,
pricing
$12.
35/100
1.75
of
−0.15
With
A
of
from
●
incomes
=
elasticity
original
the
for
100
−15/100.
the
also
to
following
price
the
the
PED
by
decreased
With
the
$10
example
●
in
increased
from
demand
lamps
the
price
price
price
=
for
When
The
price
fell
−1.75
original
●
The
=
demanded
is
Hence
PED
change
the
What
of
from
lamps
reduced
20%.
demand
With
milk
elasticity
demanded
●
of
=
of
35/−20.
the
price
price
increased
0.2
●
=
the
demanded
gnitekraM 4
quantity
its
×
170).
in
revenue.
commands
its
revenue.
product
more
elastic
market,
or
conscious
200).
is
if
in
a
consumers’
to
price.
discrimination.
Price discrimination
Charging
same
different
product
is
discrimination,
First,
can
the
vary
certain
business
its
prices
competitive.
prices
referred
Second,
different
as
price
conditions
must
and
to
to
have
charge
groups
must
be
price-setting
higher
consumers
of
consumers
discrimination.
for
the
effective
price
satised.
ability.
prices
should
For
in
have
a
This
means
market
different
that
price
that
is
not
a
rm
very
sensitivities
or
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4
elasticities
their
As
of
noted
greater
price.
elastic
On
above
the
iethey
The
other
in
the
is
a
if
a
prices
concert,
but
for
to
PED,
to
in
price
effective
in
price
that
children’s
adult
the
a
cannot
in
to
a
very
price
leads
a
we
sensitive
if
total
respond
in
product.
demanded,
are
have
of
the
to
say
to
a
that
changes
demand
is
revenue.
less
than
price
proportional
inelastic
demand,
price.
discrimination
the
and
price
products
higher
leads
consumers
the
change
they
their
consumers
changes
how
in
quantity
ie
of
getting
in
that
if
the
price
of
of
changes
demand,
the
ensure
for
an
on
change
say
sensitive
measure
of
change
elastic
we
separated
the
the
possibility
hand,
less
is
result
reduce
condition
be
a
section
price
will
demand,
are
example,
music
have
there
third
should
in
This
as
proportional
Sellers
as
change
patterns
than
consumers
in
demand.
buying
product
adults’
gain
is
tickets
access
is
not
with
that
the
easily
may
a
markets
traded.
differ
child’s
for
ticket
For
the
same
and
Student workpoint
viceversa.
4.9
Ad vantage
Disad vantage
•
•
Be knowledgeable
1.
Analyse
importance
for
2.
a
of
start-up
Examine
the
gnitekraM 4
appropriate
strategies
Businesses need to be cer tain about
to
be of benet to either consumers or
the type of elasticity of demand of their
producers. For example, during peak
consumers. For example, charging higher
times, phone companies charge
prices in a market with elastic demand
high prices and so generate higher
could lead to lower sales revenue. If rms
revenues, while during o-peak times
were to charge a lower price in the elastic
consumers benet from the lower
market, they should ensure that the extra
prices charged.
cost of producing and selling more products
branding
business.
most
pricing
needed
introducing
product
Time-based price discrimination can
the
a
when
new
the
market.
does not exceed the extra revenue.
Promotion
Key terms
Promotion
products
is
to
concerned
consumers.
with
The
communicating
main
aim
of
information
promotion
is
to
about
obtain
a
rm’s
new
Above-the-line promotion
customers
or
to
retain
existing
ones.
Promotional
activities
should
be
a paid form of communication
communicated
clearly
to
consumers
and
provide
useful
information
to
that uses independent mass
enable
them
to
purchase
a
rm’s
product.
media to promote a rm’s
products
Some
●
promotional
creating
objectives
awareness
or
include:
informing
consumers
of
a
new
or
improved
Below-the-line promotion
product
in
the
market
a form of communication that
●
convincing
or
persuading
consumers
to
purchase
a
rm’s
products
gives a business direct control
instead
of
its
competitors’
products
over its promotional activities
so that it is not reliant on the
●
use of independent media
Through-the-line promotion
reminding
existing
●
consumers
customers
enhancing
image
of
the
the
or
brand
of
the
gain
existence
new
image
of
of
a
customers
the
product
product
for
as
a
in
order
to
retain
product
well
as
the
corporate
business.
a form of promotion that
uses an integrated approach
Promotion
of combining both above-
line
and
can
be
categorized
through-the-line
into
three
forms:
above-the-line,
below-the-
promotion.
the-line and below-the-line
promotion strategies
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4.5
The seven Ps of the marketing mix
Above-the-line promotion
This
is
a
paid
a
form
to
promote
or
newspapers
of
rm’s
responsibility
to
for
communication
products.
reach
a
It
wide
advertising
target
is
that
includes
uses
independent
advertising
audience.
passed
to
In
another
via
this
mass
media
television,
case
the
radio,
control
or
organization.
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a
product
plays
to
advertising
is
Advertising
●
a
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a
can
be
make
●
want
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or
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information
the
right
about
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of
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is
rm’s
what
to
product
to
for
campaign.
make
buying.
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to
consumers.
enable
them
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market.
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Examples
of
newspapers
drink-driving.
customers
product.
the
It
product
unplanned
also
to
useful
the
convince
need
It
is
information
to
advertisements
competitor’s
really
provide
product
buy.
classied
aims
to
specications
discourage
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to
here
other
new
this
they
consumers
as
a
of
passing
Choosing
focus
about
include
instead
think
convinces
act
the
introduce
advertising
in
follows:
price,
campaigns
product
consumers
it.
to
a
awareness
advertising
Persuasive
as
–
features,
decisions
government
one
ensuring
consumers’
informative
and
in
globally
audience.
advertising
rational
businesses
role
target
categorized
product’s
increases
to
central
important
Informative
about
a
particular
helps
and
purchases
in
to
buy
C oncep t
persuades
should
buy
of
a
product
enhancing
a
product’s
–
ETHICS
gnitekraM 4
Advertising
The primary concern of most
brand
image.
businesses is to make a prot. A
For
example,
pictures
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the
of
how
looked
picture
that
most
when
people
after
of
a
advertising
they
slim
people
looked
a
slimming
before
consumed
and
would
the
they
to
look
bought
product.
healthy-looking
want
product,
In
the
this
individual
like
rms
may
product
case,
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use
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on
business’s marketing strategy is
and
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show
the
idea
that.
therefore designed to make the
service or product on oer seem
as attractive as possible.
However, businesses
should consider their ethical
●
Reassuring
advertising
–
the
focus
here
is
on
existing
customers,
responsibility to promote their
to
remind
them
that
they
made
the
right
purchasing
decisions
when
products accurately. Many
they
chose
to
buy
the
rm’s
product
and
that
they
should
continue
countries have a regulating
to
purchase
it.
Coca-Cola’s
promotional
campaigns
are
well-known
body to monitor adver tising
examples
of
this
strategy.
(such as the Adver tising
Standards Authority in the
The
main
forms
of
advertising
media
include
television,
newspapers,
UK). Ethical adver tising is not
magazines,
cinema,
radio,
posters,
billboards,
and
the
internet.
only a moral choice but also a
pragmatic business decision
Below-the-line promotion
– the reputation and sales of
This
its
is
a
form
of
promotional
depend
focus
those
on
the
the
communication
activities.
use
of
are
Unlike
activities
interested
in
the
business
above-the-line
independent
promotional
who
where
on
their
media.
has
direct
promotion,
Below-the-line
consumers
the
it
control
does
not
promotion
business
knows
over
or
a business can be severely
aected if adver tising methods
can
on
are found to be misleading or
oensive.
products.
Do some internet research to
nd examples of unethical
Forms
of
below-the-line
promotion
include:
adver tising. Can you nd
●
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the
can
marketing
consumers.
save
the
marketing,
It
–
ensures
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business
refers
this
to
the
money.
sending
that
use
Direct
of
the
product
is
aimed
intermediaries
mail,
information
which
about
a
is
a
and
form
product
directly
at
therefore
of
direct
through
the
widespread press coverage?
What sor t of criticisms are made,
and how might these aect the
reputation of the businesses?
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4
post
or
via
email.
restaurants
their
A
●
limitation
of
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information
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expensive
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attention.
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and
like
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provide
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at
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Examples
UK,
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provides
to
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aimed
includes
purposes,
business
In
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free
publicity
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include
Twenty
Three
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Century
tournaments.
short-term
increasing
is
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provided
coupons
at
–
can
the
is
buying.
confectionary
which
or
are
free
are
food
buy
tasting
be
used
location
to
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draw
is
its
to
often
–
near
for
a
for
provided
sales.
Some
customers
found
the
where
the
in
by
a
examples
when
a
newspapers,
such
the
used
as
arrangement
business
of
by
sells
the
consumers
and
supermarkets
sweets,
chocolates,
and
checkouts.
example,
smartphone.
sessions
attractive
the
attention
commonly
products
placed
gifts
they
outside
offering
Giving
a
free
free
charger
samples
supermarkets)
can
to
(such
also
help
sales.
–
they
after
(buy
one
attract
used
purchasing
stand
commonly
“BOGOF”
used
–
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objective
when
where
method
is
it
product
commission.
the
project
these
impulse
Competitions
be
is
the
it.
used
customers
right
showcase
to
rm’s
technically
products.
a
a
commonly
publicity
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of
of
representatives
invites
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main
through
draw
its
Asia
products
snacks,
encourage
It
out
magazines.
of
customers
as
it
coupons
Point-of-sale
other
–
is
paid
regard
attention
promotional
For
purchased.
encourage
■
include
sending
below.
items.
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method
representatives
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sales
and
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aim
or
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are
organization,
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sponsorship,
Chelsea
sale
sales
method
of
responsibility
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or
■
this
developers
consumers
any
individualised
this
where
promotions
given
of
team
these
business
sponsoring
business
are
use
property
most
pay
these
making
business
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sponsoring
for adver tising space
or
the
of
cars,
In
and
they
–
use
as
sponsorships.
social
them.
support
●
if
conference
process,
Media
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a
that
not
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they
Public
for
commonly
menus
may
makes
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especially
press
and
machinery.
selling,
a
–
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over
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that
their
method
products
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or
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out
catalogues.
personal
●
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sending
in
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chance
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get
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customers
maturity
product,
win
or
–
or
a
customers
prize
in
seasons
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to
attract
promotional
help
in
can
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of
a
This
customers.
strategy
eliminating
saturation
enter
competition.
that
excess
can
stock.
product’s
lifecycle.
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4.5
The seven Ps of the marketing mix
Through-the-line promotion
This
form
of
promotion
above-the-line
a
business
customers
strategy
A
is
and
aims
to
in
many
as
that
drawback
of
promotional
businesses
it
uses
get
a
leads
this
holistic
ways
to
as
integrated
afford
to
view
is
carry
of
the
possible.
the
Hence,
An
brand
cost
only
out
approach
promotion
improved
approach
campaigns.
can
an
below-the-line
of
combining
strategies.
market
and
important
awareness
involved
in
In
this
reach
out
outcome
and
both
approach,
to
of
visibility.
implementing
well-established
through-the-line
their
this
and
the
nancially
promotional
secure
activities
successfully.
