A2 Business Studies
GLOSSARY
COMPILED BY:
CEDAR BUSINESS DEPARTMENT
INDEX
Contents
UNIT 1: Business and Its Environment ..................................... 3
6: Business structure.............................................................. 3
7: Size of business ................................................................. 4
8: External Influences of Business Acrivity ................................ 5
9: EXTERNAL INFLUENCES OF BUSINESS BEHAVIOUR ................ 6
UNIT 2: People in Organisations ............................................... 9
13: FURTHER HUMAN RESOURCE MANAGEMENT ........................ 9
14: ORGANISATION STRUCTURE ............................................11
15: BUSINESS COMMUNICATION ............................................13
Unit 3 Marketing ......................................................................15
20. Marketing Planning ..........................................................15
21. Globalization & International Marketing ..............................17
Unit 4: Operations and Project Management ...........................18
25. Capacity Utilization ..........................................................18
26. Lean Production & Quality Management..............................19
27. Project Management ........................................................21
UNIT 5 Finance and Accounting .............................................. 22
32 – Costs ...........................................................................22
33: Budgets .........................................................................23
34: Contents of Published Accounts .........................................23
35 Analysis of Published Accounts ...........................................25
36 Investment Appraisal ........................................................26
UNIT 6 Strategic Management .................................................26
37: What is Strategic Management..........................................26
38: Strategic Analysis............................................................27
39: Strategic Choice ..............................................................28
40: Strategic Implementation .................................................29
UNIT 1: Business and Its Environment
Chapter 6: Business structure
1. Free Trade: No restrictions or trade barriers exist that might
prevent or limit trade between countries.
Example: European Union (such as Germany and France) member
countries enjoy free trade amongst each other
2. Tariffs: Taxes imposed on imported goods to make more expensive
than they would otherwise be.
Example: Taxes maybe imposed in order to promote the growth of
home industries
3. Voluntary export limits: An exporting country agrees to limit the
quantity of certain goods sold to one country (possibly to discourage
the setting of tariffs/quotas).
4. Protectionism: Using barriers to free trade to protect a country’s
own domestic industries.
5. Globalisation: The increasing freedom of movement of goods,
capital and people around the world.
Example: The recent moves towards free trade have been driven by
World Trade Organisation (WTO) and is made up of countries
committed to the principle of freeing world trade from restrictions.
6. Multinational Business: Business organisation that has its
headquarters in one country, but with operating branches, factories
and assembly plants in other countries.
Example: Coca Cola, Adidas and Honda
7. Privatisation: Selling state - owned and controlled business
organisations to investors in the private sector.
Example: Privatisation of K- Electric (KESC)
Chapter 7: Size of business
1. External Growth: Business expansion achieved by means of
merging or taking over another business, from either the same or a
different industry.
2. Merger: An agreement by shareholders and managers of two
business to bring both firms together under a common board of
directors with shareholders in both businesses owning shares in the
newly merged business.
3. Horizontal Integration: Integration with firms in the same
industry and at the same stage of production.
Example: FedEx and TNT Express - FedEx agreed a deal to acquire
their loss-making rival TNT Express
4. Vertical Integration:
- Forward integration with a business in the same industry but a
customer of the existing business.
Example: A manufacturer buying a retailer
- Backward integration with a business in the same industry but a
supplier of the existing business.
Example: A steel firm buying a coal mine
5. Conglomerate Integration: Integration with a business in a
different industry.
Example: A manufacturer of athletic shoes merges with a soft drink
firm.
6. Takeover: When a company buys more than 50% of the shares of
another company and becomes the controlling owner of it - often
referred to as “acquisition.”
7. Synergy: Literally means that “the whole is greater than the sum of
parts”, so in integration if its often assumed that the new larger
business will be more successful than the two, formerly separate,
businesses were.
Chapter 8: External influences of business activity
1. Monopoly: Theoretically, a situation in which there is only one
suppler, but this is very rare: for government policy purposes this is
usually redefined as a business controlling at least 25% of the
market.
Example: WAPDA, Sui Southern Gas
2. Social Audit: A report on the impact business has on society - this
can cover pollution levels, health and safety record, sources of
supplies, customer satisfaction and contribution to the community.
3. Information Technology: The use of electronic technology to
gather, store, process and communicate information.
Example: Flash drives
4. Innovation: Creating more effective processes, products or ways
of doing things in a business.
Example: Robots in manufacturing
5. Computer - aided design: Using computers and IT when
designing products.
Example: Used in architectural design and computer animation
6. Computer - aided manufacturing: The use of computers and
computer - controlled machinery to speed up the production process
and make it more flexible.
7. Environmental Audit: Assess the impact of a business’s activities
on the environment.