●
360
of
through-the-line
degree
both
advantage.
For
pamphlets
●
Digital
of
of
–
data
or
throughout
interest
highly
it
a
user’s
the
a
marketing
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time
target
small
a
has
a
social
with
newspapers.
as
a
below-the-
targeting
to
the
are
user
their
return
on
and
type
of
where
on
pieces
their
advertisements
has
thereby
preferences.
posts
is
based
display
targets
media
maximum
cookie-based
once
higher
consumer
integrating
a
advertisement
audiences
Consumers
that
by
gain
above-the-line
uses
experience
strategy
to
acting
businesses
communication
include
It
out
to
television
Cookie-based
allows
by
a
offering
same
website.
driven
methods
to
carried
activities
attached
consumer.
browsing
this
method
the
used
business’s
business,
is
product
method.
behaviour.
personalized
the
and
in
are
marketing
involves
the
targeting
(“cookies”)
browser
this
whileat
to
is
supplementing
advertised
communication
web
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the
this
include:
below-the-line
example,
benets
advertising
–
and
marketing
marketing
line
marketing
above-the-line
promotions
shown
provided
needs
or
with
wants.
investment
Examples
online
gnitekraM 4
Examples
of
(ROI),
digital
banners.
Choosing a promotional method
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there
no
type
use
above-the-line
with
of
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the
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–
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does
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Legal
the
●
●
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at?
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of
the
–
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–
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appropriate
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when
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while
want
certain
promotional
budget
it
comes
businesses
others
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the
marketing
promotional
market
aimed
on
approach
use.
to
factors
method
support
the
use
to
choosing
would
like
supplement
will
to
of
need
to
to
these
be
use:
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particular
method?
framework
various
to
only,
methods.
deciding
the
promotional
method
activities
below-the-line
considered
●
one-size-ts-all
promotional
at
product
product
–
and
the
law
specic
life
the
has
how
been
methods
it
considered
cycle
–
of
which
product
promotional
would
be
when
deciding
on
use?
segment
different
the
to
the
market
is
promotional
life
cycle
method
successfully
the
product
methods
will
be
stages?
considered
sold
to
the
nature
customers?
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4
The
strategy
in
business
a
the
to
be
exible
to
adopt
can
consumer
needed
Key term
to
and
in
depends
read
the
the
their
succeed
lot
on
how
and
communication
choice
in
a
market,
and
achieving
method
decide
their
well
whether
on
the
the
marketing
there
used.
best
marketing
is
a
department
good
The
t
between
business
method
or
will
need
combination
objectives.
Social media marketing (SMM) as
a promotional strategy
Social media marketing
SMM
is
a
marketing
approach
that
uses
social
networking
websites
to
a marketing approach that
market
a
rm’s
products.
It
is
a
marketing
tool
that
incorporates
the
use
of
uses social networking
technological
concepts
and
techniques
with
the
aim
of
growing
a
business
websites to market a
through
different
media.
This
technology
is
used
to
build
relationships,
rm’s products
drive
repeat
sharing
trafc
SMM
with
or
usually
message
appears
company
gnitekraM 4
has
Social media can be a powerful
a
In
SMM
creating
user
new
social
share
from
it
to
essence,
is
the
media
user
their
and
process
that
is
of
individuals
gaining
attracts
social
website
attention
networks.
presumably
third-party
SMM
through
sites.
content
with
trusted,
customers
as
because
opposed
through
and
corporate
resonates
source,
promotion
A
to
word
the
of
it
brand
mouth
technology.
increased
Instagram,
on
to
from
itself.
by
attract
through
centres
come
and
individuals.
readers
spreads
to
powered
SMM
other
attention
encourages
or
business,
in
Facebook,
popularity
Twitter,
with
the
LinkedIn,
development
YouTube
and
of
websites
such
as
WeChat.
Benefits of SMM
way to reach lots of customers
●
Wide
reach
–
the
internet
has
enabled
rms
to
reach
out
to
more
quickly
consumers
of
the
exceeds
time
what
about
with
is
Cost
and
●
to
be
particular
brands,
–
to
–
coupled
in
–
in
large
percentage
sites
social
with
is
such
media
as
far
and
what
voice
than
they
their
any
stakeholders
that
a
rm
like
or
provide
can
dislike
customers
complaints.
kind
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of
paid
are
nd
This
in
market
community.
useful
and
feedback,
valuable
public
measurable
opinion,
brand
habits.
less
expensive
than
using
traditional
advertising.
sharing
exposure,
to
high
short
key
management.
of
provides
interaction,
buying
the
sense
other
means
interactions
and
valuable
a
and
facing
relationship
SMM
leading
a
A
networking
spent
This
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questions
more
SMM
repeat
are
create
television
recognition
audience
ask
to
viewers.
offerings.
customer
using
as
due
wide
customers
can
social
time
customers
passive
consumer
–
such
cases,
than
helps
especially
Speed
most
customers’
savings
Brand
it
and
level.
emails.
information
methods
●
and
trends,
activity,
●
social
interactive
uses
YouTube,
product
dialogue
Market
on
rm’s
as
research,
data
in
rather
and
population
on
opportunity
known
ongoing
–
personal
and
challenges
the
the
total
spent
Engagement
out
more
Twitter,
participants
●
a
internet’s
Facebook,
●
at
and
can
brand
loyalty
internet
space
of
spreading
increase
and
speed,
of
information,
consumers’
an
awareness
enhanced
advertisements
brand
can
of
image.
reach
a
time.
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4.5
The seven Ps of the marketing mix
Limitations of SMM
Student workpoint
Accessibility
●
areas
with
problems
poor
promotional
internet
campaign
–
regions
with
connectivity
that
uses
this
no
will
computers
miss
out
on
or
internet,
any
or
4.10
ongoing
Be a thinker
tool.
1.
Lurkers
●
–
these
are
individuals
who
merely
absorb
information
Distinguish
between
online
above-the-line,
rather
of
than
social
not
promote
media
quite
users
honed
or
share
are
their
it.
According
lurkers,
online
while
social
to
TopRank
others
skills.
are
These
Marketing,
newcomers
are
who
individuals
below-
34%
the-line
and
through-
the-line
promotional
have
who
strategies.
may
not
be
active
in
helping
a
rm
promote
its
product.
2.
Used
●
as
a
supplement
–
most
businesses
will
use
SMM
as
Using
your
supplement
to
other
marketing
methods
and
not
as
a
them.
Since
it
is
easy
for
any
business
to
join
a
social
it
can
be
difcult
for
businesses
to
stand
out
from
the
the
need
to
also
have
other
marketing
new
technologies
having
an
impact
crowd,
on
hence
of
evaluate
networking
are
website,
business
choice,
replacement
how
for
a
a
its
promotional
techniques.
strategies.
Despite
these
drawbacks
drive
limitations
and,
repeat
most
business
of
SMM,
the
importantly,
and
attract
benets
SMM
new
in
many
provides
a
ways
great
outweigh
way
for
a
the
rm
to
customers.
Place
with
is
about
how
distribution
the
right
●
in
This
system
of
the
to
●
It
get
●
enables
The
use
●
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to
the
only
to
from
is
the
the
crucial
intended
it
right
user.
available
product
element
store
to
come
and
and
location
of
Businesses
present
in
up
such
market
the
to
the
with
as
to
business
should
location
effectively
intermediaries,
to
a
the
make
It
to
is
concerned
consumers.
the
right
marketing
The
place
mix
at
for
mix
their
businesses
of
getting
customers.
efciently
businesses
brand
includes
to
size.
not
goods
reaches
distributed
marketing
of
products
product
is
Distribution
any
refers
location
the
product
time.
businesses
Place
how
the
gnitekraM 4
Place
to
the
their
also
best
to
consumers’
ways
the
develop
to
strategies
location.
distribute
their
consumers.
wholesalers
their
but
therefore
products
and
and
retailers,
enhance
helps
their
image.
growing
reach
a
global
wide
use
range
of
of
the
internet
consumers
is
making
directly
with
it
easier
their
for
businesses
products.
Key term
The impor tance of different types of distribution channels
Channel of distribution
A
distribution
channel
or
channel
of
distribution
is
the
path
taken
by
a
the path taken by a product
product
from
the
producer
to
the
consumer.
Some
distribution
channels
from the producer or
make
use
of
intermediaries.
These
are
middle
in
product’s
people
such
as
wholesalers,
manufacturer to the
agents,
and
retailers
that
lie
the
path
from
the
producer
to
the
nal consumer
consumer.
The
common
distribution
channels
are
described
below.
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4
Zero intermediary channel
This
is
where
For
example,
this
method.
e-commerce.
this
a
product
is
perishable
Other
In
the
sold
directly
products
examples
service
from
such
include
sector,
as
the
producer
lettuce
the
use
airline
of
ticket
or
milk
mail
to
order
bookings
the
can
be
consumer.
sold
using
catalogues
can
be
made
and
via
method.
One intermediary channel
This
to
involves
sell
used
are
the
where
the
expensive.
through
use
various
of
one
from
retailer
and
Two
large
intermediary
the
is
Examples
retailers.
dealerships,
sell
the
products
producer
operating
include
other
on
a
selling
examples
supermarket
household
to
(such
the
as
a
large
scale
expensive
are
chains
retailer
consumer.
or
or
as
an
most
where
furniture
Volkswagen
(such
In
the
or
using
Walmart)
agent)
cases,
it
is
products
jewelry
retail
car
being
used
to
products.
Two intermediaries channel
In
this
used
case,
by
important
the
two
in
producer
selling
intermediaries
producers
goods
this
to
sell
the
channel
and
over
the
(usually
product
and
act
consumer.
large
as
to
an
This
geographical
wholesalers
the
additional
channel
is
retailers)
The
are
wholesalers
intermediary
particularly
are
between
useful
when
distances.
gnitekraM 4
producer
consumer
producer
producer
producer
and
consumer.
agent
retailer
consumer
wholesaler
retailer
consumer
wholesaler
retailer
consumer
Figure 4.5.4 Channels of distribution
Table 4.5.3 Advantages and disadvantages of dierent distribution channels
Distribution
Ad vantages
Disad vantages
channel
Zero intermediary
•
Low cost.
•
Fast.
•
Ideal for perishable products.
•
Promotion is done by the producer, which could
be time-consuming and expensive.
channel
•
•
The producer incurs all storage and delivery costs.
The producer is the key decision-maker in the
distribution process.
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4.5
The seven Ps of the marketing mix
Distribution
Ad vantages
Disad vantages
channel
One intermediary
•
Promotion and customer service are done by
channel
•
As the retailer ’s prot mark-up is included in the
the retailer.
selling price, the product may be expensive for
consumers.