8. Pressure groups: Organisations created by people with a common
interest or aim who put pressure on businesses and governments to
change policies so that an objective is reached.
Example:
WWF: Aims to improve animal welfare, especially protecting and
conserving the habitat of wild animals.
Amnesty International: Rigorously opposes anti-human rights policies
of governments.
Chapter 9: External influences of business behaviour
1. Economic Growth: An increase in a country’s productive potential
measured by an increase in its real GDP.
2. Gross Domestic Product (GDP): The total value of goods and
services produced in a country in one year - real GDP has been
adjusted for inflation.
Example: Annual real GDP growth varied in the USA from 3% to -2%
between 2008 and 2013. Negative economic growth indicates a
recession when GDP falls.
3. Business Investment: Expenditure by businesses on capital
equipment, new technology and research and development.
4. Business Cycle: The regular swings in economic activity measured
by real GDP, that occur in most economies varying from boom
conditions (high demand and rapid growth) to recession when total
national output declines.
5. Recession: A period of six months or more of deciding real GDP.
Example: The recession of 2008 was a major worldwide economic
downturn that began in 2008 and continued into 2010 and beyond. It
was caused by the Financial Crisis of 2008.
6. Inflation: An increase in the average price level of goods and
services - it results in a fall in the value of money.
Example: The official rate of inflation in Zimbabwe has rocketed past
the 100,000% barrier, by far the highest in the world.
7. Deflation: A fall in the average price level of goods and services.
8. Working Population: All those in the population of working age
who are willing and able to work.
9. Unemployment: This exists when members of the working
population are willing and able to work, but unable to find a job.
Example: The unemployment rate in Germany came down from 8.1%
in 2002 to 5.5% in 2014.
10. Cyclical Unemployment: Unemployment resulting from low
demand for goods and services in the economy during a period of slow
economic growth or a recession.
Example: An auto worker may be laid off during a recession, when
people are buying fewer cars. When people buy fewer cars, the auto
makers don't need as many employees to meet the consumer demand.
So as the demand for cars decreases, so does the demand for auto
workers.
11. Structural Unemployment: Unemployment caused by the
decline in important industries, leading to significant job losses in one
sector of industry.
Example: Natural disasters, such as hurricanes, have wiped out entire
industries in geographic regions leaving the workforce structurally
unemployed
12. Frictional Unemployment: Unemployment resulting from
workers losing or leaving jobs and taking a substantial period of time
to find alternative employment.
Example: A first-time job seeker may lack the resources or efficiency
for finding the company that has the job that is available and suitable
for him and as a result does not take other work, temporarily holding
out for the better-paying job.
13. Balance of Payments (current account): This account records
the value of trade in goods and services between one country and the
rest of the world. A deficit means that the value of goods and services
imported exceeds the value of goods and services exported.
14. Exchange Rate: The price of on currency in terms of another.
Example:
$1 = PKR 104.80
$1 = £ 0.78
15. Exchange Rate Depreciation: A fall in the external value of a
currency as measured by its exchange rate against other currencies.
Example: If $1 falls in value from £0.78 to £ 0. 70, the value of the
dollar has depreciated in value
16. Imports: Goods and services purchases from other countries.
17. Exports: Goods and services sold to consumers and business in
other countries.
18. Exchange Rate Appreciation: A rise in the external value of a
currency as measured by its exchange rate again other currencies.
Example: If $1 rises from £ 0.78 to £ 0.88, the value of the dollar has
appreciated
19. Fiscal Policy: Concerned with decisions about government
expenditure, tax rates and government borrowing - these operate
largely through the government’s annual budget decisions.
Example: Major expenditure programmes include social security,
health service, education, defence and law and order.
20. Government Budget Deficit: The value of government spending
exceeds revenue from taxation.
21. Government Budget Surplus: Taxation revenue exceeds the
value of government spending.
22. Monetary Policy: Is concerned with decisions about the rate of
interest and the supply of money in the economy.
23. Market Failure: When markets fail to achieve the most efficiency
allocation of resources and there is under - or over production of
certain goods and services.
Example: Markets may fail to produce enough merit goods, such as
education and healthcare
24. External Costs: Costs of an economic activity that are not paid
for by the producer or consumer, but by the rest of society.
Example: Driving a car imposes a private cost on the driver (cost of
petrol, tax and buying car). However, driving a car creates costs to
other people in society such as greater congestion and slower journey
times for other drivers
25. Income Elasticity of Demand: Measures the responsiveness of
demand for a product after a change in consumers incomes.
Formula:
% change in demand for a product
% change in in consumer’s incomes
Example: An example of a good with negative income elasticity could
be cheap shoes. Let's again assume the economy is doing well and
everyone's income rises by 30%. Because people have extra money
and can afford nicer shoes, the quantity of cheap shoes demanded
decreases by 10%.