•
The costs of holding stock are incurred by the retailer.
•
The retailer assists in selling the product at
•
The producer may not be aware of the promotional
strategy used by the retailer.
convenient places to consumers.
Two intermediaries
•
The wholesaler incurs storage costs, therefore
channel
•
Two prot mark-ups could lead to a more
reducing these costs for the producer.
•
expensive product oered to consumers.
The wholesaler breaks the bulk for the retailer by
•
This channel fur ther reduces the producer ’s
providing large quantitates in smaller batches.
•
responsibility for promoting products.
This is an appropriate channel when selling over long
distances.
yduts esaC
Anso matrix
Anso matrix – some organization examples
Market
penetration
This case study gives some
The
Android
operating
system
is
a
good
example
of
a
market
examples of how the Anso
penetration
strategy.
Apple
and
Blackberry
dominated
the
US
matrix provides businesses
smartphone
industry
in
the
early
2000s.
But
today
Android
is
the
with a framework with which
leader,
with
a
greater
market
share
than
Apple.
gnitekraM 4
market
to analyse and plan their
Product
An
example
of
smartphone
models
growth strategies.
development
product
development
companies
every
few
like
Apple
in
and
the
Ansoff
Samsung
matrix
putting
is
out
new
phone
Student workpoint
years.
4.11
Market
development
Be an inquirer
A
good
example
initially
started
of
a
their
market
service
development
in
the
US
strategy
and
is
expanded
PayPal.
to
They
other
countries.
Using
specic
organizational
examples,
explain
distribution
Diversication
Alphabet
search
Inc
but
exemplies
gradually
this.
moved
They
into
started
different
on
the
internet
markets,
with
including
Google
the
oil
which
channels
sector.
most
these
are
likely
effective
for
to
be
each
of
industries:
a)
clothing
b)
jewelry
c)
bakery
People
People
are
produced
and
experience
People
their
the
most
consumed
can
usually
staff
example,
have
be
from
people
attitude,
to
be
how
service
should
an
long
customer
experience
as
be
they
like,
to
to
queue
to
service
or
the
the
waiters
when
and
feedback
Examples
questioning
a
at
of
Services
all
ensure
times.
waitresses
to
are
customer
consuming
should
serving
questionnaires
book
specic
person
businesses
their
is.
and
of
business.
appearance
provide
brief
served,
so
and
smile
service
providing
to
needs
skills,
and
any
moment,
the
they
opportunity
banks
too
of
encourage
courteous,
effective
include
waited
same
meet
right
customers
they
the
to
the
to
if
element
buy
Offering
feedback
at
changed
restaurants
appropriately,
assess
important
it.
that
For
to
dress
customers.
staff
how
asking
cinema
can
to
help
collect
customers
goers
on
the
ticket.
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4
People
good
World
and
to
have
an
customer
Cup,
there
security
the
important
they
the
collect
service.
waiter
you
are
guards)
organization
and
role
many
who
to
play
Behind
people
ensure
in
service
key
(including
that
delivery
events
the
such
as
and
managers,
service
is
maintaining
hosting
the
engineers,
appropriately
FIFA
chefs,
delivered
customers.
Another
the
important
relationships.
or
consumed,
Therefore,
business
When
you
its
money,
you
waitress
what
factor
and
ie
go
who
the
(CRM),
which
service,
is
they
to
ensures
role
form
For
get
paid
on
you
in
the
on
staff
in
arrival,
eat,
are
you
of
takes
pay
the
cases
between
the
service
organization
there
your
them
link
deliver
will
order
be
and
money
for
for
a
serves
what
you
transaction.
trained
a
people
most
relationship
Customer
developing
transactional
behalf
customer
vital.
a
example,
restaurant,
you
is
that
in
people
contractual
consumer
important
a
After
the
person’s
the
that
greets
requested.
completing
and
is
customers.
between
relationship
to
deliver
long-term
the
management
good
customer
employee–customer
relationship.
All
organizations
faced
with.
organization.
same
gnitekraM 4
is
of
the
and
leading
among
will
strengthening
able
to
to
its
motivate
Consequently,
need
with
to
the
organization’s
unity
learn
to
deal
includes
Undoubtedly,
organization,
opinions,
It
need
Culture
a
the
of
of
a
to
work
close
customers’
or
dominate
they
behave
others
differing
in
are
in
the
the
beliefs
and
gap.
gap
and
improve
achieve
will
treat
the
foster
a
sense
teamworking
organization’s
customers
relationship.
cultural
needs
to
settings
perceive
this
help
to
employee–customer
the
cultural
having
cultural
will
workforce
understand
may
employees
This
to
various
employees
cultures
responsibility
employees.
employees
and
satisfy
some
groups
the
way
formation
motivated
the
with
the
In
dimensions
well,
addition,
of
goals.
further
marketers
customers
to
be
fully.
Processes
Processes
not
providing
the
product
DHL,
for
check
that
sender,
the
path
will
need
requirements,
others.
If
customer
to
before
optimal
a
so
to
are
loyalty
be
its
they
in
are
its
policies
to
involved
They
also
that
any
clearly
there
ensuring
are
a
they
repeat
go
form,
can
in
in
involve
how
the
a
for
and
to
aware
In
security
ensures
by
the
addition,
the
necessary.
their
of
what
processes
identifying
way
a
track
if
handling
long
or
required
to
shape
of
parcels
processes
This
as
use
of
doing
delivery
fully
processes
can
by
recipient.
number
complaints,
and
throughout.
dene
are
taken
they
delay
delivery
systems
and
standards
including
well,
is
the
state
stakeholders
customer
efcient
right
care
sent
number
about
to
the
exact
quality
all
and
utmost
effective,
tackled
fast
having
that
need
that
consider,
and
for
enquire
and
products.
consumer.
on
tracking
handling
these
the
itself
businesses
marketing
businesses
to
procedures
organization’s
ensures
and
take
the
delivered
receives
outset,
For
is
maintaining
processes
do.
also
to
an
known
documents
sender
the
It
is
prides
product
document’s
At
delivered
and
this.
on
the
is
relate
delivering
example,
documents,
facilitate
only
and
to
that
customer
orders,
towards
among
developing
customers.
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4.5
Some
its
ways
a
processes
business
methods
paying
cash,
easy
for
as
time
a
problems
will
in
a
on
on
support
services,
that
a
restaurant,
long
their
which
solving
product
how
prepare
such
reduces
spends
using
customers
to
as
paying
credit
customer
take
payment
such
internet,
when
informing
it
varied
after-sales
technical
the
●
the
paying
providing
●
and
customers,
over
or
improve
include:
providing
●
can
The seven Ps of the marketing mix
meal
adds
to
customerservice
exploring
●
speed
up
and
the
taking
measures
delivery
of
to
products
tocustomers.
A business like DHL puts many processes in place to operate eciently
Ensuring
can
be
the
right
process
time-consuming,
businesses
which
lack
is
in
place
complex,
the
and
experience
expensive,
and
capital
especially
that
larger
for
start-up
businesses
gnitekraM 4
mayhave.
Physical evidence
Physical
evidence
example,
well-designed
teaching
staff
and
it
the
difcult
deciding
Also,
it
element
tangible
important
a
private
managers
element
of
intangible
for
to
is
an
of
buy,
especially
because
aspects
to
for
of
of
a
their
the
of
with
service
more
and
schools,
products
the
regard
to
marketing.
attention
spacious
clearly
to
its
nature.
offering
with
service
position
intangible
service
in
pay
to
ofces
bringing
For
providing
for
out
their
the
evidence.
evaluate
business
may
classrooms
public
physical
nature
consumers
difcult
in
differentiator
school
well-equipped
than
differentiating
However,
is
managers
will
a
service
being
quality
new
and
Effectively
the
makes
before
value
products
enable
element
offered
for
with
a
focusing
business
money.
service
on
to
C oncep t
the
remain
CRE ATIVITY
competitive
in
the
market.
Today, creative thinking is rated
Physical
evidence
should
therefore
enable
customers
to
“see”
what
is
on
as one of the most in-demand
offer
prior
to
purchasing
the
service
offering.
Businesses
should
also
ensure
skills by leading organizations.
that
the
testimonials
customers
pass
on
to
others
about
their
product
are
Creativity is a way of thinking that
good
and
lead
to
an
enhanced
image
and
increased
sales.
motivates and challenges people
to generate innovative solutions
to problems. Creativity is more
Appropriate marketing mixes for particular
than just ar tistic value.
products or businesses
An
appropriate
marketing
mix
ensures
How can organizations eectively
that
consumers’
needs
incorporate creativity in their
and
marketing strategies? To what
wants
are
adequately
met.
This
requires
businesses
to
produce
the
right
extent does creative marketing
product,
sell
it
for
the
right
price,
make
it
available
at
the
right
place,
and
lead to business success?
communicate
through
the
right
promotion
channels.
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4
In
addition,
efcient
businesses
procedures
consumers,
observable
and
to
should
to
consider
ensure
paying
effective
attention
to
hiring
the
delivery
any
visible
right
of
people,
their
touch
adopting
products
points
that
to
are
customers.
Benets of a seven Ps marketing mix model
It
●
brings
making
It
●
together
it
assists
a
strategy
The
●
easier
marketing
for
business
ideas
a
business
in
strategy
to
and
concepts
market
its
formulation
in
a
simple
products
all
the
or
way
manner,
services.
to
implementation.
model
customer
allows
needs,
a
business
resource
to
vary
its
availability
marketing
and
market
activities
based
on
conditions.
Drawbacks of a seven Ps marketing mix model
The
●
incorporation
evidence)
in
businesses
that
promotion,
The
●
seven
business
As
●
gnitekraM 4
is
and
is
may
of
selling
not
an
an
that
could
out
in
the
one
four
Ps
on
as
processes,
physical
complicated
model
(product,
addressing
singular,
product
buy
if
the
risk
a
sell
message
potential
Consumers
by
some
price,
issues
related
to
this
could
these
in
mean
that
isolation,
businesses
which
is
not
may
of
the
loss
not
in
marketing
sales,
identify
mix
which
with
is
will
the
not
clear
affect
product
its
and
it.
marketing
expensive
exclusive
real-estate
effective,
be
the
(people,
viewed
mixes
include:
car
in
a
colourful
perfume
at
a
stall
children’s
where
magazine
second-hand
clothes
sold
appropriate
●
note
inappropriate
●
be
misses
than
protability.
advertising
a
Ps
be
case.
rm
a
●
To
the
to
are
extra
may
to
mentioned
focused,
Examples
Ps
used
more
important
therefore
●
are
model
produce
long-term
three
place).
Ps
necessarily
It
of
seven
productivity.
product
that
the
well
each
agent
and
in
marketing
attempting
order
mix
coordinated
so
to
for
that
to
sell
achieve
a
houses
its
business
the
in
a
vegetable
marketing
will
elements
need
market.
objectives,
an
to:
consistently
complement
other
●
be
clear
and
●
consider
●
look
●
target
the
into
the
focused,
market
the
degree
right
not
it
is
of
abstract
aiming
or
to
ambiguous
sell
competition
the
that
product
the
to
product
faces
consumer.
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4.5
The seven Ps of the marketing mix
Business plan
•
A business plan is the blueprint for taking an idea for
Marketing strategy, which explains how
a product or service and turning it into a commercially
the business will dierentiate itself from its
viable reality.
competitors’ businesses, and what approach it will
take to get customers to buy from it.
The marketing portion of a business plan addresses how
to get people to buy the product or service in sufficient
•
Marketing and sales plans, which specify the
quantities to make the business profitable. It consists of
nature and timing of promotional and other
the following:
adver tising activities that will suppor t specic
sales targets.
•
Market analysis, which assesses the market
environment in which the business competes,
Using an organization of your choice, devise a marketing
identies its competitors and analyses their
plan (with seven Ps) that would be par t of the wider
strengths and weaknesses, and identies and
business plan.
quanties the target market.
Product
 design
 technology
 perceived usefulness
 convenience of use
gnitekraM 4
 quality
 packaging
Price
 brand utility
People
 skimming
 accessories
 employees
 penetration
 warranties
 management
 value based
 organization culture
 cost plus
 customer ser vices
 cost leadership
 orientation
Marketing
Place
 retail
mix
 wholesale
Physical evidence
 mail order
 facilities
 Internet
 infrastructure
 direct sales
 ser vice delivery
 peer to peer
 multi-channel
Promotion
 special oers
Processes
 adver tisements
 uniformity of oering
 endorsements
 ser vice delivery
 user trials
 ser vice consumption
 campaigns
 joint ventures
Figure 4.5.5 Summary of the seven Ps relevant to a business in the service sector providing intangible products
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4
yduts esaC
Apple’s seven Ps marketing mix
This
is
how
achieve
Apple
uses
the
seven
Ps
method
to
Promotion
success.
Apple
and
Apple
uses
was
founded
as
a
computer
company
services.
in
the
United
States,
but
since
then
a
wide
range
of
electronic
These
TV
,
good
sales
well
history,
to
customer
the
iPhone
needs.
has
to
marketing
promote
Twitter,
its
products
Instagram,
of
and
billboards.
social
media
Apple
thus
marketing
and
products,
Based
been
main
include
print,
use
through-the-line
adapting
the
has
makes
launched
of
channels
in
Facebook,
1976
most
communication
Product
the
on
promotional
strategies.
its
People
most
soldproduct.
Since
its
75,000
Price
launch,
people
company
Since
the
beginning,
Apple
has
opted
and
prestige;
something
seeks
that
spends
a
a
business
aspect,
dened
how
Apple
and
sales
product
then
Apple
high
prices.
strategy
was
has
sold
evolves.
for
managed
The
£666.66
to
keep
the
best
to
of
some
is
the
UX
or
since
high
gnitekraM 4
can
tailor
its
products
the
one
of
User
training
for
its
to
help
its
staff
deliver
customers.
processes
stage,
the
important
product
for
Apple
designers
and
are
are
actually
main
from
depending
on
of
other
the
departments.
product
has
Once
begun,
the
the
Executive
the
meets
every
Monday
to
review
and
check
requirements.
Apple’s
pricing
acknowledged
audience
strategy
To
has
consumer
what
customers.
they
cater
for
Program
always
feedback,
need
to
giving
become
another
product’s
its
potential
who
found
its
decisions
that
a
the
brand
lower
price
later
so
released
that
Then
and
work
aim
the
the
Global
alongside
to
Engineering
Supply
each
produce
the
other,
best
making
product.
segment
products
Apple
has
built
a
product,
it
redesigns
the
too
the
everyone
and
sends
it
through
the
manufacturing
iPhone
process
for
Manager
will
product
expensive,
design.
Manager
Once
consumers
SE
and
Experience.
the
of
staff
professional
prices
Team
user’s
on
Processes
design
Apple
time
charging
relatively
competitors,
Apple
best
than
tech
rst
and
isolated
strengths
of
outcomes
especially
compared
the
more
giant
has,
In
Despite
employ
hired
The
their
the
pricing
to
lot
development
from
has
for
and
innovation
Apple
worldwide.
could
again.
This
is
a
rigorous
4
to
6
week
join
process.
Apple’s
community
and
enjoy
itsservices.
The
Apple
uses
a
price
skimming
strategy,
product
designers
means
it
sets
a
high
initial
price
for
a
once
the
main
consumers
have
bought
effort
will
drastically
reduce
the
price
to
to
low-end
obtain
new
as
buyers.
much
products
The
revenue
arrive
on
objective
as
here
possible
the
packaged.
work
only
on
communicate
consumer:
Apple
the
has
special
packaging
the
right
in
message
simplicity,
sophistication,
to
and
capture
premium
the
then
it,
the
Apple
who
product,
an
then
is
which
is
products.
to
before
other
The
next
ensure
market.
stage
that
features
or
is
staff
to
launch
are
services
well
it
the
product
trained
on
and
the
new
provides.
Place
Physical
Apple
stores
sell
only
Apple
Apple
Apple’s
products
and
services
are
physical
streets
and
available
stores
at
on
situated
strategic
Apple’s
mostly
locations.
website,
on
their
such
products.
as
telephone
online
products,
and
physical
they
focus
stores
on
and,
as
simplicity,
high
They
who
its
also
are
minimalism,
and
an
physical
use
companies
sophistication,
which
leads
to
also
attractive
evidence.
Every
effort
is
other
made
distributors
has
available
with
in
evidence
products.
to
to
improve
customer
experience.
sell
Source: Adapted from https://www.kevinvejo.com/post/
applemarketingmix
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4.5
The seven Ps of the marketing mix
TOK discussion
SWOT analysis
1.
The seven Ps frameworks
The internal and external attributes inuencing Apple are provided below from a
suggest that marketing
marketing perspective.
has seven aspects, all of
which can be described
Strengths
Weaknesses
•
•
with a word that star ts
with the letter “P ” in
Most valuable brand in the market, with
High-priced products due to their
the English language.
a brand value of over $300 billion.
premium pricing.
If this model had been
•
A brand of choice in corporate oces.
•
Millions of loyal customers whose
•
Limited adver tising and promotions
created by speakers of
that rely heavily on their retail stores.
numbers are steadily increasing.
•
another language, would
the marketing mix be
Narrow product line.
dierent?
Oppor tunities
Threats
•
•
2.
Consistent customer growth, with the
power to tap into the internet for future
Some adver tisements use
Increasing competition from brands
scientic and technical
like Samsung, Google and Dell.
terms, for example about
cosmetics. Why is that?
oppor tunities to gain new customers
•
Android commands a greater market
What does this tell us
and form new alliances.
share globally in the software
about the hierarchy
•
Expansion of its distribution network
smar tphone market.
of dierent areas of
for greater market growth.
•
Lawsuits were led when it announced
Expansion of its music streaming
that it deliberately controls CPU
services due to a growing youthful
performance on iPhone models that
3.
gnitekraM 4
knowledge?
•
What role do logic
and emotion play in
population and rapid economic growth
have older and degraded batteries.
marketing? Is there room
in emerging economies.
for both?
yduts esaC
How two companies shifted their marketing strategy to stay competitive
BMW
BMW
operates
competitive
a
result,
to
BMW
maintain
However,
are
to
its
increase
Previously,
proposition
in
a
highly
automotive
heavily
customer
well
globe
the
base
in
its
and
brand
Mercedes-Benz
invested
market
in
industry.
marketing
shares
while
loyalty.
and
marketing
As
mix
Jaguar
campaigns
maintaining
loyalties.
BMW
(USP)
high-quality
used
of
sports
characteristics
and
invests
their
brand
loyalty.
the
–
competitors
similarly
their
across
industry
to
Slogans
“Perfection
its
unique
building
cars
gain
such
with
unique
customers’
as
“Pure
perfected”
selling
point
or
high-performance,
handling
attention
driving
featured
in
China
and
pleasure”
campaigns
around
the
world.
In
of
the
Ansoff
matrix,
BMW
shift
began
with
strategy
into
but
its
later
key
switched
to
product
strategy.
markets
such
a
in
marketing
new
market
strategies
segment
came
about
became
the
largest
a
single
market-extension
as
the
because
context
India,
BMW’s
This
marketing
and
development
market
in
which
BMW
operated.
Customers
as
have
developed
a
new
preference
since
2000
that
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4
continues
high
oil
fuel
to
grow
in
efciency.
prices
in
all
but
strength
Due
the
to
and
popularity
dramatic
OPEC
nations
(a
shares
–
increases
in
Africa,
medium-risk
in
North
strategy
America,
appears
and
to
Asia,
have
BMW’s
paid
off.
STEEPLE
The MultiChoice Group
factor),
that
use
Toyota
are
customers
less
and
fuel
to
Tesla
response
raft
of
First,
mix,
to
as
part
BMW
expos
a
of
to
in
the
dynamics”
concept
latest
world’s
media
at
was
car.
was
cars
low
The
that
BMW
fuel
In
instituted
the
a
marketing
Essentially,
it
to
positioned
a
the
BMW
,
monopoly
to
is
consumers’
new
also
changed
techniques
the-line
to
gnitekraM 4
“Exhilaration
new
and
t
focus,
major
and
of
new
its
image.
slogans
excess”)
efcient
Below-
such
became
dynamics
product-differentiation
reach
gap
new
products
in
form
BMW’s
became
its
BMW’s
paired
BMW
existing
to
with
began
cars
gruelling
that
that
USP
tool.
the
part
and
Dakar
it
had
products
The
participants
extraordinary
the
fuel
has
the
most
BMW’s
in
a
as
the
taking
rally
to
efciency
previously
by
is
of
its
neglected
BMW
part
known
have
in
as
vehicles
X
the
a
race
with
DStv
a
complete
success.
In
an
BMW
of
has
customers
lost
competitors.
to
the
order
This
product
to
some
fuel
emissions,
BMW
Series
in
As
a
result,
customers
has
strategy
attempt
BMW
want
most
has
of
of
its
to
please
lost
a
and
V10
engines
many
preferred
to
view.
new
short,
BMW’s
has
arrival
HD
to
result
the
to
of
mix.
lower
engines
that
loyal,
pivot
caused
its
of
and
use
to
changes
HD
some
extent.
has
been
more
towards
a
However,
with
and
As
aware
on
to
premium
highest
in
because
used
DStv’s
the
income.
rates)
Southern
a
result,
Africa
they
demographic
of
this
online
DStv
are
in
has
advertising
on
media.
In
its
less
powerful
not
of
carbon
in
new
to
Twitter
and
and
provide
to
channels
M-Net
these
HD
Facebook
prospective
the
brought
premium
latest
were
as
rst
customers
products)
For
promoted
(those
on
example,
Discovery
before
for
information
market.
such
pages
customers
most
the
Showcase
online
likely
reaching
to
to
via
television
advertisements
other
(a
result
of
segmentation).