The income elasticity of cheap shoes is:
Income Elasticity = -10% / 30% = -0.3
UNIT 2: People in Organisations
13: Further human resource management
1. Hard HRM: An approach to managing stage that focuses on
cutting costs.
Example: Temporary and part - time employment contracts, offering
maximum flexibility but with minimum training costs.
2. Soft HRM: An approach to managing staff that focuses on
developing staff so that they reach self - fulfilment and are motivated
to work hard and stay with the business.
3. Part - time Employment Contract: Employment contract that is
less than the normal full working week.
Example: 40 hours - 8 hours/week
4. Temporary Employment Contract: Employment contract that
lasts for a fixed time period.
Example: 6 months - seasonal demand in tourism industry
5. Flexi - time Contract: Employment contract that allows staff to be
called in at times most convenient to employers and employees.
Example: Rush hour/ busy times of day
6. Outsourcing: Not employing staff directly, but using an outside
agency or organisation to carry out some business functions.
Examples: Security outside Cedar College
7. Teleworking: Staff working from home but keeping contact with
the office by means of modern IT communications.
Example: Writer and web designer
8. Zero - hours Contract: No minimum hours of work are offered
and workers are only called in - and paid - when work is available.
9. Labour Productivity: The output per worker in a given time
period. It is calculated by:
Formula:
Total output in time period, e.g one year
Total workers employed
10. Absenteeism: Measures the rate of workforce absence as a
proportion of the employee total. It is measured by:
Formula: (%)
No. of employees absent
x 100
Total no. of employees
11. Workforce Planning: Analysing and forecasting the number of
workers and the skills of those workers that will be required by the
organisation to achieve its objectives.
12. Workforce Audit: A check on the skills and qualifications of all
existing workers/managers/
13. Trade Union: An organisation of working people with the
objective of improving the pay and working conditions of their
members and providing them with support and legal services.
Example: Labour Behind the Label - Labour Behind the Label is a
campaign organisation that supports garment workers' efforts
worldwide to improve their working conditions.
14. Trade Union Recognition: When an employer formally agrees to
conduct negotiations on pay and working conditions with a trade union
rather than bargain individually with each worker.
15. Collective Bargaining: The process of negotiating the terms of
the employment between an employer and a group of workers who are
usually represented by a trade union official.
16. Terms of Employment: Include working conditions, pay, work
hours, shift length, holidays, sick leave, retirement benefits and health
care benefits.
17. Single Union Agreement: An employer recognises just one
union for purposes of collective bargaining.
Example: UNISON - UNISON is one of the UK's largest trade unions,
with 1.3 million members. They represent staff who provide public
services in the public and private sector.
18. No - strike Agreement: Unions agree to sign a no - strike
agreement with employees in exchange for greater involvement in
decisions that affect the workforce.
19. Industrial Action: Measures taken by the workforce or trade
union to put pressure on management to settle an industrial dispute in
favour of employees.
Example: Go slow, work to rule, stop work meetings and lock outs
Chapter 14: Organisation structure
1. Organisation Structure: The internal, formal framework of a
business that shows the way in which management is organised
and linked together and how authority is passed through the
organisation.
2. Hierarchical Structure: This is one where there are different
layers of the organisation with fewer and fewer people on each higher
level.
Example: The owner of the company, often called a chief executive
officer, might have the chief operating officer, chief financial officer
and marketing director report directly to him. The marketing director
would have the advertising, public relations, sales and promotions
managers under her.
3. Matrix Structure: An organisational structure that creates project
teams that cut across traditional functional departments.
Example: A project or task team established to develop a new product
might include engineers and design specialists as well as those with
marketing, financial, personnel and production skills. These teams can
be temporary or permanent depending on the tasks they are asked to
complete. Each team member can find himself/herself with two
managers - their normal functional manager as well as the team
leader of the project.
4. Level of Hierarchy: A stage of the organisational structure at
which the personnel on it have equal status and authority.
5. Span of Control: The number of subordinates reporting directly to
a manager.
Example: A call center, the span of control can be numbers over 100,
while executive functions – with high degrees of collaboration and
interaction – could productively tolerate no more than three or four.
6. Delegation: Passing authority down the organisational hierarchy.
Example: Hiring an accountant or bookkeeper is one of the most
common examples of delegation practiced by small businesses.
7. Centralisation: Keeping all of the important decision making
powers within head office or the centre of the organisation.
Example: Microsoft - Bill Gates might have wanted more control over
his company, therefore he chose to implement the centralised
structure to his organization.