However,
5
fuel.
V10.
a
come
which
result
to
the
is
of
DStv’s
to
pay
implementation
without
the
some
customers
both
campaign
to
out
the
this
cost
to
system
have
new
promote
it.
prospective
to
–
support
This
a
and
As
HD
price
the
increase
customers
has
largest
upgrades
suffered
systems
strategy
the
customers.
technological
broadcasting
for
of
drawbacks
increased
expensive
television,
who
in
increase
marketing
price
could
also
have
customer
be
DStv’s
market
share.
This
demonstrates
damaged
how
to
there
the
high-income
protability
pay
emphasis
follow
These
increased
preference
that
exploit.
techniques
example,
who
social
products
priced
In
rst-
changed
cars,
customers
marketing
using
V8
ensure
to
the
still
not
fuel-efcient
loyal
been
efciency
ceased
favour
who
its
largely
element
increase
cars
who
of
mix
the
For
highest
and
now
market
majority
of
demographic
Africa,
customers
their
market
the
greater
customers
been
from
has
fact,
considered
strategy
efciencies.
shift
to
entrants
technologically
purchase
However,
heavily
be
does
In
strategies.
fuel
such
rebranded
Rally.
customers.
market.
could
Multichoice
new
has
its
MultiChoice
competitive
marketing
terms
(those
of
Southern
marketing
promotion
(which
were
requires
new
emphasize
models
publicise),
Series
to
in
subscribers
as
websites
were
that
from
(HD)
from
televisions,
preferences
for
customers.
placed
The
and
ranging
attention
beneted
customer
marketing
high-denition
elds,
apparent
But
its
preferences.
BMW
promotion
brand
(including
without
of
MultiChoice)
it
shifted
preferences.
many
this
methods
of
also
customers’
of
highly
by
as
market
refocused
BMW
is
a
MultiChoice’s
towards
deal
advantage.
meet
no
arrival
cameras
it
in
has
meet
variety
to
(owned
mover
showcased
technology
immediately
than
a
great
operate
DStv
“efcient
a
to
the
in
smartphones
not
denitive
the
particular,
Unlike
Group
strategy
attracted
automotive
more
and
technology
showcasing
branded
MultiChoice
mix
differentiation.
largest
fuel-efciency
and
have
in
and
the
example,
their
strategy.
changes
None
which
BMW’s
and
marketing
cars
For
focused
designing
vehicles
with
development,
world.
i8,
of
product
concept
BMW
friendly
its
began
out
further.
thrived
result
this
changes
“vision”
the
–
sought
travel
have
environmentally
consumption
In
have
increased
responding
to
customer
preferences
can
have
market
a
negative
effect
on
the
customers
themselves.
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4.5
The seven Ps of the marketing mix
Revision checklist
Assessment ad vice
✓
The
seven
people,
Ps
of
the
processes
marketing
and
physical
mix
are
product,
price,
promotion,
place,
evidence.
Researching how dierent
organizations market their
✓
A
product
life
cycle
illustrates
the
six
life
cycle
stages
that
a
product
products provides a good
passes
through:
its
development,
introduction,
growth,
maturity,
insight into how marketing
saturation
and
decline
in
the
market.
Extension
strategies
are
implemented
product’s
life
cycle
works in the real world.
stages
of
a
lengthening
✓
The
Boston
that
BCG
and
✓
(or
matrix
Branding
that
perceive
Price,
as
using
✓
a
one
for
good
or
and
the
cows
is
a
falling
by
growth–share
relative
products
or
harvesting,
market
as
matrix
share
stars,
of
a
problem
dogs.
holding,
distinguishing
it
and
building
has
a
strong
one
business’s
inuence
on
product
how
consumers
main
It
mix
refers
elements,
to
the
is
essential
money
in
customers
generating
give
up
for
service.
strategies
include
cost-plus
predatory
pricing,
premium
pricing
aim
is
communicating
can
be
to
and
contribution
obtain
new
information
categorized
promotion
products,
as
pricing,
either
a
dynamic
pricing.
customers
about
penetration
pricing,
or
rm’s
retain
existing
products
above-the-line,
to
below-the-
uses
including
independent
advertising
mass
through
media
the
to
promote
television,
radio
newspapers.
Below-the-line
Instead,
at
and
promotion
rms
consumers
products,
sales
eg
both
to
many
a
as
media
business
Place
holistic
ways
Social
is
and
know
direct
and
view
depend
direct
or
those
marketing,
on
control
who
the
on
are
personal
use
of
independent
promotional
interested
selling,
in
public
activities
their
relations
an
integrated
the
market
approach
promotion
and
reach
out
of
combining
strategies.
to
The
customers
aim
in
as
possible.
attracting
about
uses
below-the-line
of
marketing
consumers
right
not
their
promotion
above-the-line
get
they
through
does
focus
promotions.
Through-the-line
to
from
saturation
through-the-line.
rm’s
is
cash
marketing
pricing
Above-the-line
aimed
✓
or
leader,
Promotion’s
media.
✓
the
competitive
by
with
and
business
pricing,
or
✓
of
a
loss
a
sales
or
product.
consumers.
✓
another,
pricing,
ones
✓
rm’s
matrix
rate
classifying
include
concerned
of
Appropriate
line
by
a
(BCG)
growth
marks),
strategies
is
a
revenue
✓
portfolio
stop
maturity
cycle.
Group
market
question
to
life
the
divesting.
from
✓
the
product
children
product’s
Consulting
measures
rm’s
✓
the
at
gnitekraM 4
✓
how
by
a
is
a
new
rm’s
getting
way
of
product
the
building
customers
right
is
relationships,
through
social
distributed
product
to
the
to
make
right
driving
media
it
place
repeat
sites.
available
at
the
time.
305
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4
✓
Distribution
channels
intermediary
✓
People
so
channel
comprise
businesses
attitude,
organization.
relationship
✓
Processes
and
inform
particular
✓
Physical
to
its
the
ensure
people
the
element
that
is
customers
intermediary
of
their
at
also
all
due
and
any
a
to
their
and
the
and
on
the
ease
of
includes
the
visible
one
business,
have
they
are
transactional
policies
provided
service
as
channel,
channel.
employees
times
form
business
procedures
product
zero
intermediaries
customers
between
are
the
two
appearance
These
organization’s
They
and
and
essential
should
skills,
organization
an
include
vital
the
the
link
role
in
right
face
of
the
between
the
the
long-term
consumer.
pertaining
delivered
doing
to
to
how
the
business
an
consumer.
with
a
organization.
evidence
customers
in
a
business.
It
is
an
touch
points
that
are
important
differentiator
a
ensures
observable
in
service
marketing.
✓
An
appropriate
needs
and
atthe
right
through
people,
to
any
marketing
wants
price,
the
this
are
right
available
at
promotion
involves
visible
mix
touch
for
sufciently
the
by
right
channels.
adopting
points
business
met
efcient
that
are
producing
place
In
and
addition
to
consumers’
right
product
communicated
procedures
observable
that
the
to
hiring
and
the
paying
right
attention
customers.
gnitekraM 4
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4.5
The seven Ps of the marketing mix
Practice question
To
answer
Quick
Quick
a
prot.
started
question
below
effectively,
see
Unit
6
pages
398–402.
Bite
Bite,
placed
a
the
a
lot
fast-food
of
From
to
restaurant
emphasis
2020,
decline.
on
sales
The
company
branding,
in
Europe
following
and
(the
table
that
until
started
2020
company’s
gives
in
it
2010,
had
biggest
information
has
always
always
made
market)
on
Quick
Bite’s
currentportfolio:
Date of launch
Product
2010
Market information
Other information
high market share but beginning to fall,
very protable, core product but
very low sales growth
protability is beginning to fall
high market share but beginning to fall,
very protable, core product but
very low sales growth
protability is falling rapidly
high market share, low market growth
very successful product
burger rolls
2010
fried potatoes
2015
toasted cheese sandwich
2020
chicken roll
falling sales, low market share in a low
not a commercial success
growth market
falling sales, low market share in a low
2020
cheese and tomato pizza
not a commercial success
Between
rate
of
2012
250
a
concentrating
analysts
and
year.
on
suggest
popularity
of
product
cater
to
becoming
aggressive
affecting
Dene
b)
(i)
rivals.
the
In
Quick
market.
restaurants
Bite
customers
towards
Quick
addition,
Bite
is
Newly
Quick
into
healthier
food
the
established
is
caught
worldwide
closing
existing
proposing
Bite
economic
was
outlets.
a
in
affecting
major
and
the
of
a
stores
marketing
its
the
Industry
introduction
health-food
in
downturn
is
at
restaurants
war
new
are
with
markets
the
the
Bite’s
reference
new
branding.
Ansoff
growth
Applying
Quick
a
the
opened
2020
more
trend
So
Bite
by
competitors.
term
Applying
With
the
chain.
for
major
current
c)
attracting
that
the
Quick
is
demand.
a)
(ii)
2017,
However,
gnitekraM 4
growth market
product
matrix,
Boston
to
Quick
Bite’s
past
the
Consulting
Group
matrix,
seven
Ps
Bite.
of
the
marketing
[4
marks]
[4
marks]
analyse
portfolio.
Quick
marks]
and
strategies.
product
for
explain
[2
mix,
recommend
[ 10
marks]
307
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4
4.6 International marketing
(HL only)
By the end of this chap ter, you should be able to:
➔
Explain how businesses
enter international markets
➔
Examine the oppor tunities
and threats posed by entry into
international markets
International
marketing
refers
across
boundaries:
products
national
another
country.
approach
to
marketing
to
other
Unlike
market
rms
globalization,
their
have
countries.
is
global
main
marketing
from
in
exibility
Increasing
the
one
marketing,
products
the
the
to
of
the
goods
in
their
in
use
in
and
services
marketed
a
to
standardized
international
marketing
competition,
rise
are
rms
countries,
differ
worldwide
cause
where
other
to
of
country
also
approach
known
international
as
marketing.
gnitekraM 4
How businesses enter international markets
Key terms
(HL only)
International marketing
Businesses
use
various
methods
or
modes
to
enter
an
international
market.
the marketing of goods and
Some
of
the
channels
or
strategies
businesses
use
to
enter
international
services across national
markets
are
considered
below.
boundaries
●
Globalization
The
to
internet
market
–
their
businesses
are
many
businesses
products
being
set
because
up
to
are
of
take
increasingly
its
global
advantage
using
reach.
of
the
the
New
low
internet
internet
costs
involved
the increasing worldwide
in
marketing
their
products
abroad.
Existing
businesses
are
using
the
competition leading to a rise
internet
as
an
additional
channel
to
enhance
their
current
marketing
in international marketing
methods.