8. Decentralisation: Decision - making powers are passed down the
organisation to empower subordinates and regional/product managers.
Example: Tesco - the supermarket chain. Each store of Tesco has a
store manager who can make certain decisions concerning their store.
The store manager is responsible to a regional manager.
9. Delayering: Removal of one or more levels of hierarchy from an
organisational structure.
Example: Many high-street banks no longer have a manager in each of
their branches, preferring to appoint a manager to oversee a number
of branches.
10. Line Managers: Managers who have direct authority over people,
decisions and resources within the hierarchy of an organisation.
Example: Small businesses in which the top manager, often the
owner, is positioned at the top of the organisational structure and has
clear "lines" of distinction between him and his subordinates.
11. Staff Managers: Managers who, as specialists provide support,
information and assistance to line managers.
12. Informal Organisation: The network of personal and social
relations that develop between people within an informal organisation.
Chapter15: BUSINESS COMMUNICATION
1. Effective Communication: The exchange of information between
people or groups, with feedback.
Example: Active listening - Active listening allows you to increase your
understanding of another person’s thoughts and feelings.
2. Communication Media: The methods used to communicate a
message.
Example: Newsletter and websites
3. Information Overload: So much information and so many
messages are received that the most important ones cannot be easily
identified and quickly acted on - most likely to occur with electronic
media.
Example: The sheer volume of email messages can take some workers
several hours to reply to each day.
4. Communication Barriers: Reasons why communication fails.
Example: The medium chosen might be in appropriate. If the message
contained detailed technical language and flow diagrams, trying to
explain these over a mobile (cell) phone could lead to incorrect
understanding.
5. Formal Communication Networks: The official communication
channels and routes used with an organisation.
Example: One person, at the top, starts o the communication message
and this is passed on to the next person on the lower level.
6. Informal Communication: Unofficial channels of communication
that exist between informal groups within an organisation.
Example: Could take place over the lunch table or might be social
interactive chat
7. Horizontal Communication: Occurs along an organisation chart between people who have approximately the same status but different
areas os responsibility.
Example: Communication between the production manager, sales
manager and purchase manager
8. Vertical Communication: Different people from different levels of
hierarchy communicate with each other.
9. Chain Network: This is typically used in a hierarchical structure.
One person, at the top, starts o the communication message and this
is passed on to the next person on the lower level. is is designed for
authoritarian leaders.
Example: Police, army and civil service
10. Vertical Network: The ‘boss’, probably the owner, has four
subordinates and communicates with them directly but individually –
there is no group network here.
Example: Used in a small department or any situation with a narrow
span of control
11. The Wheel Network: The leader is at the centre – or the person
at the centre becomes the leader. There could be two- way
communication between the leader and each of the other parts of the
wheel.
12. The Circle Network: In this network, each person or department
can communicate with only two others. Although it is a decentralised
network – there is no obvious leader.
13. The Integrated or Connected Network: This allows full twoway communication between any group members – or with all of
them. It is typical of team meetings or brainstorming sessions.
Unit 3 Marketing
Chapter 20. Marketing Planning
1. Marketing Plan: a detailed, fully researched written report on
marketing objectives and the marketing strategy to be used to achieve
them.
2. Income Elasticity of Demand: measures the responsiveness of
demand for a product following a change in consumer incomes.
Income Elasticity of Demand = % change in demand for the product
% change in consumer incomes
Example: inferior good: margarine, normal good: sports car.
3. Promotional Elasticity of Demand: measures the responsiveness
of demand for a product following a change in the amount spent on
promoting it.
Promotional Elasticity of Demand =
% change in demand for the product
% change in promotional spending
Example: a commercial for a fairly inexpensive good, such as a
hamburger, may result in a quick bump in sales.
4. Cross Price Elasticity of Demand: measures the responsiveness
of demand for a product following a change in the price of another
product.
Cross Price Elasticity of Demand: % change in demand for Good A
% change in price of Good B
Example: complement: tea and milk, substitute: tea and coffee.
5. New Product Development (NPD): the design, creation, and
marketing of new goods and services.
Example: it can be focused on consumer need or brand extension.
6. Test Marketing: the launch of the product on a small-scale market
to test consumer’s reaction to it.
Example: giving out samples of chocolates to people in a mall to
opinions about the taste.
7. Research & Development: the scientific research and technical
development of new products and processes.
Example: creating a new innovative product.
8. Sales Forecasting: predicting future sales levels and sales trends.
Example: taking into account economic states to determine the
preceding sales.
9. Sales-Force Composite: a method of sales forecasting that adds
together all of the individual predictions of future sales of all of the
sales representatives working for a business.
Example: a sales force composite analysis might be helpful to a
manufacturing business deciding how much goods to produce within a
given time frame and what amount of raw materials will be needed.