E-commerce
become
trading over the internet
●
Trading
popular
Exporting
exporting,
–
a
over
as
this
an
can
country
the
internet,
entry
be
also
strategy
done
commits
both
to
for
known
many
directly
marketing
and
its
as
e-commerce,
has
businesses.
indirectly.
product
In
direct
abroad
on
Piggybacking
its
the use of the existing
own
behalf.
control
distribution channels of one
over
involves
domestic business by another
to
home country business trying
indirect
to sell a new product overseas
business
Direct
is
of
one
is
investing
access
a
–
the
operations
intermediary
rm’s
product
business
new
also
sets
production
to
here
piggybacking,
sell
business
in
and
domestic
to
investment
a
advantage
export
domestic
trying
where
gains
the
main
products
an
exporting
channels
●
its
hiring
market
The
local
up
are
as
in
market,
a
agent
abroad.
used
A
the
Indirect
in
the
country
form
existing
another
has
exporting
home
common
already
by
business
of
distribution
home
country
overseas.
foreign
production
plants
that
abroad.
or
where
product
known
is
plants
foreign
making
direct
investment,
abroad.
country
products
is
One
that
easily
this
benet
a
of
business
available
to
308
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4.6
can
adapt
and
wants.
including
●
Joint
or
It
Many
venture
more
gains
products
parties
–
this
share
their
for
costs,
prots,
separate
in
order
Virgin
keep
from
to
Branson’s
Service
use
the
of
where
its
brand,
for
as
an
a
(a
franchise
(a
fee
international
a
a
to
the
the
interests
For
joint
provider
and
(joint
example,
venture
service
offer
two
These
Richard
venture)
its
services
name.
this
is
in
another
a
business
one
and
of
the
that
strategy
grants
permission
expertise
percentage
arrangement
country)
country)
businesses
marketing
where
responsible
venture.
company
concepts,
of
route,
However,
Teleservices
business
in
and
joint
it
needs
project.
business
network
–
this
being
cellphone
brand
franchising
Examples
each
that
Toyota.
business
markets,
Tata
The
CDMA
trademark,
royalty.
is
and
incurred.
so
consumer
arrangement
a
with
formed
from
Mobile
business
in
losses
which
franchisor
franchisee
business
Group.
suit
followed
independent
newly
Tata’s
Virgin
the
have
invest
and
formed
International
a
knowledge,
to
Samsung,
resources,
India,
was
under
market
international
company,
makes
is
to
their
the
enter
Mobile
Nike,
agree
parties
the
local
accordingly
companies
Coca-Cola,
participants
●
also
its
in
sales
have
include
the
to
use
exchange
revenue
used
this
Ocean
as
Basket,
gnitekraM 4
customers.
International marketing (HL only)
Virign Mobile India is an example of a joint
Steers,
Wimpy
and
Nando’s.
See
Chapter
1.5
for
more
on
venture
franchising.
Opportunities as a result of entering and operating
internationally (HL only)
●
A
larger
market
the
market
provides
customer
protability.
●
product
is
country
but
risks
by
dependence
case
of
key
on
perceived
domestic
brand
●
–
as
new
this
in
such
more
market.
image
stage
other
its
to
an
–
creates
its
life
life
opportunity
countries.
the
gain
than
reach
the
the
the
businesses
and
existing
home
to
spread
reduces
home
brought
businesses
those
greater
in
an
market
in
downturn.
global
that
just
sales
afresh.
Diversication
from
new
increases
when
cycle
cycle
for
a
higher
strategy
product
begin
revenue
means
to
extension
to
which
that
brand
about
by
involved
operate
prestige
only
that
can
in
can
be
the
drive
loyalty.
Gaining
economies
of
scale
–
a
operations
through
international
abroad.
a
this
so
of
products
products,
business
economic
“successful”
This
the
market
an
marketing
those
effective
sales
as
company’s
for
provides
gaining
brand
international
an
saturation
a
a
reach
enables
also
investing
risks
Enhanced
This
is
enters
Diversication
their
●
the
introducing
greater
base.
This
in
–
a
As
make
the
advantage
result,
business
by
can
more
increasing
its
business
reduce
the
by
average
competitive.
prot
can
marketing
The
mark-up
increase
selling
costs
of
business
and
its
scale
more
production
can
gaining
of
products
then
and
take
higherprots.
309
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4
●
Forming
enable
Such
a
new
suppliers
compared
provide
business
business
to
to
may
relationships
make
offer
suppliers
opportunities
new
contacts
better
in
the
for
prices
home
increased
–
marketing
with
for
inputs
market.
overseas
various
like
These
efciency
raw
materials
contacts
and
can
stakeholders.
can
protability
therefore
for
homebusinesses.
Threats as a result of entering and operating
internationally (HL only)
●
Economic
many
market
or
market
also
unstable
willing
to
change
unrest
gnitekraM 4
invasions
Legal
is
Social
have
an
there
and
to
this
therefore
have
may
for
of
income
countries
lack
in
wanting
very
exchange
problems
of
low
the
rates
businesses
older
disparity
and
The
in
they
are
policies
other
differences
countries
In
a
on
to
per-capita
income
and
to
buy
differing
willing
the
to
which
risk
regarding
in
the
some
political
businesses
global
of
are
governments
doing
terrorism
which
Middle
different
market
and
countries
East
laws
overseas.
anti-competitive
protection
arena,
that
and
the
examples.
International
that
For
marketers
laws
and
example,
behaviour,
must
intellectual
countries.
in
the
number
demographic
be
of
while
population.
the
of
have
to
should
population,
segment
are
countries
of
with
political
instability
consumer
younger
the
ease
awareness
standards.
exist
nature
domestic
threats
Somalia
if
strict
marketers.
growing
by
to
The
increases
and
various
different
increasing
a
its
volatile
threat
increased
different
–
a
markets.
with.
product
that
the
heightened
abide
for
the
rights
–
challenges
is
also
trade
to
to
pose
The
Afghanistan
international
is
also
known
structures
due
foreign
business.
need
adhere
property
●
in
should
advertising
–
regimes
challenges
EU
also
and
for
countries
Fluctuating
planning
regulations
of
businesses
the
distribution
problem
developing
power
pose
operate
businesses
●
inequitable
major
marketed.
challenges
political
international
civil
the
a
abroad.
Political
can
Many
being
rates
–
pose
purchasing
products
interest
●
can
overseas.
incomes
the
challenges
countries
markets
a
key
countries
in
or
population
consideration
many
in
Europe
African
Marketers
need
accordingly
if
for
there
countries
to
they
be
aware
are
to
of
reap
anybenets.
●
Technological
increased
However,
this
vital
poor
the
a
challenges
speed
number
resource.
at
of
the
growing
businesses
developing
This,
communication
–
which
coupled
systems,
countries
with
can
use
still
limited
have
of
operate
a
the
on
a
lack
internet
global
access
infrastructure
drastic
impact
on
has
scale.
to
and
how
businessesoperate.
310
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4.6
International marketing (HL only)
Hofstede’s cultural dimensions (HL only)
Hofstede’s cultural dimensions help businesses to understand the cultural
similarities and dierences across borders in order to assess the dierent
ways they can conduct business in those countries. Hence, when businesses
market their products and services across international boundaries, they need
to understand each local market individually.
Using Hofstede’s cultural dimensions, carry out research on how culture
inuences international marketing.
TOK discussion
Student workpoint 4.12
Be a thinker
1.
Is the dierence
between national
1.
Examine
the
implications
of
increased
worldwide
competition
on
(domestic) marketing and
international
marketing.
international marketing a
2.
Discuss
how
rms
can
adapt
their
international
marketing
strategies
dierence of degree or a
to
suit
the
changing
global
business
environment.
dierence of kind?
2.
Could it be easier to know
about customers in other
Revision checklist
International
marketing
is
the
marketing
of
goods
and
services
gnitekraM 4
countries than in the
✓
from
home country?
one
country
to
another.
It
provides
businesses
with
the
exibility
to
3.
differ
in
their
marketing
approach
to
other
countries.
Globalization
Regarding international
is
marketing, what is an
the
main
causal
factor
in
the
rise
of
international
marketing.
oppor tunity and what is a
✓
Modes
of
entry
exporting,
into
direct
international
investment,
markets
joint
include
ventures
and
the
internet,
threat? Is it only a matter
international
of perspective?
franchising.
✓
The
opportunities
share,
the
✓
The
formation
threats
social,
of
international
diversication,
of
legal,
of
new
enhanced
business
international
and
marketing
brand
include
a
larger
economies
of
market
scale,
and
relationships.
marketing
technological
image,
include
political,
economic,
challenges.
311
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4
Practice question
To
answer
FT
In
the
question
below
effectively,
see
Unit
6
pages
398–402.
Blue
2020,
with
an
the
low-cost
initial
Johannesburg
online
almost
The
within
caused
other
strategy
Brian
We
to
Kan
hope
The
by
other
this
Dene
b)
Explain
the
the
Blue
more
to
Blue
India
routes,
of
South
prices
the
Kan
African
on
$50
market
ights
tickets
expressed
between
were
his
booked
surprise:
“It
quick
to
these
respond
of
the
prices
to
the
leading
as
part
new
airline
of
its
SA
Air
long-term
market.
run
at
marketing
we
subject
have
to
a
loss
initially,
strategy
money
they
in
government
the
but
he
adopted:
bank
approval
to
was
“We
survive.
and
the
public.”
promised
gnitekraM 4
South
half
director
might
and
international
the
A
sustain
African
opportunity
entering
the
low
Brian
were
$80.
could
FT
at
crash.”
airlines
African
airlines
one
in
entered
tickets
Almost
international
South
term
to
South
that
Blue
executive
prices
before
offer
two
a)
when
the
accepted
the
Chief
website
FT
FT
50,000
Town.
competing
enter
to
of
sell
Cape
cutting
about
done
support
our
airline
to
hours.
whether
condent
have
and
two
competitor
doubted
offer
to
remain
competitive.
marketing.
and
one
African
threat
that
market.
FT
Blue
[2
marks]
[4
marks]
faced
312
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OPERATIONS
5
MAN AGEMENT
5.1 Introduction to operations management
Dene operations and describe their
➔
tnemeganam snoitarepO 5
By the end of this chap ter, you should be able to:
relationship with other
business functions
Explain the role of operations management
➔
What are “operations”?
“Operations”
they
to
do
meet
and
large
can
When
factory
take
a
lines
restaurant,
and
art
of
fundamental
deliver,
as
of
lines
forms.
school
managing
and
think
long
of
such
a
the
needs
we
with
variety
production
The
to
they
consumers’
something.
a
refer
what
oil
are
ie
how
wants.
activities
they
Every
production
of
are
reneries
also
production
all
to
the
or
goods
organization
we
car
plants,
the
best
is
a
but
what
services
producer
to
of
imagine
production
capital-intensive
but
with
end
and
tend
machines,
large-scale,
organizations
get
organizations:
processes,
sophisticated
There
of
produce
a
small
an
end
product
is
bakery,
a
product.
called
operationsmanagement
313
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5
yduts esaC
The rst factory
The
historical
and
private
employed
large
ships
Be a thinker
1.