10. Delphi Method: a long-range qualitative forecasting technique
that obtains forecasts from a panel of experts.
11. Jury of Experts: uses the specialists within a business to make
forecasts for the future.
12. The Trend: the underlying movement in a time-series.
13. Seasonal Fluctuations: the regular and repeated variations that
occur in sales data within a period of one year (12 months).
14. Cyclical Fluctuations: these variations in sales occur over
periods of time of much more than a year and are due to the business
cycle.
15. Random Fluctuations: these can occur at any time and will
cause unusual and unpredictable sales figures – examples include
exceptionally poor weather or negative public image following a highprofile product failure.
Chapter 21. Globalization & International Marketing
1. Globalization: the growing trend towards worldwide markets in
products, capital, and labor, unrestricted by barriers.
Example: growth of multinationals in various countries.
2. Multinational Companies: businesses that have operations in
more than one country.
Example: McDonalds.
3. Free International Trade: international trade that is allowed to
take place without restrictions.
Example: such as ‘protectionist’ tariffs and quotas.
4. Tariff: tax imposed on an imported product.
Example: a company produces cheese in Scotland and exports the
cheese, which costs $100 per pound, to the United States. A 20%
tariff would require Company to pay the U.S. government $20 to
export the cheese.
5. Quota: a physical limit placed on the quantity of imports of certain
products.
Example: The Organization of Petroleum Exporting Countries sets a
production quota for crude oil in order to maintain the price of crude
oil in world markets
6. International Marketing: selling products in markets other than
the original domestic market.
Example: Amazon, eBay.
7. BRICS: the acronym for five rapidly developing economies with
great market opportunities – Brazil, Russia, India, China, and South
Africa.
8. Pan-global Marketing: adopting a standardized product across
the globe as if the entire world were a single market – selling the same
goods in the same way.
Example: pan-regional marketing may target expansion to nations
within Latin America or within a trade bloc, such as the European
Union, localizing the marketing message within each country.
9. Global Localization: adapting the marketing mix, including
differentiated products, to meet national and regional tastes and
cultures.
Example: Coca-Cola first distributed in Argentina in June 2013, their
Coca-Cola Life advertisements focused on the bottle being recyclable.
The drink contains a third less sugar than Classic Coke and has 89
calories in a can; something heavily emphasized in the United
Kingdom.
Unit 4: Operations and Project Management
Chapter 25. Capacity Utilization
1. Capacity Utilization: the proportion of maximum output capacity
currently being achieved.
2. Excess Capacity: exists when the current levels of demand are
less than the full capacity output of a business – also known as spare
capacity.
Example: firms in monopolistic competition have spare capacity.
3. Rationalization: reducing capacity by cutting overheads to
increase efficiency of operations, such as closing a factory or office
department, often involving redundancies.
Example: a business that has many factories, now decides to downsize
and make those factory into one that is much larger.
4. Full Capacity: when a business produces at maximum output.
Example: in Germany, which is a traditional transit country, the rail
network is already operating almost at full capacity.
5. Capacity Shortage: when the demand for a business’s products
exceeds production capacity.
Example: this can happen in the period of economic ‘boom’.
6. Outsourcing: using another business (third party) to undertake a
part of the production process rather than doing it within the business
using the firm’s own employees.
Example: Depending on the product and the cost of labor, a business
might decide to outsource the work to another local factory or even
investigate the options of manufacturing abroad.
7. Business-process Outsourcing (BPO): a form of outsourcing
that uses a third party to take responsibility for certain business
functions, such as HR and finance.
Example: payroll, accounting, telemarketing, social media marketing,
and customer support.
Chapter 26. Lean Production & Quality Management
1. Lean Production: producing goods and services with the minimum
of wasted resources while maintaining high quality.
Example: use of JIT.
2. Simultaneous Engineering: product development is organized so
that different stages are done at the same time instead of in sequence.
Example: organizing and managing project teams to facilitate
simultaneous work.
3. Cell Production: splitting flow production into self-contained
groups that are responsible for whole work units.
Example: one-piece flow would be in the production of a metallic case
part that arrives at the factory from the vendor in separate pieces,
requiring assembly.
4. Kaizen: Japanese term meaning continuous production.
Example: The best implementations of the principles of a Kaizen have
been in the Manufacturing or Operations side of Business in the
Automobile and similar line-based industries such as Toyota.
5. Quality Product: a good or service that meets customer’s
expectations and is therefore ‘fit for purpose’.
Example: Tylenol.
6. Quality Standards: the expectations of customers expressed in
terms of the minimum acceptable production or service standards.
Example: customer service standards, internal efficiency, and energy,
health and safety management.
7. Quality Control: this is based on inspection of the product or a
sample of products.
Example: department in a manufacturing plant that is designed to
inspect each item to make sure that it is properly put together.
8. Quality Assurance: a system of agreeing and meeting quality
standards at each stage of production to ensure consumer satisfaction.
Example: telecom company experiences regular security incidents that
are reported to the executive team by quality assurance.
9. ISO 9000: this is an internationally recognized certificate that
acknowledges the existence of a quality procedure that meets certain
conditions.
Example: mdi Consultants, Inc.
10. Total Quality Management (TQM): an approach to quality that
aims to involve all employees in quality-improvement.
Example: Ford motor company practices this.
11. Internal Customers: People within the organization who depend
upon the quality of work being done by others.
Example: sales representative who needs assistance from a customer
service representative to place an order.
12. Zero Defects: achieving perfect products every time.
Example: More recently the concept of zero defects has led to the
creation and development of six sigma pioneered by Motorola and now
adopted worldwide by many other organizations.
13. Benchmarking: involves management identifying the best firm in
the industry and then comparing the performance standards –
including quality – of these businesses with those of their own
business.
Example: one company may choose to compare the cost of overhead
with competitors.
Chapter 27. Project Management
1. Project: a specific and temporary activity with a start and end
date, clear goals, defined responsibilities, and a budget.
Example: making an airplane.
2. Project Management: using modern management techniques to
carry out and complete a project from start to finish in order to
achieve pre-set targets of quality, time, and cost.
Example: doing two activities at one time to make sure the project is
ended on time.
3. Critical Path Analysis: a planning technique that identifies all
tasks in a project, puts them in the correct sequence and allows for
the identification of the critical path.
4. Critical Path: the sequence of activities that must be completed on
time for the whole project to be completed by the agreed date. For
Example:
5. Network Diagram: the diagram used in critical path analysis that
shows the logical sequence of activities and the logical dependencies
between them – so the critical path can be identified.
UNIT 5 Finance and Accounting
Chapter 32 – Costs
1. Cost Centre: A section of a business, such as a department, to
which costs can be allocated or charged.
Example: Costs of running an A Level Business Studies Departmental
costs are teacher’s salary, textbook, heating and lightening.
2. Profit Centre: A section of a business to which both costs and
revenues can be allocated – so profit can be calculated.
Example: the coffee chain Starbucks owns more than 17000 outlets in
over 50 countries around the world. The company operates each of its
stores as a profit centre.
3. Full Costing: A method of costing in which all fixed and variable
costs are allocated to products, services or divisions of a business.
Example: Total overheads could be divided between products and cost
centres on the basis of the proportion of total direct labour costs that
each accounts for.
4. Contribution or Marginal Costing: Costing method that allocates
only direct costs to cost/profit centres, not overhead costs.
Example: Producing ‘own brand’ products for supermarkets.
Chapter 33: Budgets
1. Budget: a detailed financial plan for the future.
Example: Managers may spot overspending at an early stage and
correct it before too much damage is done to the business’s finance.
2. Budget holder: individual responsible for the initial setting and
achievement of a budget.
3. Variance analysis: calculating differences between budgets and
actual performance, and analysing reasons for such differences.
4. Delegated budgets: giving some delegated authority over the
setting and achievement of budgets to junior managers.
5. Incremental budgeting: uses last year’s budget as a basis and an
adjustment is made for the coming year.
6. Zero budgeting: setting budgets to zero each year and budget
holders have to argue their case to receive any finance.
Example: HR Managers responsible for the areas covered by the
budget have to bid for budget and to justify the money they request.
7. Flexible budgeting: cost budgets for each expense are allowed to
vary if sales or production vary from budgeted levels.
8. Adverse variance: exists when the difference between
the budgeted and actual figure leads to a lower-than-expected profit.
Example: Sales revenue below the budgeted figure.
9. Favourable variance: exists when the difference between the
budgeted and actual figure leads to a higher-than-expected profit.
Example: Actual wages less than budgeted wages.
Chapter 34: Contents of Published Accounts
1. Intellectual property: the amount by which the market value of a
firm exceeds its tangible assets less liabilities – an intangible asset.
Example: Patents, copyrights, well-established brand names and
capital spent on research and development into new products
2. Market value: the estimated total value of a company if it were
taken over.
Example: The value of all of its shares
3. Capital expenditure: any item bought by a business and retained
for more than one year, that is the purchase of fixed or non-current
assets.
Example: Expenditure to purchase property, vehicles and production
equipment.
4. Revenue expenditure: any expenditure on costs other than noncurrent asset expenditure.
Example: Spending on fuel, components and raw materials.