List
that
to
sense
hundred
5.1
10
cover
on
know.
a
(eg
employed
and
as
studied
Identify
sectors
the
and
the
word.
before
16,000
the
lines
produced
one
Dynasty
were
of
the
rst
Founded
using
in
in
1104
in
every
of
it
a
imperial
been
In
Europe,
Rome.
factory
Italy,
in
The
the
several
mass-produced
parts.
day
BC).
Venice,
Revolution,
ship
had
ancient
examples
manufactured
one
China,
(771–221
established
Industrial
nearly
ancient
The
and,
at
Venice
its
Arsenal
height,
people.
the
may
image
be
of
a
easier
to
modern
understand
in
factory
its
and
the
case
of
the
secondary
semi-automated
sector,
machines.
operations
are
found
in
all
sectors,
for
example:
●
in
the
primary
sector,
●
in
the
secondary
●
in
the
tertiary
●
in
the
quaternary
mining
or
harvesting
1.2.
sector,
industrial
manufacturing
main
of
sector,
open-heart
surgery
those
organizations.
Are
they
sector,
business
consultancy.
straightforward?
The
Why
provides
in
manufactories
(eg
in
operations
always
Zhou
that
small
quaternary),
Chapters1.1
2.
Eastern
states
and
of
However,
primary,
Zhou
mills
trader,
with
charity)
of
Try
range
sole
the
assembly
Operations
types
Rites
manufactories
of
years
apparently
organizations
you
and
Arsenal
modern
Student workpoint
since
mills
Venice
text
workshops,
is
study
of
operations
provides
the
opportunity
to
investigate
how
that?
products
your
Student workpoint
5.2
are
phone,
They
are
from
wood
simple
all
made,
your
at
a
very
clothes,
the
manufactured
for
a
book)
input–output
tnemeganam snoitarepO 5
transformational
that
go
raw
show
Figure
Look
in
around
your
materials
through
can
(see
level.
furniture
using
model
process
basic
a
school
(eg
process
how
you
–
and
in
cellulose
of
at
this
book,
your
pulp
house.
extracted
transformation.
operations
are
the
result
A
of
this
5.1.1).
Be a thinker
The
1.
Apply
the
nished
model
organization
you
for
have
example
IA.
is
Apply
the
your
you
packaged,
sold
transported,
and
maybe
exported
or
bought.
chose
model?
input–
model
to
input”,
process”
“the
OPERATIONS:
INPUT materials
PROCESS,
TRANSFORMATION
what
to
you
be
How
that
“the
then
the
school;
What
can
commercialized,
that
corresponds
and
then
OUTPUT
materials
tcudorp dehsiniF
useful
output
and
an
slairetam waR
2.
your
to
studied,
organization
for
product
input–
imported,
output
“the
output”?
conclusions
draw
from
can
this?
Figure 5.1.1 Input–output model
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5.1
Introduction to operations management
Operations and the other business functions
Operations
can
Operations
are
closely
linked
Operations
deliver
the
●
be
organization’s
●
cars
Operations
done
in
the
case
of
the
car
are
of
the
factory
nancial
need
monitored,
worker’s
salon
for
must
or
1),
of
for
(see
who
management.
Unit
hair.
2),
indirectly
programs
an
example
someone’s
or
business
directly
in
the
and
case
controls
machines.
be
example
salary
breaks
of
functions:
question
people
hairdresser
worker
other
Unit
cutting
by
“what”
the
(see
funding
aspects
the
to
“what”
or
manufacturer’s
Operations
as
objectives
manufacturing
the
●
described
to
(see
Unit
carefully
to
pay
ensure
3)
the
that
and
all
budgeted
car
the
and
factory
hairdressing
even.
In the hairdressing salon, operations are carried out
directly by employees
be
marketed
right
the
The
a
price
car
to
to
(see
the
part
of
a
The
to
or
and
So
are
promoted
are
and
of
has
sold
at
the
the
hairdressing
salon
and
successful.
the
other
depend
manager
business
on
of
a
one
large
departments
and
functions
another
company
make
is
and
is
in
valuable
examples:
direct
scale
must
both
and
other
some
manager
and
functions
the
that
that
protable
operations
with
diseconomies
so
operations
the
Here
services
audience,
business
work
operations
scale
all
system.
position
recommendations.
●
Unit4),
right
between
understand:
good
goods
manufacturer
relationship
easy
are
produce
that
experience
may
take
of
the
place
economies
on
the
of
factory
oor
tnemeganam snoitarepO 5
Operations
●
Student workpoint
(Chapter
1.5),
and
can
identify
some
of
the
strengths
and
weaknesses
5.3
of
the
organization
about,
such
as
that
other
machinery
departments
obsolescence
or
would
likely
not
costs
necessarily
of
know
maintenance
in
Be a thinker
the
foreseeable
future.
1.
The
●
operations
manager
can
suggest
which
forms
of
Find
an
chart
rewards
(such
as
job
rotation
or
teamwork)
may
be
organizational
non-nancial
suitable
(or
not)
of
an
for
organization
the
organization
(see
Chapter
2.4).
For
example,
the
HR
manager
the
not
realize
but
not
that
some
forms
of
motivation
may
be
very
good
in
relationships
theory,
between
in
workers,
practice.
with
levels
hierarchy
The
●
operations
manager
may
know
which
production
costs
(such
semi-variable
would
in
turn
energy
have
an
costs)
impact
on
could
the
be
cut
(Chapter
break-even
point
3.3),
margin
of
safety
(Chapter
and
the
On
that
organizational
5.5).
chart,
identify
department
The
●
operations
manager
can
advise
on
which
product
(Chapter
4.5)
may
be
easily
implemented
(and
those
that
However,
the
marketing
manager
may
have
interesting
ideas
result
in
diseconomies
of
operations.
they
is
important
that
you
understand
that
operations
is
not
just
about
delivering”
(despite
the
negative
image
that
operations
may
Operations
management
is
an
integral
part
of
the
the
to
the
other
functions?
sometimes
What
have).
in
“doing
business
and
linked
scale.
workers
It
How
that
are
would
the
responsible
may
for
not).
the
and
extension
workers
strategies
chains
command.
which
2.
organization’s
of
and
as
of
some
showing
may
organization
can
you
and
conclude?
its
decision-making
process.
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5
Operations and the production of goods or services
Production
or
is
purely
goods
combination
in
usually
non-physical
Table
dened
products
or
services,
of
both,
as
the
creation
(services).
there
and
are
there
also
can
of
Although
a
be
range
an
physical
some
of
products
products
products
overlap
in
(goods)
can
that
be
are
denitions,
as
either
a
shown
5.1.1.
Table 5.1.1 Range of goods and services
High ser vice
High physical
A plane journey is a service which
content but
content but
includes some physical elements
Ser vices
with some
Goods
with some
physical
ser vices
products
Mobile phone,
Cosmetic surgery
Airline travel
Music concer t
Consumer gets the
Customers travel
“new” nose or a
from A to B but they
wrinkle-free face but
may have a meal and
there is extensive
watch a lm, all par t
treatment before and
of the experience that
after the operation
the airline oers
smar tphone
Consumer gets the
Assuming that
product but there
consumers don’t buy
may also be after-
the T-shir t or the CD
sales service (for
or even the sponsor ’s
example in cases of
soft drink , they only
malfunction or when
pay for the pleasure
updates are needed)
This
may
also
be
of the music
represented
through
a
continuum,
as
shown
in
Figure5.1.2.
Pure goods
Combination of goods and services
Pure services
tnemeganam snoitarepO 5
Figure 5.1.2 Continuum of goods and services
There
the
could
tertiary
where
the
not
and
be
a
business
quaternary
operations
take
without
sectors
place.
it
some
is
not
Think
of
form
of
always
a
book
operations,
easy
to
author,
even
identify
for
if
in
exactly
example.
Student workpoint
Where
did
the
operations
take
place?
In
the
author’s
mind,
as
they
thought
5.4
Be a thinker
1.
Consider
the
home
ofce?
chapters
the
continuum
about
goods”
Or
they
services”.
examples
both
be
goods
on
and
adapted
computer,
they
write?
were
And
as
they
walking
wrote
their
ultimately,
the
dog,
does
it
sentences?
thinking
In
their
about
the
matter?
to
services,
the
operations
context.
The
are
essential,
secondary
sector
but
the
and
denition
the
Place
of
goods
still
provide
the
best
situations
in
which
to
of
examine
products
when
would
manufacturing
some
their
and
must
“pure
On
between
For
“pure
text?
the
operations
of
a
business.
this
continuum.
Operations management and sustainability
2.
How
useful
do
you
In
nd
this
our
typical
example
of
a
large
factory,
operations
management
is
visual
about
planning,
organizing,
and
controlling
the
different
elements
and
representation
stages
between
the
of
the
production
process,
from
choosing
the
most
appropriate
raw
two
materials
and
equipment,
to
ensuring
that
the
nished
product
is
of
the
extremes?
standardrequired.
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5.1
The
input–output
model
(Figure
5.1.1)
reminds
us
Introduction to operations management
of
the
responsibilities
Key terms
of
an
operations
required
(for
manager.
example
it
is
If
the
nished
defective),
product
the
is
not
operations
of
the
standard
manager
will
need
to
Economic sustainability
identify
where
in
the
process
an
error
occurred.
The
role
of
the
operations
the need to use available
manager,
however,
is
wider
than
just
ensuring
that
production
is
correctly
resources and raw materials to
planned
and
executed;
operations
managers
also
have
to
take
several
other
their best advantage, ultimately
factors
into
account.
These
factors
fall
into
three
categories:
ensuring protability and
●
Economic
factors
●
Social
●
Ecological
nancial performance
factors
Social sustainability
(also
called
“environmental”)
factors
the need to take human
Economic
must
be
in
be
factors
kept
made,
for
The
a
terms.
unnecessary
aim
is
to
to
the
minimum
example
monetary
some
to
refer
use
such
that
greater
as
available
budgets
whenever
example,
costs,
the
and,
through
For
fact
in
must
possible,
efciency.
some
energy
cases
be
further
This
it
respected;
is
may
savings
usually
be
wastage
should
measured
possible
to
and
internally (eg workers)
and externally (eg local
cut
communities), when making
costs.
resources
factors into account, both
business decisions
raw
materials
to
their
best
Ecological sustainability
advantage
–
ultimately
ensuring
protability
over
the
long
term
(as
a
the need to take environmental
protable
organization
is
more
likely
to
continue
to
operate
from
one
year
factors into account when
to
the
next).
This
is
also
called
economic
sustainability
making business decisions
Social
factors
becoming
refer
aware
stakeholders,
of
and
to
the
their
fact
that
more
responsibility
towards
local
and
more
towards
communities,
organizations
their
as
workers,
external
as
are
(especially about nature and
internal
stakeholders.