5. Depreciation: the decline in the estimated value of a non-current
asset over timeAssets decline in value for two main reasons:1 normal
wear and tear through usage
2 technological change, making either the asset, or the product it is
used to make, obsolete.
Example: Home-based exporters, who can now reduce their prices in
overseas markets – this should increase the value of their exports and
lead to an expansion of the business.
6. Net book value: the current Statement of financial position value
of a non-current asset = original cost – accumulated depreciation.
7. Straight-line depreciation: a constant amount of depreciation is
subtracted from the value of the asset each year.
= original cost of asset-expected residual value/expected useful life of
asset (years)
8. Net realisable value: the amount for which an asset (usually an
inventory) can be sold minus the cost of selling it – it is only used on
Statements of financial position when NRV is estimated to be below
historical cost.
Chapter 35 Analysis of Published Accounts
1. Return on capital employed (%): operating profit/capital
employed x 100
2. Capital employed: the total value of all long-term finance invested
in the business: it is equal to (non-current assets + current assets) −
current liabilities or non-current liabilities + shareholders’ equity.
Example: Two firms employing the same number of staff may have
very different capital equipment needs, such as a hairdresser and an
optician. The latter will need expensive diagnostic and eyesightmeasuring machines.
3. Inventory turnover ratio =cost of goods sold/value of inventories
4. Day’s sales in receivables ratio =trade accounts receivable ×
365/revenue
5. Share price: the quoted price of one share on the stock exchange.
Example: State of the economy
6. Dividend: the share of the company profits paid to shareholders.
7. Dividend yield ratio (%) = dividend per share × 100/current
share price
8. Dividend per share (%) = total annual dividends/total number of
issued shares
9. Dividend cover ratio = profit for the year/annual dividends
10. Price/earnings ratio = current share price/earnings per share
11. Earnings per share = profit for the year/annual dividends
This is the amount of profit (after tax and interest) earned per share.
Chapter 36 Investment Appraisal
1. Investment appraisal: evaluating the profitability or desirability of
an investment project.
Example: Spending on new machinery, new factories and major
marketing campaigns.
2. Annual forecasted net cash flow: forecast cash inflows minus
forecast cash outflows.
3. Payback period: length of time it takes for the net cash inflows to
pay back the original capital cost of the investment.
4. Accounting rate of return: measures the annual profitability of an
investment as a percentage of the initial investment.
ARR(%) = annual profit (net cash flow)/initial capital cost× 100
An alternative formula is:
ARR(%) = annual profit (net cash flow)/average capital cost× 100
where the average capital cost = initial capital cost – residual capital
value/2
5. Net present value (NPV): today’s value of the estimated cash
flows resulting from an investment.
6. Internal rate of return (IRR): the rate of discount that yields a
net present value of zero – the higher the IRR, the more profitable the
investment project is.
7. Criterion rates or levels: the minimum levels (maximum for
payback period) set by management for investment-appraisal results
for a project to be accepted.
UNIT 6 Strategic Management
Chapter 37: What is Strategic Management
1. Corporate strategy: a long-term plan of action for the whole
organisation, designed to achieve a particular goal.
2. Tactic: short-term policy or decision aimed at resolving a particular
problem or meeting a specific part of the overall strategy.
Example: To sell a product in different-sized packaging
3. Strategic management: the role of management when setting
long-term goals and implementing cross-functional decisions that
should enable a business to reach these goals.
Example: to develop new markets abroad
4. Competitive advantage: a superiority gained by a business when
it can provide the same value product/service as competitors but at a
lower price, or can charge higher prices by providing greater value
through differentiation.
Example: The merger of two of Europe’s main travel companies,
Thomas Cook and MyTravel aimed to cut costs to increase
competitiveness. It seemed to achieve its aims because, within two
years, cost savings of more than US$300 million had
been achieved by a combination of redundancies – especially when job
titles were unnecessarily duplicated after the merger – and bulk
purchasing of holiday accommodation.
Chapter 38: Strategic Analysis
1. Strategic analysis: the process of conducting research into the
business environment within which an organisation operates, and into
the organisation itself, to help form future strategies.
2. SWOT analysis: a form of strategic analysis that identifies and
analyses the main internal strengths and weaknesses and external
opportunities and threats that will influence the future direction and
success of a business.
Example: new technologies, export markets expanding faster than
domestic markets, and lower rates of interest increasing consumer
demand.
3. PEST analysis: the strategic analysis of a firm’s macroenvironment, including political, economic, social and technological
factors.
Example: A business planning to sell products to another country
4. Mission statement: a statement of the business’s core purpose
and focus, phrased in a way to motivate employees and to stimulate
interest by outside groups.