As
ecosystems)
a
Triple bottom line
their
people
(for
is
not
social
in
(or
the
on
as
the
air
natural
(industrial
noise
noisy
all
the
expansion
employees
and
that
decisions
or
are
the
taken
relocation).
fairly
quality
by
This
the
is
treated,
of
life
for
that
local
organization
also
called
Economic
that
can
development”.
and
also
also
They
Planet.
which
is
(or
social
are
often
and
the
ship
and
workers
building).
sustainability
“the
they
represented
three
are
in
a
called
social, and ecological factors
into account when making
Venn
forms
of
also
and
may
pollution,
water
noise
is
more
pollution
pollution
for
example
called
sustainability ).
ecological
as
the
that
organization
themselves,
and
to
fact
their
or
This
pillars
referred
the
CFCs),
mines),
environmental
as
to
that
different
monoxide
mills,
sometimes
Together
refer
impact
especially
affect
as
known
factors
negative
carbon
such
sustainability,
are
the
factories,
sustainability
sustainability
People
(from
near
the need to take economic,
business decisions (the 3Ps)
environment
ecological
line”,
of
by
environment,
pollution
waste
a
case
that
acceptable,
affected
understand
(industrial
in
ensure
are
“environmental”)
managers
have
to
sustainability
Ecological
more
seek
conditions
negatively
example
such
they
working
tnemeganam snoitarepO 5
consequence,
of
sustainable
“the
3
“triple
diagram,
Ps”:
Prot,
bottom
as
shown
in
Figure5.1.3.
The
not
triple
only
making
bottom
consider
money
communities
for
as
all
stresses
nancial
for
and
business
line
shareholders),
the
natural
functions,
manufacturing
the
it
activities
fact
aspects
is
that
(such
but
business
as
also
the
environment.
particularly
may
have
even
well-being
Although
relevant
more
decisions
breaking
for
negative
of
this
should
and
local
is
relevant
operations,
impacts
than
Figure 5.1.3 The triple bottom line/the 3 Ps
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5
marketing
the
triple
aspects
campaigns
bottom
largely
line
drive
or
nancial
remains
most
an
transactions.
ideal
commercial
rather
In
many
than
a
cases,
reality,
though,
as
economic
organizations.
Circular business model
The notion of a circular business model is one of the key tools of sustainable
development. A circular business model shows how an organization creates,
oers and delivers value to its stakeholders, while minimizing social and
environmental costs.
1.
There are many ways to develop circular business models (ie to make
business operations more sustainable). For example, by making better
use of raw materials, or by making products last longer. Can you think of
TOK links
some others?
1.
Does the dierence
2.
How can you link the circular business model and the triple bottom line?
between “goods” and
“services” really matter?
Why/why not?
Student workpoint 5.5
2.
Is it possible to measure
sustainability?
3.
Be a thinker
As operations are what
1.
How
can
you
link
sustainability
the business actually
to
does, is it more impor tant
responsibility
(CSR)
Consider
organization
concepts
you
studied
in
and
Unit
social
and
1,
the
such
triple
as
bottom
corporate
line
social
enterprise?
than the other functions
2.
one
that
you
have
studied.
How
important
(marketing, nance,
is
the
triple
bottom
line
in
the
decisions
made
by
senior
managers?
human resources)?
Why?
3.
Can
tnemeganam snoitarepO 5
you
think
of
examples
different
types
of
sustainability
of
situations
of
(economic,
conict
social,
between
and
ecological)?
C oncep t
SUSTAINABILITY
Revision checklist
✓
Operations
are
the
fundamental
✓
Operations
are
done
✓
Operations
need
✓
Operations
activities
of
organizations.
The Practice Question on the
next page about Luis Pacheco
by
people
–
human
resources.
Muñoz and his Casa Blanca
to
be
funded
–
accounts
and
nance.
Eco-lodge is a good example
of a business that places
sold
sustainability at its core.
Can you nd another
✓
example? You could decide
at
the
Operations
produce
right
goods
price
–
management
environmental
and
services
marketing
is
and
inuenced
which
need
to
be
promoted
and
sales.
by
economic,
social
and
factors.
to write your IA about that
✓
Operations
should
aim
to
be
sustainable
in
all
three
areas:
the
3Ps
of
organization.
prot,
planet
and
people.
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5.1
Introduction to operations management
Practice question
To
answer
The
The
Casa
word
that
is
their
in
the
Blanca
below
of
“eco-lodge”
their
conrming
Casa
practices
is
impacts
used
they
Blanca
on
the
see
Unit
6
pages
describe
type
environment
the
Eco-lodge
a
(eco-friendly).
materials.
fulll
economic,
to
friendly
promotional
that
for
effectively,
398–402.
Eco-lodge
environmentally
negative
all
The
question
is
criteria
a
social,
They
small
and
of
of
accommodation
Eco-lodges
and
they
often
make
receive
sustainable
business
ecological
and
it
aim
to
this
(lodge)
minimize
very
ofcial
clear
certicates
development.
has
strategies
sustainability.
It
is
and
located
in
The Casa Blanca Eco-lodge
the
Mayan
mountains
of
Belize
in
Central
America.
The
eco-lodge
targets
merges well with its surrounding
three
types
of
visitor:
rich
tourists
and
jet-setters
who
seek
an
exotic,
environment
nature-based
parts
of
conservation
The
many
the
to
its
nearby
trails
to
The
its
Luis
Pacheco
tourism
Luis,
why
local
the
scientists
opened
to
many
go
keen
to
working
see
on
or
its
they
Casa
riding
may
of
the
fauna
rare
Blanca
that
was
or
non-
research
or
to
to
and
its
black
up
canoe
ora
in
on
and
from
unique
2016.
the
the
down
contributes
jaguars,
orchids
Eco-lodge
published
for
hiking
prefer
butteries
mention
Luis
opportunities
horse
bio-diversity
from
The
with
offers
can
guide,
area,
not
interview
in
Visitors
abundant
of
Muñoz
an
Today
eco-lodge
a
toucans,
environment.
from
the
with
appeal
that
extract
backpackers
environmental
adventure.
rivers.
tourist
iguanas
and
around
and
canyon
the
Belize;
young
projects.
rainforest
exploration
experience;
Here
website
to
is
an
Eco-
2019:
did
you
set
up
this
business
venture?
tnemeganam snoitarepO 5
coastal
holiday
C oncep t
Of
course
do
something
Belize
area
I
City
realized
for
the
where
which
has
that
I
so
there
local
a
market
community.
worked
much
was
to
in
the
offer.
You
opportunity,
see,
hospitality
With
the
I
grew
up
industry.
eco-lodge,
I
we
but
I
here
am
also
before
very
want
wanted
to
I
moved
attached
give
to
to
to
this
tourists
SUSTAINABILITY
the
The 17 SDGs (Sustainable
chance
to
discover
the
beauty
of
the
area,
yet
without
destroying
what
we
have.
Development Goals) were
We
are
totally
embracing
the
principles
of
eco-tourism
and
the
UN
Sustainable
adopted by the United Nations
Development
Goals.
in 2015 as a universal call to
Luis,
can
you
give
us
some
examples
of
what
that
means?
action to end pover ty, protect
the planet, and ensure that by
For
example,
all
our
electricity
is
produced
from
solar
power,
and
all
our
water
is
2030 all people enjoy peace
supplied
by
a
nearby
with
natural
mountain
spring.
We
make
sure
that
we
stay
in
harmony
and prosperity.
the
environment.
Can you nd examples of
So
the
eco-lodge
is
all
about
integrating
the
accommodation
in
its
how business activities
environment,
is
that
correct?
can positively contribute to
Yes,
this
local
a)
is
true,
economy;
produced
from
Analyse
the
although
for
example
local
of
go
we
further
only
than
employ
that.
local
We
are
people
fully
and
we
integrated
only
use
in
the
each goal?
food
suppliers.
actions
sustainability
we
the
that
Luis
has
Eco-lodge.
already
taken
to
ensure
the
[6
marks]
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5
5.2 Operations methods
By the end of this chap ter, you should be able to:
➔
➔
Dene and explain the following
●
job production
●
batch production
●
mass/ow production
●
mass customization
Recommend the most
operations methods :
appropriate method of production
for a
given situation
A
business
may
of
use
a
organization,
range
production
examples
(cakes
or
for
of
are
such
dened
large,
as
a
factory
production/operations
in
complex
Table
5.2.1,
products
manufacturing
methods.
which
(cars)
also
and
The
cars
main
provides
smaller,
or
cakes,
methods
some
simpler
typical
ones
cookies).
Table 5.2.1 The main methods of production
Type
Job production
Denition
Example
tnemeganam snoitarepO 5
Production of a special “one-o” product made to a
The design of a space shuttle.
specic order (for one individual customer).
A personalized wedding cake following the bride and
groom’s own design, favourite colours and required
size: it is unique and follows par ticular specications.
Batch production
Production of a group of identical products (the word
Car models with diering features for each model.
“batch” refers to the fact that the items in each group
A series of cookies in dierent avours: chocolate
go together from one stage of production to the next).
chip, peanut, and coconut.
Mass/ow
Production of a high volume (hence the word “mass”)
Cars that are made to a standard design.
standardized
of identical, standardized products.
Identical, undierentiated cookies produced for a
production
Flow production, process production, and line
mass market.
production are alternative terms that stress one
par ticular aspect of the mass-production process.
Mass individualized
This manufacturing technique combines mass
Flat-pack furniture with many options of components
customization
production with the personalization of custom-made
or congurations chosen by the customer (colours,
products. It is par ticularly impor tant for marketing
fabric, elements, sizes, etc).
purposes, as customers can personalize the goods
they order and make them unique, hence the
alternative names of “made-to-order ” or “built-to-
order ”.
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5.2
Operations methods
Job production
Key terms
Job
production
highest
and
end
of
is
a
the
originality;
production
market,
the
method
where
producer
can
the
normally
emphasis
charge
associated
is
on
premium
with
quality,
prices.
the
Job production
uniqueness
Production
is
production of a special “one-
market-orientated,
with
the
client
deciding
precisely
what
the
product
o” product made to a specic
should
be.
This
is
also
called
“customized
production”,
which
means
that
order (for one individual
the
order
is
made
for
a
specic
customer.
customer)
Job
production
requires
clear
objectives
and
careful
planning,
so
there
may
Batch production
be
a
longer
require
the
development
and
product
expect
has
inappropriate
product,
as
greater
been
time.
may
not
of
the
product
consultation
created.
another
there
phase
It
is
This
be
a
during
likely
can
life
that
add
to
“blueprint”
the
the
the
to
cycle.
The
process
same
time
client
and
format
taken
to
may
even
would
after
produce
production of a group of
identical products (the word
be
the
“batch” refers to the fact that
the items in each group go
use.
together from one stage of
production to the next)
Advantages
●
The
mark-up
●
Clients
●
This
get
is
likely
exactly
to
be
what
high.
they
Mass production
production of