Example: McDonald’s aims to be the world’s best quick-service
restaurant experience. Being the best means providing outstanding
quality, service, cleanliness and value so that we make every customer
in every restaurant smile.
5. Vision statement: a statement of what the organisation would like
to achieve or accomplish in the long term.
Example: Nokia's vision is a world where everyone is connected.
6. Boston Matrix: a method of analysing the product portfolio of a
business in terms of market share and market growth.
7. Core competence: an important business capability that gives a
firm competitive advantage.
Example: Black and Decker, it is claimed, has a core competence in
the design and manufacture of small electric motors.
8. Core product: product based on a business’s core competences,
but not necessarily for final consumer or end user.
Example: used in a huge variety of different applications from power
tools, such as drills, to lawnmowers and food processors.
Chapter 39: Strategic Choice
1. Ansoff ’s matrix: a model used to show the degree of risk
associated with the four growth strategies of market penetration,
market development, product development and diversification.
2. Market penetration: achieving higher market shares in existing
markets with existing products.
Example: In 2013 Samsung reduced the European prices of its
range of 4k TVs by up to €1,200. This was in response to price cuts by
other manufacturers – but Samsung’s reductions were larger in an
attempt to increase market share.
3. Product development: the development and sale of new products
or new developments of existing products in existing markets.
Example: The launch of Diet Pepsi took an existing product, developed
it into a slightly different version and sold it in the soft drinks market
where Pepsi was already available.
4. Market development: the strategy of selling existing products in
new markets.
Example: Dell or HP can use existing business-computer systems and
repackage them for sale to consumer markets.
5. Diversification: the process of selling diff erent, unrelated goods
or services in new markets.
Example: Tata Industries in India is another classic example of a very
diversified business, making a huge range of products – from steel to
tea bags.
6. Force-field analysis: technique for identifying and analysing the
positive factors that support a decision (‘driving forces’) and negative
factors that constrain it (‘restraining forces’).
Example: In business, decisions such as introducing a new product or
service, or implementing a major internal change, e.g. new IT
systems, could be analysed using this approach.
7. Decision tree: a diagram that sets out the options connected with
a decision and the outcomes and economic returns that may result.
8. Expected value: the likely financial result of an outcome obtained
by multiplying the probability of an event occurring by the forecast
economic return if it does occur.
Example: The manager of an events-organising business has to decide
between holding a fundraising auction indoors or outdoors. The
financial success of the event depends not only on the weather, but
also on the decision to hold it indoors or outdoors.
Chapter 40: Strategic Implementation
1. Strategic implementation: the process of planning, allocating and
controlling resources to support the chosen strategies.
2. Business plan: a written document that describes a business, its
objectives and its strategies, the market it is in and its financial
forecasts.
3. Corporate plan: this is a methodical plan containing details of the
organisation’s central objectives and the strategies to be followed to
achieve them.
Example: The Body Shop is most effective in incorporating its mission
into the different eco-friendly campaigns it launches.
4. Corporate culture: the values, attitudes and beliefs of the people
working in an organisation that control the way they interact with each
other and with external stakeholder groups.
Example: The culture of a steel company will be very different from
that of a nursing home.
5. Power culture: concentrating power among just a few people.
6. Role culture: each member of staff has a clearly defined job title
and role.
7. Task culture: based on cooperation and teamwork.
8. Person culture: when individuals are given the freedom to express
themselves fully and make decisions for themselves.
9. Entrepreneurial culture: this encourages management and
workers to take risks, to come up with new ideas and test out new
business ventures.
10. Change management: planning, implementing, controlling and
reviewing the movement of an organisation from its current state to a
new one.
Example: Evolutionary or incremental change occurs quite slowly over
time, e.g. the swing towards more fuel-efficient cars has been
happening for several years.
11. Business process re-engineering: fundamentally rethinking
and redesigning the processes of a business to achieve a dramatic
improvement in performance.
Example: Civil conflict in Egypt in 2011 forced many holiday
companies to re-establish themselves in other countries or markets.
In extreme cases, these dramatic changes might lead to
totally rethinking the operation of an organisation using a
‘clean slate’.
12. Project champion: a person assigned to support and drive a
project forward, who explains the benefits of change and assists and
supports the team putting change into practice.
Example: For example, they will speak up for the changes being
suggested at board or other meetings of senior managers, they will try
to ensure that sufficient resources are put in place and they will try to
make sure that everyone understands the project’s goals and
objectives.
13. Project groups: these are created by an organisation to address
a problem that requires input from different specialists.
14. Contingency plan: preparing an organisation’s resources for
unlikely events.
Example: For example, the oil industry must plan for oil tankers
sinking, explosions at refineries and leakages in oil and gas pipelines.